Baskin Robbins 2011 Annual Report Download - page 73

Download and view the complete annual report

Please find page 73 of the 2011 Baskin Robbins annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 127

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127

Common stock valuation
For all stock-based awards, we measure compensation cost at fair value on the date of grant and recognize
compensation expense over the service period that the awards are expected to vest. Prior to our initial public
offering, the key assumption in determining the fair value of stock-based awards on the date of grant is the fair
value of the underlying common stock. From fiscal year 2008 through our initial public offering on July 26,
2011, we granted restricted shares and stock options to employees with a fair value of the underlying common
stock as follows:
Grant date
Number of
restricted
shares
Number of
executive
options
Number of
nonexecutive
options
Fair value per
common share
6/24/2008 ........................................ — — 69,615 5.44
7/1/2008 ......................................... 160,902 — — 5.44
5/15/2009 ........................................ — — 14,908 1.92
2/23/2010 ........................................ — 4,575,306 — 3.01
7/26/2010 ........................................ — 169,658 19,702 5.02
8/6/2010 ......................................... — 5,473 202,496 5.02
3/9/2011 ......................................... — 637,040 21,891 7.31
7/26/2011 ........................................ 65,000 191,000 28,600 19.00
For the awards granted on July 26, 2011, the fair value per common share was determined based on the initial
public offering price of the Company’s common stock. For awards granted prior to July 26, 2011, the fair value
of common stock underlying the Company’s restricted shares and options was determined based on
contemporaneous valuations performed by an independent third-party valuation specialist in accordance with the
guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation. The valuation methodology utilized by the
independent third-party valuation specialist was consistent for all valuations completed from 2006 through the
first quarter of fiscal year 2011. Financial projections underlying the valuation were determined by management
based on long-range projections that were prepared on at least an annual basis and reviewed with the board of
directors. Due to the Company’s two classes of common stock, Class L and common, the valuation approach was
a two-step process in which the overall equity value of the Company was determined, and then allocated between
the two classes of stock.
Overall enterprise and equity values were estimated using a combination of both market and income approaches
in order to corroborate the values derived under the different methods. The market-based approach was based on
multiples of historical and projected earnings before interest, taxes, depreciation, and amortization (“EBITDA”)
utilizing trading multiples of a selected peer group of quick service restaurant companies. The selected peer
group was generally consistent in each valuation and included a consistent focus on three core peer comparables.
The selected multiples from the peer group were then applied to the Company’s historical and projected EBITDA
to derive indicated values of the total enterprise. The income approach utilized the discounted cash flow method,
which determined enterprise value based on the present value of estimated future net cash flows the business is
expected to generate over a forecasted five-year period plus the present value of estimated cash flows beyond
that period based on a level of growth in perpetuity. These cash flows were discounted to present value using a
weighted average cost of capital (“WACC”), which reflects the time value of money and the appropriate degree
of risks inherent in the business. Net debt as of the valuation date was then deducted from the total enterprise
values determined under both the market and income approaches to determine the equity values. Once calculated,
the market and income valuation approaches were then weighted to determine a single total equity value, with
60% of the weighting allocated to the market approach and 40% of the weighting allocated to the income
approach. The weighting was consistent for all periods.
-63-