28 Report of Independent Auditors 30 Financial Statements Consolidated Balance Sheets 31 Consolidated Statements of Income 32 Consolidated Statements of Shareholders Equity 33 Consolidated Statements of Cash Flows 34 Notes to the Consolidated Financial Statements 35
2010 FINANCIAL REPORT Do it Best Corp. Annual Report We state and attest that: 1. To the best of our knowledge, based upon a review of the following reports of Do it Best Corp.: (a) No report contained an untrue statement of a material fact as of the end of the period covered by such report; and (b) No report omitted to state a material fact necessary to make the statements in the report, in light of the circumstances under which they were made, not misleading as of the end of the period covered by such report. 2. We have reviewed the contents of this statement with the Do it Best Corp. board of directors. Robert N. Taylor President and CEO David W. Dietz Vice President of Finance 29
REPORT OF INDEPENDENT AUDITORS Do it Best Corp. Annual Report To the Board of Directors and Member-Shareholders Do it Best Corp. Fort Wayne, Indiana We have audited the accompanying consolidated balance sheets of Do it Best Corp. ( the Company ) as of June 26, 2010 and June 27, 2009, and the related consolidated statements of income, shareholders equity and cash flows for each of the three years in the period ended June 26, 2010. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Do it Best Corp. as of June 26, 2010 and June 27, 2009, and the results of its operations and its cash flows for each of the three years in the period ended June 26, 2010, in conformity with accounting principles generally accepted in the United States of America. Crowe Horwath LLP Fort Wayne, Indiana September 10, 2010 30
Consolidated balance sheets Do it Best Corp. Annual Report See accompanying notes to the consolidated financial statements. (Dollar amounts in thousands) June 26, 2010 and June 27, 2009 2010 2009 ASSETS Current assets Cash and cash equivalents $ 90,578 $ 129,621 Accounts and notes receivable, less allowance for doubtful accounts of $1,221 in 2010 and $834 in 2009 265,559 254,270 Income tax receivable 970 Merchandise inventories 213,385 203,988 Prepaid expenses and deferred charges 612 654 Deferred income taxes 1,706 2,527 Total current assets 571,840 592,030 Property and equipment, net 84,203 91,401 Accounts and notes receivable, less current maturities 4,743 7,095 Long-term investments 6,750 6,806 Deferred income taxes 19,407 13,886 Deposits and deferred charges 3,717 1,347 Other 665 659 Total assets $ 691,325 $ 713,224 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Accounts payable $ 335,730 $ 345,769 Accrued expenses 54,415 58,163 Total current liabilities 390,145 403,932 Long-term portion of accrued pension 38,417 31,413 Shareholders equity Common stock, voting 3,413 3,496 Common stock, non-voting 476 463 Preference stock 276,540 288,572 Accumulated other comprehensive loss (18,964) (14,995) Retained earnings 1,298 343 Total shareholders equity 262,763 277,879 Total liabilities and shareholders equity $ 691,325 $ 713,224 31
Consolidated Statements of Income Do it Best Corp. Annual Report See accompanying notes to the consolidated financial statements. (Dollar amounts in thousands) Years ended June 26, 2010, June 27, 2009 and June 28, 2008 2010 2009 2008 Gross sales $ 2,381,977 $ 2,458,648 $ 2,651,352 Returns and allowances 85,922 97,682 104,946 Net sales 2,296,055 2,360,966 2,546,406 Cost of sales 2,125,071 2,184,223 2,367,183 Gross profit 170,984 176,743 179,223 Selling, general and administrative expenses 60,648 55,652 55,356 Income before other income, profit sharing and pension costs, shareholders refund and income taxes 110,336 121,091 123,867 Other income, net 3,822 3,408 7,707 Income before profit sharing and pension costs, shareholders refund and income taxes 114,158 124,499 131,574 Profit sharing and pension costs 12,788 11,855 14,483 Income before shareholders refund and income taxes 101,370 112,644 117,091 Shareholders refund Cash 81,090 88,378 91,911 Preference stock 19,559 23,410 24,094 Total shareholders refund 100,649 111,788 116,005 Income before income taxes 721 856 1,086 Federal and state income taxes (234) 595 438 Net income $ 955 $ 261 $ 648 32
Consolidated Statements of Shareholders Equity Do it Best Corp. Annual Report See accompanying notes to the consolidated financial statements. (Dollar amounts in thousands) Years ended June 26, 2010, June 27, 2009 and June 28, 2008 2010 2009 2008 Common stock, voting Balance, beginning of year $ 3,496 $ 3,556 $ 3,569 Shares issued 108 119 173 Shares repurchased (191) (179) (186) Balance, end of year 3,413 3,496 3,556 Common stock, non-voting Balance, beginning of year 463 465 388 Shares issued 16 15 78 Shares repurchased (3) (17) (1) Balance, end of year 476 463 465 Preference stock Balance, beginning of year 288,572 289,070 290,973 Shares issued 19,559 23,410 24,094 Shares repurchased (31,591) (23,908) (25,997) Balance, end of year 276,540 288,572 289,070 