<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration Number 333-22917
PROSPECTUS
$250,000,000
BOSTON CHICKEN, INC.
[LOGO OF BOSTON MARKET]
7 3/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2004
---------------
The 7 3/4% Convertible Subordinated Debentures due 2004 (the "Debentures")
of Boston Chicken, Inc., a Delaware corporation (the "Company"), offered
hereby will be convertible at any time prior to maturity, unless previously
redeemed, into shares of common stock, $.01 par value per share, of the
Company ("Common Stock") at a conversion price of $26.70 per share, subject to
adjustment under certain conditions. The Common Stock is traded on the Nasdaq
National Market under the symbol "BOST". On April 22, 1997, the last sale
price of the Common Stock as reported on the Nasdaq National Market was $22
3/8 per share. Interest on the Debentures will be payable semi-annually on May
1 and November 1 of each year, commencing November 1, 1997.
The Debentures are not redeemable prior to May 1, 2000. Thereafter, the
Debentures are redeemable at the option of the Company, in whole or in part,
at any time and from time to time, at the redemption prices set forth herein,
plus accrued interest. Upon a Change in Control, holders of Debentures will
have the right, subject to certain conditions and restrictions, to require the
Company to purchase all or any part of their Debentures at the principal
amount thereof plus accrued and unpaid interest. See "Description of
Debentures".
The Debentures will be subordinate in right of payment to all existing and
future Senior Indebtedness of the Company. As of April 22, 1997, the Company
had approximately $324.8 million of indebtedness outstanding (excluding
accrued interest thereon) that would have constituted Senior Indebtedness. The
Debentures will rank pari passu with the Company's Liquid Yield Option Notes
due 2015 (the "LYONs") and 4 1/2% Convertible Subordinated Debentures due 2004
(the "4 1/2% Debentures"). See "Capitalization" and "Description of
Debentures--Subordination of Debentures". The Debentures have been approved
for quotation on the Nasdaq SmallCap Market under the symbol "BOSTH".
SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE DEBENTURES OFFERED HEREBY.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Debenture......... 100% 2.5% 97.5%
- ------------------------------------------------------------------------------
Total(4).............. $250,000,000 $6,250,000 $243,750,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of initial issuance.
(2) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including certain liabilities under the Securities
Act of 1933, as amended. See "Underwriting".
(3) Before deducting expenses payable by the Company estimated at $625,000.
(4) The Company has granted the several Underwriters an option to purchase up
to an additional $37,500,000 aggregate principal amount of Debentures,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discount, and Proceeds to
Company will be $287,500,000, $7,187,500 and, $280,312,500, respectively.
See "Underwriting".
---------------
The Debentures are being offered by the several Underwriters, subject to
prior sale, when, as, and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel, or
modify such offer and to reject orders in whole or in part. It is expected
that delivery of the Debentures will be made in New York, New York on or about
April 28, 1997.
---------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
MORGAN STANLEY & CO.
INCORPORATED
---------------
The date of this Prospectus is April 22, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Reports, registration
statements, proxy statements, and other information filed by the Company with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Commission's Regional Offices, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, such as the Company, that file
electronically with the Commission.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission under the Securities Act of
1933, as amended (the "Securities Act"), in respect of the Debentures offered
hereby. For purposes hereof, the term "Registration Statement" means the
initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Debentures offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete, and in each instance reference is made
to such contract or other document filed with the Commission as an exhibit to
the Registration Statement, or otherwise, each such statement being qualified
by, and subject to, such reference in all respects.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES OR
THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE
OF DEBENTURES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements of the Company and Notes
thereto included or incorporated by reference in this Prospectus. Except as
otherwise specified, the information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option. See "Underwriting". References in this
Prospectus to the "Company" mean the Company, its predecessors, and its and
their subsidiaries from time to time, unless the context otherwise requires.
Boston Chicken(R) and Boston Market(R) are trademarks owned by the Company, and
Einstein Bros.(TM) and Noah's New York Bagels(R) are trademarks owned by
Einstein/Noah Bagel Corp.
THE COMPANY
The Company franchises and operates retail food service stores under the
Boston Market brand name that specialize in fresh, convenient meals featuring
home style entrees of chicken, turkey, ham, and meat loaf, as well as
sandwiches and a variety of freshly prepared vegetables, salads, and other side
dishes. As of April 10, 1997, the Boston Market system included 1,124 stores
located in 38 states and the District of Columbia, 883 of which are operated by
area developers partially financed by the Company with convertible secured
revolving loans, 223 of which are Company stores, and 18 of which are operated
by other franchisees. See "The Company--Area Developers". As of April 10, 1997,
the Company had entered into area development agreements that provide for the
development of 2,457 additional stores. The Company currently estimates that
there will be approximately 1,400 Boston Market stores in operation systemwide
by the end of 1997. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON
PAGE 7. See also "The Company--Area Developers".
The Boston Market concept combines the fresh, flavorful, and appealing meals
associated with traditional home cooking with the convenience associated with
fast food. Boston Market stores feature a clean, bright, and inviting
environment to purchase a meal for take-out or in-store dining. Primary entrees
include rotisserie roasted chicken and turkey breast, double-glazed baked ham,
and double-sauced meat loaf. Side dishes designed to complement these entrees
include mashed potatoes made from scratch, corn, stuffing, creamed spinach,
butternut squash, garlic and dill potatoes, baked beans, macaroni and cheese,
cranberry walnut relish, cinnamon apples, and a variety of chilled salads.
Stores also offer a variety of freshly carved chicken, turkey, ham and meat
loaf sandwiches under the Boston Carver(R) and Extreme Carver(TM) brand names;
fresh-baked chicken pot pies; chicken and other soups; beverages; desserts; and
other items.
The Company owns approximately 17.3 million shares (representing
approximately 53%) of the outstanding common stock of Einstein/Noah Bagel Corp.
("ENBC") as of April 22, 1997. ENBC franchises and operates specialty retail
stores that feature fresh-baked bagels, cream cheeses, coffee, and other
related products, primarily under the Einstein Bros. Bagels and Noah's New York
Bagels brand names. The common stock of ENBC is quoted on the Nasdaq National
Market under the symbol "ENBX". On April 22, 1997, the last sale price of the
common stock of ENBC as reported on the Nasdaq National Market was $17 1/2 per
share. See "The Company--Einstein/Noah Bagel Corp."
The Company was incorporated as a Massachusetts corporation in March 1988 and
was reincorporated in the State of Delaware in September 1993. The Company's
principal executive offices are located at 14103 Denver West Parkway, P.O. Box
4086, Golden, Colorado 80401-4086, and its telephone number is (303) 278-9500.
3
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE DEBENTURES OFFERED HEREBY INVOLVES CERTAIN RISKS. SEE
"RISK FACTORS".
THE OFFERING
<TABLE>
<S> <C>
Debentures offered hereby............. $250,000,000 principal amount of 7 3/4%
Convertible Subordinated Debentures due
2004.
Interest Payment Dates................ May 1 and November 1, commencing November
1, 1997.
Maturity.............................. May 1, 2004.
Conversion Rights..................... The Debentures are convertible into
shares of Common Stock at any time prior
to maturity or redemption at a conversion
price of $26.70 per share, subject to
adjustment under certain conditions.
Optional Redemption by the Company.... The Debentures are not redeemable prior
to May 1, 2000. Thereafter, the
Debentures are redeemable at any time and
from time to time at the option of the
Company, in whole or in part, at the
redemption prices set forth herein, plus
accrued interest.
Change in Control..................... Upon a Change in Control, holders of the
Debentures will have the right, subject
to certain restrictions and conditions,
to require the Company to purchase all or
any part of their Debentures at the
principal amount thereof, plus accrued
interest.
Subordination......................... The Debentures are subordinated to all
existing and future Senior Indebtedness
of the Company. As of April 22, 1997, the
Company had approximately $324.8 million
of indebtedness outstanding (excluding
accrued interest thereon) that would have
constituted Senior Indebtedness. The
Debentures will rank pari passu with the
Company's outstanding LYONs and 4 1/2%
Debentures. The Indenture governing the
Debentures will not restrict the
incurrence of Senior Indebtedness or
other indebtedness by the Company.
Use of Proceeds....................... The Company intends to use the net
proceeds from this offering primarily
for development of the Boston Market
system, including providing partial
financing for certain of its area
developers and Boston Market
International, Inc. Net proceeds will
also be used to fund the Company's
obligations under its convertible loan
to Progressive Food Concepts, Inc. and
may be used to pursue related
opportunities in the emerging ready-to-
heat and specialty perishables market
segments. In addition, net proceeds
will be used for the repayment of
borrowings under the Company's
</TABLE>
4
<PAGE>
revolving credit facility and for
general corporate purposes, which may
include the purchase of stores from
area developers, the purchase from the
equity holders of BC New York, L.L.C.
of a minority of their equity
interests, and funding obligations
under the Company's credit facility
with ENBC. See "Use of Proceeds".
<TABLE>
<S> <C>
Nasdaq SmallCap Market Symbol........ The Debentures have been approved for
quotation on the Nasdaq SmallCap Market
under the symbol "BOSTH". The Common Stock
is quoted on the Nasdaq National Market
under the symbol "BOST".
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND STORE DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF STORES)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1)
------------------------------
DEC. 25, DEC. 31, DEC. 29,
1994 1995 1996(2)
-------- -------- ----------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenue................................ $ 96,151 $159,479 $ 264,508
Income from operations....................... 24,611 67,238 91,329
Net income................................... 16,173 33,559 66,958
Net income per common and equivalent share.. $ 0.38 $ 0.66 $ 1.01
Weighted average number of common and equiv-
alent shares outstanding................... 42,861 50,972 66,501
Ratio of earnings to fixed charges (3)....... 3.97 4.23 5.91
STORE DATA (UNAUDITED):
Systemwide Boston Market store revenue (4)... $383,691 $792,948 $1,166,591
Number of Boston Market stores:
Beginning of year.......................... 217 534 829
Opened..................................... 323 310 273
Closed (5)................................. (6) (15) (15)
-------- -------- ----------
End of year................................ 534 829 1,087
======== ======== ==========
Company stores............................. 41 3 105
Franchised stores.......................... 493 826 982
</TABLE>
<TABLE>
<CAPTION>
AT DEC. 29, 1996
--------------------------
ACTUAL AS ADJUSTED (6)
---------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................... $ 58,829 $ 301,954
Notes receivable................................... 800,519 800,519
Total assets....................................... 1,543,616 1,793,616
Long-term debt..................................... 312,454 562,454
Stockholders' equity............................... $ 935,840 $ 935,840
</TABLE>
- --------
(1) The Company's fiscal year is the 52/53-week period ending on the last
Sunday in December and normally consists of 13 four-week periods. The first
quarter consists of four periods and each of the remaining quarters
consists of three periods. The fiscal year ended December 31, 1995 includes
53 weeks of operations.
(2) On June 17, 1996, the Company began consolidating ENBC's results of
operations as a result of the Company's conversion of its loan to ENBC into
a majority equity interest in ENBC's common stock. Giving pro forma effect
to the Company's loan conversion as of the beginning of the Company's
fiscal year, revenue, net income, and net income per common and equivalent
share were $292,030,000, $59,522,000, and $0.90, respectively.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes and fixed charges. Fixed charges
include interest expense and a percentage of rents which management deems
representative of an interest factor.
(4) Includes gross revenue for all stores in the Boston Market system.
(5) Such stores were closed due to operating or site-related issues, changes in
the market or trade area, changes in store development strategy, or failure
of the store to meet desired sales or profitability levels. Of such stores,
the Company closed two stores located in Michigan and area developers
closed the remaining stores located in 15 states. Such stores were open for
an average of 2.5 years prior to their closing. Costs associated with such
closings were expensed by the owners of such stores.
(6) Adjusted to reflect the consummation of this offering and the application
of the net proceeds therefrom as set forth under "Use of Proceeds". See
also "Capitalization".
6
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS SET FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS OR WHICH ARE INCORPORATED HEREIN BY REFERENCE CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, ENBC, BOSTON MARKET
INTERNATIONAL, INC. ("BMI"), THEIR AREA DEVELOPERS, FRANCHISEES, AND
LICENSEES, BOSTON MARKET STORES, EINSTEIN BROS. BAGELS STORES AND NOAH'S NEW
YORK BAGELS STORES AND PROGRESSIVE FOOD CONCEPTS, INC. ("PFCI") TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE FOLLOWING: COMPETITION; SUCCESS OF OPERATING INITIATIVES,
INCLUDING ROLL-OUT OF THE F.A.S.T. TRACK(TM)(TM) SYSTEM AT BOSTON MARKET
STORES; DEVELOPMENT AND OPERATING COSTS; AREA DEVELOPERS' ADHERENCE TO
DEVELOPMENT SCHEDULES; ADVERTISING AND PROMOTIONAL EFFORTS; BRAND AWARENESS;
ADVERSE PUBLICITY; ACCEPTANCE OF NEW PRODUCT OFFERINGS; EXPANSION OF THE
HOLIDAY HOME MEAL REPLACEMENT BUSINESS; AVAILABILITY, LOCATIONS, AND TERMS OF
SITES FOR STORE DEVELOPMENT; CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT
PLANS; AVAILABILITY AND TERMS OF CAPITAL; FOOD, LABOR, AND EMPLOYEE BENEFIT
COSTS; CHANGES IN GOVERNMENT REGULATIONS; REGIONAL WEATHER CONDITIONS; AND
OTHER FACTORS REFERENCED IN THIS PROSPECTUS OR IN THE COMPANY'S FORM 10-K FOR
ITS 1996 FISCAL YEAR OR ANY OF THE OTHER DOCUMENTS AND INFORMATION
INCORPORATED HEREIN BY REFERENCE. SEE "DOCUMENTS INCORPORATED BY REFERENCE".
THE SUCCESS OF THE COMPANY, ENBC, AND BMI IS DEPENDENT ON THEIR RESPECTIVE
AREA DEVELOPERS AND FRANCHISEES AND THE MANNER IN WHICH THEY OPERATE AND
DEVELOP BOSTON MARKET STORES AND EINSTEIN BROS. BAGELS STORES AND NOAH'S NEW
YORK BAGELS STORES. SEE "RISK FACTORS".
RISK FACTORS
In evaluating an investment in the Debentures, prospective investors should
carefully consider the following factors in addition to the other information
contained in this Prospectus.
COMPETITION
The food service industry is intensely competitive with respect to food
quality, concept, location, service, and price. In addition, there are many
well-established food service competitors with substantially greater financial
and other resources than the Company and with substantially longer operating
histories. The Company believes that it competes with national, regional, and
local take-out food service companies, quick service restaurants, casual full-
service dine-in restaurants, delicatessens, cafeteria-style buffets, and
prepared food stores, as well as with supermarkets and convenience stores.
RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional, and local economic conditions, demographic trends, traffic
patterns, and the type, number, and location of competing restaurants. Multi-
unit food service chains such as the Company can also be substantially
adversely affected by publicity resulting from food quality, illness, injury,
or other health concerns (including food-borne illness claims) or operating
issues stemming from one store or a limited number of stores, whether or not
the Company is liable. Claims relating to foreign objects, food-borne illness
or operating issues are common in the food service industry and a number of
such claims may exist at any given time. Dependence on frequent deliveries of
produce and supplies also subjects food service businesses such as the Company
to the risk that shortages or interruptions in supply caused by adverse
weather or other conditions could adversely affect the availability, quality,
and cost of ingredients. In addition, material changes in, or the Company's
failure to comply with, applicable federal, state, and local government
regulations, and factors such as inflation, increased food, labor, and
employee benefits costs, regional weather conditions, and unavailability of an
adequate number of experienced managers and hourly employees may also
adversely affect the food service industry in general and the Company's
results of operations and financial condition in particular.
7
<PAGE>
EXPANSION/DEPENDENCE ON AREA DEVELOPERS
As of April 10, 1997, there were 1,124 Boston Market stores in operation
systemwide. The Company has entered into area development agreements that
provide for the opening of 2,457 additional stores over the next five to seven
years. There can be no assurance that the Company and its area developers will
be able to achieve these goals, manage expanding operations effectively, or
maintain or accelerate growth. The Company has extended secured debt financing
to its Boston Market area developers pursuant to which the Company has agreed
to lend an aggregate of approximately $838.0 million, of which approximately
$647.3 million had been advanced as of December 29, 1996. These loans subject
the Company to the risks of being a secured lender, including those risks
relating to borrower delinquency and default and the adequacy of the
collateral for such loans. See "--Need for Additional Capital," "The Company--
Area Developers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
The Company's success is dependent upon its area developers and franchisees
and the manner in which they develop and operate their Boston Market stores
and manage their organizational and financial resources. The opening and
success of stores are dependent on a number of factors, including the
availability of suitable sites, the negotiation of acceptable lease or
purchase terms for such sites, permitting and regulatory compliance, the
ability to meet construction schedules, the ability to hire and train
qualified personnel, the financial and other capabilities of the Company and
its area developers, and general economic and business conditions. Not all of
the foregoing factors are within the control of the Company or its area
developers. The financial resources required by the Company's area developers
to comply with their area development agreements are dependent upon, among
other things, the number and cost of stores developed and store operating
results. The cost to develop a store ranges from $700,000 to $1.5 million. The
area developers have financed, and will continue to finance, their capital
requirements through borrowings from the Company, equity, debt and lease
financing from third parties and internally generated funds. There can be no
assurance that area developers and franchisees will have the business
abilities or access to financial resources necessary to open the Boston Market
stores required by their development schedules or will successfully develop or
operate Boston Market stores in their development areas in a manner consistent
with the Company's concepts and standards. See "The Company--Area Developers".
Because the amount of additional financing that the Company may provide to
area developers depends on the amount of funds internally generated by the
area developers, the amount of additional equity, debt and lease financing to
be obtained by the area developers from other parties and the cost of stores
developed, the Company has not determined, nor is it able at present to
reasonably estimate, any amount of additional financing that it may commit to
such area developers. As of December 29, 1996, the Company had committed to
lend the area developers an additional $190.7 million, which financing is
expected to be substantially funded during 1997. The proceeds of this offering
will be used, in part, to finance such commitments.
OPERATIONS OF EINSTEIN/NOAH BAGEL CORP.
The Company owns approximately 17.3 million shares (representing
approximately 53%) of the outstanding common stock of ENBC as of April 22,
1997. The nature of ENBC's business and operations expose it to risks
substantially similar to those set forth herein with respect to the Company.
In addition, ENBC is at a significantly earlier stage in its development
program than is the Company. ENBC's anticipated expansion will require the
addition of management, facilities, systems, and personnel. The failure by
ENBC and its area developers to acquire necessary resources on a cost-
effective basis could have a material adverse effect on the value of the
Company's investment in ENBC and the contribution by ENBC to the earnings of
the Company. There can be no assurance that ENBC and its area developers will
be able to achieve their development and operating goals, manage expanding
operations effectively, or maintain or accelerate growth. In addition, there
can be no assurance of the viability of any of ENBC's brands in a particular
geographic region or locale. The Company has made available to ENBC a $50.0
million unsecured, subordinated, non-convertible loan facility (no borrowings
under which were outstanding as of April 22, 1997), which, if any amount were
outstanding, would subject the Company to the risks of being an unsecured,
subordinated lender, including those risks relating to delinquency and default
by ENBC, the subordination of the Company's claims to senior indebtedness of
ENBC, and the prior
8
<PAGE>
right of secured lenders to ENBC to realize upon assets of ENBC which secure
such lenders' indebtedness. See "The Company--Einstein/Noah Bagel Corp."
DEVELOPMENT OF BUSINESS OF BOSTON MARKET INTERNATIONAL, INC.
In January 1997, Boston Market International, Inc. ("BMI") entered into a
letter of intent with John Sun, a restaurant developer in Southeast Asia, that
contemplates the formation of a new entity that would sublicense from BMI the
right to develop up to 600 Boston Market stores in Taiwan and the People's
Republic of China. No officer or director of the Company currently owns an
equity interest in BMI. In addition, no executive officer or director of the
Company is, or will be, an executive officer or director of BMI. BMI is a
newly formed entity and the Company has been advised that BMI intends to seek
private equity financing from third parties, who may include officers and
directors of the Company, in order to provide its initial equity capital. The
Company is negotiating a license with BMI which would grant to BMI the rights
to develop Boston Market stores in such countries, and a convertible loan from
the Company to BMI which could be convertible into a majority equity interest
in BMI. See "The Company--Current Initiatives in the Boston Market System--
Boston Market International". The success of BMI and its area developers,
franchisees, licensees, and/or joint venture partners in the development of
the Boston Market brand and concept in foreign markets are subject to risks
similar to those set forth above for the Company and its area developers. In
addition, there can be no assurance that the contemplated transactions between
the Company and BMI will be consummated, foreign consumers will accept the
Boston Market brand and concept, BMI will be able to successfully identify and
recruit qualified area developers, franchisees, licensees, joint venture
partners and suppliers in foreign markets, BMI will be able to obtain
necessary foreign government approvals, or that compliance with foreign
government regulations will not significantly adversely affect BMI's business
plan.
DEVELOPMENT OF BUSINESS OF PROGRESSIVE FOOD CONCEPTS, INC.
The Company has provided a $17.0 million convertible loan to Progressive
Food Concepts, Inc. ("PFCI"). PFCI has entered into a series of agreements
with Harry's Farmers Market, Inc. ("Harry's"), an operator of retail food
stores in the Atlanta area. PFCI is a newly formed entity in which Scott Beck,
the Company's Chairman of the Board, President and Chief Executive Officer,
and Saad Nadhir, the former Co-Chairman of the Board and President of the
Company, each own a 46.2% equity interest, and Harry's owns a 7.6% interest.
Messrs. Beck and Nadhir have expressed their intention to transfer a
significant portion of their shares of PFCI common stock to other persons as
PFCI's business plan becomes more defined and is implemented. The success of
PFCI is subject to the finalization and implementation of a business plan,
adaptability of the Harry's business concepts to new markets and acceptance of
such concepts by consumers in such markets, raising sufficient capital,
obtaining the management and infrastructure necessary to implement such
business plan, financial condition and results of operations of Harry's, and
competition in the perishable fresh food, prepared foods, and specialty food
businesses, as well as the grocery business generally. See "The Company--
Progressive Food Concepts, Inc."
NEED FOR ADDITIONAL CAPITAL
The Company anticipates that it will have a continuing need for additional
capital to accomplish its and its area developers' expansion goals. There can
be no assurance that the Company will be able to raise such capital when
needed on satisfactory terms. To the extent such capital is obtained through
the incurrence of indebtedness by the Company, the terms of the Debentures do
not restrict such indebtedness from being secured by any or all of the
Company's assets or ranking senior in right of payment to the Debentures. A
substantial portion of the Company's assets are currently pledged to secure
indebtedness of the Company. See Note 6 of Notes to Consolidated Financial
Statements. In addition, the Company currently offers loans to its area
developers, ENBC, and PFCI, and is expected to offer loans to BMI, under loan
agreements pursuant to which the Company is, and will be, subject to the risks
of being a lender. See "The Company--Area Developers," "The Company--Current
Initiatives in the Boston Market System--Boston Market International", "The
Company--
9
<PAGE>
Einstein/Noah Bagel Corp." and "The Company--Progressive Food Concepts, Inc."
