PENSION PLANS

As discussed more fully under Benefit Plans in NOTE A – ACCOUNTING POLICIES, the Company sponsors two qualified defined benefit pension plans (DB plans) plus an unfunded non-qualified Supplemental Executive Retirement Plan (SERP) for “highly compensated employees” (HCE’s). A merger of the two qualified DB plans was completed as of May 29, 2012. The accounting for the DB plans and the SERP is summarized in the tables that follow.

Recognition of the overfunded or underfunded status of defined benefit pension plans is recorded as an asset or liability in the consolidated balance sheet. Funded status is measured as the difference between plan assets at fair value and projected benefit obligations, which includes projections for future salary increases. Actuarial gains and losses, prior service costs or credits and transition obligations, if any, which have not yet been recognized, are recorded in equity as Accumulated Other Comprehensive Income or Loss (AOCI).

The measurement dates in the following tables are May 29, 2012 and May 31, 2011.



	(in thousands)
Change in benefit obligation	2012			2011
Projected benefit obligation at beginning of year	$	36,852		$	33,778
Service cost	1,921			1,926
Interest cost	1,873			1,892
Plan curtailments (a)	(940		)	—
Plan settlements (b)	(331		)	—
Benefits paid from the plans (including expenses)	(2,509		)	(1,684		)
Actuarial loss	4,604			940
Projected benefit obligation at end of year (c)	$	41,470		$	36,852
Accumulated benefit obligation at end of year	$	35,356		$	31,256

	(in thousands)
Change in the plans’ assets	2012			2011
Fair value of plan assets at beginning of year (d)	$	27,906		$	23,030
Actual return on plan assets	(515		)	4,960
Employer contributions	2,133			1,600
Plan settlements (b)	(331		)	—
Benefits paid from the plans (including expenses)	(2,509		)	(1,684		)
Fair value of plan assets at end of year (d)	$	26,684		$	27,906


(a)	Plan curtailments are the result of the termination of Golden Corral employees.


(b)	Lump sum payments exceeded the settlement threshold in the former hourly DB plan ($298,000) and the SERP ($33,000) for fiscal year 2012. Unrecognized losses are recognized in net periodic pension cost in proportion to the amount settled.


(c)	The projected benefit obligation includes former Golden Corral employees measured at accumulated benefit obligation - no projections for future salary increases or additional years of credited service.


(d)	No portion of plan assets has been invested in shares of the Company’s common stock.



	(in thousands)
Reconciliation of Funded status at end of year	2012			2011
Fair value of plan assets	$	26,684		$	27,906
Projected benefit obligations	(41,470		)	(36,852		)
Funded status at end of year	$	(14,786	)	$	(8,946	)
Amount of asset or (liability) recognized at end of year	$	(14,786	)	$	(8,946	)



	(in thousands)
Funded status recognized in the consolidated balance sheet	2012			2011
Non-current asset	$	—		$	—
Current liability (e)	—			(33		)
Non-current liability (f)	(14,786		)	(8,913		)
Net amount (asset (obligation)) recognized in the consolidated balance sheet	$	(14,786	)	$	(8,946	)


(e)	Current liability for fiscal year 2011 consisted of direct benefit payments expected to be paid from the unfunded SERP in fiscal year 2012.


(f)	Non-current liability for fiscal year 2012 consists of $14,508,000 in underfunding of the two qualified defined benefit pension plans plus $278,000 for the unfunded SERP. Non-current liability for fiscal year 2011 consisted of $8,677,000 in underfunding of the two qualified defined benefit pension plans plus $236,000 for the unfunded SERP.



	(in thousands)
Pretax amounts recognized in accumulated other comprehensive income or loss (AOCI)	2012			2011
Unrecognized net actuarial loss	$	13,999		$	8,787
Unrecognized prior service cost / (credit)	(96		)	(110		)
Accumulated other comprehensive (income) loss (g)	$	13,903		$	8,677


(g)	Accumulated contributions in excess of net periodic benefit cost were $883,000 and $269,000 respectively, for fiscal years 2012 and 2011.

The estimated amounts that will be amortized from AOCI into net periodic pension cost in fiscal year 2013 are as follows:



	(in thousands)
Net actuarial loss	$	1,713
Prior service cost (credit)	(8		)
	$	1,705

The projected benefit obligation and fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets at the measurement date were as follows:



	(in thousands)
	2012		2011
Projected benefit obligation at end of year	$	41,470	$	36,852
Fair value of plan assets at end of year	26,684		27,906

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets at the measurement date were as follows:



	(in thousands)
	2012		2011
Projected benefit obligation at end of year	$	41,470	$	36,852
Accumulated benefit obligation at end of year	35,356		31,256
Fair value of plan assets at end of year	26,684		27,906



	(in thousands)
Net periodic pension cost components	2012			2011			2010
Service cost	$	1,921		$	1,926		$	1,515
Interest cost	1,873			1,892			1,823
Expected return on plan assets	(2,065		)	(1,690		)	(1,573		)
Amortization of prior service cost	1			8			8
Amortization of net actuarial loss	875			889			740
Curtailment (gain) loss recognized (a)	(16		)	—			49
Settlement loss recognized	157			—			256
Net periodic pension cost (h) (i)	$	2,746		$	3,025		$	2,818


(h)	Includes amounts for Golden Corral recorded in discontinued operations: $487,000 in fiscal year 2012 (including the effect of a $16,000 curtailment credit), $631,000 in fiscal year 2011 and $429,000 in fiscal year 2010.


(i)	Net periodic pension cost for fiscal year 2013 is currently expected to approximate $3,250,000. The primary drivers of the 18 percent increase over fiscal year 2012 are a lower discount rate (see below) and a negative return on plan assets experienced during fiscal year 2012.



