Einstein Bros 2003 Annual Report Download - page 57

http://www.sec.gov/Archives/edgar/data/949373/000104746904009609/a2132006z10-k.htm[9/11/2014 10:13:55 AM]
repayment of its investment within two years with a guaranteed accretion of 15% per year (increasing to 17% on January 17, 2002 and by
an additional 2% each six months thereafter). In connection with the Bond Purchase Agreement, we issued Greenlight five-year warrants
to purchase an aggregate of 70,462 shares of the common stock at $0.60 per share. In addition, the terms of the Bond Purchase Agreement
stipulated that a) warrants for an additional 0.9375% of our fully diluted common stock were to be issued at the first anniversary date of the
agreement and at the beginning of each three-month period thereafter provided that certain conditions had not been met (including but not
limited to a combination of New World and Einstein) and b) warrants for an additional 1.5% of our fully diluted common stock were to be
issued at such time as the Series F is redeemed through the issuance of senior subordinated notes, which obligations were superceded by the
terms included in the letter agreement described below.
On June 19, 2001, GNW, Greenlight and we entered into a letter agreement (the "Letter Agreement"). Under the terms of the Letter
Agreement, Greenlight consented to the pledge by us, as manager of GNW, of the Einstein Bonds to Jefferies & Co. to secure the Bridge
Loan (see (c) above). We were required to apply all of the proceeds related to the Einstein Bonds to the repayment of the Bridge Loan. To
the extent that there were net proceeds from the Einstein Bonds after payment of the Bridge Loan in full, the excess would be payable to
Greenlight. If the excess payment, if any, is less than the original investment by Greenlight, the difference, plus 15%
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per annum increment (increasing to 17% in January 17, 2002 and by an additional 2% each six months thereafter), shall be payable in our
Series F and warrants in an amount to 1.125% of our fully diluted common stock for every $1.0 million of deficiency. We classified the
contingently issuable warrants as a derivative liability as discussed further below. In connection with the Letter Agreement, Greenlight gave
up its secured interest in the Einstein Bonds. We concluded that the changes to the terms of the Bond Purchase Agreement represented a
substantial modification, as defined in EITF Issue 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments, and
therefore that the execution of the Letter Agreement constituted an extinguishment of the Bond Purchase Agreement, as discussed further
below.
We incurred approximately $834,000 of issuance costs in connection with the Greenlight Obligation, all of which have been expensed as a
result of the extinguishment discussed in the preceding paragraph.
As a result of the maximum number of additional warrants that could have been issued under the Bond Purchase Agreement dated
January 17, 2001 exceeding the Share Cap, we concluded that the obligation to issue warrants in the future could not have been classified
within stockholders' equity on the date of issuance. However, as a result of the subsequent extinguishment of the Series D preferred stock,
the obligation to issue warrants in the future under the Bond Purchase Agreement did not exceed the Share Cap and, accordingly, the
liability established was reclassified to stockholders' equity in accordance with EITF 00-19. We included the impact of the increases in the
interest rate associated with the instrument and the amortization of any related discount in its effective interest rate calculations. The Letter
Agreement between Greenlight and us executed in June 2001 resulted in a substantial modification that required accounting as an
extinguishment pursuant to EITF 96-19, primarily due to the additional warrant coverage (deficiency warrants) provided in the Letter
Agreement in the event the proceeds from the Einstein Bonds were not sufficient to retire the Greenlight obligation. The extinguishment
resulted in a loss from extinguishment of Greenlight obligation of $16,641,566 in 2001 representing the difference between the fair value of
the new debt obligation and the carrying amount of the extinguished debt, plus the fair value of the estimated deficiency warrants that were
recorded as a liability. Additionally, the Greenlight obligation was presented in the financial statements as debt with interest expense
thereon recorded within the statement of operations since its inception.
As a result of the deficiency of the proceeds from the settlement of the Einstein Bonds, we were required to settle their obligation with
14,250.833 additional shares of Series F and 119,871 warrants exercisable at $1.00 per share to purchase our common stock. The Series F
issued as a result of this transaction was redeemed as part of the Equity Recap (See Note 9).
The components of the Greenlight instrument were zero at December 30, 2003 and were included in the accompanying 2002 balance sheet
as follows:
December 31, 2002
(amounts in thousands)
Proceeds from issuance of Greenlight obligation $ 10,000
Discount attributable to initial and future warrants (4,316)
Extinguishment of discount 4,195
Effective interest amortization of discount 121
$ 10,000