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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Act of 1934
Date of Report (Date of earliest event reported): May 19, 1998
BOSTON CHICKEN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-22802 36-3904053
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(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation)
14123 Denver West Parkway, P.O. Box 4086, Golden, Colorado 80401-4086
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(Address of principal executive offices)
(303) 278-9500
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(Registrant's telephone number, including area code)
Not applicable
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(Former name or former address, if changes since last report)
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Item 5. Other Events.
On May 19, 1998, Boston Chicken, Inc. (the "Company") announced results of
operations for its first quarter ended April 19, 1998. The Company reported net
systemwide store revenue of $321.8 million for the first quarter of 1998
compared with $381.8 million for the year ago period. Company revenue was $211.7
million for the first quarter of 1998 compared with $116.8 million in the first
quarter of 1997. As previously disclosed, Company revenue is not readily
comparable to prior periods due primarily to an increase in the number of
Company-owned Boston Market stores resulting from the acquisition of several
area developers and the inclusion of company store results for Einstein/Noah
Bagel Corp., the Company's majority-owned subsidiary ("ENBC"), which completed
its move from a franchise system to a company-owned system in the fourth quarter
of 1997.
The Company also announced that, primarily as a result of lower than
expected store sales and customer transactions in the first quarter, the Company
had established a $202.0 million provision for potential loan losses (in
addition to the $128.0 million provision for loan losses established in the
fourth quarter of 1997), after a determination that an additional portion of its
loans to certain of its area developers may not be recoverable. The Company also
reported a $58.1 million charge, resulting from the recognition of losses
incurred by the area developers that have investments from BC Equity Funding,
L.L.C. ("BCEF") and Market Partners, L.L.C. ("Market Partners"), preferred funds
that hold equity interests in 11 of the Company's 13 area developers. The losses
were primarily non-cash due to goodwill and fixed asset write-downs by such area
developers. Primarily as a result of these charges, the Company reported a net
loss for the first quarter of 1998 of $312.6 million, or a loss of $4.38 per
share.
In addition, the Company announced that due to year-to-date decline in
customer transactions, the Company believes that its previously stated objective
of $75 million to $100 million in systemwide cash flow in 1998 may no longer be
achievable. The Company also announced that it is currently holding discussions
with the agent lenders under the Company's senior credit facilities to
restructure the payment terms and the financial covenants thereunder. However,
the agent lenders have indicated that they are unwilling to renegotiate such
terms unless and until the acquisition of BCEF and Market Partners is
consummated. In order to generate cash in an effort to improve its liquidity
position, the Company announced that it is evaluating the sale of certain
assets.
In the event it is unable to obtain an amendment to its senior credit
facilities, otherwise restructure its outstanding indebtedness or raise cash
through the sale of assets, the Company also announced that it could lead to the
Company's inability to meet its financial obligations. As a result, in
connection with the reissuance of the Company's 1997 audited financial
statements, Arthur Andersen LLP, the Company's auditors ("Arthur Andersen"), has
included an explanatory paragraph in its audit report that there is substantial
doubt about the Company's ability to continue as a going concern. The Company's
historical consolidated financial statements, with Arthur Andersen's revised
audit report and an additional footnote to the financial statements, are filed
as an exhibit to this Report. The existence of the explanatory paragraph may
materially adversely affect the Company's relationship with its creditors and
suppliers, and therefore could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has also announced that Lawrence E. White was named Chief
Financial Officer of the Company. Mr. White formerly served, from 1992, in
various capacities with El Chico Restaurants, Inc., including most recently as
its Chief Financial Officer.
On May 27, 1998, the Company announced that it had retained Morgan Stanley
& Co. Incorporated to advise and assist the Company in evaluating the sale of
all or a portion of the shares of common stock of ENBC owned by the Company to
one or more third parties. The Company also announced that it anticipated that
any sale would likely be made in a privately negotiated transaction with a
single purchaser and would be subject to agreement upon price and other terms
and conditions to be negotiated.
In connection with the Company's previously announced proposal to acquire
BCEF and Market Partners, the Company has circulated a Joint Information
Statement/Offering Memorandum soliciting the approval of holders of interests in
BCEF and Market Partners. Pursuant to the Joint Information Statement/Offering
Memorandum, holders of interests in BCEF and Market Partners are being asked to
consent to the Merger of BCEF and Market Partners with and into a wholly-owned
subsidiary of the Company (the "Merger"). The unaudited pro forma consolidated
financial information of the
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Company, giving effect to the acquisition of BCEF and Market Partners and
certain area developers of the Company, is filed as an exhibit to this Report.
In addition, the substance of the following risk factors is included in the
Joint Information Statement/Offering Memorandum:
RISK FACTORS
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" below for factors
relating to and affecting such statements.
Liquidity Risks; Need for Additional Capital; Going Concern Qualification
The Company is a party to an $85.0 million revolving credit facility (the
"Revolver Facility"). The Revolver Facility is part of a $252.7 million senior
credit facility that includes $167.7 million of master lease financing (the
"1996 Master Lease Facility," and together with the "Revolver Facility," the
"Credit Facility"). The Company also has outstanding an additional $64.1 million
of master lease financing that contains cross-default and cross-acceleration
provisions with the facilities agreement governing the Credit Facility (the
"1995 Master Lease Facility"). The facilities agreement contains, among other
things, an incurrence test (which limits the amount the Company may borrow under
the Revolver Facility based on the ratio of senior secured debt to annualized
store cash flow (as determined pursuant to the facilities agreement)) and
financial covenants, the breach of which could affect the Company's ability to
borrow under the Revolver Facility. Such test and covenants use systemwide
performance measures, including average weekly net revenue (average weekly gross
revenue net of customer coupons and discounts) ("average weekly net revenue"),
systemwide store cash flow, systemwide overhead and systemwide cash flow. In
addition, the facilities agreement also requires the Company to maintain
specific financial ratios and satisfy certain other tests on a systemwide basis,
including, without limitation, a maximum total overhead level and a minimum
fixed charge coverage ratio. Based upon the decline in customer transactions and
resulting decline in systemwide store cash flow of the Boston Market system
during 1998, the Company will not be able to access the Revolver Facility after
June 3, 1998 as a result of the limitations imposed by the incurrence test
contained in the facilities agreement and may not remain in compliance with
certain covenants contained in the facilities agreement. For example, the
facilities agreement requires average weekly net revenue of at least $17,500 for
the first quarter of fiscal 1998, $18,000 for the second quarter of fiscal 1998,
$18,500 for the third quarter of fiscal 1998, $19,000 for the fourth quarter of
fiscal 1998 and the first quarter of fiscal 1999, and $20,000 thereafter (the
"average weekly net revenue covenant"). Systemwide average weekly net revenue
for the first quarter of fiscal 1998 was $17,533. Based upon preliminary
information for the second quarter through May 17, 1998, unless store
performance improves materially through the balance of the second quarter, the
Company will not be in compliance with the average weekly net revenue covenant
at the end of the second quarter. As such, the Company is currently holding
discussions with the agent lenders under the Credit Facility to restructure the
repayment terms of the Credit Facility and the financial covenants contained in
the facilities agreement, including the average weekly net revenue covenant.
However, the agent lenders have indicated that they are unwilling to renegotiate
the terms of the Credit Facility unless and until the Merger is consummated. If
the Company is unable to obtain an amendment to the facilities agreement or
otherwise restructure its outstanding indebtedness, the Company may be in
violation of the facilities agreement. In the event the Company is in violation
of the facilities agreement, upon action of the required number of lenders, the
outstanding principal balances under the Credit Facility, which in the aggregate
totaled approximately $217 million as of May 21, 1998, may be accelerated. Any
such acceleration would also permit holders of other senior and subordinated
debt of the Company to exercise their remedies, which include acceleration of
their debt, which in the aggregate totaled approximately $683.4 million as of
April 19, 1998. The Credit Facility also contains financial and restrictive
covenants that limit the ability of the Company to, among other things, incur
additional debt, make acquisitions, sell assets or merge, grant or incur liens,
make investments or loans, engage in sale leaseback transactions, make capital
expenditures and pay cash dividends, including cash dividends on the preferred
stock of the Company to be issued in the Merger (the "Preferred Stock"). In
addition, any bankruptcy by an area developer of the Company could result in a
default under the facilities agreement. There can be no assurance that the
Company will be successful in renegotiating the facilities agreement or
otherwise obtaining relief from the covenants with which the Company may not be
in compliance.
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In addition, due to year-to-date decline in customer transactions, the
Company believes its previously stated objective of $75 million to $100 million
in systemwide cash flow for 1998 may no longer be achievable. In addition, after
June 3, 1998, the Company will no longer be able to access the Revolver Facility
as a result of the limitations imposed by the incurrence test contained in the
facilities agreement. As such, the Company will need to obtain additional
capital through the sale of assets or otherwise obtain an amendment to the
facilities agreement or otherwise restructure its outstanding indebtedness in
order to generate sufficient liquidity to implement its business plan and meet
its financial obligations, including approximately a $10.7 million payment due
under the 1995 Master Lease Facility and the 1996 Master Lease Facility on July
15, 1998. As noted above, the agent lenders have indicated that they are
unwilling to renegotiate the terms of the Credit Facility unless and until the
Merger is consummated. Although the Company is holding discussions with the
agent lenders and evaluating the sale of assets in an effort to improve its
liquidity position, there can be no assurance that the Company will be
successful in obtaining the additional capital needed to implement its business
plan and meet its financial obligations. As a result, in connection with the
reissuance of the Company's 1997 audited financial statements, Arthur Andersen
LLP, the Company's auditors, has included an explanatory paragraph in its audit
report that there is substantial doubt about the Company's ability to continue
as a going concern. The existence of the explanatory paragraph may materially
adversely affect the Company's relationship with its creditors and suppliers,
and therefore could have a material adverse effect on the Company's business,
financial condition and results of operations.
Substantial Leverage and Ability to Service Debt
Following the consummation of the Merger, the Company will continue to be
highly leveraged and a significant portion of the Company's cash flow will be
required to service indebtedness and will not be available for other purposes.
At April 19, 1998, the Company had approximately $873.1 million of total
indebtedness, which amount includes $231.8 million of master lease financing but
which excludes (i) an additional $40.6 million drawn by the Company as of May
21, 1998 under the Revolver Facility and (ii) $153.5 million of ENBC
indebtedness. The required payments by the Company of principal and interest on
such total indebtedness, based on current interest rates with respect to
indebtedness with floating interest rates, are expected to be approximately
$65.2 million for the remainder of fiscal 1998. On April 6, 1998, Standard &
Poor's ("S&P") lowered its corporate credit rating on the Company to "CCC" from
"B+". At the same time, S&P lowered the Company's subordinated debt rating to
"CC" from "B-". In addition, on May 5, 1998, Moody's Investor Service lowered
its rating on the Company's subordinated debt from "B2" to "Caa3" and assigned a
"B3" rating to the Company's Revolver Facility.
The Company's level of indebtedness could have important consequences,
including the following: (i) the ability of the Company to implement its
business plan, including the contemplated conversion of Boston Market stores to
the expanded Boston Market store format currently being tested in Charlotte,
North Carolina or to obtain additional financing for working capital, capital
expenditures, debt service requirements or other purposes, may be impaired; (ii)
the ability of the Company to respond to changing business or economic
conditions may be significantly limited and the Company may be restricted in
exploiting business opportunities; and (iii) the Company may be particularly
vulnerable to extended downturns in its business or in the economy generally.
The ability of the Company to satisfy its obligations will be primarily
dependent upon the future performance of Boston Market stores in the Boston
Market system and upon economic conditions generally, which are beyond the
Company's control. In addition, because the borrowings outstanding under the
Credit Facility bear interest at a floating rate, the Company's financial
performance may be adversely affected by increases in interest rates. In
addition, in the absence of adequate operating results and cash flows, the
Company may be required to dispose of material assets or operations, which are
currently pledged to the lenders under the Credit Facility, or refinance its
indebtedness to meet its debt service obligations. There can be no assurance
that the Company will be successful in this regard should such actions become
necessary.
Anticipated Losses of the Company; Negative Area Developer Cash Flow
If the acquisition of BCEF and Market Partners pursuant to the Merger is
approved by the holders thereof, the Company anticipates that it will convert
all or a portion of its loans to, and seek to acquire the remaining minority
equity interests in, its area developers. Upon obtaining a majority equity
interest in each such area
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developer, the Company would consolidate such area developer's results of
operations and financial position into its financial statements, resulting in
the revenue historically generated by the Company as lender, franchisor and
service provider being replaced with revenue and operating expenses from store
operations. The Company's area developers currently have, and under the current
legal structure are expected to have for the foreseeable future, negative
operating cash flow. In addition, Arthur Andersen, each of the area developer's
auditors, has included an explanatory paragraph in its audit report of each such
area developer that there is substantial doubt about each such area developer's
ability to continue as a going concern. Finally, any transaction or series of
transactions in which the Company acquires its area developers would result in
the Company recording a substantial amount of store-related fixed assets and
goodwill. Due in part to significant depreciation charges associated with an
increased company store base and significant goodwill amortization charges which
would result from the transactions, the Company would expect to report a net
loss in at least 1998. In addition, applicable accounting standards require the
Company to review long-lived assets (such as goodwill and other identifiable
intangible assets) to be held and used by the Company for impairment whenever
events or changes in circumstances indicate that the carrying values of those
assets may not be recoverable. In the event that the Company determines that the
carrying value of such intangible assets is impaired, it would write-down such
carrying value, which would result in a charge to earnings. Any such charge
could have a material adverse effect on the Company's financial position and
results of operations.
Enterprise Value of the Company May Not Exceed Its Liabilities
Given the performance during the first quarter of 1998 of the Boston Market
system of $321.8 million in net systemwide store revenue and $2.4 million in
systemwide cash flow (which consists of earnings before income taxes,
depreciation and amortization expenses and financing expenses for the Boston
Market system), and assuming no improvement or degradation in the performance of
the Boston Market system, certain financial valuation methodologies, including
discounted cash flow analysis ("DCF analysis"), would indicate that the
enterprise value of the Company does not exceed the amount of its liabilities.
Estimates of enterprise value do not purport to be appraisals reflecting
the liquidation values or actual market values that may be realized if assets
are sold. Such estimates reflect going concern values of an operating business,
and the going concern value of an operating business is subject to change (both
positive and negative) as a result of factors affecting the operations,
financial condition and prospects of that business, as well as other
uncertainties and contingencies that are difficult to predict.
