<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 15, 1998
BOSTON CHICKEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-22802 36-3904053
(STATE OR OTHER (COMMISSION FILE NO.) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION)
14123 DENVER WEST PARKWAY,
P.O. BOX 4086,
GOLDEN, COLORADO 80401-4086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 278-9500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGES SINCE LAST REPORT)
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The Company filed a Form 8-K on July 30, 1998 regarding the acquisition of
certain area developers, Market Partners, L.L.C. and BC Equity Funding, L.L.C.
At the time of the Form 8-K filing, it was impractical to provide the required
financial statements of businesses acquired and pro forma financial
information. This amendment to the July 30, 1998 Form 8-K sets forth the
required financial information.
(a) Financial Statements of Business Acquired.
(b) Pro Forma Financial Information.
(c) Exhibits.
The Exhibits to this report are listed in the Exhibit Index set forth
elsewhere herein.
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: September 28, 1998
BOSTON CHICKEN, INC.
By: /s/ Lawrence E. White
---------------------
<PAGE>
BOSTON CHICKEN, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
99.1 Financial Statements of Businesses Acquired For the Year Ended
December 28, 1997
Pro Forma Financial Information For the Year Ended December 28, 1997
99.2 Financial Statements of Businesses Acquired For the Two Quarters Ended
July 12, 1998
Pro Forma Financial Information For the Two Quarters Ended July 12,
1998
</TABLE>
<PAGE>
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EXHIBIT 99.1
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
B.C.B.M. SOUTHWEST, L.P. (FORMERLY B.C. TEXAS, INC.)
Report of Independent Public Accountants.................................. F-4
Financial Statements:
Balance Sheets at December 28, 1997 and December 29, 1996............... F-5
Statements of Operations for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995................................ F-6
Statements of Stockholders' Deficit for the period from December 30,
1996 to April 19, 1997 and the fiscal years ended December 29, 1996 and
December 31, 1995...................................................... F-7
Statement of Partners' Deficit for the period from April 20, 1997 to
December 28, 1997...................................................... F-8
Statements of Cash Flows for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995................................ F-9
Notes to Consolidated Financial Statements.............................. F-10
R&A FOOD SERVICES, L.P. (FORMERLY R&A FOOD SERVICES, INC.)
Report of Independent Public Accountants.................................. F-17
Financial Statements:
Balance Sheets at December 28, 1997 and December 29, 1996............... F-18
Statements of Operations for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995................................ F-19
Statements of Stockholders' Deficit for the period from January 1, 1996
through October 5, 1996 and the year ended December 31, 1995 .......... F-20
Statements of Partners' Deficit for the year ended December 28, 1997 and
period from October 6, 1996 through December 29, 1996 ................. F-21
Statements of Cash Flows for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995................................ F-22
Notes to Financial Statements........................................... F-23
FINEST FOODSERVICE, L.L.C.
Report of Independent Public Accountants................................ F-30
Balance Sheets at December 28, 1997 and December 29, 1996............... F-31
Statements of Operations for the fiscal years ended December 28, 1997
and December 29, 1996.................................................. F-32
Statements of Members' Deficit for the fiscal years ended December 28,
1997 and December 29, 1996............................................. F-33
Statements of Cash Flows for the years ended December 28, 1997 and
December 29, 1996...................................................... F-34
Notes to Financial Statements........................................... F-35
P&L FOOD SERVICES, L.L.C.
Report of Independent Public Accountants................................ F-42
Balance Sheets at December 28, 1997 and December 29, 1996............... F-43
Statements of Operations for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995................................ F-44
Statements of Members' Deficit for the fiscal years ended December 28,
1997, December 29, 1996 and the period from September 4, 1995 through
December 31, 1995...................................................... F-45
Statement of Stockholders' Deficit for the period from December 26, 1994
through September 3, 1995.............................................. F-46
Statements of Cash Flows for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995................................ F-47
Notes to Financial Statements........................................... F-48
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
BC BOSTON, L.P.
Report of Independent Public Accountants............................... F-55
Balance Sheets at December 28, 1997 and December 29, 1996.............. F-56
Statements of Operations for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995............................... F-57
Statements of Partners' Deficit for the fiscal years ended December 28,
1997, December 29, 1996 and December 31, 1995......................... F-58
Statements of Cash Flows for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995............................... F-59
Notes to Financial Statements.......................................... F-60
BCE WEST, L.P.
Report of Independent Public Accountants............................... F-67
Balance Sheets at December 28, 1997 and December 29, 1996.............. F-68
Statements of Operations for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995............................... F-69
Statements of Partners' Deficit for the fiscal years ended December 28,
1997, December 29, 1996 and December 31, 1995......................... F-70
Statements of Cash Flows for the fiscal years ended December 28, 1997,
December 29, 1996 and December 31, 1995............................... F-71
Notes to Financial Statements.......................................... F-72
BC GOLDENGATE, L.L.C.
Report of Independent Public Accountants............................... F-79
Balance Sheets at December 28, 1997 and December 29, 1996.............. F-80
Statements of Operations for the fiscal years ended December 28, 1997,
December 29, 1996 and the period from inception (July 14, 1995)
through December 31, 1995............................................. F-81
Statements of Members' Equity (Deficit) for the fiscal years ended
December 28, 1997, December 29, 1996 and the period from inception
(July 14, 1995) through December 31, 1995............................. F-82
Statements of Cash Flows for the fiscal years ended December 28, 1997,
December 29, 1996 and the period from inception (July 14, 1995)
through December 31, 1995............................................. F-83
Notes to Financial Statements.......................................... F-84
BC TRI-STATES, L.L.C.
Report of Independent Public Accountants............................... F-91
Balance Sheet at December 28, 1997..................................... F-92
Statement of Operations for the period from inception (March 3, 1997)
through December 28, 1997............................................. F-93
Statement of Members' Equity for the period from inception (March 3,
1997) through December 28, 1997....................................... F-94
Statement of Cash Flows for the period from inception (March 3, 1997)
through December 28, 1997............................................. F-95
Notes to Financial Statements.......................................... F-96
BC SUPERIOR, L.L.C.
Report of Independent Public Accountants............................... F-102
Balance Sheets at December 28, 1997 and December 29, 1996.............. F-103
Statements of Operations for the fiscal years ended December 28, 1997,
December 29, 1996 and the period from inception (May 3, 1995) through
December 31, 1995..................................................... F-104
Statements of Members' Equity (Deficit) for the fiscal years ended
December 28, 1997, December 29, 1996 and the period from inception
(May 3, 1995) through December 31, 1995............................... F-105
Statements of Cash Flows for the fiscal years ended December 28, 1997,
December 29, 1996 and the period from inception (May 3, 1995) through
December 31, 1995..................................................... F-106
Notes to Financial Statements.......................................... F-107
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
BC HEARTLAND, L.L.C.
Report of Independent Public Accountants............................... F-115
Balance Sheets at December 28, 1997 and December 29, 1996.............. F-116
Statements of Operations for the fiscal years ended December 28, 1997,
December 29, 1996 and the period from inception (August 7, 1995)
through December 31, 1995............................................. F-117
Statements of Members' Deficit for the fiscal years ended December 28,
1997, December 29, 1996 and the period from inception (August 7, 1995)
through December 31, 1995............................................. F-118
Statements of Cash Flows for the fiscal years ended December 28, 1997,
December 29, 1996 and the period from inception (August 7, 1995)
through December 31, 1995............................................. F-119
Notes to Financial Statements.......................................... F-120
</TABLE>
<TABLE>
<S> <C>
MARKET PARTNERS, L.L.C.
Report of Independent Public Accountants................................. F-126
Financial Statements:
Statements of Assets and Liabilities at December 29, 1996 and December
28, 1997.............................................................. F-127
Schedule of Investments at December 29, 1996 and December 28, 1997..... F-128
Statements of Operations for the period from July 18, 1996 (date of
inception) through December 29, 1996 and year ended December 28, 1997. F-130
Statements of Members' Equity for the period from July 18, 1996 (date
of inception) through December 29, 1996 and year ended December 28,
1997.................................................................. F-131
Statements of Changes in Net Assets for the period from July 18, 1996
(date of inception) through December 29, 1996 and year ended December
28, 1997.............................................................. F-132
Notes to Financial Statements.......................................... F-133
BC EQUITY FUNDING, L.L.C.
Report of Independent Public Accountants................................. F-137
Financial Statements:
Statements of Assets and Liabilities at December 29, 1996 and December
28, 1997.............................................................. F-138
Schedule of Investments at December 29, 1996 and December 28, 1997..... F-139
Statements of Operations for the period from February 15, 1995 (date of
inception) through December 31, 1995 and for the years ended December
29, 1996 and December 28, 1997........................................ F-141
Statements of Members' Equity for the period from February 15, 1995
(date of inception) through December 31, 1995 and for the years ended
December 29, 1996 and December 28, 1997............................... F-142
Statements of Changes in Net Assets for the period from February 15,
1995 (date of inception) through December 31, 1995 and for the years
ended December 29, 1996 and December 28, 1997......................... F-143
Notes to Financial Statements.......................................... F-144
</TABLE>
<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-148
Notes to Unaudited Pro Forma Consolidated Financial Statements......... F-149
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of B.C.B.M. Southwest, L.P.
We have audited the accompanying balance sheets of B.C.B.M. Southwest, L.P.
(formerly BC Texas, Inc.) as of December 28, 1997 and December 29, 1996, and
the related statements of operations, stockholders' deficit/partners' deficit
and cash flows for the fiscal years ended December 28, 1997, December 29, 1996
and December 31, 1995. These financial statements are the responsibility of the
Partnership'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.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 1 to the
financial statements, the Partnership has experienced significant losses since
its inception and has a capital deficiency that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of B.C.B.M. Southwest, L.P. as of
December 28, 1997 and December 29, 1996, and the results of its operations and
its cash flows for the fiscal years ended December 28, 1997, December 29, 1996
and December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Denver, Colorado
April 24, 1998
F-4
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
BALANCE SHEETS
AS OF DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash............................................. $ 710,301 $ 1,907,155
Inventories...................................... 1,471,343 1,421,487
Prepaid expenses and other current assets........ 170,053 650,580
------------ ------------
Total current assets........................... 2,351,697 3,979,222
Property, Equipment and Other Related Assets, net.. 25,689,691 21,736,793
Other Assets....................................... 317,477 1,116,805
------------ ------------
Total assets................................... $ 28,358,865 $ 26,832,820
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS'/PARTNERS' DEFICIT
-----------------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................. $ 1,885,460 $ 3,191,022
Accrued expenses................................. 3,655,132 3,658,697
------------ ------------
Total current liabilities...................... 5,540,592 6,849,719
Convertible Debt................................... 54,753,847 36,296,371
Other Liabilities.................................. 2,664,555 1,246,894
Commitments
Stockholders'/Partners' Deficit:
Partners' deficit................................ (34,600,129) --
Common stock, par value $.01 per share; 520,690
shares authorized; 100,000 shares issued and
outstanding..................................... -- 1,000
Preferred stock, 10,000 shares authorized; 10,000
shares issued and outstanding................... -- 10,000,000
Additional paid-in capital....................... -- 3,854,250
Accumulated deficit.............................. -- (31,415,414)
------------ ------------
Total stockholders'/partners' deficit.......... (34,600,129) (17,560,164)
------------ ------------
Total liabilities and stockholders'/partners'
deficit....................................... $ 28,358,865 $ 26,832,820
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-5
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(53 WEEKS)
<S> <C> <C> <C>
Revenue.............................. $ 71,796,304 $ 57,915,765 $ 36,359,867
Costs and Expenses:
Cost of products sold.............. 27,306,079 22,338,460 14,339,677
Salaries and benefits.............. 23,894,256 19,341,774 13,281,898
General and administrative......... 33,358,756 24,962,626 18,728,503
Provision for store closures....... 2,938,532 -- --
------------ ------------ ------------
Total costs and expenses......... 87,497,623 66,642,860 46,350,078
------------ ------------ ------------
Loss from Operations................. (15,701,319) (8,727,095) (9,990,211)
Other Income (Expense):
Interest expense................... (4,467,453) (2,664,711) (1,695,354)
Other income (expense)............. (871,223) 930,251 148,754
------------ ------------ ------------
Total other expense.............. (5,338,676) (1,734,460) (1,546,600)
------------ ------------ ------------
Net Loss............................. $(21,039,995) $(10,461,555) $(11,536,811)
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM DECEMBER 30, 1996 TO APRIL 19, 1997 AND YEARS ENDED
DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
-------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 25,
1994................... 100,000 $1,000 -- $ -- $1,999,000 $ (7,561,798) $ (5,561,798)
Issuance of preferred
stock................. -- -- 10,000 10,000,000 -- -- 10,000,000
Accrued dividends on
preferred stock....... -- -- -- -- 741,771 (741,771) --
Net loss............... -- -- -- -- -- (11,536,811) (11,536,811)
------- ------ ------ ----------- ---------- ------------ ------------
BALANCES, December 31,
1995................... 100,000 1,000 10,000 10,000,000 2,740,771 (19,840,380) (7,098,609)
Accrued dividends on
preferred stock....... -- -- -- -- 1,113,479 (1,113,479) --
Net loss............... -- -- -- -- -- (10,461,555) (10,461,555)
------- ------ ------ ----------- ---------- ------------ ------------
BALANCES, December 29,
1996................... 100,000 1,000 10,000 10,000,000 3,854,250 (31,415,414) (17,560,164)
Accrued dividends on
preferred stock....... -- -- -- -- 365,274 (365,274) --
Net loss............... -- -- -- -- -- (5,260,861) (5,260,861)
------- ------ ------ ----------- ---------- ------------ ------------
BALANCES, April 19,
1997................... 100,000 $1,000 10,000 $10,000,000 $4,219,524 $(37,041,549) $(22,821,025)
======= ====== ====== =========== ========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
STATEMENT OF PARTNERS' DEFICIT
FOR THE PERIOD FROM APRIL 20, 1997 TO DECEMBER 28, 1997
<TABLE>
<CAPTION>
COMMON UNITS PREFERRED UNITS
-------------------- ----------------------
UNITS AMOUNT UNITS AMOUNT TOTAL
------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES, April 20,
1997................... 100,000 $(22,821,025) 14,971,054 $ -- $(22,821,025)
Issuance of common
units.................. 3,000 30 -- -- 30
Issuance of preferred
units.................. -- -- 4,433,115 4,433,115 4,433,115
Distribution of warrants
to acquire BCI common
stock.................. -- (433,115) -- -- (433,115)
Accrued dividends on
preferred units........ -- (1,102,185) -- 1,102,185 --
Net loss................ -- (10,243,834) -- (5,535,300) (15,779,134)
------- ------------ ---------- ----------- ------------
BALANCES, December 28,
1997................... 103,000 $(34,600,129) 19,404,169 $ -- $(34,600,129)
======= ============ ========== =========== ============
</TABLE>
The accompanying notes to the financial statements are an integral part of this
statement.
F-8
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss........................... $(21,039,995) $(10,461,555) $(11,536,811)
Adjustments to reconcile net loss
to net cash used in operating
activities--
Depreciation and amortization.... 3,019,733 2,058,608 1,682,289
Provision for store closures..... 2,938,532 -- --
Loss on disposal of assets....... 871,224 -- --
Changes in assets and
liabilities--
Inventories.................... (49,856) (327,002) (566,653)
Prepaid expenses and other
current assets................ 480,527 (317,382) (253,764)
Accounts payable and accrued
expenses...................... 1,073,843 1,200,580 1,204,194
Other assets and liabilities... (1,432,478) (359,268) 2,338,515
------------ ------------ ------------
Net cash used in operating
activities.................. (14,138,470) (8,206,019) (7,132,230)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of property, equipment and
other related assets.............. (9,949,005) (8,974,253) (11,863,612)
Sale of property, equipment and
other related assets.............. -- 2,135,445 5,030,018
------------ ------------ ------------
Net cash used in investing
activities.................. (9,949,005) (6,838,808) (6,833,594)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from equity issuance...... 4,433,145 -- 10,000,000
Proceeds from convertible debt..... 73,141,335 61,469,713 35,489,025
Repayments of convertible debt..... (54,683,859) (44,571,392) (24,090,975)
Repayments of note payable......... -- -- (8,400,096)
------------ ------------ ------------
Net cash provided by
financing activities........ 22,890,621 16,898,321 12,997,954
------------ ------------ ------------
Increase (Decrease) in Cash.......... (1,196,854) 1,853,494 (967,870)
Cash, beginning of year.............. 1,907,155 53,661 1,021,531
------------ ------------ ------------
Cash, end of year.................... $ 710,301 $ 1,907,155 $ 53,661
============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Interest paid...................... $ 4,342,292 $ 2,631,837 $ 1,736,353
============ ============ ============
Supplemental Disclosure of Noncash
Activities:
Distribution of warrants........... $ 433,115 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-9
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
B.C.B.M. Southwest, L.P. (the "Partnership") owns and operates retail food
service establishments under franchise agreements with Boston Chicken, Inc.
("BCI"), specializing in fresh, convenient meals featuring home style entrees,
sandwiches, vegetables, salads and other dishes. On April 20, 1997, the
Partnership converted from a C-corporation to a partnership when BC Texas,
Inc., the predecessor, contributed its assets to the Partnership. The
statements of operations and cash flows for the year ended December 28, 1997
present the combined results of both entities.
The Partnership has an Area Development Agreement ("ADA") with BCI granting
it the right to open 272 stores in the state of Texas. At December 28, 1997,
the Partnership had a total of 69 stores open. Pursuant to the franchise
agreements, the Partnership is required to make periodic royalty payments based
on net revenue, and pay franchise, store development, software license,
software maintenance and other support service fees on a per store basis to
BCI. The total amount of royalties, fees, other expenses and interest on its
loan from BCI (Note 4) was $11.8 million, $9.2 million and $6.6 million in
1997, 1996 and 1995, respectively. The Partnership is also required to make
advertising fund contributions to national and local advertising funds.
Primarily as a result of its rapid store development, the Partnership has
experienced significant losses since its inception which has resulted in a
capital deficiency as of December 28, 1997. Such losses have been funded
primarily by capital contributions and advances from BCI pursuant to a secured
loan agreement. Furthermore, the Partnership anticipates that it will continue
to generate cash flow deficits for the foreseeable future.
The Partnership will require additional capital to continue its operations.
BCI has expressed its intent to convert its loan to a majority equity interest
in the Partnership and to acquire the series A and series B preferred units in
the Partnership for BCI preferred and common equity securities and cash as part
of a plan to significantly restructure BCI's operations. However, the
conversion by BCI and the proposed exchange are not assured. Further, there is
no assurance at the present time that BCI and its subsidiaries, even if
restructured, would have access to capital sufficient to continue their
operations. Consequently, there is substantial doubt about the Partnership's
ability to continue as a going concern and to satisfy its obligations as they
become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Partnership's fiscal year is the 52/53-week period ending on the last
Sunday of December.
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, equipment and other related assets
Property, equipment and other related assets are stated at cost, less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated and amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements................................... 15 years
Furniture, fixtures, equipment and software.................. 3-8 years
ADA and franchise fees....................................... 15 years
Preopening costs............................................. 1 year
</TABLE>
Leasehold improvements are amortized over the lesser of their useful lives or
their lease term, including renewal options.
F-10
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set up, initial stocking, training and general store
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Partnership to
prospectively expense pre-opening and other start-up costs as incurred
effective for fiscal years beginning after December 15, 1998, unless adopted
earlier. Restatement of prior periods is not required. Rather, the standard
must be applied as of the beginning of the fiscal year in which the SOP is
first adopted, which will be 1999. Initial application must be reported as a
cumulative effect of a change in accounting principle. The Partnership does not
anticipate the SOP will have a material impact on its financial statements.
Long-Lived Assets
The Partnership evaluates 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 Partnership estimates
the future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Revenue Recognition
Revenue is recognized in the period related food and beverage products are
sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $9.4
million, $4.6 million and $4.1 million in 1997, 1996, and 1995, respectively.
Income Taxes
The Partnership is a flow-through entity for federal and state income tax
purposes. Any taxable income or loss is reported by the partners on their
individual tax returns in accordance with the Partnership Agreement.
Prior to the formation of the Partnership, BC Texas, Inc. generated net
operating losses for each period since inception. Deferred tax assets relating
to such net operating losses were fully offset by a valuation allowance due to
the uncertainty of their ultimate realization. Accordingly, no provision or
benefit for income taxes was needed during the periods presented.
Allocation of Profits and Loss and Distributions
Profits for any fiscal year will first be allocated to the common unit
holders equal to the excess of any losses allocated to the common unit holders
over the aggregate allocation of profits to the common unit holders in the
current and prior fiscal years. Profits will then be allocated first to series
A preferred unit holders, then series B preferred unit holders and then series
C preferred unit holders in a manner similar to the allocation to the common
unit holders. Profits will then be allocated to the common unit holders in
proportion to their respective common units, in an amount equal to the excess
of any losses allocated to the common unit holders over the aggregate
allocation of profits to the common unit holders in the current and prior
fiscal years. Profits will then
F-11
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
be allocated to the series A preferred unit holders in an amount sufficient to
make the capital account balance of such unit holders equal to the series A
redemption price, as defined, that would be distributable to the series A
preferred unit holder if such series A preferred units were redeemed by the
Partnership as of the end of such fiscal year. Profits will then be allocated
to the series B preferred unit holders and then series C preferred unit holders
in a manner similar to the allocation of the series A preferred unit holders.
Thereafter, profits will be allocated to the common unit holders in proportion
to their respective common units.
Losses for any fiscal year shall be allocated first to the common unit
holders in proportion to their common units until the capital account balances
have been reduced to zero. Losses shall then be allocated to the series C
preferred unit holders, then series B preferred unit holders, then series A
preferred unit holders, in proportion to each of the respective classes of
preferred units, until their capital account balances have been reduced to
zero. Thereafter, losses shall be allocated to the common units holders.
Except for tax distributions described in Note 6, no distributions shall be
made with respect to the common units or the series C preferred units while the
series A preferred units or the series B preferred units are outstanding.
Provided the Partnership is not in default with respect to any payments due to
the series A preferred unit holders, the Partnership shall be permitted to make
required distributions to the series B preferred unit holders. At any time that
neither the series A or B preferred units are outstanding, distributions may be
made on either the common units or series C preferred units, or both.
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.
Reclassification
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 presentation.
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Property, equipment and other related assets:
Land................................................ $ -- $ 501,144
Buildings and improvements.......................... 17,990,133 17,550,356
Furniture, fixtures, equipment and software......... 6,509,300 3,954,592
ADA and franchise fees.............................. 2,337,414 2,242,500
Preopening costs.................................... 1,036,732 2,571,092
----------- -----------
27,873,579 26,819,684
Less accumulated depreciation and amortization...... (2,183,888) (5,082,891)
----------- -----------
Total property, equipment and other related
assets, net...................................... $25,689,691 $21,736,793
=========== ===========
Accrued expenses:
Accrued payroll and fringe benefits................. $ 902,377 $ 1,185,002
Accrued sales tax................................... 398,710 394,954
Accrued personal and real property taxes............ 1,249,643 1,031,308
Accrued interest.................................... 407,984 265,418
Deferred gain on equipment sales.................... 384,943 393,042
Accrued other....................................... 311,475 388,973
----------- -----------
$ 3,655,132 $ 3,658,697
=========== ===========
</TABLE>
F-12
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(4) CONVERTIBLE DEBT
The Partnership has entered into a secured loan agreement (the "Agreement")
with BCI, which provides BCI the right to convert all or any portion of the
loan into common units at $23.00 per unit for the first $28,000,000 and at
$46.00 per unit for any amounts over $28,000,000. The specified percentage of
common units to be acquired on conversion is dependent on the amount of
financing to be provided in relation to the total equity and rights
outstanding, but would constitute at least a majority of the equity of the
Partnership on a fully diluted basis in the event that all of the loan was
converted. The loan may be converted by BCI at any time up to November 2008.
Additionally, during this same time period, to the extent the loan is not fully
drawn or has been drawn and repaid, BCI has the option to acquire, at the loan
conversion price (as defined) the amount of additional equity it could have
acquired by conversion of the loan had it been fully drawn. The loan is
collateralized by substantially all of the assets of the Partnership and a
pledge of its common units. The Agreement contains various restrictive
covenants including restricting cash dividends and limiting additional
indebtedness. BCI has announced its intention to convert the loan into equity
subject to acquiring the series A and series B preferred units.
Interest is based upon the reference rate of the Bank of America National
Trust and Savings Association (8.5% as of December 28, 1997) plus 1%. Interest
only payments are required through May 2005, at which time the loan converts to
an amortizing term loan payable through May 2008 with a final balloon payment.
As of December 28, 1997, the Agreement provided for a line of credit of
$56,000,000. As of December 28, 1997, principal maturities on the outstanding
balance were as follows:
<TABLE>
<S> <C>
1998........................................................ $ --
1999........................................................ --
2000........................................................ --
2001........................................................ --
2002........................................................ --
Thereafter.................................................. 54,753,847
-----------
$54,753,847
===========
</TABLE>
(5) EMPLOYEE STOCK OPTION PLAN
A maximum of 183,964 common units are available for grant to employees
pursuant to the Employee Unit Option Plan (the "Option Plan"). The option price
is equal to the fair market value on the date of grant. All unit options
granted under the Option Plan are exercisable up to 10 years from the date of
grant. The options generally vest at a rate of 10% at the end of the first
year, an additional 20% at the end of the second year, an additional 30% at the
end of the third year and the balance at the end of the fourth year from the
date of grant.
The Partnership accounts for the Option Plan using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation". If a fair value based accounting method had been adopted,
the Partnership's pro forma net loss would have been $21,136,562, $10,472,181
and $11,600,993 for the years ended December 28, 1997, December 29, 1996 and
December 31, 1995, respectively.
F-13
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes unit option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- --------------
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year... 81,612 $25.27 60,112 $20.00 53,612 $20.00
Granted........................ 88,400 40.00 21,500 40.00 6,500 20.00
Exercised...................... -- -- --
Forfeited...................... (13,110) 35.25 -- --
Expired........................ -- -- --
------- ------- -------
Outstanding, end of year......... 156,902 $32.67 81,612 $25.27 60,112 $20.00
======= ======= =======
Exercisable, end of year......... 46,927 $21.56 24,492 $20.00 10,534 $20.00
======= ======= =======
Weighted average fair value of
options granted................. $ 10.66 $ 9.96 $ 6.54
======= ======= =======
</TABLE>
At December 28, 1997, the weighted average remaining contractual life of the
options was approximately 8 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997, 1996 and 1995 grants: risk-free interest rates of
6.20%, 5.73% and 7.92%, respectively; expected life of 5 years.
(6) PREFERRED UNITS
Series A Preferred Units
Series A preferred units accrue dividends at a rate equal to 10% of the face
amount plus accrued but unpaid dividends (the "Adjusted Issue Price").
Dividends accrue until April 2000 after which they are paid currently on a
semi-annual basis. As of December 28, 1997, there were 12,217,562 series A
preferred units outstanding.
The series A preferred units are redeemable at the option of the Partnership
at any time for a redemption price equal to the Adjusted Issue Price, plus a
redemption premium initially equal to $1,400,000, increased annually to a
maximum of $2,000,000, plus any unpaid Tax-Gross up amount, as defined.
Series B Preferred Units
Series B preferred units accrue dividends at a rate equal to 8% of the issue
price. This rate will increase to a maximum of 20% under certain
circumstances. Dividends are payable semi-annually, in cash. In 1997, the
Partnership distributed warrants to purchase 44,331 shares of BCI common
stock, which it had previously purchased from BCI, to holders of the series B
preferred units. As of December 28, 1997, there were 4,433,115 series B
preferred units outstanding.
