Einstein Bros 2007 Annual Report Download - page 59

http://www.sec.gov/Archives/edgar/data/949373/000104746908002111/a2183061z10-k.htm[9/11/2014 10:12:02 AM]
Diluted earnings (loss) per share (a)/(c) $ (1.42) $ (0.66) $ 0.88
Antidilutive stock options, SARs and warrants 1,737,113 993,707 293,898
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment ("SFAS No. 123R"). SFAS 123R is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees ("APB No. 25") 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 grant-date fair value of those awards (with limited exceptions).
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EINSTEIN NOAH RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effective January 4, 2006, we adopted the provisions of SFAS No. 123R using the modified prospective transition method. Results for periods
prior to adoption have not been restated. 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 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.
Because we previously adopted only the pro forma disclosure provisions of SFAS No. 123, we are recognizing compensation cost, over the
requisite service period, relating to the unvested portion of awards granted prior to the date of adoption using the same estimate of the grant-date
fair value and the same attribution method 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.
Our stock-based compensation cost for the year ended January 3, 2006, January 2, 2007 and January 1, 1008 was $69,000, $654,000 and
$1.7 million, respectively and has been included in general and administrative expenses. No tax benefits were recognized for these costs due to our
cumulative losses as well as a full valuation reserve on our deferred tax assets.
The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
January 3,
2006
January 2,
2007
January 1,
2008
Expected life of options and SARs from date of grant 4.0 years 4.0 years 4.0 years
Risk-free interest rate 3.55 - 4.44% 4.35 - 4.84% 3.31 - 5.02%
Volatility 100.0% 100.0% 29.0% - 97.0%
Assumed dividend yield 0.0% 0.0% 0.0%
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 US Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Prior to the secondary
offering that was completed in June 2007, our implied volatility was based on the mean reverting average of our stock's historical volatility. Our
implied volatility is now 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.
Had compensation cost for stock options granted to employees been determined on the basis of fair value for periods prior to fiscal 2006 using
the aforementioned assumptions, net loss and loss per
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