Risks Associated with the Business Plan
A special committee of the Company's Board of Directors, consisting of
independent directors, determined that acquiring control of the area developer
structure and the move to a company-controlled system was in the best interests
of the Company and its securityholders. Such determination was based, in part,
upon its business judgment that implementation of the Company's business plan,
including the potential rollout of elements of a store format currently being
tested in Charlotte, North Carolina, was in the best interests of the Company
and its securityholders. From July 1997 through February 1998, the Company
converted seven existing Boston Market stores in Charlotte, North Carolina to
test the consumer appeal and acceptance of improved product presentation and
expanded product offerings which can be replicated nationwide using the existing
Boston Market supply chain. The Company believes that the conversion of Boston
Market stores to incorporate elements of the Charlotte test presents a
significant opportunity to improve the return on the existing Boston Market
store base. However, while early sales results have been favorable, the
converted stores have not yet experienced positive store level cash flow. The
Company believes that store-level cash flow has been negatively affected by
inefficiencies associated with the Charlotte test, including, but not limited
to, continuous modification and refinement of the menu, which adversely affects
food costs and increases employee training, which, in turn, adversely affects
labor costs. Further, continuous modification of store layout has also increased
employee training costs and other operating costs in the test stores. Because of
the perceived importance of adding elements of the Charlotte test to the current
Boston Market store base, the Company intends to convert an additional 20 Boston
Market stores located in four different markets around the country during the
remainder of fiscal 1998 to incorporate elements of the Charlotte test. These
stores
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will be managed by experienced store operators without the inefficiencies
associated with the evolving test format experienced in Charlotte. The Company
believes that the ability to achieve the store-level cash flow from
incorporating elements of the Charlotte test necessary to justify additional
conversions of Boston Market stores can be enhanced by a more operational focus
on the converted stores, but there can be no assurance that sufficient store-
level cash flow can be obtained. The cost to convert an existing Boston Market
store to the expanded store format is currently estimated to be in the range of
approximately $60,000 - $80,000 per store.
Based upon the results of the additional converted stores, the Company will
make a decision regarding the conversion of additional stores. Such decision
will be based primarily upon store-level cash flow and the cost of and ability
to finance store conversions. In addition, there can be no assurance that the
Company will have available the capital necessary to convert all or a portion of
the current store base to incorporate elements of the Charlotte test or will be
able to raise such capital when needed on satisfactory terms. The availability
of such capital may be adversely affected by the Company's results of operations
and systemwide cash flow, the amounts and terms of its existing indebtedness,
market perception of the creditworthiness of the Company, interest rates and the
availability of equity capital and general market and economic conditions.
Risk of Not Acquiring Certain Area Developers
The Company has the right to convert its loans to the 10 area developers
that have waived the moratorium on conversion and in which BCEF and Market
Partners have an interest. The remaining area developer in which BCEF and Market
Partners have an interest, BC Northwest, L.P., the Company's area developer for
the Pacific Northwest ("BC Northwest"), has not waived the loan conversion
moratorium. The Company is currently negotiating the waiver of the loan
conversion moratorium with BC Northwest. The Company believes that BC Northwest
may not in the future generate sufficient cash flow to pay to the Company all
royalties and interest when due, thereby causing a default by BC Northwest under
one or more agreements with the Company. In the event of such a default, BC
Northwest may seek protection under applicable bankruptcy laws and there can be
no assurance that the Company would be able to successfully foreclose upon its
security under the secured convertible loan with BC Northwest or otherwise
convert such loan into a majority equity interest in BC Northwest. In addition,
any such bankruptcy could also result in a default under the facilities
agreement.
Risks of Minority Interests in Area Developers
Upon obtaining a majority equity interest in any area developer, the
Company will effectively control the day-to-day affairs and policies of such
area developer, including access to cash generated from operations. However, the
minority equity holders in such area developer will retain certain rights
requiring their right to consent to various transactions. Generally, under the
area developers' limited liability company agreements or partnership agreements,
as applicable, none of the following matters may be undertaken by an area
developer without the written consent of either (x) partners or members owning
85% of the then outstanding common units of the area developer, or (y) a
majority interest of partners or members, as applicable, other than the Company:
(i) increase the number of Boston Market stores to be developed under the area
developer's development agreement; (ii) issue units to a member/partner unless
such units are offered to all members/partners pro rata; (iii) enter into
extraordinary transactions (such as a merger, consolidation or sale of all or
substantially all of the assets of the area developer); (iv) amend the area
developer's development agreement to increase the amount of the royalty fee or
franchise fee payable to the Company or to otherwise change the material
financial terms thereof; (v) change the purposes of the area developer entity;
or (vi) agree to do any of the foregoing. In addition, so long as such minority
interests remain outstanding, the Company may be subject to claims that
transactions between the Company and such area developer, such as the
elimination or limitation of the area developer's special distribution rights,
involve conflicts of interests. The Company may seek to acquire the remaining
minority interests in such area developers, which will require the Company to
negotiate with the equity holders of each of its area developers. Pursuant to
the Merger Agreement, the Company has agreed not to pay cash or issue equity
senior to the Preferred Stock for any interest in any of the area developers in
which BCEF and/or Market Partners have investments. There can be no assurance
the Company will be successful in acquiring the minority equity interests in any
of its area developers or that any such acquisition will be on terms that are
favorable to the Company.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report 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 and ENBC and their respective area developers,
franchisees and licensees, Boston Market(R) stores, Einstein Bros.(R) Bagels and
Noah's New York Bagels(R) stores, and Progressive Food Concepts, Inc. ("PFCI")
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: store performance (including sales and profit
margins); success of the proposal to seek control of the area developer
structure; competition; success of operating initiatives; development and
operating costs; advertising and promotional efforts; brand awareness; adverse
publicity; acceptance of new product offerings (e.g., menu items and pricing
structures); changes in business strategy; changes in development plans;
availability and cost of capital; food, labor and employee benefit costs;
changes in government regulations; regional weather conditions; and other
factors referenced in this Report and in the Company's other filings with the
Commission. The cautionary statements made pursuant to the Reform Act herein and
elsewhere by the Company should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
effective date of the Reform Act. The Company cannot always predict or determine
after the fact what factors would cause actual results to differ materially from
those indicated by the forward-looking statements or other statements. In
addition, readers are urged to consider statements that include the terms
"believes", "belief", "expects", "plans", "objectives", "anticipates", "intends"
or the like to be uncertain and forward-looking. All cautionary statements made
herein should be read as being applicable to all forward-looking statements
wherever they appear.
All forward-looking statements relating to the proposed Merger and the
related transactions and the proposal seeking control of the area developer
structure and the transition of the Boston Market system to a company-controlled
structure discussed herein are subject to, among other things, approval of the
holders owning at least two-thirds of the interests of each of BCEF and Market
Partners. There can be no assurance that the transition to a company-controlled
structure will be achieved.
All statements made concerning expected financial performance (including
future revenue and earnings growth), ongoing business strategies and possible
future actions which the Company intends to pursue constitute forward-looking
statements. The implementation of these strategies and of such future actions
and the achievement of such financial performance are each subject to numerous
conditions, uncertainties and risk factors. Accordingly, no assurance can be
given that the Company will be able to successfully accomplish its strategic
objectives or achieve such financial performance.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits.
See Exhibit Index appearing elsewhere herein, which is incorporated herein
by such reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Dated: May 27, 1998
BOSTON CHICKEN, INC.
By: /s/ Michael R. Daigle
-----------------------------------
By: Michael R. Daigle
Title: Senior Vice President
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BOSTON CHICKEN, INC.
EXHIBIT INDEX
Exhibit Number Description
23.1 Consent of Arthur Andersen LLP with respect to the Audited
Consolidated Financial Statements of the Company.
99.1 Historical consolidated financial statements of the Company.
99.2 Boston Chicken, Inc. Pro Forma Financial Statements Giving
Effect to the Acquisition of Market Partners, L.L.C., BC Equity
Funding, L.L.C. and Certain Area Developers of Boston Chicken,
Inc.
Ex-1
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated February 18, 1998 (except Notes 6,10, and 15 as
to which that date is March 30, 1998, and Note 16 as to which the date is May
19, 1998) on the consolidated financial statements of Boston Chicken, Inc. and
subsidiaries, included in this Form 8-K, into the Company's previously filed
Registration Statements on Form S-8 (registration nos. 33-71930 and 333-15389)
and previously filed Registration Statements on Form S-3 (registration nos. 33-
91512 and 33-93872).
Denver, Colorado
May 27, 1998
/s/ Arthur Andersen LLP
<PAGE>
EXHIBIT 99.1
BOSTON CHICKEN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 29, 1996 and December 28, 1997... F-3
Consolidated Statements of Operations for the fiscal years ended
December 31, 1995, December 29, 1996, and December 28, 1997............. F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended December 31, 1995, December 29, 1996, and December 28, 1997....... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1995, December 29, 1996, and December 28, 1997............. F-6
Notes to Consolidated Financial Statements............................... F-8
F-1
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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 29, 1996
and December 28, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended December 31,
1995, December 29, 1996 and December 28, 1997. 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 29, 1996 and December 28, 1997, and the results of
their operations and their cash flows for the fiscal years ended December 31,
1995, December 29, 1996 and December 28, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16 to the
financial statements, the Company may not generate sufficient liquidity to meet
its financial obligations which raises substantial doubt about its ability to
continue as a going concern. Management's plan in regard to these matters are
also described in Note 16. The financial statements do not include adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
February 18, 1998
(except Notes 6, 10 and
15 as to which the date
is March 30, 1998 and
Note 16 as to which the
date is May 19, 1998)
F-2
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BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------------- -------------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents................................. $ 100,800 $ 90,559
Accounts receivable, net.................................. 22,438 13,894
Due from affiliates, net.................................. 10,246 -
Inventories............................................... 2,585 16,132
Prepaid expenses and other current assets................. 1,465 1,436
Deferred income taxes..................................... 8,928 2,353
------------------- -------------------
Total current assets.................................. 146,462 124,374
Property and Equipment, net.................................... 334,748 530,582
Notes Receivable, net-Boston Chicken, Inc...................... 654,432 609,175
Notes Receivable-Einstein/Noah Bagel Corp...................... 146,087 -
Deferred Financing Costs, net.................................. 13,361 24,570
Goodwill, net.................................................. 190,439 639,364
Other Assets, net.............................................. 58,087 77,062
------------------- -------------------
Total assets......................................... $1,543,616 $2,005,127
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable.......................................... $ 40,430 $ 33,205
Accrued expenses.......................................... 33,817 85,207
Other current liabilities................................. 2,730 14,119
Deferred franchise revenue................................ 10,656 -
------------------- -------------------
Total current liabilities............................ 87,633 132,531
Deferred Franchise Revenue..................................... 7,740 5,723
Convertible Subordinated Debt-Boston Chicken, Inc.............. 129,841 417,020
Convertible Subordinated Debt-Einstein/Noah Bagel Corp......... - 125,000
Liquid Yield Option Notes...................................... 182,613 197,442
Senior Term Loan-Einstein/Noah Bagel Corp...................... - 24,000
Deferred Income Taxes.......................................... 40,216 2,353
Other Noncurrent Liabilities................................... 6,292 44,753
Minority Interests............................................. 153,441 253,630
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock----$.01 par value; authorized 20,000,000
shares; no shares issued and outstanding................. - -
Common Stock----$.01 par value; authorized 480,000,000
shares; issued and outstanding: 64,245,868 shares in 1996
and 71,400,179 in 1997................................. 642 714
Additional paid-in capital................................. 827,611 918,266
Retained earnings (deficit)................................ 107,587 (116,305)
------------------- -------------------
935,840 802,675
------------------- -------------------
Total liabilities and stockholders' equity........... $1,543,616 $2,005,127
=================== ===================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
-------------------- -------------------- ----------------------
(53 WEEKS)
<S> <C> <C> <C>
Revenue:
Company stores............................. $ 51,566 $ 83,950 $ 261,077
Royalties and franchise related fees....... 74,662 115,510 117,857
Interest income............................ 33,251 65,048 83,434
-------------------- -------------------- ----------------------
Total revenue........................... 159,479 264,508 462,368
Costs and Expenses:
Cost of products sold...................... 19,737 31,160 94,736
Salaries and benefits...................... 31,137 42,172 109,424
General and administrative................. 41,367 99,847 292,534
Provision for loan losses.................. - - 128,000
Losses of Boston Chicken Inc.'s area
developers.............................. - - 49,352
-------------------- -------------------- ----------------------
Total costs and expenses................ 92,241 173,179 674,046
-------------------- -------------------- ----------------------
Income (Loss) from Operations................ 67,238 91,329 (211,678)
Other Income (Expense):
Interest expense, net...................... (13,179) (14,446) (38,209)
Gain on issuances of subsidiary's
stock.................................... - 38,163 192
Other income, net.......................... 314 137 1,603
-------------------- -------------------- ----------------------
Total other income (expense)............ (12,865) 23,854 (36,414)
-------------------- -------------------- ----------------------
Income (Loss) Before Income Taxes
and Minority Interest................... 54,373 115,183 (248,092)
Income Taxes (Benefit)....................... 20,814 42,990 (8,415)
Minority Interest in (Earnings) Loss
of Subsidiaries......................... - (5,235) 15,785
-------------------- -------------------- ----------------------
Net Income (Loss)............................ $ 33,559 $ 66,958 $(223,892)
==================== ==================== ======================
Basic Earnings (Loss) Per Share.............. $0.71 $1.07 $(3.32)
==================== ==================== ======================
Diluted Earnings (Loss) Per Share............ $0.66 $0.99 $(3.32)
==================== ==================== ======================
Weighted Average Number of
Shares Outstanding:
Basic.................................... 47,312 62,857 67,339
==================== ==================== ======================
Diluted.................................. 51,072 71,143 67,339
==================== ==================== ======================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------------------------------------
December 31, December 29, December 28,
1995 1996 1997
------------------- ------------------- ---------------------
<S> <C> <C> <C>
COMMON STOCK ($.01 par value)
Balance at beginning of year............... $ 447 $ 591 $ 642
Issuance of common stock................... 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............. 12 5 48
Stock options.............................. 5 13 24
------------------- ------------------- ---------------------
Balance at end of year..................... $ 591 $ 642 $ 714
=================== =================== =====================
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year............... $252,298 $675,611 $ 827,611
Issuance of common stock, net of
offering cost of $13,851 in 1995 and
$848 in 1996............................. 383,784 100,232 -
Conversion of convertible debt
into common stock........................ 127 31 321
Conversion of liquid yield option
notes into common stock.................. 3,232 8,192 26
Issuance of common stock in
connection with acquisitions............. 30,675 14,709 63,899
Issuance of warrants....................... - 8,373 319
Stock options, including
income tax benefits of $4,049 in 1995,
$15,204 in 1996, and $18,189 in 1997..... 5,495 20,463 26,090
------------------- ------------------- ---------------------
Balance at end of year..................... $675,611 $827,611 $ 918,266
=================== =================== =====================
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year............... $ 7,070 $ 40,629 $ 107,587
Net income (loss).......................... 33,559 66,958 (223,892)
------------------- ------------------- ---------------------
Balance at end of year..................... $ 40,629 $107,587 $(116,305)
=================== =================== =====================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------------
December 31, 1995 December 29, 1996 December 28, 1997
---------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)...................................... $ 33,559 $ 66,958 $ (223,892)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization........................ 11,442 22,887 45,896
Interest on liquid yield option notes................ 8,075 13,793 14,829
Gain on issuances of subsidiary's stock............. - (38,163) (192)
Deferred income taxes................................ 12,133 14,059 (31,288)
Minority interest.................................... - 5,235 (15,785)
Warrant and option expense........................... - - 1,254
Provision for loan losses............................ - - 128,000
Provision for write-down of assets................... - 14,550 102,922
Revenue not recognized from Boston Chicken, Inc.'s
area developers..................................... - - 21,019
Losses of Boston Chicken, Inc.'s area
developers........................................... - - 49,352
Loss (gain) on disposal of assets.................... 231 68 (1,485)
Changes in assets and liabilities, excluding
effects from acquisitions:
Accounts receivable and due from affiliates....... (10,057) (7,193) 6,764
Accounts payable, accrued expenses
and other current liabilities..................... 3,661 48,674 (52,886)
Deferred franchise revenue........................ (303) 3,174 (9,057)
Other assets and liabilities...................... (3,265) 868 22,738
-------- -------- --------
Net cash provided by operating activities...... 55,476 144,910 58,189
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment..................... (145,756) (115,062) (44,743)
Proceeds from the sale of assets....................... 80,910 86,320 12,141
Acquisition of other assets............................ (3,475) (22,370) (7,696)
Issuance of notes receivable........................... (661,033) (1,467,065) (1,292,026)
Repayment of notes receivable.......................... 407,499 993,151 814,159
-------- -------- --------
Net cash used in investing activities.......... (321,855) (525,026) (518,165)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock
and warrants........................................... 385,360 112,863 11,341
Proceeds from issuance of subsidiary's common stock.... - 135,422 10,475
Proceeds from issuance of convertible
subordinated debt...................................... - - 412,500
Proceeds from issuance of liquid
yield option notes..................................... 172,464 - -
Increase in deferred financing costs................... (6,313) (3,799) (14,581)
Proceeds from credit facilities........................ 229,240 43,250 313,200
Repayments of credit facilities....................... (229,240) (117,256) (283,200)
-------- -------- --------
Net cash provided by financing activities.............. 551,511 170,480 449,735
-------- -------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents....................................... 285,132 (209,636) (10,241)
Cash and Cash Equivalents, beginning of year.......... 25,304 310,436 100,800
-------- -------- --------
Cash and Cash Equivalents, end of year................. $ 310,436 $ 100,800 $ 90,559
======== ======== ========
</TABLE>
F-6
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Supplemental Cash Flow Information:
<S> <C> <C> <C>
Interest paid.......................................... $ 7,195 $ 7,131 $ 24,794
======= ======== ========
Income taxes paid...................................... $ 3,299 $ 5,055 $ 1,792
======= ======== ========
Non-Cash Transactions:
Tax benefit of stock options exercised................... $ 4,049 $ 15,204 $ 18,189
======= ======== ========
Conversion of notes receivable into equity interests
and acquired assets...................................... $ - $123,500 $468,665
======= ======== ========
Conversion of convertible subordinated notes and
liquid yield option notes, net of related deferred
financing costs, into common stock....................... $ 3,361 $ 8,226 $ 347
======= ======== ========
Issuance of common stock and note payable
for net assets and equity interests acquired............. $30,687 $ 21,562 $ 67,128
======= ======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-7
<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 specialty retail stores that feature fresh-baked
bagels, proprietary cream cheeses, coffees and teas, and soups, salads and
sandwiches. Unless otherwise indicated, BCI and its subsidiaries (excluding
ENBC), are hereinafter referred to collectively as the "Company".