	(in thousands)
Changes in other comprehensive income (pretax):	2012			2011			2010
Changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial loss (gain)	$	6,244		$	(2,330	)	$	2,905
Amounts recognized as a component of net periodic benefit cost:
Settlements	(157		)	—			(256		)
Amortization of actuarial loss	(875		)	(889		)	(740		)
Curtailment effects	16			—			(49		)
Amortization of prior service cost	(1		)	(8		)	(8		)
Total recognized in other comprehensive income	$	5,227		$	(3,227	)	$	1,852

Total recognized in net periodic pension cost and other Comprehensive loss (income)	$	7,973		$	(202	)	$	4,670



Weighted average assumptions	May 29, 2012	May 31, 2011	June 1, 2010
Discount rate - net periodic pension cost	5.25%	5.50%	6.50%
Discount rate - projected benefit obligation	4.25%	5.25%	5.50%
Rate of compensation increase - net periodic pension cost	4.00%	4.00%	4.00%
Rate of compensation increase - projected benefit obligation	4.00%	4.00%	4.00%
Expected long-term rate of return on plan assets	7.50%	7.50%	8.00%

The discount rate is selected by matching the cash flows of the plans to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash flows due in a particular year can be "settled" theoretically by "investing" them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The selection of the discount rate represents the equivalent single rate under a broad-market AA yield curve. The yield curve is used to set the discount rate assumption using cash flows on an aggregate basis, which is then rounded to the nearest 25 basis points.

Each decrement of 25 basis points in the discount rate results in an increase in the projected benefit obligation of $1,250,000 with a corresponding increase in annual net periodic pension cost of $135,000.

The assumption for the expected return on plan assets is selected by using a weighted average of the historical broad market return and the forward looking expected return. The historical broad market return assumes a wide period of data available for each asset class. Domestic equity securities are allocated equally between large cap and small cap funds, with fixed income securities allocated equally between long-term corporate/government bonds and intermediate-term government bonds. The model for the forward looking expected return uses a range of expected outcomes over a number of years based on the asset mix of the plan and assumptions about the return, variance, and co-variance for each asset class. The weighted average of the historical broad market return (35 percent) and the forward looking expected return (65 percent) is rounded to the nearest 25 basis points to determine the overall expected return on assets. The expected rate of return will remain at 7.50 percent for fiscal year 2013.

The following table shows the estimated future benefit payments for the DB plans and the SERP:



	(in thousands)
2013	$	1,332
2014	1,320
2015	2,789
2016	1,349
2017	2,801
Next five years	14,597

Investment Policies and Asset Allocation

The objectives of the committee that sets investment policy for pension assets include holding, protecting and investing the assets prudently. The committee has determined that plan assets should be invested using long-term objectives, since the plan is intended to fund current and future benefits for participants and beneficiaries. Equity securities have provided the highest historical return to investors over extended time horizons. Thus, the bulk of the plan assets are targeted to be held in equity securities. Prudent investment strategies also call for a certain portion of the plan assets to be held in fixed return instruments. The committee does not use derivative instruments to re-balance exposures to certain asset classes. Although not prohibited from doing so, the committee has chosen not to invest the plan assets in the common stock of the Company.

Target and actual pension plan assets are summarized as follows:



			Actual Allocations
Asset Class	Target		2012		2011
Equity securities	70	%	83	%	75	%
Fixed income	25	%	16	%	24	%
Cash equivalents	5	%	1	%	1	%
Total	100	%	100	%	100	%

Funding

The Company contributes amounts to the DB plans that are sufficient to satisfy legal funding requirements, plus discretionary tax-deductible amounts that may be deemed advisable. Contributions to the merged DB plan for fiscal year 2013 are currently anticipated at a level of $2,100,000, which includes amounts to meet minimum legal funding requirements and potential discretionary contributions. Obligations to participants in the SERP are satisfied in the form of a lump sum distribution upon the retirement of the participants. No payments from the SERP are currently anticipated for fiscal year 2013.

Future funding of the DB plans largely depends upon the performance of investments that are held in the trust that has been established for the plans. Equity securities comprise 70 percent of the target allocation of the plans’ assets. Although equity markets have since made significant rebounds, the market declines experienced in 2009 continue to adversely affect funding requirements, and combined with low bond rates will likely require the continued recognition of significantly higher net periodic pension costs than had been incurred prior to 2009.

Plan Assets at Fair Value

The Company uses fair value measurements for recording the assets of its defined benefit pension plans. Fair value is defined as the exchange price that would be received for an asset in its principal market in an orderly transaction between market participants on the measurement date. Assets of the plans are grouped into a three-level hierarchy for valuation techniques used to measure the fair values of the assets. These levels are:


•	Level I – Quoted prices in active markets for identical assets.


•	Level II – Observable inputs other than Level I prices, such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.


•	Level III – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets.

The assets of the defined benefit pension plans include investments in mutual funds whose fair values are determined based on quoted market prices and are classified within Level I of the fair value hierarchy. Plan assets also include investments in money market funds, corporate and U.S. government bonds, guaranteed insurance contracts and foreign obligations that are based on other observable inputs, which are classified within Level II of the fair value hierarchy. The following table summarizes the plan assets measured at fair value as of May 29, 2012 and May 31, 2011:



			(in thousands)
	2012				2011
	Level I		Level II		Level I		Level II
Money market funds	$	—	$	385	$	—	$	215
U.S. treasury and agency obligations	—		412		—		557
Corporate obligations	—		2,164		—		4,098
Mutual funds	22,630		—		21,572		—
Foreign obligations	—		533		—		911
Guaranteed insurance contracts	—		560		—		553
	$	22,630	$	4,054	$	21,572	$	6,334