Report of Independent Auditors 32 Financial Statements Consolidated Balance Sheets 33 Consolidated Statements of Income 34 Consolidated Statements of Shareholders Equity 35 Consolidated Statements of Cash Flows 36 Notes to the Consolidated Financial Statements 37 30 DO IT BEST CORP. 2011 ANNUAL REPORT
FISCAL YEAR 2011 FINANCIAL 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 DO IT BEST CORP. 2011 ANNUAL REPORT 31
REPORT OF INDEPENDENT AUDITORS 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 25, 2011 and June 26, 2010, and the related consolidated statements of income, shareholders equity and cash flows for each of the three years in the period ended June 25, 2011. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 25, 2011 and June 26, 2010, and the results of its operations and its cash flows for each of the three years in the period ended June 25, 2011, in conformity with accounting principles generally accepted in the United States of America. Crowe Horwath LLP Fort Wayne, Indiana September 16, 2011 32 DO IT BEST CORP. 2011 ANNUAL REPORT
Consolidated balance sheets See accompanying notes to the consolidated financial statements. (Dollar amounts in thousands) June 25, 2011 and June 26, 2010 2011 2010 ASSETS Current assets Cash and cash equivalents $ 85,493 $ 90,578 Accounts and notes receivable, less allowance for doubtful accounts of $2,453 in 2011 and $1,221 in 2010 280,730 265,559 Income tax receivable 402 Merchandise inventories 222,081 213,385 Prepaid expenses and deferred charges 716 612 Deferred income taxes 3,654 1,706 Total current assets 593,076 571,840 Property and equipment, net 80,351 84,203 Accounts and notes receivable, less current maturities 3,590 4,743 Long-term investments 6,806 6,750 Deferred income taxes 12,576 19,407 Deposits and deferred charges 2,348 3,717 Other 665 665 Total assets $ 699,412 $ 691,325 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Accounts payable $ 345,775 $ 335,730 Accrued expenses 57,556 54,415 Total current liabilities 403,331 390,145 Long-term portion of accrued pension and other postretirement liabilities 24,885 38,417 Shareholders equity Common stock, voting 3,345 3,413 Common stock, non-voting 475 476 Preference stock 275,404 276,540 Accumulated other comprehensive loss (9,784) (18,964) Retained earnings 1,756 1,298 Total shareholders equity 271,196 262,763 Total liabilities and shareholders equity $ 699,412 $ 691,325 DO IT BEST CORP. 2011 ANNUAL REPORT 33
Consolidated Statements of Income See accompanying notes to the consolidated financial statements. (Dollar amounts in thousands) Years ended June 25, 2011, June 26, 2010 and June 27, 2009 2011 2010 2009 Gross sales $ 2,411,791 $ 2,381,977 $ 2,458,648 Returns and allowances 83,165 85,922 97,682 Net sales 2,328,626 2,296,055 2,360,966 Cost of sales 2,151,830 2,125,071 2,184,223 Gross profit 176,796 170,984 176,743 Selling, general and administrative expenses 60,603 60,648 55,652 Income before other income, profit sharing and pension costs, shareholders refund and income taxes 116,193 110,336 121,091 Other income, net 3,330 3,822 3,408 Income before profit sharing and pension costs, shareholders refund and income taxes 119,523 114,158 124,499 Profit sharing and pension costs 13,035 12,788 11,855 Income before shareholders refund and income taxes 106,488 101,370 112,644 Shareholders refund Cash 83,639 81,090 88,378 Preference stock 22,154 19,559 23,410 Total shareholders refund 105,793 100,649 111,788 Income before income taxes 695 721 856 Federal and state income taxes 237 (234) 595 Net income $ 458 $ 955 $ 261 34 DO IT BEST CORP. 2011 ANNUAL REPORT
