<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 13, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-22802
BOSTON CHICKEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3904053
(State or other jurisdiction of (IRS Employer
incorporation or organization ) Identification No.)
14103 Denver West Parkway
P. O. Box 4086
Golden, CO 80401-4086
(Address of principal executive offices, including zip code)
(303) 278-9500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ----------
Number of shares of Common Stock, $.01 par value per share, outstanding as of
August 20, 1997: 68,317,858
<PAGE>
BOSTON CHICKEN, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets as of December 29, 1996 and
July 13, 1997............................................................. 2
Consolidated Income Statements for the quarter and two quarters ended
July 14, 1996 and July 13, 1997........................................... 3
Consolidated Statements of Cash Flows for the two quarters ended
July 14, 1996 and July 13, 1997........................................... 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders..................... 20
Item 6. Exhibits and Reports on Form 8-K........................................ 20
Signature Page.................................................................. 21
Exhibit Index............................................................Exhibit -1
</TABLE>
1
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 29, July 13,
1996 1997
----------- -----------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 100,800 $ 176,132
Accounts receivable, net.................................. 22,438 26,989
Due from affiliates....................................... 10,246 13,123
Inventories............................................... 2,585 4,805
Prepaid expenses and other current assets................. 1,465 1,330
Deferred income taxes..................................... 8,928 5,068
----------- -----------
Total current assets.................................. 146,462 227,447
Property and Equipment, net.................................... 334,748 395,374
Notes Receivable - Boston Chicken, Inc......................... 654,432 769,343
Notes Receivable - Einstein/Noah Bagel Corp.................... 146,087 262,595
Deferred Financing Costs, net.................................. 13,361 22,886
Goodwill, net.................................................. 190,439 257,959
Other Assets, net.............................................. 58,087 70,167
----------- -----------
Total assets......................................... $ 1,543,616 $ 2,005,771
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts Payable.......................................... $ 40,430 $ 11,225
Accrued Expenses.......................................... 36,547 29,053
Deferred Franchise Revenue................................ 10,656 4,589
----------- -----------
Total current liabilities............................ 87,633 44,867
Deferred Franchise Revenue..................................... 7,740 6,368
Convertible Subordinated Debt - Boston Chicken, Inc............ 129,841 417,020
Convertible Subordinated Debt - Einstein/Noah Bagel Corp....... - 125,000
Liquid Yield Option Notes...................................... 182,613 190,460
Deferred Income Taxes.......................................... 40,216 39,860
Other Noncurrent Liabilities................................... 6,292 4,768
Minority Interests............................................. 153,441 179,746
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: 64,245,868 in 1996
and 66,243,014 in 1997.................................. 642 662
Additional paid-in capital................................. 827,611 850,747
Retained earnings.......................................... 107,587 146,273
----------- -----------
935,840 997,682
----------- -----------
Total liabilities and stockholders' equity........... $ 1,543,616 $ 2,005,771
=========== ===========
The accompanying notes to the consolidated financial statements are an integral part of these statements.
</TABLE>
2
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Two
Quarter Ended Quarters Ended
---------------------------------- ----------------------------------
July 14, July 13, July 14, July 13,
1996 1997 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Company stores....................................... $25,424 $ 58,086 $ 26,738 $108,178
Royalties and franchise related fees................. 25,227 37,318 53,273 78,750
Interest income...................................... 13,910 21,192 31,897 46,432
-------------- -------------- -------------- --------------
Total revenue....................................... 64,561 116,596 111,908 233,360
Costs and expenses:
Cost of products sold................................ 9,468 21,481 9,948 40,225
Salaries and benefits................................ 9,328 23,302 16,837 45,213
General and administrative........................... 15,905 31,967 26,716 62,055
-------------- -------------- -------------- --------------
Total costs and expenses............................ 34,701 76,750 53,501 147,493
-------------- -------------- -------------- --------------
Income from Operations................................ 29,860 39,846 58,407 85,867
Other Expense:
Interest expense, net................................ (3,435) (9,311) (6,335) (16,540)
Gain (loss) on issuances of subsidiary's stock....... - (619) - 82
Other income, net.................................... 203 1,667 312 1,641
-------------- -------------- -------------- --------------
Total other expense................................. (3,232) (8,263) (6,023) (14,817)
-------------- -------------- -------------- --------------
Income Before Income Taxes and Minority Interest...... 26,628 31,583 52,384 71,050
Income Taxes.......................................... 9,691 12,509 19,798 27,942
Minority Interest in (Earnings) of Subsidiaries....... (1,021) (1,836) (1,021) (4,422)
-------------- -------------- -------------- --------------
Net Income............................................ $15,916 $ 17,238 $ 31,565 $ 38,686
============== ============== ============== ==============
Net Income Per Common and
Equivalent Share..................................... $0.24 $0.26 $0.48 $0.57
============== ============== ============== ==============
Weighted Average Number of Common
and Equivalent Shares Outstanding.................... 67,131 67,449 65,523 67,740
============== ============== ============== ==============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Two Quarters Ended
-----------------------------------------
July 14, July 13,
1996 1997
----------------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income........................................................ $ 31,565 $ 38,686
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................... 9,234 20,109
Interest on liquid yield option notes........................... 7,338 7,873
Loss (gain) on sale of subsidiary's stock....................... - (82)
Deferred income taxes........................................... 3,329 3,504
Minority interest............................................... 1,021 4,422
Loss (gain) on disposal of assets............................... (160) (1,057)
Changes in assets and liabilities, excluding effects
from acquisitions:
Accounts receivable and due from affiliates.................. (6,291) (6,811)
Accounts payable and accrued expenses........................ 2,482 (49,402)
Deferred franchise revenue................................... 3,076 (7,439)
Other assets and liabilities................................. (2,795) (5,798)
----------------- -----------------
Net cash provided by operating activities................... 48,799 4,005
----------------- -----------------
Cash Flows from Investing Activities:
Purchase of property and equipment.............................. (68,468) (37,710)
Proceeds from the sale of assets................................ 44,099 10,599
Purchase of other assets........................................ (5,937) (7,654)
Issuance of notes receivable.................................... (722,097) (783,121)
Repayments of notes receivable.................................. 433,334 472,468
----------------- -----------------
Net cash used in investing activities....................... (319,069) (345,418)
----------------- -----------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock.......................... 102,494 5,747
Proceeds from issuance of subsidiary's common stock............. 1,577 9,985
Proceeds from issuance of convertible subordinated debt......... - 412,500
Increase in deferred financing costs............................ (1,949) (11,487)
Repayment of long-term debt..................................... (29,006) -
Proceeds from revolving credit facilities....................... - 283,200
Repayments of revolving credit facilities...................... (2,350) (283,200)
----------------- -----------------
Net cash provided by financing activities................... 70,766 416,745
----------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents.............. (199,504) 75,332
Cash and Cash Equivalents, beginning of period.................... 310,436 100,800
----------------- -----------------
Cash and Cash Equivalents, end of period.......................... $ 110,932 $ 176,132
================= =================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements have been prepared by Boston Chicken,
Inc. (the "Company") and are unaudited except for the consolidated balance sheet
at December 29, 1996 and notes related thereto. The financial statements and
notes thereto have been prepared in accordance with the instructions for Form
10-Q and, therefore, do not necessarily include all information and footnotes
required by generally accepted accounting principles. In the opinion of the
Company, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position,
results of operations and cash flows as of July 13, 1997 and for all periods
presented have been made. The statements are subject to year-end audit
adjustment. A description of the Company's accounting policies and other
financial information is included in the audited consolidated financial
statements as filed with the Securities and Exchange Commission in the Company's
Form 10-K/A for the year ended December 29, 1996. The consolidated results of
operations for the quarter and two quarters ended July 13, 1997 are not
necessarily indicative of the results expected for the full year.
