Einstein Bros 2005 Annual Report Download - page 35

http://www.sec.gov/Archives/edgar/data/949373/000110465906016136/a06-3178_110k.htm[9/11/2014 10:13:03 AM]
Guarantees
Prior to 2001, we would occasionally guarantee leases for the benefit of certain of our franchisees. None of the guarantees have been modified
since their inception and we have since discontinued this
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NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
practice. Current franchisees are the primary lessees under the vast majority of these leases. Under the lease guarantees, we may be required by the
lessor to make all of the remaining monthly rental payments or property tax and common area maintenance payments if the franchisee does not
make the required payments in a timely manner. However, we believe that most, if not all, of the franchised locations could be subleased to third
parties reducing our potential exposure. Additionally, we have indemnification agreements with our franchisees under which the franchisees would
be obligated to reimburse us for any amounts paid under such guarantees. Historically, we have not been required to make such payments in
significant amounts. We record a liability for our exposure under the guarantees in accordance with SFAS No. 5, “Accounting for Contingencies,”
following a probability related approach. In the event that trends change in the future, our financial results could be impacted. As of January 3,
2006, we had outstanding guarantees of indebtedness under certain leases of approximately $600,000. Approximately $90,000 is reflected in
accrued expenses in our consolidated balance sheet at January 3, 2006.
Fair Value of Financial Instruments
As of January 3, 2006 and December 28, 2004, our financial instruments consist of cash equivalents, accounts receivable, accounts payable
and debt. The fair value of accounts receivable and accounts payable approximate their carrying value, due to their short-term maturities. The fair
value of debt and notes payable is estimated to approximate their carrying value by comparing the terms of existing instruments to the terms
offered by lenders for similar borrowings with similar credit ratings. As of January 3, 2006, the fair value of the $160 Million Notes approximated
$176.5 million as the notes were traded at a premium. The fair value of the $160 Million Notes approximated its carrying value at December 28,
2004 as the notes were traded at par in the market.
The Mandatorily Redeemable Series Z Preferred Stock (Series Z) is recorded in the accompanying consolidated balance sheets at its full face
value of $57.0 million, which represents the total required future cash payment. The current fair value of the Series Z, which was determined by
using the remaining term of the Series Z and the effective dividend rate from the Certificate of Designation, is estimated to be $33.2 million and
$28.5 million at January 3, 2006 and December 28, 2004, respectively.
Concentrations of Risk
We purchase a majority of our frozen bagel dough from Harlan Bakeries, Inc. (who utilizes our proprietary processes) and on which we are
dependent upon in the short-term. Additionally, we purchase all of our cream cheese from a single source. Though to date we have not experienced
significant difficulties with our suppliers, our reliance on a limited number of suppliers subjects us to a number of risks, including possible delays
or interruption in supplies, diminished control over quality and a potential lack of adequate raw material capacity. Any disruption in the supply or
degradation in the quality of the materials provided by our suppliers could have a material adverse effect on our business, operating results and
financial condition. In addition, any such disruptions in supply or degradations in quality could have a long-term detrimental impact on our efforts
to develop a strong brand identity and a loyal consumer base.
Advertising Costs
We expense advertising costs as incurred. Advertising costs were $6.6 million, $4.5 million and $12.9 million for the fiscal years ended 2005,
2004 and 2003, respectively, and are included in retail costs of sales in the consolidated statements of operations.
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NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Income Taxes