The Company's management of its capital resources may be affected by the
amount and timing of advances under such loan agreements and additional loan
agreements. The Company's obligations under the loan agreements could affect
the amount and timing of the Company's future capital financing requirements.
EFFECT OF CERTAIN CHARTER, BYLAW, AND OTHER PROVISIONS
The Company's Certificate of Incorporation and Bylaws include certain
provisions that may have the effect of discouraging a change in control of the
Company. Such provisions include the requirement that all stockholder action
must be effected at a duly-called annual or special meeting of stockholders
and the requirement that stockholders follow an advance notification procedure
for stockholder nominations of candidates for the Board of Directors and to
present other stockholder business to be considered at any meeting of
stockholders. In addition, the Board of Directors has the authority, without
further action by the stockholders, to issue up to 20,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges, and restrictions thereof, and to issue authorized but unissued
shares of Common Stock up to the maximum of 480,000,000 shares. The issuance
of preferred stock or additional shares of Common Stock could have the effect
of delaying, deferring, or preventing a change in control of the Company, even
if such change in control would be beneficial to the Company's stockholders.
The terms of the Company's LYONs and 4 1/2% Debentures provide that the
Company will be required, as of 40 business days after the occurrence of a
Change in Control (as defined) of the Company (occurring on or prior to June
1, 2000, in the case of the LYONs), to purchase for cash any LYON or 4 1/2%
Debenture, at the option of the holder, for a Change in Control Purchase Price
equal to the Issue Price plus accrued Original Issue Discount (in the case of
a LYON), or 100% of the principal amount thereof, plus accrued but unpaid
interest (in the case of a 4 1/2% Debenture), through the Change in Control
Purchase Date. The Change in Control purchase features of the LYONs and the 4
1/2% Debentures may in certain circumstances have an anti-takeover effect. The
definition of "Change in Control" for purposes of the LYONs and the 4 1/2%
Debentures is set forth in the indenture related to the LYONs and the
indenture related to the 4 1/2% Debentures, respectively, which are exhibits
to the Registration Statement of which this Prospectus is a part. The
Debentures offered hereby contain provisions substantially identical to those
discussed above with respect to the 4 1/2% Debentures in the event of a Change
in Control. See "Description of Debentures--Purchase of Debentures at the
Option of Holders upon a Change in Control". If a Change in Control was to
occur, there can be no assurance that the Company would have sufficient funds
to pay the Change in Control Purchase Price for all Debentures, LYONs, and 4
1/2% Debentures tendered by the holders thereof.
10
<PAGE>
THE COMPANY
The Company franchises and operates retail food service stores under the
Boston Market brand name that specialize in fresh, convenient meals featuring
home style entrees of chicken, turkey, ham, and meat loaf, as well as
sandwiches and a variety of freshly prepared vegetables, salads, and other
side dishes. As of April 10, 1997, the Boston Market system included 1,124
stores located in 38 states and the District of Columbia, 883 of which are
operated by area developers partially financed by the Company with convertible
secured revolving loans, 223 of which are Company stores, and 18 of which are
operated by other franchisees. As of April 10, 1997, the Company had entered
into area development agreements that provide for the development of 2,457
additional stores. The Company currently estimates that there will be
approximately 1,400 Boston Market stores in operation systemwide by the end of
1997. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7. See
also "--Area Developers".
The Boston Market concept combines the fresh, flavorful, and appealing meals
associated with traditional home cooking with the convenience associated with
fast food. Boston Market stores feature a clean, bright, and inviting
environment to purchase a meal for take-out or in-store dining. Primary
entrees include rotisserie roasted chicken and turkey breast, double-glazed
baked ham, and double-sauced meat loaf. Side dishes designed to complement
these entrees include mashed potatoes made from scratch, corn, stuffing,
creamed spinach, butternut squash, garlic and dill potatoes, baked beans,
macaroni and cheese, cranberry walnut relish, cinnamon apples, and a variety
of chilled salads. Stores also offer a variety of freshly carved chicken,
turkey, ham, and meat loaf sandwiches under the Boston Carver and Extreme
Carver brand names; fresh-baked chicken pot pies; chicken and other soups;
beverages; desserts; and other items.
Certain members of the Company's current management made their initial
investment in the Company in December 1991, at which time there were
approximately 33 stores operating under the Boston Chicken name. After an
extensive review of the Boston Chicken concept, members of the Company's
management invested additional capital and acquired control of the Company in
the spring of 1992. Subsequently, the Company substantially refined the Boston
Chicken concept, developed an attractive prototype store, created a network of
area developers, installed systemwide voice and data communications systems,
and achieved significant development momentum in most major markets in the
United States. With these formation and development phases completed, the
Company shifted its focus to evolving the Boston Chicken concept and
increasing operational efficiency. Further evolution of the concept was
initiated in early 1995 with the addition of turkey, ham, and meat loaf dinner
entrees, expansion of the line of sandwiches, salads, and soups, and entry
into the holiday home meal replacement business. To reflect the variety of
complete meals offered and to establish a broad platform for future growth,
the Company changed the name of Boston Chicken stores to Boston Market.
AREA DEVELOPERS
General. The Company relies on area developers to achieve rapid penetration
of targeted markets. The Company believes that having a relatively small group
of area developers, each led by an experienced retail food service veteran
with substantial equity invested in the area developer, is a superior means to
achieve market leadership than more traditional franchising approaches which
utilize a large number of franchisees. By concentrating its expansion efforts
through these focused area development organizations, the Company believes it
is able to achieve focused systemwide expansion and create operating and
advertising efficiencies.
11
<PAGE>
The following table sets forth certain information as of April 10, 1997,
concerning the Company's 15 domestic area developers. The operating principals
of such area developers listed below each have experience in the multi-unit
retail industry ranging from 16 to 27 years. The additional stores committed
by each area developer are generally required to be opened over the next five
to seven years. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON
PAGE 7.
<TABLE>
<CAPTION>
ADDITIONAL
OPERATING STORES STORES
AREA DEVELOPER PRIMARY MARKETS PRINCIPAL OPEN COMMITTED
-------------- ------------------------ ----------------- ------ ----------
<C> <S> <C> <C> <C>
BC Boston, L.P.(1) Portions of Patrick McDonnell 55 148
Massachusetts, Vermont,
Maine, New Hampshire,
Rhode Island and New
York
BC GoldenGate, L.L.C. Portions of Central and John Cutter 54 182
Northern California and
Nevada
BC Great Lakes, L.L.C. Portions of Illinois, John Morlock 111 44
Wisconsin, Michigan and
Ohio
BC Heartland, L.L.C. Portions of Indiana, John Morlock 12 111
Illinois, Michigan and
Wisconsin
BC Northwest, L.P. Portions of Washington, Dennis Mullen 53 93
Oregon and Idaho
BC Superior, L.L.C. Portions of Maryland, Steven Quamme 48 275
Virginia, West Virginia,
Alabama, Ohio,
Pennsylvania, Kentucky,
Tennessee and
Mississippi
BC Texas, Inc. Portions of Texas Michael Donovan 64 209
BC Tri-States, L.L.C. Portions of Connecticut, Robert Anarumo 8 259
New York and New Jersey
BCE West, L.P.(1) Arizona, Colorado, New Larry Hohl 60 156
Mexico, Utah, and
Portions of Nevada and
Wyoming
Boston West, L.L.C. Portions of Central and Alan Palmieri 89 95
Southern California
Finest Foodservice, L.L.C. Portions of Iowa, Dave Goebel 72 163
Illinois, Kansas,
Minnesota, Missouri,
Nebraska, South Dakota
and Wisconsin
Mayfair Partners, L.P. Washington, D.C., Steven Quamme 56 15
Northern Virginia, and
Portions of Maryland
P&L Food Services, L.L.C.(1) Portions of New York, Patrick McDonnell 52 172
Ohio, Pennsylvania and
West Virginia
Platinum Rotisserie, L.L.C. North Carolina and Anthony Wedo 50 353
Portions of South
Carolina, New Jersey,
Tennessee, Georgia,
Pennsylvania and
Virginia
R&A Food Services, L.P. Central and Southern Terry Spaight 99 182
Florida
--- -----
Total 883(2) 2,457
=== =====
</TABLE>
12
<PAGE>
(1) Lawrence Beck, Scott Beck's father, owns a controlling interest in such
area developers. The Company does not believe Lawrence Beck is an
affiliate of the Company. No director or officer of the Company, or a
member of their immediate families, owns a controlling interest in any
other area developer. See "--Area Developer Ownership".
(2) In addition, other franchisees operate 18 stores and the Company operates
223 stores.
The Company and its area developers are currently exploring alternative
organizational strategies that may include possible area developer
combinations. See "--Current Initiatives in the Boston Market System--
Organizational Strategy". At December 29, 1996, the Company had 15 domestic
area developers compared with 20 domestic area developers at the end of its
1995 fiscal year. The reduction in the total number of area developers was the
result of the acquisition by the Company of Mid-Atlantic Restaurant Systems
L.P. ("Mid-Atlantic"), Mid-Atlantic's acquisition of New Jersey Rose, L.L.C.
("New Jersey Rose") and the combination of three area developers with three
other area developers. Each of the combinations involved area developers with
geographically contiguous territories. Such combinations were the result of
negotiations between the area developers and were conditioned upon the consent
of the Company in its capacity as franchisor. The Company believes that future
consolidation of area developers primarily will be the result of negotiations
by and among such area developers, with input and suggestions from the Company
in its capacity as franchisor. The Company will continue to determine whether
or not to consent to any such combination on a case-by-case basis. During 1995
and 1996, area developers have used an aggregate of $10.3 million borrowed
under their secured loan agreements with the Company to acquire equity
interests in, or to purchase assets from, other area developers.
Area Developer Ownership. No officer or director of the Company owns a
controlling equity interest in any area developer. Lawrence Beck (i) is a
minority investor in R&A Food Services, L.P. ("R&A") and a director of, and
minority stockholder in, R&A Food Services, Inc., the general partner of R&A,
(ii) is the majority equity holder in P&L Food Services, L.L.C., (iii) owns,
with entities controlled by him, all of the equity interests in BC Boston,
L.P., and (iv) owns, with entities controlled by him, a majority of the
limited partnership interests and all of the general partnership interests of
BCE West, L.P. Jeffry J. Shearer, a former Vice Chairman of the Board and
former director of the Company, Peer D. Pedersen, son of Peer Pedersen, a
director of the Company, and Lawrence Beck are each minority stockholders in
BC Chicago, Inc., which is the managing member of BC Great Lakes, L.L.C. ("BC
Great Lakes"). Peer Pedersen and Dean L. Buntrock, a director of the Company,
two members of Mr. Buntrock's family, and a Buntrock family trust are limited
partners of BC Detroit/Seattle, L.P. ("BC Detroit/Seattle"), which is a
partner of BC Detroit, L.P., which is a member of BC Great Lakes. BC
Detroit/Seattle also holds limited partnership interests in BC Northwest, L.P.
Mark A. Link, Vice President-Financial Reporting of the Company, Saad J.
Nadhir, and Mark W. Stephens, Vice Chairman of the Board and Chief Financial
Officer of the Company, each own a direct equity interest in BC Equity
Funding, L.L.C. ("BCEF"), which has invested an aggregate of $58.3 million in
nine area developers of the Company in the form of 10% cumulative preferred
equity. Scott Beck owns an indirect equity interest in BCEF as a general and
limited partner of a partnership that has invested directly in BCEF, and Dean
Buntrock and Peer Pedersen each own indirect equity interests in BCEF as
limited partners of partnerships that have invested directly in BCEF. Such
interests aggregate approximately 6.4% of the outstanding equity interest in
BCEF.
Messrs. Buntrock, Link, Peer Pedersen and Stephens, John Todd, Chief
Financial Officer of the Boston Market division, and Laurence Zwain, President
and Chief Executive Officer of the Boston Market division and a director of
the Company, each own a direct minority equity interest in Market Partners,
L.L.C. ("Market Partners") a limited liability company which has invested an
aggregate of approximately $71 million in 14 area developers of the Company in
the form of 8% cumulative preferred equity or warrants. Such interests
aggregate approximately 10% of the outstanding equity interest in Market
Partners.
Area Developer Financing. The Company believes that the development and
operation of stores in a targeted market is enhanced when an area developer is
permitted to focus on development and operations, rather than on raising
capital. Accordingly, the Company has made convertible loans to its area
developers to partially
13
<PAGE>
finance store development and working capital needs and provides to certain
area developers various equipment and real estate leasing programs. See Note 9
of Notes to Consolidated Financial Statements. The Company's loan agreements
with its area developers generally require the area developer to expend at
least 75% of its contributed capital toward developing stores prior to drawing
on its revolving loan, with advances permitted during a two or three-year draw
period (or additional draw period in the event of a loan amendment) in a pre-
determined maximum amount equal to three to four times the amount of the area
developer's contributed capital. The loans are typically convertible into a
majority equity interest in the area developer at a conversion price set forth
in the loan agreement, which is at a premium over the per unit price paid by
investors in the area developer for their equity investments, after the
expiration of a moratorium period, provided generally that the area developer
has completed not less than 80% of its area development commitment, or in the
event of certain defaults. See Note 10 of Notes to Consolidated Financial
Statements. Upon conversion, the Company would typically become majority
equity owner of the area developer, resulting in the Company consolidating the
area developer's operations in its financial statements. Consequently, the
franchise and related fees earned by the Company (including interest,
royalties, real estate related fees, software fees, and other fees) from such
area developer would be eliminated in consolidation. The operating results of
the area developer (primarily store revenue, less expenses) would be included
in the Company's financial results. Such results would be adjusted for any
remaining minority interest in such area developer not acquired by the
Company.
Each area developer loan agreement contains representations, warranties,
terms, and covenants standard to those of a secured loan agreement. The
Company's loans to its area developers subject the Company to the risks of
being a secured lender. The Company considers each area developer's use of
loan proceeds, adherence to its store development schedule, store performance
trends, type and amount of collateral securing the loan, prevailing economic
conditions, and other factors it deems relevant at the time in evaluating
whether to establish an allowance for potential loan losses. See Note 10 of
Notes to Consolidated Financial Statements.
As a result of executing the rapid expansion strategy required by the
Company, Boston Market financed area developers have incurred net losses in
each of the last three years. The net losses incurred over this three-year
period, which aggregated $156.5 million in 1996, $148.3 million in 1995, and
$51.3 million in 1994, include (a) depreciation and amortization charges of
approximately $93.0 million, (b) approximately $148.0 million attributable to
investment overhead, scale inefficiencies in operating overhead, and other
start-up costs which the Company believes are necessary to establish the
Boston Market brand in new territories and open stores at a rate sufficient to
gain a competitive advantage, and (c) royalties, interest, and other franchise
related fees that would no longer be incurred in the event the Company were to
acquire, or convert its convertible secured loans to, such financed area
developers. The net loss amounts for each of the fiscal years represent the
aggregate net loss amounts for all financed area developers, the operations of
which were not consolidated into the Company's financial statements as of the
date the Company first reported such losses for such fiscal year. As a result
of the foregoing factors, as well as ongoing improvements to store operating
performance and increases in scale efficiencies, the Company does not consider
these start-up losses to be a meaningful financial measure during this rapid
expansion phase (i.e., that period during which new stores constitute a
significant percentage of the store base). The Company believes the rapid
expansion phase for most of its developers should last approximately four to
five years from the time significant development commences in such area
developer's area of dominant influence ("ADI"). As the rapid expansion phase
ends, the size of the area developer's store base should enable the developer
to gradually reduce and eventually recover such start-up losses. The reduction
in and recovery of losses is expected to be driven primarily by lower
investment overhead, increased operational and advertising efficiencies,
greater economies of scale, and further increases in store revenue through
continued product and service enhancements. The point at which losses may be
recovered will vary by area developer depending primarily upon the size and
timing of the area developer's store development schedule, the achievement of
advertising efficiency, the level of interest charges, the intensity of
competition, and the quality of management; however, there can be no assurance
that such losses will be recovered. Because the financed area developers are
generally two to three years into significant store development in their
respective ADIs, the Company believes substantially all of its financed area
developers will remain in the rapid expansion phase during 1997 in most of
their ADIs; however, the Company expects that area developer aggregate net
losses will be lower in fiscal 1997 than in fiscal 1996. Subsequent to the
completion of the rapid expansion phase, the
14
<PAGE>
Company expects area developer profitability to be a more meaningful factor in
assessing loan recoverability and any future loan commitments. Although the
Company believes its current financed area developers will achieve
profitability, in the event the foregoing strategy does not come to fruition
or an area developer otherwise fails to achieve a sufficient level of
profitability subsequent to the completion of its rapid expansion phase, such
event could have a material adverse impact on the Company's financial position
and results of operations. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 7.
AREA DEVELOPER CONVERSIONS OR ACQUISITIONS
Mid-Atlantic. In April 1996, the Company acquired a 93% interest in Mid-
Atlantic, the area developer for the Philadelphia area, for an aggregate
purchase price totaling $60.3 million, which included the assumption of $38.5
million in liabilities (including trade payables) owed to third parties by
Mid-Atlantic. The Company's $30.0 million convertible loan to Mid-Atlantic was
eliminated in the Company's consolidated financial statements. At the date of
the acquisition, Mid-Atlantic operated 78 stores. The acquisition was
accounted for as a purchase and, accordingly, the purchase price was allocated
to identified assets and liabilities based upon their fair values at the date
of acquisition, resulting in the Company recording $74.4 million in goodwill.
The results of operations of Mid-Atlantic have been included in the Company's
consolidated results of operations since the date of such acquisition. The
Company was approached by Mid-Atlantic's largest equity holder regarding
whether the Company had an interest in purchasing its equity interest in Mid-
Atlantic. Given the desire of such equity holder to sell its interest, the
Company decided, in the exercise of its business judgment, to acquire Mid-
Atlantic primarily based on the Company's desire to own additional Company
stores, the accelerated status of Mid-Atlantic's market penetration (due
primarily to its purchase and conversion of a significant number of Roy Rogers
stores in 1994), Mid-Atlantic having substantially completed its original
development schedule, the anticipated future performance of Mid-Atlantic's
stores and the Company's belief that the Company was able to more efficiently
and economically obtain any remaining required financing. The acquisition of
Mid-Atlantic was the result of arms' length negotiations between the Company
and the equity holders of Mid-Atlantic, none of whom was an officer or
director of the Company.
New Jersey Rose. In July 1996, the Company converted its loan to New Jersey
Rose, the area developer for the southern New Jersey area, into a 71% equity
interest in New Jersey Rose. The conversion premium on such loan was 13% above
the price per unit paid by the equity holders in New Jersey Rose. Immediately
after such conversion, Mid-Atlantic acquired 100% of the equity interests in
New Jersey Rose from the Company and the minority equity holders of New Jersey
Rose for an aggregate purchase price of $13.4 million, which included the
assumption of $1.1 million in liabilities (including trade payables) owed to
third parties by New Jersey Rose. At the date of such acquisition, New Jersey
Rose operated 12 stores in a development territory geographically contiguous
to Mid-Atlantic's development territory. The acquisition was accounted for as
a purchase and, accordingly, the purchase price was allocated to identified
assets and liabilities based upon their fair values at the date of
acquisition, resulting in the Company recording $7.0 million of goodwill. The
results of operations of New Jersey Rose have been included in the Company's
consolidated results of operations since the date of such acquisition. The
Company's proposal to convert its loan to New Jersey Rose and Mid-Atlantic's
decision to acquire the remaining equity interest in New Jersey Rose were
based primarily on the geographically contiguous territory of New Jersey Rose
to that of Mid-Atlantic and Mid-Atlantic's desire to own such stores and to
spread overhead costs over a larger store base. In addition, Harry Rose, the
principal equity holder and the operator of New Jersey Rose, desired to become
an area developer of ENBC, with rights to develop significantly more Einstein
Bros. stores than the 20 Boston Market stores that New Jersey Rose had the
right to develop. In order for Harry Rose to be able to devote sufficient
attention to such venture, he desired to sell his equity interest in New
Jersey Rose. New Jersey Rose's waiver of the loan conversion moratorium was
the result of arms' length negotiations between the Company and New Jersey
Rose and was based on Mid-Atlantic's agreement to acquire the remaining equity
interest in New Jersey Rose from the holders thereof. No officer or director
of the Company held an ownership interest in New Jersey Rose.
BC New York. In March 1997, the Company acquired a 73% equity interest in BC
New York, L.L.C. ("BCNY") for an aggregate purchase price totaling $88.0
million, which included conversion of the Company's loan to BCNY and the
assumption of $8.0 million in liabilities (including trade payables) owed to
third parties
15
<PAGE>
by BCNY. The conversion premium on such loan was 15% above the price per unit
paid by the equity holders in BCNY. As of the date of the acquisition, total
outstanding loan advances to BCNY aggregated $80.0 million. Additionally, the
Company has agreed to acquire an additional 11% of the equity of BCNY from the
current BCNY equity holders for approximately $15.0 million, with the form of
the consideration being subject to continuing negotiations with such holders.
Upon consummation of this transaction, such holders will retain approximately
16% of the outstanding equity of BCNY (constituting 60% of their original
ownership interest) and the Company has no obligation to acquire such
interests. As a result of the foregoing loan conversion, and assuming the
Company purchases the additional 11% of the equity of BCNY, the Company will
have approximately an 84% interest in BCNY. The BCNY transaction added 118
Boston Market stores, operating in the metropolitan New York area, northern
New Jersey, and Connecticut, to the Company store base. As part of the
transaction, the management of, and current equity investors in, BCNY formed a
new Boston Market area developer which acquired the right to develop
approximately 260 additional Boston Market stores in the New York metropolitan
area. The Company expects that such area developer will also operate the 118
Boston Market stores for the Company on terms to be negotiated. The conversion
was accounted for as a purchase and, accordingly, the purchase price was
allocated to identified assets and liabilities based upon their fair values at
the date of conversion, resulting in the Company recording $83.2 million of
goodwill (based upon a preliminary allocation). The results of operations of
BCNY have been included in the Company's consolidated results of operations
since the date of the loan conversion. Certain officers and directors of the
Company hold a 10% interest in Market Partners, which held a warrant to
acquire a minority equity interest in BCNY. Subsequent to its conversion of
the BCNY loan, the Company acquired the warrant for $2.9 million. The
Company's proposal to convert its loan to BCNY was based primarily on the
Company's desire to own additional Company stores, the concentration of BCNY
stores reflective of store penetration in a mature market, geographically
contiguous territory to an existing Company market, the anticipated future
performance of BCNY's stores and the Company's ability to consummate the
transaction utilizing a structure which did not foreclose the infusion of
additional local equity capital in a new area developer. BCNY's waiver of the
loan conversion moratorium was the result of arms' length negotiations between
the Company and BCNY. The Company believes that such waiver was primarily
dependent on the Company's willingness to transfer the BCNY development rights
with respect to the approximately 260 additional Boston Market stores to the
new area developer formed by management of, and current equity investors in,
BCNY, and a negotiated purchase price associated with the proposed acquisition
of the 11% equity interest of the current BCNY equity holders.