The series B preferred units are redeemable at the option of the Partnership
at any time after the series A preferred units have been redeemed, for a
redemption price equal to the sum of the issue price, plus a redemption
premium equal to 4% of the initial issue price, plus accrued but unpaid
preferred dividends.
F-14
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Series C Preferred Units
Series C preferred units accrue dividends at a rate equal to 12% of the issue
price. The dividend will accrue and is payable when declared but may only be
declared in the event that both series A and B preferred units have been fully
redeemed. As of December 28, 1997, there were 2,753,492 series C preferred
units outstanding.
After the series A and B preferred units have been redeemed, the series C
preferred units are redeemable at the option of the Partnership at any time for
a redemption price equal to the sum of the issue price, plus accrued but unpaid
preferred dividends.
Preferred Unit Rights
In the event of liquidation, all preferred units will be entitled to a
liquidation preference equal to the Redemption Price, as defined.
The holders of preferred units have the right to require to the Partnership
to redeem the preferred units at the Redemption Price, as defined, in certain
circumstances.
The preferred members have no voting rights or rights to manage the business
and affairs of the Partnership other than those specific rights described in
the Partnership Agreement.
The series A preferred unit holders have a warrant to purchase 158,000 common
units at $20.00 per unit. The warrant is exercisable at any time through
September 2003.
(7) COMMITMENTS
The Partnership has entered into sale/leaseback transactions whereby store
equipment was sold to a third party and subsequently subleased by the
Partnership from BCI who leased the equipment from the independent third party.
The sales of equipment resulted in deferred gains, which are being recognized
by the Partnership over the lives of the respective leases. The leases are
accounted for as operating leases.
The Partnership also leases office and store premises under various
noncancelable operating lease agreements. Lease terms are generally five to ten
years with one or more five-year renewal options. Most of the leases contain
escalation clauses and common area maintenance charges.
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 28, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 4,638,643
1999........................................................ 4,634,419
2000........................................................ 4,796,329
2001........................................................ 4,779,178
2002........................................................ 4,201,528
Thereafter.................................................. 22,085,438
-----------
$45,135,535
===========
</TABLE>
F-15
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
The total rent expense under operating leases was approximately $8,098,000,
$7,122,000 and $4,611,000 for the years ended December 28, 1997, December 29,
1996 and December 31, 1995, respectively.
The Partnership obtains a majority of its proteins, produce and other
supplies from a limited number of vendors. Management believes that, if
necessary, the Partnership would be able to replace any of its sources of
supply with other vendors without a disruption in service.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
R&A Food Services, L.P.:
We have audited the accompanying balance sheets of R&A Food Services, L.P.
(formerly R&A Food Services, Inc.) as of December 28, 1997 and December 29,
1996, and the related statements of operations, stockholders'/partners'
deficit and cash flows for the fiscal years ended December 28, 1997, December
29, 1996 and December 31, 1995. These financial statements are the
responsibility of the Partnership'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.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 1 to the
financial statements, the Partnership has experienced significant losses since
its inception and has a capital deficiency that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of R&A Food Services, L.P. as
of December 28, 1997 and December 29, 1996, and the results of its operations
and its cash flows for the fiscal years ended December 28, 1997, December 29,
1996 and December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Denver, Colorado
April 24, 1998
F-17
<PAGE>
R & A FOODSERVICES, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
ASSETS
- ------
<S> <C> <C>
Current Assets:
Cash............................................... $ 122,625 $ 1,664,778
Inventories........................................ 2,100,741 2,606,122
Prepaid expenses and other current assets.......... 561,130 1,148,117
------------ ------------
Total current assets............................. 2,784,496 5,419,017
Property, Equipment and Other Related Assets, net.... 36,564,962 42,387,079
Other Assets......................................... 2,390,453 3,803,971
------------ ------------
Total assets..................................... $ 41,739,911 $ 51,610,067
============ ============
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
- ---------------------------------
<S> <C> <C>
Current Liabilities:
Account payable.................................... $ 3,835,310 $ 2,267,928
Accrued expenses................................... 10,838,076 5,931,282
------------ ------------
Total current liabilities........................ 14,673,386 8,199,210
Convertible Debt..................................... 93,219,935 76,997,848
Other Liabilities.................................... 1,898,638 1,710,816
Commitments
Partners' Deficit.................................... (68,052,048) (35,297,807)
------------ ------------
Total liabilities and partners' deficit.......... $ 41,739,911 $ 51,610,067
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-18
<PAGE>
R&A FOODSERVICES, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue.............................. $106,134,723 $107,035,093 $ 86,669,428
Costs and Expenses:
Cost of products sold.............. 39,348,673 40,768,771 34,011,946
Salaries and benefits.............. 32,326,764 33,052,468 29,121,730
General and administrative......... 53,833,793 48,429,552 41,702,902
Provision for store closures....... 8,947,059 -- 5,997,805
------------ ------------ ------------
Total costs and expenses......... 134,456,289 122,250,791 110,834,383
------------ ------------ ------------
Loss from Operations................. (28,321,566) (15,215,698) (24,164,955)
Other Income (Expense):
Interest expense, net.............. (8,093,376) (7,412,085) (5,727,481)
Other income....................... 2,786,604 1,454,273 521,361
------------ ------------ ------------
Total other expense.............. (5,306,772) (5,957,812) (5,206,120)
------------ ------------ ------------
Net Loss............................. $(33,628,338) $(21,173,510) $(29,371,075)
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-19
<PAGE>
R&A FOOD SERVICES, L.P.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE PERIOD FROM JANUARY 1, 1996
THROUGH OCTOBER 5, 1996
<TABLE>
<CAPTION>
SENIOR
COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL
-------------- ---------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ -------- ------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 26,
1994................... 72,132 $721 -- $ -- 4,800 $ 48 $12,630,283 $(18,639,472) $ (6,008,420)
Redemption of stock..... (3,611) (36) -- -- (170) (2) (769,960) -- (769,998)
Issuance of exchangeable
senior preferred stock,
net of offering costs.. -- -- 10,000 100 -- -- 9,953,819 -- 9,953,919
Dividends on preferred
stock.................. -- -- -- -- -- 1,077,771 (1,077,771) -- --
Net loss................ -- -- -- -- -- -- -- (29,371,075) (29,371,075)
------ ---- -------- ------ ---------- ---------- ----------- ------------ ------------
BALANCES, December 31,
1995................... 68,521 685 10,000 100 4,630 1,077,817 20,736,371 (48,010,547) (26,195,574)
Issuance of preferred
stock.................. -- -- -- -- 13,299,346 132,993 13,144,926 -- 13,277,919
Dividends on preferred
stock.................. -- -- -- -- -- 1,295,407 (1,857,841) -- (562,434)
Redemption of common
stock.................. (4,500) (45) -- -- -- -- (516,955) -- (517,000)
Net loss................ -- -- -- -- -- -- -- (17,369,310) (17,369,310)
------ ---- -------- ------ ---------- ---------- ----------- ------------ ------------
BALANCES,
October 5, 1996........ 64,021 $640 10,000 $ 100 13,303,976 $2,506,217 $31,506,501 $(65,379,857) $(31,366,399)
====== ==== ======== ====== ========== ========== =========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-20
<PAGE>
R&A FOOD SERVICES L.P.
STATEMENTS OF PARTNERS' DEFICIT
FOR THE PERIOD FROM OCTOBER 6, 1996 THROUGH DECEMBER 29, 1996 AND YEAR ENDED
DECEMBER 28, 1997
<TABLE>
<CAPTION>
COMMON UNITS
----------------------------------
LIMITED
GENERAL PARTNER PARTNER
------------------- --------------
AMOUNT UNITS AMOUNT UNITS
------------ ----- ------ ------
<S> <C> <C> <C> <C>
Balances,
October 6,
1996........... $ -- -- $ -- --
Units issued in
exchange for
contributions
of net assets.. 6 640 640 64,021
Dividends
accrued........ (596,128) -- -- --
Dividends paid.. -- -- -- --
Issuance of
warrants....... -- -- 94 --
Net loss........ -- -- (734) --
------------ --- ----- ------
Balances,
December 29,
1996........... (596,122) 640 -- 64,021
Issuance of
preferred
units.......... -- -- -- --
Distribution of
warrants to
acquire BCI
common stock... -- -- -- --
Dividends
accrued........ (2,786,512) -- -- --
Dividends paid.. -- -- -- --
Net loss........ (24,132,458) -- -- --
------------ --- ----- ------
Balances,
December 28,
1997........... $(27,515,092) 640 $ -- 64,021
============ === ===== ======
<CAPTION>
PREFERRED UNITS
----------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
------------------------ ---------------------- ----------------------- ----------------------
LIMITED PARTNER LIMITED PARTNER LIMITED PARTNER LIMITED PARTNER
------------------------ ---------------------- ----------------------- ----------------------
AMOUNT UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT UNITS
------------- ---------- ------------ --------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
October 6,
1996........... $ -- -- $ -- -- $ -- -- $ -- --
Units issued in
exchange for
contributions
of net assets.. (25,674,859) 11,585,429 (10,260,703) 4,630,002 13,299,346 13,299,346 (8,892,879) 4,012,790
Dividends
accrued........ -- -- -- -- -- -- -- --
Dividends paid.. -- -- -- -- -- -- -- --
Issuance of
warrants....... -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- (3,803,466) -- -- --
------------- ---------- ------------ --------- ------------ ---------- ------------ ---------
Balances,
December 29,
1996........... (25,674,859) 11,585,429 (10,260,703) 4,630,002 9,495,880 13,299,346 (8,892,879) 4,012,790
Issuance of
preferred
units.......... -- -- 3,324,837 3,324,837 -- -- -- --
Distribution of
warrants to
acquire BCI
common stock... -- -- (1,624,184) -- -- -- -- --
Dividends
accrued........ -- -- -- -- -- -- -- --
Dividends paid.. -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- (9,495,880) -- -- --
------------- ---------- ------------ --------- ------------ ---------- ------------ ---------
Balances,
December 28,
1997........... $(25,674,859) 11,585,429 $(8,560,050) 7,954,839 $ -- 13,299,346 $(8,892,879) 4,012,790
============= ========== ============ ========= ============ ========== ============ =========
<CAPTION>
DIVIDENDS TOTAL
----------- -------------
<S> <C> <C>
Balances,
October 6,
1996........... $ -- $ --
Units issued in
exchange for
contributions
of net assets.. 162,050 (31,366,399)
Dividends
accrued........ 596,128 --
Dividends paid.. (127,302) (127,302)
Issuance of
warrants....... -- 94
Net loss........ -- (3,804,200)
----------- -------------
Balances,
December 29,
1996........... 630,876 (35,297,807)
Issuance of
preferred
units.......... -- 3,324,837
Distribution of
warrants to
acquire BCI
common stock... -- (1,624,184)
Dividends
accrued........ 2,786,512 --
Dividends paid.. (826,556) (826,556)
Net loss........ -- (33,628,338)
----------- -------------
Balances,
December 28,
1997........... $2,590,832 $(68,052,048)
=========== =============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-21
<PAGE>
R & A FOODSERVICES, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................... $(33,628,338) $(21,173,510) $(29,371,075)
Adjustments to reconcile net loss
to net cash used in operating
activities........................
Depreciation and amortization...... 4,525,855 4,970,237 4,935,239
Provision for store closures....... 8,947,059 -- 5,997,805
Gain on asset disposal............. (2,758,326) -- --
Changes in assets and liabilities:
Inventories...................... 505,381 321,766 (1,778,321)
Prepaid expenses and other
current assets.................. 586,987 (422,573) (295,744)
Accounts payable and accrued
expenses........................ (1,382,847) (3,467,011) 1,822,647
Other assets and liabilities..... 6,682,266 (6,385,472) 988,801
------------ ------------ ------------
Net cash used in operating
activities.................... (16,521,963) (26,156,563) (17,700,648)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of property, equipment and
other related assets.............. (8,379,970) (958,662) (28,625,888)
Proceeds from sale of assets....... 4,639,412 11,770,062 7,323,186
------------ ------------ ------------
Net cash from (used in)
investing activities.......... (3,740,558) 10,811,400 (21,302,702)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from equity issuances..... 3,324,837 13,278,013 9,953,819
Redemption of equity............... -- (517,000) (769,998)
Dividends.......................... (826,556) -- (176,654)
Proceeds from convertible debt..... 79,274,427 103,103,918 73,299,131
Repayments of convertible debt..... (63,052,340) (99,847,647) (45,031,555)
------------ ------------ ------------
Net cash from financing
activities.................... 18,720,368 16,017,284 37,274,743
------------ ------------ ------------
Increase (Decrease) in Cash.......... (1,542,153) 672,121 (1,728,607)
Cash, beginning of year............ 1,664,778 992,657 2,721,264
------------ ------------ ------------
Cash, end of year.................. $ 122,625 $ 1,664,778 $ 992,657
============ ============ ============
Supplemental Disclosure of Cash
Flow Information:
Interest paid.................... $ 8,102,497 $ 7,694,152 $ 5,636,719
============ ============ ============
Supplemental Disclosure of Non-cash
Activities:
Distribution of warrants......... $ 1,624,184 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-22
<PAGE>
R&A FOOD SERVICES, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
R&A Food Services, L.P. (the "Partnership") owns and operates retail food
service establishments under franchise agreements with Boston Chicken, Inc.
("BCI"), specializing in fresh, convenient meals featuring home style entrees,
sandwiches, vegetables, salads and other dishes. On October 6, 1996, the
Partnership converted from a C-corporation to a partnership when R&A Food
Services, Inc., the predecessor, contributed its assets to the Partnership. The
statements of operations and cash flows for the year ended December 29, 1996
present the combined results of both entities.
The Partnership has an Area Development Agreement ("ADA") with BCI granting
it the right to open 281 stores in all or portions of Florida, Georgia, Alabama
and Mississippi. The Partnership had 100 stores open at December 28, 1997.
Pursuant to the franchise agreements, the Partnership is required to make
periodic royalty payments based on net revenue, and pay franchise, store
development, software license, software maintenance and other support service
fees on a per store basis to BCI. The total amount of royalties, fees, other
expenses and interest on its loan from BCI (Note 4) was $17.6 million, $16.5
million and $13.7 million in 1997, 1996 and 1995, respectively. The Partnership
is also required to make advertising fund contributions to national and local
advertising funds.
Primarily as a result of its rapid store development, the Partnership has
experienced significant losses since its inception which has resulted in a
capital deficiency as of December 28, 1997. Such losses have been funded
primarily by capital contributions and advances from BCI pursuant to a secured
loan agreement. Furthermore, the Partnership anticipates that it will continue
to generate cash flow deficits for the foreseeable future.
The Partnership will require additional capital to continue its operations.
BCI has expressed its intent to convert its loan to a majority equity interest
in the Partnership and to acquire the Series A and Series C preferred units in
the Partnership in exchange for BCI preferred and common equity and cash as
part of a plan to significantly restructure BCI's operations. However, the
conversion by BCI and the proposed exchange are not assured. Further, there is
no assurance at the present time that BCI and its subsidiaries, even if
restructured, would have access to capital sufficient to continue their
operations. Consequently, there is substantial doubt about the Partnership's
ability to continue as a going concern and to satisfy its obligations as they
become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Partnership's fiscal year is the 52/53-week period ending on the last
Sunday in December.
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, Equipment and Other Related Assets
Property, equipment and other related assets are stated at cost less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated and amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements...................................... 15 years
Furniture, fixtures, equipment and software..................... 3-8 years
ADA and franchise fees.......................................... 15 years
Preopening costs................................................ 1 year
</TABLE>
Leasehold improvements are amortized over the lesser of their useful lives or
their lease term, including renewal options.
F-23
<PAGE>
R&A FOOD SERVICES, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set up, initial stocking, training and general
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Partnership to
prospectively expense pre-opening and other start-up costs as incurred
effective for fiscal years beginning after December 15, 1998, unless adopted
earlier. Restatement of prior periods is not required. Rather, the standard
must be applied as of the beginning of the fiscal year in which the SOP is
first adopted, which will be 1999. Initial application must be reported as a
cumulative effect of a change in accounting principle. The Partnership does not
anticipate the SOP will have a material impact on its financial statements.
Long-Lived Assets
The Partnership evaluates 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 Partnership estimates
the future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Revenue Recognition
Revenue is recognized in the period the related food and beverage products
are sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $13.7
million, $8.7 million and $7.2 million in 1997, 1996, and 1995, respectively.
Income Taxes
The Partnership is a flow-through entity for federal and state income tax
purposes. Any taxable income or loss is reported by the partners on their
individual tax returns in accordance with the Partnership Agreement.
Prior to the formation of the Partnership, R&A Food Services, Inc. generated
net operating losses for each period since inception. Deferred tax assets
relating to such net operating losses were fully offset by a valuation
allowance due to the uncertainty of their ultimate realization. Accordingly, no
provision or benefit for income taxes was recorded during the periods
presented.
Allocation of Profits, Losses and Distributions
Profits for any fiscal year will first be allocated to the general partner in
an amount necessary to eliminate any deficits and restore such capital accounts
to zero. Profits are then allocated to the preferred unit holders in amounts
necessary to eliminate any deficits and restore such capital accounts to zero.
The priority of the profit allocation to the preferred holders shall be to the
Series A holders first, the Series B holders second, the Series C
F-24
<PAGE>
R&A FOOD SERVICES, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
holders third and the Series D holders fourth. Remaining profits are allocated
to the common unit holders in an amount necessary to eliminate any deficits
and restore capital accounts to zero. Profits are then allocated to the
preferred unit holders, in the same order of priority as the deficit
elimination above, in an amount sufficient to make the capital account of such
preferred unit holder equal to the Redemption Price, as defined, that would be
distributable to the preferred unit holder if redeemed by the Partnership as
of the end of such fiscal year. Thereafter, profits are allocated to the
general partner and partners holding common units in proportion to their
units.
Losses for any fiscal year shall be allocated first to common limited
partnership unit holders in proportion to their common limited partnership
units until their capital account balances have been reduced to zero. Losses
are then to be allocated to the preferred unit holders until the preferred
unit holders capital balance has been reduced to zero. The priority of the
loss allocation to the preferred holders shall be to the Series D holders
first, the Series C holders second, the Series B holders third and the Series
A holders fourth. Thereafter, losses are allocated to the general partner.
Distributions related to preferred returns (Note 5) will be in the same
order of priority as the allocation of profits. However, no distributions will
be made to Series D holders while there are Series A or C units outstanding.
Distributions for tax purposes will be made on an annual basis to each
Series A, B and D preferred unit holder and each Series C preferred and common
unit holder in an amount equal to the Tax Gross-Up Amount, as defined, in the
case of the Series A, B and D preferred unit holders, and the estimated tax
liability of the members resulting from the operations of the Partnership in
the case of the Series C preferred and common unit holders. The tax
distributions to the Series A, B and D preferred unit holders have priority
over tax distributions to the Series C preferred and common unit holders,
which will only be made to Series C preferred and common unit holders to the
extent of Available Cash, as defined. Thereafter, distributions will be made
to the members subject to the Partnership being in compliance with the secured
loan agreement (Note 4) as determined by the manager. However, no
distributions shall be made to Series D preferred members or to common members
while Series A or Series C preferred member units are outstanding. From and
after the date the preferred units are retired, distributions shall be made to
and among the common unit holders in proportion to their common units.
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.
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Property, equipment and other related assets:
Land................................................ $ -- $ 388,248
Buildings and improvements.......................... 31,204,719 34,257,903
Furniture, fixtures, equipment and software......... 7,492,469 5,464,794
ADA and franchise fees.............................. 2,946,169 3,101,629
Preopening costs.................................... 294,744 234,399
----------- -----------
41,938,101 43,446,973
Less accumulated depreciation and amortization...... (5,373,139) (1,059,894)
----------- -----------
Total property, equipment and other related
assets, net...................................... $36,564,962 $42,387,079
=========== ===========
</TABLE>
F-25
<PAGE>
R&A FOOD SERVICES, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Accrued expenses:
Accrued payroll and fringe benefits................... $ 1,117,670 $1,627,068
Accrued store closure costs........................... 6,699,502 1,860,897
Deferred gain......................................... 845,029 872,776
Accrued sales tax..................................... 497,735 476,828
Accrued interest...................................... 683,887 553,409
Accrued other......................................... 994,253 540,304
----------- ----------
$10,838,076 $5,931,282
=========== ==========
</TABLE>
Interest expense was $8.2 million, $7.6 million and $5.9 million in 1997,
1996 and 1995, respectively.
(4) CONVERTIBLE DEBT
The Partnership has entered into a secured loan agreement (the "Agreement")
with BCI which provides BCI the right to convert all or any portion of the loan
into common units at $184.47 per unit. The specified percentage of partners'
capital to be acquired on conversion is dependent on the amount of financing to
be provided in relation to the total capital and rights outstanding, but would
constitute at least a majority of the capital of the Partnership on a fully
diluted basis in the event that all of the loan was converted. The loan may be
converted by BCI at any time up to January 2014. Additionally, during this same
time period, to the extent the loan is not fully drawn or has been drawn and
repaid, BCI has the option to acquire, at the loan conversion price, as
defined, the amount of additional common units it could have acquired by
conversion of the loan had it been fully drawn. In the event BCI's exercised
conversion and option rights represent a majority of the outstanding
partnership units, BCI will become the General Partner of the Partnership. The
loan is collateralized by substantially all of the assets of the Partnership
and a pledge of the partner's capital of the Partnership. The Agreement
contains various restrictive covenants including restricting cash distributions
and limiting additional indebtedness. BCI has announced its intention to
convert the loan into equity subject to acquiring the Series A and Series C
preferred units.
Interest is based upon the reference rate of the Bank of America National
Trust and Savings Association (8.5% as of December 28, 1997) plus 1%. Interest-
only payments are required through August 2006, at which time the loan converts
to an amortizing term loan payable through July 2013, with a final balloon
payment. As of December 28, 1997, the Agreement provided for a line of credit
of $98,505,200 with $93,219,935 drawn.
As of December 28, 1997, principal maturities on the outstanding balance were
as follows:
<TABLE>
<S> <C>
1998.......................................................... $ --
1999.......................................................... --
2000.......................................................... --
2001.......................................................... --
2002.......................................................... --
Thereafter.................................................... 93,219,935
-----------
$93,219,935
===========
</TABLE>
(5) PARTNERS' CAPITAL
Series A Preferred Units
The Series A preferred units accrue dividends at a rate equal to 10% of the
face amount plus accrued but unpaid dividends (the "Adjusted Issue Price").
Dividends accrue until April 14, 2000, after which they are paid currently on a
semi-annual basis.
F-26
<PAGE>
R&A FOOD SERVICES, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Series A preferred units are redeemable at the option of the Partnership
at any time for a redemption price equal to the Adjusted Issue Price, plus an
aggregate redemption premium ranging from $1,200,000 to $2,000,000 (depending
on the date of redemption).
Series B Preferred Units
The Series B preferred units accrue dividends at a rate equal to 7% of the
issue price. Dividends are payable semi-annually, in cash, on June 1 and
December 1 of each year.
Provided that the Partnership has redeemed all Series A preferred units, the
Series B preferred units are redeemable at the option of the Partnership at
any time for a redemption price equal to the issue price, plus any unpaid
accrued Series B dividends, plus the unpaid Tax Gross-Up Amount, as defined.
In connection with the Series B preferred units, each Series B unit holder
received a warrant to purchase 28,061 common units at $165 per unit.
Series C Preferred Units
The Series C preferred units accrue dividends at a rate equal to 8% of the
issue price. This rate will increase to a maximum of 20% under certain
circumstances. Dividends are payable semi-annually, in cash.
Provided that all Series A and B preferred units have been redeemed, the
Series C preferred units are redeemable at the option of the Partnership at
any time for a redemption price equal to the Adjusted Issue Price, plus a
redemption premium equal to 4% of the initial issue price.
In connection with the Series C preferred units owned by Market Partners,
L.L.C. ("MPLLC"), a warrant to purchase 7% of the Partnership's common units
(on a fully diluted basis) was acquired by MPLLC for $94. The warrant is
exercisable within 10 business days after a Controlling Interest Acquisition
at an exercise price of $184.47 per unit. In general, a Controlling Interest
Acquisition includes (i) the acquisition of a 20% or greater equity interest
in the Partnership by BCI or (ii) the purchase of more than 30% of the
Partnership's then existing stores by BCI. The warrant expires upon the
earlier of the expiration of BCI's conversion rights under the convertible
debt agreement or BCI's exercise of its call right on the warrant which can
occur within two business days after MPLLC has notified the Partnership of its
intention to exercise the warrant. Upon the exercise of the warrant, all
outstanding units and unit options (except for units held by BCI) will be
adjusted such that existing unit holders other than BCI will maintain the same
equity ownership percentage both before and after the exercise of the warrant.
In 1997, the Partnership distributed to MPLLC, warrants to purchase 166,242
shares of BCI common stock, which it had previously purchased from BCI.
Series D Preferred Units
The Series D preferred units accrue dividends at a rate equal to 12% of the
issue price. Dividends are payable when declared and can be declared only
after all Series A and C units have been redeemed.
The Series D preferred units are redeemable at the option of the Partnership
at any time for a redemption price equal to the issue price, plus any unpaid
accrued Series D dividends.
F-27
<PAGE>
R&A FOOD SERVICES, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Preferred Partnership Unit Rights
In the event of liquidation, the preferred units will be entitled to a
liquidation preference equal to their respective Redemption Prices, as defined.
The holders of preferred partnership units have the right to require the
Partnership to redeem the preferred partnership units at their respective
Redemption Prices, as defined, in certain circumstances.
The preferred partners have no voting rights or rights to manage the business
and affairs of the Partnership other than those specific rights described in
the Partnership Agreement.
(6) EMPLOYEE UNIT OPTION PLAN
A maximum of 62,615 general common units are available for grant to employees
pursuant to the Employee Unit Option Plan (the "Option Plan"). The option price
is equal to the fair market value on the date of grant, as determined by the
Manager. All unit options granted under the Option Plan are exercisable up to
10 years from the date of grant. The options generally vest at a rate of 10% at
the end of the first year, an additional 20% at the end of the second year, an
additional 30% at the end of the third year and the balance at the end of the
fourth year from the date of grant.
The Partnership accounts for the Option Plan using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation". If a fair value based accounting method had been adopted,
the Partnership's pro forma net loss would have been $33,697,727, $21,208,930,
and $29,385,380 for 1997, 1996, and 1995, respectively.
The following table summarizes unit option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARE
NUMBER OF OPTIONS EXERCISE PRICE
--------------------- -----------------------
1997 1996 1995 1997 1996 1995
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year... 49,721 47,791 45,791 $127.94 $127.15 $126.16
Granted....................... 3,250 1,930 2,000 150.00 150.00 150.00
Exercise...................... -- -- --
Forfeited..................... (623) -- -- 150.00
Expired....................... -- -- --
------ ------ ------
Outstanding, end of year......... 52,348 49,721 47,791 $129.11 $127.94 $127.15
====== ====== ======
Exercisable, end of year......... 45,832 44,833 26,609 $125.17 $125.73 $114.54
====== ====== ======
Weighted average fair value of
options granted................. $39.98 $37.36 $49.04
====== ====== ======
</TABLE>
At December 28, 1997, the weighted average remaining contractual life of the
options was approximately 6 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997, 1996 and 1995 grants: risk-free interest rate of
6.20% in 1997, 6.72% in 1996 and 7.92% in 1995, respectively; expected life of
5 years.
(7) COMMITMENTS
The Partnership leases store premises and store equipment under various
noncancelable operating lease agreements. Lease terms are generally five to ten
years with one or more five-year renewal options. Most of the leases contain
escalation clauses and common area maintenance charges.