At December 28, 1997, there were 1,166 Boston Market stores systemwide in the
United States, consisting of 859 franchise stores and 307 stores owned by the
Company. In 1995, the Company sold 91 Boston Market stores to area developers
of the Company. In 1996 and 1997, the Company acquired 103 and 211 Boston
Market stores, respectively, from area developers and other franchisees of the
Company. Pursuant to the provisions of its franchise agreements, the Company's
franchisees utilize the Company's trademarks, copyrights, recipes, operating
procedures, and other elements of the Boston Market system in the operation of
franchised Boston Market stores. At December 28, 1997, there were 574 ENBC
stores in the United States, all of which were owned by a majority-owned
subsidiary of ENBC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of BCI 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 1996 and 1997 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 are stated at the lower of cost (first-in, first-
out) or market and consist of food, paper and plastic 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 12 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 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.
F-8
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The Accounting Standards Executive Committee of the AICPA has issued for
comment a proposed statement of position ("SOP") titled "Reporting on the Costs
of Start-up Activities." If issued as proposed, the new standard would require
the Company to prospectively expense pre-opening costs as incurred. As
currently proposed, the new SOP would not require restatement of prior periods
and would be applied as of the beginning of the fiscal year in which the SOP is
first adopted. Initial application would be reported as a cumulative effect of
a change in accounting principle. The Company and ENBC do not anticipate the
SOP will have a material impact on the Company's financial statements.
Expenditures for maintenance and repairs are charged to expense as incurred.
Development costs for franchised stores are expensed when the store opens.
Goodwill. Goodwill is amortized over a 35-year life.
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 and ENBC estimate 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, an impairment loss equal to the excess of the
carrying amount over the fair value of the asset will be recognized.
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 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.
Pursuant to Statement of Financial Accounting Standards No. 45, "Accounting for
Franchise Fee Revenue", commencing with the Company's and ENBC's announcements
in October 1997 of their intent to transition from franchised to company-owned
systems, both the Company and ENBC stopped recognizing initial franchise and
area development fees for the opening of new stores. Further, commencing with
the Company's announcement in October 1997 of its intent to acquire BC Equity
Funding, L.L.C. ("BCEF") and Market Partners, L.L.C. ("Market Partners"), the
Company ceased recognizing all royalties, franchise and related fees and
interest income from area developers in which BCEF and Market Partners have
preferred equity interests. Finally, if an area developer generates insufficient
cash on a cumulative basis from store operations, capital contributions and
other sources (excluding borrowings from the Company) to pay royalties, interest
and franchise fees when due, the Company will not recognize such fees. The
Company continues to charge the area developer royalties, franchise and related
fees and interest but no longer recognizes these payments as revenue. The
components of royalties and franchise related fees recognized as revenue are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------------
DEC. 31, DEC. 29, DEC. 28,
1995 1996 1997
---------------- ------------------ ------------------
<S> <C> <C> <C>
Royalties............................................. $34,841 $ 55,821 $ 57,446
Initial franchise and area development fees........... 13,712 18,715 15,528
Lease and real estate services income................. 17,939 27,537 25,352
Software license and maintenance fees................. 7,723 13,104 19,531
Other................................................. 447 333 -
---------------- ------------------ ------------------
Total royalties and franchise related fees....... $74,662 $115,510 $117,857
================ ================== ==================
</TABLE>
F-9
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Per Share Data. In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Under the new standard, the Company was required to change the method
used to compute earnings (loss) per share and to restate prior periods
presented. A dual presentation of basic and diluted earnings (loss) per share
is now presented. Basic earnings (loss) per share are computed based upon the
weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per share are computed based upon the weighted average number of
common shares and dilutive Company securities 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 operations as gains or losses in the
period during which such issuances occur.
Advertising Costs. Advertising costs are expensed in the period incurred.
Advertising expenses, principally contributions to the National and Local
Advertising Funds (See Note 8), were $3.8 million, $6.0 million and $25.9
million in 1995, 1996 and 1997, respectively.
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 Opinion No. 25 "Accounting for Stock Issued to Employees".
Required pro forma disclosures of compensation expense determined under the fair
value method of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), are presented in Note 11.
Employee Benefit Plan. The Company and ENBC each have a 401(k) plan to which
neither the Company nor ENBC makes a contribution.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications. Certain reclasssifications have been made to the 1996
amounts to conform with the 1997 presentation.
3. ACQUISITIONS
In a series of transactions that occurred during the period from March through
August 1997, the Company acquired a 74% equity interest in BC New York, L.L.C.
("BCNY") through conversion of its loan to BCNY, and in consideration for the
issuance of 165,793 shares of its common stock with a market value at the time
of issuance of approximately $2.0 million and $0.3 million in cash. The BCNY
transaction added 118 Boston Market stores in the metropolitan New York area,
northern New Jersey, and Connecticut, to the Company store base. As of the date
of conversion, total loan advances to BCNY were $80.0 million. As part of this
transaction, the Company assumed approximately $13.2 million in liabilities owed
to third parties. The 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 approximately $64.0 million, which is being amortized
over a 35-year life.
In August 1997, the Company converted its loan to Mayfair Partners, L.P.
("Mayfair") into a 73% equity interest in Mayfair. The Mayfair transaction
added 53 Boston Market stores in Washington, D.C., northern Virginia and
portions of Maryland to the Company store base. As of the date of the
transaction, total loan advances to Mayfair were $56.0 million. As part of this
transaction, the Company assumed approximately $12.7 million in liabilities owed
to third parties. The transaction has been accounted for as a purchase, and,
accordingly, the purchase price was allocated to identified assets and
liabilities based upon their fair values at the date of the transaction,
resulting in goodwill of approximately $56.0 million, which is being amortized
over a 35-year life.
F-10
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In August 1997, the Company purchased from Saad Nadhir, the Company's Co-
Chairman of the Board and Chief Executive Officer and Scott Beck, the Company's
Co-Chairman and President, approximately an 85% equity interest in Progressive
Food Concepts, Inc. ("PFCI"), and a option to purchase Messrs. Nadhir's and
Beck's remaining PFCI interests, for an aggregate of $2.0 million in cash and
notes in the principal amount of approximately $6.4 million. The purchase price
was equal to Messrs. Nadhir's and Beck's original cost for such interests in
PFCI plus an 8% interest factor, calculated from the date of their original
investment. In November 1997, the Company's ownership interest in PFCI increased
to 100% as a result of (i) PFCI's redemption of the interest held by Harry's for
$2.5 million and (ii) the Company's exercise of its option to purchase Messrs.
Nadhir's and Beck's remaining interests in PFCI for approximately $700,000 in
cash, which was equal to their original cost for such interests plus an 8%
interest factor, calculated from the date of their original investment. In
connection with the acquisition of the remaining interests of Messrs. Beck and
Nadhir in PFCI, the Company prepaid approximately $3.2 million of the $6.4
million of notes payable and Messrs. Nadhir and Beck agreed to extend the
maturity date of the remaining balance of such notes. As part of the
acquisition, the Company assumed approximately $1.0 million in liabilities owed
to third parties. The 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 approximately $9.2 million, which is being amortized
over a 35-year life.
In three transactions occurring in August and September 1997, the Company
purchased from BCE West, L.P., an area developer of the Company, 20 Boston
Market stores in the Denver metropolitan area and related assets. The Company
issued 1,467,440 shares of its common stock, with an aggregate market value at
the time of issuance of approximately $18.3 million, for these assets. The
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
approximately $11.8 million, which is being amortized over a 35-year life.
In a series of transactions occurring in July and August 1997, the Company
purchased the remaining equity interests in Mid-Atlantic Restaurant Systems L.P.
("Mid-Atlantic"), resulting in Mid-Atlantic becoming a wholly-owned subsidiary
of the Company. The Company issued 298,037 shares of its common stock, with an
aggregate market value at the time of issuance of approximately $3.9 million,
for the equity interests. The transactions have been accounted for as a
purchase, 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 approximately $6.6 million, which is
being amortized over a 35-year life.
Finally, in December 1997, ENBC converted its outstanding loans to its area
developers into a majority equity interest in the area developers. In addition,
ENBC purchased additional area developer equity interests by exercising its
option under each of the loan agreements to purchase the amount of equity
available under the unfunded portion of the area developer loans, and four of
ENBC's five area developers; Colonial Bagels, L.P. ("Colonial"), Great Lakes
Bagels, L.P. ("Great Lakes"), Gulfstream Bagels, L.P. ("Gulfstream") and Sunbelt
Bagels, L.L.C. ("Sunbelt") merged into the surviving area developer, Noah's
Pacific, L.L.C. ("Noah's"), now known as Einstein/Noah Bagel Partners, L.P.
("Bagel Partners"). As a result of the loan conversions, the exercise of the
option to acquire additional equity and the area developer merger, ENBC owns
approximately 78% of Bagel Partners, with the remaining minority interest owned
by Bagel Store Development Funding, L.L.C. ("Bagel Funding") and area developer
management. The transactions have been accounted for as purchases, and,
accordingly, the purchase prices were allocated to identified assets and
liabilities based upon an estimate of their fair values at the date of the
transactions. The goodwill resulting from each transaction, as shown below,
(based upon a preliminary allocation) is being amortized over a 35-year life.
The following is a summary of each area developer acquisition (in thousands of
dollars):
F-11
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
LOAN OPTION LIABILITIES
AREA DEVELOPER CONVERTED EXERCISE ASSUMED GOODWILL
- ------------------------- ------------------ ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Colonial................. $46,000 $ - $12,433 $56,337
Great Lakes.............. 87,812 8,688 19,952 76,713
Gulfstream............... 69,927 16,373 8,918 54,618
Sunbelt.................. 50,200 - 6,956 47,428
Noah's................... 76,862 3,738 19,785 61,685
</TABLE>
In connection with the acquisitions, in January 1998, ENBC issued options to
purchase 2,516,829 shares of its common stock, with an estimated fair value of
$7.8 million, in exchange for options to purchase limited partnership interests
in Bagel Partners at an exchange rate of one share of its common stock for every
15 units of Bagel Partners limited partnership interest. The options have an
exercise price of $6.00 per share.
The financial statements include the results of operations for all of the
acquired entities from their respective dates 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):
1996 1997
---------------- ----------------
Revenue.................. $475,800 $ 755,838
Net income (loss)........ 34,397 (291,783)
Basic earnings (loss) per
share.................... $ 0.53 $ (4.26)
Diluted earnings (loss)
per share................ $ 0.52 $ (4.26)
4. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT DATA
Accounts Receivable, net
Accounts receivable are net of an allowance for doubtful accounts of $424,000
at December 29, 1996 and $1,160,000 at December 28, 1997.
Property and Equipment, net and Goodwill, net
<TABLE>
<CAPTION>
DEC. 29, 1996 DEC. 28, 1997
------------------- -------------------
Property and equipment consist of (in thousands of
dollars):
<S> <C> <C>
Land................................................. $104,914 $101,685
Buildings and improvements........................... 148,642 288,154
Furniture, fixtures, equipment, and computer
software.......................................... 98,817 178,408
Development in progress.............................. 5,184 -
Pre-opening costs.................................... 248 1,142
------------------- -------------------
357,805 569,389
Less: Accumulated depreciation and amortization..... (23,057) (38,807)
------------------- -------------------
Total property and equipment, net.......... $334,748 $530,582
=================== ===================
</TABLE>
F-12
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Included in property and equipment are $183.1 million (net of accumulated
depreciation and amortization of $6.1 million) and $168.3 million (net of
accumulated depreciation and amortization of $7.8 million) of assets leased to
others at December 29, 1996 and December 28, 1997, respectively.
