Jamba Juice 2007 Annual Report Download - page 66

Table of Contents
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purchase 750,000 shares for $7.50 each, follows the same accounting guidelines as the 17,250,000 warrants discussed previously, and is considered a
liability.
The Company estimated the fair value of the derivative instruments at inception and as of each balance sheet date using a Black-Scholes option-pricing
model. Option valuation models, including Black-Scholes, require the input of highly subjective assumptions, and changes in the assumptions used can
materially affect the fair value. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility, and the expected life of the
award. The risk-free rate of interest is based on the zero coupon U.S. Treasury rates appropriate for the expected term of the award and was 4.72% as of
January 9, 2007, 4.3% as of January 10, 2006 and December 31, 2005, and 4.1% as of inception. Expected dividends are zero based on history of not paying
cash dividends on the Company’s common stock. The Company does not have any plans to pay dividends in the future. Had it had plans to pay dividends,
it would use a rate for its current valuation. The expected term was determined to be the remaining contractual life of the option or derivative of 3.5 years as of
January 9, 2007 and 4.5 years as of January 10, 2006 and December 31, 2005.
Due to its limited trading history as an operating entity, the Company uses volatility rates based on a 50/50 blend of historic, daily stock price
observations of the Company’s common stock since its inception and historic, daily stock price observations of the Company’s peers (companies in Jamba
Juice Company’s industry that are viewed as a “concept” and a leader in the premium, specialty growth segment) for a period prior to the balance sheet date
that is equal in length to the expected term. Prior to the Merger Agreement, the Company used volatility rates based upon a sample of comparable special
purpose acquisition corporations. The volatility factor used in Black-Scholes has a significant effect on the resulting valuation of the derivative liabilities on
the Company’s consolidated balance sheet. The volatility index used for the calculation was 34.4% as of January 9, 2007, and 41.8% as of January 10, 2006,
and December 31, 2005, and 49.5% at inception. Since the resulting valuation of the warrant was lower than its relative fair value, the Company used the
relative fair value as of January 9, 2007. Relative fair value is estimated as the difference between the closing market price of the Company’s common stock
and the exercise price of the derivative. The Company’s stock price and volatility estimates will likely change in the future, and will therefore affect the
derivative liabilities recorded. To the extent that the Company’s stock price increases or decreases, its derivative liabilities will also increase or decrease, absent
any change in volatility rates and risk-free interest rates.
The estimated fair value of the warrants was $69.5 million, $13.6 million, $13.8 million, and $15.9 million as of January 9, 2007, January 10,
2006, December 31, 2005, and at inception, respectively. The estimated fair value of the embedded warrant was $1.7 million at January 9, 2007 and $0.2
million as of January 10, 2006, December 31, 2005, and at inception, respectively. Such amounts are recorded as derivative liabilities in the consolidated
balance sheets.
The Company issued new warrants to purchase 0.3 million shares of Company common stock (the “Rolled-Over Warrants”) on November 29, 2006,
in exchange for the then outstanding warrants of Jamba Juice Company (See Note 2). These warrants were converted to provide terms and expiration dates that
were substantially similar to the terms contained in the original Jamba Juice Company warrants. Since the Rolled-Over Warrants do not contain a requirement
to register the underlying shares and none of the other criteria that would require derivative treatment of these warrants have been met, the Rolled-Over Warrants
are considered an equity instrument and were recorded as part of the purchase price of Jamba Juice Company at their acquisition date estimated fair value of
$2.3 million.
Segment Reporting —SFAS No. 131,  requires financial information for
each segment that is individually managed with separate operating results that are reviewed regularly by the chief operating decision makers. The Company
has one reportable retail segment.
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