True Value 2010 Annual Report Download - page 44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
Financial Report 2010 23
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 previ-
ously 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 satisfied,
on a member-by-member basis, by applying the portion of future
non-cash patronage dividends as a reduction to the loss alloca-
tion account until fully satisfied. The loss allocation amount may
also be satisfied, on a member-by-member basis, by applying
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. At January 1, 2011 and January 2, 2010,
the remaining balances of the 1999 loss allocation were $2,197
and $3,088, respectively, or 1.9% and 2.7%, 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
“Patronage Dividend.” No member was allocated a loss amount
greater than its net equity investments held as of year-end 2001.
At January 1, 2011 the remaining balance of the 2001 loss, which
was the entire balance in the accumulated deficit account, was
approximately 9% 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 accounting
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
patronage source income, as a reasonable annual reserve, to
reduce the accumulated 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. For the 2010 patronage dividend that was paid in
2011, the board of directors left the base 5% of the net patronage
source income, as a reasonable reserve, to reduce the accumu-
lated deficit account.