2. Area Developer Financing
The Company currently offers convertible and non-convertible secured debt
financing to Boston Market area developers to partially finance store
development and working capital needs. 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 in a predetermined maximum amount,
generally equal to three to four times the amount of the area developer's
contributed capital. Upon expiration of the draw period, the loan converts to
an amortizing term loan payable in periodic installments. 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. As a result of amendments to
extend the time period during which area developers are required to open stores
under their development agreements, the Company and its area developers are in
the process of amending their loan agreements to extend the draw and repayment
periods. Upon expiration of the draw periods (which range from 1999 to 2006),
the loans convert to term loans payable in periodic installments over periods
ranging from two to seven years, in some cases with a balloon payment upon
maturity, with an average repayment period of approximately five years.
Interest is set at the applicable reference rate of Bank of America Illinois as
established from time to time (8.50% at July 13, 1997, an average rate of 8.50%
for the quarter ended July 13, 1997, and an average rate of 8.39% for the two
quarters ended July 13, 1997) 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
area developer.
Einstein/Noah Bagel Corp. ("ENBC") offers secured debt financing 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 convertible 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 negotiated at arm's length with
each area developer, which is at a premium 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.
Default provisions contained in the area developer loans typically include
default in payment of
5
<PAGE>
principal and interest, breach of a representation, warranty or any covenant
contained in the loan agreement or security instruments, bankruptcy or a
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. 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. On average, upon
conversion or exercise of the option, the Company would own approximately a 65%
interest in each of its area developers on a fully diluted basis.
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. On average, upon conversion or exercise of the option, ENBC would
own approximately a 70% interest in each of its area developers on a fully
diluted basis.
In March 1997, the Company converted its loan to BC New York, L.L.C. ("BCNY")
into a majority equity 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 of the date of conversion, total
loan advances to BCNY were $80.0 million. As part of this transaction, the
Company assumed approximately $10.0 million in liabilities owed to third
parties. The transaction has been 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 the transaction, resulting in goodwill of
approximately $75.0 million (based upon a preliminary allocation), which is
being amortized over a 35-year life. The operating results of BCNY are included
in consolidated net income from the date of acquisition.
The following represents the unaudited pro forma results of operations for the
two quarters ended July 13, 1997 as if the purchase transaction described above
had occurred at the beginning of the Company's fiscal year (in thousands of
dollars, except per share data):
<TABLE>
<S> <C> <C>
Revenue.................. $263,135
Net income............... $ 35,532
Net income per share..... $ 0.52
</TABLE>
There can be no assurance that the Company or ENBC will in the future exercise
their rights to convert loans to their respective area developers or acquire an
equity interest in any area developer to which they provide financing, or that
such exercise or acquisition will result in a majority interest in such area
developer.
(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):
6
<PAGE>
<TABLE>
<CAPTION>
December 29, July 13,
1996 1997
------------------- -------------------
<S> <C> <C>
Boston Market:
- --------------
Number of area developers receiving financing............. 15 15
Loan commitments.......................................... $ 838,043 $846,213
Loan availability......................................... (190,778) 91,867
------------------- -------------------
Loans outstanding (included in Notes Receivable).......... $ 647,265 $754,346
=================== ===================
Contributed capital....................................... $ 286,413 $289,170
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
December 29, July 13,
1996 1997
------------------- --------------------
<S> <C> <C>
ENBC:
- -----
Number of area developers receiving financing*............ 11 8
Loan commitments.......................................... $ 283,200 $ 359,900
Loan availability......................................... (142,446) (100,742)
------------------- --------------------
Loans outstanding (included in Notes Receivable).......... $ 140,754 $ 259,158
=================== ====================
Contributed capital....................................... $ 75,765 $ 109,621
=================== ====================
</TABLE>
*During the first two quarters of 1997, one area developer was formed and
several area developers merged, reducing the number of area developers receiving
financing from 11 to eight.
The following tables summarize area developer financing activity of Boston
Market and ENBC area developers (in thousands of dollars):
<TABLE>
<CAPTION>
Two Quarters Ended
-----------------------------------------------
July 14, July 13,
1996 1997
-------------------- --------------------
<S> <C> <C>
Boston Market:
- --------------
Area developer loan balances, beginning of year........... $ 411,418 $ 647,265
Additional loan advances.................................. 496,191 549,956
Loan repayments........................................... (317,197) (362,875)
Loans converted into equity or eliminated
in consolidation........................................ (35,400) (80,000)
-------------------- --------------------
Area developer loan balances, end of quarter.............. $ 555,012 $ 754,346
==================== ====================
</TABLE>
<TABLE>
<CAPTION>
June 17, 1996
(date of ENBC loan
conversion) Two Quarters
through Ended
July 14, 1996 July 13, 1997
------------------ -------------------
<S> <C> <C>
ENBC:
- -----
Area developer loan balances, beginning of period......... $41,224 $ 140,754
Loan advances............................................. 24,216 222,144
Loan repayments........................................... (6,119) (103,740)
------------------- -------------------
Area developer loan balances, end of quarter.............. $59,321 $ 259,158
=================== ===================
</TABLE>
The majority of the loan advance and repayment activity reflects the
revolving nature of the loans; that is, area developers draw and repay amounts
to optimize cash management.
