Einstein Bros 2010 Annual Report Download - page 29

Form 10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312511067286/d10k.htm[9/11/2014 10:09:09 AM]
undiscounted future cash flows, considering location, local competition, current restaurant management performance, existing pricing structure and alternatives available for the site. If impairment exists, the
amount of impairment is measured as the excess of the carrying amount of the asset over its fair value as determined utilizing the estimated discounted future cash flows or the expected proceeds, net of costs to
sell, upon sale of the asset.
During fiscal years ended 2008 and 2009, the Company recorded approximately $0.3 million and $0.8 million, respectively, in impairment charges related to underperforming restaurants. The Company
did not record an impairment charge in 2010.
Inventory
Inventories, which consist of food, beverage, paper supplies and bagel ingredients, are stated at the lower of cost or market, with cost being determined by the first-in, first-out method.
Leases and Deferred Rent Payable
The Company leases all of its restaurant properties. Leases are evaluated and classified as operating or capital leases for financial reporting purposes.
For a lease that contains rent escalations, the Company records the total rent payable during the lease term on a straight-line basis over the term of the lease and record the difference between rent paid
and the straight-line rent expense as deferred rent payable. Incentive payments received from landlords are recorded as landlord incentives and are amortized on a straight-line basis over the lease term as a
reduction of rent.
Internal Development Costs and Abandoned Site Costs
The Company capitalizes direct costs associated with the site acquisition and construction of a company-owned restaurant on that site, including direct internal payroll and payroll-related costs. Only
those site-specific costs incurred subsequent to the time that the site acquisition is considered probable are capitalized. If the Company subsequently makes a determination that a site for which internal
development costs have been capitalized will not be acquired or developed, any previously capitalized internal development costs are expensed and included in general and administrative expenses.
Goodwill, Trademarks and Other Intangibles
Intangible assets include both goodwill and identifiable intangibles arising from the allocation of the purchase prices of assets acquired. Goodwill represents the excess of cost over fair value of net
assets acquired in the acquisition of Manhattan Bagel. Other intangibles consist mainly of trademarks, trade secrets and patents.
Goodwill and other intangible assets with indefinite lives are not subject to amortization, but are tested for impairment annually or more frequently if events or changes in circumstances indicate that the
asset might be
58
Table of Contents
EINSTEIN NOAH RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
impaired. In accordance with GAAP, the Company follows a two-step approach for testing impairment. For goodwill, the fair value of each reporting unit is compared to its carrying value to determine whether
an indication of impairment exists. If impairment is indicated, the fair value of the reporting unit’ s goodwill is determined by allocating the unit’ s fair value to its assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a business combination. For intangibles with indefinite 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 December 30, 2008, December 29, 2009 and December 28, 2010, the Company performed an impairment analysis of the goodwill and indefinite lived intangible assets related to the Einstein Bros.
and Manhattan Bagel brands. For the fiscal years ended 2008, 2009, and 2010 there was no indication of impairment in the goodwill and indefinite lived intangible assets.
Insurance Reserves
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 Company
maintains coverage with third party insurers which limit the total exposure from medical, workers’ compensation and general liability claims. The self-insurance medical liability and insured workers’
compensation 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 estimates, the Company’ s 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 the consolidated balance sheets.
Guarantees
Prior to 2001, the Company would occasionally guarantee leases for the benefit of certain franchisees. None of the guarantees have been modified since their inception and the Company has since
discontinued this practice. Current franchisees are the primary lessees under the vast majority of these leases. Under the lease guarantees, the Company 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, the Company believes most, if not all, of
the franchised locations could be subleased to third parties, reducing the potential exposure. Additionally, the Company has indemnification agreements with the franchisees under which the franchisees would be
obligated to reimburse the Company for any amounts paid under such guarantees. Historically, the Company has not been required to make such payments in significant amounts. The Company records a
liability for the exposure under the guarantees in accordance with GAAP. In the event that trends change in the future, the Company’ s financial results could be impacted. As of December 28, 2010, the Company
had outstanding guarantees of indebtedness under certain leases of approximately $0.2 million and no liability has been recorded.
Fair Value of Financial Instruments
As of December 29, 2009 and December 28, 2010, the Company’ s 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 December 29, 2009 and
59
Table of Contents
EINSTEIN NOAH RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 28, 2010, total debt under the senior secured credit facility was $79.8 million and $87.7 million, respectively and had a fair value of $64.6 million and $87.7 million, respectively 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”) was recorded in the accompanying consolidated balance sheets at its full face value of $32.2 million as of December 29, 2009. This
balance represented the total required future cash payment. The Series Z was redeemed in full in the fourth quarter of 2010 and therefore the balance as of December 28, 2010 was $0. The 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, was estimated to be $31.0 million as of December 29, 2009.
Concentrations of Risk