Accumulated other comprehensive loss Balance, beginning of year (14,995) (4,982) (4,260) Unrealized holding loss on available-forsale securities, net of income tax effect (34) (416) - Change in defined benefit plans, net of tax (3,935) (9,597) (722) Balance, end of year (18,964) (14,995) (4,982) Retained earnings (accumulated deficit) Balance, beginning of year 343 82 (566) Net income 955 261 648 Balance, end of year 1,298 343 82 Total shareholders equity $ 262,763 $ 277,879 $ 288,191 Comprehensive loss Net income $ 955 $ 261 $ 648 Change in defined benefit plans, net of tax (3,935) (9,597) (722) Unrealized holding loss on available-forsale securities, net of income tax effect (56) (416) - Total comprehensive income (loss) $ (3,036) $ (9,752) $ (74) 33
Consolidated Statements of Cash Flows Do it Best Corp. Annual Report See accompanying notes to the consolidated financial statements. (Dollar amounts in thousands) Years ended June 26, 2010, June 27, 2009 and June 28, 2008 2010 2009 2008 Cash flows from operating activities Net income $ 955 $ 261 $ 648 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 8,026 8,686 9,086 Provision for (benefit from) deferred income taxes (2,054) 536 (1,100) (Gain) loss on sale of assets 42 123 - Shareholder refunds in preference shares 19,559 23,410 24,094 Other 985 444 115 Changes in operating assets and liabilities Accounts and notes receivable, net (9,179) 9,165 5,145 Merchandise inventories (9,397) 15,440 (14,138) Prepaid expenses and deferred charges 36 (39) 750 Deposits and deferred charges (2,128) - (1,019) Accounts payable (10,039) (43,794) (26,902) Accrued federal income taxes 1,269 (1,498) 528 Accrued expenses (3,602) 17,381 972 Net cash provided by (used in) operating activities (5,527) 30,115 (1,821) Cash flows from investing activities Purchase of long-term investment - - (7,500) Proceeds from sale of property and equipment 95 262 63 Capital expenditures (1,950) (6,319) (8,139) Net cash used in investing activities (1,855) (6,057) (15,576) Cash flows from financing activities Issuance of common shares 108 119 173 Purchase of common shares (191) (179) (186) Issuance of non-voting common shares 16 15 78 Purchase of non-voting common shares (3) (17) (1) Purchase of preference shares (31,591) (23,908) (25,997) Net cash used in financing activities (31,661) (23,970) (25,933) Net increase (decrease) in cash and cash equivalents (39,043) 88 (43,330) Cash and cash equivalents, beginning of year 129,621 129,533 172,863 Cash and cash equivalents, end of year $ 90,578 $ 129,621 $ 129,533 34
Notes to the Consolidated Financial Statements Do it Best Corp. Annual Report NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The consolidated financial statements include the accounts of Do it Best Corp. and its wholly-owned subsidiaries (the Company or Do it Best ). All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of operations: Do it Best is a member-owned wholesaler of hardware, lumber, builder supplies and related products, operating as a wholesaler cooperative. Members are located principally in the United States, with some member locations abroad. Only dealers in hardware, lumber, builder supplies and related products are eligible to hold shares in the Company. Nearly all of the Company s sales are to dealermembers, each of whom is required to purchase twenty voting common shares at $50 per share on becoming a member and, in some cases, shares of non-voting common stock. Fiscal year: The Company s fiscal year consists of 52 or 53 weeks ending on the last Saturday in June. A fifty-third week will be added every five or six years. All references to 2010, 2009 and 2008 relate to the fiscal years ended June 26, 2010, June 27, 2009 and June 28, 2008. Capital structure: The Company s capital is primarily derived from the issuance of voting common shares together with the preference shares issued in connection with the Company s annual shareholders refund. The Articles of Incorporation require that each member shareholder accept preference shares in payment of refunds, under requirements of the formula set forth in the By-Laws, and the payment of at least twenty percent in cash. Upon a member s termination of membership with the Company and demand for repurchase, the Company will repurchase the voting and/or non-voting common shares held by such shareholder at the lesser of cost or book value. After a holder of voting or non-voting common shares requests repurchase of those shares concurrently with termination of their relationship with the Company as a member-shareholder, the Board of Directors may also authorize purchase of the preference shares held by such shareholder, subject to statutory and By-Law restrictions, in sequence of termination, with the completion of repurchases typically deferred for eighteen to twenty-four months after Board of Directors approval. Upon request of a shareholder, the Company may redeem part of a shareholder s preference shares where such shareholder has experienced a substantial uninsured financial