Einstein Bros 2008 Annual Report Download - page 35

Form 10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312509042707/d10k.htm[9/11/2014 10:10:56 AM]
in June 2001) became fully depreciated within the second and third quarters of fiscal 2006, and considering the improvement in the profitability
and cash flows from each of our restaurants, we believe a significant change in any of the aforementioned assumptions would not have a material
impact to our consolidated financial statements. As of January 2, 2007, all amortizing intangible assets have been fully amortized and a change in
any of the aforementioned assumptions would have no impact to our consolidated financial statements.
At least annually, we assess the recoverability of goodwill and other intangible assets not subject to amortization related to our restaurant
concepts. These impairment tests require us to estimate the fair values of our restaurant concepts by making assumptions regarding future profits
and cash flows, expected growth rates, terminal values, discount rates and other factors. As of December 30, 2008, the fair value of goodwill and
other intangible assets not subject to amortization sufficiently exceeded the carrying values. The assumptions used in the estimate of fair value are
generally consistent with the past performance of each reporting unit and other intangible assets and are also consistent with the projections and
assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and competitive
conditions. In the event that these assumptions change in the future, we may be required to record impairment charges for these assets.
Insurance Reserves
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’
compensation, healthcare benefits and general liability. The insurance liability represents an estimate of the ultimate cost of claims incurred and
unpaid as of the balance sheet date. The estimated liabilities are established and are not discounted, with the exception of the workers’
compensation, which is discounted at 10% based upon analysis of historical data and actuarial estimates, and they are reviewed on a
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quarterly basis to ensure that the liabilities are appropriate. If actual trends, including the severity or frequency of claims differ from our estimates,
our financial results could be favorably or unfavorably impacted.
Stock-Based Compensation
We use the Black-Scholes model to estimate the fair value of our option awards under SFAS No. 123R, Share-Based Payment (“SFAS
123R”). The Black-Scholes model requires estimates of the expected term of the option, as well as future volatility and the risk-free interest rate.
Our stock options generally vest over a period of 6 months to 3 years and have contractual terms to exercise of 5 to 10 years. The expected term of
options is based upon evaluations of historical and expected future exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates
at the date of grant with maturity dates approximately equal to the expected life at the grant date. Implied volatility is based on the mean reverting
average of our stock’ s historical volatility and that of an industry peer group. The use of mean reversion is supported by evidence of a correlation
between stock price volatility and a company’ s leverage combined with the effects mandatory principal payments will have on our capital
structure, as defined under our new debt facility. We have not historically paid any dividends and are precluded from doing so under our debt
covenants.
There is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may differ from the actual
values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based
payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally
estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are
significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of
our share-based awards is determined in accordance with SFAS 123R and the Securities and Exchange Commission’ s Staff Accounting Bulletin
No. 107 (“SAB 107”) using an option-pricing model, the value calculated may not be indicative of the fair value observed in a willing buyer /
willing seller market transaction.
Estimates of share-based compensation expenses do have an impact on our financial statements, but these expenses are based on the
aforementioned option valuation model and will never result in the payment of cash by us. For this reason, and because we do not view share-
based compensation as related to our operational performance, we exclude estimated share-based compensation expense when evaluating our
performance.
Gift Card Breakage
Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as income when redeemed by the holder. While we will
continue to honor all gift cards presented for payment, we may determine the likelihood of redemption to be remote for certain gift card balances
due to the age of the unredeemed balance. In these circumstances, to the extent we determine there is no requirement for remitting balances to
government agencies under unclaimed property laws, gift card balances may be recognized as gift card breakage and recorded as a reduction to
deferred revenue and an increase to company-owned restaurant revenues. For the fiscal year ended December 30, 2008, we recognized $0.3
million in gift card breakage.