True Value 2008 Annual Report Download - page 43

notes to consolidated financial statements
22 :: T RUE VALUE COMPA NY
True Value issues Class B common stock as part of its patronage
dividend. The Class B common stock is redeemable and has
no voting rights (the ”Redeemable Class B nonvoting common
stock”). The By-Laws provide True Value the right to allow a
member to meet the stock ownership requirements for True Value’s
Redeemable Class B nonvoting common stock by the issuance of
Redeemable Class B nonvoting common stock in payment of the
year-end patronage dividend. The shares of Redeemable Class B
nonvoting common stock and other written notices distributed
by True Value to its members, which disclose to the recipient the
stated amount allocated to the member by True Value and the
portion thereof that is a patronage dividend, are ”written notices of
allocation” as that phrase is used in the Internal Revenue Code (the
”Code”). For such written notices to be ”qualified written notices
of allocation” within the meaning of the Code, it is necessary that
True Value pay 20% or more of the annual patronage dividend
in cash and that the members consent to having the allocations
(at their stated dollar amounts) treated as being constructively
received by them and includable in their gross income. True
Value has customarily issued Redeemable Class B nonvoting
common stock that are ”qualified written notices of allocation”
(the ”Redeemable qualified Class B nonvoting common stock”)
with its patronage dividend and the current amount issued and
outstanding are classified in the Consolidated Balance Sheet
as Redeemable qualified Class B nonvoting common stock.
Any written notices that do not meet these requirements are
”nonqualified written notices of allocation” within the meaning
of the Code.
True Value has issued Redeemable Class B nonvoting common
stock that are ”nonqualified written notices of allocation” (the
”Redeemable nonqualified Class B nonvoting common stock”) as
part of prior patronage dividends. Amounts issued and outstanding
are classified as a long-term liability in the Consolidated Balance
Sheet as Redeemable nonqualified Class B nonvoting common
stock. These shares are classified in long-term liabilities because
they have a planned redemption schedule commencing no later
than December 31, 2010 that calls for at least 10% of the shares to
be redeemed by December 31, 2011; 40% of the shares by Decem-
ber 31, 2019; and all of the shares by December 31, 2029.
True Value follows the practice of accounting for deferred patron-
age charges and credits as a separate component of equity.
Deferred patronage consists of net charges and expenses, pri-
marily related to costs associated with the July 1997 merger of
Cotter & Company and ServiStar Coast to Coast Corporation to
form True Value (the ”Merger”), which are included in the compu-
tation of Net margin in different periods for financial statement
purposes than for patronage purposes.
Capital Stock Redemption
Either True Value or the member, upon 60 days’ written notice,
may terminate membership without cause. In the event mem-
bership is terminated, True Value undertakes to purchase, and
the member is required to sell to True Value, all of the member’s
Redeemable Class A voting common stock and Redeemable
Class B nonvoting common stock at par value. In accordance
with True Value’s By-Laws, payment for the Redeemable Class A
voting common stock and Redeemable nonqualified Class B non-
voting common stock has historically been in cash at the time of
redemption. In accordance with True Value’s By-Laws, True Value
redeems former members’ Redeemable qualified Class B non-
voting common stock in the form of a subordinated promissory
installment note. The subordinated promissory installment notes
are payable in five equal annual installments and pay interest annu-
ally at a fixed rate. The interest rate on subordinated promissory
installment notes created during the year is determined annu-
ally on the first business day of the year based on the five-year
U.S. Treasury bill rate plus 1.0%. For notes issued in 2007, 2008
and 2009 the rate was 5.68%, 4.28% and 2.72%, respectively. In
accordance with True Value’s By-Laws, True Value first reduces its
aggregate stock redemption obligation payable in both cash or
subordinated promissory installment note by its right to legally
offset any amounts the former members may owe True Value,
including accounts and notes receivable, loss allocations and/
or accumulated deficit.
Loss Allocation to Members and Accumulated Deficit
During the third quarter of 2000, True Value management devel-
oped and the board of directors approved a plan to equitably
allocate to members the loss incurred in 1999. This loss was pre-
viously recorded as a reduction of retained earnings. True Value
has distributed the 1999 loss among its members by establish-
ing a loss allocation account as a contra-equity account in the
Consolidated Balance Sheet with the offsetting credit recorded
to the accumulated deficit account. The loss allocation account
reflects the sum of each member’s proportionate share of the
1999 loss, after being reduced by certain amounts that were
not allocated to members. The allocation was generally based
on a member’s proportionate Class B stock investment relative
to the total Class B stock investments of all the members, and
therefore a member could not be allocated a loss in excess of
its equity investment. The loss allocation account will be satis-
fied, on a member-by-member basis, by applying the portion of
future non-cash patronage dividends as a reduction to the loss
allocation account until fully satisfied. The loss allocation amount
may also be satisfied, on a member-by-member basis, by apply-
ing the par value of maturing member notes and related interest
($ in thousands)