Einstein Bros 2005 Annual Report Download - page 44

http://www.sec.gov/Archives/edgar/data/949373/000110465906016136/a06-3178_110k.htm[9/11/2014 10:13:03 AM]
The maturity date on the debt and the redemption date of certain preferred stock issuances ranged from one to three years. The debt and preferred
stock agreements required the issuance of additional warrants and payment of dividends in the event that they were not redeemed within a certain
period. Such debt and preferred stock and warrant agreements were referred to as the Increasing Rate Notes or $140 Million Facility, the Standstill
Agreements, the Bond Purchase Agreement, the Bridge Loan, and the Mandatorily Redeemable Series F Preferred Stock (Series F) and Warrant
Agreements.
In connection with the aforementioned debt and preferred stock issuances, we issued freestanding warrants and rights to receive additional
warrants based either on the passage of time or upon the occurrence (or non-occurrence) of certain contingent future events (contingently-issuable
warrants). We determined that the contingently-issuable warrants could not be classified within stockholders’ equity based on the application of the
criteria in EITF Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’ s Own Stock,”
and accordingly classified those warrants as a liability in the balance sheet. Furthermore, those warrants classified as a liability were subject to the
provisions of SFAS No. 133, “Accounting for Derivative and Hedging Activities.” The warrants were carried at fair value based upon the
underlying fair value of the common stock to which they were indexed, the estimated probability of issuance and other pertinent factors and were
adjusted to fair value at each measurement date. Changes in the fair value of derivatives were recognized in earnings. During fiscal year 2003, we
recorded a cumulative change in the fair value of derivatives resulting in a $1.0 million gain. As a result of the equity recapitalization as described
below, we no longer have contingently issuable warrants and all warrants issued have been classified as permanent equity. During the 2003,
freestanding warrants that were issued based on the passage of time were valued based upon the underlying fair value of the common stock to
which they were indexed and recorded in additional paid-in-capital with a charge to interest expense.
We previously held an investment in debt securities which included ENBC 7.25% Convertible Debentures due 2004 (Einstein Bonds). The
Einstein Bonds were classified as available for sale and recorded at fair value with changes in fair value reported in stockholders’ deficit. During
fiscal year 2003, we received proceeds of $0.4 million for the debentures from the bankruptcy court that exceeded the carrying value of the asset.
Accordingly, we recorded a gain on our investment in debt securities of $0.4 million.
The proceeds received of $36.7 million relating to our investment in the Einstein Bonds were used to repay a portion of the Bridge Loan,
which bore interest at an initial rate of 14% per annum and increased by 0.35% on the fifteenth day of each month beginning July 15, 2002. The
Bridge Loan was secured by the Einstein Bonds. We issued Series F to pay the remaining balance of the Bridge Loan. Additionally, we issued
Series F to pay the Bond Purchase Agreement in full. The Bond Purchase Agreement provided for guaranteed accretion of 15% per year,
increasing to 17% on January 17, 2002 and an additional 2% each six months thereafter. The Series F was entitled to an annual cash dividend
equal to 17% per annum increasing 100 basis points per month until the Series F was redeemed. Warrants to purchase shares of our common stock
were also issued in connection with this transaction and have since been reclassified as permanent equity as a result of the equity recapitalization.
On July 8, 2003, we issued $160 million of 13% senior secured notes due 2008 as further explained in Note 10. We used the net proceeds,
among other things, to refinance the Increasing Rate Notes. The
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NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Increasing Rate Notes bore interest at an initial rate of 13%, increasing 100 basis points each quarter commencing September 15, 2001 to a
maximum rate of 18%. Also on July 8, 2003, we entered into the AmSouth Revolver.
On June 26, 2003, our board of directors approved an equity restructuring agreement between us and the holders of all our preferred stock and
a substantial portion of our fully diluted common stock. These entities included: Greenlight Capital, L.P., Greenlight Capital Qualified, L.P.,
Greenlight Capital Offshore, Ltd., Brookwood New World Investors, L.L.C. and NWCI Holdings, LLC. These entities are collectively referred to
as Greenlight in this filing. Additionally, we also agreed to the equity recapitalization with Halpern Denny Fund III, L.P. (Halpern Denny). Certain
of these entities also held a portion of the Increasing Rate Notes.
On September 24, 2003, our stockholders approved the equity recapitalization, which included the following transactions:
· We issued Halpern Denny 57,000 shares of Series Z Preferred Stock, par value $0.001 per share (Series Z) in exchange for 56,237.994
shares of Series F, par value $0.001 per share, 23,264,107 shares of common stock and warrants to purchase 13,711,054 shares of common
stock; and
· Each stockholder received 0.6610444 new shares of common stock for every share of common stock held by such stockholder pursuant to a
1.6610444-for-one forward stock split in order to effect the transaction contemplated by the equity recapitalization;
· The per share exercise price and the number of shares of common stock issuable upon the exercise of each outstanding option or warrant
(other than warrants that were issued in connection with the Increasing Rate Notes pursuant to the Warrant Agreement dated June 19,