Einstein Bros 2007 Annual Report Download - page 57

http://www.sec.gov/Archives/edgar/data/949373/000104746908002111/a2183061z10-k.htm[9/11/2014 10:12:02 AM]
all, of the franchised locations could be subleased to third parties reducing our potential exposure. Additionally, we have indemnification
agreements with our franchisees under which the franchisees would be obligated to reimburse us for any amounts paid under such guarantees.
Historically, we have not been required to make such payments in significant amounts. We record a liability for our exposure under the guarantees
in accordance with Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. In the event that trends change in the future, our financial
results could be impacted. As of January 1, 2008, we had outstanding guarantees of indebtedness under certain leases of approximately
$1.3 million. Approximately $36,000 is reflected in accrued expenses in our consolidated balance sheet at January 1, 2008 for the guarantee of a
franchisee's lease.
Fair Value of Financial Instruments
As of January 2, 2007 and January 1, 2008, our financial instruments consist of cash equivalents, accounts receivable, accounts payable and
debt. The fair value of accounts receivable and accounts payable approximate their carrying value, due to their short-term maturities. As of
January 2, 2007 and January 1, 2008, the carrying amounts of long term debt under the senior secured credit facility approximate fair value because
the interest rate adjusts to market interest rates.
The Mandatorily Redeemable Series Z Preferred Stock (Series Z) is recorded in the accompanying consolidated balance sheets at its full face
value of $57.0 million, which represents the total required future cash payment. The current fair value of the Series Z, which was determined by
using the remaining term of the Series Z and the effective dividend rate from the Certificate of Designation, is estimated to be $38.1 million and
$49.2 million at January 2, 2007 and January 1, 2008, respectively.
Concentrations of Risk
We purchase a majority of our frozen bagel dough from Harlan who utilizes our proprietary processes and on whom we are dependent in the
short-term. Additionally, we purchase all of our cream cheese from a single source. Historically, we have not experienced significant difficulties
with our suppliers but our reliance on a limited number of suppliers 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
69
EINSTEIN NOAH RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
could have a long-term detrimental impact on our efforts to develop a strong brand identity and a loyal consumer base.
Advertising Costs
We expense advertising costs as incurred. Advertising costs were $6.6 million, $4.5 million, and $3.3 million for the fiscal years ended 2005,
2006, and 2007, respectively, and are included in restaurant costs of sales in the consolidated statements of operations.
Company Operations and Segments
We view our company as one business with four segments: company-owned restaurant sales, manufacturing and commissary revenues,
franchise and license related revenues and corporate overhead. The restaurant segment includes our Einstein and Noah's brands, which have similar
investment criteria and economic and operating characteristics. The manufacturing segment produces and distributes bagel dough, cream cheese
and other products to our restaurants, licensees and franchisees and other third parties. Inter-company sales to our company-owned restaurants
have been eliminated during consolidation. The franchise and license segment earns royalties and other fees from the use of trademarks and
operating systems developed for the Manhattan, Einstein Bros. and Noah's brands. The last segment is our corporate office, where all overhead
related to the prior segments, interest and depreciation are recorded.
We have considered the disclosure provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.
Information regarding revenue and costs of sales for each of our business segments has been reported in the Consolidated Statements of Operations