Einstein Bros 2002 Annual Report Download - page 57

http://www.sec.gov/Archives/edgar/data/949373/000104746903027186/a2116520z10-ka.htm[9/11/2014 10:14:22 AM]
As discussed in Note 16, The Company has engaged an investment bank to assist it in developing alternatives to rationalize its capital
structure. The Company is actively pursuing options to effect the refinancing or retiring of the $140 Million Facility on or before its maturity on
June 15, 2003. Such options currently under consideration by the Company include the sale of all or part of the Company, which could result in an
investment of equity and a refinancing or retirement of the Company's primary debt obligations, and the refinancing of the $140 Million Facility
with a new debt facility, which may entail a new 144A senior note offering.
The Company has recorded a loss from operations for the fiscal years ending December 21, 2002, January 1, 2002 and December 31, 2000 of
approximately $316,000, $6.8 million and $3.1 million, respectively. The Company also recorded net cash flow used in operating activities of
approximately $6,670,000 in 2002 as a result of the operating loss as well as working capital contraction related primarily to shorter payment terms
associated with its new distribution contracts. The Company has initiated cost reduction programs that stem primarily from the integration of
Einstein into the Company, including supply chain efficiencies and reductions in overhead as a result of the elimination of duplicative functions
and the streamlining of various functional areas. While most of these initiatives commenced in fiscal 2002, the full year effect is not expected to be
realized until 2003. In addition, the Company incurred substantial expenses in 2002 related to (1) the payment of unauthorized bonuses to certain
members of former management as well as the internal investigation that ensued and (2) legal and advisory fees related to various efforts to
refinance the $140 Million Facility and the Company's revolving line of credit, which are not anticipated to recur at similar levels in 2003.
Although there is no assurance that funding will be available to refinance or retire the $140 Million Facility, the Company believes that its current
business plan, if successfully funded, will improve its operating results and cash flow in the future.
3. Restatements—2001 and 2000
The Company has determined that certain of its accounting practices in previous years did not reflect the proper application of generally
accepted accounting principles ("GAAP"). Accordingly, the Company has restated its financial statements for fiscal 2000, fiscal 2001 and the
opening balances of certain accounts in 2000.
A. Beginning Balance for Fiscal 2000
In the process of reviewing the accounting treatment of certain transactions, the Company has identified certain adjustments to prior period
balances, which changes are reflected on the adjusted opening balance sheet for fiscal 2000. The impact of the adjustments on stockholders' equity
is summarized below (amounts in thousands):
Beginning Fiscal 2000 Stockholders' Equity, As Previously Reported $ 12,372
Depreciation Expense 545
Franchisee Debt Guarantee Payments (229)
Pre-opening Rent (102)
Beginning Fiscal 2000 Stockholders' Equity, As Restated $ 12,586
F-18
The restatements can be categorized as follows:
Stockholders' Equity Adjustments:
Other Adjustments. Beginning balance adjustments impacting stockholders' equity include: (1) the reversal of depreciation, which is
prohibited by SFAS 121, deducted from assets held for resale of $240,617, (2) the correction of excess depreciation taken on fixed assets of
$304,836, (3) the expensing of $228,904 in certain franchise debt guarantee payments, and (4) the expensing of $101,709 in pre-opening rent.
Balance Sheet Reclassifications:
Deferred Income Taxes. In the fourth quarter of 1999, the Company reversed its valuation allowance recorded in purchase accounting for the
Manhattan Bagel Company acquisition and as a result recorded a deferred income tax asset of $6,500,000 with an offsetting credit to goodwill. The
Company now believes this treatment was not recorded properly in accordance with SFAS 109 and has reinstated the valuation allowance, which
resulted in a $6,500,000 reduction in deferred income taxes and a corresponding increase in goodwill.
Reorganization and Integration Accruals Established in Purchase Accounting. The Company established certain accrued liabilities in
connection with expected liabilities to be incurred related to the reorganization and integration of Manhattan Bagel Company and Chesapeake
Bagel Bakery, entities acquired in 1998 and 1999, respectively. As of December 26, 1999, the balance of these liabilities was $6,119,680. The
Company has analyzed these accruals and determined that certain transactions were recorded incorrectly as $5,193,625 of these liabilities did not