Einstein Bros 2002 Annual Report Download - page 53

http://www.sec.gov/Archives/edgar/data/949373/000104746903027186/a2116520z10-ka.htm[9/11/2014 10:14:22 AM]
assets may not be realizable. Furthermore, assets held and used in operations are evaluated for continuing value and proper useful lives by
comparison to expected undiscounted future cash flows. If impairment has occurred, it is calculated based on the difference between the asset's
carrying value and the underlying discounted future cash flows it is expected to generate. Assets held for resale are evaluated by comparison to
estimated selling prices, less associated costs to sell such assets.
Prior to the adoption of SFAS 142, all intangible assets were evaluated for impairment using the methods described in the preceding
paragraph. After the adoption of SFAS 142, amortizable intangible assets continue to use these methods.
Revenue Recognition
Manufacturing revenues are recognized upon shipment to customers.
Retail sales are recognized when payment is tendered at the point of sale.
Pursuant to the franchise agreements, franchisees are generally required to pay an initial franchise fee and a monthly royalty payment equal to
a percentage of the franchisees' gross sales. Initial franchise fees are recognized as revenue when the Company performs substantially all of its
initial services as required by the franchise agreement. Royalty fees from franchisees are accrued each month pursuant to the franchise agreements.
Royalty income and initial franchise fees are included in franchise revenues.
Advertising Costs
The Company expenses advertising costs as incurred. The Company expensed approximately $13,983,000, $6,592,000 and $349,000 in
advertising costs for the years ended December 31, 2002, January 1, 2002 and December 31, 2000, respectively.
Deferred Rent
Certain of the Company's lease agreements provide for scheduled rent increases during the lease term or for rental payments commencing at a
date other than initial occupancy. Provision has been made for the excess of operating lease rental expense, computed on a straight-line basis over
the lease term, over cash rentals paid.
Shipping and Handling Costs
The Company classifies shipping and handling expenses related to product sales as a cost of goods sold.
Fair Value of Financial Instruments
The fair value of franchise notes receivable (Note 6) is estimated to approximate their carrying value based on comparisons of the terms of
these receivables to those that would be offered to similar borrowers with similar credit ratings. Investment in debt securities are carried at fair
value, as discussed previously in Note 1. The fair value of debt and notes payable outstanding, which is estimated to approximate their carrying
value, is estimated by comparing the terms of existing instruments to the
F-13
terms offered by lenders for similar borrowings with similar credit ratings. The carrying amounts of franchise and other receivables and accounts
payable approximate their fair value, due to their short-term maturities. Warrants classified as a derivative liability, if any, are carried at fair value
based upon the underlying fair value of the common stock to which they are indexed and, for contingently—issuable warrants classified as a
derivative liability, the estimated probability of issuance and other pertinent factors.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents,
investment in debt securities and notes and accounts receivable. The Company maintains cash and cash equivalents with various major financial
institutions. The Company believes that concentrations of credit risk with respect to notes and franchisee accounts receivable are limited due to the
large number and geographic dispersion of franchisees comprising the Company's franchise base. The Company performs ongoing credit
evaluations of its franchisees and maintains allowances for potential losses, as discussed previously in Note 1.
Earnings Per Share