7
<PAGE>
(c) Credit Risk and Allowance for Loan Losses
Two Boston Market area developers accounted for approximately 14% and 12% of
the Boston Market area developers' notes receivable balance at July 13, 1997 and
no other Boston Market area developer individually accounted for 10% or more of
such notes receivable balance as of such date. Six ENBC area developers
accounted for approximately 17%, 16%, 14%, 14%, 12%, and 10% of the ENBC area
developers' notes receivable balance at July 13, 1997 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 29, 1996 and July 13, 1997. There can
be no assurance, however, that such review and analysis will not result in a
provision for loan losses in any future quarter.
The following tables set forth certain combined audited financial information
as of the dates indicated provided annually 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
------------ ------------
Boston Market Financed Area Developers:
- --------------------------------------
<S> <C> <C>
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 14,456 23,797
obligations).......................................
Total other liabilities (including trade payables)..... 105,129 105,635
Total stockholder/partner/member deficit............... (9,891) (102,754)
</TABLE>
<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>
8
<PAGE>
The following tables set forth certain combined audited financial
information as of the dates indicated provided annually 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
(data concerning such area developers being 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
</TABLE>
<TABLE>
<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>
3. Progressive Food Concepts, Inc.
The Company has provided a $17.0 million convertible loan to Progressive
Food Concepts, Inc. ("PFCI") on terms substantially similar to those provided to
Boston Market area developers (see note 2). As of July 13, 1997, $8.9 million
was outstanding under the loan agreement. 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. As of July 13, 1997, Scott Beck, the Company's
Chairman of the Board, President and Chief Executive Officer, and Saad J.
Nadhir, the former Co-Chairman of the Board and President of the Company, each
owned a 46.2% equity interest in PFCI, and Harry's owned a 7.6% interest in
PFCI.
9
<PAGE>
4. Debt Issuances
In April 1997, the Company issued in a public offering $287.5 million of 7
3/4% convertible subordinated debentures due May 1, 2004. Interest is payable
semi-annually on May 1 and November 1 of each year beginning November 1, 1997.
The debentures are convertible at any time prior to maturity into shares of the
Company's common stock at a conversion rate of $26.70 per share, subject to
adjustments under certain conditions. The debentures may be redeemed at the
option of the Company beginning May 1, 2000, initially at 104.43% of their
principal amount and at declining prices thereafter, plus accrued interest. In
addition, the Company is required, as of 40 business days after the occurrence
of a Change in Control (as defined in the indenture relating to the debentures)
to purchase all or any part of any debenture at the option of the debenture
holder.
In May 1997, ENBC issued in a private offering $125.0 million of 7 1/4%
convertible subordinated debentures due June 1, 2004. Interest is payable semi-
annually on June 1 and December 1 of each year beginning December 1, 1997. The
debentures are convertible at any time prior to maturity into shares of ENBC's
common stock at a conversion rate of $21.25 per share, subject to adjustments
under certain conditions. The debentures may be redeemed at the option of ENBC
beginning June 1, 2000, initially at 104.14% of their principal amount and at
declining prices thereafter, plus accrued interest. In addition, ENBC is
required, as of 40 business days after the occurrence of a Change in Control (as
defined in the indenture relating to the debentures) to purchase all or any part
of any debenture at the option of the debenture holder. ENBC's registration
statement registering for resale the debentures and the shares of ENBC's common
stock issuable upon conversion of the debentures became effective on June 18,
1997.
5. Royalties and Franchise Related Fees
Royalties and franchise related fees are comprised of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
-------------------------------- --------------------------------
July 14, July 13, July 14, July 13,
1996 1997 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Royalties..................................... $11,584 $15,308 $26,360 $36,164
Lease and real estate services income......... 5,333 7,447 13,301 16,691
Initial franchise and area developer fees..... 4,585 5,210 7,277 12,075
Software license and maintenance fees......... 3,725 9,353 6,335 13,820
-------------- -------------- -------------- --------------
$25,227 $37,318 $53,273 $78,750
============== ============== ============== ==============
</TABLE>
6. Commitments
Through July 13, 1997, 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 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 July 13, 1997, Bagel Store Development Funding, L.L.C. ("Bagel
Funding") had invested an aggregate of $89.5 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
10
<PAGE>
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.
7. Contingencies
The Company, two of the Company's directors (the "Individual Defendants"),
a former director and officer of the Company and certain investment banking
firms which had underwritten securities offerings by the Company are defendants
in a class action lawsuit filed in the United States District Court for the
District of Colorado. The lawsuit is comprised of separate actions that were
consolidated into one action for pre-trial purposes on August 8, 1997. A
separate action has been filed in Jefferson County District Court in the State
of Colorado against the Company and the Individual Defendants. The complaints in
such actions allege, among other things, that the Company and the other
defendants violated Sections 11, 12(2) and 15 of the Securities Act of 1933, as
amended, and Section 10(b) of the Securities Act of 1934, as amended, and rule
10b-5 promulgated thereunder. The plaintiffs are seeking, among other things,
(i) to certify each of the complaints as a class action on behalf of all persons
who purchased common stock of the Company during the purported class period,
(ii) an award of unspecified compensatory damages, interests and costs to all
members of the purported class and (iii) equitable relief permitted by law,
equity or federal or state statutes. The Company believes that the complaints
are without merit and intends to vigorously defend against the allegations made
in such complaints.
In July and August 1997, four actions were filed in the United States
District Court for the District of Colorado against ENBC and certain of its
directors and officers (such individuals are collectively referred to herein as
the "ENBC Individual Defendants"). The complaints allege, among other things,
that ENBC and ENBC Individual Defendants violated Sections 11, 12(2) and 15 of
the Securities Act of 1933, as amended, and Section 10(b) of the Securities
Exchange Act of 1934, as amended and Rule 10b-5 promulgated thereunder. In each
case, the plaintiffs are seeking, among other things, (i) to certify their
complaint as a class action on behalf of all persons who purchased the common
stock of ENBC during the purported class period, (ii) an award of unspecified
compensatory damages, interest and costs to all members of the purported class
and (iii) equitable relief permitted by law, equity or federal or state
statutes. ENBC believes that all of the complaints are without merit and intends
to vigorously defend against the allegations made in such complaints.
The Company is subject to various other 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 Company's
consolidated financial position or results of operations.
8. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". SFAS No. 128 requires disclosure of basic and diluted
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the reporting period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997. The pro forma earnings per share for the quarter
and two quarters ended July 14, 1996 and July 13, 1997, utilizing the
requirements of SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
July 14, July 13, July 14, July 13,
1996 1997 1996 1997
------------ ----------- ------------ -----------
Basic earnings per share.... $0.25 $0.26 $0.51 $0.59
Diluted earnings per share.. $0.23 $0.25 $0.48 $0.56
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q 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 Boston Chicken, Inc. (the "Company"),
Einstein/Noah Bagel Corp. ("ENBC"), Boston Market International, Inc. ("BMI"),
their area developers, franchisees, and licensees, Boston Market/R/ stores,
Einstein Bros./R/ Bagels and Noah's New York Bagels/R/ 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: store
performance; competition; success of operating initiatives; 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, including the possible integration of
fresh, chilled prepared foods in the Boston Market concept; changes in
development plans; availability and cost of capital; food, labor, and employee
benefit costs; changes in government regulations; regional weather conditions;
and other factors referenced in this Form 10-Q. The success of the Company,
ENBC, and BMI is dependent on the operational and financial strength of their
respective area developers, franchisees, and licensees. In addition, readers are
urged to consider statements that include the terms "believes", "belief",
"expects", "plans", "anticipates", "intends", or the like to be uncertain and
forward-looking. All cautionary statements made herein should be read as being
applicable to all forward-looking statements wherever they appear.
General
During fiscal year 1996, the Company converted its loan to ENBC into a
majority equity interest in ENBC and acquired a 93% interest in Mid-Atlantic
Restaurant Systems L.P. ("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, L.L.C. ("New Jersey Rose"), the Boston Market area developer for the
southern New Jersey area. In March 1997, the Company converted its loan to BC
New York, L.L.C. ("BCNY") into a majority equity interest in BCNY, its Boston
Market area developer for the metropolitan New York area, northern New Jersey,
and Connecticut.
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 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 Company's operating results for fiscal
1997 will not be readily comparable to those for fiscal 1996.
Company-owned Boston Market Stores
The following table sets forth store performance data for the Company's
Boston Market Stores (excluding its test stores) for the quarters and two
quarters ended July 14, 1996 and July 13, 1997 (in thousands of dollars). Such
amounts exclude unallocated capital charges, income taxes and non-store overhead
costs, including accounting, administration and discretionary advertising:
12
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------
July 14, 1996 July 13, 1997
------------------- -------------------
<S> <C> <C> <C> <C>
Net sales........................ $21,370.3 100.0% $57,772.6 100.0%
Food and paper costs............. 8,027.5 37.6% 21,331.1 36.9%
Salaries and benefits............ 5,560.8 26.0% 14,540.4 25.2%
Operating expenses............... 1,507.3 7.1% 5,591.9 9.7%
Occupancy and advertising costs.. 2,282.7 10.6% 7,550.8 13.0%
--------- ------ --------- ------
Store cash flow.................. $ 3,992.0 18.7% $ 8,758.4 15.2%
========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Two Quarters Ended
-------------------------------------------
July 14, 1996 July 13, 1997
------------------- --------------------
<S> <C> <C> <C> <C>
Net sales........................ $21,370.3 100.0% $105,283.3 100.0%
Food and paper costs............. 8,027.5 37.6% 39,157.1 37.2%
Salaries and benefits............ 5,560.8 26.0% 25,936.2 24.6%
Operating expenses............... 1,507.3 7.1% 9,640.5 9.2%
Occupancy and advertising costs.. 2,282.7 10.6% 13,120.1 12.4%
--------- ------ ---------- ------
Store cash flow.................. $ 3,992.0 18.7% $ 17,429.4 16.6%
========= ====== ========== ======
</TABLE>
Revenue from Boston Market Company stores increased from $21.4 million for
the quarter ended July 14, 1996 to $57.8 million for the quarter ended July 13,
1997. Revenue from Company stores increased from $21.4 million for the two
quarters ended July 14, 1996 to $105.3 million for the two quarters ended July
13, 1997. The increases were primarily due to a higher average number of stores
operating during the 1997 periods partially offset by lower net revenue per
store. The average number of Boston Market Company stores for the second quarter
of 1997 was 225 compared to 78 for the second quarter of 1996. The average
number of Boston Market Company stores for the two quarters ended July 13, 1997
was 173 compared to 33 for the two quarters ended July 14, 1996. This change in
average number of stores was attributable to the Company's acquisition of, or
conversion of its loans to, Mid-Atlantic, New Jersey Rose, and BCNY. Net WPSA
revenue per Boston Market Company store decreased 6.5% from $22,837 for the
second quarter of 1996 to $21,351 for the second quarter of 1997. Net WPSA
revenue per Boston Market Company store decreased 4.8% from $22,837 for the two
quarters ended July 14, 1996 to $21,751 for the two quarters ended July 13,
1997. WPSA revenue represents the weekly per store average revenue for all
stores based upon the actual number of days the stores are open in the reporting
period. Net WPSA revenue is gross WPSA revenue after customer coupons and
employee discounts. The Company believes the decrease in WPSA revenue for its
Boston Market stores for the 1997 periods compared to the 1996 periods was due
to the continuation, through most of the second quarter of 1997, of its former
marketing strategy that was characterized by increasingly ineffective price-
promoted offers and high levels of discretionary media spending, the
cannibalistic effect of those price-promoted offers on its higher priced core
individual meal business and the relative ineffectiveness of the Extreme Carver
and Kids Market product offerings introduced in the first and second quarters of
1997, respectively. These factors compare with the successful Boston Carver
product introduction, commencement of network advertising and initiation of dual
message advertising, all of which favorably contributed to WPSA revenue in the
comparable periods of 1996.
Food and paper costs, as a percentage of net sales, declined from 37.6% for
the quarter ended July 14, 1996 to 36.9% for the quarter ended July 13, 1997.
Food and paper costs, as a percentage of net sales, declined from 37.6% for the
two quarters ended July 14, 1996 to 37.2% for the two quarters ended July 13,
1997. The decreases in the percentages were attributable to lower food and paper
costs achieved primarily through contract negotiations with food and paper
vendors and improved operating efficiencies.
Salaries and benefits, as a percentage of net sales, declined from 26.0%
for the quarter ended July 14, 1996 to 25.2% for the quarter ended July 13,
1997. Salaries and benefits, as a percentage of net sales, declined from
13
<PAGE>
26.0% for the two quarters ended July 14, 1996 to 24.6% for the two quarters
ended July 13, 1997. The decreases in the percentages were attributable to
improved labor efficiencies achieved in operating the Company store base.
Operating expenses, occupancy and advertising costs, as a percentage of net
sales, increased from 17.7% for the quarter ended July 14, 1996 to 22.7% for the
quarter ended July 13, 1997. Operating expenses, occupancy and advertising
costs, as a percentage of net sales, increased from 17.7% for the two quarters
ended July 14, 1996 to 21.6% for the two quarters ended July 13, 1997. The
increase in the percentages were attributable to a decline in WPSA revenue
without a corresponding decline in rent, utilities and other relatively fixed
store operating costs.