Conversion or Acquisition Criteria. Any determination to convert any area
developer loan or otherwise acquire an equity interest in any developer
involves a variety of economic and operational considerations, including the
projected financial impact of converting the loan, the status of the area
developer's market penetration, the performance of the area developer's
stores, the Company's desire to own such stores and the willingness of the
Company to incur the risk of owning such stores versus receiving income as a
franchisor, lender, and service provider, the Company's ability to manage
stores if necessary, the future capital requirements of the area developer and
its ability to raise a portion of such capital, and the demand on Company
resources. However, factors or circumstances unique to a specific transaction
may also impact the Company's decision. In addition, any loan conversion or
other acquisition of an equity interest in an area developer by the Company
would not be indicative of whether the Company intended to, or would, convert
or otherwise acquire an equity interest in any other area developer. There can
be no assurance that the Company will exercise its future rights to acquire an
equity interest in any area developer to which it provides financing or that
such exercise will result in control of the area developer. The Company has no
present intention to convert any of its area developers' loans or otherwise
acquire an equity interest in any area developer.
16
<PAGE>
CURRENT INITIATIVES IN THE BOSTON MARKET SYSTEM
Menu
The Company believes that variety is a primary factor influencing customer
trial and frequency. As a result, the Company has significantly expanded its
menu offerings to include additional dinner entrees and a line of salads,
soups, and Boston Carver sandwiches. The Company is currently extending its
Boston Carver sandwich brand with a line of four indulgent sandwiches marketed
under the Extreme Carver brand name. In addition, the Company has expanded its
Boston Hearth(TM) brand of holiday foods to include Boston Hearth breasts of
turkey, which are marinated and slow-roasted in Boston Market rotisserie
ovens, and banquet meal packages which serve from 10 to 24 people. The Company
continually evaluates the Boston Market menu, including product price points,
in its attempt to maximize customer trial and frequency.
F.A.S.T. Track(TM)
The Company and its area developers are currently in the process of
implementing a new customer service system, known as the F.A.S.T. (Faster
Average Service Times) Track system that is designed to enable Boston Market
stores to serve more customers faster, especially during peak hours. The
F.A.S.T. Track system is being implemented in all new Boston Market stores and
being retrofitted to many existing Boston Market stores. The F.A.S.T. Track
system modifies the way orders are taken and processed by allowing customers
to make menu selections and pay for their meals first, before the server
begins preparing the order. Using this new system, servers at various stations
assemble the individual items in the customer's order (hot and cold sides,
sandwiches, entrees, and desserts) at the same time. The F.A.S.T. Track system
has been shown to significantly reduce service times in stores in which the
new system has been implemented and optimized.
Organizational Strategy
The Company and its area developers are exploring alternative organizational
strategies in an effort to minimize area developer overhead expenses while
maximizing store level performance. The alternative organizational strategies
under consideration are possible area developer combinations and store manager
incentive programs. Programs under consideration include store level bonus
compensation plans that are based upon store performance and potential store
level ownership opportunities for the store manager. The Company believes that
the implementation of such initiatives could reduce overhead expenses and
enhance the ability of the Company and its area developers to attract and
retain highly motivated store managers who would deliver consistently superior
performance at the store level. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 7.
Boston Market International
The Company is in the preliminary stage of taking the Boston Market brand
into foreign markets, which could occur through license, franchise, area
development, joint venture, or other arrangements. In January 1997, BMI
entered into a letter of intent with John Sun, a restaurant developer in
Southeast Asia that contemplates the formation of a new entity that would
sublicense from BMI the right to develop up to 600 Boston Market stores in
Taiwan and the People's Republic of China. BMI is a newly formed entity and
the Company has been advised that BMI intends to seek private equity financing
from third parties in order to provide its initial equity capital. The Company
is negotiating a license with BMI which would grant to BMI the rights to
develop Boston Market stores in such countries, and a convertible loan from
the Company to BMI which could be convertible into a majority equity interest
in BMI. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7. See
also "Risk Factors--Development of Business of Boston Market International,
Inc."
Vendor Consolidation
The Company is working to consolidate the number of vendors who provide
products and services to the Boston Market system. The Company believes that,
based upon the number of stores in the Boston Market system and the volume
purchases associated therewith, it is capable of negotiating purchase
agreements that will provide savings to it and its area developers.
17
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
General. In March 1995, the Company made an investment in ENBC, which was
created through the combination of a number of leading regional bagel
retailers. ENBC franchises and operates specialty retail stores that feature
fresh-baked bagels, cream cheeses, coffee, and other related products,
primarily under the Einstein Bros. Bagels and Noah's New York Bagels brand
names. The Company owns approximately 17.3 million shares (representing
approximately 53%) of the outstanding common stock of ENBC as of April 22,
1997. The common stock of ENBC is quoted on the Nasdaq National Market under
the symbol "ENBX". On April 22, 1997, the last sale price of the common stock
of ENBC as reported on the Nasdaq National Market was $17 1/2 per share.
ENBC's principal business objective is to become the leading specialty
retailer of fresh-baked bagels and related products in the United States and
to ultimately support and extend its consumer brands through alternate
distribution channels, such as wholesale and contract food service.
ENBC Area Developers. As of April 10, 1997, ENBC had 400 stores in operation
systemwide, all of which were operated by area developers financed in part by
ENBC. Such financing generally permits ENBC in certain circumstances to
convert its loan into a majority equity interest in the area developer at a
premium over the price per unit paid by the investors in the area developer
for their equity investments. As of April 10, 1997, ENBC had entered into area
development agreements that provide for the development of 1,067 additional
stores, the majority of which are scheduled to open over the next three years.
SEE "SPECIAL NOTE REGARDING FOWARD-LOOKING STATEMENTS" ON PAGE 7.
The following table sets forth information as of April 10, 1997 concerning
ENBC's 12 area developers. The operating principals of such area developers
listed below each have experience in the multi-unit retail industry ranging
from 10 to 30 years.
<TABLE>
<CAPTION>
ADDITIONAL
PRIMARY OPERATING STORES STORES
AREA DEVELOPER MARKETS PRINCIPAL OPEN COMMITTED
-------------- ------- --------- ------ ----------
<C> <S> <C> <C> <C>
Einstein Bros. Bagels(2)
Alamo Bagels, L.P.(3) Dallas/Ft. Pearce Tucker 23 87
Worth, Hous-
ton, Austin
BCE West Bagels, L.L.C.(1)(3) Denver, Salt Larry Hohl 56 51
Lake City,
Phoenix,
Tucson, Al-
buquerque,
Las Vegas,
Colorado
Springs
Colonial Bagels, L.P.(3) Boston, Robert Schlacter 22 90
Cleveland,
Pittsburgh,
Columbus
Finest Bagels, L.L.C.(3) Kansas City, Edwin Brownell 35 43
St. Louis,
Minneapolis
Great Lakes Bagels, L.L.C. Milwaukee, Joseph Hoog 52 145
Chicago, De-
troit, Madi-
son, India-
napolis
Gulfstream Bagels, L.P.(3) Miami, Fort Robert Hartnett 38 57
Lauderdale,
West Palm
Beach, Or-
lando, Tampa
Liberty Foods, L.L.C.(3) New York Hank Huth 19 131
City metro-
politan area
Mayfair Bagels, L.L.C.(3) Washington, Steven Quamme 22 127
D.C., Balti-
more, Rich-
mond, Atlan-
ta(4), Char-
lotte, Nor-
folk
Philly Rose, L.P.(3) Philadelphia Harry Rose 17 68
Sunbelt Bagels, L.L.C.(3) San Diego, Pearce Tucker 17 63
Palm Springs
and portions
of Los Ange-
les
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
ADDITIONAL
OPERATING STORES STORES
AREA DEVELOPER PRIMARY MARKETS PRINCIPAL OPEN COMMITTED
- -------------- --------------- --------- ------ ----------
<S> <C> <C> <C> <C>
Noah's New York Bagels:
Noah's Bay Area Bagels, L.L.C. Sacramento, San Jim Mizes 50 45
Francisco/Oakland/San Jose,
Fresno
Noah's Pacific, L.L.C. Portions of Los Angeles, Jim Mizes 49 160
Portland, Seattle/Tacoma
--- -----
Total 400 1,067
=== =====
</TABLE>
- --------
(1) Lawrence Beck owns a controlling interest in such area developer. The
Company and ENBC do not believe Lawrence Beck is an affiliate of the
Company or ENBC. No officer or director of the Company or ENBC, including
members of their immediate families, owns a controlling equity interest in
any other area developer.
(2) Includes 11 stores operated under the Bagel & Bagel brand, one store
operated under the Offerdahl's Bagel Gourmet brand, seven stores operated
under the Baltimore Bagel brand, 11 stores operated under the Bagel
Boulevard brand and one store operating under the Bagel Street Cafe brand.
(3) On March 28, 1997, certain of ENBC's area developers entered into letters
of intent pursuant to which such area developers propose to enter into
transactions in which Alamo Bagels, L.P. would be merged into Finest
Bagels, L.L.C., BCE West Bagels, L.L.C. would be merged into Sunbelt
Bagels, L.L.C., and Liberty Foods, L.L.C. would be merged into Colonial
Bagels, L.P. On April 1, 1997, Mayfair Bagels, L.L.C. ("Mayfair") and
Philly Rose, L.P. ("Philly Rose") entered into a letter of intent pursuant
to which Mayfair proposes to merge into Philly Rose. In each of the
transactions, owners of equity interests in the merging area developer
would receive equity interests in the surviving area developer. Such
letters of intent have been entered into as a result of arms' length
negotiations between the relevant area developers and such proposed
combinations are conditioned upon the consent of ENBC in its capacity as
franchisor.
(4) Stores in the Atlanta metropolitan area operate under the Melvyn &
Elmo's(TM) brand because ENBC does not currently have the right to use the
Einstein Bros. Bagels brand for restaurant services in the Atlanta
metropolitan area.
Lawrence Beck is a minority investor in BCE West Bagels, L.L.C. and Colonial
Bagels, L.P. In addition, Messrs. Scott Beck, Pedersen and Zwain each own a
direct equity interest in Bagel Store Development Funding, L.L.C. ("BSDF"),
which has an equity interest in all of the ENBC area developers aggregating
$89.2 million. Mr. Buntrock owns an indirect equity interest in BSDF as a
member of a limited liability company that has invested directly in BSDF. All
of such interests aggregate approximately 16.2% of the outstanding equity
interest in BSDF.
As of April 10, 1997, ENBC had not converted (nor did it have the right to
convert) any loan to any area developer or otherwise acquired any equity
interest in any area developer. In making a determination to convert any ENBC
area developer loan or otherwise acquire an equity interest in any ENBC area
developer, ENBC expects to use the same economic and operational
considerations as the Company. See "--Area Developer Conversions or
Acquisitions--Conversion or Acquisition Criteria." Any loan conversion or
other acquisition of any equity interest by ENBC in any ENBC area developer
would not be indicative of whether ENBC intended to, or would, convert or
otherwise acquire an equity interest in any other area developer. There can be
no assurance that ENBC will exercise its future rights to acquire an equity
interest in any area developer to which it provides financing or that such
exercise will result in control of the area developer.
ENBC's area developers are pursuing a rapid expansion strategy similar to
that of the Company's area developers. Consequently, the Company believes that
ENBC's area developers will continue to incur net losses during their rapid
expansion phase. The Company also believes, however, that the factors
applicable to start-up losses and recovery of such losses by the Boston Market
area developers should apply to ENBC area developers as well. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7. See also "--Area
Developers".
19
<PAGE>
Relationship with the Company. ENBC has granted to the Company an option to
purchase newly issued shares of ENBC common stock for cash or registered
shares of the Company's Common Stock that permits the Company to maintain
ownership of up to 52% of the outstanding shares of ENBC common stock (the
"ENBC Option"). In the event payment is made in registered shares of the
Company's Common Stock, the Company has agreed to guarantee the price at which
those shares can be sold at the market within a limited time period. The ENBC
Option will terminate if (i) the Company sells or transfers shares of ENBC
common stock and as a result owns less than a majority of the then outstanding
shares of ENBC's voting stock or (ii) the percentage of outstanding shares of
voting stock of ENBC owned by the Company is reduced below 50% other than as a
result of the Company's voluntary sale or transfer of shares of ENBC common
stock and the Company fails to acquire a sufficient number of shares of ENBC
common stock so that it owns at least a majority of the then outstanding
shares of voting stock of ENBC by July 31 of the calendar year next following
the calendar year in which such reduction occurs. In calculating the
percentage ownership of voting stock of ENBC owned by the Company for purposes
of the ENBC Option, such calculation excludes from ownership by the Company
(i) 701,177 shares of ENBC common stock subject to options granted by the
Company, (ii) any shares of ENBC common stock held by officers, directors or
employees of the Company, and (iii) any shares of ENBC common stock held by
any person or entity that would not be counted under generally accepted
accounting principles in determining whether the Company owns a majority of
the voting stock for consolidated financial statement reporting purposes.
Pursuant to such calculation, as of March 31, 1997, the Company owned
approximately 50.4% of the outstanding common stock of ENBC and had the right
to purchase 1,096,116 shares of common stock of ENBC at prices ranging from
$25.29 to $30.75 per share. ENBC also granted to the Company pursuant to a
registration rights agreement five demand and unlimited piggyback registration
rights under the Securities Act with respect to shares of ENBC common stock
owned by the Company.
The Company has also provided to ENBC a $50.0 million unsecured,
subordinated, non-convertible loan facility. As of April 22, 1997, there was
no balance outstanding under the facility. Interest on the loans will be based
on the reference rate of Bank of America Illinois plus 0.5%. Any borrowings
outstanding are payable on June 15, 2003. The Company may satisfy a portion of
its funding obligations under the loan facility in cash or shares of Common
Stock. The Company has agreed to guarantee the price of any shares of Common
Stock delivered to ENBC in satisfaction of the Company's obligations under the
loan facility and thereafter sold by ENBC.
During fiscal 1996, the Company and ENBC were parties to several fee service
agreements, pursuant to which the Company provided ENBC with infrastructure
support services, including accounting and administration services, financial
services, real estate services and computer and communications services.
During fiscal 1996, ENBC paid the Company an aggregate of approximately $10.2
million pursuant to such agreements. The Company continues to provide ENBC
with certain accounting and administration and computer and communications
services pursuant to such agreements. ENBC and the Company are also parties to
two subleases, pursuant to which ENBC is entitled to the non-exclusive use of
aircraft leased by the Company from unaffiliated third party leasing
companies. ENBC paid the Company an aggregate of approximately $.5 million
under the two subleases. In addition, the Company subleases to ENBC
approximately 38,000 square feet of office space (and certain common areas,
including parking areas) for ENBC's support center located in Golden,
Colorado. The sublease currently provides for rental payments of $38,000 per
month and has an initial term of 15 years expiring in August 2011. The
Company's agreements with ENBC were negotiated at arms' length and the Company
believes that terms of such agreements are as favorable to the Company as
those that it would have with an unaffiliated third party.
Executive officers and directors of the Company are deemed to beneficially
own an aggregate of 787,824 shares (representing approximately 2.4%) of the
outstanding common stock of ENBC. Such number of shares include 428,359 shares
of ENBC common stock subject to options or warrants. Scott Beck is Chairman of
the Board of ENBC and Mark Goldston, Vice Chairman of the Board of the
Company, is President, Chief Executive Officer and a director of ENBC.
20
<PAGE>
PROGRESSIVE FOOD CONCEPTS, INC.
On January 31, 1997, PFCI entered into a series of agreements with Harry's
Farmers Market, Inc. ("Harry's"), an operator of retail food stores in the
Atlanta area. The common stock of Harry's is quoted on the Nasdaq National
Market under the symbol "HARY". The transaction permits PFCI to develop a
business model based on Harry's existing businesses and potentially acquire a
significant equity investment in Harry's. The Company has provided PFCI with a
$17.0 million secured loan that is convertible, after a moratorium period and
subject to PFCI meeting certain financial performance criteria, into a
majority equity interest in PFCI.
Harry's owns and operates five stores in the Atlanta area, including: three
Harry's Farmers Markets, mega-markets specializing in high quality fruits,
vegetables, meats and seafood, fresh bakery goods, fresh ready-to-heat and
ready-to-eat prepared foods, and deli, cheese and dairy products; and two
smaller Harry's In A Hurry stores, which emphasize high quality, fresh ready-
to-heat prepared foods and specialty perishables. Harry's line of over 300
ready-to-heat prepared meals are made in its 28,000 square foot USDA-approved
manufacturing facility, and over 200 proprietary bakery items are baked fresh
daily in its 55,000 square foot bakery.
Pursuant to the agreements with Harry's, PFCI has acquired beneficial
ownership of, and a royalty-free license to use, all of Harry's intellectual
property and trademark rights outside the states of Georgia and Alabama
(including all rights to the Harry's Farmers Market and Harry's In A Hurry
retail concepts) and access to Harry's personnel, information, and facilities
for purposes of developing a business model based on Harry's businesses. PFCI
has also obtained the right to acquire, subject to certain conditions, up to
seven million shares of Harry's Class A common stock (representing
approximately 43% of Harry's currently outstanding common stock and
approximately 20% of the voting power of such outstanding common stock), and a
right of first refusal with respect to additional financings and business
combination transactions into which Harry's may propose to enter.
RECENT DEVELOPMENTS
The Company expects that, based on current available data, Boston Market
systemwide weekly per store average ("WPSA") revenue for the quarter ending
April 20, 1997 will be approximately $23,250 to $23,500 compared to $22,762
for the comparable period in 1996. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 7.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
approximately $243.1 million ($279.7 million if the Underwriters' over-
allotment option is exercised in full). The Company intends to use the net
proceeds from this offering primarily for development of the Boston Market
system, including providing partial financing for certain of its area
developers and BMI. Net proceeds will also be used to fund the Company's
obligations under its convertible loan to PFCI and may be used to pursue
related opportunities in the emerging ready-to-heat and specialty perishables
market segments. In addition, net proceeds will be used for the repayment of
borrowings under the Company's revolving credit facility and for general
corporate purposes, which may include the purchase of individual stores from
area developers, the purchase from equity holders of BCNY of a minority of
their interests and funding obligations under the Company's credit facility
with ENBC.
The Company anticipates repaying its revolving bank debt ($53.0 million at
April 22, 1997) incurred to provide funds for loans made by the Company to
area developers to finance the development of stores and for general corporate
purposes. These borrowings bear interest at either the agent's reference rate
plus an applicable margin or, at the Company's option, the eurodollar rate
plus an applicable margin. Borrowings outstanding under the Company's
revolving bank debt as of April 22, 1997 bear interest at a rate of 10.0% per
annum. Any borrowings outstanding under the Company's revolving credit
agreement are payable on December 1, 1999.
A portion of the net proceeds from this offering may be used by the Company
to acquire 11% of the equity of BCNY from the current equity holders for
approximately $15.0 million, with the form of consideration being subject to
continuing negotiations with such holders. See "The Company--Area Developer
Conversions or Acquisitions".
The Company anticipates it will call for redemption of the 4 1/2% Debentures
in accordance with the terms of the indenture related thereto when the shares
of the Company's Common Stock are regularly trading at a premium to the
conversion price. The 4 1/2% Debentures are convertible at any time at a
conversion price of $27.969 per share. At December 29, 1996, the outstanding
principal amount of the 4 1/2% Debentures was $129.8 million which, upon
conversion, would result in the issuance by the Company of 4.6 million shares
of Common Stock. Upon any call for redemption, to the extent any holders do
not exercise their rights to convert the 4 1/2% Debentures into shares of
Common Stock prior to any redemption thereof, the Company may use a portion of
the proceeds from this offering in payment of the applicable redemption price
for any such 4 1/2% Debentures not so converted. However, there can be no
assurance that the Company will call for such redemption.
Pending such use, net proceeds will be invested in short-term interest-
bearing instruments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The following table sets forth, for each of the Company's fiscal quarters
indicated below, the high and low sale prices of the Common Stock as quoted on
the Nasdaq National Market as reported by The Wall Street Journal (Western
Edition).
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995:
First Quarter (ended April 16, 1995)................... 19 7/8 14 1/2
Second Quarter (ended July 9, 1995).................... 26 5/8 16 7/8
Third Quarter (ended October 1, 1995).................. 27 1/2 23
Fourth Quarter (ended December 31, 1995)............... 35 7/8 25 7/8
1996:
First Quarter (ended April 21, 1996)................... 37 5/8 27 3/8
Second Quarter (ended July 14, 1996)................... 37 27 1/4
Third Quarter (ended October 6, 1996).................. 36 3/8 24 1/8
Fourth Quarter (ended December 29, 1996)............... 41 1/2 31 3/8
1997:
First Quarter (from December 30, 1996 through April 22,
1997)................................................. 38 1/4 22 1/4
</TABLE>
22
<PAGE>
On April 22, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $22 3/8 per share. At April 22, 1997, there were
approximately 2,900 record holders of the Common Stock.
The Company has never paid cash dividends on its Common Stock and the Board
of Directors intends to continue a policy of retaining any earnings for use in
the Company's operations. The Company does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's current senior
credit facilities prohibit the payment of any cash dividends.
