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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer Identification No.)
incorporation or organization)
14103 DENVER WEST PARKWAY
P.O. BOX 4086
GOLDEN, CO 80401-4086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 278-9500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.01 PAR VALUE
4 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2004
LIQUID YIELD OPTION NOTES DUE 2015
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, and (2) has been subject to such filing requirements
for the past 90 days: Yes: [X] No: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
STOCKHOLDERS WHO WERE NOT AFFILIATES (AS DEFINED BY REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION) OF THE REGISTRANT WAS APPROXIMATELY
$1,693,426,000 AT MARCH 10, 1997 (BASED ON THE CLOSING SALE PRICE ON THE NASDAQ
NATIONAL MARKET ON MARCH 10, 1997, AS REPORTED BY THE WALL STREET JOURNAL
(WESTERN EDITION)). AT MARCH 10, 1997, THE REGISTRANT HAD ISSUED AND
OUTSTANDING AN AGGREGATE OF 64,725,510 SHARES OF ITS COMMON STOCK OF RECORD.
DOCUMENTS INCORPORATED BY REFERENCE
THOSE SECTIONS OR PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD ON MAY 13, 1997 DESCRIBED IN PART III HEREOF
ARE INCORPORATED BY REFERENCE IN THIS REPORT.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS FORM 10-K UNDER "ITEM 1. BUSINESS", "ITEM 3. LEGAL
PROCEEDINGS", "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", AND ELSEWHERE IN THIS FORM 10-K
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). 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. ("BCI"), EINSTEIN/NOAH BAGEL CORP. ("ENBC"), BOSTON MARKET
INTERNATIONAL, INC. ("BMI"), THEIR AREA DEVELOPERS, FRANCHISEES, AND
LICENSEES, BOSTON MARKETR STORES, EINSTEIN BROS.T BAGEL STORES AND NOAH'S NEW
YORK BAGEL 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 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 FORM 10-K. THE SUCCESS OF THE COMPANY, ENBC, AND
BMI IS DEPENDENT ON THEIR RESPECTIVE AREA DEVELOPERS, FRANCHISEES, AND
LICENSEES AND THE MANNER IN WHICH THEY OPERATE AND DEVELOP BOSTON MARKET
STORES, EINSTEIN BROS. BAGELS STORES, AND NOAH'S NEW YORK BAGELS STORES.
ITEM 1. BUSINESS
Unless otherwise indicated, references in this report to the "Company" mean
Boston Chicken, Inc., its predecessors, and its and their subsidiaries from
time to time (excluding Einstein/Noah Bagel Corp.). SPECIAL NOTE: CERTAIN
STATEMENTS SET FORTH BELOW UNDER THIS CAPTION CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE REFORM ACT. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
GENERAL
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" ABOVE.
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.
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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(R) 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.
The Company owns approximately 17.3 million shares (representing
approximately 53%) of the outstanding common stock of Einstein/Noah Bagel Corp.
("ENBC") (NASDAQ:ENBX) 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 Company was incorporated as a Massachusetts corporation in March 1988 and
reincorporated in the State of Delaware in 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.
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.
The Company's success is dependent upon its area developers and franchisees
and the manner in which they develop and operate Boston Market stores and
manage their organizational and financial resources. The opening and success
of stores is dependent upon 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.
At times, the Company or its area developers or franchisees may determine
that a specific store should be closed due to operating or site-related issues
specific to that store, changes in the market or trade area, changes in store
development strategy, or failure of the store to meet desired sales or
profitability levels. The cost to close a store varies depending upon whether
the site is owned or leased, and if leased, the remaining renewal terms, and
the ability of the site to be sublet, as well as the type, quantity and
condition of the equipment installed and the cost to remove such equipment and
improvements from the site. During fiscal 1996, the Company's area developers
and franchisees closed 15 stores and the Company closed no stores. The Company
has been informed by its area developers and franchisees that the costs
incurred by them to close such stores ranged from $430,000 to $890,000 per
store.
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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
2.
<TABLE>
<CAPTION>
ADDITIONAL
STORES STORES
AREA DEVELOPER PRIMARY MARKETS OPERATING PRINCIPAL OPEN COMMITTED
- -------------- ----------------- ------------------- ---------- ---------
<S> <C> <C> <C> <C>
BC Boston, L.P.(1) Portions of Massachusetts, Vermont, Maine, Patrick McDonnell 55 148
New Hampshire, Rhode Island and New York
BC GoldenGate, L.L.C. Portions of Central and Northern California John Cutter 54 182
and Nevada
BC Great Lakes, L.L.C. Portions of Illinois, Wisconsin, Michigan and Ohio John Morlock 111 44
BC Heartland, L.L.C. Portions of Indiana, Illinois, Michigan and Wisconsin John Morlock 12 111
BC Northwest, L.P. Portions of Washington, Oregon and Idaho Dennis Mullen 53 93
BC Superior, L.L.C. Portions of Maryland, Virginia, West Virginia, Steven Quamme 48 275
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, New York and New Jersey Robert Anarumo 8 259
BCE West, L.P.(1) Arizona, Colorado, New Mexico, Utah, and Larry Hohl 60 156
Portions of Nevada and Wyoming
Boston West, L.L.C. Portions of Central and Southern California Alan Palmieri 89 95
Finest Foodservice, L.L.C. Portions of Iowa, Illinois, Kansas, Minnesota, Dave Goebel 72 163
Missouri, Nebraska, South Dakota and Wisconsin
Mayfair Partners, L.P. Washington, D.C., Northern Virginia, and Portions of Steven Quamme 56 15
Maryland
P&L Food Services, L.L.C.(1) Portions of New York, Ohio, Pennsylvania and Patrick McDonnell 52 172
West Virginia
Platinum Rotisserie, L.L.C. North Carolina and Portions of South Carolina, Anthony Wedo 50 353
New Jersey, Tennessee, Georgia, Pennsylvania and
Virginia
R&A Food Services, L.P. Central and Southern Florida Terry Spaight 99 182
--- -----
Total 883(2) 2,457
--- -----
</TABLE>
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(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 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
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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 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 2.
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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 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
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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.
AREA DEVELOPMENT AGREEMENTS
Area development agreements provide for the opening of a specified number of
stores within a defined geographic territory in accordance with a schedule of
dates. As of April 10, 1997, the Company had entered into area development
agreements that provide for the development of 2,457 additional stores. An
area developer's development schedule generally covers periods up to seven
years and typically has benchmarks for the number of stores to be opened and in
operation at six-month intervals. Area developers are required to pay a
development fee of $5,000 per store and a $35,000 store franchise fee described
in "-Franchise Agreements". Area development agreements generally provide that
the area developer has the exclusive right to open Boston Market stores within
the specified territory during the term of the development schedule, except
that the Company reserves the right to engage in certain limited special
distribution arrangements and, in the event the area developer does not choose
to develop them, to develop target sites and conversion sites within the
specified territory. Target sites are sites which the Company believes should
be developed for competitive or market reasons regardless of the applicable
development schedule or the location of pre-existing sites. Conversion sites
are sites obtained from other companies which are suitable for conversion for
use as Boston Market stores.
Failure to meet development schedules or other breaches of the area
development agreement may lead to termination of the limited exclusivity
provided by the agreement, renegotiation of development and franchise
provisions, or termination of the right to build future stores, although such
termination does not generally affect existing franchise agreements for
developed locations.
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FRANCHISE AGREEMENTS
Once an acceptable lease for an approved store site has been fully executed,
the Company and the area developer enter into a franchise agreement under which
the area developer becomes the franchisee for the specific store to be
developed at the site.
Franchise agreements typically provide for payment of a $35,000 per store
franchise fee (less any applicable franchise deposit), a 5% royalty on gross
revenue minus sales/service taxes, customer refunds and coupons, and the
portion of employee meals not charged to the employee, a 2% national
advertising fund contribution, a 4% local advertising fund contribution, and a
$10,000 minimum grand opening expenditure. Under the majority of applicable
franchise agreements, the local advertising fund contribution may be increased
by .25% per calendar year up to an aggregate 5% local advertising fund
contribution. The Company has sought and received from certain of its area
developers commitments for higher advertising expenditures during the initial
phases of development. Certain of the Company's older franchise and area
development agreements provide for 4% royalties and reduced franchise and area
development fees. In addition, stores opened or to be opened pursuant to such
older forms of agreements need not make combined national and local advertising
contributions in excess of 5%. Such older forms of agreements constitute a
decreasing percentage of all franchise agreements.
