True Value 2007 Annual Report Download - page 46

2007 FINANCIAL REPORT | 25
N O T E S T O
CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
motion asking the Kentucky Supreme Court to review the
Appellate Court’s reversal of the Trial Court. On February 14,
2007, the Kentucky Supreme Court issued an Order granting
Flegles Motion for Discretionary Review. True Value filed its
cross-motion for discretionary review which was granted by the
Kentucky Supreme Court April 11, 2007. Flegles’ opening brief
to the Kentucky Supreme Court was filed June 11, 2007. True
Value’s reply brief on Flegles appeal and its opening brief on
True Value’s cross appeal were filed August 13, 2007. Flegles
response brief to True Value’s cross appeal was filed on October 12,
2007, and True Value’s sur-reply to Flegles response was filed on
October 30, 2007. Oral argument was heard by the Kentucky
Supreme Court on January 18, 2008.
Claims Against Ernst & Young LLP
True Value pursued claims against its former outside auditors,
Ernst & Young LLP (“E&Y”), for professional malpractice, breach
of contract, deceptive business practices and fraud. True Value
contended that E&Y failed to properly discharge its duties to
True Value and failed to identify, in a timely manner, and indeed
concealed, certain material weaknesses in True Value’s internal
financial and operational controls. Hearings before the arbitra-
tion panel occurred in early 2005.
On July 28, 2005, the arbitration panel denied True Value’s
claims against E&Y in their entirety. This decision of the arbitra-
tion panel also required True Value to reimburse E&Y for
reasonable attorneys’ fees and expenses related to this matter.
On August 17, 2005, True Value filed a motion asking the panel
to reconsider its award of attorneys’ fees and expenses. In its
motion, True Value claimed that the panel exceeded its author-
ity when it awarded attorneys’ fees and expenses to E&Y. On
October 19, 2005, the panel denied this motion.
On January 17, 2006, True Value filed a petition with the Circuit
Court of Cook County in Illinois (“Circuit Court”) to preserve its
rights to further challenge the panel’s authority to award any
attorneys’ fees and expenses and to vacate the final award when
it is entered.
On April 3, 2006, the arbitration panel in the E&Y matter issued
its final award. The panel ordered True Value to pay to E&Y,
attorneys’ fees and expenses totaling $12,191 and reimburse-
ment of American Arbitration Association fees and expenses
totaling $384. As a result, True Value reduced its initial reserve of
$18,200 that was recorded in the third quarter of 2005 based
upon the arbitration panel’s original decision, and recorded an
adjustment to prior year arbitration reserve of $5,625, in the
period ended April 1, 2006. On May 22, 2006, True Value satis-
fied a portion of the judgment by paying E&Y $384.
On August 25, 2006, the Circuit Court upheld the arbitration
panel’s final award ordering True Value to pay attorneys’ fees
and expenses to E&Y. On September 28, 2006, True Value satis-
fied this portion of the judgment by paying E&Y $12,191. On
October 27, 2006, the Circuit Court ordered True Value to pay
$530 in interest to E&Y. On November 17, 2006, True Value satis-
fied this final portion of the judgment by paying E&Y $530. True
Value filed an appeal with the Illinois 1st District Court of
Appeals which scheduled oral argument for the end of July,
2007. On August 28, 2007, the District Court of Appeals reversed
the judgment and remanded the matter to the circuit court with
directions to remand to the arbitration panel with instructions to
vacate that portion of the award attributable to expert witness
fees and to confirm and reinstate the award in all other respects.
The amount, if any, attributable to expert witness fees is not
determinable at this time. True Value filed a Petition for Rehear-
ing on September 17, 2007 which was denied on September 20,
2007. The mandate from the appellate court was filed Novem-
ber 29, 2007 returning the matter to the circuit court as directed
in the August 28, 2007 opinion. The matter has now been
returned to the American Arbitration Association for action by
the panel.
Other Matters
True Value is subject to various claims and lawsuits in the ordi-
nary course of business. True Value believes that the results of
pending legal proceedings and claims, including any known
claims settled during the quarter, will not have a material adverse
effect on the financial condition, results of operations or cash
flows of True Value.
9. INCOME TAXES
Income tax expense consisted of the following for fiscal years:
($ in thousands) 2007 2006 2005
Current:
Federal $ – $ – $ –
State 29 54 51
Foreign – – –
Total current 29 54 51
Deferred:
Federal – – –
State – – –
Foreign – – –
Total deferred – – –
$ 29 $ 54 $ 51