loss through catastrophe, or where the member presents a plan for a new retail business. Any request is subject to standards and limitations imposed by the Board of Directors or the Company. Upon liquidation of the Company for any reason, the holders of the preference shares shall be entitled to receive out of the assets of the Company the sum of $100 per share before any distribution is made to the holders of voting and non-voting common shares. Shareholder refund: At the end of each fiscal year, the Company is obligated to refund to its member-shareholders the gross profit on sales of merchandise to the membershareholders, less all operating expenses. Refunds are required to be made to each member-shareholder in the proportion of the gross profit on purchases to the total gross profit on purchases made by all member-shareholders, adjusted for participation in the Best Rewards program. Total cash shareholder refunds to be paid approximated $81,000 and $88,400 in 2010 and in 2009, respectively. These amounts are currently included in accounts payable. The Company also issued preference stock shareholder refunds of approximately $19,600 and $23,400 in 2010 and in 2009, respectively. These amounts are included in equity. Use of estimates: Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, making it reasonably possible that a change in certain of these estimates could occur in the near term. Certain significant estimates and assumptions used 35
NOTE 1: CONTINUED in the preparation of the Company s consolidated financial statements include those used for: pension and postretirement benefit plans; allowances for doubtful accounts; and inventory valuation. Income Taxes and Uncertain Tax Positions: The Company accounts for income taxes under the asset and liability method. The Company s taxable income is determined after deducting refunds to member-shareholders. Deferred tax assets and liabilities are recognized for operating loss and tax credit carryforwards and for the estimated future tax consequences attributable to differences between consolidated financial statement reporting basis of existing assets and liabilities and their respective income tax basis. Deferred tax assets and liabilities are measured using enacted tax rates anticipated to be in effect for the year in which those temporary differences are expected to be recovered or settled. The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to recognize, based on available evidence, the future tax benefits that will more likely than not be realized. The Company adopted guidance issued by the FASB with respect to accounting for uncertainty in income taxes as of June 27, 2009. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. Management is not aware of any uncertain tax positions and the adoption had no effect on the Company s consolidated financial statements. The Company is no longer subject to examination by taxing authorities for years before June 30, 2007. The Company is subject to U.S. federal income tax, as well as various state income taxes. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next 12 months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at June 26, 2010. Inventory valuation: Merchandise inventories are valued at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. Do it Best enters into various purchase rebate programs with vendors, pursuant to binding arrangements. Where the rebate or incentive is probable and estimable, it is recognized as a reduction to cost of each underlying transaction. If a rebate is not probable or reasonably estimable, such rebates are recognized on their achievement. Shipping and handling fees and costs: The Company includes shipping and handling fees billed to members in gross sales. Shipping and handling costs associated with inbound freight are included in cost of sales. Comprehensive income (loss): Comprehensive income (loss) is a more inclusive measurement of results, including items that are not recognized in the measurement of net income (loss). Comprehensive income (loss) represents the change in the Company s defined pension plans and the change in unrealized gains and losses on securities available for sale. Accounts receivable and revenue recognition: Do it Best sells to members using credit terms customary in its industry. The Company determines delinquent accounts in accordance with sales terms. When an invoice becomes delinquent, it is generally subject to interest at 1.5% per month. Approximately $5,908 and $6,532 of recorded trade receivables, past due by 90 days, were accruing interest in 2010 and 2009, respectively. Management establishes a reserve for losses on its accounts based on historic loss experience and current economic conditions. Losses are charged against the reserve when management deems further collection efforts will not produce additional recoveries. Do it Best has the right to set off amounts owing by the Company to its members against indebtedness owed the Company by its members. Revenues from the sale of warehoused merchandise to members are generally recognized when goods are shipped. Sales revenues for goods acquired and sold to members under drop-ship arrangements with vendors are generally recognized in accordance with vendor terms as to title and risk of loss passage. The Company provides cooperative advertising, among other services, to its members. Revenues for such services are recognized when the services are rendered. 36
