Einstein Bros 2008 Annual Report Download - page 44

Form 10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312509042707/d10k.htm[9/11/2014 10:10:56 AM]
lives, the fair value is compared to the carrying value. The amount of impairment for goodwill and other intangible assets is measured as the excess
of its carrying amount over its fair value. Intangible assets not subject to amortization consist primarily of the Einstein Bros. and Manhattan Bagel
trademarks.
As of January 2, 2007, January 1, 2008 and December 30, 2008, we performed an impairment analysis of the goodwill and indefinite lived
intangible assets related to our Einstein Bros. and Manhattan Bagel brands. For the fiscal years ended 2006, 2007, and 2008 there was no indication
of impairment in our goodwill and indefinite lived intangible assets.
Insurance Reserves
We are self-insured for certain claims related to medical insurance, general liability and workers’ compensation. We maintain coverage with third
party insurers which limit our total exposure from medical and workers’ compensation claims. The self-insurance liability and general liability
represent an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated liabilities are established based
upon analysis of historical data to ensure that the liability is appropriate. If actual claims differ from our estimates, our financial results could be
impacted. The estimated workers’ compensation liability is established based on actuarial estimates, is discounted at 10% based upon a discrete
analysis of actual claims and historical data and is reviewed on a quarterly basis to ensure that the liability is appropriate. These estimated liabilities
are included in accrued expenses in our consolidated balance sheets.
Guarantees
Prior to 2001, we would occasionally guarantee leases for the benefit of certain of our franchisees. None of the guarantees have been modified
since their inception and we have since discontinued this practice. Current franchisees are the primary lessees under the vast majority of these
leases. Under the lease guarantees, we may be required by the lessor to make all of the remaining monthly rental payments or property tax and
common area maintenance payments if the franchisee does not make the required payments in a timely manner. However, we believe most, if not
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 December 30, 2008, we had outstanding guarantees of indebtedness under certain leases of approximately $0.9
million and no liability has been recorded.
Fair Value of Financial Instruments
As of January 1, 2008 and December 30, 2008, our financial instruments consist of cash equivalents, accounts receivable, accounts payable and
debt. The fair value of accounts receivable and accounts payable approximate
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Table of Contents
EINSTEIN NOAH RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
their carrying value, due to their short-term maturities. As of December 30, 2008, our total debt under the senior secured credit facility was $87.9
million and had a fair value of $69.6 million due to the changing credit markets. The fair value of the Company’ s debt was estimated based on the
current rates found in the market place for debt with the same remaining maturities.
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 $49.2 million and
$54.7 million at January 1, 2008 and December 30, 2008, respectively.
Concentrations of Risk
We purchase a majority of our frozen bagel dough from a single supplier 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 subject 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 could have a long-term detrimental impact on our efforts