Results of Operations
Revenue. Royalties and franchise related fees increased 48% for the
quarter and two quarters ended July 13, 1997. The increases in royalties and
franchise related fees were primarily attributable to the inclusion of ENBC
royalties and franchise related fees for the entire reporting periods in 1997
compared to only a portion of the reporting periods in 1996, software license
fees recognized for store software provided by the Company to franchisees, an
increase in lease and real estate services income, and higher royalties
resulting from an increase in revenue from Boston Market franchised stores.
ENBC's royalties and franchise related fees accounted for 43% of the increase in
royalties and franchise related fees for the quarter ended July 13, 1997 and 57%
for the two quarters ended July 13, 1997. Interest income increased 52% for the
quarter ended July 13, 1997 and 46% for the two quarters ended July 13, 1997.
The increases in interest income were due to the inclusion of ENBC interest
income for the entire reporting periods in 1997 compared to only a portion of
the reporting periods in 1996 and higher outstanding loan balances associated
with the increase in stores opened by Boston Market area developers. ENBC's
interest income from area developer financing accounted for 67% of the increase
in interest income for the quarter ended July 13, 1997 and 70% for the two
quarters ended July 13, 1997.
Total systemwide Boston Market gross revenue was $311.9 million for the
second quarter of 1997 compared to $260.5 million for the second quarter of
1996. Total systemwide Boston Market gross revenue was $727.2 million for the
two quarters ended July 13, 1997 compared to $572.3 million for the two quarters
ended July 14, 1996. The increases in systemwide store revenue were primarily
due to an increase in the number of Boston Market stores in operation systemwide
offset by lower gross revenue per store. Gross WPSA revenue per Boston Market
store decreased 7.2% from $23,826 for the second quarter of 1996 to $22,114 for
the second quarter of 1997. Gross WPSA revenue per Boston Market store decreased
1.2% from $23,179 for the two quarters ended July 14, 1996 to $22,905 for the
two quarters ended July 13, 1997. Net WPSA revenue per Boston Market store
decreased 9.3% from $22,420 for the second quarter of 1996 to $20,334 for the
second quarter of 1997. Net WPSA revenue per Boston Market store decreased 4.3%
from $22,016 for the two quarters ended July 14, 1996 to $21,060 for the two
quarters ended July 13, 1997. The Company believes the decrease in WPSA revenue
for the 1997 periods compared to the 1996 periods was due to the continuation,
through most of the second quarter of 1997, of its former marketing strategy
that was characterized by increasingly ineffective price-promoted offers and
high levels of discretionary media spending, the cannibalistic effect of those
price-promoted offers on its higher priced core individual meal business and the
relative ineffectiveness of the Extreme Carver and Kids Market product offerings
introduced in the first and second quarters of 1997, respectively. These factors
compare with the successful Boston Carver product introduction, commencement of
network advertising and initiation of dual message advertising, all of which
favorably contributed to WPSA revenue in the comparable periods of 1996. The
cost of promoted offers to the stores in the Boston Market system, net of vendor
allowances, expressed as a percentage of systemwide gross revenue was
approximately 7% for the second quarter of 1997 compared to approximately 4% for
the second quarter of 1996. The Company believes that reducing the level of
price-promoted offers and utilizing a unified message to market both its lunch
and dinner products will enable it to significantly reduce discretionary
marketing spending systemwide while achieving the overall brand positioning it
desires. The Company began to implement its new strategy in the third quarter of
1997. The Company expects the decline in WPSA revenue to bottom out in the third
quarter of 1997 as the anticipated benefits of its new marketing strategy begin
to take effect; however, there can be no assurance that the Company's new
marketing strategy will favorably impact store sales. See "Special Note
Regarding Forward-Looking Statements" on page 12.
14
<PAGE>
Cost of Products Sold. As a result of a higher average number of Boston
Market and ENBC Company stores operating during the 1997 periods, cost of
products sold increased from $9.5 million for the second quarter of 1996 to
$21.5 million for the second quarter of 1997 and increased from $9.9 million for
the two quarters ended July 14, 1996 to $40.2 million for the two quarters ended
July 13, 1997. Cost of products sold, as a percentage of Company store net
revenue, decreased from 37.2% for the second quarter of 1996 to 37.0% for the
second quarter of 1997. Cost of products sold, as a percentage of Company store
net revenue, was 37.2% for both the two quarters ended July 14, 1996 and the two
quarters ended July 13, 1997.
Salaries and benefits. Salaries and benefits increased 150% for the second
quarter of 1997 compared to the second quarter of 1996. Salaries and benefits
increased 169% for the two quarters ended July 13, 1997 compared to the two
quarters ended July 14, 1996. The increases were primarily a result of the
higher average number of Company stores operating in the 1997 periods. The
increases were also due to the inclusion of ENBC employees for the entire
reporting periods in 1997 compared to only a portion of the reporting periods in
1996. ENBC accounted for 9% and 15%, respectively, of the increase in salaries
and benefits for the quarter and two quarters ended July 13, 1997. in June 1997,
the Company reduced its support center workforce by 115 people. The Company
incurred a one-time pre-tax charge of $4.0 million in the second quarter of 1997
relating to streamlining its support center organization. The streamlining was
primarily the result of the elimination of duplicative positions and the
consolidation of various administrative functions.
General and Administrative. General and administrative expenses increased
101% for the second quarter of 1997 compared to the second quarter of 1996.
General and administrative expenses increased 132% for the two quarters ended
July 13, 1997 compared to the two quarters ended July 14, 1996. The increases
were attributable to the increased number of Company stores, greater
depreciation and amortization expense, and inclusion of ENBC's general and
administrative expenses for the entire reporting periods in 1997 compared to
only a portion of the reporting periods in 1996. Included in general and
administrative expenses were depreciation and amortization charges of $9.2
million for the second quarter of 1997 compared with $5.0 million for the second
quarter of 1996. Depreciation and amortization charges were $20.1 million for
the two quarters ended July 13, 1997 compared to $9.2 million for the two
quarters ended July 14, 1996. The increases in depreciation and amortization
expense were attributable to the assets acquired from Mid-Atlantic, ENBC, BCNY,
and New Jersey Rose as well as a higher corporate fixed asset base reflecting
the Company's investment in support center infrastructure. ENBC accounted for
11% and 20% of the increase in general and administrative expenses for the
quarter and two quarters ended July 13, 1997, respectively.