The Company's franchise agreements generally provide that the Company may
from time to time specify computer hardware and software for use in the stores,
including the use of licensed software designated or created by or for the
Company and its franchisees. The computer hardware specified by the Company
costs approximately $21,000 to $49,000 per store. The Company charges a one-
time $15,000 fee for its licensed software for store systems, plus
approximately $1,500 for certain specified third-party software purchased
through the Company. Current franchise agreements also generally provide for a
maintenance fee to the Company of $323 per four-week accounting period for
modifications and enhancements made to the licensed software and certain other
maintenance and support services. The Company believes that its integrated
hardware and licensed software systems facilitate better communication with,
and monitoring of, the Boston Market system. The Company makes extensive use
of computer systems and electronic data transmission in evaluating the results
of the Boston Market system, polling a majority of its stores daily by modem to
gather revenue and other financial and statistical information.
Franchise agreements generally provide for an area of limited exclusivity
surrounding the Boston Market store in which the Company may neither develop
nor grant to others the right to develop additional Boston Market stores,
except that the Company generally reserves the right to engage in certain
limited special distribution arrangements and, in the event that the franchisee
does not choose to develop them, to develop regional shopping mall sites and
conversion sites within the franchisee's designated territory. Designated
territories in suburban locations are generally a one mile radius surrounding
the Boston Market store, while urban locations generally have a smaller (e.g.,
one-half mile) radius or a trade-area-specific designated territory.
All of the Company's franchise agreements require that the store be operated
in accordance with the operating procedures and menu established by the Company
and meet applicable quality, service, and cleanliness standards. The Company
may default and terminate any franchisee who does not comply with such
standards. The Company is specifically authorized to take accelerated action in
the event that any franchisee operation presents a health risk. The Company
believes that maintaining superior food quality, a clean and pleasing
environment, and excellent customer service is critical to the reputation and
success of the Boston Market system and intends to act aggressively to enforce
applicable contractual requirements. Franchisees could contest such defaults or
terminations. See "Item 3. Legal Proceedings".
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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 2.
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. 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 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 2.
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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.
MARKETING AND COMPETITION
The Company markets through television, radio, newspapers and other print
media (including use of free-standing inserts and promotional coupons),
signage, direct mail, and in-store point-of-purchase displays. The Company's
advertising, coupons, menus, and in-store displays concentrate on value through
the purchase of meals or meal combinations, as opposed to a la carte
selections. Both Company and franchise stores contribute to a national
advertising fund to pay for the development of advertising material and to a
local advertising fund to pay for advertising in their respective ADIs. See
"--Area Developers--Franchise Agreements" and Note 8 of Notes to Consolidated
Financial Statements.
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.
Competitors include pizza restaurants, Chinese food restaurants, other
purveyors of carry-out food, and convenience dining establishments, including
such chains as Pizza Hut, McDonald's, Kenny Rogers Roasters, and others. The
Company believes that Boston Market stores compete favorably in the important
factors of taste, food quality, convenience, customer service, and value, and
that its area developer organizational structure, communication systems, and
concentrated market development provide it with competitive advantages.
Competition in the food service business is often affected by changes in
consumer tastes, national, regional, and local economic and real estate
conditions, demographic trends, traffic patterns, the cost and availability of
labor, purchasing power, availability of product, and local competitive
factors. 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. The Company attempts to
manage or adapt to these factors, but it should be recognized that some or all
of these factors could cause the Company and some or all of its area developers
and franchisees to be adversely affected.
VENDORS
The Company maintains relationships with a variety of suppliers of proteins,
fresh vegetables, fruits, and other produce, spices and seasonings, paper
products, smallwares, furniture, equipment, fixtures, and other items and
services, although the Company is working to consolidate the number of such
vendors. See "--Current Initiatives in the Boston Market System-Vendor
Consolidation." The Company has a national account relationship with Marriott
Distribution Services Corporation, which provides for deliveries of food,
paper, and smallware products to participating stores several times a week at a
negotiated standardized mark-up above cost. The Company has entered into
supply agreements with Hudson Foods, Inc. and Tyson Foods, Inc. to purchase a
significant portion of the system's chicken and turkey needs. The Boston
Market system utilizes a number of other poultry suppliers and the Company
believes that alternative sources are available if current suppliers are unable
to provide adequate quantities of poultry or other products or services at
acceptable prices. The Boston Market system is subject to potential shortages
or interruptions in supply caused by transportation strikes, adverse weather,
or other conditions which could adversely affect the availability, quality, and
cost of ingredients. The Boston Market system purchases in excess of 10% of
its supplies from each of Marriott Distribution Services Corporation and Hudson
Foods, Inc.
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TRADEMARKS AND SERVICE MARKS
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including Boston
Market(R), Boston Chicken(R), Boston Carver(R), and the current Boston Market
logo. In addition, the Company has trademark applications pending for a number
of additional marks, including Extreme Carver(TM) and Boston Hearth(TM). The
Company has also made application for other trademarks and service marks,
primarily designations of particular food products and services with a "Boston"
appellation.
In addition, the Company has registered or made application to register its
name (or, in certain cases, its name in connection with additional words or
graphics) in more than 70 foreign countries and is currently registering the
Boston Market(R) name or logo in most of such countries, although there can be
no assurance that any mark is registrable in every country registration is
sought. The Company considers its intellectual property rights to be important
to its business and actively defends and enforces them.
ENBC owns a number of federal trademarks and service mark registrations and
has federal trademark applications pending for additional trademarks and
service marks. ENBC has made application to register certain of its trademarks
in more than 30 countries.
REGULATION
Boston Market stores are required to comply with Federal, state, and local
government regulations applicable to consumer food service businesses
generally, including those relating to the preparation and sale of food,
minimum wage requirements, overtime, working and safety conditions, and
citizenship requirements, as well as regulations relating to zoning,
construction, health, business licensing, and employment. The Company believes
that it and its area developers and franchisees are in material compliance with
these provisions.
Certain states and the Federal Trade Commission require a franchisor to
transmit specified disclosure statements to potential franchisees before
granting a franchise. Additionally, some states require the franchisor to
register its franchise with the state before it may offer a franchise. The
Company believes that its Uniform Franchise Offering Circular (together with
any applicable state versions or supplements) complies with both the Federal
Trade Commission guidelines and all applicable state laws regulating
franchising in those states in which it has offered franchises.
EINSTEIN/NOAH BAGEL CORP.
General. In March 1995, the Company made an investment in ENBC
(NASDAQ:ENBX), 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.
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 FORWARD-LOOKING STATEMENTS" on page 2.
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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
Operating Stores Stores
Area Developer Primary Markets Principal Open Committed
- -------------- --------------- --------- ------ ----------
<S> <C> <C> <C> <C>
Einstein Bros. Bagels(2):
Alamo Bagels, L.P.(3) Dallas/Ft. Worth, Houston, Austin Pearce Tucker 23 87
BCE West Bagels, L.L.C.(1)(3) Denver, Salt Lake City, Phoenix, Tucson, Larry Hohl 56 51
Albuquerque, Las Vegas, Colorado Springs
Colonial Bagels, L.P.(3) Boston, Cleveland, Pittsburgh, Columbus Robert Schlacter 22 90
Finest Bagels, L.L.C.(3) Kansas City, St. Louis, Minneapolis Edwin Brownell 35 43
Great Lakes Bagels, L.L.C. Milwaukee, Chicago, Detroit, Madison, Joseph Hoog 52 145
Indianapolis
Gulfstream Bagels, L.P.(3) Miami, Fort Lauderdale, West Palm Beach, Robert Hartnett 38 57
Orlando, Tampa
Liberty Foods, L.L.C.(3) New York City metropolitan area Hank Huth 19 131
Mayfair Bagels, L.L.C.(3) Washington, D.C., Baltimore, Richmond, Steven Quamme 22 127
Atlanta(4), Charlotte, Norfolk
Philly Rose, L.P.(3) Philadelphia Harry Rose 17 68
Sunbelt Bagels, L.L.C.(3) San Diego, Palm Springs and portions of Pearce Tucker 17 63
Los Angeles
Noah's New York Bagels:
Noah's Bay Area Sacramento, San Francisco/Oakland/San Jim Mizes 50 45
Bagels, L.L.C. Jose, Fresno
Noah's Pacific, L.L.C. Portions of Los Angeles, Portland, Seattle/Tacoma Jim Mizes 49 160
--- -----
Total 400 1,067
--- -----
</TABLE>
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(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 also 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 2 AND "-AREA DEVELOPERS".
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
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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 of 1933, as amended (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. As of April 22, 1997, there was no balance
outstanding under the facility. Interest on the loan 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.
PROGRESSIVE FOOD CONCEPTS, INC.
On January 31, 1997, Progressive Food Concepts, Inc. ("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".