Accumulated amortization at December 29, 1996 and December 28, 1997 on
goodwill was $4.3 million and $12.9 million, respectively.
Accrued Expenses
<TABLE>
<CAPTION>
Dec. 29, 1996 Dec. 28, 1997
------------------- -------------------
Accrued expenses consist of (in thousands of dollars):
<S> <C> <C>
Accrued payroll and fringe benefits.................. $ 4,090 $21,833
Accrued interest..................................... 2,888 7,153
Accrued store equipment conversion costs............. 14,778 -
Accrued vendor obligations........................... - 13,761
Accrued store and real estate disposition costs...... 5,866 19,769
Accrued other........................................ 6,195 22,691
------------------- -------------------
Total accrued expenses..................... $33,817 $85,207
=================== ===================
</TABLE>
Other Current Liabilities
<TABLE>
<CAPTION>
Dec. 29, 1996 Dec. 28, 1997
------------------- -------------------
Other current liabilities consist of (in thousands of
dollars):
<S> <C> <C>
Notes payable and current portion of long-term debt.. $ 6 $13,851
Federal and state income taxes payable............... 2,724 268
------------------- -------------------
Total other current liabilities............ $2,730 $14,119
=================== ===================
</TABLE>
Interest Expense, net
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------------------------------
Dec. 31, 1995 Dec. 29, 1996 DEC. 28, 1997
--------------------- -------------------- ---------------------
<S> <C> <C> <C>
Interest expense, net consists of (in thousands of
dollars):
Interest income...................................... $ 2,173 $ 6,427 $ 5,706
Interest expense..................................... (15,352) (20,873) (43,915)
--------------------- -------------------- ---------------------
Interest expense, net...................... $(13,179) $(14,446) $(38,209)
===================== ==================== =====================
</TABLE>
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents. The carrying value approximates fair value due to
the length of maturity of the investments.
Notes Receivable. The estimated fair value of notes receivable, including the
conversion option (See Note 10), is based on the discounted value of the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings.
Debt. The fair value of publicly-traded debt instruments is based on publicly
quoted market prices. The fair value of ENBC's senior term loan is based upon
the discounted value of the future cash flows using ENBC's current cost of
capital.
F-13
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The estimated fair values of the Company's financial instruments are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 28, 1997
------------------------------------------- -------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents........... $100,800 $100,800 $ 90,559 $ 90,559
Notes Receivable.................... 800,519 800,519 609,175 609,175
Convertible Subordinated Debt-BCI... 129,841 163,600 417,020 250,599
Convertible Subordinated Debt-ENBC.. - - 125,000 82,188
Liquid Yield Option Notes........... 182,613 232,334 197,442 115,925
Senior Term Loan-ENBC............... - - 30,000 30,000
</TABLE>
6. DEBT
Company Revolving Facility
The Company has a revolving bank credit facility providing for borrowings of
up to $85.0 million through December 1, 1999. 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. A commitment fee of 0.50% of the average daily unused portion of the
loan is required. The credit facility agreement contains covenants that, among
other things, restrict other borrowings, prohibit cash dividends, limit
systemwide overhead and require maintenance of specified systemwide average
weekly net revenue per store and systemwide store cash flow.
Specifically, the facility requires average weekly net revenue of at least
$17,500 for the first quarter of fiscal 1998, $18,000 for the second quarter of
fiscal 1998, $18,500 for the third quarter of fiscal 1998 and $19,000 for the
fourth quarter of fiscal 1998 and the first quarter of fiscal 1999. Thereafter,
average weekly net revenue is required to be at least $20,000. Systemwide
average weekly net revenue for the first 12 weeks of the first quarter of fiscal
1998 has been below the Company's expectations and below the level required for
the entire quarter by the covenant in the facility. The Company believes net
average weekly revenue levels were below expectations for such period primarily
because of the limited success of new casseroles and the resulting diversion of
focus from the Company's core products and adverse regional weather conditions.
While the Company believes, based upon its experience with the historical
pattern of the Boston Market system's first quarter's sales and the marketing
programs in place during the remainder of the quarter, that the Boston Market
system can achieve sufficient improvement in average weekly net revenue during
the remainder of the quarter to comply with the financial covenant, there can be
no assurance that average weekly net revenue will improve or that the Company
will comply with the financial covenant. If the Company is in violation of the
facility, the Company will be unable to draw on its revolving credit facility.
To the extent the Company does not have borrowing availability under the
revolving credit facility, the Company will be required to obtain additional
sources of capital, obtain an amendment to its revolving credit facility, or
otherwise restructure its existing indebtedness. If the Company is unable to
obtain additional capital, obtain an amendment to its revolving credit facility
or otherwise restructure its outstanding indebtedness, the Company may not be
able to meet its obligations. In addition, if the Company is in violation of the
facilities agreement, upon action of the required number of lenders, the
outstanding principal balances under the Company's revolving credit facility and
other senior credit facilities may be accelerated. Any such acceleration would
also permit holders of other senior and subordinated debt of the Company to
exercise their remedies, which include acceleration of their debt. The Company's
facility also limits the use of cash consideration in any acquisition of BCEF
and Market Partners to $10.0 million (See Note 15). As of December 28, 1997, the
Company had $4.0 million in letters of credit outstanding which were issued
under the credit facility. The Company's facility and its 1996 master lease
facility (See Note 9) are collateralized by substantially all of its assets.
ENBC Revolving Facility and Term Loan
ENBC has a $25.0 million revolving bank credit facility, none of which was
outstanding at December 28, 1997 and a term loan facility under which $30.0
million was outstanding at December 28, 1997. Both facilities expire in October
2000. Borrowings under the credit facility are subject to a borrowing base
formula. Interest on both facilities is at the agent's base rate, plus an
applicable margin, or at the eurodollar rate, plus an applicable margin. The
interest rate at December 28, 1997 was 9.0%. A commitment fee of 0.50% of the
average daily unused portion of the credit facility is required. Both facilities
contain covenants that, among other things, restrict other borrowings, prohibit
cash dividends, and require maintenance of specified average weekly store net
sales and cash flow ratios and limit overhead levels. Both facilities are
collateralized by substantially all of ENBC's assets. The term loan facility
requires quarterly principal payments of $1.5 million which began on March 1,
1998, and continue through October 2000, at which time the outstanding balance
is due.
Company Subordinated Debt
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 1996 and 1997, $31,000 and $321,000 of convertible subordinated
debentures were converted into 1,107 shares and 11,475 shares of common stock,
respectively. In addition, the Company is required, as of 40 business days
after the occurrence of a Change in Control (as defined in the indenture
relating to the debentures) to purchase all or any part of any debenture at the
option of the debenture holder.
F-14
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In April 1997, the Company issued $287.5 million of 7 3/4% convertible
subordinated debentures due May 1, 2004. Interest is payable semiannually on
May 1 and November 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 $26.70 per share, subject to adjustments under certain conditions. The
debentures may be redeemed at the option of the Company beginning May 1, 2000,
initially at 104.43% of their principal amount and at declining prices
thereafter, plus accrued interest. In addition, the Company is required, as of
40 business days after the occurrence of a Change in Control (as defined in the
indenture relating to the debentures) to purchase all or any part of any
debenture at the option of the debenture holder.
In 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 is
obligated to 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, common stock of the Company 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 1996 and 1997, $8.2
million and $26,000 of LYONs were converted into 328,942 shares and 955 shares
of common stock, respectively. In addition, the Company is required, as of 40
business days after the occurrence of a Change in Control (as defined in the
indenture relating to the LYONs) to purchase all or any part of any LYONs at the
option of the LYONs holder.
ENBC Subordinated Debt
In May 1997, ENBC issued $125.0 million of 7 1/4% convertible subordinated
debentures due June 1, 2004. Interest is payable semiannually on June 1 and
December 1 of each year. The debentures are convertible at any time prior to
maturity into shares of ENBC's common stock at a conversion rate of $21.25 per
share, subject to adjustments under certain conditions. The debentures may be
redeemed at the option of ENBC beginning June 1, 2000, initially at 104.14% of
their principal amount and at declining prices thereafter, plus accrued
interest. In addition, ENBC is required, as of 40 business days after the
occurrence of a Change in Control (as defined in the indenture relating to the
debentures) to purchase all or any part of any debenture at the option of the
debenture holder.
F-15
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
7. INCOME TAXES
The primary components that comprise the deferred tax assets and liabilities
at December 29, 1996 and December 28, 1997 are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
DEC. 29, 1996 DEC. 28, 1997
---------------------- --------------------
Deferred tax assets:
<S> <C> <C>
Notes receivable, net..................................... $ - $ 75,291
Property and equipment.................................... - 10,286
Accounts payable and accrued expenses..................... 7,502 11,928
Deferred franchise revenue................................ 6,355 2,232
Other noncurrent liabilities.............................. 730 3,081
ENBC net operating loss carryforward...................... 6,648 2,410
Intangible assets......................................... 1,582 1,349
Other..................................................... 1,411 3,943
---------------------- --------------------
Total deferred tax assets............................ 24,228 110,520
Deferred tax liabilities:
Gain on issuances of subsidiary's stock................... (14,883) (14,958)
Property and equipment.................................... (13,400) -
Goodwill.................................................. (8,678) (5,714)
Other..................................................... (8,273) (6,082)
---------------------- --------------------
Total deferred tax liabilities....................... (45,234) (26,754)
---------------------- --------------------
(21,006) 83,766
Valuation allowance....................................... (10,282) (83,766)
---------------------- --------------------
Net deferred tax liability........................... $(31,288) $ -
====================== ====================
</TABLE>
Income taxes consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------------------------
DEC. 31, DEC. 29, DEC. 28,
1995 1996 1997
------------------ ------------------ -------------------
<S> <C> <C> <C>
Current:
Federal................................. $ 7,784 $24,359 $ 20,796
State................................... 897 4,572 6,857
------------------ ------------------ -------------------
8,681 28,931 27,653
Deferred:
Federal................................. 10,743 11,841 (32,368)
State................................... 1,390 2,218 (3,700)
------------------ ------------------ -------------------
12,133 14,059 (36,068)
------------------ ------------------ -------------------
$20,814 $42,990 $ (8,415)
================== ================== ===================
</TABLE>
For the years ended December 31, 1995, December 29, 1996 and December 28,
1997, the Company recognized income tax benefits pertaining to the exercise of
stock options of $4,049,000, $15,204,000, and $18,189,000, respectively, which
are accounted for as a direct increase to additional paid-in capital and do not
reduce reported income tax expense.
As of December 29, 1996 and December 28, 1997, ENBC had net deferred tax
assets of $10.3 million and $9.8 million, respectively, both amounts which were
fully offset by a valuation allowance due to uncertainty regarding realization
of the related tax benefits. The decrease in the valuation allowance of
$478,000 in 1997 was due to the utilization of a portion of ENBC's operating
loss carryforwards, offset by allowances on deferred tax assets added during
1997. During 1996 and 1997, ENBC utilized $2.5 million and $10.0 million,
respectively, of operating loss carryforwards which had been fully offset by a
valuation allowance. The tax benefit from the reduction in the valuation
allowance has
F-16
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
been treated as a reduction of goodwill. ENBC files a separate tax return from
the Company. As of December 28, 1997, ENBC had remaining operating loss
carryforwards available to reduce future taxable income of approximately $6.2
million that begin to expire in 2010. As of December 28, 1997, the Company had
a net deferred tax asset of $74.0 million, which amount was fully offset by a
valuation allowance due to uncertainty regarding realization of the related tax
benefits.
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 (loss) before income taxes and minority interest is attributable to
the following (in thousands of dollars):
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------------------
Dec. 31, DEC. 29, DEC. 28,
1995 1996 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Income tax expense (benefit) at
statutory rate.......................... $19,031 $40,314 $(86,832)
State taxes (benefit), net of federal
amounts................................. 1,740 4,492 (8,039)
Tax attributes of minority interest
in (earnings) losses of subsidiaries.... - (2,042) 5,157
Other...................................... 43 226 3,860
Change in valuation allowance.............. - - 77,439
------------------ ------------------ ------------------
Provision (benefit) for income taxes....... $20,814 $42,990 $ (8,415)
================== ================== ==================
</TABLE>
8. NATIONAL AND LOCAL ADVERTISING FUNDS
The Company administers a National Advertising Fund (the "Fund") to which all
stores contribute 2% of net revenue. Collected amounts are spent primarily on
developing marketing and advertising materials for use systemwide. The Company
also maintains Local Advertising Funds ("LAFs") that provide 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 the 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 $15.2 million at December 29, 1996 and
$12.9 million at December 28, 1997, which were funded by advances from the
Company, $10.2 million and $12.9 million of which were recorded in Due from
Affiliates at December 29, 1996 and December 28, 1997, respectively, and $5.0
million of which was recorded in Notes Receivable at December 29, 1996. The
amount advanced as of December 28, 1997 has been offset by an allowance for
uncollectible amounts.
9. COMMITMENTS AND CONTINGENCIES
Through December 28, 1997, BCEF had invested an aggregate of $56.7 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 (See Note 15).
Through December 28, 1997, Bagel Funding had invested a total of approximately
$89.6 million (representing an approximate 21% equity interest) in Bagel
Partners. Bagel Funding has the right to require Bagel Partners or ENBC to
F-17
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
redeem Bagel Funding's equity interest in Bagel Partners at a pre-determined
formula price based on the store level cash flow of Bagel Partners in the event
that, at any time after December 5, 1999 and prior to June 5, 2001, ENBC does
not consent to a public offering of such equity interests or the termination of
certain rights and obligations under franchise and license agreements between
ENBC and Bagel Partners. Such rights become exercisable prior to December 5,
1999 if there is a Change in Control (as defined in the Bagel Partners'
partnership agreement) of ENBC. ENBC or Bagel Partners may pay the purchase
price for such equity interests in cash, shares of ENBC's common stock, or any
combination thereof.
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. As of December 28,
1997, the total amount outstanding under the 1995 Facility and 1996 Facility was
$237.8 million. Both the 1995 Facility and the 1996 Facility have implicit
interest rates of 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 is contingently
liable for $172.4 million, if it elects 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 subleases.
The Company and ENBC lease sites for stores and for their support centers in
Golden, Colorado. Lease terms generally range from five to ten years, with two
or three five-year renewal options. Most of the leases contain escalation
clauses and common area maintenance charges.
The Company and ENBC also purchase or lease real estate and equipment that
they then lease, sublease, or assign to an area developer, franchisee or other
parties. The leases, subleases, and assignment terms to area developers,
franchisees or other parties are negotiated at arm's length on commercially
reasonable terms. The Company is contingently liable for all lease costs,
including common area maintenance charges.
