Einstein Bros 2010 Annual Report Download - page 28

Form 10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312511067286/d10k.htm[9/11/2014 10:09:09 AM]
licensed various restaurant concepts under the brand names of Einstein Bros. Bagels (“Einstein Bros.”), Noah’ s New York Bagels (“Noah’ s”), and Manhattan Bagel Company (“Manhattan Bagel”).
The Company has a 52/53-week fiscal year ending on the Tuesday closest to December 31. Fiscal years 2008, 2009 and 2010 which ended on December 30, 2008, December 29, 2009 and December 28,
2010 respectively, contained 52 weeks. The next 53-week fiscal year is 2011 which ends on January 3, 2012.
Certain immaterial reclassifications have been made to conform previously reported data to the current presentation. These reclassifications have no effect on net income or financial position as
previously reported.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company to make estimates
and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, costs and expenses
during the reporting period. Actual results could differ from the estimates.
Revenue Recognition
Company-owned restaurant sales—The Company records revenue from the sale of food, beverage and retail items as products are sold. Sales tax amounts collected from customers that are remitted to
governmental authorities are excluded from net revenue.
Manufacturing and commissary revenues—Manufacturing revenues are recorded at the time of shipment to customers. The Company’ s manufacturing operations sell bagels to a wholesaler and a
distributor who take possession in the United States and sells outside of the United States. As the product is shipped FOB domestic dock, and invoiced and paid in U.S. dollars, there are no international risks of
loss or foreign exchange currency issues. Approximately $4.8 million, $5.3 million and $5.3 million of sales shipped internationally are included in manufacturing revenues for fiscal years ended 2008, 2009 and
2010, respectively.
Franchise and license related revenues—Initial fees received from a franchisee or licensee to establish a new location are recognized as income when the Company has performed its obligations
required to assist the franchisee or licensee in opening a new location, which is generally at the time the franchisee or licensee commences operations. The initial franchise and license fees that were recognized
in 2010 were $0.6 million and $0.4 million, respectively. Continuing royalties, which are a percentage of the net sales of franchised and licensed locations, are accrued as income each month. In 2010, the
Company recognized approximately $0.1 million relating to deposits on a franchise development agreements that were terminated.
Gift Cards—Proceeds from the sale of gift cards are recorded as deferred revenue within accrued expenses, and recognized as income when redeemed by the holder. The deferred revenue balance
represents the Company’ s liability for gift cards that have been sold, but not yet redeemed. There are no expiration dates on the Company’ s gift cards, nor does the Company charge any service fees that decrease
customer balances.
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EINSTEIN NOAH RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
While the Company will continue to honor all gift cards presented for payment, it may determine the likelihood to be remote for certain gift card balances due to the age of the unredeemed balance. In
these circumstances, to the extent the Company determines there is no requirement for remitting balances to government agencies under unclaimed property laws, gift card balances may be recognized as gift
card breakage in revenue. Gift card breakage is included in revenue within company-owned restaurant sales in the consolidated statements of operations.
For the fiscal years ended December 29, 2009 and December 28, 2010, income from gift card breakage was $0.2 and $0.2 million, respectively. The Company’ s estimate of gift card breakage is based
upon reasonable and reliable company-specific historical information that the Company believes is predictive of the future and relates to a large pool of homogenous gift card transactions over a sufficient time
frame. The Company also recognized $0.4 million in revenue in 2010 related to gift certificate breakage from a gift certificate program that ceased to exist. While these gift certificates will continue to be
honored, the Company has determined the likelihood to be remote for redemption of these gift certificates due to their age and the fact that the program is no longer in place.
Allowance for doubtful accounts—The majority of the Company’ s receivables are due from licensees, franchisees, distributors and trade customers. The Company determines the allowance by
considering a number of factors, including the length of time trade accounts receivable are past due, previous loss and payment history, the customer’ s current ability to pay its obligation to the Company and the
condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited
to the allowance for doubtful accounts.
Cash and Cash Equivalents, and Restricted Cash
Cash and cash equivalents consist of cash on hand and highly liquid instruments with original maturities of three months or less when purchased. Amounts in-transit from credit card processors are also
considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Restricted cash consists of funds paid by
franchisees that are earmarked as advertising fund contributions, monies set aside for the lease on the Company’ s corporate office and restricted cash accounts for the benefit of taxing and other government
authorities. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances and
management believes its credit risk to be minimal.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Furniture and equipment are depreciated using the straight-line method over the estimated useful life of the asset, which ranges from 3 to 12 years.
Leasehold improvements are amortized using the straight-line method. The depreciable lives for leasehold improvements are limited to the lesser of the useful life or the non-cancelable lease term. In
circumstances where the Company would incur an economic penalty by not exercising one or more option periods, we include one or more option periods when determining the depreciation period. In either
circumstance, the Company’ s policy requires consistency when calculating the depreciation period, in classifying the lease and in computing straight-line rent expense. Costs incurred to repair and maintain the
Company’ s facilities and equipment are expensed as incurred.
In the first quarter of 2008, the Company reviewed the depreciable lives of the assets and determined that the economic useful life for leasehold improvements on new restaurants should be the shorter of
10 years or the life of the lease, which is typically 10 years. The Company also determined that the economic useful lives of restaurant upgrades should be the shorter of 5 years or the life of the lease. However,
as the Company approves restaurants to be upgraded, it simultaneously reviews the lease, and typically only upgrades those locations where
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Notes to Consolidated Financial Statements
the lease has a renewal option and the Company is reasonably assured that the lease will be renewed. For 2008, the effect on both income from operations and net income was a reduction of $0.9 million in
depreciation expense, which increased both basic and diluted earnings per share by $0.05.
In accordance with GAAP, impairment losses are recorded on long-lived assets on a restaurant-by-restaurant basis whenever impairment indicators are determined to be present. The Company considers
a history of cash flow losses to be the primary indicator of potential impairment for individual restaurant locations. The Company determines whether a restaurant location is impaired based on expected