Other Expense. The Company incurred a net expense of $8.3 million for the
second quarter of 1997 compared to a net expense of $3.2 million for the second
quarter of 1996. The Company incurred a net expense of $14.8 million for the two
quarters ended July 13, 1997 compared to a net expense of $6.0 million for the
two quarters ended July 14, 1996. These increases were due to additional
interest expense from the issuance in the second quarter of 1997 of $287.5
million of convertible subordinated debentures by the Company and the issuance
of $125.0 million of convertible subordinated debentures by ENBC, higher
utilization of the Company's and ENBC's senior secured revolving credit
facilities and lower interest income earned in 1997. The Company also incurred a
loss of $0.6 million for the second quarter of 1997 and a gain of $82,000 for
the two quarters ended July 13, 1997 as a result of ENBC issuing shares of its
common stock to third parties. In addition, the Company recognized gains of $1.7
million for the quarter ended July 13, 1997 and $1.6 million for the two
quarters ended July 13, 1997 from the sale of miscellaneous assets.
Income Taxes. The provision for income taxes for the quarter and two
quarters ended July 13, 1997 is based upon the Company's anticipated tax rate.
Minority Interest. The minority interest in the earnings of subsidiaries of
$1.8 million and $4.4 million for the quarter and two quarters ended July 13,
1997, respectively, represents the minority ownership interest in the earnings
of ENBC and BCNY. The minority interest in the earnings of subsidiaries of $1.0
million for the 1996 periods represents the minority ownership interest in the
earnings of ENBC.
15
<PAGE>
Liquidity and Capital Resources
Income before non-cash charges and credits increased to $73.5 million for
the two quarters ended July 13, 1997 compared to $52.3 million for the two
quarters ended July 14, 1996 due primarily to increased net income and increased
depreciation and amortization. Cash used for working capital was $69.5 million
for the two quarters ended July 13, 1997 compared with $3.5 million for the two
quarters ended July 14, 1996. The increased use of working capital for the 1997
period compared to the 1996 period was primarily attributable to a greater level
of payments of accounts payable and accrued expenses in the 1997 period. As a
result of the foregoing factors, cash provided by operations totaled $4.0
million for the two quarters ended July 13, 1997 compared to $48.8 million for
the two quarters ended July 14, 1996.
During the second quarter of 1997, the Company issued and sold $287.5
million in aggregate principal amount of its 7 3/4% convertible subordinated
debentures due 2004, and ENBC issued and sold $125.0 million in aggregate
principal amount of its 7 1/4% convertible subordinated debentures due 2004.
During the two quarters ended July 14, 1996, the Company and ENBC received net
proceeds of $104.1 million from issuance of shares of common stock.
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 store development and to finance their working
capital needs. As of July 13, 1997, the Company had secured loan commitments to
its Boston Market financed area developers aggregating $846.2 million of which
$754.3 million had been advanced. As of July 13, 1997, ENBC had secured loan
commitments to its area developers aggregating $359.9 million, of which $259.2
million had been advanced. Net loan advances to area developers increased by
$305.5 million for the two quarters ended July 13, 1997 (consisting of $772.1
million of loan advances, net of $466.6 million of loan repayments) from $197.1
million for the two quarters ended July 14, 1996 (consisting of $520.4 million
of loan advances, net of $323.3 million of loan repayments). The majority of the
loan advance and repayment activity reflects the revolving nature of the loans;
that is, area developers draw and repay amounts to optimize their cash
management. Other loan advances and repayments in the 1996 period 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 past 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 were 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 anticipated improvements in 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). As a result of a number of factors, including recent store
performance, the desire to focus maximum resources on the productivity of the
existing store base, and the availability and cost of capital, as well as the
possibility of integrating offerings of fresh, chilled prepared foods in
existing or future Boston Market Stores, the Company and its area developers
have agreed to temporarily reduce the rate of new store development. Such
reduction has not altered the total number of stores committed to be opened by
the area developers, but rather extends the period over which such stores are to
be developed. As a result, the Company believes the rapid expansion phase for
most of its developers will be extended and should last approximately six to
eight years from the time significant development commences in an area
developer's market, although the rate of store development may vary within the
rapid expansion phase. See "Special Note Regarding Forward-Looking Statements"
on page 12.
16
<PAGE>
Beginning in the second quarter of 1997, the Company's area developers
began implementing organizational changes to centralize administrative functions
into four "support area developers" that will share corporate and managerial
resources with geographically contiguous area developers to minimize area
developer overhead expenses while maximizing store level performance. The
Company estimates that this streamlining effort, combined with lower levels of
discretionary media spending, will result in combined annual overhead savings
for the financed area developers of approximately $65 million to $75 million. As
part of their focus on store performance, the Company's area developers are in
the process of analyzing their existing store base to determine whether or not
any stores should be closed. A store closure requires the Company's consent in
its capacity as franchisor and is typically related to operating or site-related
issues, changes in the market or trade area, or the failure of the store to meet
desired sales and profitability levels. The Company believes that approximately
50 stores systemwide will be closed during the third and fourth quarters of 1997
as a result of such review. The Company estimates that the costs to close a
store range from approximately $400,000 to $800,000 (a portion of which will be
a cash outlay), depending upon a number of factors, including whether the site
is leased or owned. Each area developer intending to close stores will establish
a provision for store closures during the third quarter of 1997 to cover the
closing costs. The Company expects that these provisions, coupled with lower
store sales and margins, will result in an increase in area developer aggregate
net losses in fiscal 1997 over the originally anticipated levels and over fiscal
1996 levels. See "Special Note Regarding Forward-Looking Statements" on page 12.
The Company anticipates its financed area developers will continue to incur
losses during a significant portion of their rapid expansion phase. The ability
to recover such losses and the timing of such recovery will vary by area
developer. Such recovery will depend upon, among other things, the reversal of
the recent decline in store performance, increases in store revenue and
profitability through continued product and service enhancements, completion of
additional store development, which will require continued access to equity
development capital, the level of debt and related fixed charges, lower
investment overhead, greater economies of scale, the intensity of competition
and the quality of management. There can be no assurance that such losses will
be recovered. Although the Company believes its current financed area developers
can 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 12.
As a general matter, the Company believes that the recent decline in store
performance levels does not currently indicate a trend which would affect area
developer loan recoverability; however, if such decline is more prolonged or
severe than currently anticipated, it can be expected to adversely impact the
Company's loan recoverability analysis. However, as a result of the recent
decline in store performance, one or more of the Company's area developers may
not generate sufficient store cash flow to pay royalties, interest on loans with
the Company and franchise and other fees when due. Failure of any area developer
to make such required payments will impact the Company's analysis of the
recoverability of such area developer's loan and potentially result in the
Company classifying such loan as impaired or establishing a provision for loan
loss for such loan. In addition, any such prolonged decline in store
performance, failure of any area developer to make required payments to the
Company or the Company establishing loan loss provisions would negatively impact
the Company's earnings and liquidity and may result in violations of certain
financial covenants contained in the Company's senior credit facilities. In
addition, the Company and its area developers are in the process of amending
their loan agreements to extend the draw and repayment periods to correspond to
the extended store development schedules reflecting the reduced rate of store
development, which will delay liquidity resulting from the loan repayments. See
"Special Note Regarding Forward-Looking Statements" on page 12.