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
29, 1996 and as adjusted to give effect to this offering and application of
the net proceeds therefrom. See "Use of Proceeds". This table should be read
in conjunction with the Consolidated Financial Statements of the Company and
the Notes thereto included or incorporated in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 29, 1996
----------------------------------
ACTUAL AS ADJUSTED
---------------- -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
SHORT-TERM DEBT.............................. $ -- $ --
================ ================
LONG-TERM DEBT:
Senior credit facilities(1)................ $ -- $ --
4 1/2% Convertible Subordinated Debentures
due 2004.................................. 129,841 129,841
7 3/4% Convertible Subordinated Debentures
due 2004.................................. -- 250,000
Liquid Yield Option Notes due 2015......... 182,613 182,613
---------------- ----------------
Total long-term debt..................... 312,454 562,454
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 20,000,000
shares authorized; no shares
issued and outstanding.................... -- --
Common Stock, $.01 par value; 480,000,000
shares authorized; 64,245,868 shares is-
sued and outstanding...................... 642 642
Additional paid-in capital................. 827,611 827,611
Retained earnings.......................... 107,587 107,587
---------------- ----------------
Total stockholders' equity............... 935,840 935,840
---------------- ----------------
Total capitalization..................... $1,248,294 $ 1,498,294
================ ================
</TABLE>
- --------
(1) As of April 22, 1997, the Company had $53.0 million outstanding under its
revolving credit facility. See "Use of Proceeds". In addition, as of April
22, 1997, the Company had $254.3 million outstanding under its senior
secured master lease facilities. The master lease facilities are accounted
for as operating leases. ENBC also has a $45.0 million senior secured
revolving bank credit facility. ENBC had borrowings of $6.5 million
outstanding under such facility as of April 22, 1997.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND STORE DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF STORES)
The following table sets forth selected consolidated financial and store
data for the Company, including ENBC from the date of conversion (June 17,
1996) of the Company's loan to ENBC. This data should be read in conjunction
with the Consolidated Financial Statements of the Company and the Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1)
----------------------------------------------------
DEC. 27, DEC. 26, DEC. 25, DEC. 31, DEC. 29,
1992 1993 1994 1995 1996(2)
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
Royalties and
franchise related
fees.................. $ 2,627 $ 11,551 $ 43,603 $ 74,662 $ 115,510
Interest income........ -- 1,130 11,632 33,251 65,048
Company stores......... 5,656 29,849 40,916 51,566 83,950
------- -------- -------- -------- ----------
Total revenue........ 8,283 42,530 96,151 159,479 264,508
Costs and expenses:
Cost of products sold.. 2,241 11,287 15,876 19,737 31,160
Salaries and benefits.. 7,110 15,437 22,637 31,137 42,172
General and
administrative........ 5,241 13,879 27,930 41,367 99,847(3)
Provision for
relocation............ -- -- 5,097 -- --
------- -------- -------- -------- ----------
Total costs and
expenses............ 14,592 40,603 71,540 92,241 173,179
------- -------- -------- -------- ----------
Income (loss) from
operations............. (6,309) 1,927 24,611 67,238 91,329
Other income (expense).. 459 (280) (4,161) (12,865) 23,854(4)
------- -------- -------- -------- ----------
Income (loss) before
income taxes and
minority interest...... (5,850) 1,647 20,450 54,373 115,183
Minority interest in
(earnings) of
subsidiary............. -- -- -- -- (5,235)
Income taxes............ -- -- 4,277 20,814 42,990
------- -------- -------- -------- ----------
Net income (loss)....... $(5,850) $ 1,647 $ 16,173 $ 33,559 $ 66,958
======= ======== ======== ======== ==========
Net income (loss) per
common and equivalent
share................. $ (0.21) $ 0.06 $ 0.38 $ 0.66 $ 1.01
======= ======== ======== ======== ==========
Weighted average
number of common and
equivalent shares
outstanding........... 28,495 32,667 42,861 50,972 66,501
Ratio of earnings to
fixed charges(5)....... -- 2.38 3.97 4.23 5.91
STORE DATA (UNAUDITED):
Systemwide Boston
Market store
revenue(6)............ $42,654 $152,056 $383,691 $792,948 $1,166,591
Number of Boston
Market stores:
Beginning of year.... 34 83 217 534 829
Opened............... 50 138 323 310 273
Closed(7)............ (1) (4) (6) (15) (15)
------- -------- -------- -------- ----------
End of year.......... 83 217 534 829 1,087
======= ======== ======== ======== ==========
Company stores....... 19 38 41 3 105
Franchised stores.... 64 179 493 826 982
Systemwide Einstein/Noah Bagel store revenue(6)... $ 26,986(9) $ 145,631
Number of Einstein/Noah Bagel stores:
Beginning of year............................... -- 60
Opened or acquired.............................. 60 266
Closed(8)....................................... -- (11)
-------- ----------
End of year..................................... 60 315
======== ==========
Company stores.................................. 47 14
Franchised stores............................... 13 301
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
AT DEC. 29, 1996
-----------------------
AS
ACTUAL ADJUSTED (10)
--------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital................. $ 58,829 $ 301,954
Notes receivable................ 800,519 800,519
Total assets.................... 1,543,616 1,793,616
Long-term debt.................. 312,454 562,454
Stockholders' equity............ $ 935,840 $ 935,840
</TABLE>
- --------
(1) The Company's fiscal year is the 52/53-week period ending on the last
Sunday in December and normally consists of 13 four-week periods. The
first quarter consists of four periods and each of the remaining quarters
consists of three periods. The fiscal year ended December 31, 1995
includes 53 weeks of operations.
(2) On June 17, 1996, the Company began consolidating ENBC's results of
operations as a result of the Company's conversion of its loan to ENBC
into a majority equity interest in ENBC's common stock. Giving pro forma
effect of the Company's loan conversion as of the beginning of the
Company's fiscal year, total revenue, net income, and net income per
common and equivalent share were $292,030,000, $59,522,000, and $0.90,
respectively.
(3) Includes non-recurring charges of approximately $38.0 million.
(4) Includes non-recurring gains of approximately $38.2 million.
(5) For purposes of computing the ratio of earnings to fixed charges,
earnings consist of income (loss) before income taxes and fixed charges.
Fixed charges include interest expense and a percentage of rents which
management deems representative of an interest factor. For the year ended
December 27, 1992, earnings before fixed charges were insufficient to
cover fixed charges by $5,850,000.
(6) Includes gross revenue for all stores in the respective Boston Market or
Einstein/Noah systems.
(7) Such stores were closed due to operating or site-related issues, changes
in the market or trade area, changes in store development strategy, or
failure of the store to meet desired sales or profitability levels. Of
such stores, the Company closed two stores located in Michigan and area
developers closed the remaining stores located in 15 states. Such stores
were open for an average of 2.5 years prior to their closing. Costs
associated with such closings were expensed by the owners of such stores.
(8) Such stores were closed because the sites were determined to be
unsuitable for the Einstein Bros. Bagels brand and store. The Company
closed five stores in Colorado and one store in California and area
developers closed the remaining stores located in three states. Such
stores were open for an average of approximately 23 months prior to
closing. Costs associated with such closings were expensed by the owners
of such stores.
(9) Reflects period from March 24, 1995 (inception) through December 31,
1995.
(10) Adjusted to reflect the consummation of this offering and the application
of the net proceeds therefrom as set forth under "Use of Proceeds". See
also "Capitalization".
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
During fiscal year 1996, the Company converted its loan into a majority
equity interest in ENBC and acquired a 93% interest in Mid-Atlantic, its
Boston Market area developer for the Philadelphia area. Subsequent to the
Company's acquisition of its interest in Mid-Atlantic, Mid-Atlantic acquired
100% of the equity interest in New Jersey Rose, the Boston Market area
developer for the southern New Jersey area. In March 1997, the Company
converted its loan to BCNY into a majority equity interest in BCNY, its Boston
Market area developer for the metropolitan New York, northern New Jersey, and
Connecticut areas. Additionally, the Company has agreed to acquire a portion
of the current equity holders' interest in BCNY, which, after giving effect to
the conversion, will result in the Company having an equity interest in BCNY
of approximately 84%. See "The Company--Area Developer Conversions or
Acquisitions".
As a result of these transactions, the revenue previously generated by the
Company as a lender and service provider to ENBC and as a lender, franchisor,
and service provider to such area developers prior to the date of the
respective transactions has been or will be eliminated in consolidation and
replaced with revenue and operating expenses from ENBC franchise operations as
well as from ENBC company-owned stores and from Company-owned stores from and
after the dates of the respective transactions. The foregoing results are
adjusted in the "minority interest" line item to reflect the minority
interests not owned by the Company. As a result of these transactions, the
operating results for the 1996 fiscal year are not, and for the 1997 fiscal
year will not be, readily comparable to those for the 1995 and 1994 fiscal
years.
COMPANY-OWNED STORES
As part of its rapid store development strategy, the Company had a practice
of "seeding" a start-up market with Company stores, which the Company would
subsequently sell to a newly-formed area developer for that market. In 1994
and 1995, as part of its store seeding practice, the Company sold 54 and 91
Boston Market stores, respectively, to newly formed area developers. As a
result of the completion of the area developer network in 1995, the Company no
longer has the need to "seed" start-up markets with Boston Market stores. ENBC
is currently seeding markets in a manner similar to that previously undertaken
by the Company. In 1996, ENBC sold 59 stores to its area developers and
anticipates completing its store seeding program in 1997. As a result of the
sale of Company stores to newly-formed area developers, revenue and operating
expenses from such stores (while owned by the Company and ENBC) was replaced
with revenue generated as a franchisor and service provider. There have been
no material gains or losses recognized as a result of the sales.
Because of the store seeding program, stores owned by the Company in 1994
and 1995 were generally newer stores in start-up markets. Typically, these
stores tend to have higher costs due to employee inexperience and resulting
inefficiencies, a lack of store-specific operating history to assist in
forecasting daily food and labor needs, and lack of brand awareness in their
market area. Beginning with the acquisition of the Mid-Atlantic stores, the
Company has established a base of Company-owned stores that it believes are
more reflective of mature store performance in an established market. The
following table sets forth store performance data for these stores from the
date of their acquisition through December 29, 1996 (in thousands of dollars).
Such amounts exclude unallocated capital charges, income taxes and non-store
overhead costs:
<TABLE>
<S> <C> <C>
Net sales................................................ $73,512.7 100.0%
Food and paper costs..................................... 27,441.7 37.3%
Salaries and benefits.................................... 18,470.6 25.1%
Operating expenses....................................... 5,656.8 7.7%
Occupancy and advertising costs.......................... 8,080.8 11.0%
--------- -----
Store cash flow.......................................... $13,862.8 18.9%
========= =====
</TABLE>
26
<PAGE>
RESULTS OF OPERATIONS
Fiscal Year 1996 Compared to Fiscal Year 1995
Revenue. Total revenue increased 66% for 1996 over 1995. Royalties and
franchise related fees increased 55%, primarily attributable to higher
royalties resulting from an increase in revenue from Boston Market franchised
stores and the inclusion of ENBC royalties from the date of conversion of the
Company's loan into ENBC common stock. Total Boston Market systemwide store
revenue increased to $1.2 billion in 1996, up 47% from $792.9 million in 1995.
The increase in systemwide store revenue was due primarily to an increase in
the number of Boston Market stores open and higher average revenue per store.
WPSA revenue per Boston Market store increased 6.6% to $24,064 for 1996, from
$22,570 in 1995. WPSA represents the weekly per store average gross revenue
for all stores in the Boston Market system based upon the actual number of
days the stores are open in the reporting period. ENBC's royalties and
franchise related fees accounted for 37% of the increase in royalty and
franchise related fees for 1996. Interest income increased 96% over 1995 due
to higher outstanding loan balances associated primarily with the increases in
stores opened by Boston Market and ENBC area developers. ENBC's interest
income from area developer financing accounted for 16% of the increase in
interest income.
Revenue from Company-owned stores is significantly affected by the average
number of such stores operating in the periods being compared. The average
number of Company stores for 1996 was 64 compared to 37 for 1995. This change
in average number of stores is attributable to the timing of store sales to
area developers in 1995 and the acquisition of stores in 1996. Revenue from
Company stores increased 63% for 1996 compared with 1995. The increase for the
fiscal year was due to a combination of a higher average number of Company
stores operating during fiscal 1996 and the inclusion of ENBC's company stores
from the date of conversion of the ENBC loan. Revenue from ENBC company stores
accounted for 24% of the increase in store revenue for the fiscal year.
Cost of Products Sold. As a result of a higher average number of Company
stores operating during the year, cost of products sold increased 58% for 1996
compared with 1995. ENBC's company stores accounted for 24% of the increase in
cost of products sold for the fiscal year. Costs of products sold, as a
percentage of Company store revenue, decreased from 38.3% in 1995 to 37.1% in
1996. The decrease in the percentage was attributable to the inclusion of
ENBC's company stores (from the date of conversion of the ENBC loan) which
have a lower cost of sales than Boston Market stores and improved management
of waste and operational variability at Boston Market stores.
Salaries and Benefits. Salaries and benefits increased 35% for 1996 from
1995, primarily as a result of the higher average number of Company stores
operating in 1996. The increase was also due to the inclusion of ENBC
employees from the date of conversion of the Company's loan to ENBC and an
increased number of employees at the Company's support center necessary to
support systemwide expansion. ENBC accounted for 39% of the increase in
salaries and benefits for the year.
General and Administrative. Included in general and administrative expenses
for 1996 were non-recurring charges of approximately $38 million for asset
write-downs and a provision to purchase certain store equipment from Boston
Market area developers related to the introduction of the new F.A.S.T. Track
service system designed to provide faster service to Boston Market customers.
Absent these items, general and administrative expenses increased 50% for
1996. The increase for the year was primarily attributable to greater
depreciation and amortization expense, an increase in the general and
administrative expenses at the support center necessary to support systemwide
expansion, and inclusion of ENBC's general and administrative expenses from
the date of conversion of the Company's loan to ENBC. Excluding the non-
recurring charges, ENBC accounted for 38% of the increase in general and
administrative expenses for the year. Included in general and administrative
expenses were depreciation and amortization charges of $22.9 million in 1996
compared with $11.4 million in 1995. The increase in depreciation and
amortization expense was primarily attributable to a higher fixed asset base
reflecting the Company's and ENBC's investment in support center
infrastructure as well as the goodwill associated with the acquisition of the
interest in Mid-Atlantic and the conversion of the ENBC loan.
27
<PAGE>
Other Income (Expense). Included in other income (expense) for the year was
a $38.2 million gain recognized as a result of ENBC issuing approximately 8.9
million shares of ENBC common stock to third parties
at prices per share greater than the Company's carrying value. See Note 13 of
Notes to Consolidated Financial Statements. Absent this gain, the Company had
a net expense of $14.3 million compared with a net expense of $12.9 million in
1995. This increase was due to additional interest expense incurred in 1996
resulting from the Company's LYONs being outstanding during all of 1996 versus
only a portion of the year in 1995.
Income Taxes. The provision for income taxes for 1996 reflects the Company's
expected effective tax rate.
Minority Interest. The minority interest in the earnings of subsidiary of
$5.2 million for 1996 represents the minority ownership interest in the
earnings of ENBC.
Fiscal Year 1995 Compared to Fiscal Year 1994
Revenue. Total revenue increased 66% for 1995 from 1994. Royalty and
franchise related fees increased 71% primarily due to an increase in royalties
attributable to the larger base of franchise stores operating systemwide, from
493 stores at December 25, 1994 to 826 stores at December 31, 1995 and an
increase in lease and real estate services income. Interest income increased
as a result of increased loans made to certain area developers.
Revenue from Company stores increased 26% for 1995 due to a combination of a
higher average number of Company stores open and higher average store revenue
during 1995. The Company had three Company stores at December 31, 1995,
compared to 41 at December 25, 1994. During 1995, the Company sold 91 Company
stores that it had opened to seed development in start-up markets prior to
executing area development agreements for such markets. The Company's seeding
program concluded in 1995 as a result of the completion of its nationwide area
developer network.
Cost of Products Sold. Cost of products sold increased 24% for 1995 from
1994 primarily due to an increase in the number of Company stores open and
higher average store revenue during the year.
Salaries and Benefits. Salaries and benefits increased 38% in 1995 from
1994. The increase resulted from an increase in the number of employees at the
Company's support center necessary to support systemwide expansion and an
increase in the number of employees at Company stores due to a higher average
number of Company stores open during the year.
General and Administrative. General and administrative expenses increased
48% for 1995 from 1994. The increase is attributable to the continued
development of the Company's support center infrastructure necessary to
support systemwide expansion and higher general and administrative expenses at
Company stores resulting from a higher average number of Company stores open
during the year. Included in general and administrative expenses were
depreciation and amortization charges of $11.4 million in 1995 and $6.1
million in 1994. The increase in depreciation and amortization expense is
primarily attributable to a substantially higher fixed asset base reflecting
the Company's investment in its infrastructure.
Other Expense. The Company incurred other expense of $12.9 million in 1995
compared with other expense of $4.2 million in 1994. This increase reflects
higher net interest expense, primarily attributable to the Company's 4 1/2%
Debentures, which were outstanding during all of 1995, interest expense on the
Company's LYONs commencing in June 1995, and short-term borrowings under its
credit facility, partially offset by higher interest income.
Income Taxes. The provision for income taxes for 1995 reflects the Company's
expected effective tax rate.
Fiscal Year 1994 Compared to Fiscal Year 1993
Revenue. Total revenue increased 126% for 1994 from 1993. Royalty and
franchise related fees increased 277% primarily due to an increase in
royalties attributable to the larger base of franchise stores operating
systemwide, from 179 stores at December 26, 1993 to 493 stores at December 25,
1994, and an increase in franchise fees related to the increase in the number
of stores that commenced operation as franchised stores
28
<PAGE>
during the year. Additional factors contributing to the increase in revenue
from royalty and franchise related fees include an increase in lease income
due to a higher number of store sites that the Company owns and leases to area
developers, and recognition of software license and maintenance fees for
store-level computer software systems developed by the Company for use by
franchisees. No software-related fees were earned in 1993. Interest income
increased as a result of increased loans made to certain area developers.
Revenue from Company stores increased 37% for 1994 from 1993. This increase
was due to a higher average number of Company stores open during the year. The
Company had 38 Company stores at December 26, 1993 compared to 41 at December
25, 1994. During 1994, the Company sold 54 Company stores that it had opened
to seed new markets.
Cost of Products Sold. Cost of products sold increased 41% for 1994 from
1993. This increase was primarily due to an increase in the number of Company
stores open during 1994.
Salaries and Benefits. Salaries and benefits increased 47% for 1994 from
1993. The increase resulted from an increase in the number of employees at the
Company's support center necessary to support systemwide expansion and an
increase in the number of employees at Company stores due to a higher average
number of Company stores open during the year.
General and Administrative. General and administrative expenses increased
101% for 1994 from 1993. The increase is attributable to the development of
the Company's support center infrastructure necessary to support systemwide
expansion and higher general and administrative expenses at Company stores
resulting from a higher average number of Company stores open during the year.
Included in general and administrative expenses were depreciation and
amortization charges of $6.1 million in 1994 and $2.0 million in 1993. The
increase in depreciation and amortization expense is primarily attributable to
a substantially higher fixed asset base reflecting the Company's investment in
its infrastructure.
Provision for Relocation. In September 1994, the Company consolidated its
four Chicago-based support center facilities into a single facility and
relocated to Golden, Colorado. The total cost of the relocation was $5.1
million.
Other Expense. The Company incurred other expense of $4.2 million in 1994,
compared with other expense of $0.3 million in 1993. This increase reflects
higher interest expense, primarily attributable to the $130.0 million of the 4
1/2% Debentures and short-term borrowings under its unsecured credit facility,
partially offset by higher interest income.
Income Taxes. Included in income taxes in 1994 is a $3.5 million benefit
reflecting an adjustment to the valuation allowance previously provided
against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations increased to $144.9 million in 1996 from $55.5
million in 1995 and from $35.9 million in 1994. Income before non-cash charges
and credits increased to $99.4 million in 1996 compared to $65.4 million in
1995 and $26.2 million in 1994. The annual increases were due primarily to
increased net income. Cash provided from working capital was $45.5 million in
1996 compared with a decrease of working capital of $10.0 million in 1995 and
an increase in working capital of $9.8 million in 1994. The change in working
capital in 1996 compared to 1995 was primarily attributable to increases in
accounts payable and accrued expenses experienced as a result of the general
growth of the business. The working capital generated in 1994 resulted from an
increase in accounts payable and accrued expenses due to the general growth in
the business and an increase in deferred franchise revenue associated with
executing franchise agreements for new stores.
Cash provided from financing activities over the past three years reflect
the Company's use of various sources of capital to fund its business. During
1996, the Company sold 2,992,000 shares of its Common Stock for net proceeds
of approximately $100.3 million and ENBC sold 8,670,000 shares of ENBC common
stock, which raised net proceeds of $174.6 million, including purchases by the
Company of $45.9 million of shares of ENBC's common stock.
29
<PAGE>
In 1996, the Company terminated its existing revolving credit facility and
entered into a new $110.0 million senior revolving credit facility. Borrowings
under the revolving credit facility bear interest at either the agent's
reference rate plus an applicable margin or the eurodollar rate plus an
applicable margin, at the Company's option. The revolving credit agreement is
secured by certain assets of the Company and expires in December 1999. The
Company also entered into a new $190.0 million senior secured credit facility,
structured as a master lease, which provides financing for equipment and real
estate for stores operated by the Company and its area developers. The 1996
master lease facility is accounted for as an operating lease, bears interest
at LIBOR plus an applicable margin, and has terms, including renewal options,
of between three and five years. As of December 29, 1996, the Company had
utilized approximately $149.0 million of the facility to retire the existing
outstanding balance under a prior master lease and to finance equipment and
real estate for new stores. Availability of borrowings under the Company's
revolving credit facility and the 1996 master lease facility is formula-based.
In connection with the revolving credit facility and the 1996 master lease
facility, the Company also entered into a facilities agreement, which contains
affirmative, negative, and financial covenants governing both such facilities.
The revolving credit facility and the 1996 master lease facility are also
cross-collateralized and cross-defaulted. As of December 29, 1996, the Company
and ENBC had $50.1 million and $50.7 million, respectively, available in cash
and cash equivalents. In addition, the Company and ENBC had $110.0 million and
$45.0 million, respectively, available under their revolving credit
facilities.
During 1995, the Company completed the sale of LYONs, for which the Company
received gross proceeds of approximately $172.5 million and sold 10,350,000
shares of its Common Stock for net proceeds of approximately $342.0 million.
See Note 6 of Notes to Consolidated Financial Statements. During 1994, the
Company issued $130.0 million of 4 1/2% Debentures. See Note 6 of Notes to
Consolidated Financial Statements. During 1994, the Company also sold
6,900,000 shares of its Common Stock for net proceeds of approximately $120.0
million.
Over the last three years the Company's primary use of capital reflects its
goal of establishing brand awareness and market leadership by providing
partial financing to its area developers for their use in rapid store
development and to finance their working capital needs. As of December 29,
1996, the Company had secured loan commitments to its Boston Market financed
area developers aggregating $838.0 million of which $647.3 million had been
advanced. As of December 29, 1996, ENBC had secured loan commitments to its
area developers aggregating $283.2 million, of which $140.8 million had been
advanced. Net loan advances to area developers were $378.3 million in 1996
(consisting of $1,198.8 million of loan advances, net of $820.5 million of
loan repayments), $210.2 million in 1995 (consisting of $549.2 million of loan
advances, net of $339.0 million of loan repayments), and $156.4 million in
1994 (consisting of $224.9 million of loan advances, net of $68.5 million of
loan repayments). The majority of the loan advance and repayment activity
reflects the revolving nature of the loans, that is, amounts are drawn and
repaid on a regular basis to optimize cash management. The annual increases in
loan advances were attributable to more stores being opened each year by the
Company's and ENBC's area developers and consolidation among area developers.
Certain notes to Boston Market area developers which were issued with original
maturities prior to fiscal 1999 have been amended to change their due dates in
connection with the significant expansion in 1996 of the area developers'
development schedules and/or in connection with the contribution of additional
equity capital to an area developer by third parties. Other loan advances and
repayments in 1996 and 1995 consisted primarily of activity under the
Company's convertible loan to ENBC prior to the date of conversion of the
loan.