F-28
<PAGE>
R&A FOOD SERVICES, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
The Partnership has entered into sale/leaseback transactions whereby store
equipment was sold to a third party and subsequently subleased by the
Partnership from BCI who leased the equipment from the independent third party.
The sale of equipment resulted in deferred gains which are being recognized by
the Partnership over the lives of the respective leases. The leases are
accounted for as operating leases.
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 28, 1997.
<TABLE>
<S> <C>
1998.......................................................... $ 8,650,378
1999.......................................................... 8,376,699
2000.......................................................... 7,884,220
2001.......................................................... 7,604,127
2002.......................................................... 7,599,449
Thereafter.................................................... 27,272,689
-----------
$67,387,562
===========
</TABLE>
Total rent expense under operating leases, including common area maintenance
charges, was $12.9 million, $14.2 million and $10.8 million for 1997, 1996 and
1995, respectively.
The Partnership obtains a majority of its proteins, produce and other
supplies from a limited number of vendors. Management believes that, if
necessary, the Partnership would be able to replace any of its sources of
supply with other vendors without a disruption in service.
(8) OTHER INCOME
Included in other income in 1997, is a gain of $4.3 million resulting from
the sale of certain distribution rights to BCI.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Finest Foodservice, L.L.C.:
We have audited the accompanying balance sheets of Finest Foodservice, L.L.C.
(a Delaware limited liability company) as of December 28, 1997 and December 29,
1996, and the related statements of operations, members' deficit and cash flows
for the years then ended. 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced significant losses since its
inception and has a capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Finest Foodservice, L.L.C. as
of December 28, 1997 and December 29, 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
April 24, 1998
F-30
<PAGE>
FINEST FOODSERVICE, L.L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash............................................... $ -- $ 638,513
Inventories........................................ 1,512,569 1,552,609
Prepaid expenses and other current assets.......... 340,827 802,783
----------- -----------
Total current assets............................. 1,853,396 2,993,905
Property, Equipment and Other Related Assets, net.... 19,699,916 20,861,434
Costs in Excess of Net Assets Acquired, net.......... 20,009,547 23,702,578
Other Assets, net.................................... 899,970 1,259,458
----------- -----------
Total assets..................................... $42,462,829 $48,817,375
=========== ===========
<CAPTION>
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 1,978,067 $ 1,785,608
Accrued expenses................................... 9,313,599 4,807,505
----------- -----------
Total current liabilities........................ 11,291,666 6,593,113
Long-Term Debt....................................... 78,120,503 46,309,084
Other Liabilities.................................... 2,228,811 1,999,395
Commitments
Members' Deficit..................................... (49,178,151) (6,084,217)
----------- -----------
Total liabilities and members' deficit........... $42,462,829 $48,817,375
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-31
<PAGE>
FINEST FOODSERVICE, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
Revenue............................................ $ 67,952,893 $ 68,778,045
Costs and Expenses:
Cost of products sold............................ 27,167,707 27,004,488
Salaries and benefits............................ 23,445,527 24,937,541
General and administrative....................... 43,689,673 37,330,992
Provision for store closures..................... 12,327,193 --
------------ ------------
Total costs and expenses....................... 106,630,100 89,273,021
------------ ------------
Loss From Operations............................... (38,677,207) (20,494,976)
Other Income (Expense):
Interest expense................................. (6,024,352) (3,318,215)
Interest income.................................. 52,941 46,873
Other income (expense)........................... (1,445,316) 617,564
------------ ------------
Total other expense............................ (7,416,727) (2,653,778)
------------ ------------
Net Loss........................................... $(46,093,934) $(23,148,754)
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-32
<PAGE>
FINEST FOODSERVICE, L.L.C.
STATEMENTS OF MEMBERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
VOTING NONVOTING
MEMBERS' CAPITAL MEMBERS' CAPITAL ACCRUED
---------------------- ----------------------- NONVOTING
UNITS AMOUNT UNITS AMOUNT DIVIDENDS TOTAL
--------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1,
1996................... 1,100,000 $ 1,100,000 10,000,000 $ 15,401,324 $ 552,603 $ 17,053,927
Dividends on preferred
units................. -- (1,098,003) -- -- 1,098,003 --
Sale of warrants....... -- 10,610 -- -- -- 10,610
Net loss............... -- (7,747,430) -- (15,401,324) -- (23,148,754)
--------- ------------ ---------- ------------ ---------- ------------
BALANCES, December 29,
1996................... 1,100,000 (7,734,823) 10,000,000 -- 1,650,606 (6,084,217)
Dividends on preferred
units................. -- (1,441,599) -- -- 1,441,599 --
Issuance of preferred
units................. -- -- 3,324,837 3,324,837 -- 3,324,837
Distribution of
warrants to acquire
BCI common stock...... -- (324,837) -- -- -- (324,837)
Net loss............... -- (42,769,097) -- (3,324,837) -- (46,093,934)
--------- ------------ ---------- ------------ ---------- ------------
BALANCES, December 28,
1997................... 1,100,000 $(52,270,356) 13,324,837 $ -- $3,092,205 $(49,178,151)
========= ============ ========== ============ ========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-33
<PAGE>
FINEST FOODSERVICE, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss......................................... $(46,093,934) $(23,148,754)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 4,105,105 5,053,857
Provision for store closures................... 12,327,193 --
Loss on the disposal of assets................. 1,441,635 --
Changes in assets and liabilities:
Inventories.................................. 40,040 (328,248)
Prepaid expenses and other current assets.... 461,956 (448,194)
Accounts payable and accrued liabilities..... 509,585 (1,578,106)
Other assets and liabilities................. 851,802 1,286,449
------------ ------------
Net cash used in operating activities...... (26,356,618) (19,162,996)
Cash Flows from Investing Activities:
Purchases of property, equipment and other
related assets.................................. (9,418,151) (7,307,611)
Proceeds from sale of property and equipment..... -- 8,984,340
Purchase of BCI warrants......................... -- (433,114)
------------ ------------
Net cash provided by investing activities.. (9,418,151) 1,243,615
Cash Flows from Financing Activities:
Issuance of preferred units...................... 3,324,837 --
Proceeds from long-term debt..................... 87,412,038 67,486,341
Repayments on long-term debt..................... (55,600,619) (50,744,217)
Sale of warrants to MPLLC........................ -- 10,610
------------ ------------
Net cash provided by financing activities.. 35,136,256 16,752,734
------------ ------------
Net Decrease in Cash............................... (638,513) (1,166,647)
Cash, beginning of year............................ 638,513 1,805,160
------------ ------------
Cash, end of year.................................. $ -- $ 638,513
============ ============
Supplemental Disclosures of Cash Flow Information:
Interest paid.................................... $ 5,764,570 $ 3,047,884
============ ============
Non-cash Transactions:
Distribution of warrants......................... $ 324,837 $ --
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-34
<PAGE>
FINEST FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Finest Foodservice, L.L.C. (the "Company") owns and operates retail food
service establishments under franchise agreements with Boston Chicken, Inc.
("BCI"), specializing in fresh, convenient meals featuring home style entrees,
sandwiches, vegetables, salads and other dishes. The Company was formed on
December 31, 1995 under the Delaware Limited Liability Company Act.
The Company has an Area Development Agreement ("ADA") with BCI, granting it
the right to open 235 stores in portions of Kansas, Missouri, Nebraska,
Minnesota, South Dakota and Iowa, and certain limited designated areas in other
states. The Company had 68 stores open at December 28, 1997. Pursuant to the
franchise agreements, the Company is required to make periodic royalty payments
based on net revenue, and pay franchise, store development, software license,
software maintenance and other support service fees on a per store basis to
BCI. The total amount of royalties, fees, other expenses and interest on its
loans from BCI (Note 5) was $17.6 million and $12.6 million in 1997 and 1996,
respectively. The Company is also required to make advertising fund
contributions to national and local advertising funds.
Primarily as a result of its rapid store development, the Company has
experienced significant losses since its inception which has resulted in a
capital deficiency as of December 28, 1997. Such losses have been funded
primarily by capital contributions and advances from BCI pursuant to a secured
loan agreement. Furthermore, the Company anticipates that it will continue to
generate cash flow deficits for the foreseeable future.
The Company will require additional capital to continue its operations. BCI
has expressed its intent to convert its loan to a majority equity interest in
the Company and to acquire the Class A and Class B preferred membership units
in the Company in exchange for BCI preferred and common equity securities and
cash as part of a plan to significantly restructure BCI's operations. However,
the conversion and the proposed exchange by BCI are not assured. Further, there
is no assurance at the present time that BCI and its subsidiaries, even if
restructured, would have access to capital sufficient to continue their
operations. Consequently, there is substantial doubt about the Company's
ability to continue as a going concern and to satisfy its obligations as they
become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52/53-week period ending on the last Sunday
in December.
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, Equipment and Other Related Assets
Property, equipment and other related assets are stated at cost less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated and amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................... 15 years
Furniture, fixtures, equipment and software................... 3-8 years
ADA and franchise fees........................................ 15 years
Preopening costs.............................................. 1 year
</TABLE>
Leasehold improvements are amortized over the lesser of their useful lives or
their lease term, including renewal options.
F-35
<PAGE>
FINEST FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set-up, initial stocking, training, and general store
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Company to prospectively
expense pre-opening and other start-up costs as incurred effective for fiscal
years beginning after December 15, 1998, unless adopted earlier. Restatement of
prior periods is not required. Rather, the standard must be applied as of the
beginning of the fiscal year in which the SOP is first adopted, which will be
1999. Initial application must be reported as a cumulative effect of a change
in accounting principle. The Company does not anticipate the SOP will have a
material impact on its financial statements.
Costs in Excess of Net Assets Acquired
The excess purchase price over the fair value of net assets acquired is being
amortized on a straight-line basis over 15 years.
Notes Receivable
The Company has received notes receivable from certain unit holders in
exchange for their member units. In general, these notes are due within three
years of issuance, bear interest at the prime rate plus 1% and are
collateralized by the member units.
Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate revision to the remaining useful life or the remaining balances of
long-lived assets may be appropriate. Such events and circumstances include,
but are not limited to, change in business strategy or change in current and
long-term projected operating performance. When factors indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Revenue Recognition
Revenue is recognized in the period related food and beverage products are
sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $9.7
million and $6.2 million in 1997 and 1996, respectively.
Income Taxes
The Company is a flow-through entity for federal and state income tax
purposes. Any taxable income or loss is reported by the members on their
individual tax returns in accordance with the Company's Operating Agreement.
F-36
<PAGE>
FINEST FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Allocation of Profits, Losses and Distributions
Profits for any fiscal year will first be allocated to the members in an
amount necessary to eliminate any deficits and restore such capital accounts to
zero. Profits are then allocated to the Class A and B ("Senior") preferred unit
holder in an amount sufficient to make the capital account of such Senior
preferred unit holder equal to the Redemption Price, as defined, that would be
distributable to the Senior preferred unit holder if redeemed by the Company as
of the end of such fiscal year. Next, profits are allocated to the Class C
preferred unit holder in an amount sufficient to make the capital account of
such Class C preferred unit holder equal to the Redemption Price, as defined,
that would be distributable to the Class C preferred unit holder if redeemed by
the Company as of the end of such fiscal year. Thereafter, profits are
allocated to the members holding common units in proportion to their units.
Losses for any fiscal year shall be allocated first to common membership unit
holders in proportion to their common membership units until their capital
account balances have been reduced to zero. Losses are then to be allocated to
the Class C preferred unit holder until the Class C preferred unit holder's
capital balance has been reduced to zero. Next, losses are to be allocated to
the Senior preferred unit holder until the Senior preferred unit holder's
capital balance has been reduced to zero. Thereafter, losses are allocated to
the members holding common units.
Distributions related to preferred returns will be made first to Senior
preferred unit holders and then to Class C preferred unit holders.
Distributions for tax purposes will be made on an annual basis to each Senior
preferred and common unit holder in an amount equal to the Tax Gross-Up Amount,
as defined, in the case of the Senior preferred unit holder, and the estimated
tax liability of the members resulting from the operations of the Company in
the case of the common unit holder. The tax distributions to the Senior
preferred unit holder have priority over tax distributions to the common unit
holders, which will only be made to common unit holders to the extent of
Available Cash, as defined. Thereafter, distributions will be made to the
members subject to the Company being in compliance with the secured loan
agreement (Note 5) as determined by the manager. However, no distributions
shall be made to common members while preferred member units are outstanding.
From and after the date the preferred units are retired, distributions shall be
made to and among the common unit holders in proportion to their common units.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentations.
F-37
<PAGE>
FINEST FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Property, equipment and other related assets:
Land............................................... $ -- $ 365,000
Buildings and improvements......................... 15,456,417 15,906,339
Furniture, fixtures, equipment and software........ 3,814,143 2,527,034
ADA and franchise fees............................. 2,888,912 2,981,823
Preopening costs................................... 2,456,375 2,394,259
----------- -----------
24,615,847 24,174,455
Less accumulated depreciation and amortization..... (4,915,931) (3,313,021)
----------- -----------
Total property, equipment and other related assets,
net................................................. $19,699,916 $20,861,434
=========== ===========
Costs in excess of net assets acquired:
Cost in excess of net assets....................... $23,416,710 $25,416,710
Less accumulated amortization...................... (3,407,163) (1,714,132)
----------- -----------
Total costs in excess of net assets acquired, net.... $20,009,547 $23,702,578
=========== ===========
Accrued expenses:
Accrued store closure costs........................ $ 5,832,727 $ 1,227,688
Accrued payroll and fringe benefits................ 1,004,174 1,268,431
Accrued personal and real property taxes........... 1,099,129 1,229,349
Accrued interest................................... 581,913 322,131
Accrued state sales tax............................ 220,107 323,030
Accrued other...................................... 575,549 436,876
----------- -----------
$ 9,313,599 $ 4,807,505
=========== ===========
</TABLE>
(4) CONTRIBUTION OF NET ASSETS AND PURCHASE OF ASSETS FROM BCI
On December 31, 1995, Northstar Restaurants, Inc. contributed 33 Boston
Market stores and their related net assets to the Company in exchange for
7,500,000 Class A units and a warrant to purchase 4,750,000 voting member units
(Note 7) in the Company. On December 31, 1995, the Company acquired
substantially all of the net assets of 17 Boston Market stores from BCI for
approximately $6,875,000. These transactions have been accounted for under the
purchase method of accounting resulting in approximately $25,417,000 of costs
in excess of net assets acquired.
(5) LONG-TERM DEBT
The Company has entered into a secured loan agreement (the "Agreement") with
BCI which provides BCI the right to convert all or any portion of the loan into
common units of members' capital at $1.20 per common member unit. The specified
percentage of members' capital to be acquired on conversion is dependent on the
amount of financing to be provided in relation to the total capital and rights
outstanding, but would constitute at least a majority of the capital of the
Company on a fully diluted basis in the event all of the loan was converted.
The loan may be converted by BCI at any time up to June 2013. Additionally,
during this same time period, to the extent the loan is not fully drawn or has
been drawn and repaid, BCI has the option to acquire, at the loan conversion
price, as defined, the amount of additional units it could have acquired by
conversion of the loan had it been fully drawn. In the event BCI's exercised
conversion and option rights represent a majority of the outstanding units, BCI
will become the manager of the Company. BCI has announced its intention to
convert the loan into equity subject to acquiring the Class A and Class B
preferred membership units.
F-38
<PAGE>
FINEST FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest is based upon the reference rate of the Bank of America National
Trust and Savings Association (8.5% as of December 28, 1997) plus 1%. Interest-
only payments are required through December 2005, at which time the loan
converts to an amortizing term loan payable through November 2012, with a final
balloon payment. As of December 28, 1997, the Agreement provides for a line of
credit of $54,400,000.
The Company has also entered into a nonconvertible secured loan agreement
with BCI providing for borrowings of up to $23,647,736. Interest is based upon
the reference rate of Bank of America National Trust and Savings Association
plus 1%. Interest only payments are required through December 2005, at which
time the loan converts to an amortizing term loan payable through November
2012, with a final balloon payment.
The loans are collateralized by substantially all of the assets of the
Company and a pledge of the voting members' capital of the Company. The loan
agreements contain various restrictive covenants including restricting cash
distributions and limiting additional indebtedness.
As of December 28, 1997, principal maturities were as follows:
<TABLE>
<S> <C>
1998........................................................ $ --
1999........................................................ --
2000........................................................ --
2001........................................................ --
2002........................................................ --
Thereafter.................................................. 78,120,503
-----------
$78,120,503
===========
</TABLE>
(6) VOTING UNIT WARRANT
In October, 1996, Market Partners, L.L.C. ("MPLLC") acquired a warrant to
purchase 7% of the Company's voting member's equity (on a fully diluted basis)
for $10,610. The warrant is exercisable within 10 business days after a
Controlling Interest Acquisition at an exercise price of $1.15 per unit. In
general, a Controlling Interest Acquisition includes (i) the acquisition of a
20% or greater equity interest in the Company by BCI or (ii) the purchase of
more than 30% of the Company's then existing stores by BCI. The warrant expires
upon the earlier of the expiration of BCI's conversion rights under the
convertible debt agreement or BCI's exercise of its call right on the warrant
which can occur within two business days after MPLLC has notified the Company
of its intention to exercise the warrant.
(7) NON-VOTING MEMBERSHIP UNITS
Class A and B Preferred Membership Units
The Class A and Class B preferred membership units accrue dividends at a rate
equal to 10% of the face amount plus accrued but unpaid dividends (the
"Adjusted Issue Amount"). Dividends accrue until the fifth anniversary of the
respective issue date, after which they are paid currently on a semi-annual
basis. At December 28, 1997 there were 7,500,000 Class A units and 2,500,000
Class B units outstanding.
The Class A and Class B preferred membership units are redeemable at the
option of the Company at any time for a redemption price equal to the Adjusted
Issue Amount, plus a redemption premium initially equal to 10% of the initial
issue price increased 2% each year, up to a maximum of 20%, plus any unpaid Tax
Gross-Up amount, as defined in the Operating Agreement (the "Redemption
Price").
F-39
<PAGE>
FINEST FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Class C Preferred Membership Units
The Class C preferred membership units accrue dividends at a rate equal to 8%
of the issue price. This rate will increase to a maximum of 20% under certain
circumstances. Dividends are payable semi-annually, in cash. At December 29,
1996 there were 3,324,837 Class C units outstanding.
The Class C preferred membership units are redeemable at the option of the
Company at any time for a redemption price equal to the sum of the issue price,
plus a redemption premium equal to 4% of the initial issue price, plus any
accrued but unpaid preferred dividends.
In 1997, the Company distributed warrants to purchase 33,248 shares of BCI
common stock, which it had previously purchased from BCI, to the Class C
preferred membership units.
Preferred Membership Unit Rights
In the event of liquidation, the preferred membership units will be entitled
to a liquidation preference equal to the Redemption Price.
The holders of preferred membership units have the right to require the
Company to redeem the preferred membership units at the Redemption Price in
certain circumstances.
The preferred members have no voting rights or rights to manage the business
and affairs of the Company other than those specific rights described in the
Operating Agreement.
Northstar Restaurants, Inc., the Class A and Class B unit holder, holds a
warrant to purchase 4,750,000 voting membership units of the Company at an
initial exercise price of $1.00 per voting member unit. The warrant is
exercisable through June 2004.
(8) OPTION PLANS
A maximum of 5,000,000 voting units are available for grant to employees and
certain non-employees pursuant to the Unit Option Plan (the "Option Plan"). The
option price is equal to the fair market value on the date of grant, as
determined by the Manager. All unit options granted under the Option Plan are
exercisable up to 10 years from the date of grant. The options generally vest
at a rate of 10% at the end of the first year, an additional 20% at the end of
the second year, an additional 30% at the end of the third year and the balance
at the end of the fourth year from the date of grant.
The Company accounts for employee options using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation". If a fair value based accounting method had been adopted,
the Company's pro forma net loss would have been $46,325,008 and $23,364,317
for the years ended December 28, 1997 and December 29, 1996, respectively.
F-40
<PAGE>
FINEST FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes stock option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
1997 1996
----------------- ---------------
SHARES PRICE SHARES PRICE
---------- ----- --------- -----
<S> <C> <C> <C> <C>
Outstanding, beginning of year............... 3,531,350 $1.00 3,171,850 $1.00
Granted.................................... 60,000 1.15 359,500 $1.00
Exercised.................................. -- --
Canceled................................... (1,356,050) 1.00 --
Expired.................................... -- --
---------- ---------
Outstanding, end of year..................... 2,235,300 $1.00 3,531,350 $1.00
========== =========
Exercisable, end of year..................... 1,390,538 $1.00 1,380,525 $1.00
========== =========
Weighted average fair value of options
granted..................................... $ 0.31 $0.26
========== =========
</TABLE>
At December 28, 1997, the weighted average remaining contractual life of the
options was approximately 6 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997 and 1996 grants; risk-free interest rate of 6.20% and
6.14% respectively; expected life of 5 years.
(9) COMMITMENTS
The Company has entered into sale/lease back transactions whereby store
equipment was sold to a third party and subsequently subleased by the Company
from BCI who leased the equipment from the third party. The lease is accounted
for as an operating lease.
The Company leases store premises under various noncancelable operating lease
agreements. Lease terms are generally 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 following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 28, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 6,512,417
1999........................................................ 6,528,874
2000........................................................ 6,530,355
2001........................................................ 6,530,521
2002........................................................ 6,466,457
Thereafter.................................................. 37,049,992
-----------
$69,618,616
===========
</TABLE>
Total rent expense under operating leases, including common area maintenance
charges, was approximately $12,143,000 and $10,722,000 for 1997 and 1996,
respectively.
The Company obtains a majority of its proteins, produce and other supplies
from a limited number of vendors. Management believes that, if necessary, the
Company would be able to replace any of its sources of supply with other
vendors without a disruption in service.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
P&L Food Services, L.L.C.:
We have audited the accompanying balance sheets of P&L Food Services, L.L.C.
(a Delaware limited liability company) as of December 28, 1997 and December 29,
1996, and the related statements of operations, stockholders'/members' deficit
and cash flows for the years ended December 28, 1997, December 29, 1996 and
December 31, 1995. 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced significant losses since its
inception and has a capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of P&L Food Services, L.L.C. as
of December 28, 1997 and December 29, 1996, and the results of its operations
and its cash flows for the years ended December 28, 1997, December 29, 1996 and
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
May 7, 1998
F-42
<PAGE>
P&L FOODSERVICE, L.L.C.
BALANCE SHEETS
AS OF DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ----------- -----------
<S> <C> <C>
Current Assets:
Cash................................................ $ 389,568 $ 272,459
Inventories......................................... 1,168,315 1,090,234
Prepaid expenses and other current assets........... 239,953 1,427,441
----------- -----------
Total current assets.............................. 1,797,836 2,790,134
Property, Equipment and Other Related Assets, net..... 28,074,145 26,606,756
Costs in Excess of Net Assets Acquired, net........... 1,694,389 1,800,420
Other Assets, net..................................... 366,326 1,296,852
----------- -----------
Total assets...................................... $31,932,696 $32,494,162
=========== ===========
<CAPTION>
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 1,322,297 $ 1,758,772
Accrued expenses.................................... 4,514,934 3,086,535
----------- -----------
Total current liabilities......................... 5,837,231 4,845,307
Debt.................................................. 49,674,999 36,526,820
Other Liabilities..................................... 528,466 642,914
Commitments...........................................
Members' Deficit...................................... (24,108,000) (9,520,879)
----------- -----------
Total liabilities and members' deficit............ $31,932,696 $32,494,162
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-43
<PAGE>
P&L FOODSERVICE, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(53 WEEKS)
<S> <C> <C> <C>
Revenue............................... $ 54,677,183 $46,864,618 $32,495,149
Cost and Expenses:
Cost of products sold............... 21,015,064 18,021,880 12,532,332
Salaries and benefits............... 17,795,339 15,145,496 11,652,062
General and administrative.......... 25,442,348 19,927,160 15,280,178
Provision for store closures........ 4,228,667 -- --
------------ ----------- -----------
Total costs and expenses.......... 68,481,418 53,094,536 39,464,572
------------ ----------- -----------
Loss from Operations.................. (13,804,235) (6,229,918) (6,969,423)
Other Income (Expense):
Interest expense.................... (4,123,076) (3,120,948) (2,178,279)
Other income (expense).............. (841,346) 759,192 359,314
------------ ----------- -----------
Total other expense............... (4,964,422) (2,361,756) (1,818,965)
------------ ----------- -----------
Net Loss.............................. $(18,768,657) $(8,591,674) $(8,788,388)
============ =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-44
<PAGE>
P&L FOODSERVICE, L.L.C.
STATEMENTS OF MEMBERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996 AND
THE PERIOD FROM SEPTEMBER 4, 1995 THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
CLASS A AND B CLASS C
COMMON UNITS PREFERRED UNITS PREFERRED UNITS DIVIDENDS TOTAL
---------------------- --------------------- ---------------------- ---------- -------------
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT
--------- ------------ --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, inception..... -- $ -- -- $ -- -- $ -- $ -- $ --
Issuance of units for
contribution of net
assets................ 2,615,483 (6,286,503) -- -- -- -- -- (6,286,503)
Issuance of Class A
preferred units....... -- -- 2,500,000 2,500,000 -- -- -- 2,500,000
Dividends on preferred
units................. -- (81,945) -- -- -- -- 81,945 --
Net loss............... -- (1,691,140) -- (2,500,000) -- -- -- (4,191,140)
--------- ------------ --------- ----------- ---------- ----------- ---------- -------------
BALANCES, December 31,
1995................... 2,615,483 (8,059,588) 2,500,000 -- -- -- 81,945 (7,977,643)
Capital contributions.. -- -- 1,500,000 1,500,000 5,541,394 5,541,394 -- 7,041,394
Issuance of warrants... -- 7,044 -- -- -- -- -- 7,044
Dividends on preferred
units................. -- (506,992) -- -- -- -- 506,992 --
Net loss............... -- (1,550,280) -- (1,500,000) -- (5,541,394) -- (8,591,674)
--------- ------------ --------- ----------- ---------- ----------- ---------- -------------
BALANCES, December 29,
1996................... 2,615,483 (10,109,816) 4,000,000 -- 5,541,394 -- 588,937 (9,520,879)
Capital contributions.. -- -- -- -- 5,541,394 5,541,394 -- 5,541,394
Distribution of
warrants to acquire
BCI common stock...... -- -- -- -- -- (1,082,790) -- (1,082,790)
Dividends on preferred
units................. -- (1,283,858) -- -- -- -- 1,283,858 --
Dividends paid......... -- -- -- -- -- -- (277,068) (277,068)
Net loss............... -- (14,310,053) -- -- -- (4,458,604) (18,768,657)
--------- ------------ --------- ----------- ---------- ----------- ---------- -------------
BALANCES, December 28,
1997................... 2,615,483 $(25,703,727) 4,000,000 $ -- 11,082,788 $ -- $1,595,727 $ (24,108,000)
========= ============ ========= =========== ========== =========== ========== =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-45
<PAGE>
P&L FOOD SERVICES L.L.C.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM DECEMBER 26, 1994 THROUGH SEPTEMBER 3, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances, December 26,
1994................... 1,903,409 $19,034 $3,980,966 $ (6,939,255) $(2,939,255)
Issuance of common
stock................ 520,833 5,208 1,244,792 -- 1,250,000
Net loss.............. -- -- -- (4,597,248) (4,597,248)
--------- ------- ---------- ------------ -----------
Balances, September 3,
1995................... 2,424,242 $24,242 $5,225,758 $(11,536,503) $(6,286,503)
========= ======= ========== ============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-46
<PAGE>
P&L FOOD SERVICES, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................... $(18,768,657) $ (8,591,674) $ (8,788,388)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities, excluding
effects from acquisition and
contribution of net assets:
Depreciation and amortization.... 2,803,588 2,155,813 1,548,487
Provision for store closures..... 4,228,667 -- --
Loss on sale of assets........... 841,346 -- --
Changes in assets and
liabilities--
Inventories.................... (78,081) (199,336) (431,815)
Prepaid expenses and other
current assets................ 1,187,488 (1,197,892) 858,554
Accounts payable and accrued
expenses...................... (140,089) 781,220 710,327
Other assets and liabilities... (472,578) (1,111,187) 1,606,677
------------ ------------ ------------
Net cash (used in) provided
by operating activities..... (10,398,316) (8,163,056) (4,496,158)
Cash Flows from Investing Activities:
Purchase of property, equipment and
other related assets.............. (8,766,760) (5,674,203) (9,581,754)
Purchase of net assets, net of cash
acquired.......................... -- (5,537,121) --
Proceeds from sale of property,
equipment and other related
assets............................ 869,680 1,615,157 --
Purchase of BCI warrants........... -- (1,082,790) --
------------ ------------ ------------
Net cash used in investing
activities.................. (7,897,080) (10,678,957) (9,581,754)
Cash Flows from Financing Activities:
Proceeds from issuance of member
units............................. 5,541,394 7,041,394 3,750,000
Proceeds from debt................. 52,477,842 44,183,985 28,419,740
Payments on debt................... (39,329,663) (32,629,359) (18,386,951)
Dividends paid..................... (277,068) -- --
Issuance of warrants............... -- 7,044 --
------------ ------------ ------------
Net cash provided by
financing activities........ 18,412,505 18,603,064 13,782,789
------------ ------------ ------------
Net (Decrease) Increase in Cash...... 117,109 (238,949) (295,123)
Cash, beginning of period............ 272,459 511,408 806,531
------------ ------------ ------------
Cash, end of period.................. $ 389,568 $ 272,459 $ 511,408
============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Interest paid...................... $ 4,028,250 $ 3,108,587 $ 2,178,279
============ ============ ============
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Issuance of member units in
exchange for contribution of net
assets............................ $ -- $ -- $ 5,908,244
============ ============ ============
Distribution of warrants........... $ 1,082,790 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-47
<PAGE>
P&L FOOD SERVICES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
P&L Food Services, L.L.C. (the "Company") owns and operates retail food
service establishments under franchise agreements with Boston Chicken, Inc.