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
17
<PAGE>
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, the demand on Company resources and the Company's
desire to obtain operational and financial control over the area developer or a
market. 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.
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 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. As of July 13, 1997, the Company had funded $8.9 million of its
loan commitment to PFCI. Through the second quarter of 1997, the Company
expended $7.6 million on its corporate infrastructure and $26.1 million for
Boston Market and ENBC store acquisition and development, including acquisition
of real estate. Through the second quarter of 1996, the Company expended $35.2
million on its corporate infrastructure and $26.3 million for store development,
including acquisition of real estate. These capital expenditures have been
partially offset with cash proceeds from selling ENBC company stores as a result
of its store seeding practice. Through the second quarters of 1996 and 1997,
ENBC generated $16.3 million and $3.6 million, respectively, from the sale of
ENBC company stores to newly-formed area developers. Both the Company and ENBC
have completed their store seeding programs; accordingly, neither the Company
nor ENBC anticipates receiving cash proceeds in the future from the sale of
stores to newly-formed area developers. In addition to this seeding program, the
Company generated cash from financing land, building and equipment and from the
sale of assets of $27.8 million and $7.0 million for the two quarters ended July
14, 1996 and July 13, 1997, respectively.
The Company anticipates that it and its area developers will have a need
for additional financing dependent primarily upon the number of stores opened,
the cost of such stores, store operating results and potential modification of
existing stores to integrate the offerings of fresh, chilled prepared foods. The
Company anticipates the opening systemwide of 150 to 200 Boston Market Stores in
fiscal year 1997 and 150 to 250 Boston Market Stores in fiscal year 1998. The
Company's original development objective was to open approximately 300 stores in
each such fiscal year. The reduction in the rate of store development will
negatively impact earnings for fiscal 1997 and 1998. See "Special Note Regarding
Forward-Looking Statements" on page 12.
The Company currently has availability under its senior revolving credit
facility. However, such facility contains a financial covenant requiring
systemwide gross WPSA revenue of not less than $20,500 per accounting period. As
a result of the change in the Company's marketing strategy, which is designed to
reduce the level of customer discounts, the Company believes that a more
relevant measure of store performance is net WPSA revenue. As such, the Company
is currently in the process of discussing with the agent lenders under the
senior credit facilities the modification of such covenant to reflect net WPSA
revenue at levels consistent with recent store performance. The Company believes
that based upon its initial conversations with the agent lenders it will be able
to obtain the necessary modification of the covenant; however, there can be no
assurance that such modification will be obtained. To the extent systemwide
gross WPSA revenue drops below $20,500 and the Company is unable to obtain
modification of the covenant, the Company will be in violation of the senior
credit facilities. Any such violation would prohibit the Company from drawing on
its revolving credit facility and, upon action of the required number of
lenders, result in a default of the facilities agreement and an acceleration of
the approximately $171 million outstanding principal balance under the Company's
1996 master lease facility. Any such acceleration would also permit holders of
other senior and subordinated debt of the Company to exercise their remedies,
which may include acceleration of their debt. See "Special Note Regarding
Forward-Looking Statements" on page 12.
18
<PAGE>
The Company also expects that BMI, its area developers, franchisees,
licensees, and/or joint venture partners, ENBC and its area developers, 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, 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 12.
On May 31, 1997, the Company, BMI and John Sun, a restaurant developer in
Southeast Asia, agreed to extend, until June 1, 1998, the period during which
such parties may negotiate and execute definitive agreements providing for BMI's
development of Boston Market stores and Mr. Sun's sublicense from BMI of certain
of such development rights. The extension resulted from Mr. Sun's desire to
explore the possible opportunity to integrate the offerings of fresh, chilled
prepared foods in Boston Market international stores and the Company's desire to
focus, in the short-run, on its domestic business. The delay in international
development has and will effect the amount of fees to be received by the Company
from BMI and the cost and expenses incurred by the Company in connection with
such development, which, in turn, will negatively impact earnings for 1997 and
1998. See "Special Note Regarding Forward-Looking Statements" on page 12.
In addition, ENBC and its area developers have commenced their annual
development planning process for 1998, which will take into account various
factors, including changes in the competitive environment and the effect of the
current pace of development on store operations and performance. As a result of
such review, the rate of store development for ENBC and its area developers for
1998 relative to the current pace of store development may be reduced.
Recent Developments
In August 1997, the Company purchased a portion of Messrs. Beck's and
Nadhir's equity interest in PFCI and agreed to purchase the balance of their
interests for a purchase price equal to their original cost plus an 8% interest
factor, resulting in the Company currently owning an 85% equity interest in
PFCI. The Company purchased the equity interests in PFCI in part because it
believes there are significant additional opportunities in home meal replacement
through the introduction of fresh, chilled prepared foods in Boston Market
stores and because of PFCI's ownership of proprietary technology which could be
useful in exploring those opportunities. In addition to the Company's
acquisition of an equity interest in PFCI, the Company has purchased 16 Boston
Market stores in the Denver metropolitan area for use in testing the
introduction of fresh, chilled prepared foods in the Boston Market concept in an
entire geographic market.
Also in August 1997, the Company converted its loan to Mayfair Partners,
L.P. ("Mayfair") into a majority equity interest in Mayfair, which added 53
Boston Market stores operating in Washington, D.C., northern Virginia and
portions of Maryland to the Company store base. As of the date of conversion,
total loan advances to Mayfair were $56 million. The Company desired to convert
the Mayfair loan primarily to concentrate its ownership of stores in the
northeast portion of the United States and to gain operational and financial
control over the business and the market. Mayfair's waiver of the loan
conversion moratorium was the result of arms' length negotiations between the
Company and Mayfair.
Finally, in August 1997, the Company purchased the remaining equity
interests in Mid-Atlantic, resulting in Mid-Atlantic becoming a wholly-owned
subsidiary of the Company.