As a result of executing the rapid expansion strategy required by the
Company, Boston Market financed area developers have incurred net losses in
each of the last three years. The net losses incurred over this three-year
period, which aggregated $156.5 million in 1996, $148.3 million in 1995, and
$51.3 million in 1994, include (a) depreciation and amortization charges of
approximately $93.0 million, (b) approximately $148.0 million attributable to
investment overhead, scale inefficiencies in operating overhead, and other
start-up costs which the Company believes are necessary to establish the
Boston Market brand in new territories and open stores at a rate sufficient to
gain a competitive advantage, and (c) royalties, interest, and other franchise
related fees that would no longer be incurred in the event the Company were to
acquire, or convert its convertible secured loans to, such financed area
developers. The net loss amounts for each of the fiscal years represent the
aggregate net loss amounts for all financed area developers, the operations of
which were not consolidated into the Company's
30
<PAGE>
financial statements as of the date the Company first reported such losses for
such fiscal year. As a result of the foregoing factors, as well as ongoing
improvements to store operating performance and increases in scale
efficiencies, the Company does not consider these start-up losses to be a
meaningful financial measure during this rapid expansion phase (i.e., that
period during which new stores constitute a significant percentage of the
store base). The Company believes the rapid expansion phase for most of its
developers should last approximately four to five years from the time
significant development commences in such area developer's ADI. As the rapid
expansion phase ends, the size of the area developer's store base should
enable the developer to gradually reduce and eventually recover such start-up
losses. The reduction in and recovery of losses is expected to be driven
primarily by lower investment overhead, increased operational and advertising
efficiencies, greater economies of scale, and further increases in store
revenue through continued product and service enhancements. The point at which
losses may be recovered will vary by area developer depending primarily upon
the size and timing of the area developer's store development schedule, the
achievement of advertising efficiency, the level of debt and interest charges,
the intensity of competition, and the quality of management; however, there
can be no assurance that such losses will be recovered. Because the financed
area developers are generally two to three years into significant store
development in their respective ADIs, the Company believes substantially all
of its financed area developers will remain in the rapid expansion phase
during 1997 in most of their ADIs; however, the Company expects that area
developer aggregate net losses will be lower in fiscal 1997 than in fiscal
1996. Subsequent to the completion of the rapid expansion phase, the Company
expects area developer profitability to be a more meaningful factor in
assessing loan recoverability and any future loan commitments. Although the
Company believes its current financed area developers will achieve
profitability, in the event the foregoing strategy does not come to fruition
or an area developer otherwise fails to achieve a sufficient level of
profitability subsequent to the completion of its rapid expansion phase, such
event could have a material adverse impact on the Company's financial position
and results of operations. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 7.
The allowance for financed area developers' loan losses is maintained at a
level that in management's judgment is adequate to provide for estimated
possible loan losses. The amount of the allowance is based on management's
review of use of loan proceeds, adherence to store development schedules,
store performance trends, type and amount of collateral securing the loan,
prevailing economic conditions, and other factors that management deems
relevant at the time. Based upon this review and analysis, no allowance for
loan losses was required as of December 31, 1995 and December 29, 1996.
Area developer loans are typically convertible into a majority equity
interest in the area developer at a conversion price set forth in the loan
agreement, which is at a premium over the per unit price paid by investors in
the area developer for their equity, after the expiration of a moratorium
period, provided generally that the area developer has completed not less than
80% of its area development commitment, or in the event of certain defaults.
Any determination to convert any area developer loan or otherwise acquire an
equity interest in any area developer would involve a variety of economic and
operational considerations, including the projected financial impact of
converting the loan, the status of the area developer's market penetration,
the performance of the area developer's stores, the Company's desire to own
such stores and the willingness of the Company to incur the risk of owning
such stores versus receiving income as a franchisor, lender, and service
provider, the Company's ability to manage stores if necessary, the future
capital requirements of the area developer and its ability to raise a portion
of such capital, and the demand on Company resources. However, factors and
circumstances unique to a specific transaction may also impact the Company's
decision. In addition, any loan conversion or other acquisition of an equity
interest in an area developer by the Company would not be indicative of
whether the Company intended to, or would, convert or otherwise acquire an
equity interest in any other area developer. There can be no assurance that
the Company will exercise its future rights to acquire an equity interest in
any area developer to which it provides financing or that such exercise will
result in control of the area developer. The Company has no present intention
to convert any of its area developers' loans or otherwise acquire an equity
interest in any area developer.
In addition to providing financing to its area developers, the Company's
capital requirements relate to continued development of its corporate
infrastructure, which supports systemwide expansion, acquisition and
31
<PAGE>
development of Company stores, and funding commitments to PFCI and any future
commitments to BMI. The Company has committed to provide PFCI a $17.0 million
convertible secured loan and expects to make a convertible secured loan to
BMI. See "The Company--Current Initiatives in the Boston Market System--Boston
Market International" and "The Company--Progressive Food Concepts, Inc." In
1996, the Company expended $50.5 million on its corporate infrastructure and
$49.3 million to acquire and develop Company stores. During 1995 and 1994, the
Company expended $24.9 million and $46.3 million, respectively, on its
corporate infrastructure and $87.5 million and $115.8 million, respectively,
to develop Company stores and acquire real estate for store development. These
capital expenditures have been partially offset with cash proceeds from
selling Company stores as a result of the Company's store seeding practice.
The Company generated $54.1 million and $40.5 million in 1995 and 1994,
respectively, from selling Company stores to newly-formed area developers. As
a result of completing the Boston Market area developer network in 1995, the
Company no longer has the need to seed new markets. Accordingly, in 1996, the
Company did not, and in the future the Company does not anticipate it will
realize cash proceeds from the sale of stores to newly-formed area developers.
ENBC is currently seeding markets in a manner similar to that previously
undertaken by the Company. During 1996, ENBC generated $30.1 million from the
sale of ENBC company stores to newly-formed area developers. ENBC anticipates
completing its store seeding program in 1997. In addition to this seeding
program, the Company generated cash from financing land, building and
equipment of $45.4 million, $18.4 million, and $6.1 million in 1996, 1995, and
1994, respectively.
The Company anticipates that it and ENBC, and their respective area
developers, will have need for additional financing dependent primarily upon
the number of stores opened, the cost of such stores, and store operating
results. In addition, the Company expects that BMI, its area developers,
franchisees, licensees, and/or joint venture partners, and PFCI will have need
for additional financing. The Company's capital requirements depend primarily
upon the amount and timing of borrowings under the loan agreements between the
Company and its area developers and the Company and ENBC, BMI, and PFCI. The
Company, ENBC, and the other aforementioned entities may seek additional funds
from offerings of debt or equity securities. There can be no assurance that
the Company, ENBC, or such entities will be able to raise such funds on
satisfactory terms when needed. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 7.
SEASONALITY
Historically, the Company has experienced lower average store revenue in the
months of January and February as a result of inclement weather.
IMPACT OF INFLATION
The Company and ENBC believe that inflation has not had a material impact on
its operations to date. Substantial increases in labor, employee benefits,
food, and other operating expenses could adversely affect the operations of
Boston Market, Einstein Bros. Bagels and Noah's New York Bagel stores.
32
<PAGE>
DESCRIPTION OF DEBENTURES
The Debentures will be issued pursuant to an indenture to be dated as of
April 28, 1997 (the "Indenture") between the Company, as issuer, and Bankers
Trust Company, as trustee (the "Trustee"). A copy of the Indenture is filed as
an exhibit to the Registration Statement of which this Prospectus forms a
part. The terms of the Debentures will include those stated in the Indenture
and those provisions required by, or made a part of the Indenture by reference
to, the Trust Indenture Act of 1939, as in effect on the date of the Indenture
(the "Trust Indenture Act"). The Debentures will be subject to all such terms,
and prospective investors are referred to the Indenture for a statement
thereof.
The following summary of the Debentures is qualified in its entirety by
express reference to the Debentures and the Indenture, which are incorporated
by reference as a part of such summary. Capitalized terms defined in the
Indenture shall have the same meanings herein.
GENERAL
The Debentures will be subordinated unsecured obligations of the Company,
will be limited to an aggregate principal amount of $250,000,000 ($287,500,000
if the Underwriters' over-allotment option is exercised in full), and will
mature on May 1, 2004.
The Debentures will bear interest from the date of issuance at the rate per
annum shown on the cover page of this Prospectus. Interest will be payable
semi-annually on May 1 and November 1 of each year, commencing November 1,
1997, to Holders of record at the close of business on April 15 or October 15
preceding each such interest payment date. Principal of and interest on the
Debentures will be payable at the office of the Paying Agent. Interest on the
Debentures will be mailed to each Holder's registered address. The Trustee
will initially act as the Paying Agent.
The Debentures will be issued only in registered form, without coupons, and
only in denominations of $1,000 and integral multiples thereof. Debentures may
be presented for conversion at the office of the Conversion Agent and for
exchange or registration of transfer at the office of the Registrar. The
Trustee will initially act as the Conversion Agent and Registrar. Any exchange
or transfer will be without charge, except that the Company or the Registrar
may, subject to certain exceptions, require payment of a sum sufficient to
cover any tax, assessment, or other governmental charge that may be imposed in
relation thereto.
CONVERSION RIGHTS
A Holder may, at any time prior to maturity, convert the principal amount of
a Debenture (or any portion thereof equal to $1,000 or an integral multiple of
$1,000) into shares of Common Stock at the conversion price set forth on the
cover page of this Prospectus, subject to adjustment as described below (the
"Conversion Price"). The right to convert a Debenture called for redemption
will terminate at the close of business on the Redemption Date for such
Debenture or such earlier date as the Holder presents the Debenture for
redemption (unless the Company shall default in making the redemption payment
when due, in which case the conversion right shall terminate at the close of
business on the date such default is cured and such Debenture is redeemed). A
Debenture for which a Holder has delivered a Change in Control Purchase Notice
exercising the option of such Holder to require the Company to purchase such
Debenture may be converted only if such notice is withdrawn by a written
notice of withdrawal delivered by the Holder to the Paying Agent prior to the
close of business on the Change in Control Purchase Date in accordance with
the Indenture.
No payment or adjustment will be made for dividends or distributions with
respect to shares of Common Stock issued upon conversion of a Debenture.
Except as otherwise provided in the Indenture, interest accrued shall not be
paid on Debentures converted. If any Holder surrenders a Debenture for
conversion between the record date for the payment of an installment of
interest and the related interest payment date, then, notwithstanding such
conversion, the interest payable on such interest payment date will be paid to
the Holder on such record date. However, in such event, such Debenture, when
surrendered for conversion, must be
33
<PAGE>
accompanied by delivery by such Holder of a check or draft payable in an
amount equal to the interest payable on such interest payment date on the
portion so converted. Notwithstanding the foregoing, if any Debenture is
called for redemption on May 1, 2000 and such Debenture is surrendered for
conversion at any time during the ten business days immediately preceding the
date fixed for redemption, interest shall accrue on such Debenture through,
but not including, the date fixed for redemption and shall be payable on such
redemption date to the person who surrenders such Debenture for conversion and
the conversion date of such Debenture will be deemed to be the redemption
date. No fractional shares will be issued upon conversion, but a cash payment
will be made for any fractional interest based upon the current market price
of the Common Stock.
The Conversion Price is subject to adjustment upon the occurrence of certain
events, including (i) the issuance of shares of Common Stock as a dividend or
distribution on the Common Stock, (ii) the subdivision or combination of the
outstanding Common Stock, (iii) the issuance to all or substantially all
holders of Common Stock of rights or warrants to subscribe for or purchase
Common Stock (or securities convertible into Common Stock) at a price per
share less than the then current market price per share, as defined, (iv) the
distribution to all or substantially all holders of Common Stock of shares of
capital stock of the Company (other than Common Stock), evidences of
indebtedness, or other non-cash assets (including securities of any company
other than the Company), (v) the distribution to all or substantially all
holders of Common Stock of rights or warrants to subscribe for its securities
(other than those referred to in (iii) above), and (vi) the distribution to
all or substantially all holders of Common Stock of cash in an aggregate
amount that (together with all other cash distributions to all or
substantially all holders of Common Stock made within the preceding 12 months
not triggering a Conversion Price adjustment) exceeds an amount equal to 20%
of the Company's market capitalization on the Business Day immediately
preceding the day on which the Company declares such distribution. In the
event of a distribution pro rata to holders of Common Stock of rights to
subscribe for additional shares of the Company's capital stock (other than
those referred to in (iii) above), the Company may, instead of making any
adjustment in the Conversion Price, make proper provisions so that each Holder
who converts a Debenture (or any portion thereof) after the record date for
such distribution and prior to the expiration or redemption of such rights
shall be entitled to receive upon such conversion, in addition to the shares
of Common Stock issuable upon conversion, an appropriate number of such
rights. No adjustment of the Conversion Price will be required to be made
until the cumulative adjustments require an increase or decrease of at least
1% in the Conversion Price as last adjusted.
Subject to any applicable right of the Holders upon a Change in Control, if
the Company reclassifies or changes its outstanding Common Stock, or
consolidates with or merges into or sells or conveys all or substantially all
of the assets of the Company as an entirety to any person, or is a party to a
merger that reclassifies or changes its outstanding Common Stock, the
Debentures will become convertible into the kind and amount of shares of stock
and other securities and property (including cash) that the Holders would have
owned immediately after the transaction if the Holders had converted the
Debentures immediately before the effective date of the transaction.
The term "all or substantially all" as used in the previous two paragraphs
has not been interpreted under New York law (which is the governing law of the
Indenture) to represent a specific quantitative test. As a consequence, in the
event the Holders of the Debentures elected to exercise their rights under the
Indenture and the Company elected to contest such election, there could be no
assurance as to how a court would interpret the phrase under New York law,
which may have the effect of preventing the Trustee or the Holders of the
Debentures from asserting that the Conversion Price is subject to adjustment
or that the Debentures are convertible into other shares of stock and other
securities and property that the Holders would have owned immediately after
the transaction if the Holders had converted the Debentures immediately before
the effective date of the transaction.
Certain adjustments to the Conversion Price to reflect the Company's
issuance of certain rights, warrants, evidences of indebtedness, securities,
or other property (including cash) to holders of the Common Stock may result
in constructive distributions taxable as dividends to Holders of the
Debentures. Similarly, if instead of adjusting the Conversion Price upon a pro
rata distribution of rights to subscribe for additional shares of the
34
<PAGE>
Company's capital stock, as described above, the Company elects at such time
to alter the consideration receivable by the holders of the Debentures upon
conversion to include the rights such holders would have been entitled to if
conversion had occurred prior to the record date for such distribution of
rights, the alteration may result in constructive distributions taxable as
dividends to Holders of the Debentures.
OPTIONAL REDEMPTION BY THE COMPANY
The Debentures may not be redeemed at the option of the Company prior to May
1, 2000. Thereafter, the Debentures may be redeemed at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice by mail.
The redemption prices (expressed as a percentage of principal amount) are as
follows for the 12-month period beginning on May 1 of the following years:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2000................. 104.43%
2001................. 103.32
</TABLE>
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2002................. 102.21%
2003................. 101.11
</TABLE>
in each case together with accrued interest up to but not including the date
of redemption.
PURCHASE OF DEBENTURES AT THE OPTION OF HOLDERS UPON A CHANGE IN CONTROL
In the event of a Change in Control (as defined below), each Holder will
have the option, subject to the terms and conditions of the Indenture, to
require the Company to purchase all or any part (provided that the principal
amount must be $1,000 or an integral multiple thereof) of the Holder's
Debentures as of the date that is 40 Business Days after the occurrence of
such Change in Control (the "Change in Control Purchase Date") for a purchase
price equal to 100% of the principal amount thereof, plus accrued interest up
to but not including the Change in Control Purchase Date.
Within ten Business Days after the occurrence of a Change in Control, the
Company shall mail to the Trustee and to each Holder and cause to be published
a written notice of the Change in Control, setting forth, among other things,
the terms and conditions of, and the procedures required for exercise of, the
Holder's right to require the purchase of such Holder's Debentures.
To exercise the purchase right upon a Change in Control, a Holder must
deliver written notice of such exercise to the Paying Agent at any time prior
to the close of business on the Change in Control Purchase Date, specifying
the Debentures with respect to which the purchase right is being exercised.
Such notice of exercise may be withdrawn by the Holder by a written notice of
withdrawal delivered to the Paying Agent at any time prior to the close of
business on the Change in Control Purchase Date.
A Change in Control shall be deemed to have occurred if any of the following
occurs after the original issuance of the Debentures:
(i) the acquisition by any Person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) or 14(d)(2) of the Exchange
Act or any successor provision, but excluding Scott A. Beck, Saad J.
Nadhir, or a person or group controlled by them or either of them (or their
heirs or legatees)) of beneficial ownership, directly or indirectly,
through a purchase, merger, or other acquisition transaction or series of
transactions, of shares of capital stock of the Company entitling such
Person to exercise more than 50% of the total voting power of all shares of
capital stock of the Company entitling the holders thereof to vote
generally in elections of directors; or
(ii) any consolidation of the Company with, or merger of the Company
into, any other Person, any merger of another Person into the Company, or
any sale, lease, or exchange of all or substantially all of the property
and assets of the Company to another Person (other than (i) sales or leases
of property to franchisees of the Company in the ordinary course of
business or (ii) a merger which (x) does not result in any
reclassification, conversion, exchange, or cancellation of outstanding
shares of capital stock of the
35
<PAGE>
Company or (y) is effected primarily to change the jurisdiction of
incorporation of the Company and results in reclassification, conversion,
or exchange of outstanding shares of Common Stock solely into shares of
Common Stock of the surviving entity).
A "beneficial owner" shall be determined in accordance with Rule 13d-3
promulgated by the Commission under the Exchange Act, as in effect on the date
of execution of the Indenture, except that the Indenture requires that the
number of shares of capital stock of the Company entitling the holders thereof
to vote generally in the election of directors shall be deemed to include, in
addition to all outstanding shares of capital stock of the Company entitling
the holders thereof to vote generally in the election of directors and
Unissued Shares deemed to be held by the Person with respect to which the
Change in Control determination is being made, all Unissued Shares deemed to
be held by all other Persons. As defined in the Indenture, "Unissued Shares"
means shares of capital stock of the Company not outstanding that are subject
to options, warrants, rights to purchase, or conversion privileges exercisable
within 60 days of the date of determination of a Change in Control and that,
upon issuance, will entitle the holders thereof to vote generally in the
election of directors.
The term "all or substantially all" as used in clause (ii) of the definition
of Change in Control has not been interpreted under New York law (which is the
governing law of the Indenture) to represent a specific quantitative test. As
a consequence, in the event the Holders of the Debentures elected to exercise
their rights under the Indenture and the Company elected to contest such
election, there could be no assurance as to how a court would interpret the
phrase under New York law, which may have the effect of preventing the Trustee
or the Holders of the Debentures from successfully asserting that a Change in
Control has occurred.
The Company will comply with the provisions of Rule 13e-4 and Rule 14e-1
under the Exchange Act, will file Schedule 13E-4 or any successor or similar
schedule required thereunder, and will otherwise comply with all federal and
state securities laws in connection with any offer by the Company to purchase
Debentures at the option of the Holders upon a Change in Control.
The Change in Control purchase feature of the Debentures may in certain
circumstances make more difficult or discourage a takeover of the Company and
the removal of incumbent management. The Company is not aware of any specific
effort to accumulate shares of Common Stock or to obtain control of the
Company by means of a merger, tender offer, solicitation, or otherwise, nor is
the Change of Control purchase feature part of a plan by management to adopt a
series of anti-takeover provisions. Instead, the Change in Control purchase
feature is a result of negotiations between the Company and the Underwriters.
Depending upon the terms of the transaction, a future highly leveraged
transaction, reorganization, restructuring, merger, or similar transaction
involving the Company's present management or directors could constitute a
Change in Control. Neither the Company nor its current management has any
current intention to engage in a transaction involving a Change in Control,
although it is possible that the Company or its management may decide to do so
in the future.
Subject to the limitation on mergers and consolidations discussed below, the
Company could, in the future, enter into certain transactions, including
certain recapitalizations, the sale of all or substantially all of its assets,
or the liquidation of the Company, that would not constitute a Change in
Control under the Indenture, but that would increase the amount of Senior
Indebtedness (or any other indebtedness) outstanding at such time,
substantially reduce or eliminate the Company's assets, or otherwise adversely
affect the Holders of the Debentures. There are no restrictions in the
Indenture on the creation of additional Senior Indebtedness (or any other
indebtedness), and, under certain circumstances, the incurrence of significant
amounts of additional indebtedness could have an adverse effect on the
Company's ability to service its indebtedness, including the Debentures.
If a Change in Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the Change in Control Purchase
Price for all Debentures tendered by the Holders thereof. Because the LYONs
and the 4 1/2% Debentures contain provisions substantially identical to the
Change in Control purchase feature of the Debentures, upon the occurrence of a
Change in Control, holders of the LYONs and the 4 1/2% Debentures will also
have the right to require the Company to repurchase the LYONs and the 4 1/2%
36
<PAGE>
Debentures. In addition, the Company's revolving credit facility and 1996
master lease facility, each of which constitutes Senior Indebtedness, provide
that a change in control (as defined therein) will constitute an event of
default thereunder, the occurrence of which would cause any repurchase of the
Debentures, absent a waiver, to be blocked by the subordination provisions of
the Debentures. Even if such event of default did not occur or was waived, the
exercise by any Holder of Debentures of the right to require the Company to
repurchase Debentures as a result of the occurrence of a Change in Control
could create an event of default under Senior Indebtedness of the Company, as
a result of which any repurchase could, absent a waiver, be blocked by the
subordination provisions of the Debentures. See "Subordination of Debentures".
Further, the terms of future Senior Indebtedness or other future indebtedness
ranking pari passu in right of payment with the Debentures could require that
such indebtedness be repaid upon the occurrence of a Change in Control.
Failure by the Company to repurchase the Debentures when required will result
in an Event of Default with respect to the Debentures whether or not such
repurchase is permitted by the subordination provisions thereof.
SUBORDINATION OF DEBENTURES
To the extent set forth in the Indenture, the Debentures will be
subordinated and subject in right of payment to the prior payment in full of
all Senior Indebtedness of the Company, whether outstanding on the date of the
Indenture or thereafter created, assumed, or guaranteed. Upon any payment or
distribution of assets of the Company in any dissolution, winding-up,
liquidation, or reorganization of the Company (whether in an insolvency or
bankruptcy proceeding or otherwise), all Senior Indebtedness must be paid in
full (including the principal thereof, interest thereon, and fees and expenses
relating thereto) before any payment is made on or in respect of the
Debentures. In the event of a default in payment (whether at maturity or at a
date fixed for prepayment or by acceleration or otherwise) of principal of or
interest on Senior Indebtedness, no payment may be made by the Company on or
in respect of the Debentures until payment in full of the Senior Indebtedness
then due or cure of the default. Upon a default with respect to any Senior
Indebtedness (other than a default in the payment of principal of or interest
on Senior Indebtedness) permitting a holder thereof to accelerate its
maturity, and upon written notice of such default to the Trustee and the
Company by any holder of such Senior Indebtedness or its representative, then,
unless and until such default has been cured, waived in writing, or has ceased
to exist, no payment may be made by the Company in respect of the Debentures;
provided that nothing in the above-described provision will prevent the making
of any payment in respect of the Debentures for a period of more than 89 days
after the date such written notice of default is given unless the maturity of
the Senior Indebtedness has been accelerated, in which case no payment on the
Debentures may be made until such acceleration has been waived or such Senior
Indebtedness has been paid in full. No such subordination will prevent the
occurrence of any Event of Default (as defined in the Indenture) with respect
to the Debentures, but, as a result of these subordination provisions, in the
event of insolvency, Holders may recover less ratably than other creditors of
the Company.