NOTE 1: CONTINUED Reclassification: Certain prior year amounts have been reclassified to conform to the current year presentation. FASB Accounting Standards Codification: The Company adopted FASB ASC 105 (formerly statement No. 168), Generally Accepted Accounting Principles - FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( Codification or ASC ) is the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ( GAAP ). The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. Fair value of financial instruments: The Company follows guidance in FASB ASC 820 which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This requirement establishes a fair value hierarchy regarding the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. This requirement establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The requirement describes three levels of inputs that may be used to measure fair value. See Note 8 and 10 for further discussion. The fair value of cash and cash equivalents, accounts and notes receivable and accounts payable approximates carrying value because of the short-term maturities of these financial instruments, or underlying interest rates, where applicable, approximate market for the same or similar issues. Pensions and Other Postretirement Benefits Disclosures: In December 2008, the FASB issued FSP FAS 132R-1, Employers Disclosures about Postretirement Benefit Plan Assets as codified by ASC 715-20-65-2. This standard amends SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits as codified by ASC 715-20 and requires additional disclosures regarding defined benefit plan assets, including investment policies and strategies, major categories of plan assets, valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within plan assets. ASC 715-20-65-2 is effective for fiscal years ending after December 15, 2009. The adoption of ASC 715-20-65-2 did not have a material impact on the consolidated financial statements. Cash and cash equivalents: The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The Company places its cash with high credit quality financial institutions. Cash balances generally exceed insurance provided on such deposits. Property and equipment: Property and equipment are stated at cost. Upon retirement or sale of assets, the cost of the disposed assets and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to income, respectively. Major additions and improvements are capitalized, while minor items, maintenance and repairs are expensed currently. Depreciation is calculated using a combination of straightline and accelerated methods. Estimated useful lives range from fifteen to forty years for building and improvements, and from three to ten years for equipment and fixtures. Advertising and promotion costs: Costs associated with advertising and promotion are charged to operations in the period incurred. The Company participates in cooperative advertising arrangements with its vendors. Reimbursements received under cooperative advertising arrangements with vendors are recognized as a reduction of associated advertising costs. Advertising and promotion costs charged to operations in 2010, 2009 and 2008 were $21,685, $22,367 and $21,560, respectively. Marketable securities: The Company has evaluated its investment policies consistent with ASC 320, Investments Debt and Equity Securities, and determined that its investment securities are to be classified as available-for-sale ( AFS ). 37
NOTE 1: CONTINUED AFS securities are carried at fair value, with unrealized gains and losses reported in shareholders equity under the caption accumulated other comprehensive loss. Realized gains and losses and declines in value judged to be other-than temporary are recognized in earnings on occurrence, with cost determined by the specific identification method. Included in accumulated other comprehensive loss, net of income tax effect, is approximately $450 and $416 of temporary unrealized losses related to an auction rate security at June 26, 2010 and June 27, 2009, respectively. The original cost of the auction rate security approximated $7,500 and it has a maturity date of December 1, 2047. The auction rate security has been in a loss position in excess of one year. The Company has no intent to sell this investment and it is more-likely-than-not that the Company will not be required to sell this auction rate security prior to recovery, thus the Company has concluded the decline in the fair value is temporary and has recorded the unrealized loss to accumulated other comprehensive income. Subsequent Events: Management has performed an