These transactions will be accounted for as purchases, and accordingly, the
purchase prices will be allocated to identified assets and liabilities based
upon their values at the date of the respective transaction, which will result
in a portion of the purchase prices being allocated to goodwill. In addition,
given recent store performance levels and other factors, the Company expects
these transactions to have a negative impact on the Company's earnings.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth under Note 7 of the Company's Notes to
Consolidated Financial Statements contained in Part I of this Form 10-Q is
incorporated herein by reference thereto.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting was held on May 13, 1997. Each of the
Company's current directors was re-elected. The votes cast for and withheld from
each such director were as follows:
<TABLE>
<CAPTION>
Director For Withheld
-------- --- --------
<S> <C> <C>
Scott A. Beck 57,507,712 248,811
Dean L. Buntrock 57,506,638 249,885
Mark R. Goldston 57,508,273 248,250
Arnold C. Greenberg 57,508,188 248,335
J. Bruce Harreld 57,487,291 269,232
M Howard Jacobsen 57,508,016 248,507
Peer Pedersen 57,506,247 250,276
Mark W. Stephens 57,508,278 248,245
Laurence M. Zwain 57,507,553 248,970
</TABLE>
Also at the annual meeting, a proposal to approve an amendment to the
Company's 1995 Employee Stock Option Plan was approved. The votes cast for and
against this proposal, and the number of abstentions and broker non-votes with
respect to this proposal, were as follows:
<TABLE>
<CAPTION>
Amendment of 1995 Employee Stock Option Plan
--------------------------------------------
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
<S> <C> <C> <C>
37,983,798 19,437,946 135,034 1,199,196
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits: See Exhibit Index appearing elsewhere herein, which is
incorporated herein by reference.
B. Reports on Form 8-K: The Company filed one report on Form 8-K during
the quarter ended July 13, 1997, which report was dated June 25, 1997 (the
"Form 8-K"). The Form 8-K reported under Item 5 (Other Events) that the
Company and its area developers expected to open a total of 150 - 200 new
Boston Market stores during 1997 and a total of 150 - 250 new stores during
1998, a decrease from the original objective of 300 stores per year, which
decrease would negatively impact earnings expectations in 1997 and 1998.
The Form 8-K also reported under Item 5 (Other Events) that the Company (i)
was transitioning its marketing strategy to refocus on its core dinner
business, (ii) was reducing couponing and media spending, (iii) was seeing
sales weakness in Boston Market store performance for the second quarter of
1997, and (iv) anticipated during the marketing strategy transition period
store performance would to be choppy.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOSTON CHICKEN, INC.
Date: August 26, 1997 /s/ Scott A. Beck
----------------------------------------------
Scott A. Beck
Chairman of the Board, Chief Executive Officer
and President
Date: August 26, 1997 /s/ Mark W. Stephens
----------------------------------------------
Mark W. Stephens
Vice Chairman and Chief Financial
Officer (Principal Financial Officer)
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
----------
Exhibit Page
- ------- ----
Number Exhibits Number
- ------ -------- ------
<S> <C> <C>
4.1 Indenture dated as of April 28, 1997 by and between the Company and
Bankers Trust Company, as Trustee, which includes as an Exhibit the
form of Debenture for the Company's 7 3/4% Convertible Subordinated
Debentures due 2004 (the "7 3/4% Debenture Indenture") (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 20, 1997).
4.2 Amendment to 1995 Employee Stock Option Plan (incorporated by
reference to Exhibit 4.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 20, 1997).
10.1 Second Amendment dated April 29, 1997 to Secured Credit Agreement
dated as of May 17, 1996 ("ENBC Secured Credit Agreement") among ENBC,
the Lenders named therein, and Bank of America Illinois, as Agent
(incorporated by reference to Exhibit 10.5(c) to ENBC's 1997 annual
report on Form 10-K/A) (Exchange Act File No. 0-21097).
10.2 Third Amendment dated May 20, 1997 to ENBC Secured Credit Agreement
(incorporated by reference to Exhibit 10.2 to ENBC's Quarterly Report
on Form 10-Q for the quarter ended April 20, 1997) (Exchange Act File
No. 0-21097).
10.3 Fourth Amendment dated August 11, 1997 to ENBC Secured Credit
Agreement (incorporated by reference to Exhibit 10.3 to ENBC's
Quarterly Report on Form 10-Q for the quarter ended July 13, 1997)
(Exchange Act File No. 0-21097).
10.4 Indenture dated as of May 29, 1997 by and between ENBC and Bankers
Trust Company, as Trustee, which includes as Exhibits the forms of
Debenture for ENBC's 7 1/4% convertible subordinated debentures due
2004 (incorporated by reference to Exhibit 4.1 to ENBC's Current
Report on Form 8-K dated as of May 22, 1997 (Exchange Act File No. 0-
21097).
10.5 7 3/4% Debenture Indenture (included in Exhibit 4.1).
11 Statement re Computation of Earnings Per Share.
27 Financial Data Schedule.
</TABLE>
Exhibit - 1
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(In thousands)
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
-------------------------------- --------------------------------
July 14, July 13, July 14, July 13,
1996 1997 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Primary earnings per share:
Weighted average number of shares outstanding...... 63,648 65,724 61,848 65,145
Dilutive effect of common stock options
and warrants.................................... 3,483 1,724 3,675 2,595
-------------- -------------- -------------- --------------
Adjusted primary weighted average number of
common and equivalent shares outstanding........ 67,131 67,449 65,523 67,740
============== ============== ============== ==============
Fully diluted earnings per share:
Weighted average number of shares outstanding...... 63,648 65,724 61,848 65,145
Dilutive effect of common stock options,
warrants and convertible subordinated
debentures...................................... 3,483 6,355 3,675 7,226
-------------- -------------- -------------- --------------
Adjusted fully diluted weighted average number
of common and equivalent shares outstanding..... 67,131 72,079 65,523 72,371
============== ============== ============== ==============
</TABLE>
Note: For purposes of calculating fully diluted earnings per share for the
quarter and two quarters ended July 13, 1997, interest expense, net of taxes of
$2.1 million and $4.9 million, respectively, is added to net income.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> JUL-13-1997
<CASH> 176,132
<SECURITIES> 0
<RECEIVABLES> 26,989
<ALLOWANCES> 0
<INVENTORY> 4,805
<CURRENT-ASSETS> 227,447
<PP&E> 395,374
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,005,771
<CURRENT-LIABILITIES> 44,867
<BONDS> 732,480
0
0
<COMMON> 662
<OTHER-SE> 997,020
<TOTAL-LIABILITY-AND-EQUITY> 997,682
<SALES> 108,178
<TOTAL-REVENUES> 233,360
<CGS> 40,225
<TOTAL-COSTS> 40,225
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,540
<INCOME-PRETAX> 71,050
<INCOME-TAX> 27,942
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,686
<EPS-PRIMARY> .57
<EPS-DILUTED> 0
</TABLE>
