Einstein Bros 2002 Annual Report Download - page 59

http://www.sec.gov/Archives/edgar/data/949373/000104746903027186/a2116520z10-ka.htm[9/11/2014 10:14:22 AM]
(Note 4) and has also expensed as general and administrative expenses $424,785 of intangible assets erroneously recorded relating to these
acquisitions. In addition, as detailed in Note 12, the Company recognized an impairment charge in connection with the realization of assets in
accordance with SFAS 121 of $966,001 and recorded an increase in the loss on the sale of equipment of $109,706 in the restated financials relating
to stores closed in 2000 and the first quarter of 2001. The impairment charge was calculated based on the difference between the estimated selling
price of the stores, if any, less selling costs, and their carrying value. The Company also reversed $378,827 of depreciation charged against assets
held for resale in 2000, which is prohibited by SFAS 121 for assets held for sale.
Income Tax Benefit. In 2000, the Company recognized an income tax benefit of $3,100,178 with a corresponding addition to the deferred tax
asset related primarily to expected utilization of loss carryforwards related to the Company prior to the acquisition of Manhattan Bagel Company.
The restated financial statements include the reversal of the income tax benefit, reflecting the Company's position that such recognition was in
error, as the realization of such deferred tax asset did not meet the "more likely than not" criteria required by SFAS No. 109. Also, the Company
recognized $260,000 in additional amortization expense in connection with the increase in goodwill associated with the deferred tax restatement
discussed in Note 3-A.
Purchase Accounting. The Company has expensed as general and administrative expenses, or reclassified as debt issuance costs, certain
costs originally capitalized as deferred acquisition costs relating to the Einstein Acquisition. Of the $1,085,721 of such costs expensed, $946,470
represented payments in stock and cash to consultants providing capital raising and financial advisory services that were not direct and incremental
to the acquisition of the assets of Einstein/Noah Bagel Corp. (Note 4).
Other Adjustments. The Company reduced its investment in debt securities with a corresponding charge to unrealized loss in fair value of
investments within stockholders' equity of $4,742,384 to reflect a temporary decline in the fair value of its investment in the 7.25% Convertible
Debentures due 2004 of Einstein/Noah Bagel Corp. as of December 31, 2000. This temporary decline was reversed in 2001 as a result of
subsequent increases in the fair value of the debentures based on market trading prices. The impairment referenced in Note 1—Investment in Debt
Securities was unaffected by these adjustments. The restated financial statements also include an increase of $843,000 and $354,321 to the
allowances for doubtful accounts for accounts receivable and notes receivable, respectively. In addition, the Company expensed $440,791 in
bonuses paid to employees in stock that had not been properly recorded. Also, $685,403 of stock issued to service providers was not accounted for
properly and has been expensed as general and administrative expenses in 2000. The Company also identified mispostings involving franchise
revenue and royalty income and bad debt expenses resulting in a $925,000 reduction to previously stated amounts. In addition to the above items
and in connection with its review of fiscal 2000 financial records, the Company determined that other accounting and classification errors were
made in various areas. We have restated the fiscal 2000 financial statements for such items, the effects of which were immaterial with respect to
the net loss available to common stockholders' and stockholders' equity.
Earnings Per Share. In the Company's restated financial statements, outstanding warrants for the purchase of its common stock that are
exercisable for $0.01 per share are included in the loss per share—basic and diluted, in accordance with paragraph 10 of SFAS 128, Earnings per
Share. These warrants were previously excluded from the basic earnings per share computations.
F-21
Equity Adjustments:
Series C Preferred Stock. The Company overstated the deemed dividend in connection with the beneficial conversion feature relating to the
conversion of Series C preferred stock in 2000 by $639,596 (Note 10). The restated financial statements include an increase in retained earnings
and a corresponding reduction in additional paid-in capital related to Series C preferred stock of $639,596, which reduces the deemed dividend of
$1,263,045 as originally reported, to the restated balance of $623,449. In addition, as a result of this revision, earnings allocable to common
stockholders was increased on the statement of operations.
Series D Preferred Stock. The Company has determined that the accounting treatment of its Series D preferred stock in 2000 was incorrect
with respect to the initial allocation of the proceeds from issuance between the preferred stock and the associated freestanding warrants, the
recognition of increasing rate dividends and the amortization of the discount associated with the allocation of proceeds to the freestanding warrants
and issuance costs.
The accounting for the Series D preferred stock in the Company's restated filings is as follows: Net proceeds from the issuance have been
allocated between the freestanding warrants and the preferred stock based on the relative fair value of each instrument. Proceeds allocated to the
freestanding warrants are classified within equity. The Company has computed the effective dividend rate over the three-year term to the final
mandatory redemption date. The effective dividend rate established on the date of issuance includes an estimate of the fair value of additional
warrants that are required to be issued in years two and three if the Company has not redeemed the preferred stock by that time. The estimated fair
value of the warrants was determined using the stock price on the computation date. Changes in the estimated fair value of the warrants the
Company expects to issue will be taken into account in determining a new effective dividend rate at the end of each reporting period. The new