Discover 2010 Annual Report Download - page 137

defined by ASC 820, with which each item is associated. For a description of the fair value hierarchy, see Note 22: Fair
Value Disclosures. (Dollars in thousands):
For the Year Ended November 30, 2010
Level 1 Level 2 Level 3 Total
Asset
Allocation
Long-duration U.S. fixed income fund ................................................................................... $ 0 $205,695 $0 $205,695 64%
Registered Investment Company – International equity fund ...................................................... 19,400 0 0 19,400 6%
Common Collective Trusts:
International equity fund .................................................................................................. 0 18,062 0 18,062 6%
Domestic large cap equity fund......................................................................................... 0 68,624 0 68,624 21%
Domestic small cap equity fund......................................................................................... 0 9,207 0 9,207 3%
Total ......................................................................................................................... $19,400 $301,588 $0 $320,988 100%
The investments that are categorized as Level 2 assets primarily consist of common collective trusts, and group annuity
contract consisting of a domestic equity fund and a stable value product. The common collective trusts and the domestic
equity fund are public investment vehicles valued using the Net Asset Value (“NAV”) provided by the administrator of the
fund. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments
that are traded on an active market. The fair value of the stable value product is calculated as the present value of future
cash flows.
Cash Flows. The Company expects to contribute approximately $1.5 million to its postretirement benefit plans for
2011.
Expected benefit payments associated with the Company’s pension and postretirement benefit plans for the next five
years and in aggregate for the years thereafter are as follows (dollars in thousands):
Pension Postretirement
2011 ............................................................................................................................................................................ $11,805 $1,469
2012 ............................................................................................................................................................................ $12,233 $1,520
2013 ............................................................................................................................................................................ $12,699 $1,575
2014 ............................................................................................................................................................................ $13,224 $1,607
2015 ............................................................................................................................................................................ $13,739 $1,653
Following five years thereafter........................................................................................................................................... $84,964 $9,658
Discover 401(k) Awards. Under the Discover 401(k) Plan, eligible U.S. employees of the Company receive 401(k)
matching contributions. Effective January 1, 2009, eligible employees also receive fixed employer contributions and, if
eligible, employer transition credit contributions. The pretax expense associated with the 401(k) match for the years
ended November 30, 2010, 2009 and 2008 was $31.7 million, $33.7 million and $15.4 million, respectively.
14. Common and Preferred Stock
On March 13, 2009, the Company issued and sold to the United States Department of the Treasury (the “U.S.
Treasury”) under the Capital Purchase Program (i) 1,224,558 shares of the Company’s Fixed Rate Cumulative Perpetual
Preferred Stock, Series A (the “senior preferred stock”) and (ii) a ten-year warrant to purchase 20,500,413 shares of the
Company’s common stock, par value $0.01 per share, (the “warrant”) for an aggregate purchase price of $1.225
billion. The senior preferred stock paid a cumulative dividend rate of 5% per year for the first five years. The warrant had
a 10-year term and was immediately exercisable upon issuance, with an exercise price equal to $8.96 per share of
common stock. Of the aggregate amount of $1.225 billion received, approximately $1.15 billion was attributable to the
senior preferred stock and approximately $75 million was attributable to the warrant, based on the relative fair values of
these instruments on the date of issuance. The value of the warrant was initially scheduled to accrete over a period of five
years through a reduction to retained earnings on an effective yield basis. The Company used a discounted cash flow
analysis to determine the fair value of the senior preferred stock, which included the following key assumptions: (i) a
discount rate of 15%, (ii) a dividend rate for the first five years of 5% and (iii) a dividend rate after five years of 9%. The
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