Einstein Bros 2003 Annual Report Download - page 21

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we perform substantially all of our initial services as required by the franchise agreement. Royalty fees from franchisees and licensees are accrued
each month pursuant to the respective agreements when collection is probable. Royalty income and initial fees for both franchisees and licensees
are included in the franchise related revenue category.
Accounts Receivable. The majority of our accounts receivable are due from our franchisees and distributors. Accounts receivable are due
within 7 to 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time
trade accounts receivable are past due, previous loss history, the customer's current ability to pay its obligation to us, and the condition of the
general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently
received on such receivables are credited to the allowance for doubtful accounts.
Purchase Commitments. We have obligations with certain of our major suppliers of raw materials (primarily frozen bagel dough) for
minimum purchases both in terms of quantity and pricing on an annual basis. Furthermore, from time to time, we will commit to the purchase
price of certain commodities that are related to the ingredients used for the production of our bagels. On a periodic basis, we review the
relationship of these purchase commitments to our business plan, general market trends and our assumptions in our operating plans. If these
commitments are deemed to be in excess of the market, we will charge off the costs in excess of the market in the period they are incurred.
Furthermore, if the minimum purchase commitment requirements are deemed in excess of our forecasted purchases, we will charge off the excess
purchase commitment as an increase in cost of sales, in the period the difference is determined.
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Goodwill, Trademarks and Other Intangibles. We adopted Statement of Financial Accounting Standard SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") effective January 2, 2002. SFAS 142 provides that goodwill and other indefinite-lived intangibles should not be
amortized, but be subject to an annual assessment for impairment, or more frequently if circumstances indicate potential impairment, through a
comparison of fair value to their carrying amount. The two-step approach to assess our goodwill impairment requires that we first compare the
estimated fair value of each reporting unit that houses goodwill to the carrying amount of the unit's assets and liabilities, including its goodwill and
intangible assets. If the fair value of the reporting unit is below its carrying amount, then the second step of the impairment test is performed, in
which the current fair value of the unit's assets and liabilities will determine the current implied fair value of the unit's goodwill.
In conducting our impairment analyses, we utilized independent valuation experts to perform the analyses and tests of our indefinite-lived
assets with respect to our reporting units. The test methods employed involved assumptions concerning useful lives of intangible assets, interest
and discount rates, growth projections and other assumptions of future business conditions. The assumptions employed were based on our
judgment using internal and external data. We also utilized independent valuation experts to assist us in determining useful lives for our intangibles
other than goodwill, including the assessment that our Einstein Bros. trademarks have indefinite useful lives. Our determination that this trademark,
as well as our other trademarks, have indefinite useful lives is based on the fact that there are no legal, regulatory, competitive or other factors that
limit their useful lives.
The annual impairment analyses of goodwill conducted by us indicated that the fair value of the Manhattan reporting unit (the only reporting
unit with goodwill) as of December 30, 2003 and December 31, 2002 exceeded its carrying value. Thus, the associated goodwill on our
consolidated balance sheets as of December 30, 2003 and December 31, 2002 was not impaired, and the second step of the impairment tests was
not required. Additionally, the annual impairment analyses for our indefinite-lived intangibles (trademarks) indicated that, for certain of the
intangibles, the respective carrying values exceeded their fair values. Therefore we recorded an impairment of approximately $3.2 million and
$1.7 million for Manhattan and Chesapeake, respectively, as of December 30, 2003. In addition to the trademark impairment, we also wrote-off the
value of previously reacquired Manhattan franchise territory rights of $414,000. The impairments for both Manhattan and Chesapeake were related
to declining cash flows for those brands and applying the trend of lower sales to future years. For fiscal year 2004, we are developing new
strategies with respect to both the Manhattan and Chesapeake brands. These strategies are aimed at revitalizing the brands and growing our cash
flow from these brands. We are also reviewing our long-term plans for each of these brands and their relation to our business as a whole.
Accordingly, we are continuing to classify the trademarks as indefinite-lived at this time, and will review this determination in future periods if our
intentions for these brands were to change. The fair value of Einstein Bros. and Noah's indefinite-lived intangible assets (trademarks) exceeded
their carrying value. Therefore no impairment was present at December 30, 2003. There was no impairment as of December 31, 2002 with respect
to the indefinite lived intangibles (trademarks).
Derivative Instruments. Effective January 1, 2000, we adopted Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivatives be recognized in the balance sheet at their
fair value. Changes in the fair values of derivatives that do not qualify for hedge accounting under SFAS 133 are recognized through earnings. In
conjunction with certain debt and preferred stock issuances in 2000 and 2001, 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, for a period of time in 2001, certain of these freestanding warrants and contingently-issuable warrants could not be