Einstein Bros 2003 Annual Report Download - page 22

http://www.sec.gov/Archives/edgar/data/949373/000104746904009609/a2132006z10-k.htm[9/11/2014 10:13:55 AM]
classified within stockholders' equity based on the application of the criteria in EITF Issue 00-19, "Accounting for Derivative Financial Instruments
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Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"), and accordingly classified those warrants as a liability in the
balance sheet. Further, those warrants classified as a liability are subject to the provisions of SFAS 133, including the requirement to adjust the
recorded amount of the warrants to fair value at each balance sheet date, with changes in fair value being recognized in earnings. To the extent that
the number of freestanding warrants and the maximum number of additional warrants that could potentially be issued in the future exceed the
maximum number of authorized shares at the time the debt or preferred stock instrument is issued, we determine the classification of, and
accounting for, the freestanding and additional warrants as follows: (1) freestanding warrants (those that are immediately exercisable) are
considered first for equity treatment, to the extent of the maximum number of authorized shares; (2) among various outstanding instruments, those
with the earlier issuance dates are considered first for equity treatment; and (3) contractual priorities are considered where applicable.
Issued $0.60 and $1.00 warrants (formerly pre-split $0.01 warrants) classified as liabilities, if any, are recognized in the balance sheet at their
fair value, as determined periodically based on quoted market prices of the underlying common stock. As of December 30, 2003 and December 31,
2002, there were no issued warrants classified as liabilities. Contingently-issuable $0.60 and $1.00 warrants (formerly pre-split $0.01 warrants)
classified as liabilities are also recorded at fair value based on quoted market prices of the underlying common stock and considering the
probability of issuance, our assessments of the probability of refinancing our debt and other pertinent factors. Changes in the fair value of
derivative liabilities are recorded within the statement of operations. If reclassification from liability to permanent equity is required under
EITF 00-19, prior to reclassification, the liability is adjusted to fair value with the change recorded in cumulative change in derivative fair value
within the statement of operations. In the event of reclassification from permanent equity to liability, the related warrants are adjusted to fair value
with the change recorded in additional paid-in-capital.
As a result of the Equity Recap, we no longer have contingently issuable warrants and all issued warrants are classified as permanent equity.
Consequently, we no longer have a warrant derivative liability at December 30, 2003.
Series Z. The exchange of the Halpern Denny Interest for Series Z Preferred Stock (Series Z) resulted in a reduction of the effective dividend
rate relative to that required by the Series F, and as a result of this and other factors, we accounted for this transaction as troubled debt restructuring
as required by Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings"
("SFAS 15"). The Series Z is recorded in the accompanying balance sheet at its full face value of $57.0 million, which represents the total required
future cash payment due to the fact that the Series Z does not require dividends. Since a portion of this exchange included the receipt of our
common stock and warrants previously held by Halpern Denny, we did not recognize a gain from troubled debt restructuring.
Interest and Dividends. Interest expense and dividends on our $140 Million Facility and Series F, respectively, are determined, in part, by
assumptions related to expected maturity of such instruments. These assumptions were reviewed and adjusted as our circumstances changed while
the $140 Million Facility and Series F were outstanding.
Income Taxes. We account for income taxes under Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes"
("SFAS 109"). Realization of deferred taxes is dependent on future events and earnings, if any, the timing and extent of which are uncertain. At
December 30, 2003, we had net operating loss carryforwards of approximately $139.6 million available to offset future taxable income. These net
operating loss carryforwards expire on various dates through 2023. The utilization of approximately $116.5 million of the aforementioned net
operating loss carryforwards is subject to an annual limitation under the provisions of Section 382 of the Internal Revenue Code.
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We believe it is more likely than not that our net deferred tax asset will not be realized. Accordingly, a valuation allowance has been recorded
against the deferred tax asset at December 30, 2003 and December 31, 2002. Should we conclude that the deferred tax asset is, at least in part,
realizable, the valuation allowance will be reversed to the extent of such expected realizability.
Results of Operations
Year Ended December 30, 2003 (fiscal 2003) Compared to Year Ended December 31, 2002 (fiscal 2002)
Revenues. Total revenues decreased 3.9% to $383.3 million for fiscal 2003 compared with $398.7 million for fiscal 2002. The decrease in
revenue consisted of a $13.2 million decrease in retail sales (e.g. company-operated store sales) and a $2.2 million decrease in manufacturing sales