("BCI") specializing in fresh, convenient meals featuring home style entrees,
sandwiches, vegetables, salads and other dishes. On September 4, 1995, the
Company converted from a C-corporation to a limited liability corporation when
P&L Food Service, Inc., the predecessor, contributed its assets to the Company.
The statements of operations and cash flows for the year ended December 31,
1995 present the combined results of both entities.
The Company has an Area Development Agreement ("ADA") with BCI granting it
the right to open 223 stores in the states of Pennsylvania, Maryland, Ohio,
West Virginia and New York. The Company had 56 stores open at December 28,
1997. Pursuant to the franchise agreements, the Company is required to make
periodic royalty payments based on net revenue, and pay franchise, store
development, software license, software maintenance and other support service
fees on a per store basis to BCI. The total amount of royalties, fees, other
expenses and interest on its loans from BCI (Note 6) was $8.1 million, $6.6
million and $5.0 million in 1997, 1996 and 1995, respectively. The Company is
also required to make advertising fund contributions to national and local
advertising funds.
Primarily as a result of its rapid store development, the Company has
experienced significant losses since its inception which has resulted in a
capital deficiency as of December 28, 1997. Such losses have been funded
primarily by capital contributions and advances from BCI pursuant to a secured
loan agreement. Furthermore, the Company anticipates that it will continue to
generate cash flow deficits for the foreseeable future.
The Company will require additional capital to continue its operations. BCI
has expressed its intent to convert its loan to a majority equity interest in
the Company and to acquire the Class A, Class B and Class C preferred
membership units in the Company in exchange for BCI preferred and common equity
securities and cash as part of a plan to significantly restructure BCI's
operations. However, the conversion by BCI and the proposed exchange are not
assured. Further, there is no assurance at the present time that BCI and its
subsidiaries, even if restructured, would have access to capital sufficient to
continue their operations. Consequently, there is substantial doubt about the
Company's ability to continue as a going concern and to satisfy its obligations
as they become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52/53-week period ending on the last Sunday
of December.
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, Equipment and Other Related Assets
Property, equipment and other related assets are stated at cost, less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated and amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements...................................... 15 years
Furniture, fixtures, equipment and software..................... 3-8 years
ADA and franchise fees.......................................... 15 years
Preopening costs................................................ 1 year
</TABLE>
Leasehold improvements are amortized over the lesser of their useful lives or
their lease terms, including renewal options.
F-48
<PAGE>
P&L FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set up, initial stocking, training and general store
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Company to prospectively
expense pre-opening and other start-up costs as incurred effective for fiscal
years beginning after December 15, 1998, unless adopted earlier. Restatement of
prior periods is not required. Rather, the standard must be applied as of the
beginning of the fiscal year in which the SOP is first adopted, which will be
1999. Initial application must be reported as a cumulative effect of a change
in accounting principle. The Company does not anticipate the SOP will have a
material impact on its financial statements.
Costs in Excess of Net Assets Acquired
The excess purchase price over the fair value of net assets acquired is being
amortized on a straight-line basis over 15 years.
Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate revision to the remaining useful life or the remaining balances of
long-lived assets may be appropriate. Such events and circumstances include,
but are not limited to, change in business strategy or change in current and
long-term projected operating performance. When factors indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Revenue Recognition
Revenue is recognized in the period related food and beverage products are
sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $7.4
million, $4.6 million and $3.0 million in 1997, 1996, and 1995, respectively.
Income Taxes
The Company is a flow-through entity for federal and state income tax
purposes. Any taxable income or loss is reported by members on their individual
tax returns in accordance with the Company's Operating Agreement.
F-49
<PAGE>
P&L FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Allocation of Profits, Losses and Distributions
Profits for any fiscal year will first be allocated to all members in
proportion to the deficit balances in their capital accounts, in an amount
necessary to eliminate any deficits and restore such capital accounts to zero.
Profits are then allocated to the Class A and B ("Senior") preferred unit
holders in an amount sufficient to make the capital account of such Senior
preferred unit holders equal to the Redemption Price (Note 7) that would be
distributable to the Senior preferred unit holders if redeemed by the Company
as of the end of such fiscal year. Next, profits are allocated to the Class C
preferred unit holders in an amount sufficient to make the capital account of
such Class C preferred unit holders equal to the Redemption Price that would be
distributable to the Class C preferred unit holders if redeemed by the Company
as of the end of such fiscal year. Thereafter, profits are allocated to members
holding common units in proportion to their common membership units.
Losses for any fiscal year shall be allocated first to common membership unit
holders in proportion to their common membership units until their capital
account balances have been reduced to zero. Losses are then to be allocated to
the Class C preferred unit holders until the Class C preferred unit holders'
capital balance has been reduced to zero. Next, losses are to be allocated to
the Senior preferred unit holders until the Senior preferred unit holders'
capital balance has been reduced to zero. Thereafter, losses are allocated to
common members in proportion to their common membership units.
Distributions related to preferred returns (Note 7) will be made first to
Senior preferred unit holders and then to Class C preferred unit holders.
Distributions for tax purposes will be made on an annual basis to each Senior
preferred and common unit holder in an amount equal to the Tax Gross-Up Amount,
as defined, in the case of the Senior preferred unit holders, and the estimated
tax liability of the members resulting from the operations of the Company in
the case of the common unit holders. The tax distributions to the Senior
preferred unit holders have priority over tax distributions to the common unit
holders, which will only be made to common unit holders to the extent of
Available Cash, as defined. Thereafter, distributions will be made to the
members subject to the Company being in compliance with the secured loan
agreement (Note 6) as determined by the manager. However, no distributions
shall be made to common members while preferred member units are outstanding.
From and after the date the preferred units are retired, distributions shall be
made to and among the common unit holders in proportion to their common
membership units.
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.
F-50
<PAGE>
P&L FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Property, equipment and other related assets:
Land............................................... $ 2,413,903 $ 2,031,597
Buildings and improvements......................... 22,159,500 20,713,066
Furniture, fixtures, equipment and software........ 6,696,169 3,641,768
ADA and franchise fees............................. 1,950,346 1,705,956
Preopening costs................................... 1,977,342 976,550
----------- -----------
35,197,260 29,068,937
Less accumulated depreciation and amortization..... (7,123,115) (2,462,181)
----------- -----------
Total property, equipment and other related
assets, net..................................... $28,074,145 $26,606,756
=========== ===========
Costs in excess of net assets acquired:
Costs in excess of net assets acquired............. $ 1,925,168 $ 1,902,879
Less accumulated amortization...................... (230,779) (102,459)
----------- -----------
Total costs in excess of net assets acquired,
net............................................. $ 1,694,389 $ 1,800,420
=========== ===========
Accrued expenses:
Accrued payroll and fringe benefits................ $ 846,633 $ 771,609
Accrued sales tax.................................. 171,278 141,888
Accrued store closure costs........................ 2,029,253 1,056,207
Accrued personal and real property taxes........... 235,366 161,083
Accrued interest................................... 354,537 259,710
Deferred gain on equipment sales................... 324,586 324,856
Accrued other...................................... 553,281 371,182
----------- -----------
$ 4,514,934 $ 3,086,535
=========== ===========
</TABLE>
(5) CONTRIBUTION OF NET ASSETS
On September 4, 1995, P&L Food Services, Inc. contributed 32 Boston Market
stores and their related net assets to the Company in exchange for 5,230,966
Class A common units. The transaction has been accounted for as a transfer of
net assets between entities under common control, and as such, the related net
assets have been recorded at their predecessor net book value.
(6) DEBT
The Company has entered into a secured loan agreement (the "Agreement") with
BCI which provides BCI the right to convert all or any portion of the loan into
common member units at $3.43 per voting unit. The specified percentage of
common member units to be acquired on conversion is dependent on the amount of
financing to be provided in relation to the total equity and rights
outstanding, but would constitute at least a majority of the equity of the
Company on a fully diluted basis in the event all of the loan was converted.
The loan may be converted by BCI at any time up to January 2011. Additionally,
to the extent the loan is not fully drawn or has been drawn and repaid, BCI has
the option to acquire, at the loan conversion price, as defined, the amount of
additional equity it could have acquired by conversion of the loan had it been
fully drawn. In the event BCI's exercised conversion and option rights
represent a majority of the outstanding member units, BCI will become the
manager of the Company. BCI has announced its intention to convert the loan
into equity subject to acquiring the Class A, Class B and Class C preferred
membership units.
F-51
<PAGE>
P&L FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest is based upon the reference rate of the Bank of America National
Trust and Savings Association (8.5% as of December 28, 1997) plus 1%. Interest
only payments are required through October 2005, at which time the loan
converts to an amortizing term loan payable through September 2010, with a
final balloon payment. The Agreement provides for a line of credit of
$47,000,000, all of which was drawn at December 28, 1997.
The Company has also entered into a nonconvertible secured loan agreement
with BCI providing for borrowings of up to $8,000,000 of which $1,181,328 was
outstanding at December 28, 1997. Interest is based upon the reference rate of
Bank of America National Trust and Savings Association plus 1%. Interest only
payments are required through September 2005 with the principal balance due
October 2005.
The loans are collateralized by substantially all of the assets of the
Company and a pledge of the voting members' capital of the Company. The loan
agreements contain various restrictive covenants including restricting cash
distributions and limiting additional indebtedness.
As of December 28, 1997, principal maturities were as follows:
<TABLE>
<S> <C>
1998........................................................ $ --
1999........................................................ --
2000........................................................ --
2001........................................................ --
2002........................................................ --
Thereafter.................................................. 48,181,328
-----------
$48,181,328
===========
</TABLE>
(7) PREFERRED MEMBERSHIP UNITS
Class A and B Preferred Membership Units
The Class A and B preferred membership units accrue dividends at a rate equal
to 10% of the face amount plus accrued but unpaid dividends (the "Adjusted
Issue Price"). Dividends accrue until the fifth anniversary of the respective
issue date, after which they are paid currently on a semi-annual basis.
The Class A and B preferred membership units are redeemable at the option of
the Company at any time for a redemption price equal to the Adjusted Issue
Price, plus a redemption premium initially equal to 10% of the initial issue
price increased 2% each year, up to a maximum of 20%, plus any unpaid Tax
Gross-Up amount, as defined in the Company's Operating Agreement (the
"Redemption Price").
Class C Preferred Membership Units
The Class C preferred membership units accrue dividends at a rate equal to 8%
of the issue price. This rate will increase to a maximum of 20% under certain
circumstances. Dividends are payable semi-annually.
The Class C preferred membership units are redeemable at the option of the
Company at any time for a redemption price equal to the issue price, plus a
redemption premium equal to 4% of the initial issue price, plus any accrued but
unpaid preferred dividends.
F-52
<PAGE>
P&L FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Class C preferred membership units owned by Market
Partners, L.L.C. ("MPLLC"), a warrant to purchase 7% of the Company's common
member equity (on a fully diluted basis) was acquired by MPLLC for $7,044. The
warrant is exercisable within 10 business days after a Controlling Interest
Acquisition, at an exercise price of $3.43 per unit. In general, a Controlling
Interest Acquisition includes (i) the acquisition of a 20% or greater equity
interest in the Company by BCI or (ii) the purchase of more than 30% of the
Company's then existing stores by BCI. The warrant expires upon the earlier of
the expiration of BCI's conversion rights under the convertible loan agreement
or BCI's exercise of its call right on the warrant which can occur within two
business days after MPLLC has notified the Company of its intention to exercise
the warrant. Upon the exercise of the warrant, all outstanding units and unit
options (except for units held by BCI) will be adjusted such that existing unit
holders other than BCI will maintain the same equity ownership percentage both
before and after the issuance of the warrant.
In 1997, the Company distributed warrants to purchase 110,828 shares of BCI
common stock, which it previously acquired from BCI, to holders of the Class C
preferred membership units.
Preferred Membership Unit Rights
In the event of liquidation, the preferred membership units will be entitled
to a liquidation preference equal to their respective Redemption Price.
The holders of preferred membership units have the right to require the
Company to redeem the preferred membership units at the Redemption Price in
certain circumstances, including BCI exercising its Conversion or Option
rights.
The preferred members have no voting rights or rights to manage the business
and affairs of the Company other than those specific rights described in the
Company's Operating Agreement.
(8) EMPLOYEE STOCK OPTION PLAN
A maximum of 1,109,291 common units are available for grant to employees
pursuant to the Employee Unit Option Plan (the "Option Plan"). The option price
is equal to the fair market value on the date of grant, as determined by the
Manager. All unit options granted under the Option Plan are exercisable up to
10 years from the date of grant. The options generally vest at a rate of 10% at
the end of the first year, an additional 20% at the end of the second year, an
additional 30% at the end of the third year and the balance at the end of the
fourth year from the date of grant.
The Company accounts for the Option Plan using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation". If a fair value based accounting method had been adopted,
the Company's pro forma net loss would have been $18,804,035, $8,604,273 and
$8,793,395 for the years ended December 28, 1997, December 29, 1996 and
December 31, 1995, respectively.
F-53
<PAGE>
P&L FOODSERVICE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes stock option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----- ---------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period................... 1,109,291 $2.19 931,903 $2.15 901,694 $2.15
Granted................. -- -- 177,388 2.40 63,695 $2.15
Exercised............... -- -- -- -- -- --
Canceled................ (86,947) 2.37 -- -- (33,486) $2.15
Expired................. -- -- -- -- --
--------- ---------- --------
Outstanding, end of
period................... 1,022,344 $2.18 1,109,291 $2.19 931,903 $2.15
========= ========== ========
Exercisable, end of
period................... 807,025 $2.12 649,362 $2.02 322,845 $2.00
========= ========== ========
Weighted average fair
value of options granted. $ .62 $ .70
===== =====
</TABLE>
At December 28, 1997, the weighted average remaining contractual life of the
options was approximately 6 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997, 1996 and 1995 grants, respectively: risk-free
interest rates of 6.73% in 1996 and 7.92% in 1995; expected lives of 5 years.
(9) COMMITMENTS
The Company has entered into sale/leaseback transactions where store
equipment was sold to a third party and subsequently subleased by the Company
from BCI who leased the equipment from the third party. The sale of equipment
resulted in deferred gains which are being recognized by the Company over the
term of the leases.
The Company also leases office and store premises under various noncancelable
operating lease agreements. Lease terms are generally ten years with two or
three five-year renewal options. Most of the leases contain escalation clauses
and common area maintenance charges.
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 28, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 3,199,667
1999.......................................................... 3,095,138
2000.......................................................... 2,857,378
2001.......................................................... 2,758,979
2002.......................................................... 2,663,721
Thereafter.................................................... 16,072,507
-----------
$30,647,390
===========
</TABLE>
The total rent expense under operating leases, including common area
maintenance charges, was approximately $5,106,000, $4,648,000 and $3,042,000
for 1997, 1996 and 1995.
The Company obtains a majority of its proteins, produce and other supplies
from a limited number of vendors. Management believes that, if necessary, the
Company would be able to replace any of its sources of supply with other
vendors without a disruption in service.
F-54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of BC Boston, L.P.:
We have audited the accompanying balance sheets of BC Boston, L.P. (a
Delaware limited partnership) as of December 28, 1997 and December 29, 1996,
and the related statements of operations, partners' deficit and cash flows for
the years ended December 28, 1997, December 29, 1996 and December 31, 1995.
These financial statements are the responsibility of the Partnership'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.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 1 to the
financial statements, the Partnership has experienced significant losses since
its inception and has a capital deficiency that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BC Boston, L.P. as of December
28, 1997 and December 29, 1996, and the results of its operations and its cash
flows for the years ended December 28, 1997, December 29, 1996 and December 31,
1995 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
May 7, 1998
F-55
<PAGE>
BC BOSTON, L.P.
BALANCE SHEETS
AS OF DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------------ -----------
<S> <C> <C>
Current Assets:
Cash................................................ $ -- $ 755,535
Inventories......................................... 1,114,710 1,037,562
Prepaid expenses and other current assets........... 264,052 1,533,944
------------ -----------
Total current assets.............................. 1,378,762 3,327,041
Property, Equipment and Other Related Assets, net..... 20,725,955 25,311,812
Costs in Excess of Net Assets Acquired, net........... 5,800,498 6,280,601
Other Assets, net..................................... 115,153 899,544
------------ -----------
Total assets...................................... $ 28,020,368 $35,818,998
============ ===========
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 973,325 $ 4,252,050
Accrued expenses.................................... 2,958,278 2,709,179
------------ -----------
Total current liabilities......................... 3,931,603 6,961,229
Long-Term Debt........................................ 46,687,421 33,526,567
Other Liabilities..................................... 739,920 307,117
Commitments
Partners' Deficit..................................... (23,338,576) (4,975,915)
------------ -----------
Total liabilities and partners' deficit........... $ 28,020,368 $35,818,998
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-56
<PAGE>
BC BOSTON, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
DECEMBER DECEMBER
DECEMBER 28, 29, 31,
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Revenue................................ $ 58,307,231 $47,796,794 $30,183,858
Costs and Expenses:
Cost of products sold................ 22,280,654 18,464,112 12,453,044
Salaries and benefits................ 17,294,186 15,693,832 11,342,794
General and administrative........... 28,150,053 20,141,197 12,882,659
Provision for store closures......... 2,734,819 -- --
------------ ----------- -----------
Total costs and expenses........... 70,459,712 54,299,141 36,678,497
------------ ----------- -----------
Loss from Operations................... (12,152,481) (6,502,347) (6,494,639)
Other Income (Expense):
Interest expense..................... (4,035,642) (2,642,372) (2,032,722)
Other income (expense)............... (1,555,232) 1,351,146 187,587
------------ ----------- -----------
Total other expense................ (5,590,874) (1,291,226) (1,845,135)
------------ ----------- -----------
Net Loss............................... $(17,743,355) $(7,793,573) $(8,339,774)
============ =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-57
<PAGE>
BC BOSTON, L.P.
STATEMENTS OF PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON UNITS PREFERRED UNITS
------------------------------------------ ---------------------
GENERAL PARTNER LIMITED PARTNER LIMITED PARTNER
------------------- --------------------- --------------------- PREFERRED
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT DIVIDENDS TOTAL
------ ------------ --------- ----------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 25,
1994................... 30,000 $ 9,219 2,970,000 $ 912,710 -- $ -- $ -- $ 921,929
Capital contributions.. 58,005 58,005 742,500 742,500 5,000,000 5,000,000 -- 5,800,505
Dividends on preferred
units................. -- (204,168) -- -- -- -- 204,168 --
Net loss............... -- (1,684,564) -- (1,655,210) -- (5,000,000) -- (8,339,774)
------ ------------ --------- ----------- --------- ----------- ---------- ------------
BALANCES, December 31,
1995................... 88,005 (1,821,508) 3,712,500 -- 5,000,000 -- 204,168 (1,617,340)
Capital contributions.. -- -- -- -- 4,433,115 4,433,115 -- 4,433,115
Dividends on preferred
units................. -- (631,071) -- -- -- -- 631,071 --
Issuance of warrants... -- -- -- 1,883 -- -- -- 1,883
Net loss............... -- (3,358,575) -- (1,883) -- (4,433,115) -- (7,793,573)
------ ------------ --------- ----------- --------- ----------- ---------- ------------
BALANCES, December 29,
1996................... 88,005 (5,811,154) 3,712,500 -- 9,433,115 -- 835,239 (4,975,915)
Dividends on preferred
units................. -- (953,995) -- -- -- -- 953,995 --
Dividends paid......... -- -- -- -- -- -- (186,192) (186,192)
Distribution of
warrants to acquire
BCI common stock...... -- (433,114) -- -- -- -- -- (433,114)
Net loss............... -- (17,743,355) -- -- -- -- -- (17,743,355)
------ ------------ --------- ----------- --------- ----------- ---------- ------------
BALANCES, December 28,
1997................... 88,005 $(24,941,618) 3,712,500 $ -- 9,433,115 $ -- $1,603,042 $(23,338,576)
====== ============ ========= =========== ========= =========== ========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-58
<PAGE>
BC BOSTON, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................... $(17,743,355) $ (7,793,573) $ (8,339,774)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 3,195,257 2,331,356 1,753,816
Provision for store closures..... 2,734,819 -- --
Loss on the sale of assets....... 1,555,232 -- --
Changes in assets and
liabilities:
Inventories.................... (77,148) (232,760) (376,840)
Prepaid expenses and other
current assets................ 1,181,887 (1,142,259) (123,209)
Accounts payable and accrued
expenses...................... (3,521,923) 2,606,694 2,114,041
Other assets and liabilities... 899,913 18,731 65,437
------------ ------------ ------------
Net cash used in operating
activities.................. (11,775,318) (4,211,811) (4,906,529)
Cash Flows from Investing Activities:
Purchase of property, equipment and
other related assets.............. (5,948,374) (10,048,594) (10,230,021)
Purchase of BCI warrants........... -- (649,676) --
Proceeds from sale of property,
equipment and other related
assets............................ 3,993,495 -- 3,702,329
Purchase of assets acquired from
Boston Chicken, Inc., net of cash
acquired.......................... -- -- (6,910,000)
------------ ------------ ------------
Net cash provided by (used
in) investing activities.... (1,954,879) (10,698,270) (13,437,692)
Cash Flows from Financing Activities:
Proceeds from long-term debt....... 52,360,754 32,928,708 25,882,354
Payments on long-term debt......... (39,199,900) (23,630,836) (13,597,329)
Proceeds from notes receivable..... -- 1,500,000 --
Proceeds from sale of warrants..... -- 1,883 --
Dividends paid..................... (186,192) -- --
Capital contributions.............. -- 4,433,115 5,750,000
------------ ------------ ------------
Net cash provided by
financing activities........ 12,974,662 15,232,870 18,035,025
------------ ------------ ------------
Net Increase (Decrease) in Cash...... (755,535) 322,789 (309,196)
Cash, beginning of year.............. 755,535 432,746 741,942
------------ ------------ ------------
Cash, end of year.................... $ -- $ 755,535 $ 432,746
============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Interest paid...................... $ 3,948,568 $ 2,695,268 $ 1,872,954
============ ============ ============
Supplemental Non-Cash Flow
Information:
Distribution of warrants........... $ 433,114 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-59
<PAGE>
BC BOSTON, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
BC Boston, L.P. (the "Partnership"), a Delaware limited partnership organized
on March 8, 1994 under the Delaware Revised Uniform Limited Partnership Act, as
amended, owns and operates retail food service establishments under franchise
agreements with Boston Chicken, Inc. ("BCI"), specializing in fresh, convenient
meals featuring home style entrees, sandwiches, vegetables, salads and other
dishes.
The Partnership has an Area Development Agreement ("ADA") with BCI granting
it the right to open 201 stores in portions of Massachusetts, Rhode Island,
Maine, Vermont and New Hampshire. At December 28, 1997, the Partnership had 55
stores open. Pursuant to the franchise agreements, the Partnership is required
to make periodic royalty payments based on net revenue, and pay franchise,
store development, software license, software maintenance and other support
service fees on a per store basis to BCI. The total amount of royalties, fees,
other expenses and interest on its loans from BCI (Note 5) was $8.0 million,
$6.3 million and $4.6 million in 1997, 1996 and 1995, respectively. The
Partnership is also required to make advertising fund contributions to national
and local advertising funds.
Primarily as a result of its rapid store development, the Partnership has
experienced significant losses since its inception which has resulted in a
capital deficiency as of December 28, 1997. Such losses have been funded
primarily by capital contributions and advances from BCI pursuant to a secured
loan agreement. Furthermore, the Partnership anticipates that it will continue
to generate cash flow deficits for the foreseeable future.
The Partnership will require additional capital to continue its operations.
BCI has expressed its intent to convert its loans to a majority equity interest
in the Partnership and to acquire the Class A and Class B preferred partnership
units in the Partnership in exchange for BCI preferred and common equity
securities and cash as part of a plan to significantly restructure BCI's
operations. However, the conversion by BCI and the proposed exchange are not
assured. Further, there is no assurance at the present time that BCI and its
subsidiaries, even if restructured, would have access to capital sufficient to
continue their operations. Consequently, there is substantial doubt about the
Partnership's ability to continue as a going concern and to satisfy its
obligations as they become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Partnership's fiscal year consists of the 52/53-week period ending on the
last Sunday in December.
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, Equipment and Other Related Assets
Property, equipment and other related assets are stated at cost, less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated and amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................... 15 years
Furniture, fixtures, equipment and software................... 3-8 years
ADA and franchise fees........................................ 15 years
Preopening costs.............................................. 1 year
</TABLE>
Leasehold improvements are amortized over the lesser of their useful lives or
their lease term, including renewal options.
F-60
<PAGE>
BC BOSTON, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set up, initial stocking, training and general store
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Partnership to
prospectively expense pre-opening and other start-up costs as incurred
effective for fiscal years beginning after December 15, 1998, unless adopted
earlier. Restatement of prior periods is not required. Rather, the standard
must be applied as of the beginning of the fiscal year in which the SOP is
first adopted, which will be 1999. Initial application must be reported as a
cumulative effect of a change in accounting principle. The Partnership does not
anticipate the SOP will have a material impact on its financial statements.
Long-Lived Assets
The Partnership evaluates 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 Partnership estimates
the future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Costs in Excess of Net Assets Acquired
The excess purchase price over the fair value of net assets acquired is being
amortized on a straight-line basis over 15 years.
