Einstein Bros 2005 Annual Report Download - page 34

http://www.sec.gov/Archives/edgar/data/949373/000110465906016136/a06-3178_110k.htm[9/11/2014 10:13:03 AM]
During fiscal 2005, we 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.
Goodwill, Trademarks and Other Intangibles
Intangible assets include both goodwill and identifiable intangibles arising from the allocation of the purchase prices of assets acquired.
Goodwill represents the excess of cost over fair value of net assets acquired in the acquisition of Manhattan. Other intangibles consist mainly of
trademarks, trade secrets and patents.
Goodwill and other intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually or more
frequently if events or changes in circumstances indicate that the asset might be impaired. SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142), requires a two-step approach for testing impairment of goodwill. For goodwill, the fair value of each reporting unit is compared
to its carrying value to determine whether an indication of impairment exists. If impairment is indicated, the fair value of the reporting unit’ s
goodwill is determined by allocating the unit’ s fair value to its assets and liabilities (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination. For other indefinite lived intangibles, the fair value is compared to the carrying value.
The amount of impairment for goodwill and other intangible assets is measured as the excess of its carrying amount over its fair value. Intangible
assets not subject to amortization consist primarily of the Einstein Bros. and Manhattan trademarks.
Intangible assets with lives restricted by contractual, legal or other means are amortized over their useful lives and consist primarily of patents
used in our manufacturing process. Amortization expense is calculated using the straight-line method over the estimated useful lives of
approximately 5 years. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in
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NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with SFAS No. 144.
During the second quarter of fiscal 2004, we began an evaluation of whether each of our brands should be a part of our overall strategic
business plan. As a result of this evaluation, we determined that the Chesapeake brand did not fit within our long-term business model.
Accordingly, we performed an interim impairment analysis and determined that no impairment existed. We also performed a longevity analysis
and determined that the brand had an estimated useful life of four years. The trademarks were previously treated as a non-amortizing intangible and
were reclassified to an amortizing intangible at June 29, 2004. During the second quarter of fiscal 2005, we re-visited the long term strategic fit of
Chesapeake utilizing the recommendations of a third party consultant previously engaged to present viable alternatives for the brand. Based upon
the consultant’ s recommendations, we began forming an exit strategy that we believed could be completed within one year. Because there had
been a change in circumstances, it was necessary to review the asset for impairment. The analysis indicated that the carrying amount of the
Chesapeake trademarks was greater than its fair value and accordingly we recorded an impairment charge of $1.2 million during the quarter ended
June 28, 2005. As we continued to work with our remaining franchisees on an exit strategy, we also continued to review the carrying amount of
the Chesapeake trademarks in relation to their fair value. We recorded an additional $0.1 million in impairment charges related to the Chesapeake
trademarks. As of January 3, 2006, there is no remaining value reflected in our consolidated financial statements related to the Chesapeake
trademarks and we anticipate completion of our exit strategy during fiscal year 2006. Our ability to execute an exit strategy is dependent upon the
agreement and cooperation of our franchisees and we cannot provide any assurance that we will be successful in fully completing an exit strategy.
For the fiscal years ended 2005, 2004 and 2003, we engaged an independent valuation expert to assist us in performing an impairment
analysis of the goodwill and indefinite lived intangible assets related to our Einstein Bros. and Manhattan brands. At January 3, 2006 and
December 28, 2004, there was no indication of impairment in our goodwill and indefinite lived intangible assets. At December 30, 2003, there was
an indication that the carrying amounts of certain indefinite lived assets exceeded their fair values and accordingly we recorded an impairment
charge of $4.9 million related to our Manhattan and Chesapeake trademarks. The impairments for both Manhattan and Chesapeake were related to
declining cash flows for those brands and our expectation that the trend of lower sales will continue in future years. In addition to the trademark
impairment, we also wrote-off the value of previously reacquired Manhattan franchise territory rights of $0.4 million.
Insurance Reserves
We are insured for losses related to health, general liability and workers’ compensation under large deductible policies. The insurance
liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated liability is established
based on actuarial estimates, is discounted at 10% based upon a discrete analysis of actual claims and historical data and is reviewed on a quarterly
basis to ensure that the liability is appropriate. The estimated liability is included in accrued expenses in our consolidated balance sheets.