"Senior Indebtedness" means the following, whether outstanding upon issuance
of the Debentures or thereafter incurred or created: (a) the principal and
premium, if any, and interest on and fees, costs, enforcement expenses,
collateral protection expenses, and other reimbursement or indemnity
obligations in respect of all indebtedness or obligations of the Company to
any Person, including but not limited to banks and other lending institutions,
for money borrowed (other than that evidenced by the Debentures) or in respect
of credit or other banking facilities evidenced by a note, bond, debenture,
loan agreement, a lease intended as security or similar instrument or
agreement (including purchase money obligations with original maturities in
excess of one year and noncontingent reimbursement obligations in respect of
the amounts paid under letters of credit); (b) commitment or standby fees due
and payable to lending institutions with respect to credit facilities
available to the Company; (c) all noncontingent obligations of the Company (i)
for the reimbursement of any obligor on any letter of credit, banker's
acceptance, or similar credit transaction, (ii) under interest rate swaps,
caps, collars, options, and similar arrangements and (iii) under any foreign
exchange contract, currency swap agreement, futures contract, currency option
contract, or other foreign currency hedge; (d) all obligations of the Company
for the payment of money relating to a Capitalized Lease Obligation; (e) any
liabilities of others described in the preceding clauses that the Company has
guaranteed or which are otherwise its legal liability; and (f) renewals,
extensions, refundings, refinancings, restructurings, amendments, and
modifications of any such indebtedness or
37
<PAGE>
guarantee. Notwithstanding anything to the contrary in the Indenture or the
Debentures, "Senior Indebtedness" does not include any indebtedness of the
Company (i) to any person under any employee benefit plan or to any employee
or affiliates of the Company, (ii) any indebtedness or other obligation of the
Company that by its terms or the terms of the instrument creating or
evidencing it is stated to be not superior in right of payment to the
Debentures, or (iii) indebtedness represented by the LYONs or the 4 1/2%
Debentures.
The Indenture does not limit the amount of future or additional
indebtedness, including Senior Indebtedness, that the Company can create,
incur, assume, or guarantee, nor does the Indenture limit the amount of
indebtedness that any subsidiary can incur. All indebtedness of the Company
incurred from time to time under the Company's revolving credit facility and
master lease facilities will constitute Senior Indebtedness. See
"Capitalization". As of April 22, 1997, the Company had approximately $324.8
million of indebtedness outstanding (excluding accrued interest thereon) that
would have constituted Senior Indebtedness. The Debentures will rank pari
passu with the Company's outstanding LYONs and 4 1/2% Debentures, which
indebtedness aggregated approximately $312.5 million as of December 29, 1996.
In addition, the Debentures will be effectively subordinated to all
liabilities, including trade payables, of the Company's subsidiaries. Any
right of the Company to receive assets of any of its subsidiaries upon their
liquidation or reorganization (and the consequent right of the Holders of the
Debentures to participate in those assets) will be effectively subordinated to
the claims of that subsidiary's creditors (including trade creditors), except
to the extent that the Company is itself recognized as a creditor of such
subsidiary, in which case the claims of the Company would still be subordinate
to any security interests in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company.
EVENTS OF DEFAULT; NOTICE AND WAIVER
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency, or reorganization) occurs and is continuing, the
Trustee may, by notice to the Company, declare all unpaid principal of and
accrued interest to the date of acceleration on the Debentures then
outstanding to be due and payable immediately. Also, in such event, the
Holders of at least 25% in principal amount of the Debentures then outstanding
may notify the Company and the Trustee with respect thereto, and upon the
request of such Holders, the Trustee shall declare all unpaid principal of and
accrued interest to the date of acceleration on the Debentures then
outstanding to be due and payable immediately. If an Event of Default
resulting from certain events of bankruptcy, insolvency, or reorganization
shall occur, all unpaid principal of and accrued interest on the Debentures
then outstanding shall become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holders.
The Indenture provides that the Holders of a majority in principal amount of
the Debentures may on behalf of all Holders waive any existing default or
Event of Default and its consequences except a default in the payment of
principal of or accrued interest on the Debentures or any default in respect
of any provision of the Indenture that cannot be modified or amended without
the consent of the Holder of each Debenture affected.
Other than granting Holders the option to require the Company to purchase
all or part of their Debentures upon the occurrence of a Change in Control as
described in "Purchase of Debentures at the Option of Holders Upon a Change in
Control," the Indenture does not contain any covenants or other provisions
designed to afford Holders protection in the event of takeovers,
recapitalizations, highly leveraged transactions, or similar restructurings
involving the Company.
The following are Events of Default under the Indenture: (i) failure of the
Company to pay interest for 30 days after the same is due or failure to pay
principal when due; (ii) failure of the Company to comply with any of its
other agreements contained in the Debentures or the Indenture for 30 days
after receipt of notice of such failure; (iii) default under any bond,
debenture, note, or other evidence of indebtedness for money borrowed of the
Company having an aggregate outstanding principal amount of in excess of $10
million, which default shall have resulted in such indebtedness being
accelerated, without such indebtedness being discharged, or such acceleration
having been rescinded or annulled, within ten days from the date of such
acceleration; and
38
<PAGE>
(iv) certain events of bankruptcy or insolvency, including without limitation
appointment of a Custodian of the Company's property, or liquidation of the
Company.
The Trustee shall, within 90 days after the occurrence of any default known
to it, give to the Holders notice of such default; provided that, except in
the case of a default in the payment of principal of or interest on any of the
Debentures, the Trustee may withhold such notice if it in good faith
determines that the withholding of such notice is in the interests of the
Holders.
No Holder may pursue any remedy under the Indenture or the Debentures
against the Company (except actions for payment of overdue principal or
interest or for the conversion of the Debentures), unless (i) the Holder gives
to the Trustee written notice of a continuing Event of Default, (ii) the
Holders of at least 25% in principal amount of the outstanding Debentures make
a written request to the Trustee to pursue the remedy, (iii) such Holder or
Holders offer satisfactory indemnity to the Trustee against any loss,
liability, or expense, (iv) the Trustee does not comply with the request
within 60 days after receipt of the request and the offer of indemnity, and
(v) the Trustee shall not have received during such 60-day period a contrary
direction from the Holders of at least a majority in principal amount of the
outstanding Debentures.
The Company must deliver an Officer's Certificate to the Trustee within 90
days after the end of each fiscal year of the Company as to the signer's
knowledge of the Company's compliance with all conditions and covenants on its
part contained in the Indenture, and stating whether or not the signer knows
of any default or Event of Default. If such signer knows of such a default or
Event of Default, the Officer's Certificate shall describe the default or
Event of Default and the efforts to remedy the same.
AMENDMENT
The Company and the Trustee may amend or supplement the Indenture or the
Debentures without notice to any Holder but with the written consent of the
Holders of at least a majority in principal amount of the outstanding
Debentures. The Holders of a majority in principal amount of the Debentures
then outstanding may waive compliance in a particular instance by the Company
with any provision of the Indenture or the Debentures without notice to any
Holder. Without the consent of the Holder of each Debenture affected thereby,
however, an amendment, supplement, or waiver may not (i) reduce the principal
amount of Debentures whose Holders must consent to an amendment, supplement,
or waiver, (ii) reduce the rate of or change the time for payment of interest
on any Debenture, (iii) reduce the principal of or premium on or change the
fixed maturity of any Debenture or alter the redemption provisions with
respect thereto in a manner adverse to the Holder thereof, (iv) alter the
conversion provisions with respect to any Debenture in a manner adverse to the
Holder thereof, (v) waive a default in the payment of the principal of or
premium or interest on any Debenture, (vi) make any changes that could alter
the rights of Holders to waive defaults or Events of Default, or to receive
payment of the Debentures, (vii) modify the subordination provisions of the
Indenture in a manner adverse to the Holders, or (viii) make any Debenture
payable in money other than that stated in the Debenture.
The Company and the Trustee may amend or supplement the Indenture or the
Debentures without notice to or consent of any Holder in certain events, such
as to comply with the certain conversion adjustment, liquidation, and merger
provisions described in the Indenture, to provide for uncertificated
Debentures in addition to or in place of certificated Debentures, to cure any
ambiguity, defect, or inconsistency, or to make any other change that does not
adversely affect the rights of the Holders, to comply with the provisions of
the Trust Indenture Act, or to appoint a successor Trustee.
SATISFACTION AND DISCHARGE
The Company may terminate all of its obligations under the Indenture, other
than its obligation to pay the principal of and interest on the Debentures and
certain other obligations (including its obligation to deliver shares of
Common Stock upon conversion of the Debentures), at any time, by depositing
with the Trustee or a paying agent other than the Company, money or non-
callable U.S. Government Obligations sufficient to pay the principal of and
interest on the Debentures then outstanding to maturity.
39
<PAGE>
MERGERS AND CONSOLIDATIONS
Subject to the right of the Holders to require the Company to purchase the
Debentures in the event of a Change in Control, the Company may consolidate or
merge with or into any other corporation, and the Company may transfer its
property and assets substantially as an entirety to any other person, provided
(i) either the Company is the resulting or surviving corporation, or the
successor corporation is a domestic corporation and the successor expressly
assumes, by supplemental indenture executed and delivered to the Trustee,
payment of the principal of and interest on the Debentures and performance and
observance of every covenant of the Indenture, and (ii) immediately before and
immediately after giving effect to such transaction, no default or Event of
Default shall have occurred and be continuing. Thereafter, all obligations of
the Company under the Indenture and the Debentures will terminate.
CONCERNING THE TRUSTEE
Bankers Trust Company will be the Trustee under the Indenture.
The Indenture will contain certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; provided, however, if it acquires any conflicting
interest (as defined) and there exists a default with respect to the
Debentures, it must eliminate such conflict or resign.
The Holders of a majority in principal amount of all outstanding Debentures
will have the right to direct the time, method, and place of conducting any
proceeding for exercising any remedy or power available to the Trustee,
provided that such direction does not conflict with any rule of law or with
the Indenture, is not unduly prejudicial to the rights of another Holder or
the Trustee, and does not involve the Trustee in personal liability.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Alex. Brown & Sons Incorporated and Morgan Stanley & Co.
Incorporated (the "Underwriters"), the Company has agreed to sell to each of
the Underwriters named below, and each of the Underwriters has severally
agreed to purchase from the Company, the respective principal amounts of
Debentures set forth opposite its name below. In the Purchase Agreement, the
Underwriters have agreed, subject to the terms and conditions set forth
therein, to purchase all of the Debentures offered hereby if any of such
Debentures are purchased.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER DEBENTURES
----------- ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................... $ 83,334,000
Alex. Brown & Sons Incorporated............................. 83,333,000
Morgan Stanley & Co. Incorporated........................... 83,333,000
------------
Total.................................................. $250,000,000
============
</TABLE>
The Underwriters have advised the Company that they propose to offer the
Debentures to the public at the offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of 1.5% of the principal amount thereof. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of .25% of the
principal amount thereof to certain other dealers. After the offering
contemplated hereby, the offering price and other selling terms may be changed
by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
$37.5 million principal amount of the Debentures at the public
40
<PAGE>
offering price set forth on the cover page hereof, less the underwriting
discount. The Underwriters may exercise such option only to cover over-
allotments, if any, made in connection with the sale of the Debentures offered
hereby. To the extent that the Underwriters exercise this option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the principal amount
of Debentures to be purchased by it shown in the above table is of the $250
million principal amount of Debentures initially offered hereby. If purchased,
the Underwriters will offer such additional Debentures on the same terms as
those on which the $250 million principal amount of Debentures are being
offered.
Until the distribution of the Debentures is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members (if any) to bid for and purchase the
Debentures and the Common Stock. As an exception to these rules, the
Representatives are permitted to engage in certain transactions that stabilize
the price of the Debentures or the Common Stock. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Debentures or the Common Stock.
If the Underwriters create a short position in the Debentures in connection
with the offering, i.e., if they sell a greater principal amount of Debentures
than is set forth on the cover page of this Prospectus, the Underwriters may
reduce that short position by purchasing Debentures in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Debentures. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act.
The Company has agreed that it will not sell or otherwise dispose of any
Common Stock without the prior written consent of the Underwriters for a
period of 120 days from the date of this Prospectus, except that the Company
may, without such consent, (i) issue shares upon the exercise of options
granted pursuant to the Company's stock option plans, or upon exercise or
conversion of other outstanding options, warrants, or convertible debt, and
(ii) issue up to an aggregate of one million shares pursuant to potential
acquisitions and shelf registration statements.
Charles A. Lewis, a Vice Chairman of Investment Banking of Merrill Lynch &
Co., and his wife, Penny Bender Sebring, have economic interests in 916,779
shares of Common Stock.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Debentures offered
hereby are being passed upon for the Company by Bell, Boyd & Lloyd, Chicago,
Illinois. Attorneys in that firm own an aggregate of approximately 2,700
shares of Common Stock. Mayer, Brown & Platt, Chicago, Illinois, is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the sale of the Debentures offered hereby.
41
<PAGE>
EXPERTS
The financial statements of the Company at December 31, 1995, at December
29, 1996 and for the fiscal years ended December 25, 1994, December 31, 1995,
and December 29, 1996 and the related financial statement schedule included in
or incorporated by reference in this Prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as set forth in their reports
thereon also included in or incorporated by reference in this Prospectus, and
are included in or incorporated by reference herein in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents and information heretofore filed by the Company with
the Commission are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended December
29, 1996, which was filed with the Commission on March 18, 1997.
(2) The Company's Current Report on Form 8-K dated January 31, 1997,
which was filed with the Commission on February 5, 1997.
(3) The description of the Company's capital stock set forth under the
caption "Description of Capital Stock" in the Company's prospectus
constituting a part of the Company's registration statement on Form S-1
(Reg. No. 33-69256), which description is incorporated by reference in the
Company's registration statement on Form 8-A dated November 4, 1993 for the
registration of the Common Stock under Section 12(g) of the Exchange Act.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14, or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Debentures offered hereby (except to the
extent specified therein or in rules or regulations of the Commission) shall
be deemed to be incorporated in this Prospectus by reference and to be part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is, or is deemed to be, incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, at the written or oral request of such
person, a copy of any or all of the documents referred to above which have
been or may be incorporated in this Prospectus by reference other than
exhibits to such documents. Requests for such copies should be directed to
Boston Chicken, Inc., 14103 Denver West Parkway, P.O. Box 4086, Golden,
Colorado, 80401-4086, Attention: Investor Relations Department (telephone:
303-278-9500).
42
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and December 29, 1996... F-3
Consolidated Income Statements for the fiscal years ended December 25,
1994, December 31, 1995, and December 29, 1996.......................... F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended December 25, 1994, December 31, 1995, and December 29, 1996....... F-5
Consolidated Statements of Cash Flows for the fiscal years ended December
25, 1994,
December 31, 1995, and December 29, 1996................................ F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Boston Chicken, Inc.:
We have audited the accompanying consolidated balance sheets of Boston
Chicken, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and December 29, 1996, and the related consolidated income statements,
statements of stockholders' equity and cash flows for the fiscal years ended
December 25, 1994, December 31, 1995, and December 29, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Boston Chicken, Inc. and
subsidiaries as of December 31, 1995 and December 29, 1996, and the results of
their operations and their cash flows for the fiscal years ended December 25,
1994, December 31, 1995, and December 29, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 18, 1997
F-2
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 310,436 $ 100,800
Accounts receivable, net........................... 13,445 22,438
Due from affiliates................................ 9,614 10,246
Notes receivable................................... 5,462 --
Prepaid expenses and other current assets.......... 1,536 4,050
Deferred income taxes.............................. 3,322 8,928
---------- ----------
Total current assets............................. 343,815 146,462
Property and Equipment, net.......................... 258,550 334,748
Notes Receivable..................................... 450,572 800,519
Deferred Financing Costs, net........................ 15,745 13,361
Goodwill, net........................................ -- 190,439
Other Assets, net.................................... 5,195 58,087
---------- ----------
Total assets..................................... $1,073,877 $1,543,616
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 12,292 $ 40,430
Accrued expenses................................... 9,095 36,547
Deferred franchise revenue......................... 8,945 10,656
---------- ----------
Total current liabilities........................ 30,332 87,633
Deferred Franchise Revenue........................... 2,072 7,740
Convertible Subordinated Debt........................ 129,872 129,841
Liquid Yield Option Notes............................ 177,306 182,613
Deferred Income Taxes................................ 16,631 40,216
Other Noncurrent Liabilities......................... 833 6,292
Minority Interest.................................... -- 153,441
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock--$.01 par value; authorized
20,000,000 shares; no shares issued and
outstanding....................................... -- --
Common Stock--$.01 par value; authorized
480,000,000 shares; issued and outstanding:
59,129,301 shares in 1995 and 64,245,868 in 1996.. 591 642
Additional paid-in capital......................... 675,611 827,611
Retained earnings.................................. 40,629 107,587
---------- ----------
716,831 935,840
---------- ----------
Total liabilities and stockholders' equity....... $1,073,877 $1,543,616
========== ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ ------------
(53 WEEKS)
<S> <C> <C> <C>
Revenue:
Royalties and franchise related fees.. $43,603 $ 74,662 $115,510
Company stores........................ 40,916 51,566 83,950
Interest income....................... 11,632 33,251 65,048
------- -------- --------
Total revenue....................... 96,151 159,479 264,508
Costs and Expenses:
Cost of products sold................. 15,876 19,737 31,160
Salaries and benefits................. 22,637 31,137 42,172
General and administrative............ 27,930 41,367 99,847
Provision for relocation.............. 5,097 -- --
------- -------- --------
Total costs and expenses............ 71,540 92,241 173,179
------- -------- --------
Income From Operations.................. 24,611 67,238 91,329
Other Income (Expense):
Interest expense, net................. (4,235) (13,179) (14,446)
Gain on issuances of subsidiary's
stock................................ -- -- 38,163
Other income, net..................... 74 314 137
------- -------- --------
Total other income (expense)........ (4,161) (12,865) 23,854
------- -------- --------
Income Before Income Taxes and Minority
Interest............................... 20,450 54,373 115,183
Income Taxes............................ 4,277 20,814 42,990
Minority Interest in (Earnings) of
Subsidiary............................. -- -- (5,235)
------- -------- --------
Net Income.............................. $16,173 $ 33,559 $ 66,958
======= ======== ========
Net Income Per Common and Equivalent
Share.................................. $ 0.38 $ 0.66 $ 1.01
======= ======== ========
Weighted Average Number of Common and
Equivalent Shares Outstanding.......... 42,861 50,972 66,501
======= ======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year.......... $ 347 $ 447 $ 591
Issuance of common stock.............. 85 125 30
Conversion of convertible debt into
common stock......................... -- 1 --
Conversion of liquid yield option
notes into common stock.............. -- 1 3
Issuance of common stock in connection
with acquisitions.................... 11 12 5
Exercise of stock options............. 4 5 13
-------- -------- --------
Balance at end of year................ $ 447 $ 591 $ 642
======== ======== ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year.......... $103,662 $252,298 $675,611
Issuance of common stock, net of
offering cost of $1,475 in 1994,
$13,851 in 1995, and $848 in 1996.... 124,905 383,784 100,232
Conversion of convertible debt into
common stock......................... -- 127 31
Conversion of liquid yield option
notes into common stock.............. -- 3,232 8,192
Issuance of common stock in connection
with acquisitions.................... 19,920 30,675 14,709
Issuance of warrants.................. -- -- 8,373
Exercise of stock options, including
income tax benefits of $3,102 in
1994, $4,049 in 1995 and $15,204 in
1996................................. 3,811 5,495 20,463
-------- -------- --------
Balance at end of year................ $252,298 $675,611 $827,611
======== ======== ========
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year.......... $ (9,103) $ 7,070 $ 40,629
Net income............................ 16,173 33,559 66,958
-------- -------- --------
Balance at end of year................ $ 7,070 $ 40,629 $107,587
======== ======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 16,173 $ 33,559 $ 66,958
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 6,074 11,442 22,887
Interest on liquid yield option notes. -- 8,075 13,793
Gain on issuances of subsidiary's
stock................................ -- -- (38,163)
Deferred income taxes................. 4,277 12,133 14,059
Minority interest..................... -- -- 5,235
Provision for write-down of assets.... -- -- 14,550
Loss (gain) on disposal of assets..... (368) 231 68
Changes in assets and liabilities,
excluding effects from acquisitions:
Accounts receivable and due from
affiliates........................... (7,800) (10,057) (7,193)
Accounts payable and accrued expenses. 13,724 3,661 48,674
Deferred franchise revenue............ 5,926 (303) 3,174
Other assets and liabilities.......... (2,088) (3,265) 868
--------- --------- -----------
Net cash provided by operating
activities........................... 35,918 55,476 144,910
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..... (163,622) (145,756) (115,062)
Proceeds from the sale of assets....... 62,342 80,910 86,320
Acquisition of other assets............ (5,175) (3,475) (22,370)
Issuance of notes receivable........... (225,282) (661,033) (1,467,065)
Repayment of notes receivable.......... 68,498 407,499 993,151
--------- --------- -----------
Net cash used in investing activities. (263,239) (321,855) (525,026)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
and warrants.......................... 125,703 385,360 112,863
Proceeds from issuance of subsidiary's
common stock.......................... -- -- 135,422
Proceeds from issuance of convertible
subordinated debt..................... 130,000 -- --
Proceeds from issuance of liquid yield
option notes.......................... -- 172,464 --
Increase in deferred financing costs... (7,615) (6,313) (3,799)
Proceeds from revolving credit
facilities............................ 96,130 229,240 43,250
Repayments of revolving credit
facilities............................ (96,130) (229,240) (117,256)
--------- --------- -----------
Net cash provided by financing
activities........................... 248,088 551,511 170,480
--------- --------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 20,767 285,132 (209,636)
Cash and Cash Equivalents, beginning
of year.............................. 4,537 25,304 310,436
--------- --------- -----------
Cash and Cash Equivalents, end of
year................................. $ 25,304 $ 310,436 $ 100,800
========= ========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.......................... $ 3,395 $ 7,195 $ 7,131
========= ========= ===========
Income taxes paid...................... $ -- $ 3,299 $ 5,055
========= ========= ===========
NON-CASH TRANSACTIONS:
Tax benefit of stock options exercised. $ 3,102 $ 4,049 $ 15,204
========= ========= ===========
Conversion of notes receivable into
equity interests...................... $ -- $ -- $ 123,500
========= ========= ===========
Conversion of convertible subordinated
notes and liquid yield option notes,
net of related deferred financing
costs, into common stock.............. $ -- $ 3,361 $ 8,226
========= ========= ===========
Issuance of common stock and note
payable for net assets acquired....... $ 19,931 $ 30,687 $ 21,562
========= ========= ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Boston Chicken, Inc. ("BCI") franchises and operates food service stores
under the Boston Market brand name which specialize in fresh, convenient meal
solutions featuring home style entrees, sandwiches, freshly prepared
vegetables, salads, and other side dishes. BCI's majority-owned subsidiary,
Einstein/Noah Bagel Corp. ("ENBC"), operates and franchises specialty retail
stores that feature fresh-baked bagels, proprietary cream cheeses, specialty
coffees and teas, and creative soups, salads, and sandwiches. Unless otherwise
indicated, BCI and its subsidiaries (excluding ENBC), are hereinafter referred
to collectively as the "Company".