The following is a schedule of future minimum rental payments that are
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year, sublease proceeds, guarantees and
assignments, and rental receipts due under leases on property and equipment
owned by the Company and ENBC as of December 28, 1997 (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>
1998................ $103,389 $ 53,600 $ 49,789 $ 10,962 $ 14,972
1999................ 66,936 21,418 45,518 10,594 15,344
2000................ 55,145 6,196 48,949 10,379 16,046
2001................ 49,912 5,890 44,022 16,739 16,464
2002................ 43,755 5,365 38,390 11,161 16,523
Later Years......... 184,232 22,752 161,480 64,686 65,987
---------------- --------------- ----------------- ------------------ ----------------------
$503,369 $115,221 $388,148 $124,521 $145,336
================ =============== ================= ================== ======================
</TABLE>
Rent expense, net of sublease income, under operating leases was $4,495,000,
$4,637,000 and $20,596,000 for fiscal years 1995, 1996, and 1997, respectively.
The Company and ENBC have entered into agreements with certain vendors which
provide for minimum purchases over specified terms. Such agreements call for
retroactive rate adjustments or cash settlement in the event of purchase
shortfalls. Management believes that the ultimate settlement of such
commitments will not have a material impact on the consolidated financial
position or results of operations.
F-18
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The Company, two executive officers who are also directors (the "Individual
Defendants"), certain investment banking firms which had underwritten
securities offerings by the Company (the "Underwriter Defendants") and the
Company's independent public accountants are defendants in a class action
lawsuit filed in the United States District Court for the District of Colorado
(the "federal proceeding"). The federal proceeding is comprised of separate
actions that were consolidated into one action for pre-trial purposes on August
8, 1997. The Company, the Individual Defendants, the Underwriter Defendants and
the Company's independent public accountants, are defendants in a separate class
action lawsuit filed in Jefferson County District Court in the State of Colorado
(the "state proceeding"). The state proceeding is comprised of two separate
actions that were consolidated into one action on November 13, 1997. Also on
November 13, 1997, the judge in the state proceeding agreed to stay the state
proceeding until resolution of the federal proceeding. The complaints in the
federal proceeding and the state proceeding allege, among other things, that the
Company and the other defendants violated Sections 11, 12(2) and 15 of the
Securities Act of 1933, as amended, and Section 10(b) of the Securities Act of
1934, as amended, and Rule 10b-5 promulgated thereunder, as well as certain
similar provisions of Colorado state securities statutes. The plaintiffs are
seeking, among other things, (i) to certify each of the complaints as a class
action on behalf of all persons who purchased securities of the Company during
the purported class period, (ii) an award of unspecified compensatory damages,
interests and costs to all members of the purported class period and (iii)
equitable relief permitted by law, equity or federal or state statutes. On
February 10, 1998, the Company filed a motion to dismiss the complaint in the
federal case. The Company believes that the complaints are without merit and
intends to vigorously defend against the allegations made in such complaints.
ENBC, certain of its current and former executive officers and directors, the
underwriters in ENBC's initial public offering and the ENBC's independent public
accountants are defendants in a class action lawsuit filed in the United States
District Court for the District of Colorado. The lawsuit is comprised of
separate actions that were consolidated into one action for pre-trial purposes.
ENBC and certain of the other defendants are also defendants in a class action
lawsuit filed in state court in Jefferson County Colorado, although such action
has been stayed pending resolution of the federal case. The complaints allege,
among other things, that ENBC and the other defendants violated Sections 11,
12(2) and 15 of the Securities Act of 1933, as amended, and Section 10(b) of the
Securities Exchange Act of 1934, as amended and Rule 10b-5 promulgated
thereunder, as well as certain similar provisions of Colorado state securities
statutes. In each case, the plaintiffs are seeking, among other things, (i) to
certify their complaint as a class action on behalf of all persons who purchased
the securities of ENBC during the purported class period, (ii) an award of
unspecified compensatory damages, interest and costs to all members of the
purported class and (iii) equitable relief permitted by law, equity or federal
or state statutes. On February 10, 1998, ENBC filed a motion to dismiss the
complaint in the federal case. ENBC believes that the complaints are without
merit and intends to vigorously defend against the allegations made in such
complaints.
In July 1997, GFI America, Inc. a former vendor of processed beef products to
the Company and its area developers initiated an action against the Company by
filing a complaint in the District Court of Hennepin County, Minnesota. In the
complaint, the plaintiff asserted various causes of action including
misappropriation of trade secrets, breach of unilateral and bilateral contract,
breach of fiduciary duty, fraud, promissory estoppel, equitable estoppel and
violation of Minnesota trade secrets law arising from the Company's decision to
stop purchasing processed beef products from plaintiff and commence purchasing
such products from another vendor. The plaintiff sought injunctive relief and
unspecified damages, reasonable attorney's fees and costs, and such other relief
available under state law. The matter was removed to federal court, and in
October 1997, the court denied the plaintiff's motion for injunctive relief. The
Company filed a motion to dismiss the complaint in September 1997. The Company's
motion to dismiss is pending, and discovery continues. The Company denies the
material allegations asserted in the complaint and intends to vigorously defend
against the complaint.
The Company and ENBC have become subject to other various lawsuits, claims,
and other legal matters in the course of conducting its business, including its
business as a franchisor. The Company and ENBC believe that the outcome of such
other lawsuits, claims, and other legal matters will not have a material impact
on the Company's consolidated financial position or results of operations.
F-19
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
10. AREA DEVELOPER AND OTHER FINANCING
Area Developer Financing
The Company offers convertible and non-convertible secured debt financing to
Boston Market area developers to partially finance store development and working
capital needs. Advances under the facility are permitted in a predetermined
maximum amount, generally equal to three to four times the amount of the area
developer's contributed capital. Upon expiration of the draw period, the loan
converts to an amortizing term loan payable in periodic installments, 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 National Trust and Savings Association as established from time to time
(8.5% at December 28, 1997 and an average rate of 8.4% for 1997) plus 1%, and is
payable each four-week period. The loan is secured by a pledge of substantially
all of the assets of the area developer and generally by a pledge of the equity
interests of the owners of the developer.
(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. The Company has received from all but one of its area developers, a
waiver of the moratorium period. 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. To the extent such loan is not fully drawn or has been drawn and
repaid, the Company has a corresponding option to acquire, at the loan
conversion price, the amount of additional equity it could have acquired by
conversion of the loan, had the loan been fully drawn. On average, upon
conversion or exercise of the option, the Company would own approximately an 80%
interest in each of its area developers.
In March 1998, the Company converted its loan to Great Lakes, L.L.C.
("Great Lakes") into an 85% equity interest in Great Lakes. The Great Lakes
transaction added 113 Boston Market stores, operating in Chicago, Detroit,
Milwaukee, Toledo and parts of Indiana to the Company store base. As of the date
of the transaction, total loan advances to Great Lakes were $119.2 million.
F-20
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(b) COMMITMENTS TO EXTEND AREA DEVELOPER FINANCING
The following tables summarize loan commitments, loan availability,
outstanding loan balances (included in Notes Receivable on the Company's balance
sheets) and contributed capital for Boston Market and ENBC area developers (in
thousands of dollars, except number of area developers):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------------- -------------------
<S> <C> <C>
BOSTON MARKET:
- --------------
Number of area developers receiving financing............. 15 14
Loan commitments.......................................... $ 838,043 $842,148
Loan availability......................................... (190,778) (42,105)
------------------- -------------------
Loans outstanding (included in Notes Receivable).......... $ 647,265 $800,043
=================== ===================
Contributed capital....................................... $ 286,413 $276,104
=================== ===================
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
===================
</TABLE>
The following tables summarize area developer financing activity of Boston
Market area developers during fiscal years 1996 and 1997 and of ENBC area
developers from conversion (June 17, 1996) through December 29, 1996 and during
fiscal 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
DECEMBER 29, DECEMBER 28,
1996 1997
------------------- --------------------
<S> <C> <C>
Boston Market:
- --------------
Area developer loan balances, beginning of year........... $ 411,418 $ 647,265
Additional loan advances.................................. 1,044,861 925,386
Loan repayments........................................... (766,114) (636,589)
Loans converted into equity or eliminated
in consolidation....................................... (42,900) (136,019)
------------------- --------------------
Area developer loan balances, end of year................. $ 647,265 $ 800,043
=================== ====================
FISCAL YEARS ENDED
----------------------------------------------
DECEMBER 29, DECEMBER 28,
1996 1997
------------------- --------------------
ENBC:
- -----
Area developer loan balances, at conversion
(June 17, 1996) of the Company loan or beginning $ 41,224 $ 140,754
of year................................................
Loan advances............................................. 153,961 359,218
Loan repayments........................................... (54,431) (169,171)
Loans converted into equity............................... - (330,801)
-------------------- -------------------
Area developer loan balances, end of year................. $140,754 $ -
==================== ===================
</TABLE>
F-21
<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):
1998.............................. $ 72
1999.............................. 252
2000.............................. 2,631
2001.............................. 4,747
2002.............................. 4,770
Thereafter........................ 787,571
---------------------
$800,043
=====================
(c) AREA DEVELOPER INFORMATION
Three Boston Market area developers accounted for approximately 14%, 12%, and
10% of the Boston Market area developers' notes receivable balance at December
28, 1997 and no other Boston Market area developer individually accounted for
10% or more of such notes receivable balance as of such date.
A loan is considered impaired if it is probable that the Company will be
unable to collect all contractual principal and interest when due. As of
December 28, 1997, the Company believed that all the area developer loans may be
impaired. Once a loan is deemed impaired, the Company determines the ultimate
collectibility of the loan without regard to the contractual terms of the
existing loan. Such evaluation resulted in a provision for potential loan losses
of $128.0 million, which related to nine of the area developer loans aggregating
$503.4 million. No provision for potential loan losses was deemed necessary for
the remaining five area developer loans which had an aggregate balance of $296.6
million. The Company did not have any impaired loans at December 29, 1996. The
provision for potential loan losses for 1997 was based upon management's review
of use of loan proceeds, the form and amount of consideration proposed in the
acquisition of BCEF and Market Partners (See Note 15) and evaluations regarding
the cost and availability of capital and the value of the collateral securing
the loans. The provision for potential loan losses does not relieve the area
developer of their obligation to repay their indebtedness to the Company. The
balance at the beginning of fiscal 1997, average balance for the year and
balance at the end of the year, of all of the Company's 14 area developer loans,
was $518.9 million, $690.5 million and $800.0 million, respectively. The Company
recognizes interest income on impaired loans, if in its judgement, the interest
is ultimately collectible. Total interest income for 1997 recognized on impaired
loans was $55.3 million, all of which has been collected by the Company. The
total interest income the Company would have earned based upon the contractual
terms of the loans was $56.5 million in 1997. The activity in the allowance for
loan losses for 1997 was as follows (in thousands of dollars):
Balance at December 29, 1996............. $ -
Provision for loan losses............... 128,000
Loan write-offs.......................... -
------------------
Balance at December 28, 1997............. $ 128,000
==================
Commencing from the date the Company announced its intent in October 1997, to
acquire BCEF and Market Partners, the Company has recognized in a single line
item on its consolidated statement of operations, the net losses of the area
developers in which BCEF and Market Partners have preferred equity interests,
which aggregated $49.4 million. The Company continues to charge such area
developers royalties, franchise and related fees and interest, but no longer
recognizes these payments as revenue. The area developer net losses recognized
by the Company have been correspondingly reduced by the amount of the royalties,
franchise and related fees and interest not recognized by the Company, which
amounts aggregated $15.7 million. In addition, if an area developer generates
insufficient cash on a cumulative basis from store operations, capital
contributions and other sources (excluding borrowings from the Company) to pay
royalties, interest and franchise fees when due, the Company will not recognize
such fees, which amounts
F-22
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
aggregated $5.3 million in 1997. The area developer losses and revenue not
recognized by the Company have been presented as a reduction of the notes
receivable balance from area developers in the accompanying balance sheet.
As a result of the foregoing, the Boston Market area developer notes receivable
balance as of December 28, 1997, is summarized as follows (in thousands of
dollars):
Notes Receivable.................. $ 800,043
Provision for loan losses......... (128,000)
Losses of area developers......... (49,352)
Revenue from area developers not
recognized........................ (21,019)
--------------------
Notes Receivable, net............. $ 601,672
====================
The following tables set forth certain combined financial information provided
to the Company by Boston Market financed area developers. 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, New
Jersey Rose, L.L.C., and BCNY for both years and Mayfair and Great Lakes for
1997, 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 29, DECEMBER 28,
1996 1997
------------------- -------------------
<S> <C> <C>
Boston Market Financed Area Developers:
- ---------------------------------------
Total number of financed area developers.................. 14 13
Total number of financed area developer stores open....... 841 734
Balance sheet data:
Total gross assets..................................... $ 640,534 $ 516,300
Total debt:
To the Company...................................... 555,105 687,366
To third parties (including capital lease 23,797 20,462
obligations).......................................
Total other liabilities (including trade payables)..... 105,635 108,974
Total stockholder/partner/member deficit............... (102,754) (377,960)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------
DECEMBER 29, DECEMBER 28,
1996 1997
-------------------- -------------------
<S> <C> <C>
Statement of operations data:
Gross revenue.......................................... $ 865,082 $ 801,792
Income (loss) from continuing operations............... (156,505) (337,342)
Statement of cash flows data:
Cash flows from (used in) operating activities......... $(128,819) $(244,435)
Cash flows from (used in) investing activities......... (82,307) (35,555)
Cash flows from (used in) financing activities......... 212,366 272,555
-------------------- -------------------
Net change in cash................................ $ 1,240 $ (7,435)
==================== ===================
</TABLE>
F-23
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables set forth certain combined financial information as of
December 29, 1996, and the year then ended, provided to ENBC by its financed
area developers. 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>
Dec. 29,
1996
-------------------
<S> <C>
ENBC Financed Area Developers:
- ------------------------------
Total number of financed area developers.................. 11
Total number of financed area developer stores open....... 301
Balance sheet data:
Total gross assets..................................... $221,156
Total debt:
To ENBC............................................. 140,754
To third parties.................................... -
Total other liabilities (including trade payables)..... 37,033
Total partner/member equity............................ 33,847
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DEC. 29,
1996
-------------------
<S> <C>
Statement of operations data:
Gross revenue.......................................... $ 109,940
Income (loss) from continuing operations............... (40,592)
Statement of cash flows data:
Cash flows from (used in) operating activities......... $ (16,382)
Cash flows from (used in) investing activities......... (187,955)
Cash flows from (used in) financing activities......... 205,756
-------------------
Net change in cash................................ $ 1,419
===================
</TABLE>
Other Financing
PFCI has provided Harry's Farmers Market, Inc. ("Harry's") with two credit
facilities (the "Loans"): (i) a $12.0 million refinancing loan, all of which was
outstanding as of December 28, 1997 (the "Refinancing Loan"), and the proceeds
of which were used by Harry's to repay other indebtedness and (ii) a $5.5
million development loan, $1.5 million of which was outstanding as of December
28, 1997 (the "Development Loan"). PFCI is obligated upon the request of
Harry's, subject to certain conditions, to advance an additional principal
amount of $2.0 million of the Development Loan on each of May 3, 1998 and
November 3, 1998 (or at any time after such dates and prior to January 31,
2002). Proceeds of the Development Loan are to be used by Harry's to fund (i)
expenditures in connection with the development of a business model for the
improvement and expansion of Harry's business and facilities, (ii) the
refurbishment of existing Harry's Farmers Market megastores and Harry's in a
Hurry stores, and (iii) the development of new Harry's in a Hurry stores. The
Loans bear interest at 5% per annum until January 31, 2002, and thereafter at a
per annum rate equal to the rate designated by Bank of America National Trust
and Savings Association as its reference rate plus 1%. Interest only is payable
quarterly on the Loans until January 31, 2002, after which date the Loans become
an amortized term loan payable in 20 equal quarterly installments of principal
and interest unless otherwise exchanged as described below.
