Einstein Bros 2007 Annual Report Download - page 18

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natural resources, near-term construction costs for our new restaurants as well as sales in our restaurants going forward. If we are not able to
anticipate or react to changing costs of food and other raw materials by adjusting our purchasing practices or menu prices, our operating margins
would likely deteriorate.
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We have single suppliers for most of our key ingredients, and the failure of any of these suppliers to perform could harm our business.
We currently purchase our raw materials from various suppliers; however, we have only one supplier for each of our key ingredients. We
purchase a majority of our frozen bagel dough from a single supplier, who utilizes our proprietary processes and on whom we are dependent in the
short-term. All of our remaining frozen bagel dough is produced at our dough manufacturing facility in Whittier, California. Additionally, we
purchase all of our cream cheese and coffee from a single source. Although to date we have not experienced significant difficulties with our
suppliers, our reliance on a single supplier for each of our key ingredients 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 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, any such disruptions in supply or degradations in quality could have a long-term detrimental impact on our efforts to maintain a strong
brand identity and a loyal consumer base.
Failure of our distributors to perform adequately or any disruption in our distributor relationships could adversely affect our business and
reputation.
We depend on our network of independent regional distributors to distribute frozen bagel dough and other products and materials to our
company-owned, franchised and licensed restaurants. Any failure by one or more of our distributors to perform as anticipated, or any disruption in
any of our distribution relationships for any reason, would subject us to a number of risks, including inadequate products delivered to our
restaurants, diminished control over quality of products delivered, and increased operating costs to prevent delays in deliveries. Any of these events
could harm our relationships with our franchisees or licensees, or diminish the reputation of our menu offerings or our brands in the marketplace. In
addition, a negative change in the volume of products ordered from our distributors by our company-owned, franchised and/or licensed restaurants
could increase our distribution costs. These risks could have a material adverse effect on our business, financial condition and results of operations.
In early 2008, one of our distributors announced its intention to relocate part of its distribution network in the southeast. If this transition or
relocation does not go smoothly, this could adversely affect our operations.
Increasing labor costs could adversely affect our results of operations and cash flows.
We are dependent upon an available labor pool of associates, many of whom are hourly employees whose wages may be affected by increases
in the federal, state or municipal "living wage" rates. Numerous increases have been made on federal, state and local levels to increase minimum
wage levels. Increases in state minimum hourly wage rates in some of the states in which we operate became effective January 2008, and the
federal government has recently enacted minimum wage increases for 2008 and we expect the minimum wage will be raised again in 2009.
Increases in the minimum wage may create pressure to increase the pay scale for our associates, 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 associates from management to hourly employees could affect our labor cost. An increase in labor costs could have a
material adverse effect on our income from operations and decrease our profitability and cash flows if we are unable to recover these increases by
raising the prices we charge our guests.
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We may not be able to generate sufficient cash flow to make payments on our substantial amount of debt and mandatorily redeemable preferred
stock.
We have a considerable amount debt and are substantially leveraged. As of January 1, 2008, we had $89.8 million in term loans outstanding.
We also have $57.0 million of mandatorily redeemable preferred stock due June 30, 2009. In addition, we may, subject to certain restrictions, incur
substantial additional indebtedness in the future. Our high level of debt, among other things, could:
•make it difficult for us to satisfy our obligations under our indebtedness;
•limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate