Einstein Bros 2005 Annual Report Download - page 22

http://www.sec.gov/Archives/edgar/data/949373/000110465906016136/a06-3178_110k.htm[9/11/2014 10:13:03 AM]
administrative facilities located in New Jersey. The loss on disposal or abandonment of assets was offset by a gain of approximately $90,000 on the
sale of the assets of Willoughby’ s.
Charges (adjustments) of integration and reorganization cost for fiscal 2004 primarily represents adjustments to previously recorded liabilities
associated with the closing and consolidation of our Eatontown facilities during 2002. During April 2004, we reached an agreement with the
landlord of our Eatontown facility to settle outstanding litigation. Previously recorded integration and reorganization estimates associated with
closing this facility were adjusted to reflect a reduction of the prior year’ s accrued cost of $0.7 million. The charge in fiscal 2003 reflects an
increase in the estimated liability associated with closing certain facilities as part of our reorganization partially offset by an adjustment from an
estimated reorganization liability recorded in 2002.
During fiscal 2005, we recorded approximately $1.3 million in impairment charges related to the Chesapeake trademarks. We also recorded
approximately $0.2 million in impairment charges related to company-owned stores and approximately $0.1 million in exit costs from the decision
to close one restaurant. During fiscal 2004, we recorded $0.5 million in impairment charges for long-lived asset impairments and exit costs from
the decision to close two restaurants and to write down the assets of under-performing restaurants. During fiscal 2003, we recorded a charge of
approximately $5.3 million due to the reduced value of certain trademarks associated with our Manhattan and Chesapeake brands and the value of
franchisee territory rights for our Manhattan brand. There was no impairment of intangible assets in fiscal 2004.
During fiscal 2005, net interest expense increased 2.2% when compared to fiscal 2004 primarily due to the 53-week basis. Calculated on a
comparative 53-week basis for both fiscal 2005 and 2004, interest expense remained flat. Net interest expense decreased 32.1% during fiscal 2004
when compared to the preceding fiscal year as a result of refinancing our debt in July 2003 in which the stated interest rate on our primary debt
facility declined from 18% to 13% per year.
As a result of the equity recapitalization in September 2003, we no longer have contingently issuable warrants and all issued warrants are
classified as permanent equity. The cumulative change in fair value of derivatives during fiscal 2003 is due to the change in the fair value of
warrants classified as a derivative liability based on the underlying fair value of 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.
In fiscal 2003, we recognized a gain on the investment in debt securities of $0.4 million from our investment in the Einstein/Noah Bagel
Corp. 7.25% Convertible Debentures due 2004. The proceeds from the bankruptcy court were in excess of our original estimates.
In September 2003, we completed an equity recapitalization with our preferred stockholders, who held a substantial portion of our common
stock. Among other things, our Mandatorily Redeemable Series F Preferred Stock was eliminated. In exchange, we issued 57,000 shares of
Series Z Mandatorily Redeemable Preferred Stock to Halpern Denny Fund III, L.P. and we issued 9,380,843 shares of our common stock to
Greenlight Capital and affiliates. The exchange of the Halpern Denny interest resulted in a reduction of our effective dividend rate and as a result
of this and other factors, we accounted for this transaction as troubled debt restructuring. This exchange did not result in a gain from troubled debt
restructuring. The exchange of the Greenlight interest into common shares was recorded at fair value, which resulted in a loss upon exchange of
approximately $23.0 million reflected in fiscal 2003.
28
Financial Condition, Liquidity and Capital Resources
The restaurant industry is predominantly a cash business where cash is received at the time of the transaction. We generate sufficient cash
flow and we have sufficient availability under our revolving credit facility to fund operations, capital expenditures and required debt and interest
payments. Our inventory turns frequently since our products are perishable. Accordingly, our investment in inventory is minimal. Our accounts
payable are on terms that we believe are consistent with those of other companies within the industry.
The primary driver of our operating cash flow is our restaurant operations, specifically the gross margin from our company-operated
restaurants. Therefore, we focus on the elements of those operations including comparable store sales and cash flows to ensure a steady stream of
operating profits that enable us to meet our cash obligations. On a weekly basis, we review our company-operated store performance compared
with the same period in the prior year and our operating plan. We are continuously identifying and implementing initiatives to increase revenue as
well as reduce costs, not only at the store operations level, but also within other disciplines such as supply chain, manufacturing operations and
overhead. During 2005, we continued to identify and implement these initiatives, including but not limited to:
· price increases on certain menu items based upon competitive analysis and the cost of underlying ingredients;
· refinement of merchandising to drive sales of higher margin items;
· new revenue initiatives related to our manufacturing and commissary operations;
· expansion of our catering program;
· menu optimization to remove and/or modify slow moving products and thus reduce waste;