Einstein Bros 2013 Annual Report Download - page 39

10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312514073832/d629623d10k.htm[9/11/2014 10:05:27 AM]
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 31, 2013, 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.
Leases
Under the provisions of certain of our leases, there are rent holidays and/or escalations in payments over the base lease term, as well as
renewal periods. The effects of rent holidays and escalations are reflected in rent costs on a straight-line basis over the expected lease term, which
includes cancelable option periods when it is deemed to be reasonably assured that we will exercise such option periods. The lease term
commences on the date when we become legally obligated for the rent payments which coincides with the time when the landlord delivers the
property for us to develop and we waive contract contingencies. All rent costs recognized during construction periods are expensed immediately as
pre-opening expenses.
Judgments made by management for its lease obligations include the probable term for each lease that affects the classification and
accounting for a lease as capital or operating; the rent holidays and/or escalations in payments that are taken into consideration when calculating
straight-line rent; incremental borrowing rates; and the term over which leasehold improvements for each restaurant facility are amortized. These
judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed
lease terms were used.
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Table of Contents
Business Combinations
We account for our acquisitions using the acquisition method of accounting. This method of accounting involves the allocation of the
purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process involves the use of estimates and
assumptions to derive fair values and to complete the allocation. Acquisition accounting allows for up to one year to obtain the information
necessary to finalize the fair value of all assets acquired and liabilities. As of December 31, 2013, all our recorded acquisition accounting
allocations have been finalized.
Insurance Liabilities
We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities on workers’ compensation, general
liability and healthcare benefits. The insurance liabilities represent 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 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. The total estimated insurance liabilities as of December 31, 2013 were $3.0 million.
Stock-Based Compensation
We use the Black-Scholes model to estimate the fair value of our option awards. 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 term 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 Senior Credit Facility. We
routinely declare quarterly dividends and anticipate that we will continue to pay dividends in the future, at the discretion of the Board, dependent
on a variety of factors, including available cash and the overall financial condition of the Company.
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 GAAP and the SEC’ s Staff Accounting Bulletin No. 107 using an option-pricing model,