Einstein Bros 2003 Annual Report Download - page 51

http://www.sec.gov/Archives/edgar/data/949373/000104746904009609/a2132006z10-k.htm[9/11/2014 10:13:55 AM]
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. We have determined which warrants are to be classified within stockholders' equity by first considering those warrants that have been
issued (exercisable), to the extent there are a sufficient number of authorized shares, and then considering contingently-issuable warrants, to the
extent there are a sufficient number of authorized shares.
As a result of the Equity Recap executed on September 24, 2003, 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. The ensuing discussion
outlines our policy for determining equity or liability classification for warrants, primarily as a result of contingently-issuable warrants associated
with our Series F and $140 Million Facility, which are no longer outstanding.
Our financial statements reflect our systematic evaluation of the maximum potential issuance of shares possible at each time an instrument
with associated warrants was issued (taking into consideration the terms of existing contractual agreements) as compared to the number of
authorized shares of common stock at the dates of issuance of each instrument. The maximum number of authorized shares of common stock was
830,522 in 2000 and from January 1, 2001 to September 25, 2001. Pursuant to a vote held at a special meeting of our shareholders on
September 20, 2001, the maximum number of authorized shares of common stock was increased, effective September 26, 2001, to 2,491,567
shares. On June 19, 2001, the issued freestanding warrants exceeded the authorized number of shares and, accordingly, some of the warrants issued
on that date were classified as liabilities, in accordance with the method described below, until the increase in authorized shares was approved in
September 2001, at which time such issued, freestanding warrants were reclassified as permanent equity. In June 2001, certain of the Series F
holders agreed not to exercise their warrants if, in doing so, the authorized number of shares remaining after exercise by the holders of the Series F
was not sufficient to permit warrants associated with the $140 Million Facility to be exercised. To the extent that the number of freestanding
warrants and the maximum number of additional warrants that could have potentially been issued in the future exceeded the maximum number of
authorized shares (the "Share Cap") at the time the debt or preferred stock instrument was issued, we determined the classification of, and
accounting for, the freestanding and additional warrants as follows:
•freestanding warrants (those that are immediately exercisable) were considered first for equity treatment, to the extent of the
maximum number of authorized shares;
•among various outstanding instruments, those with the earlier issuance dates were considered first for equity treatment; and
•contractual priorities were considered where applicable.
Freestanding warrants and the maximum number of additional warrants that could have potentially been issued which exceeded the Share Cap
were treated as liabilities. If the freestanding warrants and the maximum number of additional warrants that could have been issued exceeded the
Share Cap on the date the debt or preferred stock instrument was issued, the proceeds from issuance were first
F-19
allocated to the freestanding warrants and the contingent additional warrants based on the fair value of those warrants, with the remainder allocated
to the debt or preferred stock instrument. If only the maximum number of additional warrants that could have been issued exceeded the Share Cap
on the date the debt or preferred stock instrument was issued, the proceeds from issuance were first allocated between the freestanding warrants and
the debt or preferred stock instrument based on their relative fair value. An amount is then allocated to the contingent additional warrants based on
the estimated fair value of those warrants, which results in an additional discount on the debt or preferred stock instrument. In determining the fair
value of the contingent additional warrants, the probability of their issuance as well as the price of the underlying common stock was considered.
The classification of freestanding and contingently-issued warrants as equity or as liabilities was reevaluated at each issuance, and at each balance
sheet date, upon consideration of the priorities outlined above.
Issued $0.01 (pre-split) warrants classified as liabilities, if any, were 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 $0.01 (pre-split) warrants classified as liabilities were also recorded at fair value
based on quoted market prices of the underlying common stock and considering the probability of issuance and other pertinent factors. Changes in
the fair value of derivative liabilities were recorded within the statement of operations. If reclassification from liability to permanent equity was
required under EITF 00-19, prior to reclassification the liability was 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 were
adjusted to fair value, with the change recorded in additional paid-in capital.
2. Liquidity
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate our continuation as a going concern. However, we have sustained substantial losses in recent years,