Baskin Robbins 2012 Annual Report Download - page 54

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minimum ratio (the “interest coverage ratio”) of adjusted EBITDA to interest expense, each of which becomes more restrictive
over time. For fiscal year 2012, the terms of the senior credit facility require that we maintain a leverage ratio of no more than
8.25 to 1.00 and a minimum interest coverage ratio of 1.55 to 1.00. The leverage ratio financial covenant will become more
restrictive over time and will require us to maintain a leverage ratio of no more than 6.25 to 1.00 by the second quarter of fiscal
year 2017. The interest coverage ratio financial covenant will also become more restrictive over time and will require us to
maintain an interest coverage ratio of no less than 1.95 to 1.00 by the second quarter of fiscal year 2017. Failure to comply with
either of these covenants would result in an event of default under our senior credit facility unless waived by our senior credit
facility lenders. An event of default under our senior credit facility can result in the acceleration of our indebtedness under the
facility. Adjusted EBITDA is a non-GAAP measure used to determine our compliance with certain covenants contained in our
senior credit facility, including our leverage ratio. Adjusted EBITDA is defined in our senior credit facility as net income/(loss)
before interest, taxes, depreciation and amortization and impairment of long-lived assets, as adjusted for the items summarized
in the table below. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of the term adjusted
EBITDA varies from others in our industry due to the potential inconsistencies in the method of calculation and differences due
to items subject to interpretation. Adjusted EBITDA should not be considered as an alternative to net income, operating income
or any other performance measures derived in accordance with GAAP, as a measure of operating performance or as an
alternative to cash flows as a measure of liquidity. Adjusted EBITDA has important limitations as an analytical tool and should
not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations
we rely primarily on our GAAP results. However, we believe that presenting adjusted EBITDA is appropriate to provide
additional information to investors to demonstrate compliance with our financing covenants. As of December 29, 2012, we
were in compliance with our senior credit facility financial covenants, including a leverage ratio of 5.15 to 1.00 and an interest
coverage ratio of 5.08 to 1.00, which were calculated for fiscal year 2012 based upon the adjustments to EBITDA, as provided
for under the terms of our senior credit facility. The following is a reconciliation of our net income to such adjusted EBITDA
for fiscal year 2012 (in thousands):
Fiscal year
2012
Net income including noncontrolling interests $ 107,624
Interest expense 74,031
Income tax expense 54,377
Depreciation and amortization 56,027
Impairment charges 1,278
EBITDA 293,337
Adjustments:
Non-cash adjustments(a) 29,628
Transaction costs(b) 1,682
Loss on debt extinguishment and refinancing transactions(c) 3,963
Severance charges(d) 4,591
Other(e) 7,759
Total adjustments 47,623
Adjusted EBITDA $ 340,960
(a) Represents non-cash adjustments, including stock compensation expense, legal reserves, and other non-cash gains and
losses.
(b) Represents direct and indirect cost and expenses related to the Company’s secondary offering transactions.
(c) Represents transaction costs associated with the refinancing of long-term debt, which consists primarily of fees paid to
third parties.
(d) Represents severance and related benefits costs associated with non-recurring reorganizations.
(e) Represents one-time costs and fees associated with entry into new markets, costs associated with various franchisee-
related information technology investments and one-time market research programs, and the net impact of other non-
recurring and individually insignificant adjustments.
Based upon our current level of operations and anticipated growth, we believe that the cash generated from our operations and
amounts available under our revolving credit facility will be adequate to meet our anticipated debt service requirements, capital
expenditures and working capital needs for at least the next twelve months. We believe that we will be able to meet these
obligations even if we experience no growth in sales or profits. There can be no assurance, however, that our business will
generate sufficient cash flows from operations or that future borrowings will be available under our revolving credit facility or