PFCI is a newly formed entity in which Scott Beck and Saad Nadhir, the former
Co-Chairman of the Board and President of the Company, each own a 46.2% equity
interest, and Harrys owns a 7.6% interest. Messrs. Beck & 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 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.
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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.
EMPLOYEES
As of March 11, 1997, the Company and ENBC had approximately 975 employees,
including approximately 630 employed at their support centers in Golden,
Colorado, and approximately 345 employed as salaried or hourly personnel at
Company stores and ENBC company stores. None of the Company's or ENBC's
employees are represented by any labor union or covered by any collective
bargaining contract. The Company and ENBC believes their relationship with
their employees is good.
EXECUTIVE OFFICERS
Set forth below are the names and ages of the executive officers of the
Company, the positions they hold with the Company, and summaries of their
business experience. Executive officers are elected by, and serve at the
discretion of, the Board of Directors. The executive officers of the Company
are as follows:
Scott A. Beck, age 38, joined the Company as Chairman of the Board, Chief
Executive Officer, and a director in June 1992 and has been Chairman or Co-
Chairman since that date. In January 1997, he also assumed the
responsibilities of President of the Company. He was Vice Chairman of the
Board of Blockbuster Entertainment Corporation ("Blockbuster") from September
1989 until his retirement in January 1992, and Chief Operating Officer from
September 1989 to January 1991. From June 1987 to August 1989, Mr. Beck was
Managing Partner of Blockbuster's first and largest franchisee ("Blockbuster
Midwest") until its acquisition by Blockbuster in 1989. Since 1980, Mr. Beck
has served as President of Pace Affiliates, Inc., an investment banking firm
which he founded. Mr. Beck is the Company's officer principally in charge of
overseeing the Company's investment in ENBC and serves as their Chairman of the
Board.
Mark W. Stephens, age 42, joined the Company as Chief Financial Officer in
October 1993 and, in addition, became a Vice Chairman of the Board and a
director in December 1995. From November 1992 until October 1993, he was
Managing Director of Haas, Wheat & Partners Incorporated, a private investment
firm. From April 1989 until November 1992, Mr. Stephens was a Senior Vice
President of Grauer & Wheat Investments, Inc. Prior thereto, Mr. Stephens was
Senior Vice President of Donaldson, Lufkin & Jenrette Securities Corporation
from 1985 until 1989 and Vice President of Merrill Lynch Private Capital from
1984 to 1985.
Laurence M. Zwain, age 44, joined the Company in January 1996 as President
and Chief Executive Officer of the Company's Boston Market division and, in
addition, became a Vice Chairman of the Board and a director in August 1996.
From November 1994 until joining the Company, Mr. Zwain served as President and
Chief Operating Officer of PepsiCo Restaurants International, a division of
PepsiCo, Inc. From September 1992 until November 1994, he served as President
and Chief Executive Officer of KFC International. From February 1991 until
September 1992, he served as Senior Vice President of Operations for KFC
International. From October 1988 until February 1991, he served as Division
Vice President of Pizza Hut, Inc.'s Western U.S. region. Mr. Zwain was Vice
President of New Concepts for Pizza Hut from 1987 to 1988, and served as Vice
President of National Marketing for Pizza Hut from 1986 to 1987. KFC and Pizza
Hut, Inc. are subsidiaries of PepsiCo, Inc.
16
<PAGE>
Mark R. Goldston, age 41, joined the Company in January 1996 to undertake
various special projects and became a Vice Chairman of the Board and a director
in August 1996. Mr. Goldston also serves as President, Chief Executive Officer
and a director of ENBC. From July 1994 to April 1996, Mr. Goldston was the
Chairman and Chief Executive Officer of The Goldston Group, a strategic
advisory firm which advises high-growth companies on improving performance and
creating operating leverage and efficiencies. From October 1991 to June 1994,
Mr. Goldston served as President and Chief Operating Officer of L.A. Gear, Inc.
John J. Todd, age 36, joined the Company in April 1996 as Chief Financial
Officer of the Company's Boston Market division. From 1988 to 1996, he was
employed at Pizza Hut, Inc. in a variety of positions including Manager -
Strategic Planning, Division Finance Director and Vice President of
Acquisitions. Before Pizza Hut, he served as a Senior Financial Analyst at
General Foods.
Mark A. Link, age 38, became Vice President-Financial Reporting of the
Company in March 1995 and became Principal Accounting Officer in December 1995.
Mr. Link joined the Company in December 1993 as Director of SEC and Financial
Reporting and served in that capacity until March 1995. From 1980 until
December 1993, Mr. Link was employed by Deloitte & Touche, LLP where he was a
Senior Manager for five years prior to joining the Company. Mr. Link is a
certified public accountant.
ITEM 2. PROPERTIES
The Company and ENBC lease their support centers (containing its principal
executive offices, Boston Market and Einstein Bros. test kitchens, and training
facilities), which are located in approximately 157,000 square feet of space in
Golden, Colorado. The Company also leases approximately 25,000 square feet of
additional office space in a building near its support center. The Company
considers its offices to be in good condition.
The Company also owns or leases land or buildings for its Company stores. In
certain circumstances, the Company owns or leases land or buildings which it
then leases or subleases to its area developers. Stores leased by the Company
are typically leased under "triple net" leases that require the Company to pay
real estate taxes, maintenance costs, and insurance premiums and, in a few
cases, to pay percentage rent based on sales in excess of specified amounts.
Generally, the Company's leases have initial terms of five years with options
to renew for three additional five year periods.
ITEM 3. LEGAL PROCEEDINGS
The Company and ENBC, like others in the food service business, are from time
to time the subject of complaints, threat letters, or litigation from customers
alleging illness, injury, or other food quality, health (including food-borne
illness claims), or operational concerns. 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. Adverse publicity
resulting from such allegations may materially adversely affect the Company and
ENBC and one or more of their brands, regardless of whether such allegations
are valid or whether the Company or ENBC are liable. In addition, the Company
encounters complaints and allegations from former or prospective employees or
others from time to time, as well as other matters which are common for large
businesses such as the Company. The Company does not believe that any such
matters of which it is aware are material to the Company individually or in the
aggregate, but matters may arise which could adversely affect the Company or
the business operations.
The Company believes that the lawsuits, claims, and other legal matters to
which it and ENBC have become subject in the course of their business are not
material to the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal 1996.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the common
stock during each of the Company's fiscal quarters for the last two years as
quoted on the Nasdaq National Market as reported by The Wall Street Journal
(Western Edition).
High Low
---- ---
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
As of February 28, 1997, there were approximately 2,900 record holders of the
common stock.
The Company does not pay cash dividends on its common stock and the Board of
Directors intends to continue a policy of retaining 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 cash dividends.
During the fourth quarter of 1996, the Company issued a warrant to purchase
an aggregate of 69,600 shares of the Company's common stock. The warrant has
an exercise price of $37.75 per share and is exercisable at any time through
December 12, 2001. The warrant was issued without registration under the
Securities Act in reliance on section 4(2) of the Securities Act and Rule 506
of Registration D promulgated under the Securities Act.
18
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
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 included
in Item 8 hereof and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Item 7 hereof.
<TABLE>
<CAPTION>
Fiscal years ended (1)
----------------------------------------------------------------
Dec. 27, Dec. 26, Dec. 25, Dec. 31, Dec. 29,
1992 1993 1994 1995 1996 (2)
--------- --------- ---------- --------- ---------
(In thousands, except per share data and number of stores)
<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
Store Data (unaudited):
Systemwide Boston Market store revenue(5). $ 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 (6)............................. (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(5)............................... $ 26,986(8) $ 145,631
Number of Einstein/Noah Bagel stores:
Beginning of year...................... - 60
Opened or acquired..................... 60 266
Closed (7)............................. - (11)
--------- ----------
End of year............................ 60 315
========= ==========
Company stores......................... 47 14
Franchised stores...................... 13 301
Consolidated Balance Sheet Data:
Working capital........................ $ 7,816 $ 2,788 $ 32,049 $ 313,483 $ 58,829
Notes receivable....................... 773 45,716 202,500 456,034 800,519
Total assets........................... 22,670 110,064 426,982 1,073,877 1,543,616
Long-term debt......................... - - 130,000 307,178 312,454
Stockholders' equity................... $ 17,037 $ 94,906 $ 259,815 $ 716,831 $ 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
fiscal year ended December 31, 1995 includes 53 weeks of operations.
19
<PAGE>
(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) Includes gross revenue for all stores in the respective Boston Market or
Einstein/Noah systems.
(6) 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.
(7) 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.
(8) Reflects period from March 24, 1995 (inception) through December 31, 1995.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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 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 "Item 1. Business-Area Developer Conversion 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:
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%
========= =====
21
<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.
