Einstein Bros 2003 Annual Report Download - page 48

http://www.sec.gov/Archives/edgar/data/949373/000104746904009609/a2132006z10-k.htm[9/11/2014 10:13:55 AM]
Fair Value of Financial Instruments
The fair value of debt, notes payable and Series F outstanding, which is estimated to approximate their carrying value, is estimated by
comparing the terms of existing instruments to the 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. The Series Z is recorded in the accompanying balance sheet at its full face value of $57.0 million, which represents the total required future
cash payment because the Series Z does not require dividends. This presentation was required since the Series Z issuance was accounted for as a
troubled debt restructuring. The current fair value is estimated to be $24.4 million, which was determined by using the useful life of the Series Z
and the effective discount rate from the Certificate of Designation.
Debt Issuance Cost
Direct costs incurred for the issuance of debt are capitalized and amortized using the effective interest method over the term of the debt, unless
the debt is retired prior to the maturity date. In that instance, the debt issuance costs are charged to expense in the period the debt if repaid. Net debt
issuance costs as of December 30, 2003 and December 31, 2002 were $7.8 million and $0.6 million, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash,
and franchise and other receivables. We maintain cash and cash equivalents and restricted cash with various major financial institutions. We
believe that concentrations of credit risk with respect to franchisee and other receivables are limited due to the large number and geographic
dispersion of franchisees comprising our franchise base. We perform ongoing credit evaluations of our franchisees and maintain allowances for
potential losses, as discussed previously in this note under the caption Accounts Receivable.
Earnings Per Share
In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), basic earnings per common
share amounts ("basic EPS") are computed by dividing net earnings by the weighted average number of common shares outstanding (which
include warrants exercisable for a nominal price of $.01 per share on a pre-split basis prior to the Equity Recap on September 24, 2003) and
exclude any potential dilution. Diluted earnings per common share amounts assuming dilution ("diluted EPS") are computed by reflecting potential
dilution of our common stock
F-15
equivalents. Common stock equivalents are not reflected in diluted EPS if their effect would be anti-dilutive.
The following table summarizes the weighted average shares used in the basic and diluted EPS computations:
For the Years Ended
December 30,
2003
December 31,
2002
January 1,
2002
Weighted average shares outstanding 3,268,986 371,413 271,215
Weighted average warrants exercisable for $.01 on a pre-split basis(a) 604,298 942,347 330,394
3,873,284 1,313,760 601,609
(a) Given the decline of our stock price in the months subsequent to the Equity Recap (and the resultant forward and reverse stock splits), we
have determined that, commencing in the fourth quarter 2003, the warrants exercisable for $.01 on a pre-split basis ($.60 or $1.00 on a
post-split basis) should no longer be included in basic EPS under the provisions of paragraph 10 of SFAS 128.
All stock options and warrants outstanding (excluding those exercisable for $0.01 per share on a pre-split basis prior to the Equity Recap on