Einstein Bros 2007 Annual Report Download - page 46

http://www.sec.gov/Archives/edgar/data/949373/000104746908002111/a2183061z10-k.htm[9/11/2014 10:12:02 AM]
There is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may differ from the actual
values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based
payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally
estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are
significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of
our share-based awards is determined in accordance with SFAS 123R and the Securities and Exchange Commission's Staff Accounting Bulletin
No. 107 ("SAB 107") using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller
market transaction.
Estimates of share-based compensation expenses do have an impact on our financial statements, but these expenses are based on the
aforementioned option valuation model and will never result in the payment of cash by us. For this reason, and because we do not view share-
based compensation as related to our operational performance, we exclude estimated share-based compensation expense when evaluating our
performance.
Gift Card Breakage
Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as income when redeemed by the holder. While we will
continue to honor all gift cards presented for payment, we may determine the likelihood of redemption to be remote for certain gift card balances
due to the age of the unredeemed balance. In these circumstances, to the extent we determine there is no requirement for remitting balances to
government agencies under unclaimed property laws, gift card balances may be recognized as gift card breakage and is recorded as a reduction to
deferred revenue and an increase to company-owned restaurant revenues. For the fiscal year ended January 1, 2008, we recognized $1.3 million in
gift card breakage representing our estimate of breakage for gift cards sold in fiscal years 2003 through 2006. There was no gift card breakage
recognized on unredeemed gift cards in fiscal years 2006 or 2005.
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Income Taxes
As of January 1, 2008, net operating loss carryforwards of $148.8 million were available to be utilized against future taxable income for years
through fiscal 2026, subject in part to annual limitations. Our net operating loss carryforwards are one of our deferred income tax assets; however,
the ultimate realization of these deferred income tax assets is dependent upon the generation of future taxable income. Due to the uncertainty of
future taxable income, deferred tax assets resulting from these net operating losses have been fully reserved.
In accordance with SFAS No. 109 we will assess the continuing need for a valuation allowance that results from uncertainty regarding our
ability to realize the benefits of our deferred tax assets. We achieved net income of $12.6 million for fiscal 2007 and we expect to continue to be
profitable in fiscal 2008. However, we will continue to review various qualitative and quantitative data, including events within the restaurant
industry, the cyclical nature of our business, our future forecasts and historical trending. If we conclude that our prospects for the realization of our
deferred tax assets are more likely than not, we will then reduce our valuation allowance as appropriate and credit income tax expense after
considering the following factors:
•The level of historical taxable income and projections for future taxable income over periods in which the deferred tax assets would
be deductible, and
•Accumulation of net income before tax utilizing a look-back period of three years.
The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the
carryforward periods are reduced.
On January 3, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48").
Previously, we accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies.
As Required by FIN 48, which clarifies SFAS No. 109, we recognize the financial statement benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement with the relevant tax authority. At the adoption date, we applied FIN 48 to all tax positions for which the statute of limitations
remained open. We adopted FIN 48 in the first quarter of fiscal 2007. At the adoption date, we applied FIN 48 to all tax positions for which the
statute of limitations remained open. As a result of the implementation, we recorded a reduction of approximately $1.8 million of the gross deferred
tax asset and a corresponding reduction of the valuation allowance. Due to the completion and the filing of Forms 3115, Application for Change in
Accounting Method, it is highly certain that approximately $1.5 million of the unrecognized tax benefits will be realized. Additionally, we have
refined our estimate of the unrecognized tax benefits related to the remaining $0.3 million. Accordingly, in Quarter 4, 2007, we recorded an