Weekly per store average ("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. Cost 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.
22
<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 Liquid Yield Option Notes due June 1, 2015 ("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%
convertible subordinated debentures (the "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.
23
<PAGE>
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 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.
24
<PAGE>
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.
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
25
<PAGE>
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 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 2.
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.
26
<PAGE>
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 and expects to make a convertible secured loan to BMI.
See "Item 1. Business-Progressive Food Concepts, Inc.", and "Item 1. Business-
Current Initiatives in the Boston Market System-Boston Market International".
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 2.
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.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(In thousands of dollars, except per share data)
The following table shows quarterly financial results for fiscal 1995 and 1996.
The first quarter consists of four four-week periods and the second and third
quarters consist of three four-week periods. The fourth quarter of 1995
contains two four-week periods and one five-week period. The fourth quarter of
1996 contains three four-week periods.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1996:
- -----
Revenue..................... $47,347 $64,561 $74,310 $78,290
Income from Operations...... 28,547 29,860 19,513 13,409
Net Income.................. 15,649 15,916 17,300 18,093
Net Income per Common and
Equivalent Share........... $ 0.24 $ 0.24 $ 0.26 $ 0.27
1995:
- -----
Revenue..................... $40,107 $34,800 $38,671 $45,901
Income from Operations...... 13,527 14,412 18,881 20,418
Net Income.................. 7,116 7,420 8,814 10,209
Net Income per Common and
Equivalent Share........... $ 0.15 $ 0.15 $ 0.17 $ 0.19
28
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................. 30
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and December 29, 1996. 31
Consolidated Income Statements for the fiscal years ended
December 25, 1994, December 31, 1995, and December 29, 1996........... 32
Consolidated Statements of Stockholders' Equity for the fiscal years
ended December 25, 1994, December 31, 1995, and December 29, 1996..... 33
Consolidated Statements of Cash Flows for the fiscal years ended
December 25, 1994, December 31, 1995, and December 29, 1996........... 34
Notes to Consolidated Financial Statements............................. 35
Report of Independent Public Accountants on Schedule..................... 53
Supplemental Schedule.................................................... 54
29
<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
30
<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.
31
<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.
32
<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.
33
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------
December 25, 1994 December 31, 1995 December 29, 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.
34
<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.
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.
35
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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. 25, DEC. 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.
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.
36
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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.
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):
1995 1996
------ ------
Revenue......................... $257,248 $326,758
Net income (loss)............... $(11,025) $ 53,733
Net income (loss) per share..... $ (0.23) $ 0.80
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.
37
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------
DEC. 25, 1994 DEC. 31, 1995 DEC. 29, 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.
38
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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.
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.
39
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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>
Income taxes consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
DEC. 25, DEC. 31, DEC. 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>
40
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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):
FISCAL YEARS ENDED
---------------------------------
DEC. 25, DEC. 31, DEC. 29,
1994 1995 1996
-------- -------- --------
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
======= ======= =======
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 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.
41
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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.
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.
42
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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
RENTAL RECEIPTS ON
NET PROPERTY AND
MINIMUM MINIMUM GUARANTEES EQUIPMENT
RENTAL SUBLEASE RENTAL AND 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 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.
43
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 commitments or in the event of certain defaults 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 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 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.
44
<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):
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
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
========= =========
DECEMBER 29,
1996
------------
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
=========
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):
FISCAL YEARS ENDED
---------------------------
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
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
========= ==========
FISCAL YEAR
ENDED
DECEMBER 29,
1996
------------
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
========
45
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 principal maturities of the aforementioned receivables are as follows (in
thousands of dollars):
1997................................... $ -
1998................................... 16,471
1999................................... 61,006
2000................................... 71,004
2001................................... 78,802
Thereafter............................. 560,736
--------
$788,019
========
(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 tables set 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 obligations)......... 14,456 23,797
Total other liabilities (including trade payables)................. 105,129 105,635
Total stockholder/partner/member deficit........................... (9,891) (102,754)
</TABLE>
46
<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 tables set 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
FISCAL YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
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>
47
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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.
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.
48
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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):
1995 1996
------ ------
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
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1995 1996
------ ------
Expected volatility........................... 38.0% 37.1%
Risk-free interest rate....................... 6.8% 6.3%
Expected lives................................ 5 years 5 years
Dividend yield................................ 0 0
Activity under the option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARE
NUMBER OF COMPANY OPTIONS 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>
49
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Information on options outstanding and options exercisable as of December 29,
1996, is as follows:
<TABLE>
<CAPTION>
COMPANY OPTIONS OUTSTANDING COMPANY OPTIONS EXERCISABLE
------------------------------------------ -----------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER OF CONTRACTUAL AVERAGE NUMBER OF EXERCISE PRICE
EXERCISE PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS PER 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
========= ==== ====== ========= ======
NUMBER OF WEIGHTED
ENBC AVERAGE SHARE
OPTIONS EXERCISE PRICE
--------- --------------
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>
50
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Information on options outstanding and exercisable as of December 29, 1996,
is as follows:
<TABLE>
<CAPTION>
ENBC OPTIONS OUTSTANDING ENBC OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER OF CONTRACTUAL AVERAGE NUMBER OF EXERCISE PRICE
EXERCISE PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS PER 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 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.
51
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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.
52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Boston Chicken, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Boston Chicken, Inc. and subsidiaries as
of December 31, 1995 and December 29, 1996, and for the fiscal years ended
December 25, 1994, December 31, 1995, and December 29, 1996 included in this
Form 10-K, and have issued our report thereon dated March 18, 1997. Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplemental schedule listed in Part IV, Item
14 of this Form 10-K is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 18, 1997
53
<PAGE>
SCHEDULE II
BOSTON CHICKEN, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END OF
CLASSIFICATIONS OF PERIOD EXPENSES DEDUCTIONS(A) PERIOD
- --------------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Fiscal year ended December 29, 1996:
Allowance for Doubtful Accounts........................ $1,042,585 $402,307 $1,020,892 $ 424,000
Fiscal year ended December 31, 1995:
Allowance for Doubtful Accounts........................ 246,193 796,392 - 1,042,585
Fiscal year ended December 25, 1994:
Allowance for Doubtful Accounts........................ 323,234 186,510 263,551 246,193
</TABLE>
(a) Deductions represent recoveries of doubtful accounts and write-offs of
uncollectible accounts.
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors. The information appearing under the caption "Election of
Directors" in the Company's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held May 13, 1997 (the "Proxy Statement"), is
incorporated herein by reference.
Executive Officers. Information with respect to executive officers of the
Company is set forth under the caption "Executive Officers" in Item 1 of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Principal Stockholders and
Securities Ownership of Management" in the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Transactions" in the
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. The Company's Consolidated Financial Statements are set forth in Part II,
Item 8.
A. Report of Independent Public Accountants (Arthur Andersen LLP);
B. Consolidated Balance Sheets at December 31, 1995 and December 29, 1996;
C. Consolidated Income Statements for each of the three years ended
December 25, 1994, December 31, 1995, and December 29, 1996;
D. Consolidated Statements of Stockholders' Equity for each of the three
years ended December 25, 1994, December 31, 1995, and December 29,
1996;
E. Consolidated Statements of Cash Flows for each of the three years ended
December 25, 1994, December 31, 1995, and December 29, 1996; and
F. Notes to Consolidated Financial Statements.
55
<PAGE>
2. The following schedules are set forth in Part II, Item 8.
A. Report of Independent Public Accountants (Arthur Andersen LLP);
B. Schedule II - Valuation and Qualifying Accounts.
3. Exhibits
The exhibits to this report are listed in the Exhibit Index included
elsewhere herein. Included in the exhibits listed therein are the following
exhibits which constitute management contracts or compensatory plans or
arrangements:
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of
fiscal 1996.
56
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April 23, 1997
Boston Chicken, Inc.
By: /s/ SCOTT A. BECK
-------------------------------------
Name: Scott A. Beck
Title: Chairman of the Board, President
and Chief Executive Officer
57
<PAGE>
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------- -------- ----------
3.1(a) Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Reg. No. 33-71930)).
3.1(b) Certificate of Amendment to Certificate of Incorporation
dated May 14, 1996 of the Company (incorporated by
reference to Exhibit 3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 21, 1996).
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-81001).
4.1(a) Certificate of Incorporation of the Company, as amended
(included in Exhibit 3.1(a)).
4.1(b) Certificate of Amendment to Certificate of Incorporation
(included in Exhibit 3.1(b)).
4.2 Amended and Restated Bylaws of the Company (included in
Exhibit 3.2).
