Einstein Bros 2004 Annual Report Download - page 48

http://www.sec.gov/Archives/edgar/data/949373/000104746905006202/a2153240z10-k.htm[9/11/2014 10:13:29 AM]
We previously held an investment in debt securities which included ENBC 7.25% Convertible Debentures due 2004 (Einstein Bonds). The
Einstein Bonds were classified as available for sale and recorded at fair value with changes in fair value reported in stockholders' deficit. During
the years ended 2003 and 2002, we received proceeds of $374 and $36,711, respectively, for the debentures from the bankruptcy court that
exceeded the carrying value of the asset. Accordingly, we recorded a gain on our investment in debt securities of $374 and $2,537 in 2003 and
2002, respectively.
The proceeds received of $36,711 relating to our investment in the Einstein Bonds were used repay a portion of the Bridge Loan, which bore
interest at an initial rate of 14% per annum and increased by 0.35% on the fifteenth day of each month beginning July 15, 2002. The Bridge Loan
was secured by the Einstein Bonds. We issued Series F to pay the remaining balance of the Bridge Loan. Additionally, we issued Series F to pay
the Bond Purchase Agreement in full. The Bond Purchase Agreement provided for guaranteed accretion of 15% per year, increasing to 17% on
January 17, 2002 and an additional 2% each six months thereafter. The Series F was entitled to an annual cash dividend equal to 17% per annum
increasing 100 basis points per month until the Series F was redeemed. Warrants to purchase shares of our common stock were also issued in
connection with this transaction and have since been reclassified as permanent equity as a result of the equity recapitalization.
On July 8, 2003, we issued $160 million of 13% senior secured notes due 2008 as further explained in Note 10. We used the net proceeds,
among other things, to refinance the Increasing Rate Notes. The Increasing Rate Notes bore interest at an initial rate of 13%, increasing 100 basis
point each quarter commencing September 15, 2001 to a maximum rate of 18%. On that same date, we also entered into a three-year, $15 million
senior secured facility with AmSouth Bank.
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In September 2003, we completed an equity recapitalization with our preferred stockholders, who held a substantial portion of our common
stock. Among other things, our Mandatorily Redeemable Series F Preferred Stock (Series F) and its related dividends and accretion were
eliminated. In exchange, we issued 57,000 shares of our Mandatorily Redeemable Series Z Preferred Stock (Series Z) to Halpern Denny Fund III,
L.P. ("Halpern Denny") and we issued 9,380,843 shares of our common stock to Greenlight Capital and affiliates ("Greenlight").
The exchange of the Halpern Denny interest resulted in a reduction of our effective dividend rate and as a result of this and other factors, we
accounted for this transaction as troubled debt restructuring. This exchange did not result in a gain from troubled debt restructuring. The exchange
of the Greenlight interest into common shares was recorded at fair value, which resulted in a loss upon exchange of approximately $23,000.
In connection with the equity recapitalization and because certain debt agreements were not redeemed within a certain period, we issued step-
up warrants to prevent further dilution and entered into Standstill Agreements with holders of our Increasing Rate Notes. Under the terms of the
Standstill Agreements, we agreed to issue additional warrants to purchase shares of our common stock. The Standstill Agreements prevented the
call of the debt until such time as we completed the equity recapitalization. For the year ended December 30, 2003, we recorded $3,132 in interest
expense related to the standstill and step-up warrants representing the fair value of our stock on the date of issuance.
14. MANDATORILY REDEEMABLE SERIES Z PREFERRED STOCK
The major provisions of our Mandatorily Redeemable Series Z Preferred Stock (Series Z) are as follows:
•2,000,000 shares authorized;
•par value of $0.001 per share;
•mandatory redemption upon the earlier of (i) a merger or change of control or (ii) June 30, 2009;
•shares are non-voting (except for certain limited voting rights with respect to specified events);
•liquidation value is $1,000 per share;
•dividends are not accrued or paid unless the shares are not redeemed by the redemption date; and
•shares may be redeemed in whole or in part at an earlier date at our discretion.
The Series Z is recorded in the accompanying consolidated balance sheets at its full face value of $57,000 as a result of the accounting under
troubled debt restructuring as discussed in Note 13. The $57,000 represents the total cash payable upon liquidation.