Consolidated Statements of Shareholders Equity See accompanying notes to the consolidated financial statements. (Dollar amounts in thousands) Years ended June 25, 2011, June 26, 2010 and June 27, 2009 2011 2010 2009 Common stock, voting Balance, beginning of year $ 3,413 $ 3,496 $ 3,556 Shares issued 123 108 119 Shares repurchased (191) (191) (179) Balance, end of year 3,345 3,413 3,496 Common stock, non-voting Balance, beginning of year 476 463 465 Shares issued 16 16 15 Shares repurchased (17) (3) (17) Balance, end of year 475 476 463 Preference stock Balance, beginning of year 276,540 288,572 289,070 Shares issued 22,154 19,559 23,410 Shares repurchased (23,290) (31,591) (23,908) Balance, end of year 275,404 276,540 288,572 Accumulated other comprehensive loss Balance, beginning of year (18,964) (14,995) (4,982) Unrealized holding gain (loss) on availablefor-sale securities, net of income tax effect 34 (34) (416) Change in defined benefit plans, net of tax 9,146 (3,935) (9,597) Balance, end of year (9,784) (18,964) (14,995) Retained earnings Balance, beginning of year 1,298 343 82 Net income 458 955 261 Balance, end of year 1,756 1,298 343 Total shareholders equity $ 271,196 $ 262,763 $ 277,879 Comprehensive income (loss) Net income $ 458 $ 955 $ 261 Change in defined benefit plans, net of tax 9,146 (3,935) (9,597) Unrealized holding loss on available-forsale securities, net of income tax effect 34 (56) (416) Total comprehensive income (loss) $ 9,638 $ (3,036) $ (9,752) DO IT BEST CORP. 2011 ANNUAL REPORT 35
Consolidated Statements of Cash Flows See accompanying notes to the consolidated financial statements. (Dollar amounts in thousands) Years ended June 25, 2011, June 26, 2010 and June 27, 2009 2011 2010 2009 Cash flows from operating activities Net income $ 458 $ 955 $ 261 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 7,871 8,026 8,686 Provision for (benefit from) deferred income taxes (1,237) (2,054) 536 (Gain) loss on sale of assets - 42 123 Shareholder refunds in preference shares 22,154 19,559 23,410 Other - 985 444 Changes in operating assets and liabilities Accounts and notes receivable, net (14,018) (9,179) 9,165 Merchandise inventories (8,696) (9,397) 15,440 Prepaid expenses and deferred charges (104) 36 (39) Deposits and deferred charges 1,369 (2,128) - Accounts payable 10,045 (10,039) (43,794) Accrued federal income taxes (402) 1,269 (1,498) Accrued expenses 4,854 (3,602) 17,381 Net cash provided by (used in) operating activities 22,294 (5,527) 30,115 Cash flows from investing activities Proceeds from sale of property and equipment - 95 262 Capital expenditures (4,020) (1,950) (6,319) Net cash used in investing activities (4,020) (1,855) (6,057) Cash flows from financing activities Issuance of common shares 123 108 119 Purchase of common shares (191) (191) (179) Issuance of non-voting common shares 16 16 15 Purchase of non-voting common shares (17) (3) (17) Purchase of preference shares (23,290) (31,591) (23,908) Net cash used in financing activities (23,359) (31,661) (23,970) Net increase (decrease) in cash and cash equivalents (5,085) (39,043) 88 Cash and cash equivalents, beginning of year 90,578 129,621 129,533 Cash and cash equivalents, end of year $ 85,493 $ 90,578 $ 129,621 36 DO IT BEST CORP. 2011 ANNUAL REPORT
Notes to the Consolidated Financial Statements (Amounts in thousands, except share data)...june 25, 2011, June 26, 2010 and June 27, 2009 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 dealer-members, 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 nonvoting 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 2011, 2010 and 2009 relate to the fiscal years ended June 25, 2011, June 26, 2010 and June 27, 2009. 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 nonvoting 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 $83,600 and $81,100 in 2011 and in 2010, respectively. These amounts are currently included in accounts payable. The Company also issued preference stock shareholder refunds of approximately $22,200 and $19,600 in 2011 and in 2010, 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 in the preparation of DO IT BEST CORP. 2011 ANNUAL REPORT 37