4.3 Indenture dated as of February 1, 1994 by and between the
Company and Harris Trust and Savings Bank, as Trustee,
which includes as Exhibit A the form of Debenture for the
Company's 4-1/2% Convertible Subordinated Debentures Due 2004
(the "Debenture Indenture") (incorporated by reference to
Exhibit 4.1 to the Company's 1993 annual report on Form 10-
K).
4.4 Secured Revolving Credit Agreement dated as of December 9,
1996 among the Company, Bankers Trust Company, as
Documentation Agent, Bank of America Illinois, as Agent,
and the Lenders Named Therein ("Credit Agreement")
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-3 (Reg. No. 333-22917)).
4.5(a) Facilities Agreement dated as of December 9, 1996 among the
Company, Bank of America Illinois, as Agent for Certain
Lenders, and General Electric Capital Corporation
("Facilities Agreement") (incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on Form
S-3 (Reg. No. 333-22917)).
4.5(b) Amendment No. 1 to Facilities Agreement dated February 28,
1997 ("Amendment No. 1 to Facilities Agreement") among the
Company, Bank of America Illinois, as Agent for Certain
Lenders, and General Electric Capital Corporation
(incorporated by reference to Exhibit 4.5(b) to the Company's
1996 annual report on Form 10-K).
4.6 Concurrent Private Placement Agreement dated November 8,
1993 (incorporated by reference to Exhibit 4.7 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-
73870)).
4.7 Second Amended and Restated Piggyback Registration
Agreement dated November 8, 1993 (incorporated by reference
to Exhibit 4.8 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-73870)).
4.8 Form of Certificate for Common Stock (incorporated by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-69256)).
Exhibit - 1
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------- -------- ----------
4.9 Stock Purchase Agreements dated as of March 24, 1995 by and
between the Company and Einstein/Noah Bagel Corp. ("ENBC"),
formerly known as Einstein Bros. Bagels, Inc., formerly
known as Progressive Bagel Concepts, Inc. (the "ENBC Stock
Purchase Agreements") (incorporated by reference to
Exhibit 4.10 to the Company's 1994 annual report on Form 10-
K).
4.10 Stock Purchase Agreement dated March 31, 1995 by and
between the Company and ENBC (the "Third ENBC Stock
Purchase Agreement") (incorporated by reference to Exhibit
4.11 to the Company's Registration Statement on Form S-1
(Reg. No. 33-79280)).
4.11 Registration Rights Agreements dated as of March 24, 1995
between the Company and ENBC (incorporated by reference to
Exhibit 4.11 to the Company's 1994 annual report on Form 10-
K).
4.12 Registration Rights Agreement dated as of March 31, 1995 by
and between the Company and ENBC (incorporated by reference
to Exhibit 4.13 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-79280)).
4.13 Indenture dated as of June 1, 1995 by and between the
Company and Chemical Bank, as Trustee, which includes as an
Exhibit the form of LYON for the Company's Liquid Yield
Option Notes due 2015 (the "LYONs Indenture")
(incorporated by reference to Exhibit 4.14 to the Company's
Registration Statement on Form S-3 (Reg. No. 33-93872)).
4.14 Stock Purchase Agreement dated August 10, 1995 by and
between the Company and ENBC (the "Fourth ENBC Stock
Purchase Agreement") (incorporated by reference to Exhibit
4.15 to the Company's Registration Statement on Form S-1
(Reg. No. 33-96230)).
4.15 Registration Rights Agreement dated August 10, 1995 by and
between the Company and ENBC (incorporated by reference to
Exhibit 4.16 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-96230)).
4.16 Warrant Purchase Agreement dated as of July 18, 1996 by and
between the Company and Market Partners, L.L.C. ("Market
Partners"), including the form of Warrant (incorporated by
reference to Exhibit 4.17 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-15389)).
4.17 Registration Rights Agreement dated as of September 27,
1996 by and between the Company and Market Partners
(incorporated by reference to Exhibit 4.18 to the Company's
Registration Statement on Form S-8 (Reg. No. 333-15389)).
4.18 Warrant Certificate of the Company dated December 12, 1996
issued to General Electric Capital Corporation
(incorporated by reference to Exhibit 4.18 to the Company's
Registration Statement on Form S-3 (Reg. No. 333-22917)).
Exhibit - 2
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------- -------- ----------
4.19 Registration Rights Agreement dated as of December 12, 1996
by and between the Company and General Electric Capital
Corporation (incorporated by reference to Exhibit 4.19 to
the Company's Registration Statement on Form S-3 (Reg. No.
333-22917)).
10.1 Credit Agreement (included in Exhibit 4.4).
10.2(a) Facilities Agreement (included in Exhibit 4.5(a)).
10.2(b) Amendment No. 1 to Facilities Agreement (included in
4.5(b)).
10.3 Debenture Indenture (included in Exhibit 4.3).
10.4 Amended and Restated 1991 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-69256)).
10.5 1995 Employee Stock Option Plan (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-81001))
10.6 Amended and Restated 1991 Stock Option Plan for Non-
Employee Directors (the "Directors Plan") (incorporated
by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-69256)).
10.7 Amendment to Directors Plan dated as of December 7, 1995
(incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-81001)).
10.8 Concurrent Private Placement Agreement dated November 8,
1993 (included in Exhibit 4.6).
10.9(a) Aircraft Dry Leases dated November 15, 1993 between the
Company and Bowana Aviation, Inc. ("Bowana")
(incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-
73870)).
10.9(b) Letter Agreement dated May 19, 1994 between the Company and
Bowana amending the Aircraft Dry Leases dated November 15,
1993 (incorporated by reference to Exhibit 10.9(b) to the
Company's Registration Statement on Form S-1 (Reg. No. 33-
79280)).
10.10 Boston Chicken Relocation Programs for Officers
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended October
2, 1994).
10.11(a) Accounting and Administration Services Agreement by and
between the Company and ENBC (incorporated by reference to
Exhibit 10.14 to the Company's 1994 annual report on Form
10-K).
Exhibit - 3
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------- -------- ----------
10.11(b) Amended and Restated Accounting and Administration Services
Agreement dated as of May 28, 1996 between the Company and
ENBC (incorporated by reference to Exhibit 10.12(a) to the
Registration Statement on Form S-1 of ENBC (Registration
No. 333-04725)).
10.11(c) First Amendment to Amended and Restated Accounting and
Administration Services Agreement dated as of June 17, 1996
between the Company and ENBC (incorporated by reference to
Exhibit 10.12(b) to the Registration Statement on Form S-1
of ENBC (Registration No. 333-04725)).
10.12(a) Financial Services Agreement by and between the Company and
ENBC (incorporated by reference to Exhibit 10.15 to the
Company's 1994 annual report on Form 10-K).
10.12(b) First Amendment to Financial Services Agreement dated as of
March 7, 1996 between the Company and ENBC (incorporated by
reference to Exhibit 10.13(b) to the Registration Statement
on Form S-1 of ENBC (Registration No. 333-04725)).
10.12(c) Financial Services Termination Agreement dated as of May
28, 1996 between the Company and ENBC (incorporated by
reference to Exhibit 10.13(c) to the Registration Statement
on Form S-1 of ENBC (Registration No. 333-04725)).
10.13(a) Real Estate Services Agreement by and between the Company
and ENBC (incorporated by reference to Exhibit 10.16 to the
Company's 1994 annual report on Form 10-K).
10.13(b) Amended and Restated Real Estate Services Agreement dated
as of May 28, 1996 between the Company and ENBC
(incorporated by reference to Exhibit 10.14(a) to the
Registration Statement on Form S-1 of ENBC (Registration
No. 333-04725)).
10.13(c) Amended and Restated Real Estate Service Termination
Agreement dated as of June 17, 1996 between the Company and
ENBC (incorporated by reference to Exhibit 10.14(b) to the
Registration Statement on Form S-1 of ENBC (Registration
No. 333-04725)).
10.14(a) Computer and Communication Services Agreements by and
between the Company and ENBC (incorporated by reference to
Exhibit 10.17 to the Company's 1994 annual report on Form
10-K).
10.14(b) Amended and Restated Computer and Communications Systems
Services Agreement dated as of June 17, 1996 between the
Company and ENBC (incorporated by reference to Exhibit
10.15(a) to the Registration Statement on Form S-1 of ENBC
(Registration No. 333-04725)).
10.14(c) First Amendment to the Amended and Restated Computer
Communications Systems Services Agreement dated as of June
17, 1996 between the Company and ENBC (incorporated by
reference to Exhibit 10.15(b) to the Registration Statement
on Form S-1 of ENBC (Registration No. 333-04725)).
