True Value 2009 Annual Report Download - page 38

Notes To Consolidated Financial Statements
($ in thousands)
2009 Financial Report 23
and $3,834, respectively, or 2.7% and 3.4%, respectively, of the
original 1999 loss allocation of $113,918.
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 accumu-
lated deficit account that is allocable to the terminated member
will be distributed to the terminating member and satisfied 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 member’s pro-
portionate equity investment, net of any 1999 loss allocation
account, relative to the total equity investments of all members
that were both stockholders and purchased from True Value in
2001. Approximately 82% of the total 2001 loss was effectively
allocated based on the member’s purchases from True Value in
2001 using the same methodology as described below in “Patron-
age Dividend.” No member was allocated a loss amount greater
than its net equity investments held as of year-end 2001. At January
2, 2010 the remaining balance of the 2001 loss, which was the
entire balance in the accumulated deficit account, was approx-
imately 16% of the original 2001 loss.
7. PATRONAGE DIVIDEND
True Value operates on a cooperative basis with respect to busi-
ness transacted with or for members. When there are annual
profits, members in good standing are entitled to receive patron-
age dividend distributions from True Value on the basis of gross
margins of merchandise purchased by each member. In accor-
dance with True Value’s By-Laws and Retail Member Agreement,
the annual patronage dividend, as authorized by the board of
directors, is paid to members out of patronage source income,
less certain deductions, calculated as provided in the following
sentence. The total patronage dividend paid to members is based
on pre-tax net margins calculated in accordance with account-
ing principles generally accepted in the United States of America
after reducing or increasing net margins for non-member income/
(losses), reasonable reserves, earnings retained by the coopera-
tive and deferred patronage amortization. The total dividend is
then allocated to each purchase category, with the main purchase
categories being warehouse, direct shipment and paint. Once
the patronage dividend is allocated to the purchase categories,
it is distributed to members based on the relative gross margin
participation of the member for each type of purchase category.
Commencing with the 2004 patronage dividend that was paid in
2005, the board of directors authorized retaining 5% of net patron-
age source income, as a reasonable annual reserve, to reduce the
accumulated deficit account. For the 2008 patronage dividend
that was paid in 2009, the board of directors authorized an addi-
tional one-time retention of $3,007 related to the E&Y arbitration
matter and an extra 2% over the base 5% of the net patronage
source income, as a reasonable reserve, to reduce the accumu-
lated deficit account. For the 2009 patronage dividend that was
paid in 2010, the board of directors authorized an additional
5% over the base 5% of the net patronage source income, as a
reasonable reserve, to reduce the accumulated deficit account.
Patronage dividends related to the year ended January 2, 2010,
were $57,264. True Value’s By-Laws and the Internal Revenue
Service (the “IRS”) require that the payment of at least 20% of
patronage dividends be in cash. Historically, True Value has paid
approximately 30% of the patronage dividend in cash. How-
ever, in light of the current economic environment, True Value
has chosen to make a one-time increase in this percentage and
paid $22,906 of the dividend in cash, which was approximately
40% of the estimated patronage dividend for the year. In addi-
tion, approximately $614 was paid in cash in lieu of subordinated
promissory notes being issued for de minimis amounts. True
Value paid the remainder through the issuance of True Value’s
Redeemable qualified Class B nonvoting common stock and sub-
ordinated promissory notes. For those members who have loss
allocation accounts, the Redeemable qualified Class B nonvoting
common stock was offset against those accounts. Patronage divi-
dends of $56,163 related to the year ended January 3, 2009, were
paid in March 2009 and patronage dividends of $56,131 related
to the year ended December 29, 2007, were paid in March 2008;
approximately 30% of which were paid in cash for both years.
True Value paid the remainder through the issuance of True Val-
ue’s Redeemable qualified Class B nonvoting common stock and
subordinated promissory notes, offsetting that against the loss
allocation accounts of those members that had such accounts.
8. COMMITMENTS AND CONTINGENCIES
True Value is subject to various claims and lawsuits in the ordinary
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.