NOTE 1: CONTINUED 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 follows guidance issued by the Financial Accounting Standards Board ( FASB ) with respect to accounting for uncertainty in income taxes. 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. The Company is no longer subject to examination by taxing authorities for years before June 29, 2008. 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 25, 2011 and June 26, 2010, respectively. 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 $3,450 and $3,600 of recorded trade receivables, past due by 90 days, were accruing interest in 2011 and 2010, 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 38 DO IT BEST CORP. 2011 ANNUAL REPORT
NOTE 1: CONTINUED 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. 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. 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 2011, 2010 and 2009 were $19,927, $21,685 and $22,367, respectively. 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. 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-forsale ( AFS ). 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 $416, $450 and $416 of temporary unrealized losses related to an auction rate security at June 25, 2011, 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. DO IT BEST CORP. 2011 ANNUAL REPORT 39
NOTE 1: CONTINUED Subsequent Events: Management has performed an analysis of the activities and transactions subsequent to June 25, 2011 to determine the need for any adjustments to and/or disclosures within the audited consolidated financial statements for the year ended June 25, 2011. Management has performed their analysis through September 16, 2011, the date the consolidated financial statements were available to be issued. NOTE 2 CASH FLOWS Supplemental disclosures of cash flow information for the years ended 2011, 2010 and 2009 are as follows: 2011 2010 2009 Cash paid for income taxes $ 2,100 $ 950 $1,000 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 25, 2011 or June 26, 2010. The due date on the line of credit is September 30, 2011. Outstanding letters of credit approximated $3,200 and $10,200 at June 25, 2011 and June 26, 2010, respectively. NOTE 4 PROPERTY AND EQUIPMENT Property and equipment is summarized by major classification as follows at June 25, 2011 and June 26, 2010: 2011 2010 Land, buildings and site improvements $ 107,778 $ 107,778 Equipment and fixtures 66,376 63,183 174,154 170,961 Less accumulated depreciation and amortization 93,803 86,758 Property and equipment, net $ 80,351 $ 84,203 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 25, 2011 approximate $220, $130, and $44 in 2012, 2013, and 2014, respectively, and $394 in the aggregate thereafter. Rents charged to operations under all operating leases during 2011, 2010 and 2009 were $42,644, $41,038 and $43,058, respectively. 40 DO IT BEST CORP. 2011 ANNUAL REPORT
NOTE 6 CAPITAL STOCK SHARE DATA Share data relevant to amounts reported in the consolidated statements of shareholders equity is as follows: 2011 2010 2009 Common stock, voting $50 par value, 990,000 shares authorized: Shares outstanding, beginning of year 68,260 69,920 71,120 Shares issued 2,460 2,160 2,380 Shares repurchased (3,820) (3,820) (3,580) Shares outstanding, end of year 66,900 68,260 69,920 Common stock, non-voting $50 par value, 100,000 shares authorized: Shares outstanding, beginning of year 9,510 9,250 9,290 Shares issued 320 320 300 Shares repurchased (340) (60) (340) Shares outstanding, end of year 9,490 9,510 9,250 Preference shares, $100 par value, 4,000,000 shares authorized: Shares outstanding, beginning of year 2,765,406 2,885,726 2,890,695 Shares issued 221,538 195,590 234,111 Shares repurchased (232,899) (315,910) (239,080) Shares outstanding, end of year 2,754,045 2,765,406 2,885,726 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. 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 2011, 2010 and 2009, Do it Best was charged $157, $164 and $150, respectively, by the Alliance for administrative costs. Do it Best was paid $67, $66 and $70, respectively, in 2011, 2010 and 2009 for management services rendered to the Alliance. DO IT BEST CORP. 2011 ANNUAL REPORT 41