Revenue Recognition
Revenue is recognized in the period related food and beverage products are
sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $8.4
million, $3.8 million and $1.9 million in 1997, 1996, and 1995, respectively.
Income Taxes
The Partnership is not a taxable entity for federal or state income tax
purposes. Any taxable income or loss is reported by the partners on their
individual tax returns in accordance with the amended and restated Partnership
Agreement.
Allocation of Profits, Losses and Distributions
Partnership profits are first allocated to the general partner until the
general partner's deficit capital account, if any, is restored to zero. Next,
profits are to be allocated to the preferred limited partner in an amount
sufficient
F-61
<PAGE>
BC BOSTON, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
to make the capital account of such preferred limited partner equal to the
Redemption Price (Note 6) that would be distributable to the preferred limited
partner if redeemed by the Partnership as of the end of such fiscal year.
Thereafter, profits are allocated to the general partner and the limited
partner holding common units in proportion to their common units.
Losses are first allocated to the general partner and the limited partner
holding common units in proportion to their common units until the capital
account balances of such partners have been reduced to zero. Losses are then to
be allocated to the preferred limited partner until the capital account balance
of such limited partner has been reduced to zero. Thereafter, losses shall be
allocated to the general partner.
Notwithstanding any of the above, the general partner shall not receive less
than 1% of any Partnership allocation.
Distributions will be made on an annual basis to the preferred limited
partner and common limited partner in an amount equal to the Tax Gross-Up
Amount, as defined, in the case of the preferred limited partner, and the
estimated tax liability of the partner resulting from the operations of the
Partnership in the case of the common limited partner. The tax distributions to
the preferred limited partner have priority over the tax distributions to the
common limited partner, which will only be made to the common limited partner
to the extent of Available Cash, as defined. Thereafter, distributions will be
made to the partners subject to being in compliance with the secured loan
agreement (Note 5) as determined by the general partner. However, no
discretionary distributions shall be made to common holders while the preferred
limited partner units are outstanding. From and after the date the preferred
limited partner units are redeemed, distributions shall be made to and among
the general partner and common limited partner in proportion to their units.
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.
F-62
<PAGE>
BC BOSTON, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Property, equipment and other related assets:
Land............................................... $ -- $ 1,157,081
Buildings and improvements......................... 16,410,264 17,749,398
Furniture, fixtures, equipment and software........ 7,041,479 7,449,736
ADA and franchise fees............................. 1,492,525 1,295,775
Preopening costs................................... 1,098,093 858,663
----------- -----------
26,042,361 28,510,653
Less accumulated depreciation and amortization..... (5,316,406) (3,198,841)
----------- -----------
Total property, equipment and other related
assets, net..................................... $20,725,955 $25,311,812
=========== ===========
Costs in excess of net assets acquired:
Costs in excess of net assets acquired............. $ 7,203,064 $ 7,203,064
Less accumulated amortization...................... (1,402,566) (922,463)
----------- -----------
Total costs in excess of net assets acquired,
net............................................. $ 5,800,498 $ 6,280,601
=========== ===========
Accrued expenses:
Accrued payroll and fringe benefits................ $ 610,391 $ 801,289
Accrued sales tax.................................. 127,139 111,448
Accrued store closure costs........................ 1,382,592 1,241,357
Accrued personal and real property taxes........... 119,596 250,889
Accrued interest................................... 344,711 242,682
Accrued other...................................... 373,849 61,514
----------- -----------
$ 2,958,278 $ 2,709,179
=========== ===========
</TABLE>
(4) ACQUISITION OF ASSETS FROM BCI
During 1995, the Partnership acquired substantially all of the assets of 14
Boston Market stores from BCI through various transactions for approximately
$6,910,000. The transactions have been accounted for under the purchase method
of accounting and resulted in approximately $7,203,000 of costs in excess of
net assets acquired.
(5) LONG-TERM DEBT
The Partnership has entered into a secured loan agreement (the "Agreement")
with BCI which provides BCI the right to convert all or any portion of the loan
into common limited partner units based upon a tiered pricing structure ranging
from $1.13 to $1.41 per unit. The specified percentage of common limited
partner units to be acquired on conversion is dependent on the amount of
financing to be provided in relation to the total equity and rights outstanding
of the Partnership, but would constitute at least a majority of the capital of
the Partnership on a fully-diluted basis in the event that all of the loan was
converted. The loan may be converted by BCI at any time up to December 2008.
Additionally, during this same time period, to the extent the loan is not fully
drawn or has been drawn and repaid, BCI has the option to acquire, at the Loan
Conversion Price (as defined), the amount of additional common limited
partnership units it could have acquired by conversion of the loan had it been
fully drawn. In the event BCI's exercised conversion and option rights
represent a majority interest of the then outstanding common limited
partnership units, 1% of BCI's common limited partnership units calculated on a
fully-diluted basis excluding the preferred limited partner units will be
converted to general partnership units and BCI will become the sole general
partner of the Partnership. BCI has announced its intention to convert the loan
into equity subject to acquiring the Class A and Class B preferred partnership
units.
F-63
<PAGE>
BC BOSTON, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest is based upon the reference rate of the Bank of America National
Trust and Savings Association (8.5% as of December 28, 1997) plus 1%. Interest
only payments are required through June 2005, at which time the loan converts
to an amortizing term loan payable through July 2008, with a final balloon
payment. As of December 28, 1997 the Agreement provides for a line of credit of
$43,000,000, all of which was outstanding.
The Partnership has also entered into a nonconvertible secured loan agreement
with BCI providing for borrowings of up to $7,464,789 of which $3,687,421 was
outstanding as of December 28, 1997. Interest is based upon the reference rate
of Bank of America National Trust and Savings Association plus 1%. Interest
only payments are required through June 2008, with the principal balance due
July 2008.
The loans are collateralized by substantially all of the assets of the
Partnership and a pledge of all common units of limited and general partnership
interest. The loan agreements contain various restrictive covenants including
restricting cash distributions and limiting additional indebtedness.
<TABLE>
<S> <C>
1998.......................................................... $ --
1999.......................................................... --
2000.......................................................... --
2001.......................................................... --
2002.......................................................... --
Thereafter.................................................... 46,687,421
-----------
$46,687,421
===========
</TABLE>
(6) PREFERRED PARTNERSHIP UNITS
Class A Preferred Partnership Units
The Class A preferred partnership units bear dividends at a rate equal to 10%
of the face amount plus accrued but unpaid dividends (the "Adjusted Issue
Price"). Dividends accrue until the fifth anniversary of the respective issue
date, after which they are paid currently on a semi-annual basis. At December
28, 1997, 5,000,000 Class A preferred partnership units were outstanding.
The Class A preferred partnership units are redeemable at the option of the
Partnership at any time for a redemption price equal to the Adjusted Issue
Price, plus a redemption premium initially equal to 10% of the initial issue
price increased 2% each year, up to a maximum of 20%, plus any unpaid Tax
Gross-Up amount, as defined in the Operating Agreement (the "Redemption
Price").
Class B Preferred Partnership Units
The Class B preferred partnership units bear dividends at a rate equal to 8%
of the issue price. This rate will increase to a maximum of 20% under certain
circumstances. Dividends will be payable semi-annually, in cash, on March 27,
1997 and each six months subsequent. At December 28, 1997, 4,433,115 Class B
preferred partnership units were outstanding.
F-64
<PAGE>
BC BOSTON, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Class B preferred partnership units are redeemable at the option of the
Partnership at any time for a redemption price equal to the Adjusted Issue
Price, plus a redemption premium equal to 4% of the initial issue price.
In connection with the Class B preferred partnership units owned by Market
Partners, L.L.C. ("MPLLC"), a warrant to purchase 7% of the Partnership's
common partner equity (on a fully diluted basis) was acquired by MPLLC for
$8,914. The warrant is exercisable within 10 business days after a Controlling
Interest Acquisition at an exercise price of $1.47 per unit. In general, a
Controlling Interest Acquisition includes (i) the acquisition of a 20% or
greater equity interest in the Partnership by BCI or (ii) the purchase of more
than 30% of the Partnership's then existing stores by BCI. The warrant expires
upon the earlier of the expiration of BCI's conversion rights under the
convertible debt agreement or BCI's exercise of its call right on the warrant
which can occur within two business days after MPLLC has notified the
Partnership of its intention to exercise the warrant. Upon the exercise of the
warrant, all outstanding units and unit options (except for units held by BCI)
will be adjusted such that existing unit holders other than BCI will maintain
the same equity ownership percentage both before and after the exercise of the
warrant.
In 1997, the Partnership distributed warrants to purchase 44,331 shares of
BCI common stock, which it had previously purchased from BCI.
Preferred Partnership Unit Rights
In the event of liquidation, the preferred partnership units will be entitled
to a liquidation preference equal to the Redemption Price.
The holders of preferred partnership units have the right to require the
Partnership to redeem the preferred partnership units at the Redemption Price
in certain circumstances.
The preferred partners have no voting rights or rights to manage the business
and affairs of the Partnership other than those specific rights described in
the Operating Agreement.
(7) PARTNERSHIP UNIT OPTION PLAN
A maximum of 3,600,000 common units are available for grant to employees
pursuant to the Employee Unit Option Plan (the "Option Plan"). The option price
is equal to the fair market value on the date of grant, as determined by the
Manager. All unit options granted under the Option Plan are exercisable up to
10 years from the date of grant. The options generally vest at a rate of 10% at
the end of the first year, an additional 20% at the end of the second year, an
additional 30% at the end of the third year and the balance at the end of the
fourth year from the date of grant.
The Partnership accounts for the Option Plan using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation." If a fair value based accounting method had been adopted,
the Partnership's pro forma net loss would have been $17,991,485, $8,008,867
and $8,358,882 for 1997, 1996 and 1995, respectively.
F-65
<PAGE>
BC BOSTON, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes unit option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- ---------------
UNITS PRICE UNITS PRICE UNITS PRICE
--------- ----- ---------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period.................. 2,481,657 $1.24 254,250 $1.00 -- --
Granted................ -- -- 2,385,907 $1.25 275,250 $1.00
Exercised.............. -- -- -- -- -- --
Canceled............... (124,500) $1.06 (158,500) $1.06 (21,000) $1.00
Expired................ -- -- -- -- -- --
--------- ---------- --------
Outstanding, end of
period.................. 2,357,157 $1.25 2,481,657 $1.24 254,250 $1.00
========= ========== ========
Exercisable, end of
period.................. 1,347,454 $1.25 684,837 $1.24 18,425 $1.00
========= ========== ========
Weighted average fair
value of options
granted................. $ 0.40 $ 0.32
========== ========
</TABLE>
At December 28, 1997, the weighted average contractual life of the options
was approximately 7 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997, 1996 and 1995 grants, respectively: risk-free
interest rates of 6.20%, 6.72% and 7.78%, respectively; expected lives of 5
years.
(8) COMMITMENTS
The Partnership has entered into sale/lease back transactions whereby store
equipment was sold to a third party and subsequently subleased by the
Partnership from BCI who leases the equipment from the third party.
The Partnership also leases office and store premises under various
noncancelable operating lease agreements. Lease terms are generally five to ten
years with one or more five-year renewal options.
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 28, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 3,736,316
1999.......................................................... 3,618,887
2000.......................................................... 3,338,466
2001.......................................................... 2,876,092
2002.......................................................... 2,556,496
Thereafter.................................................... 11,056,247
-----------
$27,182,504
===========
</TABLE>
Total rent expense under operating leases, including common area maintenance
charges, was approximately $5,504,000, $4,052,000 and $2,057,000 for 1997, 1996
and 1995, respectively.
The Partnership obtains a majority of its proteins, produce and other
supplies from a limited number of vendors. Management believes that, if
necessary, the Partnership would be able to replace any of its sources of
supply with other vendors without a disruption in service.
F-66
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of BCE West, L.P.:
We have audited the accompanying balance sheets of BCE West, L.P. (a Delaware
limited partnership) as of December 28, 1997 and December 29, 1996 and the
related statements of operations, partners' deficit and cash flows for the
years ended December 28, 1997, December 29, 1996 and December 31, 1995. These
financial statements are the responsibility of the Partnership'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.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 1 to the
financial statements, the Partnership has experienced significant losses since
its inception and has a capital deficiency that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BCE West, L.P. as of December
28, 1997 and December 29, 1996, and the results of its operations and its cash
flows for the years then ended December 28, 1997, December 29, 1996 and
December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
May 8, 1998
F-67
<PAGE>
BCE WEST, L.P.
BALANCE SHEETS
AS OF DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash............................................... $ 95,857 $ 1,242,953
Inventories........................................ 912,061 1,338,652
Prepaid expenses and other current assets.......... 262,537 1,170,214
------------ ------------
Total current assets............................. 1,270,455 3,751,819
Property, Equipment and Other Related Assets, net.... 15,667,653 24,423,249
Costs in Excess of Net Assets Acquired, net.......... 2,975,629 3,228,466
Other Assets, net.................................... 213,300 1,456,291
------------ ------------
Total assets..................................... $ 20,127,037 $ 32,859,825
============ ============
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 233,322 $ 1,907,258
Accrued expenses................................... 4,036,490 5,474,636
------------ ------------
Total current liabilities........................ 4,269,812 7,381,894
Debt................................................. 43,337,487 39,545,690
Other Liabilities.................................... 763,855 370,930
Commitments
Partners' Deficit.................................... (28,244,117) (14,438,689)
------------ ------------
Total liabilities and partners' deficit.......... $ 20,127,037 $ 32,859,825
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-68
<PAGE>
BCE WEST, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues............................. $ 60,510,538 $ 59,112,073 $ 36,939,042
Costs and Expenses:
Cost of products sold.............. 22,489,664 23,134,739 14,947,274
Salaries and benefits.............. 21,278,451 19,104,993 13,336,589
General and administrative......... 29,074,560 27,057,608 20,744,802
Provision for store closures....... 2,688,259 -- --
------------ ------------ ------------
Total costs and expenses......... 75,530,934 69,297,340 49,028,665
------------ ------------ ------------
Loss from Operations................. (15,020,396) (10,185,267) (12,089,623)
Other Income (Expense):
Interest expense................... (4,078,383) (3,316,089) (2,153,661)
Other income....................... 1,103,195 832,541 123,094
------------ ------------ ------------
Total other expense.............. (2,975,188) (2,483,548) (2,030,567)
------------ ------------ ------------
Net loss............................. $(17,995,584) $(12,668,815) $(14,120,190)
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-69
<PAGE>
BCE WEST, L.P.
STATEMENTS OF PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
CLASS B
COMMON UNITS COMMON UNITS
------------------------------------------------ -------------------
GENERAL PARTNER LIMITED PARTNER LIMITED PARTNER
---------------------- ------------------------ -------------------
AMOUNT UNITS AMOUNT UNITS AMOUNT UNITS
------------ -------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
December 25,
1994............ $ 300,961 392,370 $ 6,384,457 9,607,630 $ 130,194 204,082
Capital
contributions.. -- -- -- -- -- --
Reclassification
of mandatory
redemption
units to debt.. -- -- (1,000,000) (1,000,000) -- --
Conversion of
General Partner
units to
Limited Partner
units.......... -- (292,370) -- 292,370 -- --
Cancellation of
Class A
preference
amount......... 4,614 -- 112,986 -- -- --
Redemption of
member units... -- -- (2,500,000) (2,500,000) (130,194) (204,082)
Dividends
accrued........ (100,694) -- -- -- -- --
Net loss........ (8,622,747) -- (2,997,443) -- -- --
------------ -------- ----------- ----------- --------- --------
BALANCES,
December 31,
1995............ (8,417,866) 100,000 -- 6,400,000 -- --
Capital
contributions.. -- -- -- -- -- --
Dividends
accrued........ (415,206) -- -- -- -- --
Issuance of
warrants....... -- -- 5,904 -- -- --
Net loss........ (8,626,733) -- (5,904) -- -- --
------------ -------- ----------- ----------- --------- --------
BALANCES,
December 29,
1996............ (17,459,805) 100,000 -- 6,400,000 -- --
Capital
contributions.. -- -- -- -- -- --
Dividends
accrued........ (1,227,915) -- -- -- -- --
Dividends paid.. -- -- -- -- -- --
Distribution of
warrants to
acquire BCI
common stock... -- -- -- -- -- --
Net loss........ (11,031,764) -- -- -- -- --
------------ -------- ----------- ----------- --------- --------
BALANCES,
December 28,
1997............ $(29,719,484) 100,000 $ -- 6,400,000 $ -- --
============ ======== =========== =========== ========= ========
<CAPTION>
PREFERRED UNITS
----------------------------------------------
CLASS A CLASS B
---------------------- -----------------------
LIMITED PARTNER LIMITED PARTNER
---------------------- -----------------------
AMOUNT UNITS AMOUNT UNITS DIVIDENDS TOTAL
------------ --------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
December 25,
1994............ $ -- -- $ -- -- $ -- $ 6,815,612
Capital
contributions.. 2,500,000 2,500,000 -- -- -- 2,500,000
Reclassification
of mandatory
redemption
units to debt.. -- -- -- -- -- (1,000,000)
Conversion of
General Partner
units to
Limited Partner
units.......... -- -- -- -- -- --
Cancellation of
Class A
preference
amount......... -- -- -- -- -- 117,600
Redemption of
member units... -- -- -- -- -- (2,630,194)
Dividends
accrued........ -- -- -- -- 100,694 --
Net loss........ (2,500,000) -- -- -- -- (14,120,190)
------------ --------- ------------ ---------- ----------- -------------
BALANCES,
December 31,
1995............ -- 2,500,000 -- -- 100,694 (8,317,172)
Capital
contributions.. 1,000,000 1,000,000 5,541,394 5,541,394 -- 6,541,394
Dividends
accrued........ -- -- -- -- 415,206 --
Issuance of
warrants....... -- -- -- -- -- 5,904
Net loss........ (1,000,000) -- (3,036,178) -- -- (12,668,815)
------------ --------- ------------ ---------- ----------- -------------
BALANCES,
December 29,
1996............ -- 3,500,000 2,505,216 5,541,394 515,900 (14,438,689)
Capital
contributions.. -- -- 5,541,394 5,541,394 -- 5,541,394
Dividends
accrued........ -- -- -- -- 1,227,915 --
Dividends paid.. -- -- -- -- (268,448) (268,448)
Distribution of
warrants to
acquire BCI
common stock... -- -- (1,082,790) -- -- (1,082,790)
Net loss........ -- -- (6,963,820) -- -- (17,995,584)
------------ --------- ------------ ---------- ----------- -------------
BALANCES,
December 28,
1997............ $ -- 3,500,000 $ -- 11,082,788 $1,475,367 $(28,244,117)
============ ========= ============ ========== =========== =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-70
<PAGE>
BCE WEST, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................... $(17,995,584) $(12,668,815) $(14,120,190)
Adjustments to reconcile net loss
to net cash used in operating
activities--
Depreciation and amortization.... 3,149,637 3,253,666 2,532,780
Provision for store closures..... 2,688,259 -- --
Gain on the sale of assets....... (1,103,196) -- --
Changes in assets and
liabilities:
Inventories.................... 426,591 (301,591) (495,354)
Prepaid expenses and other
current assets................ 907,677 (822,591) 1,024,673
Accounts payable and accrued
expenses...................... (1,758,474) 1,983,214 1,548,668
Other assets and liabilities... 4,470,638 (978,292) 2,379,398
------------ ------------ ------------
Net cash used in operating
activities.................. (9,214,452) (9,534,409) (7,130,025)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of property, equipment and
other related assets.............. (23,524,885) (4,890,495) (13,822,880)
Proceeds from sale of property and
equipment......................... 22,527,498 -- 4,463,347
Acquisition of BCI warrants........ -- (1,082,790) --
------------ ------------ ------------
Net cash provided by (used
in) investing activities.... (997,387) (5,973,285) (9,359,533)
------------ ------------ ------------
Cash Flows from Financing Activities:
Borrowings on debt................. 77,417,455 55,182,767 30,535,452
Payments on debt................... (73,625,658) (44,206,241) (19,983,832)
Collection of note receivable
issued for partnership units...... -- -- 5,000,000
Redemption of partnership units.... -- (1,000,000) (2,630,194)
Dividends paid..................... (268,448) -- --
Proceeds from issuance of preferred
partnership units................. 5,541,394 6,541,394 2,500,000
Proceeds from issuance of warrants. -- 5,904 --
------------ ------------ ------------
Net cash provided by
financing activities........ 9,064,743 16,523,824 15,421,426
------------ ------------ ------------
Net Increase (Decrease) in Cash...... (1,147,096) 1,016,130 (1,068,132)
Cash, beginning of year.............. 1,242,953 226,823 1,294,955
------------ ------------ ------------
Cash, end of year.................... $ 95,857 $ 1,242,953 $ 226,823
============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Interest paid...................... $ 4,052,160 $ 3,374,017 $ 2,114,779
============ ============ ============
Supplemental Disclosure of Non-Cash
Information:
Distribution of warrants........... $ 1,082,790 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-71
<PAGE>
BCE WEST, L.P.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
BCE West, L.P. (the "Partnership"), a Delaware limited partnership organized
under the Delaware Revised Uniform Limited Partnership Act, as amended, owns
and operates retail food service establishments under franchise agreements with
Boston Chicken, Inc. ("BCI"), specializing in fresh, convenient meals featuring
home style entrees, sandwiches, vegetables, salads and other dishes.
The Partnership has an Area Development Agreement ("ADA") with BCI granting
it the right to open 193 stores in Colorado, New Mexico, Idaho, Utah, Wyoming,
Arizona and Nevada. At December 28, 1997, the Partnership had 45 stores open.
Pursuant to the franchise agreements, the Partnership is required to make
periodic royalty payments based on net revenue, and pay franchise, store
development, software license, software maintenance and other support service
fees on a per store basis to BCI. The total amount of royalties, fees, other
expenses and interest on its loan from BCI (Note 4) was $10.3 million, $9.7
million and $7.8 million in 1997, 1996 and 1995, respectively. The Company is
also required to make advertising fund contributions to national and local
advertising funds.
Primarily as a result of its rapid store development, the Partnership has
experienced significant losses since its inception which has resulted in a
capital deficiency as of December 28, 1997. Such losses have been funded
primarily by capital contributions and advances from BCI pursuant to a secured
loan agreement. Furthermore, the Partnership anticipates that it will continue
to generate cash flow deficits for the foreseeable future.
The Partnership will require additional capital to continue its operations.
BCI has expressed its intent to convert its loans to a majority equity interest
in the Partnership and to acquire the Class A and Class B preferred partnership
units in exchange for BCI preferred and common equity securities and cash as
part of a plan to significantly restructure BCI's operations. However, the
conversion by BCI and the proposed exchange are not assured. Further, there is
no assurance at the present time that BCI and its subsidiaries, even if
restructured, would have access to capital sufficient to continue their
operations. Consequently, there is substantial doubt about the Partnership's
ability to continue as a going concern and to satisfy its obligations as they
become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Partnership's fiscal year is the 52/53-week period ending on the last
Sunday in December.
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, Equipment and Other Related Assets
Property, equipment and other related assets are stated at cost, less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated or amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements...................................... 15 years
Furniture, fixtures, equipment and software..................... 3-8 years
ADA and franchise fees.......................................... 15 years
Preopening costs................................................ 1 year
</TABLE>
Leasehold improvements are amortized over the lesser of their useful lives or
their lease term, including renewal options.
F-72
<PAGE>
BCE WEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set up, initial stocking, training and general store
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Partnership to
prospectively expense pre-opening and other start-up costs as incurred
effective for fiscal years beginning after December 15, 1998, unless adopted
earlier. Restatement of prior periods is not required. Rather, the standard
must be applied as of the beginning of the fiscal year in which the SOP is
first adopted, which will be 1999. Initial application must be reported as a
cumulative effect of a change in accounting principle. The Partnership does not
anticipate the SOP will have a material impact on its financial statements.
Long-Lived Assets
The Partnership evaluates 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 Partnership estimates
the future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Costs in Excess of Net Assets Acquired
The excess purchase price over the fair value of net assets acquired is being
amortized on a straight-line basis over 15 years.
Revenue Recognition
Revenue is recognized in the period during which related food and beverage
products are sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $9.6
million, $4.6 million and $2.8 million in 1997, 1996, and 1995, respectively.
Income Taxes
The Partnership is not a taxable entity for federal or state income tax
purposes. Any taxable income or loss is reported by the partners on their
individual tax returns in accordance with the amended and restated Partnership
Agreement.
Allocation of Profits, Losses and Distributions
Profits for any fiscal year will first be allocated to the general partner in
an amount necessary to eliminate any deficits and restore such capital accounts
to zero. Profits are then allocated to the Class A and B ("Senior")
F-73
<PAGE>
BCE WEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
preferred unit holder in an amount sufficient to make the capital account of
such Senior preferred unit holder equal to the Redemption Price that would be
distributable to the Senior preferred unit holder if redeemed by the
Partnership as of the end of such fiscal year. Thereafter, profits are
allocated to the general partner and members holding common units in proportion
to their units.
Losses for any fiscal year shall be allocated first to common membership unit
holders in proportion to their common membership units until their capital
account balances have been reduced to zero. Next, losses are to be allocated to
the Senior preferred unit holder until the Senior preferred unit holder's
capital balance has been reduced to zero. Thereafter, losses are allocated to
the general partner.
Distributions for tax purposes will be made on an annual basis to each Senior
preferred and common unit holder in an amount equal to the Tax Gross-Up Amount,
as defined, in the case of the Senior preferred unit holder, and the estimated
tax liability of the members resulting from the operations of the Partnership
in the case of the common unit holder. The tax distributions to the Senior
preferred unit holder have priority over tax distributions to the common unit
holders, which will only be made to common unit holders to the extent of
Available Cash, as defined. Thereafter, distributions will be made to the
members subject to the Partnership being in compliance with the secured loan
agreement (Note 4) as determined by the manager. However, no distributions
shall be made to common members while preferred member units are outstanding.
From and after the date the preferred units are retired, distributions shall be
made to and among the common unit holders in proportion to their common units.
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.
F-74
<PAGE>
BCE WEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Property, equipment and other related assets:
Buildings and improvements.......................... $12,767,867 $20,973,233
Furniture, fixtures, equipment and software......... 3,914,319 3,606,829
Preopening costs.................................... 2,811,391 3,049,113
ADA and franchise fees.............................. 1,862,000 2,430,000
----------- -----------
21,355,577 30,059,175
Less accumulated depreciation and amortization...... (5,687,924) (5,635,926)
----------- -----------
$15,667,653 $24,423,249
=========== ===========
Costs in excess of net assets acquired:
Costs in excess of net assets acquired.............. $ 3,692,723 $ 3,692,723
Less accumulated amortization....................... (717,094) (464,257)
----------- -----------
$ 2,975,629 $ 3,228,466
=========== ===========
Accrued expenses:
Accrued payroll and fringe benefits................. $ 1,379,490 $ 1,396,809
Accrued sales tax................................... 275,737 441,035
Accrued store closure costs......................... 1,126,662 1,733,327
Accrued personal and real property taxes............ 240,201 842,862
Accrued interest.................................... 319,601 282,167
Deferred gain on equipment sales.................... 486,305 378,037
Accrued other....................................... 208,494 400,399
----------- -----------
$ 4,036,490 $ 5,474,636
=========== ===========
</TABLE>
(4) DEBT
The Partnership has entered into a secured loan agreement (the "Agreement")
with BCI which provides BCI the right to convert all or any portion of the loan
into units of common limited partnership interests at $1.5265 per voting unit.
The specified percentage of units to be acquired upon conversion is dependent
on the amount of financing to be provided in relation to the total capital and
rights outstanding, but would constitute at least a majority of the capital of
the Partnership on a fully diluted basis in the event all of the loan was
converted. The loan may be converted by BCI at any time up to March 2011.