At December 29, 1996, there were 1,087 Boston Market stores systemwide in
the United States, consisting of 982 franchise stores and 105 Company stores.
In 1994 and 1995, in connection with its practice of opening new stores to
seed development in targeted markets, the Company sold 54 and 91 Company
stores, respectively, to area developers or franchisees of the Company. At
December 29, 1996, there were 315 ENBC stores systemwide in the United States,
consisting of 301 franchise stores and 14 ENBC company stores. In 1996, ENBC
sold 59 ENBC company stores (since conversion of the Company's loan to ENBC on
June 17, 1996) to its area developers. The Company discontinued its practice
of seeding stores in new markets in 1995, and ENBC anticipates discontinuing
its practice of seeding stores in new markets in 1997. Pursuant to the
provisions of its franchise agreements, the Company is obligated to allow
franchisees to utilize its trademarks, copyrights, recipes, operating
procedures, and other elements of the Boston Market system in the operation of
franchised Boston Market stores. ENBC has a similar obligation under its
franchise agreements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries (including ENBC). All material intercompany
accounts and transactions have been eliminated in consolidation.
Fiscal Year
The Company's and ENBC's fiscal year is the 52/53-week period ending on the
last Sunday in December, and normally consists of 13 four-week periods. The
first quarter consists of four periods, and each of the remaining three
quarters consists of three periods, with the first, second, and third quarters
ending 16 weeks, 28 weeks, and 40 weeks, respectively, into the fiscal year.
Fiscal years 1994 and 1996 each contained 52 weeks, or 13 four-week periods.
Fiscal year 1995 contained 53 weeks.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit, and highly
liquid instruments purchased with maturities of three months or less.
Inventories
Inventories, which are classified in prepaid expenses and other current
assets, are stated at the lower of cost (first-in, first-out) or market and
consist of food, paper products, and supplies.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization has been
calculated using the straight-line method with buildings and improvements
being depreciated over 15 to 30 years, leasehold improvements being amortized
over the lesser of their useful lives or their lease term, including option
periods, furniture, fixtures, equipment, and computer software being
depreciated over three to eight years, and pre-opening costs being depreciated
over one year.
F-7
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment additions include acquisitions of property and
equipment, costs incurred in the development and construction of new stores,
major improvements to existing stores, and costs incurred in the development
and purchase of computer software. Pre-opening costs consist primarily of
salaries and other direct expenses relating to the set-up, initial stocking,
training, and general store management activities incurred prior to the
opening of new stores.
Expenditures for maintenance and repairs are charged to expense as incurred.
Development costs for franchised stores are expensed when the store opens.
Long-Lived Assets
The Company and ENBC evaluate whether events and circumstances have occurred
that indicate revision to the remaining useful life or the remaining balances
of long-lived assets may be appropriate. Such events and circumstances
include, but are not limited to, change in business strategy or change in
current and long-term projected operating performance. When factors indicate
that the carrying amount of an asset may not be recoverable, the Company
estimates the future cash flows expected to result from the use of such asset
and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, the Company will recognize an impairment loss equal to the
excess of the carrying amount over the fair value of the asset.
Deferred Financing Costs
Deferred financing costs are amortized over the period of the related
financing, which ranges from two to 20 years.
Revenue Recognition
Revenue from Company stores and from ENBC company stores is recognized in
the period during which related food and beverage products are sold. Royalties
are recognized in the same period that related franchise store revenue is
generated. Revenue derived from initial franchise fees and area development
fees is recognized when the franchised store opens. Interest, real estate
services, and software maintenance fees are recognized as earned. Lease income
is recognized over the life of the lease on a straight-line basis. Software
license income is recognized as the software is placed in service. The
components of royalties and franchise related fees are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------
DEC. DEC.
25, 31, DEC. 29,
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Royalties........................................... $17,421 $34,841 $ 55,821
Initial franchise and area development fees......... 13,057 13,712 18,715
Lease and real estate services income............... 5,361 17,939 27,537
Software license and maintenance fees............... 6,480 7,723 13,104
Other............................................... 1,284 447 333
------- ------- --------
Total royalties and franchise related fees...... $43,603 $74,662 $115,510
======= ======= ========
</TABLE>
Per Share Data
Earnings per share are computed based upon the weighted average number of
common stock and common equivalent shares outstanding during the period.
F-8
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Issuances of Subsidiaries' Stock
Changes in the Company's proportionate interest in the net assets of its
subsidiaries that result from issuances of the subsidiaries' stock are
recognized in earnings as gains or losses in the period during which such
issuances occur.
Advertising Costs
Advertising costs are expensed in the period incurred.
Employee Stock Options
The Company and ENBC account for their employee stock options in accordance
with the intrinsic value method prescribed by Accounting Principles Board No.
25. Required pro forma disclosures of compensation expense determined under
the fair value method of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), are presented in
Note 11.
Employee Benefit Plan
The Company and ENBC each have a 401(k) plan to which neither the Company
nor ENBC makes a contribution.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 amounts to
conform with the 1996 presentation.
3. ACQUISITIONS
In April 1996, the Company delivered 450,640 shares of common stock with a
market value of approximately $15.0 million and a $6.8 million promissory note
to acquire the equity interests of certain investors in Mid-Atlantic
Restaurant Systems L.P. ("Mid-Atlantic"), its Boston Market area developer for
the Philadelphia area. As part of this transaction, the Company assumed $38.5
million in liabilities owed to third parties. The transaction resulted in the
Company acquiring a 93% equity interest in Mid-Atlantic. Subsequent to the
Company acquiring its interest in Mid-Atlantic, Mid-Atlantic acquired 100% of
the equity interest in New Jersey Rose, L.L.C., the Boston Market area
developer for the southern New Jersey area ("New Jersey Rose") for a purchase
price of $13.4 million, including the assumption of $1.1 million in
liabilities owed to third parties. Also, in June 1996, the Company converted
its $120.0 million loan to ENBC into shares of common stock of ENBC and
subsequently invested an additional $45.9 million in ENBC common stock,
resulting in an ownership interest of approximately 53% of the outstanding
shares of common stock of ENBC as of March 7, 1997. These transactions have
been accounted for as purchases, and, accordingly, the purchase prices were
allocated to identified assets and liabilities based upon their fair values at
the date of the transactions, resulting in goodwill of $110.1 million on the
ENBC transactions and $81.4 million on the Mid-Atlantic transactions, both of
which are being amortized over a 35-year life. The operating results of each
acquisition are included in consolidated net income from the date of
acquisition.
F-9
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents the unaudited pro forma results of operations as if
the purchase transactions described above had occurred at the beginning of the
periods presented (in thousands of dollars, except per share data):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Revenue............................................... $257,248 $326,758
Net income (loss)..................................... $(11,025) $ 53,733
Net income (loss) per share........................... $ (0.23) $ 0.80
</TABLE>
This pro forma information does not purport to be indicative of the results
of operations that actually would have been reported if the transactions had
occurred at the beginning of the periods presented. The pro forma information
is not intended to be a projection of future results or trends.
4. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT DATA
Accounts receivable are net of an allowance for doubtful accounts of
$486,000 at December 31, 1995 and $424,000 at December 29, 1996.
<TABLE>
<CAPTION>
DEC. 31, 1995 DEC. 29, 1996
------------- -------------
<S> <C> <C>
Property and equipment consist of (in
thousands of dollars):
Land..................................... $106,244 $104,914
Buildings and improvements............... 92,935 148,642
Furniture, fixtures, equipment, and
computer
software................................ 64,338 98,817
Development in progress.................. 5,170 5,184
Pre-opening costs........................ 163 248
-------- --------
268,850 357,805
Less: Accumulated depreciation and
amortization............................ (10,300) (23,057)
-------- --------
Total property and equipment, net...... $258,550 $334,748
======== ========
</TABLE>
Included in land and buildings and improvements are $171.0 million (net of
accumulated depreciation and amortization of $3.7 million) and $183.1 million
(net of accumulated depreciation and amortization of $6.1 million) of assets
leased to others at December 31, 1995 and December 29, 1996, respectively.
Accumulated amortization at December 29, 1996 on goodwill was $4.3 million.
<TABLE>
<CAPTION>
DEC. 31, 1995 DEC. 29, 1996
------------- -------------
<S> <C> <C>
Accrued expenses consist of (in thousands
of dollars):
Accrued payroll and fringe benefits...... $1,556 $ 4,090
Accrued interest......................... 2,538 2,888
Accrued F.A.S.T. Track conversion costs.. -- 14,778
Accrued real estate disposition costs.... -- 5,866
Accrued other............................ 5,001 8,925
------ -------
Total accrued expenses................. $9,095 $36,547
====== =======
</TABLE>
F-10
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------
DEC.
25, DEC. 31, DEC. 29,
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Interest expense, net consists of (in thousands
of
dollars):
Interest income................................ $ 1,592 $ 2,173 $ 6,427
Interest expense............................... (5,827) (15,352) (20,873)
------- -------- --------
Interest expense, net........................ $(4,235) $(13,179) $(14,446)
======= ======== ========
</TABLE>
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and Cash Equivalents
The carrying value approximates fair value due to the length of maturity of
the investments.
Notes Receivable
The estimated fair value of notes receivable, including the conversion
option (See Note 10), is based on the discounted value of the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings.
Debt
The fair value of debt instruments is based on prices as quoted on the
Nasdaq SmallCap Market as reported by the Wall Street Journal (Western
Edition).
The estimated fair values of the Company's financial instruments are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 29, 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents............... $310,436 $310,436 $100,800 $100,800
Notes Receivable........................ 456,034 456,034 800,519 800,519
Convertible Subordinated Debt........... 129,872 154,872 129,841 163,600
Liquid Yield Option Notes............... 177,306 228,148 182,613 232,334
</TABLE>
6. DEBT
The Company and ENBC each have a revolving bank credit facility. The
Company's facility provides for borrowings of up to $110.0 million through
December 1, 1999, and ENBC's facility provides for borrowings up to $45.0
million through April 30, 1998. Borrowings under the Company's facility are
subject to a borrowing formula and may be either floating rate loans with
interest at the agent's base rate plus an applicable margin or eurodollar rate
loans with interest at the eurodollar rate plus an applicable margin.
Borrowings under ENBC's facility may be either floating rate loans with
interest at the agent's base rate plus an applicable margin or eurodollar rate
loans with interest at the eurodollar rate plus an applicable margin. In
addition, a commitment fee applicable to each facility (.25% for the Company's
facility and .5% for ENBC's facility) of the average daily unused portion of
the loan is required. The credit facility agreements contain covenants that,
among other things, restrict other borrowings, prohibit cash dividends,
require specified store-level sales, and require maintenance of specified cash
flow ratios. As of December 29, 1996, no amount was outstanding under either
facility. The Company's facility and its 1996 master lease facility (See Note
9) are collateralized by assets with a net book value of $795.4 million and
ENBC's facility is collateralized by substantially all of its assets.
F-11
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1994, the Company issued $130.0 million of 4 1/2% convertible
subordinated debentures due February 1, 2004. Interest is payable semiannually
on February 1 and August 1 of each year. The debentures are convertible at any
time prior to maturity into shares of the Company's common stock at a
conversion rate of $27.969 per share, subject to adjustment under certain
conditions. The debentures may be redeemed at the option of the Company
initially at 103.15% of their principal amount and at declining prices
thereafter, plus accrued interest. In 1995 and 1996, $128,000 and $31,000 of
convertible subordinated debentures were converted into 4,576 shares and 1,107
shares of common stock, respectively.
In June 1995, the Company completed the sale of $828.0 million aggregate
principal amount at maturity of Liquid Yield Option Notes due June 1, 2015
("LYONs") for which the Company received gross proceeds of approximately
$172.5 million. The LYONs are zero-coupon subordinated notes that were sold at
an issue price of $208.29 per $1,000 principal amount due at maturity,
representing an 8% yield. Each LYON is convertible at the option of the holder
at any time on or prior to maturity into 8.532 shares of common stock of the
Company. In the event the holder exercises the option to convert, the holder
will not receive any payment for the accrued original issue discount. The
Company will purchase the LYONs at the option of the holder as of June 1,
2000, June 1, 2005, and June 1, 2010, for a purchase price per LYON of
$308.32, $456.39, and $675.57, respectively. The Company may elect to pay the
purchase price in cash or common stock or a combination thereof. Commencing on
June 1, 2000, the LYONs are redeemable at the option of the Company for cash,
at a price equal to the original issue price plus accrued original issue
discount through the redemption date. In 1995 and 1996, $3.2 million and $8.2
million of LYONs were converted into 127,980 shares and 328,942 shares of
common stock, respectively.
7. INCOME TAXES
The primary components that comprise the deferred tax assets and liabilities
at December 31, 1995 and December 29, 1996 are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
DEC. 31, 1995 DEC. 29, 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Accounts payable and accrued expenses........... $ 841 $ 7,502
Deferred franchise revenue...................... 3,495 6,355
Other noncurrent liabilities.................... 181 730
ENBC net operating loss carryforward............ -- 6,648
Write-off of intangible assets that are
amortizable for tax............................ -- 1,582
Alternative minimum tax credit.................. 827 --
Other........................................... 651 1,411
-------- --------
Total deferred tax assets..................... 5,995 24,228
Deferred tax liabilities:
Gain on issuances of subsidiary's stock......... -- (14,883)
Property and equipment.......................... (18,340) (13,400)
Goodwill........................................ -- (8,678)
Other........................................... (964) (8,273)
-------- --------
Total deferred tax liabilities................ (19,304) (45,234)
-------- --------
(13,309) (21,006)
Valuation allowance............................. -- (10,282)
-------- --------
Net deferred tax liability.................... $(13,309) $(31,288)
======== ========
</TABLE>
F-12
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------
DEC. DEC. DEC.
25, 31, 29,
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $ 7,784 $24,359
State.................................................. -- 897 4,572
------ ------- -------
-- 8,681 28,931
Deferred:
Federal................................................ 3,614 10,743 11,841
State.................................................. 663 1,390 2,218
------ ------- -------
4,277 12,133 14,059
------ ------- -------
$4,277 $20,814 $42,990
====== ======= =======
</TABLE>
For the years ended December 25, 1994, December 31, 1995, and December 29,
1996, the Company recognized income tax benefits pertaining to the exercise of
stock options of $3,102,000, $4,049,000, and $15,204,000, respectively, which
are accounted for as a direct increase to additional paid-in capital and do
not reduce reported income tax expense.
The Company's conversion of its loan to ENBC resulted in the recognition of
a deferred tax asset of $14.8 million, which amount has been offset by a
valuation allowance due to the uncertainty in realizing the benefits of the
deferred tax asset. During 1996, the Company recognized $2.5 million of the
deferred tax asset as a reduction of the goodwill which resulted from the ENBC
loan conversion. As of December 29, 1996, the Company had a deferred tax asset
of $10.3 million associated with ENBC's temporary differences, which amount
has been offset by a valuation allowance. The decrease in the valuation
allowance from the date of conversion to December 29, 1996 results from
realization of a portion of the deferred tax asset. ENBC files a separate tax
return from the Company. As of December 29, 1996, ENBC has a net operating
loss carryforward of $17.0 million that begins to expire in 2010.
The difference between the Company's actual tax provision and the tax
provision that would result from applying the statutory federal income tax
rate to income before income taxes and minority interest is attributable to
the following (in thousands of dollars):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------
DEC. DEC. DEC.
25, 31, 29,
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Income tax expense at statutory rate.............. $ 6,953 $19,031 $40,314
State taxes, net of Federal benefit............... 818 1,740 4,492
Tax attributes of minority interest in earnings of
subsidiary....................................... -- -- (2,042)
Other............................................. 26 43 226
Change in valuation allowance..................... (3,520) -- --
------- ------- -------
Provision for income taxes........................ $ 4,277 $20,814 $42,990
======= ======= =======
</TABLE>
8. NATIONAL AND LOCAL ADVERTISING FUNDS
The Company administers a National Advertising Fund (the "Fund") to which
all stores make contributions based on individual franchise agreements (2% of
net revenue). Collected amounts are spent primarily on developing marketing
and advertising materials for use systemwide. In addition, the Company
maintains Local
F-13
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Advertising Funds ("LAFs") that provide comprehensive advertising and sales
promotion support (primarily television and radio media time) for stores in
particular markets. Periodic contributions are made by all stores (a minimum
of 4% of net revenue). The Company disburses funds and accounts for all
transactions related to such Fund and LAFs. Such amounts are not segregated
from the cash resources of the Company; however, consistent with Statement of
Financial Accounting Standards No. 45 "Accounting for Franchise Fee Revenue",
such amounts are accounted for separately and are not included in the
financial statements of the Company because the Company acts only as an agent
for its franchisees in placing orders for advertising and paying related
invoices out of such accounts.
The Fund had an accumulated deficit of $9.6 million at December 31, 1995 and
$15.2 million at December 29, 1996, which were funded by advances from the
Company, $9.6 million and $10.2 million of which were recorded in Due from
Affiliates at December 31, 1995 and December 29, 1996, respectively, and $5.0
million of which was recorded in Notes Receivable at December 29, 1996. The
amounts classified in Due from Affiliates are short term advances to the Fund
to be repaid within the next fiscal year. The amount classified in Notes
Receivable is due October 1998 and bears interest at the applicable reference
rate of Bank of America Illinois as established from time to time (8.25% at
December 29, 1996) and is payable each four-week period.
ENBC, as agent for its franchisees, administers similar national and local
advertising funds. ENBC accounts for these funds in a similar manner.
9. COMMITMENTS AND CONTINGENCIES
Through December 29, 1996, BC Equity Funding, L.L.C. ("BCEF") had invested
an aggregate of $58.3 million in certain Boston Market area developers in the
form of 10% cumulative preferred equity, redeemable by the area developers at
a premium initially equal to 10% of the initial issue price, to be increased
by 2% each year up to a maximum of 20% of the initial issue price plus accrued
dividends (the "Redemption Price"). In the event the Company's conversion and
option rights under its secured loan agreement with any of these area
developers expire unexercised (See Note 10) and the Company does not consent
to an area developer's request to undertake a firm commitment underwritten
public offering of the stock of such area developer, the Company has agreed to
purchase the preferred equity of such area developer from BCEF at the
Redemption Price.
Through December 29, 1996, Bagel Store Development Funding, L.L.C. ("Bagel
Funding") had invested an aggregate of $70.2 million in ENBC's area developers
in the form of common equity. ENBC is obligated to purchase Bagel Funding's
equity interest in an area developer at a formula price in the event that the
area developer fails to fulfill its obligation to redeem such interests at
such price in any one of the following circumstances: (i) ENBC converts its
loan into or otherwise acquires a majority equity interest in the area
developer; (ii) ENBC does not consent to the area developer's request to
undertake a firm commitment underwritten public offering of stock of the area
developer after ENBC's conversion and option rights under its loan agreement
with the area developer have expired unexercised; or (iii) ENBC does not
consent to the area developer's request to terminate the area developer's area
development and franchise agreements with ENBC after ENBC's conversion and
option rights under its loan agreement with the area developer have expired
unexercised.
The Company has entered into two master lease facilities (the "1995
Facility" and the "1996 Facility") for the purpose of leasing equipment and
real estate for stores owned by the Company and its area developers. Financing
available under the 1995 Facility is $95.6 million and financing available
under the 1996 Facility is $190.0 million. Both the 1995 Facility and the 1996
Facility bear interest at LIBOR plus an applicable margin and have terms,
including renewal options, of between three and five years and contain a
purchase option. The 1996 Facility is cross-collateralized and cross-defaulted
with the Company's revolving credit facility (See Note 6). The Company
subleases a majority of the leased assets to its area developers. The
subleases to area developers contain substantially the same terms as the
master leases. The Company would be contingently liable for $192.6 million if
it utilized the entire amount available under the facilities and elected not
to purchase the leased assets or renew the leases. Such contingent obligation
would be reduced by a portion of the proceeds received by the lessor on the
sale of the leased assets and payments received from the sublessees.
F-14
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company leases sites for stores and for its support center in Golden,
Colorado. Lease terms are generally five years, with two or three five-year
renewal options. Most of the leases contain escalation clauses and common area
maintenance charges.
The Company also purchases or leases real estate and equipment that it then
leases, subleases, or assigns to an area developer or franchisee. The leases,
subleases, and assignment terms to area developers and franchisees are
negotiated at arm's length on commercially reasonable terms. The Company is
contingently liable for all lease costs, including common area maintenance
charges.
The following is a schedule of future minimum rental payments that are
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year, sublease proceeds, guarantees and
assignments, and rental receipts due under leases on property and equipment
owned by the Company as of December 29, 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
MINIMUM
NET RENTAL RECEIPTS
MINIMUM MINIMUM GUARANTEES ON PROPERTY AND
RENTAL SUBLEASE RENTAL AND EQUIPMENT OWNED
PAYMENTS PROCEEDS PAYMENTS ASSIGNMENTS BY THE COMPANY
-------- -------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1997..................... $ 73,802 $ 74,095 $ -- $ 12,822 $ 18,675
1998..................... 57,114 57,178 -- 12,048 18,359
1999..................... 24,003 23,153 850 11,089 18,475
2000..................... 22,032 20,942 1,090 10,591 19,003
2001..................... 18,373 17,924 449 16,640 19,465
Later Years.............. 82,802 68,432 14,370 67,552 88,323
-------- -------- ------- -------- --------
$278,126 $261,724 $16,759 $130,742 $182,300
======== ======== ======= ======== ========
</TABLE>
Rent expense, net of sublease income, under operating leases was $3,242,000,
$4,495,000, and $4,637,000 for fiscal years 1994, 1995, and 1996,
respectively.
The Company has entered into an agreement with a poultry supplier relating
to the production of two chicken processing facilities. The agreement expires
in 2001, and contains two two-year and one one-year renewal options.
ENBC has entered into a supply agreement relating to the purchase of certain
minimum levels of cream cheese, which expires in October 2000, or earlier in
certain circumstances. The agreement requires ENBC, its subsidiaries, area
developers, and other authorized purchasers to purchase the lesser of 160,000
pounds of cream cheese per week or 60% of their requirements for cream cheese
(excluding certain requirements that may be satisfied through other
commitments and certain requirements of acquired companies). The price per
pound is determined over the term of the contract based upon production costs.