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 $6,200, $5,800 and $3,400 for 2011, 2010 and 2009, respectively. Benefits paid to employees related to this plan approximated $7,000, $3,000 and $2,700 in 2011, 2010 and 2009, respectively. Cost related to the defined contribution profit sharing plan approximated $6,800, $7,000 and $8,400 in 2011, 2010 and 2009, 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 $5.8 million will be contributed to the defined benefit pension plan by the Company during the fiscal year ending June 30, 2012. Expected benefit payments for the ensuing five years and in the aggregate related to the defined benefit pension plan approximate $4,200, $5,300, $5,200, $6,400, $7,500 in 2012, 2013, 2014, 2015 and 2016, respectively. Expected benefit payments from 2017 to 2021 approximate $42,500, for an aggregate total of $71,100. 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 $900, $1,200 and $1,000 in 2011, 2010 and 2009, respectively. Participant contributions to the Plan aggregated $756, $92 and $57 in 2010, 2009 and 2008, respectively. Benefits paid to employees related to the Plan aggregated $578, $787 and $840 in 2011, 2010 and 2009, respectively. Management estimates approximately $350 will be contributed to the Plan by the Company during the fiscal year ending June 30, 2012. Expected benefit payments for the ensuing five years and in the aggregate related to the Plan approximate $1,000, $1,000, $1,000, $900, $900 in 2012, 2013, 2014, 2015 and 2016, respectively. Expected benefit payments from 2017 to 2021 approximate $3,500, for an aggregate total of $8,300. Effective April 1, 2011, the plan was frozen such that any participants who were not retired as of that date, ceased participation in the plan. As a result of this change, the plan was remeasured as of March 31, 2011, a negative prior service cost base was established equal to the reduction in APBO for those individuals who ceased participation, and a curtailment charge was recognized equal to the change in the plan s funded status due to the accelerated retirement. 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 2011, the trend rate was reset to 9.00% for 2011, grading down to an ultimate rate of 5.00% through and after 2020. 42 DO IT BEST CORP. 2011 ANNUAL REPORT
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 2011 2010 2009 2011 2010 2009 Change in benefit obligation: Beginning balance $ 75,831 $ 61,712 $ 52,966 $ 13,622 $ 11,619 $ 10,869 Service cost 4,781 4,167 3,599 248 296 248 Interest cost 3,996 3,775 3,434 600 714 642 Plan participants contributions - - - 756 92 57 Actuarial (gain)/loss (1,596) 9,297 4,433 (1,381) 1,688 646 Curtailments - - - 248 - - Plan amendments - - - (5,128) - - Benefits paid (7,041) (3,120) (2,720) (578) (787) (843) Ending balance $ 75,971 $ 75,831 $ 61,712 $ 8,387 $ 13,622 $ 11,619 Change in plan assets: Beginning balance at fair value $ 49,176 $ 40,312 $ 43,825 $ 1,442 $ 1,226 $ 2,059 Actual return on plan assets 9,404 6,241 (7,100) 255 146 (299) Company contributions 5,318 5,743 6,307 191 765 252 Plan participants contributions - - - 756 92 57 Benefits paid (7,041) (3,120) (2,720) (578) (787) (843) Ending balance at fair value $ 56,857 $ 49,176 $ 40,312 $ 2,066 $ 1,442 $ 1,226 Under funded status $ (19,114) $ (26,655) $ (21,400) $ (6,321) $ (12,180) $ (10,393) Amounts recognized in statement of financial position consist of: Current liabilities (200) (75) (75) (350) (343) (305) Non-current liabilities (18,914) (26,580) (21,325) (5,971) (11,837) (10,088) Net liability recognized in balance sheet $ (19,114) $ (26,655) $ (21,400) $ (6,321) $ (12,180) $ (10,393) DO IT BEST CORP. 2011 ANNUAL REPORT 43