Additionally, during this same time period, to the extent the loan is not fully
drawn or has been drawn and repaid, BCI has the option to acquire, at the loan
conversion price, as defined, the amount of additional limited partnership
units it could have acquired by conversion of the loan had it been fully drawn.
In the event BCI's exercised conversion and option rights represent a majority
interest of all the units, BCI's limited partnership units will be converted to
general partnership units and BCI will become the sole general partner of the
Partnership. The loan is collateralized by substantially all the assets of the
Partnership and a pledge of all units of limited and general partner interests.
The Agreement contains various restrictive covenants including restrictions on
cash distributions and additional indebtedness. BCI has announced its intention
to convert the loan into equity subject to acquiring the Class A and Class B
preferred partnership units.
Interest is equal to the reference rate of the Bank of America National Trust
and Savings Association (8.5% as of December 28, 1997) plus 1%. Interest only
payments are required through September 2003, at which time the loan converts
to an amortizing term loan payable through August 2010, with a final balloon
payment. The Agreement provides for a line of credit of $54,300,000 with
$43,337,487 drawn as of December 28, 1997.
F-75
<PAGE>
BCE WEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of December 28,1997, principal maturities on the outstanding balance were
as follows:
<TABLE>
<S> <C>
1998.......................................................... $ --
1999.......................................................... --
2000.......................................................... --
2001.......................................................... --
2002.......................................................... --
Thereafter.................................................... 43,337,487
-----------
$43,337,487
===========
</TABLE>
(5) PARTNERS' CAPITAL
Class A Preferred Partnership Units
The Class A preferred partnership units accrue dividends at a rate equal to
10% of the face amount plus accrued but unpaid dividends (the "Adjusted Issue
Price"). Dividends accrue until the fifth anniversary of the respective issue
date, after which they are paid currently on a semi-annual basis. At December
28, 1997 there were 3,500,000 Class A units outstanding.
The Class A preferred partnership units are redeemable at the option of the
Partnership at any time for a redemption price equal to the Adjusted Issue
Price, plus a redemption premium initially equal to 10% of the initial issue
price increased 2% of the initial issue price each year, up to a maximum of
20%, plus any unpaid Tax Gross-Up amount, as defined in the Partnership
Agreement (the "Redemption Price").
Class B Preferred Partnership Units
The Class B preferred partnership units accrue dividends at a rate equal to
8% of the issue price. This rate will increase to a maximum of 20% under
certain circumstances. Dividends are payable semi-annually. At December 28,
1997 there were 11,082,788 Class B units outstanding.
The Class B preferred partnership units are redeemable at the option of the
Partnership at any time for a redemption price equal to the sum of the issue
price, plus a redemption premium equal to 4% of the initial issue price, plus
any accrued but unpaid preferred dividends.
In connection with the issuance of Class B preferred partnership units to
Market Partners, L.L.P. ("MPLLC"), a warrant to purchase 7% of the
Partnership's common partnership units (on a fully diluted basis) was acquired
by MPLLC for $5,904. The warrant is exercisable within 10 business days after a
Controlling Interest Acquisition at an exercise price of $1.53 per unit. In
general, a Controlling Interest Acquisition includes (i) the acquisition of a
20% or greater equity interest in the Partnership by BCI or (ii) the purchase
of more than 30% of the Partnership's then existing stores by BCI. The warrant
expires upon the earlier of the expiration of BCI's conversion rights under the
convertible debt agreement or BCI's exercise of its call right on the warrant
which can occur within two business days after MPLLC has notified the
Partnership of its intention to exercise the warrant.
In 1997, the Partnership distributed warrants to acquire 110,828 shares of
BCI common stock, which it had previously purchased from BCI, to the Class B
holders.
F-76
<PAGE>
BCE WEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Preferred Partnership Unit Rights
In the event of liquidation, the preferred partnership units will be entitled
to a liquidation preference equal to the Redemption Price.
The holders of preferred partnership units have the right to require the
Partnership to redeem the preferred partnership units at the Redemption Price
in certain circumstances.
The preferred partners have no voting rights or rights to manage the business
and affairs of the Partnership other than those specific rights described in
the Partnership Agreement.
Redemption of Class B Common Limited Units
During 1995, all Class B common limited units were redeemed by the
Partnership and the Partnership Agreement was amended and restated to cancel
all rights associated with such Class B common limited units.
Cancellation of Common Preference Amount
During 1995, the Partnership Agreement was amended to terminate any rights to
any accrued Common Preference Amount and any future rights to any Common
Preference Amount.
(6) OPTION PLAN
A maximum of 3,600,384 common limited partnership units are available for
grant to employees pursuant to the Option Plan. The option price is equal to
the fair market value on the date of grant, as determined by the manager. All
unit options granted under the Option Plan are exercisable up to 10 years from
the date of grant. The options generally vest at a rate of 10% at the end of
the first year, an additional 20% at the end of the second year, an additional
30% at the end of the third year and the balance at the end of the fourth year
from the date of grant.
The Partnership accounts for the Option Plan using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standard No. 123, "Accounting for Stock Based
Compensation." If a fair value based accounting method had been adopted, the
Partnership's pro forma net loss would have been $18,250,379, $12,901,657 and
$14,320,930 for the years ended December 28, 1997, December 29, 1996 and
December 31, 1995, respectively.
The following table summarizes option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- ----------------
UNITS PRICE UNITS PRICE UNITS PRICE
--------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of period.............. 3,298,070 $1.04 3,075,000 $1.00 1,905,000 $1.00
Granted............... 115,380 $1.30 393,070 $1.30 1,170,000 $1.00
Exercised............. -- -- -- -- -- --
Canceled.............. (38,460) $1.30 (170,000) $1.00 -- --
Expired............... -- -- -- -- -- --
--------- ---------- ----------
Outstanding, end of
period................. 3,374,990 $1.04 3,298,070 $1.04 3,075,000 $1.00
========= ========== ==========
Exercisable, end of
period................. 2,158,461 $1.00 1,181,500 $1.00 543,500 $1.00
========= ========== ==========
Weighted average fair
value of options
granted................ $ 0.35 $ 0.27 $ 0.31
========= ========== ==========
</TABLE>
F-77
<PAGE>
BCE WEST, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 28, 1997, the weighted average remaining contractual life of the
options, was approximately 7 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997, 1996 and 1995 grants, respectively: risk-free
interest rates of 6.20%, 6.31% and 7.33%, respectively; expected lives of 5
years.
(7) COMMITMENTS
The Partnership has entered into sale/leaseback transactions where store
equipment was sold to a third party and subsequently subleased by the
Partnership from BCI who leased the equipment from the third party. The sale of
equipment resulted in deferred gains which are being recognized by the
Partnership over the lives of the respective leases.
The Partnership also leases office and store premises under various
noncancelable operating lease agreements. Lease terms are generally ten years
with two or three five-year renewal options. Most of the leases contain
escalation clauses and common area maintenance charges. The following is a
schedule of future minimum rental payments which are required under operating
leases that have initial or remaining noncancelable lease terms in excess of
one year as of December 28, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 3,669,714
1999.......................................................... 3,661,524
2000.......................................................... 3,613,787
2001.......................................................... 3,647,706
2002.......................................................... 3,712,811
Thereafter.................................................... 17,441,676
-----------
$35,747,218
===========
</TABLE>
Total rent expense under operating leases, including common area maintenance
charges, was approximately $7,831,000, $7,536,000 and $4,430,000 for the years
ended December 28, 1997, December 29, 1996 and December 31, 1995, respectively.
The Partnership obtains a majority of its proteins, produce and other
supplies from a limited number of vendors. Management believes that, if
necessary, the Partnership would be able to replace any of its sources of
supply with other vendors without a disruption in service.
(8) OTHER INCOME
Included in other income in 1997, is a gain of $2.8 million resulting from
the sale of Boston Market stores and related assets to BCI.
F-78
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of BC GoldenGate, L.L.C.:
We have audited the accompanying balance sheets of BC GoldenGate, L.L.C. (a
Delaware limited liability company) as of December 28, 1997 and December 29,
1996, and the related statements of operations, members' equity (deficit) and
cash flows for the years ended December 28, 1997, December 29, 1996 and the
period from inception (July 14, 1995) through December 31, 1995. 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced significant losses since its
inception and has a capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BC GoldenGate, L.L.C. as of
December 28, 1997 and December 29, 1996, and the results of its operations and
its cash flows for the years ended December 28, 1997, December 29, 1996 and the
period from inception (July 14, 1995) through December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
May 7, 1998
F-79
<PAGE>
BC GOLDENGATE, L.L.C.
BALANCE SHEETS
AS OF DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------------ -----------
<S> <C> <C>
Current Assets:
Cash............................................... $ 171,029 $ 1,029,503
Inventories........................................ 1,151,503 1,251,264
Prepaid expenses and other current assets.......... 381,984 2,101,265
------------ -----------
Total current assets............................. 1,704,516 4,382,032
Property, Equipment and Other Related Assets, net.... 24,188,945 26,437,561
Costs in Excess of Net Assets Acquired, net.......... 3,224,537 3,469,004
Other Assets, net.................................... 1,116,236 1,394,749
------------ -----------
Total assets..................................... $ 30,234,234 $35,683,346
============ ===========
<CAPTION>
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 2,220,982 $ 2,864,243
Accrued expenses................................... 3,669,478 2,198,531
------------ -----------
Total current liabilities........................ 5,890,460 5,062,774
Debt................................................. 49,992,626 31,511,548
Other Liabilities.................................... 1,866,076 2,060,854
Commitments
Members' Deficit..................................... (27,514,928) (2,951,830)
------------ -----------
Total liabilities and members' deficit........... $ 30,234,234 $35,683,346
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-80
<PAGE>
BC GOLDENGATE, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED PERIOD FROM INCEPTION
-------------------------- (JULY 14, 1995)
DECEMBER 28, DECEMBER 29, THROUGH DECEMBER 31,
1997 1996 1995
------------ ------------ ---------------------
<S> <C> <C> <C>
Revenue...................... $ 59,267,645 $ 45,597,269 $ 9,303,564
Costs and Expenses:
Cost of products sold...... 22,241,142 17,609,683 3,699,970
Salaries and benefits...... 18,670,954 14,525,287 3,340,169
General and administrative. 34,931,896 23,179,377 6,226,577
Provision for store
closures.................. 4,966,862 -- --
------------ ------------ -----------
Total costs and expenses. 80,810,854 55,314,347 13,266,716
------------ ------------ -----------
Loss from Operations......... (21,543,209) (9,717,078) (3,963,152)
Other Income (Expense):
Interest expense........... (3,754,194) (1,900,969) (495,128)
Other income (expense)..... (3,265,696) 1,444,616 12,752
------------ ------------ -----------
Total other expense...... (7,019,890) (456,353) (482,376)
------------ ------------ -----------
Net Loss..................... $(28,563,099) $(10,173,431) $(4,445,528)
============ ============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-81
<PAGE>
BC GOLDENGATE, L.L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND FOR
THE PERIOD FROM INCEPTION (JULY 14, 1995)
THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
PREFERRED
COMMON MEMBERS' EQUITY MEMBER'S EQUITY
----------------------- ---------------------- PREFERRED
UNITS AMOUNT UNITS AMOUNT DIVIDENDS TOTAL
--------- ------------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, inception..... -- $ -- -- $ -- $ -- $ --
Issuance of common
units................. 2,400,000 2,400,000 -- -- -- 2,400,000
Issuance of preferred
units and warrants.... -- -- 7,500,000 7,500,000 -- 7,500,000
Preferred dividends.... -- (359,977) -- -- 359,977 --
Net loss............... -- (2,040,023) -- (2,405,505) -- (4,445,528)
--------- ------------- ---------- ----------- ---------- -------------
BALANCES, December 31,
1995................... 2,400,000 -- 7,500,000 5,094,495 359,977 5,454,472
Issuance of preferred
units................. -- -- 1,700,000 1,700,000 -- 1,700,000
Issuance of warrants... -- 67,129 -- -- -- 67,129
Preferred dividends.... -- (837,052) -- -- 837,052 --
Net loss............... -- (3,378,936) -- (6,794,495) -- (10,173,431)
--------- ------------- ---------- ----------- ---------- -------------
BALANCES, December 29,
1996................... 2,400,000 (4,148,859) 9,200,000 -- 1,197,029 (2,951,830)
Issuance of preferred
units................. -- -- 4,433,115 4,433,115 -- 4,433,115
Distribution of
warrants to acquire
BCI common stock...... -- -- -- (433,114) -- (433,114)
Preferred dividends.... -- (1,364,295) 1,364,295 --
Net loss............... -- (24,563,098) -- (4,000,001) -- (28,563,099)
--------- ------------- ---------- ----------- ---------- -------------
BALANCES, December 28,
1997................... 2,400,000 $ (30,076,252) 13,633,115 $ -- $2,561,324 $ (27,514,928)
========= ============= ========== =========== ========== =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-82
<PAGE>
BC GOLDENGATE, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 14,
FISCAL YEARS ENDED 1995)
-------------------------- THROUGH
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................... $(28,563,099) $(10,173,431) $ (4,445,528)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities--
Depreciation and amortization.... 3,416,996 2,915,203 621,903
Provision for store closures..... 4,966,862 -- --
Loss on sale of assets........... 3,265,696 -- --
Changes in assets and
liabilities, excluding effects
from acquisition:
Inventories.................... 99,761 (610,661) (279,597)
Prepaid expenses and other
current assets................ 1,719,281 49,042 865,744
Accounts payable and accrued
expenses...................... (787,946) 1,509,421 3,304,897
Other assets and liabilities... (2,105,114) 1,044,346 813,570
------------ ------------ ------------
Net cash provided by (used
in) operating activities.... (17,987,563) (5,266,080) 880,989
Cash Flows from Investing Activities:
Purchase of property, equipment and
other related assets.............. (15,684,759) (11,256,020) (8,948,938)
Proceeds from sale of equipment.... 9,899,655 -- 6,225,985
Purchase of net assets acquired
from Boston West, L.L.C........... -- (7,571,873) --
Purchase of net assets acquired
from BCI.......................... -- -- (20,278,946)
Investment in BCI warrants......... -- (129,931) --
Sale of assets to BCI.............. -- 4,795,640 --
------------ ------------ ------------
Net cash used in investing
activities.................. (5,785,104) (14,162,184) (23,001,899)
Cash Flows from Financing Activities:
Proceeds from issuance of members'
units............................. 4,433,115 1,700,000 9,250,000
Proceeds from issuance of warrants. -- 67,129 --
Proceeds from debt................. 66,852,323 55,227,937 32,606,510
Payment on debt.................... (48,371,245) (36,897,019) (19,425,880)
Collection of notes receivable..... -- -- 50,000
------------ ------------ ------------
Net cash provided by
financing activities........ 22,914,193 20,098,047 22,480,630
------------ ------------ ------------
Increase (Decrease) in Cash.......... (858,474) 669,783 359,720
Cash, beginning of period............ 1,029,503 359,720 --
------------ ------------ ------------
Cash, end of period.................. $ 171,029 $ 1,029,503 $ 359,720
============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Interest paid...................... $ 3,672,905 $ 1,923,411 $ 395,846
============ ============ ============
Supplemental Disclosure of Noncash
Transactions:
Issuance of common member units in
exchange for notes receivable..... $ -- $ -- $ 650,000
============ ============ ============
Distribution of warrants........... $ 433,114 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-83
<PAGE>
BC GOLDENGATE, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
BC GoldenGate, L.L.C. (the "Company") owns and operates retail food service
establishments under franchise agreements with Boston Chicken, Inc. ("BCI"),
specializing in fresh, convenient meals featuring home style entrees,
sandwiches, vegetables, salads and other dishes. The Company was formed on July
14, 1995, under the Delaware Limited Liability Company Act.
The Company has an Area Development Agreement ("ADA") with BCI granting it
the right to open 236 stores in portions of California and Nevada. The Company
had 57 stores open at December 28, 1997. Pursuant to the franchise agreements,
the Company is required to make periodic royalty payments based on net revenue,
and pay franchise, store development, software license, software maintenance
and other support services on a per store basis to BCI. The total amount of
royalties, fees, other expenses and interest on its loans from BCI (Note 4) was
$8.8 million, $8.6 million and $5.1 million in 1997, 1996 and 1995,
respectively. The Company is also required to make advertising fund
contributions to national and local advertising funds.
Primarily as a result of its rapid store development, the Company has
experienced significant losses since its inception which has resulted in a
capital deficiency as of December 28, 1997. Such losses have been funded
primarily by capital contributions and advances from BCI pursuant to a secured
loan agreement. Furthermore, the Company anticipates that it will continue to
generate cash flow deficits for the foreseeable future.
The Company will require additional capital to continue its operations. BCI
has expressed its intent to convert its loans to a majority equity interest in
the Company and to acquire the class A and class B preferred membership units
in exchange for BCI preferred and common equity securities and cash as part of
a plan to significantly restructure BCI's operations. However, the conversion
by BCI and the proposed exchange are not assured. Further, there is no
assurance at the present time that BCI and its subsidiaries, even if
restructured, would have access to capital sufficient to continue their
operations. Consequently, there is substantial doubt about the Company's
ability to continue as a going concern and to satisfy its obligations as they
become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52/53-week period ending on the last Sunday
of December.
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, Equipment and Other Related Assets
Property, equipment and other related assets are stated at cost less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated and amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements...................................... 15 years
Furniture, fixtures, equipment and software..................... 3-8 years
ADA and franchise fees.......................................... 15 years
Preopening costs................................................ 1 year
</TABLE>
Leasehold improvements are amortized over the lesser of their useful lives or
their lease term, including renewal options.
F-84
<PAGE>
BC GOLDENGATE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set-up, initial stocking, training and general store
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Company to prospectively
expense pre-opening and other start-up costs as incurred effective for fiscal
years beginning after December 15, 1998, unless adopted earlier. Restatement of
prior periods is not required. Rather, the standard must be applied as of the
beginning of the fiscal year in which the SOP is first adopted, which will be
1999. Initial application must be reported as a cumulative effect of a change
in accounting principle. The Company does not anticipate the SOP will have a
material impact on its financial statements.
Cost in Excess of Net Assets Acquired
The excess purchase price over the fair value of net assets acquired is being
amortized on a straight-line basis over 15 years.
Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate revision to the remaining useful life or the remaining balances of
long-lived assets may be appropriate. Such events and circumstances include,
but are not limited to, change in business strategy or change in current and
long-term projected operating performance. When factors indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Revenue Recognition
Revenue is recognized in the period related food and beverage products are
sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $10.2
million, $4.0 million and $0.9 million in 1997, 1996, and 1995, respectively.
Income Taxes
The Company is considered a flow-through entity for federal and state income
tax purposes. Any taxable income or loss is reported by the members on their
individual tax returns in accordance with the Company's Operating Agreement.
F-85
<PAGE>
BC GOLDENGATE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Allocation of Profits, Losses and Distributions
Profits for any fiscal year will first be allocated to all members in
proportion to the deficit balances, if any, in their capital accounts, in an
amount necessary to eliminate any deficits and restore such capital accounts to
zero. Profits are then allocated to the preferred unit holder in an amount
sufficient to make the capital account of such preferred unit holder equal to
the Redemption Price (Note 5) that would be distributable to the preferred unit
holder if redeemed by the Company as of the end of such fiscal year.
Thereafter, profits are allocated to members holding common units in proportion
to their common membership units.
Losses for any fiscal year shall be allocated first to common membership unit
holders in proportion to their common membership units until their capital
account balances have been reduced to zero. Losses are then to be allocated to
the preferred unit holder until the preferred unit holder's capital balance has
been reduced to zero. Thereafter, losses are allocated to common members in
proportion to their units.
Distributions will be made on an annual basis to each preferred membership
unit holder and common membership unit holder in an amount equal to the Tax
Gross-Up Amount, as defined, in the case of the preferred unit holder and the
estimated tax liability of the members resulting from the operations of the
Company in the case of the common unit holders. The tax distributions to the
preferred unit holder have priority over the tax distributions to the common
unit holders, which will only be made to the common unit holders to the extent
of Available Cash, as defined. Thereafter, distributions will be made to the
members subject to being in compliance with the secured loan agreement (Note 4)
as determined by the manager. However, no discretionary distributions shall be
made to common unit holders while the preferred units are outstanding. From and
after the date the preferred units are redeemed and subject to the notice
requirements contained in the warrant (Note 5), distributions shall be made to
and among the common unit holders in proportion to their units.
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.
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Property, equipment and other related assets:
Buildings and improvements.......................... $21,700,161 $22,390,703
Furniture, fixtures, equipment and software......... 2,893,911 2,835,335
ADA and franchise fees.............................. 2,594,188 2,452,539
Preopening costs.................................... 2,470,771 1,964,997
----------- -----------
29,659,031 29,643,574
Less accumulated depreciation and amortization...... (5,470,086) (3,206,013)
----------- -----------
Total property, equipment and other related
assets, net...................................... $24,188,945 $26,437,561
=========== ===========
Costs in excess of net assets acquired:
Costs in excess of net assets acquired.............. $ 3,785,464 $ 3,777,477
Less accumulated amortization....................... (560,927) (308,473)
----------- -----------
Total cost in excess of net assets acquired, net.. $ 3,224,537 $ 3,469,004
=========== ===========
</TABLE>
F-86
<PAGE>
BC GOLDENGATE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued expenses:
Accrued payroll and fringe benefits.................... $ 775,058 $1,333,602
Accrued sales tax...................................... 315,740 349,901
Accrued personal and real property taxes............... 143,882 216,578
Accrued store closure costs............................ 1,566,053 --
Accrued interest....................................... 367,300 225,476
Deferred gain on equipment sales....................... 215,875 --
Accrued other.......................................... 285,570 72,974
---------- ----------
$3,669,478 $2,198,531
========== ==========
</TABLE>
(4) DEBT
The Company has entered into a secured loan agreement (the "Agreement") with
BCI, which provides BCI the right to convert all or any portion of the loan
into common membership units at $1.23 per unit. The specified percentage of
common members' capital to be acquired on conversion is dependent on the amount
of financing to be provided in relation to the total capital and rights
outstanding, but would constitute at least a majority of the capital of the
Company on a fully diluted basis in the event that all of the loan was
converted. The loan may be converted by BCI at any time up to January 2010.
Additionally, during this same time period, to the extent the loan is not fully
drawn or has been drawn and repaid, BCI has the option to acquire, at the loan
conversion price, as defined, the amount of additional units it could have
acquired by conversion of the loan had it been fully drawn. In the event BCI's
exercised conversion and option rights represent a majority of the then
outstanding member units, BCI will become manager of the Company. BCI has
announced its intention to convert the loan into equity subject to acquiring
the class A and class B preferred membership units.
Interest is based upon the reference rate of the Bank of America National
Trust and Savings Association (8.50% as of December 28, 1997) plus 1%.
Interest-only payments are required through July 2005, at which time the loan
converts to an amortizing term loan payable through August 2009, with a final
balloon payment. As of December 28, 1997, the Agreement provides for a line of
credit of $41,000,000, all of which was outstanding.
The Company has also entered into a nonconvertible secured loan agreement
with BCI providing for borrowings of up to $10,000,000, of which $8,992,626 was
outstanding at December 28, 1997. Interest is based upon the reference rate of
Bank of America National Trust and Savings Association plus 1%. Interest only
payments are required through July 2009, with principal balance due August
2009.
The loans are collateralized by substantially all of the assets of the
Company and a pledge of the voting members' capital of the Company. The loan
agreements contain various restrictive covenants including restricting cash
distributions and limiting additional indebtedness.
As of December 28, 1997, principal maturities were as follows:
<TABLE>
<S> <C>
1998.......................................................... $ --
1999.......................................................... --
2000.......................................................... --
2001.......................................................... --
2002.......................................................... --
Thereafter.................................................... 49,992,626
-----------
$49,992,626
===========
</TABLE>
F-87
<PAGE>
BC GOLDENGATE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) PREFERRED MEMBERSHIP UNITS
Class A Preferred Membership Units
The class A preferred membership units bear dividends at a rate equal to 10%
of the face amount plus accrued but unpaid dividends (the "Adjusted Issue
Price"). Dividends accrue until the fifth anniversary of the issue date, after
which they are paid currently on a semi-annual basis. At December 28, 1997,
there were 9,200,000 class A preferred membership units outstanding.
The class A preferred membership units are redeemable at the option of the
Company at any time for a redemption price equal to the Adjusted Issue Price,
plus a redemption premium initially equal to 10% of the initial issue price
increased 2% each year, up to a maximum of 20%, plus any unpaid Tax-Gross-Up
Amount as defined in the Operating Agreement (the "Redemption Price").
In the event of liquidation, the class A preferred membership units will be
entitled to a liquidation preference equal to the Redemption Price.
The holder of the class A preferred membership units has the right to require
the Company to redeem all but not less than all the preferred membership units
at the Redemption Price in certain circumstances.
In the event of a public offering of the Company's common membership units,
any class A preferred membership units which remain outstanding will be
automatically converted into shares of common membership units based on the
Redemption Price divided by the price of the common stock in the public
offering.
If, at any time, dividends payable on preferred units are in arrears and
unpaid for two consecutive semi-annual periods, then the preferred unit holder
will have the right to remove the manager and appoint a new manager by giving
notice to the members. Such right shall continue until such time as all unpaid
dividends have been paid and such condition shall have continued to exist for
two semi-annual periods. The class A preferred membership unit holder will have
no other voting rights except for approval of certain matters including the
issuance of any other preferred membership units not junior to the existing
preferred membership units and approving any changes to the Operating Agreement
that would adversely affect the rights and preferences of the preferred
membership unit holder.
In connection with the preferred membership unit investment, the class A
preferred unit holder was also issued a warrant to purchase 3,750,000 common
membership units at $1.00 per common unit. The warrant is exercisable at any
time through July 13, 2003. The exercise price and number of units are subject
to adjustment in the event of a unit split, dividend or recapitalization of one
or more classes of the Company's common membership units. The value of the
warrant is included in the capital account balance of the preferred unit
holder.
Class B Preferred Membership Units
The class B preferred membership units accrue dividends at a rate equal to 8%
of the issue price. This rate will increase to a maximum of 20% under certain
circumstances. Dividends will be payable semi-annually, in cash. At December
28, 1997, there were 4,433,115 class B preferred membership units outstanding.
The class B preferred membership units are redeemable at the option of the
Company at any time for a redemption price equal to the issue price, plus a
redemption premium equal to 4% of the initial issue price, plus any accrued but
unpaid preferred dividends.
In connection with the class B preferred membership units owned by Market
Partners, L.L.C. ("MPLLC"), a warrant to purchase 7% of the Company's common
member equity (on a fully diluted basis) was acquired by
F-88
<PAGE>
BC GOLDENGATE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MPLLC for $67,129. The warrant is exercisable within 10 business days after a
Controlling Interest Acquisition, at an exercise price of $1.23 per unit. In
general, a Controlling Interest Acquisition includes (i) the acquisition of a
20% or greater equity interest in the Company by BCI or (ii) the purchase of
more than 30% of the Company's then existing stores by BCI. The warrant expires
upon the earlier of the expiration of BCI's conversion rights under the
convertible loan agreement or BCI's exercise of its call right on the warrant
which can occur within two business days after MPLLC has notified the Company
of its intention to exercise the warrant. Upon the exercise of the warrant, all
outstanding units and unit options (except for units held by BCI) will be
adjusted such that existing unit holders other than BCI will maintain the same
equity ownership percentage both before and after the issuance of the warrant.
In 1997, the Company distributed warrants to acquire 44,331 shares of BCI
common stock, which it had previously purchased from BCI, to the class B
holders.