F-24
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Subject to certain conditions, PFCI has the option, after July 30, 1998 and
until April 2002, to contribute to Harry's the principal amount of the Loans in
exchange for approximately 13% of the common voting equity of Harry's, on a
fully diluted basis as of December 28, 1997. Subject to certain exceptions,
PFCI is obligated, not later than January 31, 2002, to contribute the principal
amount of the Refinancing Loan to Harry's in exchange for approximately 9.0% of
the common voting equity of Harry's on a fully diluted basis as of December 28,
1997. As of December 28, 1997, the carrying value of the outstanding balance of
the Refinancing Loan was $6.0 million and the carrying value of the Development
Loan was $1.5 million.
11. STOCKHOLDERS' EQUITY
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 905,651 shares of common stock to
third parties exercisable at prices ranging from $7.03 to $25.00. The warrants
expire at various dates through December 2001.
Stock Option Plans
The Company has stock option plans (the "Plans") under which options to
purchase up to 17,240,000 shares of common stock may be granted. Under the
terms of the Plans, the Company may grant options to certain employees and
officers and directors of, and consultants to, the Company. The option price is
equal to the fair market value on the date of the grant and each option has a
term of ten years. The options vesting period is determined at the time of the
stock option grant by the Stock Option Committee of the board of directors.
Except with respect to the stock option exchange program described below,
options granted to date generally vest at either 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 and the balance vesting at the end of the fourth year from
the date of the grant or vest ratably over a four-year period. The Company's
1997 stock option plan provides for 100% vesting of all outstanding options upon
the occurrence of a Change in Control (as defined in the option plan). As of
December 28, 1997, approximately 3.2 million options were outstanding under the
1997 stock option plan.
In October 1997, the Stock Option Committee of the board of directors
authorized a stock option exchange program to provide employees the opportunity
to exchange existing options for new options priced at fair market value on the
date of exchange. Approximately 3.4 million vested and unvested outstanding
options with original exercise prices ranging from $11.19 to $37.88 per share
were canceled in exchange for the grant of the same number of new options with
an exercise price of $8.94 per share. The vesting schedule of the new options
was determined based on the grant date of the canceled options. New options
issued upon cancellation of options originally granted from January 1, 1994
through November 14, 1994 vest 100% on November 10, 1998. New options issued
upon cancellation of options originally granted from November 15, 1994 through
December 18, 1995 vest 50% on each of November 10, 1998 and November 10, 1999.
New options issued upon cancellation of options originally granted after
December 18, 1995, vest 33% on each of November 10, 1998, November 10, 1999 and
November 10, 2000.
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 employee stock option plans under which options to purchase up to
11,813,146 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 generally similar to the
F-25
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's plans, however, option grants to each director who is not an officer
or employee of the Company are limited to a market value of $50,000 at the date
of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the Company's stock
options granted at fair market value to employees. Had employee compensation
expense for the Company's plans been determined based on the fair value at the
grant date for awards in 1995, 1996 and 1997 consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and basic and diluted earning
(loss) per share would have been as indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Net income (loss) - as reported.......... $33,559 $66,958 $(223,892)
Net income (loss) - pro forma............ $33,015 $62,638 $(237,438)
Basic earnings (loss) per share -
as reported........................... $ 0.71 $ 1.07 $ (3.32)
Basic earnings (loss) per share -
pro forma............................. $ 0.70 $ 1.01 $ (3.59)
Diluted earnings (loss) per share -
as reported............................ $ 0.66 $ 0.99 $ (3.32)
Diluted earnings (loss) per share -
pro forma.............................. $ 0.65 $ 0.94 $ (3.59)
</TABLE>
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Expected volatility...................... 38.0% 37.1% 45.0%
Risk-free interest rate.................. 6.8% 6.3% 6.2%
Expected lives........................... 5 years 5 years 5 years
Dividend yield........................... 0 0 0
</TABLE>
Activity under the option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARE
NUMBER OF COMPANY OPTIONS EXERCISE PRICE
----------------------------------------------- ---------------------------------
1995 1996 1997 1995 1996 1997
--------- ---------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Company plans:
Options outstanding at
beginning of fiscal year. 8,140,421 8,668,265 8,704,381 $ 5.81 $ 8.36 $12.33
Options granted.......... 1,141,955 1,647,550 5,079,441 24.37 26.31 14.66
Options exercised....... (539,899) (1,343,647) (2,298,410) 2.68 3.94 3.04
Options forfeited........ (74,212) (267,787) (5,123,291) 21.07 15.13 23.68
--------- ---------- ---------- ------ ------ ------
Options outstanding at
end of fiscal year....... 8,668,265 8,704,381 6,362,121 $ 8.36 $12.33 $ 8.53
========= ========== ========== ====== ====== ======
Options exercisable at
end of fiscal year....... 2,693,143 4,152,163 2,566,891 $ 3.25 $ 4.41 $ 5.13
========= ========== ========== ====== ====== ======
</TABLE>
F-26
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Information on Company options outstanding and options exercisable as of
December 28, 1997, 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 PRICE OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS PER SHARE
- ----------------- --------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 3.00 1,261,960 4.24 $ 1.54 1,241,960 $ 1.53
3.01 - 6.00 949,347 5.36 4.15 949,347 4.15
6.01 - 9.00 3,202,647 9.87 8.93 - -
12.01 - 15.00 244,580 6.93 14.88 134,070 14.88
15.01 - 18.00 325,739 6.43 17.55 147,632 17.72
18.01 - 21.00 27,779 6.78 19.89 17,767 19.52
21.01 - 24.00 96,987 9.19 22.76 8,988 22.25
24.01 - 27.00 63,074 8.34 25.17 9,088 24.95
27.01 - 30.00 2,127 7.85 29.72 614 29.75
30.01 - 33.00 143,984 8.40 30.96 26,174 31.00
33.01 - 36.00 43,897 8.35 35.52 31,251 35.75
--------- ------- ---------- --------- ----------
6,362,121 7.71 $ 8.53 2,566,891 $ 5.13
========= ======= ========== ========= ==========
</TABLE>
Activity under the ENBC option plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
ENBC AVERAGE SHARE
OPTIONS EXERCISE PRICE
---------------------------- --------------------
1996 1997 1996 1997
---------- --------- ------- -------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of fiscal year (or date of loan conversion)..... 3,410,734 3,478,075 $ 6.50 $ 6.87
Options granted............................... 239,714 2,327,327 12.57 11.48
Options exercised............................. (47,440) (269,904) 5.89 6.20
Options forfeited............................. (124,933) (579,611) 7.98 11.44
---------- --------- ------- -------
Options outstanding at end of fiscal year.......... 3,478,075 4,955,887 $ 6.87 $ 8.58
========== ========= ======= =======
Options exercisable at end of fiscal year.......... 275,824 557,816 $ 5.93 $ 6.56
========== ========= ======= =======
</TABLE>
F-27
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Information on ENBC options outstanding and exercisable as of December 28,
1997, 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>
$ 5.00 - $ 6.00 1,283,812 7.45 $ 5.88 406,151 $ 5.88
6.01 - 9.00 1,188,333 8.04 6.58 99,718 6.56
9.01 - 12.00 2,456,251 9.60 10.79 50,300 11.44
12.01 - 15.00 5,288 8.58 15.00 523 15.00
18.01 - 21.00 10,736 9.37 18.63 - -
27.01 - 30.00 9,124 8.94 29.59 911 29.59
30.01 - 33.00 1,546 8.77 32.65 137 32.63
33.01 - 34.00 797 8.81 33.66 76 33.67
--------- ------------ -------------- --------- --------------
4,955,887 8.67 $ 8.58 557,816 $ 6.56
========= ============ ============== ========= ==============
</TABLE>
As of December 28, 1997, the Company had 33,337,013 shares of common stock
reserved for issuance upon exercise of stock options and warrants and conversion
of convertible subordinated debentures and LYONs.
Earnings (Loss) Per Share
A reconciliation of the weighted average number of shares of common stock and
dilutive Company securities used in the computation of basic and diluted
earnings (loss) per share is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding to compute basic earnings (loss) per
share............................................... 47,312 62,857 67,339
Dilutive effect of common stock options,
warrants and convertible debentures................. 3,760 8,286 -
----------------- ------------------ ------------------
Diluted weighted average number of
shares outstanding.................................. 51,072 71,143 67,339
================= ================== ==================
</TABLE>
For the year ended December 29, 1996, net income was increased by $3.6
million in the computation of diluted earnings per share. The increase to net
income represents interest expense, net of income taxes on the Company's 4 1/2%
convertible subordinated debentures.
The calculation of diluted earnings (loss) per share excludes the Company's
liquid yield option notes and convertible subordinated debentures (other than
the impact in 1996 of the 4 1/2% convertible subordinated debentures) because
of their antidilutive effect. In addition, stock options and warrants
outstanding in 1995 and 1996, which had exercise prices greater than the average
market price of the Company's common stock, were excluded from the 1995 and 1996
computations because of their antidilutive effect. All stock options and
warrants outstanding in 1997 were excluded from the computation because of their
antidilutive effect.
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
officers of the Company, ENBC and members of their families have a direct
F-28
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
or indirect equity interest. These entities have paid approximately $20.0
million, $41.0 million and $60.0 million in national and local advertising
contributions in 1995, 1996 and 1997. 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 $14.6 million, $30.5 million and $3.6 million in 1995, 1996 and
1997, respectively. In 1997, the Company purchased from certain of these
entities, Boston Market stores and related assets for a purchase price of $25.6
million. The Company has paid to one of these area developers $100,000 in 1995
for various services. The Company believes that the terms of these agreements
are as favorable to the Company as those with other area developers of the
Company.
Pursuant to Statement of Financial Accounting Standards No. 57 "Related Party
Disclosures", all Company and ENBC financed area developers may be or may have
been 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 $59.9 million, $110.9 million
and $116.6 million in 1995, and 1996 and 1997, respectively. Total interest
income earned from all financed area developers was $32.0 million, $57.1 million
and $81.6 million in 1995, 1996 and 1997, respectively. Total notes receivable
from all financed area developers were $788.0 million and $800.0 million at
December 29, 1996 and December 28, 1997, 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.
As of December 29, 1996 and December 28, 1997, ENBC had notes receivable from
a stockholder of $3.4 million. The notes receivable bear interest at the
applicable reference rate of Bank of America National Trust and Savings
Association plus 1%. Principal and interest are due April 2001. The notes are
collateralized by various assets.
Certain officers and directors of the Company are officers and minority
investors in BCEF, having invested $4.2 million of an aggregate of $60.0 million
at December 28, 1997. 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 and ENBC and members of their
families are investors in Bagel Funding, having invested $16.3 million of an
aggregate of $89.6 million. ENBC is the manager of Bagel Funding. Bagel Funding
paid $250,000 to ENBC (since conversion on June 17, 1996) during 1996 in its
capacity as manager. Neither the Company nor ENBC has an equity interest in
Bagel Funding. Certain officers and directors of ENBC and members of their
families acquired equity interests in ENBC's area developers in exchange for
promissory notes. These equity interests were converted into equity interests in
Bagel Partners in December 1997 and were redeemed in exchange for cancellation
of such promissory notes (having an aggregate principal amount of approximately
$2.1 million) in January 1998.
Certain officers and directors of the Company have an equity interest in
Market Partners, having invested $9.4 million of an aggregate of $76.5 million
at December 28, 1997. Neither the Company nor ENBC has an equity interest in
Market Partners.
During 1997, the Company purchased approximately a 92% equity interest in PFCI
for $2.7 million in cash and notes in the principal amount of approximately $6.4
million from Saad Nadhir and Scott Beck (See Note 3). PFCI, prior to its
acquisition, paid $0.5 million in interest on its loan with the Company.
F-29
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In July 1997, the Company sold to certain directors and members of their
family, all of its 20,000 shares of Series A Convertible Preferred Stock (the
"Series A Stock") of Spincycle, Inc. ("Spincycle") owned by the Company. The
Company sold the Series A Stock to such investors for $199.25 per share. Such
per share price was the same per share price paid to Spincycle by third party
investors not affiliated with Spincycle in June 1997 for shares of preferred
stock of Spincycle with substantially the same terms as the Series A Stock. The
Company sold its investment in Spincycle because such investment was unrelated
to its core business. Such sale provided the Company with an opportunity to
liquidate an otherwise illiquid investment for an aggregate gain of $1.5
million.
During 1995 and 1996, the Company paid approximately $662,000 and $282,000,
respectively, to Bowana Aviation, Inc. ("Bowana") for the use of aircraft. Scott
Beck 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 and 1997, from the date of the conversion of the Company's loan
to ENBC, ENBC issued approximately 9.9 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 28, 1997, the Company
held approximately a 52% interest in ENBC. These transactions generated a pretax
gain of approximately $38.2 million in 1996 and $0.2 million in 1997, 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. IMPAIRMENT LOSS
In addition to the impairment loss on notes receivable (See Note 10), in
1997, the Company recognized an impairment loss of $76.3 million on various
long-lived assets. The loss resulted primarily from the planned disposition of
store related real estate for closed Boston Market stores and the
discontinuation of computer software, hardware and other store related programs,
all of which had a net book value of $80.1 million. The Company plans to dispose
of the real estate in 1998. In addition, ENBC recognized an impairment loss of
$10.8 million which related primarily to the planned closure of a bagel dough
production facility, anticipated to be disposed of in 1998. In addition, as a
result of ENBC's transition to a Company-owned system, ENBC wrote-off certain
store development costs and other store related programs. ENBC assets subject to
the impairment loss had a net book value of $11.6 million. The impairment losses
are included in general and administrative expenses in the accompanying
statement of operations.