NOTE 8: CONTINUED Retirement and Pension Plan Postretirement Medical Plan 2011 2010 2009 2011 2010 2009 Reconciliation of amounts recognized in accumulated other comprehensive loss: Prior service cost $ (249) $ (292) $ (334) $ 4,776 $ (119) $ (135) Net transition obligation - - - (91) (348) (477) Net actuarial loss (17,602) (25,973) (20,702) (2,447) (4,125) (2,651) Accumulated other comprehensive loss (17,851) (26,265) (21,036) 2,238 (4,592) (3,263) Underfunded accrued benefit cost (1,263) (390) (364) (8,559) (7,588) (7,130) Net liability recognized in balance sheet $ (19,114) $ (26,655) $ (21,400) $ (6,321) $ (12,180) $ (10,393) Change in accumulated other comprehensive income (loss): Beginning of year (no tax effect) $ (26,265) $ (21,037) $ (5,907) $ (4,592) $ (3,262) $ (2,396) Less amounts amortized during the year: Net transition obligation - - - (113) (129) (129) Prior service (cost) credit arising during the year (42) (43) (43) 88 (15) 2 Net (loss) gain arising during the year (1,450) (1,207) (100) (161) (151) (106) Occurring during the year: Amortization of prior service (credit) cost - - - 5,127 - - Amortization of net (loss) gain 6,922 (6,478) (15,273) 1,517 (1,625) (1,099) End of year (17,851) (26,265) (21,037) 2,238 (4,592) (3,262) Deferred income taxes 7,140 10,506 8,415 (895) 1,837 1,305 Accumulated other comprehensive income (loss), net of tax $ (10,711) $ (15,759) $ (12,622) $ 1,343 $ (2,755) $ (1,957) Estimated amounts to be amortized from accumulated other comprehensive income over the next fiscal year: Prior service credit (cost) $ (42) $ (42) $ (43) $ 396 $ (15) $ (15) Net transition obligation - - - (65) (129) (129) Net actuarial loss (893) (1,591) (1,181) (173) (259) (149) Total $ (935) $ (1,633) $ (1,224) $ 158 $ (403) $ (293) As of June 25, 2011, the defined benefit pension plans and the postretirement medical plan had accumulated benefit obligations of approximately $62,000 and $8,400, respectively. At 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. 44 DO IT BEST CORP. 2011 ANNUAL REPORT
NOTE 8: CONTINUED The components of net periodic benefit (cost) income are as follows: Retirement and Pension Plan Postretirement Medical Plan 2011 2010 2009 2011 2010 2009 Components of net periodic benefit (costs)/income: Service cost $ (4,781) $ (4,167) $ (3,599) $ (248) $ (296) $ (248) Interest cost (3,996) (3,775) (3,434) (600) (714) (642) Expected return on plan assets 4,077 3,423 3,740 120 83 153 Amortization (1,491) (1,259) (143) (186) (294) (232) Net periodic benefit costs $ (6,191) $ (5,778) $ (3,436) $ (914) $ (1,221) $ (969) Assumptions: Weighted average actuarial assumptions used to determine pension and other postretirement obligations as of year-end are as follows: 2011 2011 2010 2010 2009 2009 Retirement and Pension Plan Postretirement Medical Retirement and Pension Plan Postretirement Medical Retirement and Pension Plan Postretirement Medical Discount rate 5.50% 5.50% 5.50% 5.50% 6.25% 6.25% Salary increase 3.94% N/A 4.08% N/A 4.14% N/A Current year trend N/A 9.00% N/A 8.50% N/A 9.00% Ultimate year trend N/A 5.00% N/A 5.00% N/A 5.00% Year of ultimate trend date N/A 2020 N/A 2018 N/A 2018 DO IT BEST CORP. 2011 ANNUAL REPORT 45
NOTE 8: CONTINUED Weighted average assumptions used to determine net periodic pension cost: 2011 2011 2010 2010 2009 2009 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% Salary increase 3.94% N/A 4.08% N/A 4.14% N/A Long-term rate of return on assets 8.00% 7.75% 8.00% 7.75% 8.00% 7.75% Current year trend N/A 8.50% N/A 9.00% N/A 8.58% Ultimate year trend N/A 5.00% N/A 5.00% N/A 5.00% Year of ultimate trend date N/A 2020 N/A 2018 N/A 2013 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 long-term 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 long-term 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. 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 employer. Plan assets held consisted of the following at June 25, 2011, and June 26, 2010: 2011 2010 Target Allocation Retirement and Pension Plan Postretirement Medical Target Allocation Retirement and Pension Plan Postretirement Medical Equity securities 65% 66% 64% 65% 67% 31% Debt securities 33% 34% 36% 33% 25% 27% Other 2% 0% 0% 2% 8% 42% Total 100% 100% 100% 100% 100% 100% 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. 46 DO IT BEST CORP. 2011 ANNUAL REPORT