(6) EMPLOYEE UNIT OPTION PLAN
A maximum of 3,250,000 common units are available for grant to employees
pursuant to the 1995 Employee Unit Option Plan (the "Option Plan"). The option
price is equal to the fair market value on the date of grant, as determined by
the Manager. All unit options granted under the Option Plan are exercisable up
to 10 years from the date of grant. The options generally vest at a rate of 10%
at the end of the first year, an additional 20% at the end of the second year,
an additional 30% at the end of the third year and the balance at the end of
the fourth year from the date of grant.
The Company accounts for the Option Plan using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation". If a fair value based accounting method had been adopted,
the Company's pro forma net loss would have been $28,745,895, $10,348,478 and
$4,529,128 for the years ended December 28, 1997, December 29, 1996 and the
period from inception (July 14, 1995) through December 31, 1995, respectively.
The following table summarizes stock option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period.................. 2,557,000 $1.00 2,412,000 $1.00 -- --
Granted................ 67,141 $1.00 235,000 $1.00 2,482,000 $1.00
Exercised.............. -- -- -- -- -- --
Canceled............... (327,000) $1.00 (90,000) $1.00 (70,000) $1.00
Expired................ -- -- -- -- -- --
--------- --------- ---------
Outstanding, end of
period.................. 2,297,141 $1.00 2,557,000 $1.00 2,412,000 $1.00
========= ========= =========
Exercisable, end of
period.................. 658,000 $1.00 241,200 $1.00 -- --
========= ========= =========
Weighted average fair
value of options $0.27 $0.27 $0.27
granted................. ===== ===== =====
</TABLE>
At December 28, 1997, the weighted average remaining contractual life of the
options was approximately 8 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997, 1996 and 1995 grants, respectively: risk-free
interest rates of 6.27%, 6.27% and 6.28%; expected lives of 5 years.
F-89
<PAGE>
BC GOLDENGATE, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS
The Company has entered into sale/leaseback transactions whereby store
equipment was sold to a third party and subsequently subleased by the Company
from BCI who leased the equipment from the third party.
The Company also leases store premises under various noncancelable operating
lease agreements. Lease terms are generally five to ten years with one or more
five-year renewal options. Most of the leases contain escalation clauses and
common area maintenance charges.
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 28, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 5,419,851
1999.......................................................... 5,304,217
2000.......................................................... 5,216,098
2001.......................................................... 4,919,604
2002.......................................................... 4,432,493
Thereafter.................................................... 22,291,585
-----------
$47,583,848
===========
</TABLE>
Total rent expense under operating leases, including common area maintenance
charges, was approximately $9,903,000, $5,551,000 and $1,167,000 for 1997, 1996
and 1995, respectively.
The Company obtains a majority of its proteins, produce and other supplies
from a limited number of vendors. Management believes that, if necessary, the
Company would be able to replace any of its sources of supply with other
vendors without a disruption in service.
F-90
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of BC Tri-States, L.L.C.:
We have audited the accompanying balance sheet of BC Tri-States, L.L.C. (a
Delaware limited liability company) as of December 28, 1997, and the related
statements of operations, members' equity and cash flows for the period from
inception (March 3, 1997) through 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced significant losses since its
inception that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BC Tri-States, L.L.C. as of
December 28, 1997, and the results of its operations and its cash flows for the
period from inception (March 3, 1997) through December 28, 1997, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
May 7, 1998
F-91
<PAGE>
BC TRI-STATES, L.L.C.
BALANCE SHEET
AS OF DECEMBER 28, 1997
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
ASSETS
Current assets:
Cash............................................................. $ 7,908
Inventories...................................................... 344,660
Prepaid expenses and other current assets........................ 116,319
-----------
Total current assets........................................... 468,887
Property, equipment and other related assets, net.................. 14,454,557
Costs in Excess of Net Assets Acquired, net........................ 27,541,127
Other assets, net.................................................. 676,971
-----------
Total assets................................................... $43,141,542
===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 1,123,617
Accrued expenses................................................. 1,690,200
-----------
Total current liabilities...................................... 2,813,817
Debt............................................................... 38,011,758
Other liabilities.................................................. --
Commitments
Members' equity.................................................... 2,315,967
-----------
Total liabilities and members' equity.......................... $43,141,542
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-92
<PAGE>
BC TRI-STATES, L.L.C.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 3,
1997)
THROUGH
DECEMBER 28,
1997
------------
<S> <C>
Revenue........................................................... $ 12,006,694
Costs and expenses:
Cost of products sold........................................... 4,408,983
Salaries and benefits........................................... 10,972,156
General and administrative...................................... 3,153,703
Provision for store closures.................................... 697,062
------------
Total costs and expenses...................................... 19,231,904
------------
Loss from operations.............................................. (7,225,210)
Other expense:
Interest expense................................................ (2,241,611)
Other expense................................................... (5,438,689)
------------
Total other expense........................................... (7,680,300)
------------
Net loss.......................................................... $(14,905,510)
============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-93
<PAGE>
BC TRI-STATES, L.L.C.
STATEMENT OF MEMBERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MARCH 3, 1997) THROUGH DECEMBER 28, 1997
<TABLE>
<CAPTION>
COMMON PREFERRED
MEMBERS' CAPITAL MEMBERS' CAPITAL
--------------------------------- ---------------------
NON-VOTING VOTING TOTAL
UNITS UNITS AMOUNT UNITS AMOUNT DIVIDENDS AMOUNT
---------- --------- ------------ --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, inception..... -- -- $ -- -- $ -- $ -- $ --
Contribution of assets
for equity issuance.... 5,198,690 5,255,863 12,208,179 -- -- -- 12,208,179
Capital contributions. -- -- -- 5,541,394 5,554,693 -- 5,554,693
Preferred dividends... -- -- (320,885) -- -- 320,885 --
Distribution of
warrants to acquire
BCI common stock..... -- -- -- -- (541,395) -- (541,395)
Net loss.............. -- -- (11,887,294) -- (3,018,216) -- (14,905,510)
--------- --------- ------------ --------- ----------- -------- ------------
Balances, December 28,
1997................... 5,198,690 5,255,863 $ -- 5,541,394 $ 1,995,082 $320,885 $ 2,315,967
========= ========= ============ ========= =========== ======== ============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-94
<PAGE>
BC TRI-STATES, L.L.C.
STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 3,
1997)
THROUGH
DECEMBER 28,
1997
------------
<S> <C>
Cash flows from operating activities:
Net loss........................................................ $(14,905,510)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization.................................. 2,551,555
Loss on asset disposal......................................... 5,438,688
Provision for store closures................................... 697,062
Changes in assets and liabilities:
Inventories................................................... (184,341)
Prepaid expenses and other current assets..................... 2,039,228
Accounts payable and accrued expenses......................... (2,971,194)
Other assets and liabilities.................................. (800,646)
------------
Net cash used in operating activities........................ (8,135,158)
Cash flows from investing activities:
Purchase of property, equipment and other related assets........ (12,858,523)
Sale of assets.................................................. 468,687
------------
Net cash used in investing activities........................ (12,389,836)
Cash flows from financing activities:
Proceeds from issuance of member units.......................... 5,554,693
Proceeds from debt.............................................. 56,775,038
Payments on debt................................................ (41,796,829)
------------
Net cash provided by financing activities.................... 20,532,902
------------
Net increase in cash............................................. 7,908
Cash, beginning of period........................................ --
------------
Cash, end of year................................................ $ 7,908
============
Supplemental disclosure of cash flow information:
Interest paid................................................... $ 1,986,954
============
Supplemental disclosure of non-cash transactions:
Issuance of equity interests for contribution of net assets..... $ 12,208,179
============
Distribution of warrants........................................ $ 541,395
============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-95
<PAGE>
BC TRI-STATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
BC Tri-States, L.L.C. (the "Company") owns and operates retail food service
establishments under franchise agreements with Boston Chicken, Inc. ("BCI"),
specializing in fresh, convenient meals featuring home style entrees,
sandwiches, vegetables, salads and other dishes. The Company was formed on
March 3, 1997 under the Delaware Limited Liability Company Act upon the
contribution of certain Boston Market stores, related assets and liabilities
from BC New York, L.L.C., an area developer of BCI.
The Company has an Area Development Agreement ("ADA") with BCI, granting it
the right to open 273 stores in portions of New York, Connecticut and New
Jersey. The Company had 22 stores open at December 28, 1997. Pursuant to the
franchise agreements, the Company is required to make periodic royalty payments
based on net revenue, and pay franchise, store development, software license,
software maintenance and other support service fees on a per store basis to
BCI. The total amount of royalties, fees, other expenses and interest on its
loan from BCI (Note 4) was $4.8 million in 1997. The Company is also required
to make advertising fund contributions to national and local advertising funds.
Primarily as a result of its rapid store development, the Company has
experienced significant losses since its inception. Such losses have been
funded primarily by capital contributions and advances from BCI pursuant to a
secured loan agreement. Furthermore, the Company anticipates that it will
continue to generate cash flow deficits for the foreseeable future.
The Company will require additional capital to continue its operations. BCI
has expressed its intent to convert its loans to a majority equity interest in
the Company and to acquire the preferred membership units in the Company in
exchange for BCI preferred and common equity securities and cash as part of a
plan to significantly restructure BCI's operations. However, the conversion by
BCI and the proposed exchange are not assured. Further, there is no assurance
at the present time that BCI and its subsidiaries, even if restructured, would
have access to capital sufficient to continue their operations. Consequently,
there is substantial doubt about the Company's ability to continue as a going
concern and to satisfy its obligations as they become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52/53-week period ending on the last Sunday
in December.
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, Equipment and Other Related Assets
Property, equipment and other related assets are stated at cost less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated and amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................... 15 years
Furniture, fixtures, equipment and software................... 3-8 years
ADA and franchise fees........................................ 15 years
Preopening costs.............................................. 1 year
</TABLE>
Leasehold improvements are amortized over the lesser of their useful lives or
their lease term, including renewal options.
F-96
<PAGE>
BC TRI-STATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set up, initial stocking, training and general store
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Company to prospectively
expense pre-opening and other start-up costs as incurred effective for fiscal
years beginning after December 15, 1998, unless adopted earlier. Restatement of
prior periods is not required. Rather, the standard must be applied as of the
beginning of the fiscal year in which the SOP is first adopted, which will be
1999. Initial application must be reported as a cumulative effect of a change
in accounting principle. The Company does not anticipate the SOP will have a
material impact on its financial statements.
Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate revision to the remaining useful life or the remaining balances of
long-lived assets may be appropriate. Such events and circumstances include,
but are not limited to, change in business strategy or change in current and
long-term projected operating performance. When factors indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Revenue Recognition
Revenue is recognized in the period related food and beverage products are
sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $1.0
million in 1997.
Income Taxes
The Company is a flow-through entity for federal and state income tax
purposes. Any taxable income or loss is reported by the members on their
individual tax returns in accordance with the Company's Operating Agreement.
Allocation of Profits, Losses and Distributions
Profits for any fiscal year will first be allocated to all members in
proportion to the deficit balances in their capital accounts, in an amount
necessary to eliminate any deficits and restore such capital accounts to zero.
Profits are then allocated to the preferred unit holders in an amount
sufficient to make the capital account of the preferred unit holders equal to
the Redemption Price, as defined, that would be distributable to the preferred
unit holders if redeemed by the Company as of the end of such fiscal year.
Thereafter, profits are allocated to members holding common units in proportion
to their common membership units.
F-97
<PAGE>
BC TRI-STATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Losses for any fiscal year shall be allocated first to common membership unit
holders in proportion to their common membership units until their capital
account balances have been reduced to zero. Losses are then to be allocated to
the preferred unit holders until the preferred unit holders' capital balance
has been reduced to zero. Thereafter, losses are allocated to common members in
proportion to their common membership units held.
Distributions will be made on an annual basis to each preferred and common
unit holder in an amount equal to the Tax Gross-Up Amount, as defined, in the
case of the preferred unit holder, and the estimated tax liability of the
members resulting from the operations of the Company in the case of the common
unit holders. The tax distributions to the preferred unit holders have priority
over the tax distributions to the common unit holders, which will only be made
to the common unit holders to the extent of Available Cash, as defined.
Thereafter, distributions will be made to the members at the manager's
discretion and subject to the Company being in compliance with the secured loan
agreement (Note 4). However, no discretionary distributions shall be made to
common members if any preferred member units are outstanding.
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.
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Property, equipment and other related assets:
Buildings and improvements....................................... $ 9,634,605
Furniture, fixtures, equipment and software...................... 4,663,349
ADA and franchise fees........................................... 646,967
Preopening costs................................................. 551,828
-----------
15,496,749
Less accumulated depreciation and amortization................... (1,042,192)
-----------
Total property, equipment and other related assets, net........ $14,454,557
===========
Costs in excess of net assets acquired:
Costs in excess of net assets acquired........................... $29,048,912
Less accumulated amortization.................................... (1,507,785)
-----------
Total costs in excess of net assets acquired, net.............. $27,541,127
===========
Accrued expenses:
Accrued payroll and fringe benefits.............................. $ 226,982
Accrued sales tax................................................ 108,671
Accrued personal and real property taxes......................... 11,563
Accrued interest................................................. 254,658
Accrued store closure costs...................................... 545,644
Accrued other.................................................... 542,682
-----------
$ 1,690,200
===========
</TABLE>
F-98
<PAGE>
BC TRI-STATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) DEBT
The Company has entered into a secured loan agreement (the "Agreement") with
BCI which provides BCI the right to convert all or any portion of the loan into
common units of members' capital at prices ranging from $1.17 to $1.79 per
common member unit. The specified percentage of members' capital to be acquired
on conversion is dependent on the amount of financing to be provided in
relation to the total capital and rights outstanding, but would constitute at
least a majority of the capital of the Company on a fully diluted basis in the
event all of the loan was converted. The loan may be converted by BCI at any
time up to August 2007. Additionally, during this same time period, to the
extent the loan is not fully drawn or has been drawn and repaid, BCI has the
option to acquire, at the loan conversion price, as defined, the amount of
additional common units it could have acquired by conversion of the loan had it
been fully drawn. In the event BCI's exercised conversion and option rights
represent a majority of the outstanding member units, BCI will become the
manager of the Company. BCI has announced its intention to convert the loan
into equity subject to acquiring the preferred membership units.
Interest is based upon the reference rate of the Bank of America National
Trust and Savings Association (8.50% as of December 28, 1997) plus 1%.
Interest-only payments are required through February 2005, at which time the
loan converts to an amortizing term loan payable through March 2007, with a
final balloon payment. The Agreement provides for a line of credit of
$39,000,000, of which $35,011,758 was outstanding at December 28, 1997.
The loan is collateralized by substantially all of the assets of the Company
and a pledge of the voting members' capital of the Company. The loan agreement
contains various restrictive covenants including restricting cash distributions
and limiting additional indebtedness.
As of December 28, 1997, principal maturities were as follows:
<TABLE>
<S> <C>
1998........................................................ $ --
1999........................................................ --
2000........................................................ --
2001........................................................ --
2002........................................................ --
Thereafter.................................................. 35,011,758
-----------
$35,011,758
===========
</TABLE>
(5) PREFERRED MEMBERSHIP UNITS
The preferred membership units bear dividends at a rate equal to 8% of the
issue price. This rate will increase to a maximum of 20% under certain
circumstances. Dividends are payable semi-annually, in cash. In 1997, the
Company distributed warrants to acquire 55,414 shares of BCI common stock,
which it had previously purchased from BCI, to the unit holders.
The preferred membership units are redeemable at the option of the Company at
any time for a redemption price equal to the Adjusted Issue Price, as defined,
plus a redemption premium equal to 4% of the initial issue price.
In the event of liquidation, the preferred membership units will be entitled
to a liquidation preference equal to the Redemption Price.
The holders of preferred membership units have the right to require the
Company to redeem the preferred membership units at the Redemption Price in
certain circumstances.
F-99
<PAGE>
BC TRI-STATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The preferred members have no voting rights or rights to manage the business
and affairs of the Company other than those specific rights described in the
Operating Agreement.
(6) EMPLOYEE UNIT OPTION PLAN
A maximum of 3,589,669 voting common units are available for grant to
employees pursuant to the Employee Unit Option Plan (the "Option Plan"). The
option price is equal to the fair market value on the date of grant, as
determined by the manager. All unit options granted under the Option Plan are
exercisable up to 10 years from the date of grant. The options generally vest
at a rate of 10% at the end of the first year, an additional 20% at the end of
the second year, an additional 30% at the end of the third year and the balance
at the end of the fourth year from the date of grant.
The Company accounts for employee options using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation". If a fair value based accounting method had been adopted,
the Company's pro forma net loss would have been $15,028,535 for 1997.
The following table summarizes stock option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
1997
---------------
SHARES PRICE
--------- -----
<S> <C> <C>
Outstanding, beginning of period............................... -- $ --
Granted...................................................... 3,165,081 1.00
Exercised.................................................... --
Canceled..................................................... --
Expired...................................................... --
---------
Outstanding, end of year....................................... 3,165,081 $1.00
=========
Exercisable, end of year....................................... 1,207,004 $1.00
=========
Weighted average fair value of options granted................. $ 0.27
=========
</TABLE>
At December 28, 1997, the weighted average remaining contractual life of the
options was approximately 9 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997 grants; risk-free interest rate of 6.20%; expected
life of 5 years.
(7) COMMITMENTS
The Company has entered into sale/lease back transactions whereby store
equipment was sold to a third party and subsequently subleased by the Company
from BCI who leased the equipment from the third party.
The Company also leases store premises under various noncancelable operating
lease agreements. Lease terms are generally five to ten years with one or more
five-year renewal options. Most of the leases contain escalation clauses and
common area maintenance charges.
F-100
<PAGE>
BC TRI-STATES, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 28, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,972,064
1999............................................................. 1,888,692
2000............................................................. 1,800,525
2001............................................................. 1,777,902
2002............................................................. 1,753,647
Thereafter....................................................... 11,169,576
-----------
$20,362,406
===========
</TABLE>
Total rent expense under operating leases, including common area maintenance
charges, was $1,134,000 for 1997.
The Company obtains a majority of its proteins, produce and other supplies
from a limited number of vendors. Management believes that, if necessary, the
Company would be able to replace any of its sources of supply with other
vendors without a disruption in service.
F-101
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of BC Superior, L.L.C.:
We have audited the accompanying balance sheets of BC Superior, L.L.C. (a
Delaware limited liability company) as of December 28, 1997 and December 29,
1996, and the related statements of operations, members' equity (deficit) and
cash flows for the years ended December 28, 1997 and December 29, 1996 and the
period from inception (May 3, 1995) through December 31, 1995. 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 audits 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced significant losses since its
inception and has a capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BC Superior, L.L.C. as of
December 28, 1997 and December 29, 1996, and the results of its operations and
its cash flows for the years ended December 28, 1997 and December 29, 1996 and
the period from inception (May 3, 1995) through December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
May 7, 1998
F-102
<PAGE>
BC SUPERIOR, L.L.C.
BALANCE SHEETS
AS OF DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................. $ -- $ 336,713
Inventories.......................................... 854,506 829,727
Prepaid expenses and other current assets............ 35,863 984,649
----------- -----------
Total current assets............................... 890,369 2,151,089
Property, Equipment and Other Related Assets, net...... 14,351,713 20,659,259
Costs in Excess of Net Assets Acquired, net............ 20,089,370 25,121,767
Other Assets........................................... 340,000 886,563
----------- -----------
Total assets....................................... $35,671,452 $48,818,678
=========== ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable..................................... $ 1,205,004 $ 4,207,904
Accrued expenses..................................... 15,629,784 1,617,897
----------- -----------
Total current liabilities.......................... 16,834,788 5,825,801
Debt................................................... 46,967,714 28,174,459
Other Liabilities...................................... 904,569 757,349
Commitments............................................
Members' Equity (Deficit).............................. (29,035,619) 14,061,069
----------- -----------
Total liabilities and members' equity (deficit).... $35,671,452 $48,818,678
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-103
<PAGE>
BC SUPERIOR, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
FISCAL YEAR ENDED (MAY 3, 1995
-------------------------- THROUGH
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue............................... $ 40,274,207 $28,000,471 $ 7,656,001
Costs and Expenses:
Cost of products sold............... 15,678,357 10,929,868 2,883,948
Salaries and benefits............... 16,336,770 9,533,459 2,308,810
General and administrative.......... 26,102,316 12,917,715 3,390,764
Provision for store closures........ 23,971,630 -- --
------------ ----------- -----------
Total costs and expenses.......... 82,089,073 33,381,042 8,583,522
------------ ----------- -----------
Loss From Operations.................. (41,814,866) (5,380,571) (927,521)
Other Income (Expense):
Interest expense.................... (3,978,462) (1,948,655) (458,195)
Other income........................ 696,644 1,098,043 16,827
------------ ----------- -----------
Total other expense, net.......... (3,281,818) (850,612) (441,368)
------------ ----------- -----------
Net Loss.............................. $(45,096,684) $(6,231,183) $(1,368,889)
============ =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-104
<PAGE>
BC SUPERIOR, L.L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996 AND FOR THE PERIOD
FROM INCEPTION (MAY 3, 1995) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON UNITS PREFERRED UNITS
--------------------------------------------- ----------------------
VOTING NON-VOTING
---------------------- --------------------- ACCRUED
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT DIVIDENDS TOTAL
--------- ------------ --------- ----------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 25,
1994.................. -- $ -- -- $ -- -- $ -- $ -- $ --
Units exchanged for
net assets........... 3,391,999 3,245,000 -- -- 3,670,000 3,670,000 -- 6,915,000
Net loss.............. -- (1,368,889) -- -- -- -- -- (1,368,889)
--------- ------------ --------- ----------- ---------- ---------- -------- ------------
Balances, December 31,
1995.................. 3,391,999 1,876,111 -- -- 3,670,000 3,670,000 -- 5,546,111
Units issued for cash. -- -- -- -- 2,500,000 2,500,000 -- 2,500,000
Unit redemption and
net asset exchange
with Mayfair......... -- -- -- -- (2,500,000) (988,114) -- (988,114)
Units exchanged for
net assets........... 2,775,274 5,117,160 4,391,617 8,113,630 -- -- -- 13,230,790
Preferred dividends... -- (177,436) -- -- -- -- 177,436 --
Issuance of common
unit warrants........ -- 3,465 -- -- -- -- -- 3,465
Net loss.............. -- (3,836,499) -- (2,394,684) -- -- -- (6,231,183)
--------- ------------ --------- ----------- ---------- ---------- -------- ------------
Balances, December 29,
1996.................. 6,167,273 2,982,801 4,391,617 5,718,946 3,670,000 5,181,886 177,436 14,061,069
Preferred dividends... -- (414,934) -- -- -- -- 414,934 --
Issuance of preferred
units................ -- -- -- -- 2,216,558 2,216,558 -- 2,216,558
Distribution of
warrants to acquire
BCI common stock..... -- -- -- -- -- (216,562) -- (216,562)
Net loss.............. -- (32,195,856) -- (5,718,946) -- (7,181,882) -- (45,096,684)
--------- ------------ --------- ----------- ---------- ---------- -------- ------------
Balances, December 28,
1997.................. 6,167,273 $(29,627,989) 4,391,617 $ -- 5,886,558 $ -- $592,370 $(29,035,619)
========= ============ ========= =========== ========== ========== ======== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-105
<PAGE>
BC SUPERIOR, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 3,
FISCAL YEARS ENDED 1995)
-------------------------- THROUGH
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.............................. $(45,096,684) $(6,231,183) $(1,368,889)
Adjustments to reconcile net loss to
net cash used in operating
activities--
Depreciation and amortization......... 4,188,159 2,473,732 583,080
Provision for store closures.......... 23,971,630 -- --
Gain on the sale of assets............ (696,644) -- --
Changes in assets and liabilities,
excluding effects from acquisitions:
Inventories.......................... (165,265) (286,300) (38,090)
Prepaid expenses and other current
assets.............................. 1,005,949 426,330 (404,941)
Accounts payable and accrued
expenses............................ (4,943,664) 1,781,098 (1,485,752)
Other assets and liabilities......... 3,433,439 1,000,737 36,225
------------ ----------- -----------
Net cash used in operating
activities........................ (18,303,080) (835,586) (2,678,367)
Cash Flows From Investing Activities:
Purchase of net assets from Kenny
Rogers Roasters...................... -- (3,658,871) --
Purchase of property, equipment and
other related assets................. (18,711,450) (6,376,318) (580,946)
Purchase of BCI warrants.............. -- (433,114)
Proceeds from sale of assets.......... 15,668,004 -- 372,311
------------ ----------- -----------
Net cash provided by (used in)
investing activities.............. (3,043,446) (10,468,303) (208,635)
Cash Flows From Financing Activities:
Payments on capital leases............ (895,664) (1,334,809) (243,619)
Proceeds from issuance of preferred
units................................ 2,216,558 2,500,000 --
Proceeds from debt.................... 63,375,370 33,552,090 7,279,445
Payments on debt...................... (43,686,451) (23,489,374) (3,736,129)
------------ ----------- -----------
Net cash provided by financing
activities........................ 21,009,813 11,227,907 3,299,697
------------ ----------- -----------
Increase (Decrease) in Cash............ (336,713) (75,982) 412,695
Cash, beginning of period.............. 336,713 412,695 --
------------ ----------- -----------
Cash, end of year...................... $ -- $ 336,713 $ 412,695
============ =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Interest paid......................... $ 3,858,440 $ 1,781,895 $ 424,230
============ =========== ===========
Supplemental Disclosure of Noncash
Activities:
Liabilities transferred in exchange
for preferred units.................. $ -- $10,134,494 $ --
============ =========== ===========
Liabilities assumed in net asset
contribution......................... $ -- $25,609,004 $ --
============ =========== ===========
Issuance of member units in exchange
for net assets contributed........... $ -- $12,242,676 $ 6,808,817
============ =========== ===========
Distribution of warrants............... $ 216,562 $ -- $ --
============ =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-106
<PAGE>
BC SUPERIOR, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
BC Superior, L.L.C. (the "Company") owns and operates retail food service
establishments under franchise agreements with Boston Chicken, Inc. ("BCI"),
specializing in fresh, convenient meals featuring home style entrees,
sandwiches, vegetables, salads and other dishes. The Company was formed on May
3, 1995 under the Delaware Limited Liability Company Act and commenced
operations on June 12, 1995.
The Company has an Area Development Agreement ("ADA") with BCI granting it
the right to open 310 stores in portions of Maryland, Virginia, West Virginia,
Ohio, Kentucky, Alabama, Tennessee and Washington, D.C. The Company had 42
stores open at December 28, 1997. Pursuant to the franchise agreements, the
Company is required to make periodic royalty payments based on net revenue, and
pay franchise, store development, software license, software maintenance and
other support service fees on a per store basis to BCI. The total amount of
royalties, fees, other expenses and interest on its loans to BCI (Note 5) was
$8.3 million in 1997, $5.0 million in 1996 and $1.5 million in 1995. The
Company is also required to make advertising fund contributions to national and
local advertising funds.
Primarily as a result of its rapid store development, the Company has
experienced significant losses since its inception which has resulted in a
capital deficiency as of December 28, 1997. Such losses have been funded
primarily by capital contributions and advances from BCI pursuant to a secured
loan agreement. Furthermore, the Company anticipates that it will continue to
generate cash flow deficits for the foreseeable future.
The Company will require additional capital to continue its operations. BCI
has expressed its intent to convert its convertible loans to a majority equity
interest in the Company and to acquire the Class B and Class C preferred
membership units in the Company in exchange for BCI preferred and common equity
securities and cash as part of a plan to significantly restructure BCI's
operations. However, the conversion by BCI and the proposed exchange are not
assured. Further, there is no assurance at the present time that BCI and its
subsidiaries, even if restructured, would have access to capital sufficient to
continue their operations. Consequently, there is substantial doubt about the
Company's ability to continue as a going concern and to satisfy its obligations
as they become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52/53-week period ending on the last Sunday
in December.
