Einstein Bros 2007 Annual Report Download - page 39

http://www.sec.gov/Archives/edgar/data/949373/000104746908002111/a2183061z10-k.htm[9/11/2014 10:12:02 AM]
General and Administrative Expenses
Our general and administrative expenses increased 3.8%, or $1.4 million, in 2006 when compared to 2005. As a percentage of sales, our
general and administrative expenses were 9.3% in 2005 compared to 9.6% in 2006. Predominantly contributing to the increase was approximately
$0.7 million in stock based compensation expense and $0.7 million for our 2006 annual leadership summits for our Einstein Bros. and Noah's
general managers and our Manhattan Bagel franchisees.
Depreciation and Amortization
Depreciation and amortization expenses decreased 35.6%, or $9.4 million, in 2006 compared to 2005. The decrease is primarily due to all of
our amortizing intangible assets becoming fully amortized and a substantial portion of our other assets becoming fully depreciated within the
second and third quarters of fiscal 2006. Depreciation and amortization expense is predominantly related to the assets of Einstein/Noah Bagel
Corp. that we acquired in bankruptcy proceedings in June 2001.
Loss on the Disposal, Sale or Abandonment of Assets
Loss on the disposal, sale or abandonment of assets represents the excess of book value over proceeds received, if any, over the net book value
of an asset. We establish estimated useful lives for our assets, which range from three to eight years, and depreciate using the straight-line method.
Leasehold improvements are limited to the lesser of the useful life or the non-cancelable lease term. The useful lives of the assets are based upon
our expectations of the period of time that the asset will be used to generate revenue. We periodically review the assets for changes in
circumstances, which may impact their useful lives.
46
Impairment Charges and other Related Costs
Impairment losses are non-cash charges recorded on long-lived assets, goodwill, trademarks and our other intangible assets. Generally, an
indicator of impairment would include significant change in an asset's ability to generate positive cash flow in the future or in the fair value of an
asset. Whenever impairment indicators are determined to be present, the amount of impairment is measured as the excess of the carrying amount of
the asset over its fair value. During 2006, we recorded $0.2 million in impairment charges related to company-owned restaurants compared to
$0.2 million in 2005. In addition, during 2005 we recorded $1.2 million in impairment charges related to our Chesapeake trademarks.
Some of our manufacturing equipment is located at the plant of Harlan Bakeries, Inc., our frozen bagel dough supplier. In late 2006, we were
notified of Harlan's intent, under the terms of the contract, to purchase the equipment and we agreed to sell the equipment to Harlan for
$1.1 million. In order to adjust the assets down to their mutually agreed-upon fair value, we recorded an impairment charge of $2.2 million during
the quarter ended January 2, 2007. The assets have been classified as held for sale on the consolidated balance sheet as of January 2, 2007.
Other Expense (Income)
On February 28, 2006, we completed a debt refinancing that redeemed our $160 million notes and retired our $15.0 million AmSouth
Revolver. We replaced this debt with $170.0 million in new term loans and a $15.0 million revolving credit facility. It reduced our effective
interest rate from 13.9% to a weighted-average effective interest rate of 10.27% as of January 2, 2007. In 2006, we incurred $19.6 million in net
interest expense compared to $23.7 million in 2005. In connection with refinancing our $160 million notes, we wrote off $4.0 million of debt
issuance costs and paid a 3% redemption premium in the amount of $4.8 million during the first quarter ended 2006.
Net Income (Loss) and Income Taxes
For our financial statements prepared in accordance with GAAP, we reported a net loss for 2006 of $6.9 million, which was a 51.0% decrease
from the net loss of $14.0 million we reported for 2005. Due to improved operations and as a result of a reduction in our depreciation and
amortization expense, as well as a savings from the reduction in the interest rate on our debt facility, we achieved net income of $0.8 million and
$6.0 million during the third and fourth quarters of 2006, respectively.
For tax purposes, net operating losses generated in 2006 will result in no federal or state income tax liability for 2006 and also will result in an
estimated net operating loss carryforward for U.S. federal income tax purposes of $1.6 million, which expires on December 31, 2026. Net
operating losses generated in 2005 from continuing operations resulted in no federal or state income tax liability for 2005 and also resulted in a net
operating loss carryforward for U.S. federal income tax purposes of $5.4 million, which expires on December 31, 2025. As of January 2, 2007, our
net operating loss carryforwards for U.S. federal income tax purposes were $156.8 million, $97.0 million of which are
47