analysis of the activities and transactions subsequent to June 26, 2010 to determine the need for any adjustments to and/ or disclosures within the audited consolidated financial statements for the year ended June 26, 2010. Management has performed their analysis through September 10, 2010, the date the consolidated financial statements were available to be issued. Litigation: The Company, in the ordinary course of business, is the subject of or party to various pending or threatened litigation. While it is not possible to predict with certainty the outcome of these matters, management of the Company does not believe that they will materially affect the financial position, or operating results or cash flows of the Company. NOTE 2 CASH FLOWS Supplemental disclosures of cash flow information for the years ended 2010, 2009 and 2008 are as follows: 2010 2009 2008 Cash paid for income taxes $ 950 $1,000 $ 675 NOTE 3 CREDIT AGREEMENT The Company has available an unsecured line of credit with a commercial bank in the amount of $30,000, with a $10,000 sub-limit for letters of credit. This line of credit is reduced in availability to $15,000 from January 1 to October 1. Interest is payable monthly on outstanding balances at either prime rate plus an applicable margin or Libor plus an applicable margin. There were no borrowings against the line of credit at June 26, 2010 or June 27, 2009. The due date on the line of credit is October 31, 2010. Outstanding letters of credit approximated $10,193 and $5,223 at June 26, 2010 and June 27, 2009, respectively. NOTE 4 PROPERTY AND EQUIPMENT Property and equipment is summarized by major classification as follows at June 26, 2010 and June 27, 2009: 2010 2009 Land, buildings and site improvements $ 107,778 $ 107,950 Equipment and fixtures 63,183 64,740 170,961 172,690 Less accumulated depreciation and amortization 86,758 81,289 Property and equipment, net $ 84,203 $ 91,401 38
NOTE 5 OPERATING LEASES The Company leases office space, data processing equipment, software, office equipment, autos and delivery equipment under operating leases expiring on various dates through 2014. Various agreements are cancelable at the option of the Company upon fulfillment of certain conditions. Future annual minimum lease payments under all non-cancelable operating leases as of June 26, 2010 approximate $259, $205, $131 and $44 in 2011, 2012, 2013 and 2014, respectively, and $639 in the aggregate. Rents charged to operations under all operating leases during 2010, 2009 and 2008 were $41,038, $43,058 and $45,423, respectively. NOTE 7 TRANSACTIONS WITH UNCONSOLIDATED EQUITY AFFILIATE Do it Best is a 50% stakeholder in Alliance International, LLC ( the Alliance ), a hardware and related products purchasing consortium consisting of Do it Best and an unrelated party engaged in the distribution and sale of hardware and related products. The Alliance procures vendor purchase contracts to enable vendor pricing on a larger scale than that which would be available to the individual companies. Virtually all purchases made by Do it Best are transacted through the Alliance. NOTE 6 CAPITAL STOCK SHARE DATA Share data relevant to amounts reported in the consolidated statements of shareholders equity is as follows: 2010 2009 2008 Common stock, voting $50 par value, 990,000 shares authorized: Shares outstanding, beginning of year 69,920 71,120 71,380 Shares issued 2,160 2,380 3,460 Shares repurchased (3,820) (3,580) (3,720) Shares outstanding, end of year 68,260 69,920 71,120 Common stock, non-voting $50 par value, 100,000 shares authorized: Shares outstanding, beginning of year 9,250 9,290 7,750 Shares issued 320 300 1,560 Shares repurchased (60) (340) (20) Shares outstanding, end of year 9,510 9,250 9,290 Preference shares, $100 par value, 4,000,000 shares authorized: Shares outstanding, beginning of year 2,885,726 2,890,695 2,909,725 Shares issued 195,590 234,111 240,940 Shares repurchased (315,910) (239,080) (259,970) Shares outstanding, end of year 2,765,406 2,885,726 2,890,695 39
NOTE 7: CONTINUED Do it Best provides certain management services, including accounting assistance to the Alliance, for which the Alliance reimburses Do it Best in accordance with the management services arrangement. The parties share in the expenses of the Alliance proportionate to their benefit received. During 2010, 2009 and 2008, Do it Best was charged $164, $150 and $165, respectively, by the Alliance for administrative costs. Do it Best was paid $66, $70 and $77, respectively, in 2010, 2009 and 2008 for management services rendered to the Alliance. NOTE 8 EMPLOYEE BENEFIT PLANS Retirement plans: The Company has a defined benefit pension plan and a defined contribution profit sharing plan ( the Plans ), both covering substantially all employees. Benefits are based on years of service and the employee s compensation during the last five years of employment. The Company makes various discretionary contributions to the Plans. Retirement plan costs related to the pension plan approximated $5,800, $3,400 and $4,700 for 2010, 2009 and 2008, respectively. Benefits paid to employees related to this plan approximated $3,000, $2,700 and $2,600 in 2010, 2009 and 2008, respectively. Cost related to the defined contribution profit sharing plan approximated $7,000, $8,400 and $9,800 in 2010, 2009 and 2008, respectively. The Company has a defined benefit supplemental retirement plan with its executives, designed to provide benefits that would have been received under the retirement plan were it not for maximum limitations imposed by ERISA and the Internal Revenue Code. Expense is incorporated into retirement plan cost noted above. Management estimates approximately $5,200 will be contributed to the defined benefit pension plans by the Company during the fiscal year ending June 25, 2011. Expected benefit payments for the ensuing five years and in the aggregate related to the defined benefit pension plan approximate $2,900, $4,400, $5,300, $5,400, $6,600 in 2011, 2012, 2013, 2014 and 2015, respectively. Expected benefit payments from 2016 to 2020 approximate $42,800, for an aggregate total of $67,400. Postretirement medical benefit plan: The Company has a postretirement medical benefit plan ( the Plan ). The Plan covers retired employees who are less than 65 years of age and have greater than 10 years of service with the Company. Employees over 65 years of age are not covered beyond benefits provided by Medicare. Costs related to the Plan approximated $1,200, $1,000 and $1,100 in 2010, 2009 and 2008, respectively. Participant contributions to the Plan aggregated $92, $57 and $199 in 2010, 2009 and 2008, respectively. Benefits paid to employees related to the Plan aggregated $787, $840 and $650 in 2010, 2009 and 2008, respectively. Management estimates approximately $343 will be contributed to the Plan by the Company during the fiscal year ending June 25, 2011. Expected benefit payments for the ensuing five years and in the aggregate related to the Plan approximate $700, $800, $800, $1,000, $1,000 in 2011, 2012, 2013, 2014 and 2015, respectively. Expected benefit payments from 2016 to 2020 approximate $6,700, for an aggregate total of $11,000. The Plan contains an assumption about the annual rates of change in the cost of health care benefits currently provided by the Plan, due to factors other than changes in the composition of the Plan population by age and dependency status, for each year from the measurement date until the end of the period in which benefits are expected to be paid. The health care cost trend rate implicitly considers estimates of health care inflation, changes in health care utilization or delivery patterns, technological advances, and changes in the health status of the Plan participants. Differing types of services, such as hospital care and dental care, may have different trend rates. During 2010, the trend rate was reset to 8.5% for 2010, grading down to an ultimate rate of 5.00% through and after 2018. The Company has deemed any further disclosures related to Medicare Prescription Drug improvement and Modernization Act as immaterial. 40
NOTE 8: CONTINUED The following schedule shows changes in the benefit obligation, plan assets and funded status of the Plans. Benefit obligation balances presented below reflect the projected benefit obligation for the Company s retirement and pension plans, and accumulated postretirement benefit obligations for the postretirement medical plan. The measurement date used to determine the benefit obligations were each June 30. Retirement and Pension Plan Postretirement Medical Plan 2010 2009 2008 2010 2009 2008 Change in benefit obligation: Beginning balance $ 61,712 $ 52,966 $ 50,847 $ 11,619 $ 10,869 $ 10,915 Service cost 4,167 3,599 3,626 296 248 278 Interest cost 3,775 3,434 3,013 714 642 671 Plan participants contributions - - - 92 57 199 Actuarial (gain)/loss 9,297 4,433 (1,892) 1,688 646 (541) Benefits paid (3,120) (2,720) (2,628) (787) (843) (653) Ending balance $ 75,831 $ 61,712 $ 52,966 $ 13,622 $ 11,619 $ 10,869 Change in plan assets: Beginning balance at fair value $ 40,312 $ 43,825 $ 46,735 $ 1,226 $ 2,059 $ 1,992 Actual return on plan assets 6,241 (7,100) (406) 146 (299) (77) Company contributions 5,743 6,307 3,904 765 252 598 Plan participants contributions - - - 92 57 199 Benefits paid (3,120) (2,720) (2,629) (787) (843) (653) Other adjustment - - (3,779) - - - Ending balance at fair value $ 49,176 $ 40,312 $ 43,825 $ 1,442 $ 1,226 $ 2,059 Under funded status $ (26,655) $ (21,400) $ (9,141) $ (12,180) $ (10,393) $ (8,810) Amounts recognized in statement of financial position consist of: Current liabilities (75) (75) (64) (343) (305) (299) Non-current liabilities (26,580) (21,325) (9,077) (11,837) (10,088) (8,511) Net liability recognized in balance sheet $ (26,655) $ (21,400) $ (9,141) $ (12,180) $ (10,393) $ (8,810) 41
