True Value 2007 Annual Report Download - page 44

2007 FINANCIAL REPORT | 23
N O T E S T O
CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
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 alloca-
tion” 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 Con-
solidated 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 that calls for at least 10% of the shares to be redeemed
by December 31, 2011; 40% of the shares by December 31,
2019; and all of the shares by December 31, 2029.
True Value follows the practice of accounting for deferred
patronage charges and credits as a separate component of
equity. Deferred patronage consists of net charges and expenses,
primarily 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
computation 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
nonvoting 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 nonvoting 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 annually at a fixed rate. The interest rate on
subordinated promissory installment notes created during the
year is determined annually 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 2006, 2007 and 2008 the rate was 5.30%, 5.68% and
4.28%, respectively. In accordance with True Value’s By-Laws,
True Value first reduces its aggregate stock redemption obliga-
tion payable in both cash or subordinated promissory installment
note by its right to legally offset any amounts the former mem-
bers 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 there-
fore a member could not be allocated a loss in excess of its
equity investment. The loss allocation account will be satisfied,
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
payments as a reduction to the loss allocation account until
such account is fully satisfied. However, in the event a member
should terminate as a stockholder of True Value, any unsatisfied
portion of that member’s loss allocation account will be satisfied
by reducing the redemption amount paid for the member’s stock
investment in True Value. As of December 29, 2007, $109,140, or
approximately 96%, of the $113,918 1999 loss allocation was sat-
isfied. As of December 30, 2006, $106,776, or approximately
94%, of the $113,918 1999 loss allocation was satisfied.
The board of directors determined that True Value would retain
the 2001 loss as part of the accumulated deficit account. All or a
portion of patronage income and all non-patronage income, if
any, may be retained in the future to reduce the accumulated
deficit account. In the event a member terminates its status as a
stockholder of True Value, any remaining 2001 loss in the accu-
mulated deficit account that is allocable to the terminated
member will be distributed to the terminating member and sat-
isfied by reducing the redemption amount paid for the member’s
stock investment in True Value. True Value has determined for
each member that was both a stockholder and purchased from
True Value in 2001, its share of the 2001 loss that has been
retained in the accumulated deficit account. Approximately
18% of the $50,687 2001 loss was allocated based upon the