The Company has become subject to various lawsuits, claims, and other legal
matters in the course of conducting its business, including its business as a
franchisor. The Company believes that the outcome of such lawsuits, claims,
and other legal matters will not have a material impact on the consolidated
financial position or results of operations.
10. AREA DEVELOPER FINANCING
The Company currently offers convertible secured debt financing to certain
Boston Market area developers to partially finance store development and
working capital needs. Only developers that are developing a significant
portion of an area of dominant influence or metropolitan area of a major city
and that meet all of the Company's requirements are eligible for such financing.
Area developer financing generally requires the developer to expend at least 75%
of its contributed capital toward developing stores prior to drawing on its
revolving loan facility provided by the Company, with advances permitted during
a two-or three-year draw period (or additional draw period in the event of a
loan amendment) in a predetermined maximum amount, generally equal to three to
four times the amount of the area developer's contributed capital. Upon
expiration of
F-15
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the draw period, the loan converts to an amortizing term loan payable over
four to five years in periodic installments, sometimes with a final balloon
payment. The Company may extend the draw and repayment periods, subject to the
area developer purchasing additional development rights, contributing
additional capital, or in connection with other amendments to the loan
agreement. Interest is set at the applicable reference rate of Bank of America
Illinois as established from time to time (8.25% at December 29, 1996 and an
average rate of 8.27% for 1996) plus 1%, and is payable each four-week period.
The loan is secured by a pledge of substantially all of the assets of the area
developer and generally by a pledge of the equity interests of the owners of
the developer.
ENBC offers secured debt financings to its area developers to partially
finance store development and working capital needs on terms similar to those
offered by the Company to Boston Market area developers.
(A) LOAN CONVERSION OPTION
The Company may convert all or any portion of the loan amount after a
moratorium period (generally two years from execution or subsequent amendment
of the loan) and generally after the area developer has completed not less
than 80% of its area developer commitment or in the event of the defaults set
forth below and generally up to the later of full repayment of the loan or a
specified date in the agreement, into equity in the area developer at the
conversion price set forth in the loan agreement, which is at a premium over
the per unit price paid by investors in the area developer for their equity
investments made concurrently with the execution of the loan agreement or
subsequent amendments thereto. Default provisions contained in the area
developer loans typically include default in payment of principal and
interest, breach of a representation or warranty or of any covenant contained
in the loan agreement or security instruments, bankruptcy or bankruptcy-
related act of the borrower, resignation or termination of key management
personnel, default under the area development agreement, termination of three
or more franchise agreements, dissolution or liquidation, material adverse
change in financial condition, default of other indebtedness, the master
lease, sublease or any real estate lease, a judgment in excess of $100,000
(not satisfied, vacated or covered by insurance) and the invalidity or
termination of any security instrument. The conversion price is negotiated at
arms' length with each area developer and, at December 29, 1996, the average
conversion premium was approximately 17% over the per unit price paid by the
investors in the area developer for their equity investment made concurrently
with the execution of the loan agreement or subsequent amendments thereto. The
maximum loan amount is established to give the Company majority ownership of
the developer upon conversion, provided the Company exercises its right to
participate in any intervening financing by the developer. To the extent such
loan is not fully drawn or has been drawn and repaid, the Company has a
corresponding option to acquire, at the loan conversion price, the amount of
additional equity it could have acquired by conversion of the loan, had the
loan been fully drawn.
ENBC's loan agreements with its area developers contain conversion and
option features similar to the Company's loan agreements with its Boston
Market area developers. The conversion price is negotiated at arms' length
with each area developer and, at December 29, 1996, the average conversion
premium was approximately 12% over the per unit price paid by the investors in
the ENBC area developer for their equity investment made concurrently with the
execution of the loan agreement or subsequent amendment thereto.
In March 1997, the Company converted its loan to BC New York, L.L.C.
("BCNY") into a majority equity interest in BCNY. Additionally, the Company
has agreed to acquire an additional 11% of the equity of BCNY from the current
BCNY equity holders for approximately $15.0 million. After giving effect to
the conversion, and assuming the Company purchases the additional 11% of the
equity of BCNY, the Company will have an equity interest in BCNY of
approximately 84%. The BCNY transaction added 118 Boston Market stores,
operating in the metropolitan New York area, northern New Jersey, and
Connecticut, to the Company store base. As of the date of conversion, total
loan advances to BCNY were $80.0 million.
There can be no assurance that the Company or ENBC will exercise future
rights to convert their loans to any other area developers or acquire an
equity interest in any other area developers to which they provide financing,
or that such exercise or acquisition will result in a majority interest in
such area developer.
F-16
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(B) COMMITMENTS TO EXTEND AREA DEVELOPER FINANCING
The following tables summarize loan commitments, loan availability,
outstanding loan balances (included in Notes Receivable on the Company's
balance sheets) and contributed capital for Boston Market and ENBC area
developers (in thousands of dollars, except number of area developers):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
BOSTON MARKET:
Number of area developers receiving financing...... 17 15
Loan commitments................................... $ 614,094 $ 838,043
Loan availability.................................. (202,676) (190,778)
--------- ---------
Loans outstanding (included in Notes Receivable)... $ 411,418 $ 647,265
========= =========
Contributed capital................................ $ 200,268 $ 286,413
========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 29,
1996
------------
<S> <C>
ENBC:
Number of area developers receiving financing................... 11
Loan commitments................................................ $ 283,200
Loan availability............................................... (142,446)
---------
Loans outstanding (included in Notes Receivable)................ $ 140,754
=========
Contributed capital............................................. $ 75,765
=========
</TABLE>
The following tables summarize area developer financing activity of Boston
Market area developers during fiscal years 1995 and 1996 and of ENBC area
developers from conversion (June 17, 1996) through December 29, 1996 (in
thousands of dollars):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
BOSTON MARKET:
Area developer loan balances, beginning of year... $ 201,266 $ 411,418
Additional loan advances.......................... 549,174 1,044,861
Loan repayments................................... (339,022) (766,114)
Loans converted into equity or eliminated in
consolidation..................................... -- (42,900)
--------- ----------
Area developer loan balances, end of year......... $ 411,418 $ 647,265
========= ==========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER 29,
1996
------------
<S> <C>
ENBC:
Area developer loan balances, at conversion (June 17, 1996) of
the Company loan.............................................. $ 41,224
Loan advances.................................................. 153,961
Loan repayments................................................ (54,431)
----------
Area developer loan balances, end of year...................... $ 140,754
==========
</TABLE>
The majority of the loan advance and repayment activity reflects the
revolving nature of the loans, that is, amounts are drawn and repaid on a
regular basis to optimize cash management.
F-17
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The principal maturities of the aforementioned receivables are as follows
(in thousands of dollars):
<TABLE>
<S> <C>
1997............................................................. $ --
1998............................................................. 16,471
1999............................................................. 61,006
2000............................................................. 71,004
2001............................................................. 78,802
Thereafter....................................................... 560,736
--------
$788,019
========
</TABLE>
(C) CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES
Three Boston Market area developers accounted for approximately 14%, 13%,
and 12% of the Boston Market area developers' notes receivable balance at
December 29, 1996 and no other Boston Market area developer individually
accounted for 10% or more of such notes receivable balance as of such date.
Five ENBC area developers accounted for approximately 21%, 17%, 15%, 10%, and
10% of the ENBC area developers' notes receivable balance at December 29, 1996
and no other ENBC area developer individually accounted for 10% or more of
such notes receivable balance as of such date.
The allowance for Boston Market and ENBC financed area developers' loan
losses is maintained at a level that in management's judgment is adequate to
provide for estimated possible loan losses. The amount of the allowance is
based on management's review of use of loan proceeds, adherence to store
development schedules, store performance trends, type and amount of collateral
securing the loan, prevailing economic conditions, and other factors that
management deems relevant at the time. Based upon this review and analysis, no
allowance for loan losses was required as of December 31, 1995 and December
29, 1996.
The following table sets forth certain combined financial information as of
the dates indicated provided to the Company by Boston Market financed area
developers. During 1995, six financed area developers were formed, and their
data have been included in the table for 1995 from the dates of their
respective formation. During 1996, two financed area developers were formed,
and their data have been included in the table for 1996 from the dates of
their respective formation and two financed area developers combined with two
other financed area developers with geographically contiguous territories. The
table excludes Mid-Atlantic and New Jersey Rose for both years and BCNY for
1996, the loans to which have been converted into equity or eliminated in
consolidation (in thousands, except number of financed area developers and
store data):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
BOSTON MARKET FINANCED AREA DEVELOPERS:
Total number of financed area developers............ 15 14
Total number of financed area developer stores open. 627 841
Balance sheet data:
Total gross assets................................ $513,926 $ 640,534
Total debt:
To the Company.................................. 372,071 555,105
To third parties (including capital lease obli-
gations)....................................... 14,456 23,797
Total other liabilities (including trade
payables)........................................ 105,129 105,635
Total stockholder/partner/member deficit.......... (9,891) (102,754)
</TABLE>
F-18
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Statement of operations data:
Gross revenue.................................... $ 491,341 $ 865,082
Income (loss) from continuing operations......... (148,338) (156,505)
Statement of cash flows data:
Cash flows from (used in) operating activities... $ (76,926) $(128,819)
Cash flows from (used in) investing activities... (193,100) (82,307)
Cash flows from (used in) financing activities... 269,746 212,366
--------- ---------
Net change in cash............................. $ (280) $ 1,240
========= =========
</TABLE>
The following table sets forth certain combined financial information as of
the dates indicated provided to ENBC by its financed area developers. During
1995, two financed area developers were formed, and their data have been
included in the table for 1995 from the dates of their respective formation.
During 1996, ten financed area developers were formed, and their data have
been included in the table for 1996 from the dates of their respective
formation, and one financed area developer combined with one other financed
area developer with geographically contiguous territory.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
ENBC FINANCED AREA DEVELOPERS:
Total number of financed area developers.......... 2 11
Total number of financed area developer stores
open............................................. 13 301
Balance sheet data:
Total gross assets.............................. $ 9,262 $ 221,156
Total debt:
To ENBC....................................... 3,538 140,754
To third parties.............................. -- --
Total other liabilities (including trade
payables)...................................... 3,011 37,033
Total partner/member equity..................... 2,676 33,847
<CAPTION>
FISCAL YEAR ENDED
-------------------------
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Statement of operations data:
Gross revenue................................... $ 768 $ 109,940
Income (loss) from continuing operations........ (1,324) (40,592)
Statement of cash flows data:
Cash flows from (used in) operating activities.. $ 1,616 $ (16,382)
Cash flows from (used in) investing activities.. (8,064) (187,955)
Cash flows from (used in) financing activities.. 7,038 205,756
------- ---------
Net change in cash............................ $ 590 $ 1,419
======= =========
</TABLE>
11. STOCKHOLDERS' EQUITY
In August 1994, the Company completed the public sale of 6,900,000 shares of
its common stock, receiving net proceeds of approximately $120.0 million.
In November 1994, the Company sold to BC Midwest L.P. 1,542,852 shares of
common stock, receiving net proceeds of approximately $4.5 million.
F-19
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1995, the Company completed the public sale of 10,350,000 shares
of its common stock, receiving net proceeds of approximately $342.0 million.
Warrants
The Company has issued warrants to purchase 819,600 shares of common stock
to third parties exercisable at prices ranging from $25.00 to $37.75. The
warrants expire at various dates through December 2001.
Stock Option Plans
The Company has employee stock option plans (the "Employee Plans") under
which options to purchase up to 12,240,000 shares of common stock may be
granted. Under the terms of the Employee Plans, the Company may annually grant
options to certain employees and officers of, and consultants to, the Company.
The option price is equal to the fair market value of the stock on the date of
the grant and each option has a term of ten years. The options generally vest
at a rate of 10% at the end of the first year, an additional 20% at the end of
the second year, an additional 30% at the end of the third year, with the
balance vesting at the end of the fourth year from the date of the grant.
The Company also maintains a stock option plan for non-employee directors
(the "Directors Plan") under which options to purchase up to 360,000 shares of
common stock may be granted. Under the terms of the Directors Plan, the
Company automatically grants to each director who is not an officer or
employee of the Company, options to purchase shares having a fair market value
of $200,000 at the date of grant, each time they are elected or reelected as a
director of the Company. The option price is equal to the fair market value of
the stock on the date of grant and each option generally has a term of ten
years. The options are exercisable at the end of one year of service from the
date of grant.
ENBC has an employee stock option plan under which options to purchase up to
5,500,000 shares of common stock of ENBC may be granted. ENBC also has a stock
option plan for non-employee directors under which options to purchase up to
100,000 shares of common stock of ENBC may be granted. The terms of these
plans are similar to the Company's plans, however, option grants to each
director who is not an officer or employee of the Company are limited to a
market value of $50,000 at the date of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the Company's stock
option plans. Had employee compensation expense for the Company's plans been
determined based on the fair value at the grant date for awards in 1995 and
1996 consistent with the provisions of SFAS No. 123, the Company's net income
and net income per common and equivalent share would have been reduced to the
pro forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net income--as reported................................... $33,559 $66,958
Net income--pro forma..................................... $33,015 $62,638
Net income per common and equivalent share--as reported... $ 0.66 $ 1.01
Net income per common and equivalent share--pro forma..... $ 0.65 $ 0.95
</TABLE>
F-20
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Expected volatility..................................... 38.0% 37.1%
Risk-free interest rate................................. 6.8% 6.3%
Expected lives.......................................... 5 years 5 years
Dividend yield.......................................... 0 0
</TABLE>
Activity under the option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF COMPANY OPTIONS SHARE EXERCISE PRICE
-------------------------------- --------------------
1994 1995 1996 1994 1995 1996
--------- --------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Company plans:
Options outstanding at
beginning of fiscal
year................. 6,698,024 8,140,421 8,668,265 $ 2.59 $ 5.81 $ 8.36
Options Granted....... 2,362,133 1,141,955 1,647,550 14.70 24.37 26.31
Options Exercised..... (384,905) (539,899) (1,343,647) 1.85 2.68 3.94
Options Forfeited..... (534,831) (74,212) (267,787) 4.19 21.07 15.13
--------- --------- ---------- ------ ------ ------
Options outstanding at
end of fiscal year..... 8,140,421 8,668,265 8,704,381 $ 5.81 $ 8.36 $12.33
========= ========= ========== ====== ====== ======
Options exercisable at
end of fiscal year..... 1,302,984 2,693,143 4,152,163
========= ========= ==========
</TABLE>
Information on options outstanding and options exercisable as of December
29, 1996, is as follows:
<TABLE>
<CAPTION>
COMPANY OPTIONS
COMPANY OPTIONS OUTSTANDING EXERCISABLE
------------------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING WEIGHTED EXERCISE
CONTRACTUAL AVERAGE PRICE
NUMBER OF LIFE EXERCISE NUMBER OF PER
RANGE OF EXERCISE PRICES OPTIONS (YEARS) PRICE OPTIONS SHARE
- ------------------------ --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 1.00-$ 3.00................ 2,752,263 5.27 $ 1.56 2,707,263 $ 1.55
$ 3.00-$ 6.00................ 1,721,579 6.29 4.02 860,402 4.11
$12.00-$15.00................ 940,955 7.92 14.88 256,131 14.88
$15.01-$18.00................ 871,962 7.55 17.43 199,973 17.37
$18.01-$21.00................ 178,940 7.66 19.59 47,695 19.54
$21.01-$24.00................ 53,662 8.58 23.32 13,486 22.67
$24.01-$27.00................ 971,085 9.50 25.36 4,529 24.97
$27.01-$30.00................ 313,109 9.05 27.96 237 29.69
$30.01-$33.00................ 711,133 9.02 31.24 60,497 31.00
$33.01-$36.00................ 186,042 9.28 34.66 1,950 34.78
$36.01-$39.00................ 3,651 9.30 36.36 -- --
--------- ---- ------ --------- ------
8,704,381 7.06 $12.33 4,152,163 $ 4.41
========= ==== ====== ========= ======
</TABLE>
F-21
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE SHARE
ENBC EXERCISE
OPTIONS PRICE
--------- -------------
<S> <C> <C>
ENBC plans:
Outstanding as of the date of conversion (June 17,
1996).............................................. 3,410,734 $ 6.50
Granted........................................... 239,714 12.57
Exercised......................................... (47,440) 5.89
Canceled.......................................... (124,933) 7.98
--------- ------
Outstanding as of December 29, 1996................. 3,478,075 $ 6.87
========= ======
Exercisable as of December 29, 1996................... 275,824 $ 5.93
========= ======
</TABLE>
Information on options outstanding and exercisable as of December 29, 1996,
is as follows:
<TABLE>
<CAPTION>
ENBC OPTIONS
ENBC OPTIONS OUTSTANDING EXERCISABLE
------------------------------ ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING WEIGHTED EXERCISE
CONTRACTUAL AVERAGE NUMBER PRICE
NUMBER OF LIFE EXERCISE OF PER
RANGE OF EXERCISE PRICES OPTIONS (YEARS) PRICE OPTIONS SHARE
- ------------------------ --------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$ 5.88......................... 1,616,739 8.46 $ 5.88 257,700 $5.88
$ 6.00-$ 9.00.................. 1,433,755 9.04 6.58 18,124 6.54
$ 9.01-$12.00.................. 417,411 9.41 11.36 -- --
$12.01-$15.00.................. 8,109 9.58 15.00 -- --
$27.01-$30.00.................. 685 9.70 29.13 -- --
$30.01-$33.00.................. 1,376 9.76 32.63 -- --
--------- ---- ------ ------- -----
3,478,075 8.81 $ 6.87 275,824 $5.93
========= ==== ====== ======= =====
</TABLE>
As of December 29, 1996, the Company had 22,328,419 shares of common stock
reserved for issuance upon exercise of stock options and warrants and
conversion of convertible subordinated debentures and LYONs.
12. RELATED-PARTY TRANSACTIONS
The Company and ENBC have entered into secured loan, area development and
franchise agreements with certain area developers in which certain directors
and certain current and former officers of the Company, ENBC and members of
their families have a direct or indirect equity interest. In addition, certain
officers and directors of the Company, and members of their immediate
families, have a direct or indirect equity interest in ENBC. The Company has
also entered into loan agreements with ENBC. These entities have paid
approximately $11.3 million, $20.0 million, and $41.0 million in national and
local advertising contributions in 1994, 1995, and 1996. The Company and ENBC
(since conversion on June 17, 1996) have also sold to certain of these
entities, stores, inventory, equipment, and other miscellaneous assets,
including reimbursement of the Company's and ENBC's general and administrative
costs and expenses, common stock, and warrants to purchase common stock for
which they received approximately $47.1 million, $14.6 million, and $30.5
million in 1994, 1995, and 1996, respectively. The Company believes that the
terms of these agreements are as favorable to the Company as those with other
area developers of the Company.
The Company has paid to one of these area developers $146,000 in 1994 and
$100,000 in 1995 for various services.
Pursuant to Statement of Financial Accounting Standards No. 57, all Company
and ENBC financed area developers may be deemed to be related parties as a
result of the lending and franchise relationships with their
F-22
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
area developers. Total royalties and franchise related fees earned from all
financed area developers were $27.9 million, $59.9 million, and $110.9 million
in 1994, 1995, and 1996, respectively. Total interest income earned from all
financed area developers was $11.6 million, $32.0 million, and $57.1 million,
in 1994, 1995, and 1996, respectively. Total notes receivable from all
financed area developers were $411.4 million and $788.0 million at December
31, 1995 and December 29, 1996, respectively.
Certain officers and directors of the Company have an equity interest in
ENBC. For the Company's 1995 fiscal year, ENBC paid to the Company
approximately $1.2 million for the purchase of furniture, equipment, and other
miscellaneous assets. In addition, ENBC paid to the Company approximately $3.0
million and $7.6 million in software license, software maintenance, real
estate, financial advisory, accounting fees, and interest on its loan with the
Company during fiscal 1995 and 1996 (prior to conversion on June 17, 1996),
respectively.
Certain officers and directors of the Company are officers and minority
investors in BCEF, having invested $7.3 million of an aggregate of $60.0
million at December 29, 1996. The Company has been engaged by BCEF to be its
manager for which it received fees of $375,000 in 1995 and $125,000 in 1996.
Neither the Company nor ENBC has an equity interest in BCEF.
Certain officers and directors of the Company are investors in Bagel
Funding, having invested $15.2 million of an aggregate of $75.0 million at
December 29, 1996. ENBC is the manager of Bagel Funding. Bagel Funding paid
$250,000 to ENBC (since conversion on June 17, 1996) in its capacity as
manager during 1996. Neither the Company nor ENBC has an equity interest in
Bagel Funding.
Certain officers and directors of the Company have an equity interest in
Market Partners, L.L.C. ("Market Partners"), having invested $9.0 million of
an aggregate of $38.3 million at December 29, 1996. As of such date, Market
Partners had invested $35.6 million in certain area developers of the Company.
Neither the Company nor ENBC has an equity interest in Market Partners.
A director/officer and a former director/officer of the Company control BC
Midwest Trust, successor to the interests previously held by BC Midwest L.P.
During 1994, 1995, and 1996, the Company paid approximately $528,000,
$662,000, and $282,000, respectively, to Bowana Aviation, Inc. ("Bowana") for
the use of aircraft. The Company's chief executive officer and a relative
owned Bowana. The Company believes that the amounts charged are at rates at
least comparable to those charged by third parties.
13. ENBC EQUITY OFFERINGS
During 1996, from the date of the conversion of the Company's loan to ENBC,
ENBC issued approximately 8.9 million shares of its common stock to third
parties pursuant to an initial and a subsequent public offering, a concurrent
non-underwritten public offering, and through the exercise of stock options
and warrants at prices ranging from $5.88 per share to $28.58 per share. Prior
to these transactions, the Company held approximately a 70% interest in ENBC,
and subsequent to these transactions at December 29, 1996, the Company held
approximately a 54% interest in ENBC. These transactions generated a pretax
gain of approximately $38.2 million as a result of ENBC issuing shares of
common stock at prices per share greater than the Company's carrying value.
Deferred income taxes have been provided on the gain.
14. RELOCATION
In September 1994, the Company consolidated its four Chicago-based support
center facilities into a single facility and relocated to Golden, Colorado.
The cost of the relocation, including moving personnel and facilities,
severance payments, and the write-off of vacated leasehold improvements, was
$5.1 million.
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE DEBENTURES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Special Note Regarding Forward-Looking Statements......................... 7
Risk Factors.............................................................. 7
The Company............................................................... 11
Recent Developments....................................................... 21
Use of Proceeds........................................................... 22
Price Range of Common Stock and Dividend Policy........................... 22
Capitalization............................................................ 23
Selected Consolidated Financial and Store Data............................ 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Description of Debentures................................................. 33
Underwriting.............................................................. 40
Legal Matters............................................................. 41
Experts................................................................... 42
Documents Incorporated by Reference....................................... 42
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$250,000,000
[BOSTON CHICKEN LOGO]
7 3/4% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE 2004
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
MORGAN STANLEY & CO.
INCORPORATED
APRIL 22, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
