Einstein Bros 2012 Annual Report Download - page 38

10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312513085036/d445565d10k.htm[9/11/2014 10:07:50 AM]
differ from these estimates.
Impairment of Long-Lived Assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying values of these assets
may not be recoverable. For the purpose of reviewing restaurant assets for indicators of potential impairment, assets are grouped together at the
market level. The Company manages its restaurants by market with significant common costs and promotional activities which are generally not
clearly identifiable with an individual restaurant’ s cash flows. We believe that historical cash flows, in addition to other relevant facts and
circumstances, are the primary basis for estimating future cash flows. Relevant facts and circumstances may include, but are not limited to, local
competition in the area, the ability of existing restaurant management, the necessity of tiered pricing structures and the impact that upgrading our
restaurants may have on our estimates. Recoverability of restaurant assets is measured by a comparison of the carrying amount of an individual
restaurant’ s assets to the estimated identifiable undiscounted future cash flows expected to be generated by those restaurant assets. This process
requires the use of estimates and assumptions, which are subject to a high degree of judgment. If the carrying amount of an individual restaurant’ s
assets exceeds its estimated, identifiable, undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying
amount of the assets exceeds its fair value. Generally, a restaurant’ s identifiable future cash flows are discounted to estimate its fair value. We
have not recorded impairment charges for fiscal 2011 and fiscal 2012.
Impairment of Goodwill and Other Indefinite Lived Intangible Assets
At least annually, we assess the recoverability of goodwill and other intangible assets that are not subject to amortization. These impairment
tests require us to estimate the fair values of our restaurant concepts by making assumptions regarding future profits and cash flows, expected
growth rates, terminal values, discount rates and other factors. As of January 1, 2013, the fair value of goodwill and other intangible assets not
subject to amortization sufficiently exceeded the carrying values. The assumptions used in 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
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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.
Business Combinations
We account for our acquisitions using the acquisition method of accounting. This method of accounting involves the allocation of the
purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process involves the use of estimates and
assumptions to derive fair values and to complete the allocation. Acquisition accounting allows for up to one year to obtain the information
necessary to finalize the fair value of all assets acquired and liabilities. As of January 1, 2013, all our recorded acquisition accounting allocations
have been finalized.
Insurance Liabilities
We use a combination of insurance and self-insurance mechanisms to provide for potential liabilities on 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 term 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 credit facility. Starting in
2010, we began declaring dividends and anticipate that we will continue to pay dividends in the future, at the discretion of the Board, dependent on
a variety of factors, including available cash and the overall financial condition of the Company.