NOTE 8: CONTINUED 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. 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 value was determined using quoted market prices based on the closing price as of the balance sheet date (level 1 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 25, 2011: Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) 2011 Retirement and Pension Plan Interest-bearing cash $ 178 $ 178 $ - $ - Mutual funds Domestic equity 20,444 20,444 - - International equity 10,778 10,778 - - Domestic fixed 19,317 19,317 - - Inflation-indexed securities 1,524 1,524 - - World bond 3,054 3,054 - - Domestic equity exchange traded 1,562 1,562 - - $ 56,857 $ 56,857 $ - $ - Post-retirement Medical Plan Interest-bearing cash $ 1 $ 1 $ - $ - Mutual funds Domestic equity 1,056 1,056 - - Domestic fixed 741 741 - - International equity 100 100 - - Domestic equity exchange traded 132 132 - - International equity exchange traded 36 36 - - $ 2,066 $ 2,066 $ - $ - DO IT BEST CORP. 2011 ANNUAL REPORT 47
NOTE 8: CONTINUED 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 $ - $ - Mutual funds Domestic equity 23,744 23,744 - - International equity 8,933 8,933 - - Domestic fixed 12,583 12,583 - - Inflation-indexed securities 2,492 2,492 - - $ 49,176 $ 49,176 $ - $ - Post-retirement Medical Plan Interest-bearing cash $ 606 $ 606 $ - $ - Mutual funds Domestic equity 329 329 - - Domestic fixed 385 385 - - International equity 99 99 - - Domestic equity exchange traded 17 17 - - International equity exchange traded 6 6 - - $ 1,442 $ 1,442 $ - $ - NOTE 9 INCOME TAXES The provision for (benefit from) income taxes at June 25, 2011, June 26, 2010 and June 27, 2009, consisted of the following: 2011 2010 2009 Current income tax provision $ 1,698 $ 1,499 $ 59 Deferred income tax benefit: Accrued cooperative advertising (137) (313) 99 Allowance for inventory obsolescence (12) (40) 24 Deferred compensation (128) (404) (383) Compensated absences - (39) (45) Retirement plans (280) (188) 650 Postretirement healthcare benefits (301) (188) (244) Allowance for doubtful accounts (432) (96) 63 Accrued self-insured claims - (148) 335 Prepaids and other (171) (317) 37 Net deferred taxes (1,461) (1,733) 536 Provisions for (benefit from) income taxes $ 237 $ (234) $ 595 48 DO IT BEST CORP. 2011 ANNUAL REPORT
NOTE 9: CONTINUED 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. 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 (money market accounts), fair value was determined using quoted market prices based on the closing price as of the balance sheet date. At June 25, 2011, components of net deferred income taxes recognized in the consolidated balance sheet included deferred income tax assets of $19,092 and deferred income tax liabilities of $2,862. At June 26, 2010, components of net deferred income taxes recognized in the consolidated balance sheet included deferred income tax assets of $22,560 and deferred income tax liabilities of $1,447. State income tax obligations and the non-deductible expenses give rise to the difference between taxes computed at the U.S. federal statutory income tax rate and the provision for income taxes recorded in the consolidated statements of income. 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 25, 2011: 2011 Level 1 Level 2 Level 3 Cash equivalents $79,212 $79,212 $...- $...- Marketable security 6,806-6,806...- $86,018 $79,212 $ 6,806 $...- 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 $...- DO IT BEST CORP. 2011 ANNUAL REPORT 49