Einstein Bros 2002 Annual Report Download - page 62

http://www.sec.gov/Archives/edgar/data/949373/000104746903027186/a2116520z10-ka.htm[9/11/2014 10:14:22 AM]
based on the actual purchases of the vendor's product rather than over a fixed period of time. As a result, cost of goods sold and other long-term
liabilities were increased in 2001 by $793,783. In addition, the Company reclassified $1,420,784 of the liability related to this contract from short-
term to long-term liabilities. The restated financials also include $114,726 in an addition to the allowance for doubtful accounts for notes
receivable and $450,000 in consulting and financing fees that were not properly recorded as general and administrative expense. In addition to the
above items and in connection with its review of 2001 financial records, the Company determined that other accounting and classification errors
were made in various areas. The Company has restated the fiscal 2001 financial statements for such items, the effects of which were immaterial
with respect to the net loss available to common 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 No. 128, Earnings
per Share. These warrants were previously excluded from the loss per share computations.
Debt, Preferred Stock and Equity Adjustments:
The Company has determined that the accounting treatment of many of its debt and equity instruments in 2001 was incorrect with respect to
the initial allocation of the proceeds from issuance between the debt and equity instruments and associated freestanding warrants, the classification
of, and accounting for, the obligation to issue additional warrants in the future if the debt or equity instrument was not redeemed, the classification
of certain freestanding warrants, the recognition of increasing rate dividends and interest rates, the amortization of the discount associated with the
warrants and issuance costs, and the extinguishment of certain instruments upon significant changes in terms thereto. Affected instruments include:
Series D preferred stock (Note 10), Series F preferred stock (Note 10), the Bond Purchase Agreement with Greenlight and a certain letter
agreement dated June 19, 2001 between Greenlight and the Company (Note 8), the Bridge Loan (Note 8), and the $140 Million Facility (Note 8).
As mentioned in Note 1—Derivative Instruments, the Company's restated financial statements reflect the Company's systematic evaluation of
the maximum potential issuance of shares possible at each time an instrument with associated warrants is issued (taking into consideration the
terms of existing contractual agreements) as compared to the number of authorized shares of Common Stock at the dates of issuance of each
instrument. The maximum number of authorized shares of Common Stock was 50,000,000 in 2000 and from January 1, 2001 to September 25,
2001. Pursuant to a vote held
F-25
at a special meeting of the Company's shareholders on September 20, 2001, the maximum number of authorized shares of Common Stock was
increased, effective September 26, 2001, to 150,000,000 shares. On June 19, 2001, the issued freestanding warrants exceeded the authorized
number of shares and, accordingly, some of the warrants issued on that date were classified as liabilities, in accordance with the method described
below, until the increase in authorized shares was approved in September 2001, at which time such issued, freestanding warrants were reclassified
as permanent equity. In June 2001, certain of the Series F preferred stock holders agreed not to exercise their warrants if, in doing so, the
authorized number of shares remaining after exercise by the holders of the Series F preferred stock was not sufficient to permit warrants associated
with the $140 Million Facility to be exercised. To the extent that the number of freestanding warrants and the maximum number of additional
warrants that could potentially be issued in the future exceed the maximum number of authorized shares (the "Share Cap") at the time the debt or
preferred stock instrument is issued, the Company determines the classification of, and accounting for, the freestanding and additional warrants as
follows: (1) freestanding warrants (those that are immediately exercisable) are considered first for equity treatment, to the extent of the maximum
number of authorized shares; (2) among various outstanding instruments, those with the earlier issuance dates are considered first for equity
treatment; and (3) contractual priorities are considered where applicable. Freestanding warrants and the maximum number of additional warrants
that could potentially be issued in the future resulting in the Company's exceeding the Share Cap are treated as liabilities. If the freestanding
warrants and the maximum number of additional warrants that could be issued in the future exceed the Share Cap on the date the debt or preferred
stock instrument is issued, the proceeds from issuance are first allocated to the freestanding warrants and the contingent additional warrants based
on the fair value of those warrants, with the remainder allocated to the debt or preferred stock instrument. If only the maximum number of
additional warrants that could be issued in the future exceed the Share Cap on the date the debt or preferred stock instrument is issued, the proceeds
from issuance are first allocated between the freestanding warrants and the debt or preferred stock instrument based on their relative fair value. An
amount is then allocated to the contingent additional warrants based on the estimated fair value of those warrants, which results in an additional
discount on the debt or preferred stock instrument. In determining the fair value of the contingent additional warrants, the probability of their
issuance as well as the price of the underlying Common Stock is considered. The classification of freestanding warrants as equity or as liabilities is
reevaluated at each issuance upon consideration of the priorities outlined above.
Series D Preferred Stock (Note 10). On January 18, 2001, the two holders of Series D preferred stock BET and Brookwood) exchanged their
Series D preferred stock for Series F preferred stock. The restated financial statements account for the exchange as an extinguishment of the
Series D preferred stock. The Company applied EITF 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments, by analogy,
given the mandatory redemption feature of the Series D preferred stock, which imbues the issuance with debt-like characteristics, and determined
that the exchange resulted in a substantial modification that requires accounting for the transaction as an extinguishment rather than a modification.