15. SUBSEQUENT EVENT
In March 1998, the Company entered into an agreement with BCEF and Market
Partners to acquire BCEF and Market Partners. The agreement calls for the
Company to acquire BCEF and Market Partners through a proposed merger of BCEF
and Market Partners with and into a wholly-owned subsidiary of the Company for
aggregate consideration of $126.8 million aggregate liquidation preference of
10% Series A Exchangeable Preferred Stock of the Company (the "Preferred
Stock"), 3.5 million shares of common stock of the Company and $10.0 million in
cash. The 10% dividend payable quarterly on the Preferred Stock is payable,
at the Company's option, in either additional shares of Preferred Stock or cash
for a period of three years and is payable in cash thereafter. The Preferred
Stock is optionally redeemable by the Company at any time, in cash, at
redemption prices which start at 50% of the liquidation preference and increase
over time. The Preferred Stock is mandatorily redeemable in 2005 at a price of
110% of the liquidation preference. The transaction is subject to approval of
holders owning at least two-thirds of the interest of each of BCEF and Market
Partners, regulatory approvals and final documentation.
16. GOING CONCERN
On May 19, 1998, the Company announced that as the result of its analysis
of operating results for the quarter ended April 19, 1998, and subsequent
periods, it concluded that based upon the decline in store cash flow of the
Boston Market system during 1998, unless the Company is able to renegotiate its
senior credit facilities, sell assets and/or improve Boston Market store
performance, the Company may not generate sufficient liquidity to meet its
financial obligations in 1998. The Company is holding discussions with its
senior lenders to restructure the repayment terms and financial covenants of its
credit facilities and evaluating the sale of assets in an effort to improve its
liquidity. In addition, based upon the trends in performance of the Boston
Market system to date, the Company may not remain in compliance with certain
covenants contained in its senior credit facilities. If the Company is in
violation of the senior credit facilities, upon action of the required number of
lenders, the outstanding principal balances under the Company's revolving credit
facility and other senior credit facilities, including the master lease, which
in the aggregate totaled $241.8 million as of April 19, 1998 may be accelerated.
Any such acceleration would also permit holders of other senior and subordinated
debt of the Company to exercise their remedies, which include acceleration of
their debt which in the aggregate totaled approximately $619.3 million as of
April 19, 1998. Due to the uncertainties related to these matters, there exists
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
F-30
<PAGE>
EXHIBIT 99.2
INDEX TO PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Boston Chicken, Inc. Pro Forma Financial Statements Giving Effect to the
Acquisition of Market Partners, L.L.C., BC Equity Funding, L.L.C. and
Certain Area Developers of Boston Chicken, Inc.
Unaudited Pro Forma Consolidated Statement of Operations for the fiscal
year ended December 28, 1997.......................................... F-2
Unaudited Pro Forma Consolidated Balance Sheet as of December 28, 1997. F-3
Notes to Unaudited Pro Forma Consolidated Financial Statements......... F-5
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF
BOSTON CHICKEN, INC. GIVING EFFECT TO THE ACQUISITION OF
MARKET PARTNERS, L.L.C., BC EQUITY FUNDING, L.L.C. AND
CERTAIN AREA DEVELOPERS OF BOSTON CHICKEN, INC.
The pro forma consolidated financial information for Boston Chicken, Inc.
(the "Company") gives effect to the merger of Market Partners, L.L.C. ("Market
Partners") and BC Equity Funding, L.L.C. ("BC Equity Funding") into BCI
Acquisition Sub, L.L.C., a wholly-owned subsidiary of the Company and the
conversion of the Company's loans to the area developers of the Company which
have preferred equity investments from Market Partners and BC Equity Funding
and have waived the moratorium on their loan conversion (collectively, the
"Merger and loan conversions"). The adjusted pro forma consolidated financial
information for the Company gives effect to the Merger and loan conversion and
the conversion of the Company's loan to BC Great Lakes, L.L.C. ("BC Great
Lakes"), which loan was converted by the Company in March 1998. The pro forma
consolidated financial statements of the Company are based upon the
assumptions set forth in the accompanying notes to such statements. The pro
forma balance sheet assumes the transactions occur as of December 28, 1997 and
the pro forma results of operations assume the transactions occured at the
beginning of the period presented. The pro forma financial information does
not reflect provisions totalling $260.1 million for additional asset
impairment recorded by the Company for the quarter ended April 19, 1998. The
pro forma financial statements should be read in conjunction with the related
historical financial statements and are not necessarily indicative of the
results that would have actually occurred had the transactions been
consummated on the date or the period indicated or which may occur in the
future.
F-2
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
GIVING EFFECT TO THE ACQUISITION OF MARKET PARTNERS, L.L.C.,
BC EQUITY FUNDING, L.L.C.
AND CERTAIN AREA DEVELOPERS OF BOSTON CHICKEN, INC.
FOR THE YEAR ENDED DECEMBER 28, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
BC Equity Market
Boston Funding Partners, Total Area Pro Forma BC Great Pro Forma
Chicken, Inc. L.L.C. L.L.C. Developers Adjustments Pro Forma Lakes, L.L.C. Adjustments
------------- --------- --------- ---------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Stores............ $ 261,077 $ -- $ -- $ 546,559 $807,636 $123,545
Royalties and
franchise related
fees.............. 117,857 -- -- -- $ (6,827)(2) 65,562 -- $(10,210)(15)
(45,468)(6)
Interest income... 83,434 -- -- -- (2,900)(2) 47,435 -- (9,623)(15)
(33,099)(6)
--------- -------- -------- --------- --------- --------- -------- --------
Total revenue... 462,368 -- -- 546,559 (88,294) 920,633 123,545 (19,833)
Costs and Expenses:
Cost of products
sold.............. 94,736 -- -- 208,108 302,844 47,928
Salaries and
benefits.......... 109,424 -- -- 187,385 296,809 37,841
General and
administrative.... 292,534 52 158 284,431 286 (2) 517,076 60,282 (9,523)(15)
(46,436)(6) (2,881)(16)
(13,949)(7)
Provision for
store closures.... -- -- -- 63,501 -- 63,501 3,245 --
Provision for
loan losses....... 128,000 -- -- -- (76,420)(8) 51,580 --
Losses of Boston
Chicken, Inc.'s
area developers... 49,352 -- -- -- 10,413 (2) 16,959 --
(42,806)(4)
--------- -------- -------- --------- --------- --------- -------- --------
Total costs and
expenses........ 674,046 52 158 743,425 (168,912) 1,248,769 149,296 (12,404)
--------- -------- -------- --------- --------- --------- -------- --------
Loss from
Operations......... (211,678) (52) (158) (196,866) 80,618 (328,136) (25,751) (7,429)
Other Income
(Expense):
Investment
income............ -- 14 10,618 -- (10,516)(5) 116 --
Interest expense,
net............... (38,209) -- -- (41,130) 40,421 (6) (38,918) (9,711) 9,623 (15)
Gain on issuances
of subsidiary's
stock............. 192 -- -- -- 192 --
Other income
(expense), net.... 1,603 -- -- (8,363) (10,674)(6) (17,434) (1,819)
Unrealized
depreciation on
investments....... -- (25,465) (17,575) -- 43,040 (3) -- --
--------- -------- -------- --------- --------- --------- -------- --------
Total other
income
(expense):...... (36,414) (25,451) (6,957) (49,493) 62,271 (56,044) (11,530) 9,623
--------- -------- -------- --------- --------- --------- -------- --------
Loss Before Income
Taxes and Minority
Interest........... (248,092) (25,503) (7,115) (246,359) 142,889 (384,180) (37,281) 2,194
Income Tax Benefit. 8,415 -- -- -- 4,700 (10) 13,115 --
Minority Interest
in Losses of
Subsidiaries....... 15,785 -- -- -- 19,297 (9) 35,082 -- 4,354 (17)
--------- -------- -------- --------- --------- --------- -------- --------
Net Loss........... (223,892) (25,503) (7,115) (246,359) 166,886 (335,983) (37,281) 6,548
Dividends on
Preferred Stock.... -- -- -- -- (13,163)(12) (13,163) --
--------- -------- -------- --------- --------- --------- -------- --------
Net Loss Applicable
to Common Stock.... $(223,892) $(25,503) $ (7,115) $(246,359) $ 153,723 $(349,146) $(37,281) $ 6,548
========= ======== ======== ========= ========= ========= ======== ========
Basic Loss Per
Share.............. $ (3.32) $ (5.03)(13)
========= =========
Diluted Loss Per
Share.............. $ (3.32) $ (5.03)(13)
========= =========
Weighted Average
Number of Common
Shares Outstanding:
Basic............. 67,339 3,500 (11) 70,839
========= ========= =========
Diluted........... 67,339 3,500 (11) 70,839
========= ========= =========
<CAPTION>
Adjusted
Pro Forma
----------
<S> <C>
Revenue:
Stores............ $ 931,181
Royalties and
franchise related
fees.............. 55,352
Interest income... 37,812
----------
Total revenue... 1,024,345
Costs and Expenses:
Cost of products
sold.............. 350,772
Salaries and
benefits.......... 334,650
General and
administrative.... 564,954
Provision for
store closures.... 66,746
Provision for
loan losses....... 51,580
Losses of Boston
Chicken, Inc.'s
area developers... 16,959
----------
Total costs and
expenses........ 1,385,661
----------
Loss from
Operations......... (361,316)
Other Income
(Expense):
Investment
income............ 116
Interest expense,
net............... (39,006)
Gain on issuances
of subsidiary's
stock............. 192
Other income
(expense), net.... (19,253)
Unrealized
depreciation on
investments....... --
----------
Total other
income
(expense):...... (57,951)
----------
Loss Before Income
Taxes and Minority
Interest........... (419,267)
Income Tax Benefit. 13,115
Minority Interest
in Losses of
Subsidiaries....... 39,436
----------
Net Loss........... (366,716)
Dividends on
Preferred Stock.... (13,163)
----------
Net Loss Applicable
to Common Stock.... $(379,879)
==========
Basic Loss Per
Share.............. $ (5.46)
==========
Diluted Loss Per
Share.............. $ (5.46)
==========
Weighted Average
Number of Common
Shares Outstanding:
Basic............. 70,839
==========
Diluted........... 70,839
==========
</TABLE>
F-3
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
GIVING EFFECT TO THE ACQUISITION OF MARKET PARTNERS, L.L.C.,
BC EQUITY FUNDING, L.L.C. AND CERTAIN AREA DEVELOPERS OF BOSTON CHICKEN, INC.
DECEMBER 28, 1997
(in thousands)
<TABLE>
<CAPTION>
BC
Boston Equity Market
Chicken, Funding, Partners, Total Area Pro Forma B.C. Great Pro Forma
Inc. L.L.C. L.L.C. Developers Adjustments Pro Forma Lakes, L.L.C. Adjustments
---------- -------- --------- ---------- ----------- ----------- ------------- -----------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents...... $ 90,559 $ 230 $ 494 $ 1,590 $ (10,000)(11) $ 82,873 $ --
Accounts
receivable, net.. 13,894 -- -- -- (7,237)(6) 6,657 -- $ (1,195)(15)
Inventories....... 16,132 -- -- 11,000 27,132 2,337
Prepaid expenses
and other current
assets........... 1,436 1 3 2,384 3,824 126
Deferred income
taxes............ 2,353 -- -- -- 2,353 --
---------- ------- ------- -------- ---------- ----------- ------- --------
Total Current
Assets......... 124,374 231 497 14,974 (17,237) 122,839 2,463 (1,195)
Property and
Equipment, net..... 530,582 -- -- 207,466 (62,478)(14) 675,570 51,356 (14,559)(18)
Investments in
Boston Chicken,
Inc. Area
Developers......... -- 50,841 57,928 -- (108,769)(14) -- --
Notes Receivable,
net................ 609,175 -- -- -- (363,600)(14) 245,575 -- (112,677)(18)
Deferred Financing
Costs, net......... 24,570 -- -- -- -- 24,570 --
Goodwill, net....... 639,364 -- -- 81,335 334,377 (14) 1,055,076 19,445 75,249 (18)
Other Assets, net... 77,062 43 285 6,709 (328)(11) 83,771 1,151
---------- ------- ------- -------- ---------- ----------- ------- --------
Total Assets.... $2,005,127 $51,115 $58,710 $310,484 $ (218,035) $ 2,207,401 $74,415 $(53,182)
========== ======= ======= ======== ========== =========== ======= ========
<CAPTION>
Adjusted
Pro Forma
----------
ASSETS
------
<S> <C>
Current Assets:
Cash and cash
equivalents...... $ 82,873
Accounts
receivable, net.. 5,462
Inventories....... 29,469
Prepaid expenses
and other current
assets........... 3,950
Deferred income
taxes............ 2,353
----------
Total Current
Assets......... 124,107
Property and
Equipment, net..... 712,367
Investments in
Boston Chicken,
Inc. Area
Developers......... --
Notes Receivable,
net................ 132,898
Deferred Financing
Costs, net......... 24,570
Goodwill, net....... 1,149,770
Other Assets, net... 84,922
----------
Total Assets.... $2,228,634
==========
</TABLE>
F-4
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
GIVING EFFECT TO THE ACQUISITION OF MARKET PARTNERS, L.L.C.,
BC EQUITY FUNDING, L.L.C. AND CERTAIN AREA DEVELOPERS OF BOSTON CHICKEN, INC.
DECEMBER 28, 1997 (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
BC
Boston Equity Market
Chicken, Funding, Partners, Total Area Pro Forma B.C. Great
Inc. L.L.C. L.L.C. Developers Adjustments Pro Forma Lakes, L.L.C.
