Einstein Bros 2008 Annual Report Download - page 12

Form 10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312509042707/d10k.htm[9/11/2014 10:10:56 AM]
•increase our vulnerability to downturns in our business or the economy generally;
• increase our vulnerability to volatility in interest rates; and
• limit our ability to withstand competitive pressures from our less leveraged competitors.
Economic, financial, competitive, legislative and other factors beyond our control may affect our ability to generate cash flow from
operations to make payments on our indebtedness and to fund necessary working capital. A significant reduction in operating cash flow would
likely increase the need for alternative sources of liquidity. If we are unable to generate sufficient cash flow to make payments on our debt, we will
have to pursue one or more alternatives, such as reducing or delaying capital expenditures, refinancing our debt on terms that are not favorable to
us, selling assets or issuing additional equity securities. We may not be able to accomplish any of these alternatives on satisfactory terms, if at all,
and even if accomplished, they may not yield sufficient funds to service our debt.
We have $57.0 million of mandatorily redeemable preferred stock due June 30, 2009. Given the current state of the credit markets as well as
the financial condition of some of our lenders, our ability to borrow
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additional funds on our First Lien credit facility could be unlikely. Failure to redeem all of the preferred stock on June 30, 2009 will result in us
paying additional redemption price to redeem the remaining shares in the future.
We face the risk of adverse publicity and litigation in connection with our operations.
We are from time to time the subject of complaints or litigation from our consumers alleging illness, injury or other food quality, health or
operational concerns. Adverse publicity resulting from these allegations may materially adversely affect us, regardless of whether the allegations
are valid or whether we are liable. In addition, employee claims against us based on, among other things, discrimination, harassment or wrongful
termination, or labor code violations may divert financial and management resources that would otherwise be used to benefit our future
performance. For example, we recently settled two class actions in California as described in Note 19 to our Consolidated Financial Statements set
forth in Item 8 of this report. There is also a risk of litigation from our franchisees and licensees. We have been subject to a variety of these and
other claims from time to time and a significant increase in the number of these claims or the number that are successful could materially adversely
affect our business, prospects, financial condition, operating results or cash flows.
A regional or global health pandemic could severely affect our business.
A health pandemic is a disease that spreads rapidly and widely by infection and affects many individuals in an area or population at the same
time. If a regional or global health pandemic were to occur, depending upon its duration and severity, our business could be severely affected. We
have positioned ourselves as a “neighborhood atmosphere” between home and work where people can gather for human connection and high
quality food. Customers might avoid public gathering places in the event of a health pandemic, and local, regional or national governments might
limit or ban public gatherings to halt or delay the spread of disease. A regional or global pandemic might also adversely impact our business by
disrupting or delaying production and delivery of products and materials in our supply chain and causing staff shortages in our restaurants. The
impact of a health pandemic might be disproportionately greater on us than on other companies that depend less on the gathering of people in a
neighborhood atmosphere.
Our franchisees and licensees may not help us develop our business as we expect, or could actually harm our business.
We rely in part on our franchisees and licensees and the manner in which they operate their restaurants to develop and promote our business.
Although we have developed criteria to evaluate and screen prospective candidates, the candidates may not have the business acumen or financial
resources necessary to operate successful restaurants in their respective areas. In addition, franchisees and licensees are subject to business risks
similar to what we face such as competition, consumer acceptance, fluctuations in the cost, availability and quality of raw ingredients, and
increasing labor costs. The failure of franchisees and licensees to operate successfully could have a material adverse effect on us, our reputation,
our ability to collect royalties, our brands and our ability to attract prospective candidates. Potential franchisees and licensees may have difficulty
obtaining proper financing as a result of the downturn in the credit markets. As we offer and grant franchises for our Einstein Bros. brand, our
reliance on our franchisees is expected to increase in proportion to growth of the franchisee base. With respect to franchising our Einstein Bros.
brand, we may not be able to identify franchisees that meet our criteria, or to enter into franchise area development agreements with prospective
franchisee candidates that we identify. As a result, our franchise program for the Einstein Bros. brand may not grow at the rate we currently expect,
or at all.
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