True Value 2009 Annual Report Download - page 37

Notes To Consolidated Financial Statements
($ in thousands)
22 True Value Company
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 includ-
able in their gross income. True Value has customarily issued
Redeemable Class B nonvoting common stock that are “qual-
ified 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 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 the 1997 and 1998 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, which are taxable to the
member upon redemption, are classified in long-term liabilities
because they have a planned redemption schedule that calls for
at least 10% of the shares initially issued to be redeemed
by December 31, 2011; 40% of the shares initially issued by
December 31, 2019; and all of the shares by December 31, 2029.
As of January 2, 2010, through stock redemptions with former
members, True Value has satisfied the December 31, 2011 and
December 31, 2019 requirements having redeemed 50.4% of the
Redeemable nonqualified Class B nonvoting common stock ini-
tially offered. The original redemption schedule can be modified
at the discretion of True Value’s board of directors.
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 2008, 2009
and 2010 the rate was 4.28%, 2.72% and 3.65%, 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
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 por-
tion 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. At January 2, 2010 and January 3, 2009,
the remaining balances of the 1999 loss allocation were $3,088