---------- -------- --------- ---------- ----------- ---------- -------------
LIABILITIES AND
SOCKHOLDERS'/PARTNERS'/T
MEMBERS' EQUITY
(DEFICIT)
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable.. $ 33,205 $ -- $ -- $ 14,998 $ (3,538)(6) $ 44,665 $ 3,034
Accrued expenses.. 85,207 -- -- 57,300 (4,112)(14) 134,696 9,977
(3,699)(6)
Other current
liabilities...... 14,119 -- -- -- 14,119 --
---------- ------- ------- -------- --------- ---------- -------
Total Current
Liabilities.... 132,531 -- -- 72,298 (11,349) 193,480 13,011
Deferred Franchise
Revenue............ 5,723 -- -- -- (3,265)(14) 2,458 --
Convertible
Subordinated Debt--
Boston Chicken,
Inc................ 417,020 -- -- -- 417,020 --
Convertible
Subordinated Debt--
Einstein/Noah Bagel
Corp............... 125,000 -- -- -- 125,000 --
Liquid Yield Option
Notes.............. 197,442 -- -- -- 197,442 --
Senior Term Loan--
Einstein/Noah Bagel
Corp............... 24,000 -- -- -- 24,000 --
Long-Term Debt...... -- -- -- 508,391 (503,406)(14) 4,985 112,677
Deferred Income
Taxes.............. 2,353 -- -- -- -- 2,353 --
Other Noncurrent
Liabilities........ 44,753 -- -- 11,892 (21)(14) 56,624 2,173
Mandatorily
Redeemable
Preferred Stock.... -- -- -- -- 82,905 (11) 82,905 --
Minority Interests.. 253,630 -- -- -- 28,237 (14) 281,867 --
Stockholders'/Partners'/Members'
Equity/Deficit: --
Preferred stock... -- -- -- -- -- --
Common stock...... 714 -- -- -- 35 (11) 749 --
Additional paid-in
capital.......... 918,266 -- -- -- 16,557 (11) 934,823 --
Partners'/Members'
equity (deficit). -- 51,115 58,710 (282,097) 282,097 (14) -- (53,446)
(109,825)(11)
Accumulated
deficit.......... (116,305) -- -- -- (116,305) --
---------- ------- ------- -------- --------- ---------- -------
Total Equity
(Deficit)...... 802,675 51,115 58,710 (282,097) 188,864 819,267 (53,446)
---------- ------- ------- -------- --------- ---------- -------
Total
Liabilities and
Stockholders'/Partners'/Members'
Equity
(Deficit)...... $2,005,127 $51,115 $58,710 $310,484 $(218,035) $2,207,401 $74,415
========== ======= ======= ======== ========= ========== =======
<CAPTION>
Pro Forma Adjusted
Adjustments Pro Forma
--------------- -----------
LIABILITIES AND
SOCKHOLDERS'/PARTNERS'/T
MEMBERS' EQUITY
(DEFICIT)
- ------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.. $ (381)(15) $ 47,318
Accrued expenses.. (814)(15) 142,673
(1,186)(18)
Other current
liabilities...... 14,119
--------------- -----------
Total Current
Liabilities.... (2,381) 204,110
Deferred Franchise
Revenue............ (455)(18) 2,003
Convertible
Subordinated Debt--
Boston Chicken,
Inc................ 417,020
Convertible
Subordinated Debt--
Einstein/Noah Bagel
Corp............... 125,000
Liquid Yield Option
Notes.............. 197,442
Senior Term Loan--
Einstein/Noah Bagel
Corp............... 24,000
Long-Term Debt...... (112,677)(18) 4,985
Deferred Income
Taxes.............. 2,353
Other Noncurrent
Liabilities........ 58,797
Mandatorily
Redeemable
Preferred Stock.... 82,905
Minority Interests.. 8,885 (18) 290,752
Stockholders'/Partners'/Members'
Equity/Deficit:
Preferred stock... --
Common stock...... 749
Additional paid-in
capital.......... 934,823
Partners'/Members'
equity (deficit). 53,446 (18) --
Accumulated
deficit.......... (116,305)
--------------- -----------
Total Equity
(Deficit)...... 53,446 819,267
--------------- -----------
Total
Liabilities and
Stockholders'/Partners'/Members'
Equity
(Deficit)...... $(53,182) $2,228,634
=============== ===========
</TABLE>
F-5
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS GIVING EFFECT TO THE
ACQUISITION OF MARKET PARTNERS, L.L.C, BC EQUITY FUNDING, L.L.C. AND
CERTAIN AREA DEVELOPERS OF BOSTON CHICKEN, INC.
1. The following details the financial position and results of operations of
the Boston Chicken area developers acquired in the accompanying pro forma
balance sheet and statement of operations (in thousands):
<TABLE>
<CAPTION>
BC
P&L Food BC BCE Golden Finest BC BC B.C.B.M. BC Tri- R&A Food
Services, Boston, West, Gate, Foodservice, Superior, Heartland, Southwest, States, Services,
ASSETS L.L.C. L.P. L.P. L.L.C. L.L.C. L.L.C. L.L.C. L.P. L.L.C. L.P.
------ --------- ------- ------- ------- ------------ --------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents....... $ 390 $ -- $ 96 $ 171 $ -- $ -- $ 92 $ 710 $ 8 $ 123
Inventories....... 1,168 1,115 912 1,152 1,512 855 368 1,472 345 2,101
Prepaid expenses
and other current
assets............ 240 264 263 382 341 36 11 170 116 561
------- ------- ------- ------- ------- ------- ------ ------- ------- -------
Total Current
Assets.......... 1,798 1,379 1,271 1,705 1,853 891 471 2,352 469 2,785
Property and
Equipment, net..... 28,074 20,726 15,668 24,189 19,700 14,352 8,047 25,690 14,455 36,565
Goodwill, net...... 1,694 5,800 2,976 3,225 20,010 20,089 -- -- 27,541 --
Other Assets, net.. 366 115 213 1,116 900 340 275 317 677 2,390
------- ------- ------- ------- ------- ------- ------ ------- ------- -------
Total Assets.... $31,932 $28,020 $20,128 $30,235 $42,463 $35,672 $8,793 $28,359 $43,142 $41,740
======= ======= ======= ======= ======= ======= ====== ======= ======= =======
<CAPTION>
LIABILITIES AND PARTNERS'/MEMBERS' EQUITY (DEFICIT)
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current
Liabilities:
Accounts payable.. $ 1,322 $ 973 $ 233 $ 2,221 $ 1,978 $ 1,205 $ 222 $ 1,885 $ 1,124 $ 3,835
Accrued expenses.. 4,515 2,958 4,036 3,669 9,314 15,630 995 3,655 1,690 10,838
------- ------- ------- ------- ------- ------- ------ ------- ------- -------
Total Current
Liabilities..... 5,837 3,931 4,269 5,890 11,292 16,835 1,217 5,540 2,814 14,673
Long-Term Debt..... 49,675 46,687 43,338 49,993 78,121 46,968 7,623 54,754 38,012 93,220
Other Noncurrent
Liabilities........ 528 741 765 1,866 2,228 905 295 2,665 -- 1,899
Partners'/Members'
Equity (Deficit)... (24,108) (23,339) (28,244) (27,514) (49,178) (29,036) (342) (34,600) 2,316 (68,052)
------- ------- ------- ------- ------- ------- ------ ------- ------- -------
Total
Liabilities and
Partners'/Members'
Equity.......... $31,932 $28,020 $20,128 $30,235 $42,463 $35,672 $8,793 $28,359 $43,142 $41,740
======= ======= ======= ======= ======= ======= ====== ======= ======= =======
<CAPTION>
Total Area
ASSETS Developers
------ ----------
<S> <C>
Current Assets:
Cash and cash
equivalents....... $ 1,590
Inventories....... 11,000
Prepaid expenses
and other current
assets............ 2,384
----------
Total Current
Assets.......... 14,974
Property and
Equipment, net..... 207,466
Goodwill, net...... 81,335
Other Assets, net.. 6,709
----------
Total Assets.... $310,484
==========
<CAPTION>
LIABILITIES AND PARTNERS'/MEMBERS' EQUITY (DEFICIT)
- ---------------------------------------------------
<S> <C>
Current
Liabilities:
Accounts payable.. $ 14,998
Accrued expenses.. 57,300
----------
Total Current
Liabilities..... 72,298
Long-Term Debt..... 508,391
Other Noncurrent
Liabilities........ 11,892
Partners'/Members'
Equity (Deficit)... (282,097)
----------
Total
Liabilities and
Partners'/Members'
Equity.......... $310,484
==========
</TABLE>
F-6
<PAGE>
BOSTON CHICKEN, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS GIVING EFFECT TO THE
ACQUISITION OF MARKET PARTNERS, L.L.C, BC EQUITY FUNDING, L.L.C. AND
CERTAIN AREA DEVELOPERS OF BOSTON CHICKEN, INC.
<TABLE>
<CAPTION>
BC
P&L Food BC BCE Golden Finest BC BC B.C.B.M. BC Tri- R&A Food
Services, Boston, West, Gate, Foodservice, Superior, Heartland, Southwest, States, Services,
L.L.C. L.P. L.P. L.L.C. L.L.C. L.L.C. L.L.C. L.P. L.L.C. L.P.
--------- -------- -------- -------- ------------ --------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............ $ 54,677 $ 58,307 $ 60,511 $ 59,268 $ 67,953 $ 40,274 $15,631 $ 71,796 $ 12,007 $106,135
Costs and Expenses:
Cost of products
sold.............. 21,015 22,281 22,490 22,241 27,168 15,678 6,172 27,306 4,409 39,348
Salaries and
benefits.......... 17,795 17,294 21,278 18,671 23,446 16,337 5,371 23,894 10,972 32,327
General and
administrative.... 25,442 28,150 29,075 34,932 43,690 26,102 6,694 33,358 3,154 53,834
Provision for
store closures.... 4,229 2,735 2,688 4,967 12,327 23,972 -- 2,939 697 8,947
-------- -------- -------- -------- -------- -------- ------- -------- -------- --------
Total costs and
expenses........ 68,481 70,460 75,531 80,811 106,631 82,089 18,237 87,497 19,232 134,456
-------- -------- -------- -------- -------- -------- ------- -------- -------- --------
Loss from
Operations......... (13,804) (12,153) (15,020) (21,543) (38,678) (41,815) (2,606) (15,701) (7,225) (28,321)
Other Income
(Expense):
Interest expense,
net............... (4,123) (4,036) (4,078) (3,754) (5,971) (3,978) (388) (4,467) (2,242) (8,093)
Other income
(expense), net.... (841) (1,555) 1,103 (3,266) (1,445) 697 468 (871) (5,439) 2,786
-------- -------- -------- -------- -------- -------- ------- -------- -------- --------
Total other
income
(expense)....... (4,964) (5,591) (2,975) (7,020) (7,416) (3,281) 80 (5,338) (7,681) (5,307)
-------- -------- -------- -------- -------- -------- ------- -------- -------- --------
Net Loss........... $(18,768) $(17,744) $(17,995) $(28,563) $(46,094) $(45,096) $(2,526) $(21,039) $(14,906) $(33,628)
======== ======== ======== ======== ======== ======== ======= ======== ======== ========
<CAPTION>
Total
Area
Developers
-----------
<S> <C>
Revenue............ $ 546,559
Costs and Expenses:
Cost of products
sold.............. 208,108
Salaries and
benefits.......... 187,385
General and
administrative.... 284,431
Provision for
store closures.... 63,501
-----------
Total costs and
expenses........ 743,425
-----------
Loss from
Operations......... (196,866)
Other Income
(Expense):
Interest expense,
net............... (41,130)
Other income
(expense), net.... (8,363)
-----------
Total other
income
(expense)....... (49,493)
-----------
Net Loss........... $(246,359)
===========
</TABLE>
F-7
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
GIVING EFFECT TO THE ACQUISITION OF
MARKET PARTNERS, L.L.C., BC EQUITY FUNDING, L.L.C. AND
CERTAIN AREA DEVELOPERS OF BOSTON CHICKEN, INC.
2. As a result of the acquisition of Market Partners and BC Equity Funding
and the moratorium on converting the Company's loan to BC Northwest, L.P.
("BC Northwest"), the Company recognizes, in a single line item on its
consolidated statement of operations, the net losses of BC Northwest for
the entire fiscal year. The Company continues to charge BC Northwest
royalties, franchise and related fees and interest, but the Company no
longer recognizes these payments as revenue. As a result, BC Northwest's
net losses recognized by the Company have been correspondingly reduced by
the amount of royalties, franchise and related fees and interest not
recognized by the Company. The Company has also not recognized the
reimbursement of general and administrative expenses by BC Northwest.
3. To eliminate the unrealized depreciation recognized on Market Partners'
and BC Equity Funding's investments. In lieu of recording the change in
the investments' market value, the Company either recognizes the
operations of the area developers in which Market Partners and BC Equity
Funding have preferred equity investments (See note 2) or, as a result of
the loan conversions, consolidates their results of operations.
4. To eliminate the losses of the Boston Chicken area developers which had
been recognized by the Company. As a result of the loan conversions, in
lieu of recording the area developers' losses in a single line item on the
statement of operations, the Company has consolidated their results of
operations.
5. To eliminate the investment income earned from the area developers in
which Market Partners and BC Equity Funding have preferred equity
investments. In lieu of recognizing the investment income, the Company
either recognizes the operations of the area developers in which Market
Partners and BC Equity Funding have preferred equity investments (See note
2) or, as a result of the loan conversions, consolidates their results of
operations.
6. To eliminate intercompany transactions between the Company, Market
Partners, BC Equity Funding and the Boston Chicken area developers.
7. To amortize goodwill resulting from the conversions over a 35-year period
and adjust depreciation on assets acquired based upon their estimated fair
market value.
8. To reverse the provision for loan losses for the area developers whose
loans are being converted. In lieu of such loan losses, the pro forma
financial statements reflect the net losses of the area developers.
9. To allocate the portion of the area developers' losses applicable to the
minority interests.
10. To adjust the income tax benefit as a result of the consolidated loss.
11. To record the issuance, at estimated market value, the consideration for
the acquisition of Market Partners and BC Equity Funding and adjust
acquired assets to their estimated market value. The estimated market
value of the common stock was based upon the market value of the Company's
common stock measured over a period of time prior to and after the
agreement in principle to acquire BCEF and Market Partners was reached and
publicly announced. The estimated market value of the series A
exchangeable preferred stock was determined based upon a discounted cash
flow analysis of the dividend and principle payments of the instrument.
The analysis utilized a discount rate equal to the yield of the Company's
publicly-traded debentures measured over a period of time prior to and
after the agreement in principle to acquire BCEF and Market Partners was
reached and publicly announced.
12. To record the dividend on the series A exchangeable preferred stock issued
in the transaction.
13. The net loss has been increased by $7.0 million in the calculation of
basic and diluted loss per share as a result of the accretion of the
series A exchangeable preferred stock to its redemption value.
F-8
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
GIVING EFFECT TO THE ACQUISITION OF
MARKET PARTNERS, L.L.C., BC EQUITY FUNDING, L.L.C. AND
CERTAIN AREA DEVELOPERS OF BOSTON CHICKEN, INC.
14. To record the conversion of the outstanding balance of the convertible
secured loans and elimination of the nonconvertible loans from the Company
to the area developers (reflected as $503.4 million on the balance sheet
of the area developers and reflected as $363.6 million on the balance
sheet of the Company), record acquired assets and liabilities at their
estimated fair market value, and recognize the minority interests in the
area developers. Additionally, the $108.8 million investment in the area
developers by Market Partners and BC Equity Funding is eliminated as the
area developers are now accounted for on a consolidated basis.
15. To eliminate intercompany transactions between the Company and BC Great
Lakes.
16. To amortize goodwill resulting from the conversions over a 35-year period
and adjust depreciation on assets acquired based upon their estimated fair
market value.
17. To allocate the portion of BC Great Lakes' losses applicable to the
minority interests.
18. To record the conversion of the $112.7 million outstanding balance of the
convertible secured loan, record acquired assets and liabilities at their
estimated fair market value, and recognize the minority interest in BC
Great Lakes.
F-9
