Einstein Bros 2009 Annual Report Download - page 32

Form 10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312510040721/d10k.htm[9/11/2014 10:09:50 AM]
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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 Liabilities
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’
compensation, general liability and healthcare benefits. The insurance liabilities represent an estimate of the ultimate cost of claims incurred and
unpaid as of the balance sheet date. The estimated liabilities are established and are not discounted, with the exception of the workers’
compensation, which is discounted at 10% based upon analysis of historical data and actuarial estimates, and they are reviewed on a quarterly basis
to ensure that the liabilities are appropriate. 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
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.
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 GAAP and the Securities and Exchange Commission’ s Staff Accounting Bulletin
No. 107 using an option-pricing model, the value calculated 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 being 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 recorded as a reduction to
deferred revenue and an increase to company-owned restaurant revenues. For 2009, we recognized $0.2 million in gift card breakage.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During 2008 and 2009, our results of operations, financial position and cash flows have not been materially affected by changes in the relative
values of non-U.S. currencies to the U.S. dollar. We do not use derivative financial instruments to limit our foreign currency risk exposure since
virtually all of our business is conducted in the United States. Our manufacturing operations sell bagels to a wholesaler and a distributor who take
possession in the United States and sell outside of the United States. As the product is shipped FOB domestic dock, and invoiced and paid in U.S.