10.15 ENBC Stock Purchase Agreements (included in Exhibit 4.9).
Exhibit - 4
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------- -------- ----------
10.16 Third ENBC Stock Purchase Agreement (included in Exhibit
4.10).
10.17 Fourth ENBC Stock Purchase Agreement (included in Exhibit
4.14).
10.18(a) Amended and Restated Loan Agreement dated May 17, 1996
between the Company and Boston Chicken (incorporated by
reference to Exhibit 10.1(a) to ENBC's Registration
Statement on Form S-1 (Reg. No. 333-04725)).
10.18(b) First Amendment to the Amended and Restated Loan Agreement
between the Company and ENBC dated July 19, 1996
(incorporated by reference to Exhibit 10.1(b) to the
Registration Statement on Form S-1 of ENBC (Registration
No. 333-04725)).
10.18(c) Second Amendment to the Amended and Restated Loan
Agreement between the Company and ENBC dated September 16,
1996 and Second Amendment to Secured Demand Note of ENBC
dated September 16, 1996 (incorporated by reference to
Exhibit 10.1(c) to ENBC's Registration Statement on Form S-
1 (Registration No. 333-12395)).
10.18(d) Second demand note of ENBC dated January 30, 1996, in favor
of the Company (incorporated by reference to Exhibit
10.23(d) to the Company's 1995 annual report on Form 10-K).
10.18(e) First Amendment to Secured Demand Note of ENBC dated as of
March 7, 1996 (incorporated by reference to Exhibit 10.3(b)
to ENBC's Registration Statement on Form S-1 (Reg. No. 333-
04725)).
10.19 LYONs Indenture (included in Exhibit 4.13).
10.20 Form of Area Development between the Company and its Area
Developers (incorporated by reference to Exhibit 99 to the
Company's Current Report on Form 8-K dated April 10, 1996).
10.21 Form of Franchise Agreement between the Company and Boston
Market Franchisees (incorporated by reference to Exhibit 99
to the Company's Current Report on Form 8-K dated
April 10, 1996).
10.22 Form of Secured Loan Agreement between the Company and Area
Developers partially financed by the Company (incorporated
by reference to Exhibit 99 to the Company's Current Report
on Form 8-K dated April 10, 1996).
10.23 Letter Agreement dated January 15, 1996 relating to
employment of Laurence M. Zwain (incorporated by reference
to Exhibit 10.23 to the Company's 1996 annual report on Form
10-K).
10.24 Consulting Agreement dated October 14, 1995, between the
Company and J. Bruce Harreld (incorporated by reference to
Exhibit 10.30 to the Company's 1995 annual report on
Form 10-K).
Exhibit - 5
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------- -------- ----------
10.25 Merger Agreement dated as of January 22, 1996, as
amended, among ENBC, NNYB Acquisition
Corporation, Noah's New York Bagels, Inc.
("Noah's"), and the shareholders of Noah's
(incorporated by reference to Exhibit 2.5 to the
Registration Statement on Form S-1 of ENBC
(Registration No. 333-04725)).
10.26 Purchase and Supply Agreement (Amended and
Restated as of April 1, 1996) between the Company
and Hudson Foods, Inc. (incorporated by reference
to Exhibit 10 to Form 10-Q for the quarter ended
March 30, 1996 filed by Hudson Foods, Inc.,
Commission File No. 1-9050).
10.27 Letter Agreement dated April 5, 1996 between ENBC
and Mark R. Goldston (incorporated by reference
to Exhibit 10.18 to the Registration Statement on
Form S-1 of ENBC (Registration No. 333-04725)).
10.28 Concurrent Private Placement Agreement and
Registration Agreement dated August 1, 1996
between the Company and ENBC (incorporated by
reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended July 14, 1996).
10.29 Option Agreement between the Company and Mark W.
Stephens dated as of April 23, 1996 (incorporated
by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended July 14, 1996).
10.30 Option Agreement between the Company and Laurence
M. Zwain dated as of April 23, 1996 (incorporated
by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended July 14, 1996).
10.31 Option Agreement between the Company and Mark R.
Goldston dated as of April 23, 1996 (incorporated
by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended July 14, 1996).
10.32(a) Secured Credit Agreement dated as of May 17, 1996
among ENBC, the Lenders named therein, and Bank
of America Illinois, as Agent (incorporated by
reference to Exhibit 10.9 to the Registration
Statement on Form S-1 of ENBC (Registration No.
333-04725)).
10.32(b) First Amendment and Waiver dated August 27, 1996
to Secured Credit Agreement dated as of May 17,
1996 among ENBC, the Lenders named therein, and
Bank of America Illinois, as Agent (incorporated
by reference to Exhibit 10.9(b) to ENBC's
Registration Statement on Form S-1 (Registration
No. 333-12395)).
10.33 Option Agreement dated August 27, 1996 among
ENBC, Harlan Bagel Supply Company, L.L.C., and
Hal P. Harlan, Hugh P. Harlan, and Doug H. Harlan
(the "Harlans") (incorporated by reference to
Exhibit 10.25 ENBC's Registration Statement on
Form S-1 (Registration No. 333-12395)).
Exhibit - 6
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------- -------- ----------
10.34 Project and Approved Supplier Agreement among
Harlan Bagel Supply Company, Harlan Bakeries,
Inc. and ENBC (incorporated by reference to
Exhibit 10.24 to the Registration Statement on
Form S-1 of ENBC (Registration No. 333-04725)).
10.35 Right of First Refusal Agreement among ENBC,
Harlan Bakeries, Inc. and the Harlans
(incorporated by reference to Exhibit 10.26 to
ENBC's Registration Statement on Form S-1
(Registration No. 333-12395)).
10.36 Warrant Purchase Agreement (included in Exhibit
4.16).
10.37 Option Agreement between the Company and Saad J.
Nadhir dated as of July 25, 1996 (incorporated by
reference to Exhibit 10.7 to the Company's
Quarterly Report on Form
10-Q for the quarter ended October 6, 1996).
10.38 Option Agreement between the Company and John
Todd dated as of July 29, 1996(incorporated by
reference to Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended October 6, 1996).
10.39 Letter Agreement between the Company and Jeffry
J. Shearer dated as of August 19, 1996
(incorporated by reference to Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended October 6, 1996).
10.40 Fourth Amended and Restated Limited Liability
Company Agreement of Bagel Store Development
Funding, L.L.C. dated as of July 1, 1996
(incorporated by reference to Exhibit 10.28 to
ENBC's Registration Statement on Form S-1
(Registration No. 333-12395)).
10.41 Concurrent Offering Purchase Agreement dated
November 26, 1996 between the Company and ENBC
(incorporated by reference to Exhibit 10.41 to
the Company's 1996 annual report on Form 10-K).
10.42 Consulting Agreement dated November 13, 1996
between the Company and Donald J. Bingle
(incorporated by reference to Exhibit 10.42 to
the Company's 1996 annual report on Form 10-K).
10.43 Letter Agreement dated December 27, 1996 between
the Company and Thomas R. Sprague (incorporated
by reference to Exhibit 10.43 to the Company's
1996 annual report on Form 10-K).
10.44(a) Master Lease Agreement No. 2 dated as of December
9, 1996 between the Company, as Lessee, and
General Electric Capital Corporation, for itself
and as Agent for certain participants
(incorporated by reference to Exhibit 10.44(a) to
the Company's 1996 annual report on Form 10-K).
10.44(b) Amendment No. 1 to Master Lease Agreement No. 2
dated as of February 28, 1997 between the
Company, as Lessee, and General Electric Capital
Corporation, for itself and as Agent for certain
participants (incorporated by reference to
Exhibit 10.44(b) to the Company's 1996 annual report
on Form 10-K).
Exhibit - 7
<PAGE>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------- -------- ----------
10.44(c) Amendment No. 2 to Master Lease Agreement No. 2
dated as of March 18, 1997 between the Company,
as Lessee, and General Electric Capital
Corporation, for itself and as Agent for certain
participants.
10.45 Secured Loan Agreement dated as of January 31,
1997 between the Company and HFMI Acquisition
Corporation, now known as Progressive Food
Concepts, Inc. (incorporated by reference to
Exhibit 10.45 to the Company's 1996 annual report
on Form 10-K).
10.46(a) Amendment No. 1 to Master Lease Agreement dated
as of September 28, 1995 between the Company, a
Lessee, and General Electric Capital Corporation,
for itself and as Agent for certain participants.
10.46(b) Amendment No. 2 to Master Lease Agreement dated
as of December 9, 1996 between the Company, as
Lessee, and General Electric Capital Corporation,
for itself and as Agent for certain participants.
