Einstein Bros 2007 Annual Report Download - page 45

http://www.sec.gov/Archives/edgar/data/949373/000104746908002111/a2183061z10-k.htm[9/11/2014 10:12:02 AM]
estimates and assumptions, which are subject to high degree of judgment. In the event that these estimates and assumptions change in the future,
we may be required to record impairment charges for these assets. Given a substantial portion of our property and equipment (related to the assets
of Einstein/Noah Bagel Corp. that we acquired in bankruptcy proceedings in June 2001) became fully depreciated within the second and third
quarters of fiscal 2006, and considering the improvement in the profitability and cash flows from each of our restaurants, we believe a significant
change in any of the aforementioned assumptions would not have a material impact to our consolidated financial statements. As of January 2,
2007, all amortizing intangible assets have been fully amortized and a change in any of the aforementioned assumptions would have no impact to
our consolidated financial statements.
At least annually, we assess the recoverability of goodwill and other intangible assets not subject to amortization related to our restaurant
concepts. These impairment tests require us to estimate the fair values of our restaurant concepts by making assumptions regarding future profits
and cash flows, expected growth rates, terminal values, discount rates and other factors. As of January 1, 2008, the fair value of goodwill and other
intangible assets not subject to amortization sufficiently exceeded the carrying values. A much greater than inconsequential movement in any of the
aforementioned assumptions would not have a material impact to our consolidated financial statements. The assumptions used in the estimate of
fair value are generally consistent with the past performance of each reporting unit and other intangible assets and are also consistent with the
projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and
competitive conditions. In the event that these assumptions change in the future, we may be required to record impairment charges for these assets.
Insurance Reserves
We are insured for certain losses related to health, general liability and workers' compensation under large deductible policies. The insurance
liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated liability is established
and discounted at 10% based upon analysis of historical data and actuarial estimates and is reviewed on a quarterly basis to ensure that the liability
is appropriate. A 300 basis point decrease in the discount factor would increase our net loss by approximately $0.1 million annually. If actual
trends, including the severity or frequency of claims differ from our estimates, our financial results could be favorably or unfavorably impacted.
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees and
its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. The Statement requires entities to recognize compensation expense for awards of equity instruments
to employees based on the fair value of those awards on the date of grant (with limited exceptions).
Effective January 4, 2006, we adopted the provisions of SFAS No. 123R using the modified prospective transition method. Prior to the
adoption of SFAS No. 123R, we applied the intrinsic value-based method of accounting prescribed by APB No. 25 and related interpretations, in
accounting for our fixed award stock options to our employees. As such, compensation expense was recorded only if the current market price of
the underlying common stock exceeded the exercise price of the option on the date of grant. We applied the fair value basis of accounting as
prescribed by SFAS No. 123 in
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accounting for our fixed award stock options to our consultants. Under SFAS No. 123, compensation expense was recognized based on the fair
value of stock options granted.
Historically, we adopted only the pro forma disclosure provisions of SFAS No. 123. Since adoption of SFAS No. 123R, we are recognizing
compensation costs relating to the unvested portion of awards granted prior to the date of adoption using the same estimates and attributions used
to determine the pro forma disclosures under SFAS No. 123, except that forfeiture rates are estimated for all options, as required by SFAS
No. 123R.
We use the Black-Scholes model to estimate the fair value of our option awards. The Black-Scholes model requires estimates of the expected
term of the option, as well as future volatility and the risk-free interest rate. Our stock options generally vest over a period of 6 months to 3 years
and have contractual terms to exercise of 5 to 10 years. The expected term of options is based upon evaluations of historical and expected future
exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the
expected life at the grant date. Implied volatility is based on the mean reverting average of our stock's historical volatility and that of an industry
peer group. The use of mean reversion is supported by evidence of a correlation between stock price volatility and a company's leverage combined
with the effects mandatory principal payments will have on our capital structure, as defined under our new debt facility. We have not historically
paid any dividends and are precluded from doing so under our debt covenants.