NOTE 8: CONTINUED Retirement and Pension Plan Postretirement Medical Plan 2010 2009 2008 2010 2009 2008 Reconciliation of amounts recognized in accumulated other comprehensive loss: Prior service cost $ (292) $ (334) $ (378) $ (119) $ (135) $ (149) Net transition obligation - - - (348) (477) (607) Net actuarial loss (25,973) (20,702) (5,529) (4,125) (2,651) (1,641) Accumulated other comprehensive loss (26,265) (21,036) (5,907) (4,592) (3,263) (2,397) Prepaid (underfund accrued) benefit cost (390) (364) (3,234) (7,588) (7,130) (6,413) Net liability recognized in balance sheet $ (26,655) $ (21,400) $ (9,141) $ (12,180) $ (10,393) $ (8,810) Change in accumulated other comprehensive loss: Beginning of year $ (21,037) $ (5,907) $ (3,201) $ (3,262) $ (2,396) $ (2,987) Less amounts amortized during the year: Net transition obligation - - - (129) (129) (129) Prior service (cost) credit arising during the year Net (loss) gain arising during the year Occurring during the year: (43) (43) (62) (15) 2 (15) (1,207) (100) (137) (151) (106) (126) Amortization of prior - - - - - - service (credit) cost Amortization of net (loss) gain (6,478) (15,273) (2,905) (1,625) (1,099) 321 End of year (26,265) (21,037) (5,907) (4,592) (3,262) (2,396) Deferred income taxes 10,506 8,415 2,363 1,837 1,305 958 Accumulated other comprehensive loss, net of tax $ (15,759) $ (12,622) $ (3,544) $ (2,755) $ (1,957) $ (1,438) Estimated amounts to be amortized from accumulated other comprehensive income over the next fiscal year: Prior service credit (cost) $ (42) $ (43) $ (43) $ (15) (15) $ (15) Net transition obligation - - - (129) (129) (129) Net actuarial gain (loss) (1,591) (1,181) (121) (259) (149) (97) Total $ (1,633) $ (1,224) $ (164) $ (403) $ (293) $ (241) As of June 26, 2010, the defined benefit pension plans and the postretirement medical plan experienced accumulated benefit obligations of approximately $61,340 and $13,622, respectively. At June 27, 2009, the defined benefit pension plans and the postretirement medical plan experienced accumulated benefit obligations of approximately $49,800 and $11,600, respectively. 42
NOTE 8: CONTINUED The components of net periodic benefit (cost) income are as follows: Retirement and Pension Plan Postretirement Medical Plan 2010 2009 2008 2010 2009 2008 Components of net periodic benefit (costs)/income: Service cost $ (4,167) $ (3,599) $ (3,625) $ (296) $ (248) $ (278) Interest cost (3,775) (3,434) (3,013) (714) (642) (671) Expected return on plan assets 3,423 3,740 3,634 83 153 143 Amortization (1,259) (143) (200) (294) (232) (270) Net periodic benefit costs $ (5,778) (3,436) $ (3,204) $ (1,221) $ (969) $ (1,076) Assumptions: Weighted-average actuarial assumptions used to determine pension and other postretirement obligations as of year-end are as follows: 2010 2010 2009 2009 2008 2008 Retirement and Pension Plan Postretirement Medical Retirement and Pension Plan Postretirement Medical Retirement and Pension Plan Postretirement Medical Discount rate 5.50% 5.50% 6.25% 6.25% 6.75% 6.75% Average compensation increase Variable N/A Variable N/A Variable N/A Current year trend N/A 8.50% N/A 9.00% N/A 9.29% Ultimate year trend N/A 5% N/A 5% N/A 5% Year of ultimate trend date N/A 2018 N/A 2018 N/A 2013 Weighted-average assumptions used to determine net periodic pension cost: 2010 2010 2009 2009 2008 2008 Retirement and Pension Plan Postretirement Medical Retirement and Pension Plan Postretirement Medical Retirement and Pension Plan Postretirement Medical Discount rate 6.25% 6.25% 6.75% 6.75% 6.25% 6.25% Average compensation increase Variable N/A Variable N/A Variable N/A Long-term rate of return on assets 8% 7.75% 8% 7.75% 8% 7.75% Current year trend N/A 9.00% N/A 8.58% N/A 9.29% Ultimate year trend N/A 5% N/A 5% N/A 5% Year of ultimate trend date N/A 2018 N/A 2013 N/A 2013 43
NOTE 8: CONTINUED Plan Assets: The investment policy and strategy is to invest plan assets in order to provide income and capital growth consistent with reasonable risk tolerance. In determining pension expense, the Company utilizes an expected longterm rate of return that, over time, should approximate the actual long-term rate of return earned on plan assets, based upon historical returns of plan assets and similar asset classes. The assumed rate for the long-term return on plan assets was determined based upon target asset allocations and expected long-term rates of return by asset class. Plan fiduciaries set investment policies and strategies for the trust. Long-term strategic investment objectives include preserving the funded status of the plan and balancing risk and return. The plan fiduciaries oversee the investment allocation process, which includes selecting investment managers, setting longterm strategic targets and monitoring asset allocations. Target allocation ranges are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below a target range. During 2010, the discount rate percentage changed from 6.25% to 5.50%, which represents a change in actuarial assumptions. All Plans assets are composed primarily of corporate equity and debt securities and U.S. government securities and, depending on the plan, are directed by either the employee or the employer. Plan assets held consisted of the following at June 26, 2010, and June 27, 2009: FASB ASC 820-10, Fair Value Measurements and Disclosures, establishes a framework and provides guidance on measuring the fair value of assets in a pension plan and how an employer should disclose the same. The framework establishes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value. The three levels of fair value hierarchy are described as follows: Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Target Allocation 2010 2009 Retirement and Pension Plan Postretirement Medical Target Allocation Retirement and Pension Plan Postretirement Medical Equity securities 65% 67% 31% 65% 55% 61% Debt securities 33% 25% 27% 33% 41% 37% Other 2% 8% 42% 2% 4% 2% Total 100% 100% 100% 100% 100% 100% 44
NOTE 8: CONTINUED In some cases, a valuation technique used to measure fair value may include inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. The following descriptions of the valuation methods and assumptions used by the Plan to estimate the fair values of investments apply to investments held directly by the Plan. Equity, debt and inflation-indexed securities: Fair values reflect the closing price reported in the active market in which the security is traded (level 1 inputs). Interest-bearing cash (money market accounts): Fair values are estimated to approximate deposit account balances, payable on demand, as no discounts for credit quality or liquidity were determined to be applicable (level 2 inputs). The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following table summarizes the Company s financial assets measured at fair value on a recurring basis in accordance with ASC 820-10 as of June 26, 2010: 2010 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Retirement and Pension Plan Interest-bearing cash $ 1,424 $ - $ 1,424 $ - Equity securities U.S. 23,744 23,744 - - Equity securities Foreign 8,933 8,933 - - Debt securities Government 12,583 12,583 - - Inflation-indexed securities 2,492 2,492 - - $ 49,176 $ 47,752 $ 1,424 $ - Post-retirement Medical Plan Interest-bearing cash $ 606 $ - $ 606 $ - Equity securities U.S. 346 346 - - Equity securities Foreign 105 105 - - Debt securities Government 385 385 - - $ 1,442 $ 836 $ 606 $ - 45
NOTE 9 INCOME TAXES The provision for (benefit from) income taxes at June 26, 2010, June 27, 2009 and June 28, 2008, consisted of the following: 2010 2009 2008 Current income tax provision $ 1,499 $ 59 $ 1,235 Deferred income tax benefit: Accrued cooperative advertising (313) 99 300 Allowance for inventory obsolescence (40) 24 (48) Deferred compensation (404) (383) (402) Compensated absences (39) (45) (1) Retirement plans (188) 650 (333) Postretirement healthcare benefits (188) (244) (110) Allowance for doubtful accounts (96) 63 44 Accrued self-insured claims (148) 335 (15) Prepaids and other (317) 37 (232) Net deferred taxes (1,733) 536 (797) Provisions for (benefit from) income taxes $ (234) $ 595 $ 438 Deferred income taxes are provided to recognize the effects of temporary differences between financial reporting and income tax reporting. The more significant temporary differences arise from various accrued liabilities, which exceed currently deductible amounts. Management believes it is more likely than not that deferred income tax assets will be realized in full. Accordingly, no valuation allowance has been provided. At June 26, 2010, components of net deferred income taxes recognized in the consolidated balance sheet included deferred income tax assets of $20,396 and deferred income tax liabilities of $1,447. At June 27, 2009, components of net deferred income taxes recognized in the consolidated balance sheet included deferred income tax assets of $18,072 and deferred income tax liabilities of $1,659. The provision for income taxes at June 26, 2010, June 27, 2009 and June 28, 2008 is higher than that which would result from application of the U.S. federal statutory rate due principally to state income taxes and non-deductible expenses for income tax purposes. 46
NOTE 10 FAIR VALUE The following table summarizes the Company s financial assets measured at fair value on a recurring basis in accordance with ASC 820-10 as of June 26, 2010: 2010 Level 1 Level 2 Level 3 Cash equivalents $84,980 $84,980 $...- - Marketable security 6,750-6,750 - $91,730 $84,980 $ 6,750 - The following table summarizes the Company s financial assets measured at fair value on a recurring basis in accordance with ASC 820-10 as of June 27, 2009: 2009 Level 1 Level 2 Level 3 Cash equivalents $84,668 $84,668 $...- - Marketable security 6,806-6,806 - $91,474 $84,668 $ 6,806 - The Company s marketable security is comprised of an auction rate security within their available-for-sale investment portfolio. The fair value of the auction rate security was determined using a pricing model that used observable market data. For the Company s cash equivalents, fair value was determined using quoted market prices based on the closing price as of the balance sheet date. 47