10.46(c) Amendment No. 3 to Master Lease Agreement dated
as of March 18, 1997 between the Company, as
Lessee, and General Electric Capital Corporation,
for itself and as Agent for certain participants.
11 Statement re Computation of Earnings Per Share.
21 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule
99.1 Form of Amended and Restated Agreements between
the Company and BC Equity Funding, L.L.C.
(incorporated by reference to Exhibit 99.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended July 14, 1996).
99.2 Form of Agreement between ENBC and Bagel Funding,
L.L.C. relating to ENBC's purchase of Bagel
Funding's interest in area developers
(incorporated by reference to Exhibit 10.30 to
the Registration Statement on Form S-1 of ENBC
(Registration No. 333-04725)).
Exhibit - 8
<PAGE>
EXHIBIT 10.44(C)
AMENDMENT NO. 2 TO
MASTER LEASE AGREEMENT NO. 2
THIS AMENDMENT NO. 2 TO MASTER LEASE AGREEMENT NO. 2 (this "Amendment") is
made as of the 18th day of March, 1997, between GENERAL ELECTRIC CAPITAL
CORPORATION, FOR ITSELF AND AS AGENT FOR CERTAIN PARTICIPANTS (hereinafter
called, together with its successors and assigns, if any, "Lessor"), and BOSTON
CHICKEN, INC. (hereinafter called "Lessee").
Lessor and Lessee have heretofore executed that certain Master Lease
Agreement No. 2 dated as of December 9, 1996, as amended (the "Agreement"), and
desire further to amend the Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. The Agreement is hereby amended as follows:
a. Solely in connection with the replacement of all of the Equipment
located at one or more Lease Asset Locations operated by BC New York, L.L.C.
("BCNY") following the acquisition of a majority equity interest by Lessee in
BCNY (the "Transaction"), Section V(f) is amended to permit the replacement of
such Equipment (the "BCNY Equipment") with Equipment and Fee Property, provided
that the Fee Property otherwise satisfies the requirements specified in the
Agreement with respect to Fee Property and the requirements of Section V(f) of
the Agreement and the replacement is completed as promptly as is reasonably
practicable. In addition, the notice requirement specified in the first sentence
of Section V(f) (B) is waived solely in connection with such replacement of the
BCNY Equipment pursuant to the Transaction. Notwithstanding the termination of
the Agreement with respect to the BCNY Equipment, and the delayed subsequent
replacement thereof, Lessee's obligations with respect to Rent remain unchanged.
b. The following new Paragraph (8) is added to Section XVII(b):
"(8) Lessee shall deliver to Lessor, as Agent,
cash collateral in the amount of $14,050,047.44, and
Lessee hereby grants to Lessor, as Agent, a first
priority security interest in such cash collateral,
together with the proceeds thereof. The cash collateral
shall be held by Lessor, as Agent, and need not be
segregated in any manner from any other monies of
Lessor and may be deposited by Lessor in any general
account maintained by it. Provided that no Default shall
have occurred and be continuing hereunder, at such time
as Lessee completes the replacement of Lease Assets in
accordance with Section V(f) hereof with respect to the
Lease Assets presently subleased by BC New York L.L.C.,
to the
<PAGE>
satisfaction of Lessor, and delivers to Lessor a
certificate of the Vice President - Finance of
Lessee (which certificate shall expressly permit
reliance thereon by the Participants) to the effect
that the replacement of Lease Assets has been
completed in accordance with all applicable
requirements of Section V(f) hereof (as amended),
such cash collateral (together with interest
thereon for the period held by Lessor, such
interest to be calculated at a rate per annum equal
to the thirty (30) day GE Capital commercial paper
rate) shall be released to Lessee."
2. Except as expressly set forth herein, the terms and conditions of the
Agreement remain unmodified and in full force and effect.
3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
4. This Amendment may be executed in counterparts, each of which taken
together shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, Lessee and Lessor have caused this Amendment No. 2 to
Master Lease Agreement No. 2 to be executed by their duly authorized
representatives as of the date first above written.
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL BOSTON CHICKEN, INC.
CORPORATION, FOR ITSELF AND AS
AGENT FOR CERTAIN PARTICIPANTS
By: /s/ David Avigdor By: /s/ Bernadette Dennehy
-------------------------- ---------------------------
Name: David Avigdor Name: Bernadette Dennehy
Title: Transactions and Syndication Title: Vice President
Senior Manager
3
<PAGE>
EXHIBIT 10.46 (A)
AMENDMENT NO. 1 TO MASTER LEASE AGREEMENT
THIS AMENDMENT NO. 1 TO MASTER LEASE AGREEMENT is made as of September
28, 1995 (the "Amendment"), between GENERAL ELECTRIC CAPITAL CORPORATION, FOR
ITSELF AND AS AGENT FOR CERTAIN PARTICIPANTS ("Lessor"), and BOSTON CHICKEN,
INC. ("Lessee").
The parties have heretofore executed that certain Master Lease
Agreement dated as of September 27, 1995 (the "Agreement"), pursuant to which
Lessor is to lease to Lessee certain Equipment pursuant to one or more Schedules
on the terms described therein. Capitalized terms used herein without
definition shall have the meaning given them in the Agreement.
In anticipation of the leasing of certain Equipment under the
Agreement, the parties have prepared Schedule No. Series A-1 dated September
28, 1995 ("Equipment Schedule No. A-1"), specifying Capitalized Lessor's Cost of
$42,686,709.10. The parties have now determined that certain items of the
Equipment (the "Special Equipment") having a Capitalized Lessor's Cost of
$3,816,137.67 (the "Allocated Capitalized Lessor's Cost"), will not be available
to be leased on September 28, 1995. However, the parties have agreed to proceed
with the execution of Equipment Schedule No. A-1, and the funding of the full
Capitalized Lessor's Cost specified therein, on the terms and conditions
specified herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Equipment Schedule No. A-1 will be executed on September 28,
1995, specifying Capitalized Lessor's Cost of $42,686,709.10, notwithstanding
the present unavailability for leasing thereunder of the Special Equipment. The
parties acknowledge and agree that Annex A attached to Equipment Schedule No.
A-1 will not describe the Special Equipment and the Capitalized Lessor's Cost
specified on Annex A will not include the Allocated Capitalized Lessor's Cost.
However, the Capitalized Lessor's Cost specified in Section B.1. of Equipment
Schedule No. A-1 will include the Allocated Capitalized Lessor's Cost and the
Rent to be paid by Lessee will include the Allocated Capitalized Lessor's Cost
for purposes of calculation.
2. Within ninety (90) days after the date of execution hereof,
Lessee agrees to satisfy the requirements of Section I(b) of the Agreement with
respect to additional items of Equipment (the "Additional Equipment") having an
aggregate Capitalized Lessor's Cost not less than the Allocated Capitalized
Lessor's Cost, and will execute and deliver to GE Capital such supplements or
amendments to Annex A to Equipment Schedule No. A-1 as may be required by Lessor
in connection therewith (such execution and delivery to GE Capital to occur on
not more than three (3) occasions during such ninety (90) day period). If
Lessee fails timely to comply with the provisions of this Section 2, then Lessor
may require Lessee to prepay the Applicable Amount of the Allocated Capitalized
Lessor's Cost on the date specified in a written notice from Lessor to Lessee
(the "Prepayment Date"). On the Prepayment Date, Lessee shall pay to Lessor, in
cash, by application of the Escrowed Funds (as such term is hereinafter defined)
held by Lessor, the amount of the required prepayment plus a premium calculated
as one (1) percent of
<PAGE>
the amount of the required prepayment. As used herein, "Applicable Amount" shall
mean the Allocated Capitalized Lessor's Cost less the aggregate Capitalized
Lessor's Cost of all Additional Equipment as to which Lessee has then satisfied
the requirements of Section I(b) of the Agreement and this Section 2.
