This excerpt taken from the FL 10-Q filed Dec 10, 2008.
3. Impairment Charges and Store Closing Program Costs
On September 16, 2008, the Company requested redemption of its shares in the Reserve International Liquidity Fund, Ltd., a money market fund (the Fund), totaling $75 million. The Company has not yet received the redemption payment, and accordingly, has reclassified the total amount due from Cash and cash equivalents to Short-term investments in the Condensed Consolidated Balance Sheet as of November 1, 2008. At the time the redemption request was made, the Company was informed by the Reserve Management Company, the Funds investment advisor, that the Companys redemption trades would be honored at a $1.00 per share net asset value. The Company has not received any information as to when the redemption will be paid, and based on the maturities of the underlying investments in the Fund and the current status of the redemption process, the proceeds of the assets of the Fund may not be fully distributed until 2009. The Fund has suspended all redemptions from and purchases into the Fund in order to allow for the realization of the Funds assets, and has postponed the date of payment of redemption proceeds. In addition, litigation, to which the Company is not a party, exists that involves how the remaining assets of the Fund should be distributed. Therefore, there is a risk that the Company could receive less than the $1.00 per share net asset value. As a result, the Company recognized an impairment loss of $3 million to reflect a decline in fair value that is other-than-temporary. This charge was recorded with no tax benefit. This impairment is primarily related to the underlying securities of Lehman Brothers Holdings Inc. held in the Fund.
On January 23, 2001, the Company announced that it was exiting its Northern Group segment. During the second quarter of 2001, the Company completed the liquidation of the 324 stores in the United States. On September 28, 2001, the Company completed the stock transfer of the 370 Northern Group stores in Canada through one of its wholly owned subsidiaries for approximately CAD$59 million, which was paid in the form of a note. Over the last several years, the note has been amended and payments have been received; however, the interest and payment terms remained unchanged. The note was required to be repaid upon the occurrence of payment events, as defined in the purchase agreement, but no later than September 28, 2008. During the first quarter of 2008, the principal owners of the Northern Group requested an extension on the repayment of the note. The Company determined, based on the Northern Groups current financial condition and projected performance, that repayment of the note pursuant to the original terms of the purchase agreement was not likely. Accordingly, a non-cash impairment charge of $15 million was recorded during the first quarter of 2008 in accordance with SFAS No.114, Accounting by Creditors for Impairment of a Loan. This charge has been recorded with no tax benefit. The tax benefit is a capital loss that can only be used to offset capital gains. The Company does not anticipate recognizing sufficient capital gains to utilize these losses. Therefore, the Company determined that a full valuation allowance was required.
Another wholly owned subsidiary of the Company was the assignor of the store leases involved in the Northern Group transaction and, therefore, retains potential liability for such leases. As the assignor of the Northern Canada leases, the Company remained secondarily liable under these leases. As of November 1, 2008, the Company estimates that its gross contingent lease liability is CAD$2 million. The Company currently estimates the expected value of the lease liability to be insignificant. The Company believes that, because it is secondarily liable on the leases, it is unlikely that it would be required to make such contingent payments.
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During the first three quarters of 2008, the Company closed 17 unproductive stores as part of the program announced in 2007 to close unproductive stores. Exit costs of $5 million for the thirty-nine weeks ended November 1, 2008, comprising primarily lease termination costs, were recognized in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. During the fourth quarter of 2008, the Company currently expects to close eight additional unproductive stores prior to normal lease expiration, depending on the Companys success in negotiating agreements with its landlords. The lease exit costs associated with the remaining closures are expected to total approximately $1 million and will be recorded during 2008 in accordance with SFAS No. 146. The cash impact of the 2008 store closings is expected to be minimal, as the related cash lease costs are expected to be offset by associated inventory reductions. Under SFAS No. 144, store closings may constitute discontinued operations if migration of customers and cash flows are not expected. The Company has concluded that no store closings have met the criteria for discontinued operations treatment.