Einstein Bros 2004 Annual Report Download - page 27

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operate or expect to enter, local or regional competitors already exist. This may make it more difficult to obtain real estate, advertising space, and
retain customers and personnel.
We are vulnerable to fluctuations in the cost, availability and quality of our raw ingredients.
The cost, availability and quality of the ingredients we use to prepare our food are subject to a range of factors, many of which are beyond our
control. Fluctuations in economic and political conditions, weather and demand could adversely affect the cost of our ingredients. During 2004,
weather has been a factor in the increase in commodity prices. We have limited control over fluctuations in the price and quality of commodities,
and we may not be able to pass through any cost increases to our customers. We are dependent on frequent deliveries of fresh ingredients, thereby
subjecting us to the risk of shortages or interruptions in supply. All of these factors could adversely affect our business and financial results.
We heavily depend on our suppliers and distributors.
We currently purchase our raw materials from various suppliers. We purchase a majority of our frozen bagel dough from one supplier (who
utilizes our proprietary processes) and on which we are dependent upon in the short-term. Additionally, we purchase all of our cream cheese from a
single source. Though to date we have not experienced significant difficulties with our suppliers, our reliance on our suppliers subjects us to a
number of risks, including possible delays or interruption in supplies, diminished control over quality and a potential lack of adequate raw material
capacity. Any disruption
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in the supply or degradation in the quality of the materials provided by our suppliers could have a material adverse effect on our business, operating
results and financial condition. In addition, such disruptions in supply or degradations in quality could have a long-term detrimental impact on our
efforts to develop a strong brand identity and a loyal consumer base.
We depend on our network of six regional custom distributors to distribute frozen bagel dough and other materials to our locations. If any one
or more of these distributors fails to perform as anticipated, or if there is any disruption in any of our distribution relationships for any reason, it
could have a material adverse effect on our business, financial condition and results of operations.
Increasing labor costs could adversely affect our continued profitability.
We are dependent upon an available labor pool of employees, many of whom are hourly employees whose wages may be affected by an
increase in the federal or state minimum wage. Numerous proposals have been made on federal, state and local levels to increase minimum wage
levels. Although few, if any, of our employees are paid at the minimum wage level, an increase in the minimum wage may create pressure to
increase the pay scale for our employees, which would increase our labor costs and those of our franchisees and licensees. A shortage in the labor
pool or other general inflationary pressures or changes could also increase labor costs. In addition, changes in labor laws or reclassifications of
employees from management to hourly employees could affect our labor cost. For example, federal overtime regulations under the Fair Labor
Standards Act, which went into effect on August 23, 2004, may impact the classification of several of our positions. We are continuing to evaluate
the specific impact of these changes. An increase in labor costs could have a material adverse effect on our income from operations and decrease
our profitability and cash available to service our debt obligations if we are unable to recover these increases by raising the prices we charge our
customers.
We face the risk of adverse publicity and litigation in connection with our operations.
We are from time to time the subject of complaints or litigation from our consumers alleging illness, injury or other food quality, health or
operational concerns. Adverse publicity resulting from these allegations may materially adversely affect us, regardless of whether the allegations
are valid or whether we are liable. In addition, employee claims against us based on, among other things, discrimination, harassment or wrongful
termination may divert financial and management resources that would otherwise be used to benefit our future performance. We have been subject
to claims from time to time, and although these claims have not historically had a material impact on our operations, a significant increase in the
number of these claims or the number that are successful could materially adversely affect our business, prospects, financial condition, operating
results or cash flows.
We rely in part on our franchisees.
We rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. Although we
have developed criteria to evaluate and screen prospective franchisees, franchisees may not have the business acumen or financial resources
necessary to operate successful franchises in their franchise areas. The failure of franchisees to operate franchises successfully could have a