3. The amount of the Allocated Capitalized Lessor's Cost (the
"Escrowed Funds") will be held in escrow by Lessor on the following terms and
conditions:
a. The Escrowed Funds will be held by Lessor and, for the
period held in escrow, interest shall be credited monthly to the Escrowed Funds
and shall be held in escrow hereunder. Interest shall be credited on the
Escrowed Funds at a variable per annum interest rate which shall be equal to the
applicable interest rate for General Electric Company thirty (30) -day
commercial paper from time to time.
b. Provided that no Default or event which, with the giving of
notice or the lapse of time, or both, would become a Default, has then occurred,
at such time as Lessee satisfies the requirements of Section I(b) of the
Agreement with respect to Additional Equipment, Lessor shall release from escrow
and remit to Lessee an amount equal to the aggregate Capitalized Lessor's Cost
of such Additional Equipment.
c. Provided that no Default or event which, with the giving of
notice or the lapse of time, or both, would become a Default, has then occurred,
at such time as Lessee has satisfied the requirements of Section I(b) of the
Agreement with respect to Additional Equipment having an aggregate Capitalized
Lessor's Cost equal to or in excess of the Allocated Capitalized Lessor's Cost,
Lessor shall release from escrow and remit to Lessee the then remaining balance,
if any, then held in escrow by Lessor.
d. Lessor undertakes to hold the Escrowed Funds and to perform
such duties and only such duties as are specifically set forth herein and no
implied covenants or obligations shall be read into this Amendment against
Lessor. Lessor shall not be liable to Lessee for any action taken or omitted to
be taken by Lessor hereunder or pursuant hereto, except for the failure to
comply with the express provisions hereof. In acting hereunder, Lessor may rely
and shall be protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request, direction,
consent, order or other paper or document reasonably believed by it to be
genuine and to have been signed or presented by the proper party or parties; and
Lessor shall not be bound to make any investigation into the facts or matters
stated in any thereof. Lessor may exercise its powers and perform its duties by
or through such attorneys, agents and servants as it shall appoint, and it shall
be entitled to the advice of counsel in anything done or omitted to be done in
accordance with such advice; and Lessor shall not be required to take any action
nor shall any provision herein set forth be deemed to impose a duty on Lessor to
take any action, if Lessor shall have been advised by counsel that such action
is contrary to the terms hereof or is otherwise contrary to law.
4. Lessee hereby grants to Lessor a first priority security
interest in all right, title and interest of Lessee in and to the Escrowed Funds
and any and all money, deposit accounts,
<PAGE>
documents, instruments, uncertificated securities and other accounts in which
the Escrowed Funds may at any time be held, and all proceeds (both cash and non-
cash) thereof, in order to secure the prompt payment of the Rent and all of the
other amounts from time to time outstanding under and with respect to the
Agreement and the Schedules, and the performance and observance by Lessee of all
the agreements, covenants and provisions of the Agreement and the Schedules
(including, without limitation, all of the agreements, covenants and provisions
hereof and thereof that are incorporated in the Schedules).
5. The failure of Lessee timely to perform its obligations under
Section 2 hereof (which failure continues unremedied for a period of ten (10)
days) shall constitute a Default under the Agreement.
6. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICT
OF LAWS PRINCIPALS OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE. The parties agree that any action or proceeding
arising out of or relating to this amendment may be commenced in the United
States District Court for the Southern District of New York.
<PAGE>
EXHIBIT 10.46 (B)
AMENDMENT NO. 2 TO MASTER LEASE AGREEMENT
THIS AMENDMENT NO. 2 TO MASTER LEASE AGREEMENT is made as of the 9th
day of December, 1996, between GENERAL ELECTRIC CAPITAL CORPORATION, FOR ITSELF
AND AS AGENT FOR CERTAIN PARTICIPANTS ("Lessor"), and BOSTON CHICKEN, INC.
("Lessee").
Lessor and Lessee have heretofore entered into that certain Master
Lease Agreement dated as of September 27, 1995 (the "Agreement"), and desire to
amend the Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00) in
hand paid, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. The Agreement is amended as follows:
a. The address specified for Lessor in the first paragraph on
page one is changed to: 4 Northpark Drive, Suite 500, Hunt Valley, Maryland
21030.
b. In Section IV(b), the fourth sentence is deleted.
c. The following language is added to the end of Section XI(a):
"As used herein, 'Credit Agreement' shall mean that certain
Facilities Agreement dated as of December 9, 1996, among
Lessee, Bank of America Illinois, as Agent for Certain
Lenders, and General Electric Capital Corporation, for
Itself and as Agent for Certain Lease Participants, and that
certain Secured Revolving Credit Agreement dated as of
December 9, 1996, among Lessee, the Lenders named therein,
Bankers Trust New York Corporation, as Documentation Agent,
and Bank of America, Illinois as Agent (as each may be
amended, supplemented, modified, restated, refinanced,
refunded or renewed from time to time)."
2. Except as expressly set forth herein, the terms and conditions of
the Agreement remain unmodified and in full force and effect.
3. THIS AMENDMENT NO. 2 TO MASTER LEASE AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE
<PAGE>
INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Amendment No. 2
to Master Lease Agreement to be executed by their duly authorized
representatives as of the date first above written.
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL BOSTON CHICKEN, INC.
CORPORATION, FOR ITSELF AND AS
AGENT FOR CERTAIN PARTICIPANTS
By: /s/ David Avigdor By: /s/ Bernadette Dennehy
Name: David Avigdor Name: Bernadette Dennehy
Title: Transaction & Syndication Senior Manager Title: Vice President
<PAGE>
IN WITNESS WHEREOF, Lessee and Lessor have caused this Amendment to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL BOSTON CHICKEN, INC.
CORPORATION, FOR ITSELF
AS AGENT FOR CERTAIN
PARTICIPANTS
By: /s/ David Avigdor By: /s/ Donald J. Bingle
Name: David Avigdor Name: Donald J. Bingle
Title: Syndication Senior Manager Title: Vice President
<PAGE>
EXHIBIT 10.46 (C)
AMENDMENT NO. 3 TO
MASTER LEASE AGREEMENT
THIS AMENDMENT NO. 3 TO MASTER LEASE AGREEMENT (this "Amendment") is made
as of the 18th day of March, 1997, between GENERAL ELECTRIC CAPITAL CORPORATION,
FOR ITSELF AND AS AGENT FOR CERTAIN PARTICIPANTS (hereinafter called, together
with its successors and assigns, if any, "Lessor"), and BOSTON CHICKEN, INC.
(hereinafter called "Lessee").
Lessor and Lessee have heretofore executed that certain Master Lease
Agreement dated as of September 27, 1995, as amended (the "Agreement"), and
desire further to amend the Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. The Agreement is hereby amended as follows:
a. Solely in connection with the replacement of all of the Equipment
located at one or more Lease Asset Locations operated by BC New York, L.L.C.
("BCNY") following the acquisition of a majority equity interest by Lessee in
BCNY, Section V(d) is amended to permit the replacement of such Equipment (the
"BCNY Equipment") in accordance with the terms of Section V(d) of the Agreement,
provided that the replacement is completed as promptly as is reasonably
practicable; and Lessor hereby consents to such replacement. Notwithstanding the
termination of the Agreement with respect to the BCNY Equipment, and the delayed
subsequent replacement thereof, Lessee's obligations with respect to Rent remain
unchanged.
b. Paragraphs (5) through (7) of Section XVII(b) are renumbered as
Paragraphs (6) through (8); and the following new Paragraph (5) is added to
Section XVII(b):
"(5) Lessee shall deliver to Lessor, as
Agent, cash collateral in the amount of
$5,944,057.99, and Lessee hereby grants to
Lessor a first priority security interest in
such cash collateral, together with the
proceeds thereof. The cash collateral shall
be held by Lessor and need not be segregated
in any manner from any other monies of Lessor
and may be deposited by Lessor in any general
account maintained by it. Provided that no
Default shall have occurred and be continuing
hereunder, at such time as Lessee completes
the replacement of Lease Assets in accordance
with Section V(d) hereof with respect to the
Lease Assets presently subleased by BC New
York L.L.C., to the satisfaction of Lessor,
and delivers to Lessor a certificate of the
Vice President - Finance of Lessee (which
certificate shall expressly permit reliance
thereon by the Participants) to the effect
that the replacement of Lease
<PAGE>
Assets has been completed in accordance with all
applicable requirements of Section V(d) hereof
(as amended), such cash collateral (together with
interest thereon for the period held by Lessor,
such interest to be calculated at a rate per annum
equal to the thirty (30) day GE Capital commercial
paper rate) shall be released to Lessee."
2. Except as expressly set forth herein, the terms and conditions of the
Agreement remain unmodified and in full force and effect.
3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
4. This Amendment may be executed in counterparts, each of which taken
together shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, Lessee and Lessor have caused this Amendment No. 3 to
Master Lease Agreement to be executed by their duly authorized representatives
as of the date first above written.
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL BOSTON CHICKEN, INC.
CORPORATION, FOR ITSELF AND AS
AGENT FOR CERTAIN PARTICIPANTS
By: /s/ David Avigdor By: /s/ Bernadette Dennehy
---------------------------- ---------------------------
Name: David Avigdor Name: Bernadette Dennehy
Title: Transactions and Syndication Title: Vice President
Senior Manager
3
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K/A, into the Company's previously filed
Registration Statement File Nos. 33-71930, 33-91512, 33-93872, 333-15389 and
333-22917.
Arthur Andersen LLP
Denver, Colorado
April 21, 1997