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.
Common Unit Split
Effective April 21, 1996, the board of directors approved a unit split of one
unit into 1.0453 units for all common units outstanding. The unit split has
been applied retroactively in the accompanying financial statements.
Property, Equipment and Other Related Assets
Property, equipment and other related assets are stated at cost less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated and amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................... 15 years
Furniture, fixtures, equipment and software .................. 3-8 years
ADA and franchise fees........................................ 15 years
Preopening costs.............................................. 1 year
</TABLE>
F-107
<PAGE>
BC SUPERIOR, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Leasehold improvements are amortized over the lesser of their useful lives or
their lease term, including renewal options.
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set up, initial stocking, training and general store
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Company to prospectively
expense pre-opening and other start-up costs as incurred effective for fiscal
years beginning after December 15, 1998, unless adopted earlier. Restatement of
prior periods is not required. Rather, the standard must be applied as of the
beginning of the fiscal year in which the SOP is first adopted, which will be
1999. Initial application must be reported as a cumulative effect of a change
in accounting principle. The Company does not anticipate the SOP will have a
material impact on its financial statements.
Costs in Excess of Net Assets Acquired
The excess purchase price over the fair value of net assets acquired is being
amortized on a straight-line basis over 15 years.
Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate revision to the remaining useful life or the remaining balances of
long-lived assets may be appropriate. Such events and circumstances include,
but are not limited to, change in business strategy or change in current and
long-term projected operating performance. When factors indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Revenue Recognition
Revenue is recognized in the period related food and beverage products are
sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $5.7
million, $1.8 million and $0.5 million in 1997, 1996, and 1995, respectively.
Income Taxes
The Company is a flow-through entity for federal and state income tax
purposes. Any taxable income or loss is reported by the members on their
individual tax returns in accordance with the Company's Operating Agreement.
F-108
<PAGE>
BC SUPERIOR, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Allocation of Profits, Losses and Distributions
Profits for any fiscal year will first be allocated to all members in
proportion to their membership units until any deficit capital accounts have
been reduced to zero. Profits are then allocated to the preferred unit holders
until their capital accounts are restored. Next, a similar allocation is made
to restore the capital accounts of the common unit holders. Next, profits are
to be allocated to the preferred unit holders in an amount equal to the excess
of any losses allocated to the preferred unit holders over the aggregate
allocation of profits to the preferred unit holders. Next, profits are
allocated to common unit holders in an amount equal to excess losses over
cumulative allocations of profits. Next, profits are allocated to the
preferred unit holders until they have received their Preferred Return, as
defined. Thereafter, profits are allocated to common unit holders in
proportion to their common units.
Losses for any fiscal year shall be allocated first to common unit holders
in proportion to their common units to the extent such common members had been
allocated profits in prior years. Losses are then to be allocated to preferred
unit holders in proportion to their preferred units to the extent such
preferred unit holders had been allocated profits in prior years. Losses are
then allocated to common members in proportion to their common membership
units.
Distributions will be made on an annual basis to each preferred unit holder
and common unit holder in an amount equal to the Tax Gross-Up amount, as
defined, in the case of the preferred unit holders, and the estimated tax
liability of the member resulting from the operations of the Company in the
case of the common unit holders. The tax distributions to the preferred unit
holders have priority over the tax distributions to the common unit holders.
Thereafter, distributions will be made out of available cash, as defined, to
the members subject to being in compliance with the secured loan agreement
(Note 5) in the following order: first to the preferred unit holders until
they have received their Preferred Return (Note 6), and then to the common
unit holders in proportion to their units. However, no distributions shall be
made to common unit holders until the preferred unit holders have been
distributed their Preferred Return.
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.
F-109
<PAGE>
BC SUPERIOR, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Property, equipment and other related assets:
Land.............................................. $ 448,622 $ 399,848
Buildings and improvements........................ 9,485,307 13,461,662
Furniture, fixtures, equipment and software....... 5,110,409 6,335,746
ADA and franchise fees............................ 994,260 754,260
Preopening costs.................................. 800,657 474,102
----------- -----------
16,839,255 21,425,618
Less accumulated depreciation and amortization.... (2,487,542) (766,359)
----------- -----------
Total property, equipment and other related
assets, net...................................... $14,351,713 $20,659,259
=========== ===========
Costs in excess of net assets acquired:
Costs in excess of net assets acquired............ $23,080,137 $26,333,258
Less accumulated amortization..................... (2,990,767) (1,211,491)
----------- -----------
Costs in excess of net assets acquired, net....... $20,089,370 $25,121,767
=========== ===========
Accrued expenses:
Accrued payroll and fringe benefits............. $ 730,861 $ 564,147
Accrued sales tax............................... 119,052 111,703
Accrued personal and real property taxes........ 377,651 236,430
Accrued store closure costs..................... 13,410,443 157,500
Accrued interest................................ 341,294 211,327
Deferred gain on equipment sales................ 373,607 295,815
Accrued other................................... 276,876 40,975
----------- -----------
$15,629,784 $ 1,617,897
=========== ===========
</TABLE>
(4) CONTRIBUTION OF NET ASSETS
In June 1995, Superior Foods of Maryland, Inc., Superior Foods of New York,
Inc., and New Mayfair, L.L.C. contributed 12 Boston Market stores and their
related net assets and certain development rights in exchange for 3,245,000
common units and 3,670,000 Series A preferred units and options to purchase an
additional 1,535,000 common units at $1.00 per unit. The transaction has been
accounted for under the purchase method of accounting, resulting in
approximately $6,409,000 of costs in excess of net assets acquired.
In April 1996, the Company contributed certain Boston Market stores and the
development rights for the Richmond, Virginia area with a total net book value
of approximately $988,000 to Mayfair Partners, L.P. ("Mayfair") in exchange for
2,500,000 preferred limited partnership units of Mayfair and an option to
purchase 500,000 common limited partnership units in Mayfair for $2.80 per
common limited partnership unit. This transaction has been accounted for at
predecessor cost due to the common control between the entities and, as a
result, no gain or loss was recognized in the accompanying financial
statements. The Company then redeemed $2,500,000 of the Series A preferred
units in exchange for the Company's 2,500,000 preferred limited partnership
units of Mayfair.
EFM Holding, Inc. contributed $2,500,000 in cash for 2,500,000 Series B
Preferred membership units.
Also, in April 1996, BC TKO, L.P., contributed substantially all of its net
assets to the Company in exchange for 4,391,617 nonvoting common units and
2,775,274 voting common units of the Company. The
F-110
<PAGE>
BC SUPERIOR, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
transaction has been accounted for under the purchase method of accounting,
resulting in approximately $18,194,000 of cost in excess of net assets
acquired.
In September 1996, the Company paid to Kenny Rogers Roasters $3,659,000 for
the net tangible assets of 7 stores. The transaction has been accounted for
under the purchase method of accounting resulting in cost in excess of net
assets acquired of approximately $519,000. The pro forma effect of this
transaction is not material to the accompanying financial statements.
(5) DEBT
The Company has entered into a secured loan agreement (the "Agreement") with
BCI which provides BCI with the right to convert all or any portion of the loan
into common units at tiered pricing ranging from $1.15 to $1.60 per unit. The
specified percentage of members' capital to be acquired on conversion is
dependent on the amount of financing to be provided in relation to the total
capital and rights outstanding, but would constitute at least a majority of the
capital of the Company on a fully diluted basis in the event that all of the
loan was converted. The loan may be converted by BCI any time and up to August
2010. Additionally, during this same time period, to the extent the loan is not
fully drawn or has been drawn and repaid, BCI has the option to acquire, at the
loan conversion price, the amount of additional common units it could have
acquired by conversion of the loan had it been fully drawn. In the event BCI's
exercised conversion and option rights represent a majority of the outstanding
member units, BCI will become the manager of the Company. BCI has announced its
intention to convert the loan into equity subject to acquiring the Class B and
Class C preferred membership units.
Interest is based upon the reference rate of the Bank of America National
Trust and Savings Association (8.5% as of December 28, 1997) plus 1%. Interest-
only payments are required through March 2005, at which time the loan converts
to an amortizing term loan payable through April 2010, with a final balloon
payment. The Agreement provided for a line of credit of $46,396,059, all of
which was outstanding as of December 28,1997.
The Company has also entered into a nonconvertible secured loan agreement
with BCI providing for borrowings of up to $3,603,941, of which $81,774 was
outstanding as of December 28, 1997. Interest is based upon the reference rate
of Bank of America National Trust and Savings Association plus 1%. Interest
only payments are required through March 2009, with the principal balance due
in August 2009.
The loans are collateralized by substantially all of the assets of the
Company and a pledge of the voting members' capital of the Company. The loan
agreements contain various restrictive covenants including restricting cash
distributions and limiting additional indebtedness.
As of December 28, 1997, principal maturities were as follows:
<TABLE>
<S> <C>
1998........................................................ $ --
1999........................................................ --
2000........................................................ --
2001........................................................ --
2002........................................................ --
Thereafter.................................................. 46,477,803
-----------
$46,477,803
===========
</TABLE>
F-111
<PAGE>
BC SUPERIOR, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) PREFERRED MEMBERSHIP UNITS
Class A Preferred Membership Units
The Series A preferred unit holders have the right to require the Company,
under certain circumstances, to redeem all or any portion of the Series A
preferred membership units for a redemption price equal to the initial issue
price of the Series A preferred membership units plus a 9% cumulative per annum
return through June 2000, 15% from June 2000 through June 2001, and 20% from
June 2001 through January 2024. Series A Preferred unit holders may require the
Company to redeem preferred units upon the first to occur of (i) exercise by
BCI of its conversion or option rights (Note 5), and BCI obtains a majority of
the then outstanding common membership units, (ii) the sale of all or
substantially all of the assets of the Company, or (iii) a sale of
substantially all of the common membership units in the Company.
The Series A preferred unit holders have the right to convert all, but not
less than all, of their Series A preferred units into voting common units at
any time. The number of voting units to be received will be equal to the Series
A preferred unit issue price divided by 1.20. At December 28, 1997, there were
1,170,000 Series A units outstanding.
Class B Preferred Membership Units
The Class B ("Senior") preferred units accrue dividends at a rate equal to
10% of the face amount plus accrued but unpaid dividends (the "Adjusted Issue
Price"). Dividends accrue until the fifth anniversary of the respective issue
date, after which they are paid currently on a semi-annual basis.
In 1997, the Company distributed warrants to acquire 22,166 shares of BCI
common stock, which it had previously purchased from BCI, to Class B holders.
The Senior preferred units are redeemable at the option of the Company at any
time for a redemption price equal to the Adjusted Issue Price, plus a
redemption premium initially equal to 10% of the initial issue price increased
2% each year, up to a maximum of 20%, plus any unpaid Tax Gross-Up amount, as
defined in the Operating Agreement.
At December 28, 1997, there were 2,500,000 Series B units outstanding.
Class C Preferred Membership Units
The Class C preferred membership units accrue dividends at a rate equal to 8%
of the issue price. This rate will increase to a maximum of 20% under certain
circumstances. Dividends are payable semi-annually, in cash. At December 28,
1997 there were 2,216,558 Class C units outstanding.
The Class C preferred membership units are redeemable at the option of the
Company at any time for a redemption price equal to the sum of the issue price,
plus a redemption premium equal to 4% of the initial issue price, plus any
accrued but unpaid preferred dividends.
Preferred Membership Unit Rights
In the event of liquidation, the preferred membership units will be entitled
to a liquidation preference equal to their respective Redemption Price, as
defined.
The preferred members have no voting rights or rights to manage the business
and affairs of the Company other than those specific rights described in the
Company Operating Agreement.
F-112
<PAGE>
BC SUPERIOR, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) ISSUANCE OF WARRANTS
In October 1996, Market Partners, L.L.C. ("MPLLC") acquired a warrant to
purchase 7% of the Company's common member equity (on a fully diluted basis)
for $3,465. The warrant is exercisable within 10 business days after a
Controlling Interest Acquisition at an exercise price of $1.15 per unit. In
general, a Controlling Interest Acquisition includes (i) the acquisition of a
20% or greater equity interest in the Company by BCI or (ii) the purchase of
more than 30% of the Company's then existing stores by BCI. The warrant expires
upon the earlier of the expiration of BCI's conversion rights under the
convertible loan agreement or BCI's exercise of its call right on the warrant
which can occur within two business days after MPLLC has notified the Company
of its intention to exercise the warrant. Upon the exercise of the warrant, all
outstanding units and unit options (except for units held by BCI) will be
adjusted such that existing unit holders other than BCI will maintain the same
equity ownership percentage both before and after the issuance of the warrant.
(8) OPTION PLANS
A maximum of 3,724,527 voting common units are available for grant pursuant
to the 1995 Unit Option Plan (the "Option Plan"). The option price is equal to
the fair market value on the date of grant, as determined by the Manager. All
unit options granted under the Option Plan are exercisable up to 10 years from
the date of grant. The options generally vest at a rate of 10% at the end of
the first year, an additional 20% at the end of the second year, an additional
30% at the end of the third year and the balance at the end of the fourth year
from the date of grant.
The Company accounts for the Option Plan using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation". If a fair value based accounting method had been adopted,
the Company's pro forma net loss would have been $45,408,880, $6,600,967 and
$1,451,243 for the years ended December 28, 1997, December 29, 1996 and the
period from inception (May 3, 1995) through December 31, 1995, respectively.
The following table summarizes stock option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period...................... 3,455,000 $1.01 1,970,000 $1.00 -- --
Granted..................... 110,000 $1.12 2,007,500 $1.02 1,970,000 $1.00
Exercised................... -- -- -- -- -- --
Canceled.................... (337,500) $1.05 (522,500) $1.00 -- --
Expired..................... -- -- -- -- -- --
--------- --------- ---------
Outstanding, end of period... 3,227,500 $1.01 3,455,000 $1.01 1,970,000 $1.00
========= ========= =========
Exercisable, end of period... 1,959,170 $1.00 1,099,500 $1.00 -- --
========= ========= =========
Weighted average fair value
of options granted.......... $ 0.30 $ 0.33 $ 0.29
========= ========= =========
</TABLE>
At December 28, 1997, the weighted average remaining contractual life of the
options was approximately 6 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997, 1996 and 1995 grants, respectively: risk-free
interest rates of 6.20%, 6.00% and 6.81% respectively; expected lives of 5
years.
F-113
<PAGE>
BC SUPERIOR, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) COMMITMENTS
The Company has entered into sale/lease back transactions whereby store
equipment was sold to a third party and subsequently subleased by the Company
from BCI who leased the equipment from the third party.
The Company also leases store premises under various noncancelable operating
lease agreements. Lease terms are generally five to ten years with one or more
five-year renewal options. Most of the leases contain escalation clauses and
common area maintenance charges.
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 28, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 3,512,426
1999........................................................ 3,403,022
2000........................................................ 3,477,348
2001........................................................ 3,387,961
2002........................................................ 3,008,652
Thereafter.................................................. 17,114,774
-----------
$33,904,183
===========
</TABLE>
Total rent expense under operating leases, including common area maintenance
charges, was $6,504,000, $3,101,000 for and $450,000 for 1997, 1996 and 1995,
respectively.
The Company obtains a majority of its proteins, produce and other supplies
from a limited number of vendors. Management believes that, if necessary, the
Company would be able to replace any of its sources of supply with other
vendors without a disruption in service.
(10) RELATED PARTY TRANSACTIONS
The Company had entered into a management agreement with Mayfair whereby
Mayfair provided certain administrative services for the Company. Mayfair and
the Company are commonly controlled entities. The Company incurred management
fees from Mayfair of approximately $528,000 for the year ended December 29,
1996 and $494,000 for the period from inception (May 3, 1995) through December
31, 1995.
(11) OTHER INCOME
Included in other income in 1997, is a gain of $3.6 million resulting from
the sale of Boston Market stores to BCI.
F-114
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of BC Heartland, L.L.C.:
We have audited the accompanying balance sheets of BC Heartland, L.L.C. (a
Delaware limited liability company) as of December 28, 1997 and December 29,
1996, and the related statements of operations, members' deficit and cash flows
for the years ended December 28, 1997 and December 29, 1996 and the period from
inception (August 7, 1995) through December 31, 1995. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced significant losses since its
inception and has a capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BC Heartland, L.L.C. as of
December 28, 1997 and December 29, 1996, and the results of its operations and
its cash flows for the years ended December 28, 1997 and December 29, 1996 and
the period from inception (August 7, 1995) through December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
May 7, 1998
F-115
<PAGE>
BC HEARTLAND, L.L.C.
BALANCE SHEETS
AS OF DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 92,120 $ 383,612
Inventories........................................... 367,736 266,250
Prepaid expenses and other current assets............. 11,203 137,197
---------- ----------
Total current assets................................ 471,059 787,059
Property, equipment and other related assets, net....... 8,046,521 2,118,795
Other assets, net....................................... 275,000 1,074,441
---------- ----------
Total assets........................................ $8,792,580 $3,980,295
========== ==========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable...................................... $ 222,451 $ 742,331
Accrued expenses...................................... 994,655 1,154,881
---------- ----------
Total current liabilities........................... 1,217,106 1,897,212
Debt.................................................... 7,623,160 2,505,932
Other liabilities....................................... 294,696 366,344
Commitments
Members' deficit........................................ (342,382) (789,193)
---------- ----------
Total liabilities and members' deficit.............. $8,792,580 $3,980,295
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-116
<PAGE>
BC HEARTLAND, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 7,
FISCAL YEARS ENDED 1995)
------------------------ THROUGH
DECEMBER DECEMBER DECEMBER
28, 1997 29, 1996 31, 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................. $15,631,397 $12,295,177 $ 3,694,249
Costs and expenses:
Cost of products sold................. 6,172,183 4,891,584 1,692,458
Salaries and benefits................. 5,370,605 4,018,752 1,696,586
General and administrative............ 6,693,602 5,025,995 1,996,927
----------- ----------- -----------
Total costs and expenses............ 18,236,390 13,936,331 5,385,971
----------- ----------- -----------
Loss from operations.................... (2,604,993) (1,641,154) (1,691,722)
Other income (expense):
Interest expense...................... (387,742) (135,910) (35,255)
Other income.......................... 468,099 844,233 194,595
----------- ----------- -----------
Total other income.................. 80,357 708,323 159,340
----------- ----------- -----------
Net loss................................ $(2,524,636) $ (932,831) $(1,532,382)
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-117
<PAGE>
BC HEARTLAND, L.L.C.
STATEMENTS OF MEMBERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND THE
PERIOD FROM INCEPTION (AUGUST 7, 1995) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON PREFERRED
MEMBERS' CAPITAL MEMBERS' CAPITAL
------------------ ---------------------
TOTAL
UNITS AMOUNT UNITS AMOUNT DIVIDENDS AMOUNT
------ ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, inception..... -- $ -- -- $ -- $ -- $ --
Capital contributions. 51,020 51,020 -- -- -- 51,020
Net loss.............. -- (1,532,382) -- -- -- (1,532,382)
------ ----------- --------- ----------- -------- -----------
Balances, December 31,
1995................... 51,020 (1,481,362) -- -- -- (1,481,362)
Capital contributions. -- -- 1,625,000 1,625,000 -- 1,625,000
Preferred dividends... -- (64,034) -- -- 64,034 --
Net loss.............. -- (782,278) -- (150,553) -- (932,831)
------ ----------- --------- ----------- -------- -----------
Balances, December 29,
1996................... 51,020 (2,327,674) 1,625,000 1,474,447 64,034 (789,193)
Capital contributions. -- -- 3,553,433 3,553,433 -- 3,553,433
Preferred dividends... -- (307,203) -- -- 307,203 --
Dividends paid........ -- -- -- -- (76,056) (76,056)
Distribution of
warrants to acquire
BCI common stock..... -- -- -- (505,930) -- (505,930)
Net loss.............. -- -- -- (2,524,636) -- (2,524,636)
------ ----------- --------- ----------- -------- -----------
Balances, December 28,
1997................... 51,020 $(2,634,877) 5,178,433 $ 1,997,314 $295,181 $ (342,382)
====== =========== ========= =========== ======== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-118
<PAGE>
BC HEARTLAND, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 7,
FISCAL YEARS ENDED 1995)
-------------------------- THROUGH
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $ (2,524,636) $ (932,831) $(1,532,382)
Adjustments to reconcile net loss to
net cash used in operating
activities--
Depreciation and amortization........ 531,300 130,004 36,601
Gain on sale of assets............... -- (643,978) --
Changes in assets and liabilities:
Inventories......................... (101,486) (20,667) (245,578)
Prepaid expenses and other current
assets............................. 994 972,858 (1,116,967)
Accounts payable and accrued
expenses........................... (847,613) (876,853) 2,757,905
Other assets and liabilities........ 681,674 17,149 753,321
------------ ----------- -----------
Net cash provided by (used in)
operating activities.............. (2,259,767) (1,354,318) 652,900
Cash flows from investing activities:
Purchase of property, equipment and
other related assets................. (6,626,330) (445,066) (1,821,557)
Purchase of BCI warrants.............. -- (754,977) --
------------ ----------- -----------
Net cash used in investing
activities........................ (6,626,330) (1,200,043) (1,821,557)
Cash flows from financing activities:
Proceeds from issuance of member
units................................ 3,553,433 1,625,000 51,020
Dividends paid........................ (76,056) -- --
Proceeds from debt.................... 20,532,605 4,645,113 1,549,678
Payments on debt...................... (15,415,377) (3,764,181) --
------------ ----------- -----------
Net cash provided by financing
activities........................ 8,594,605 2,505,932 1,600,698
------------ ----------- -----------
Net increase (decrease) in cash........ (291,492) (48,429) 432,041
Cash, beginning of period.............. 383,612 432,041 --
------------ ----------- -----------
Cash, end of year...................... $ 92,120 $ 383,612 $ 432,041
============ =========== ===========
Supplemental disclosure of cash flow
information:
Interest paid......................... $364,324 $ 117,954 $ 51,892
============ =========== ===========
Supplemental disclosure of non-cash
transactions:
Distribution of warrants.............. $505,930 $ -- $ --
============ =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-119
<PAGE>
BC HEARTLAND, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
BC Heartland, L.L.C. (the "Company") owns and operates retail food service
establishments under franchise agreements with Boston Chicken, Inc. ("BCI"),
specializing in fresh, convenient meals featuring home style entrees,
sandwiches, vegetables, salads and other dishes. The Company was formed on
August 7, 1995 under the Delaware Limited Liability Company Act.
The Company has an Area Development Agreement ("ADA") with BCI, granting it
the right to open 123 stores in portions of Indiana, Michigan and Illinois. The
Company had 17 stores open at December 28, 1997. Pursuant to the franchise
agreements, the Company is required to make periodic royalty payments based on
net revenue, and pay franchise, store development, software license, software
maintenance and other support service fees on a per store basis to BCI. The
total amount of royalties, fees, other expenses and interest on its loans from
BCI (Note 4) was $2.0 million, $1.1 million and $0.1 million in 1997, 1996 and
1995, respectively. The Company is also required to make advertising fund
contributions to national and local advertising funds.
Primarily as a result of its rapid store development, the Company has
experienced significant losses since its inception which has resulted in a
capital deficiency as of December 28, 1997. Such losses have been funded
primarily by capital contributions and advances from BCI pursuant to a secured
loan agreement. Furthermore, the Company anticipates that it will continue to
generate cash flow deficits for the foreseeable future.
The Company will require additional capital to continue its operations. BCI
has expressed its intent to convert its convertible loans to a majority equity
interest in the Company and to acquire the preferred membership units in the
Company in exchange for BCI preferred and common equity securities and cash as
part of a plan to significantly restructure BCI's operations. However, the
conversion by BCI and the proposed exchange are not assured. Further, there is
no assurance at the present time that BCI and its subsidiaries, even if
restructured, would have access to capital sufficient to continue their
operations. Consequently, there is substantial doubt about the Company's
ability to continue as a going concern and to satisfy its obligations as they
become due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52/53-week period ending on the last Sunday
in December.
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, Equipment and Other Related Assets
Property, equipment and other related assets are stated at cost less
accumulated depreciation and amortization. The provision for depreciation and
amortization has been calculated using the straight-line method. These assets
are depreciated and amortized over the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................... 15 years
Furniture, fixtures, equipment and software................... 3-8 years
ADA and franchise fees........................................ 15 years
Preopening costs.............................................. 1 year
</TABLE>
Leasehold improvements are amortized over the lesser of their useful lives or
their lease term, including renewal options.
F-120
<PAGE>
BC HEARTLAND, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property, equipment and other related asset additions include acquisitions of
buildings, equipment, software, leasehold improvements and major improvements
to existing stores. Additions also include costs incurred in the development
and construction of new stores, including development and franchise fees paid
to BCI. Expenditures for maintenance and repairs are charged to expense as
incurred.
Preopening costs consist primarily of salaries and other incremental direct
expenses relating to the set up, initial stocking, training and general store
management activities incurred prior to the opening of new stores. Amortization
begins on the date the store is opened.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued a statement of position titled "Reporting on the Costs of Start-up
Activities" ("SOP"). The new standard will require the Company to prospectively
expense pre-opening and other start-up costs as incurred effective for fiscal
years beginning after December 15, 1998, unless adopted earlier. Restatement of
prior periods is not required. Rather, the standard must be applied as of the
beginning of the fiscal year in which the SOP is first adopted, which will be
1999. Initial application must be reported as a cumulative effect of a change
in accounting principle. The Company does not anticipate the SOP will have a
material impact on its financial statements.
Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate revision to the remaining useful life or the remaining balances of
long-lived assets may be appropriate. Such events and circumstances include,
but are not limited to, change in business strategy or change in current and
long-term projected operating performance. When factors indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows expected to result from the use of such asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss equal to the excess of the carrying amount over
the fair value of the asset will be recognized.
Revenue Recognition
Revenue is recognized in the period related food and beverage products are
sold.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $1.4
million, $1.1 million and $0.6 million in 1997, 1996, and 1995, respectively.
Income Taxes
The Company is a flow-through entity for federal and state income tax
purposes. Any taxable income or loss is reported by the members on their
individual tax returns in accordance with the Company's Operating Agreement.
Allocation of Profits, Losses and Distributions
Profits for any fiscal year will first be allocated to all members in
proportion to the deficit balances in their capital accounts, in an amount
necessary to eliminate any deficits and restore such capital accounts to zero.
Profits are then allocated to the preferred unit holders in an amount
sufficient to make the capital account of the preferred unit holders equal to
the Redemption Price that would be distributable to the preferred unit holders
if redeemed by the Company as of the end of such fiscal year. Thereafter,
profits are allocated to members holding common units in proportion to their
common membership units.
F-121
<PAGE>
BC HEARTLAND, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Losses for any fiscal year shall be allocated first to common membership unit
holders in proportion to their common membership units until their capital
account balances have been reduced to zero. Losses are then to be allocated to
the preferred unit holders until the preferred unit holders' capital balance
has been reduced to zero. Thereafter, losses are allocated to common members in
proportion to their common membership units held.
Distributions will be made on an annual basis to each preferred and common
unit holder in an amount equal to the Tax Gross-Up Amount, as defined, in the
case of the preferred unit holder, and the estimated tax liability of the
members resulting from the operations of the Company in the case of the common
unit holders. The tax distributions to the preferred unit holders have priority
over the tax distributions to the common unit holders, which will only be made
to the common unit holders to the extent of Available Cash, as defined.
Thereafter, distributions will be made to the members at the manager's
discretion and subject to the Company being in compliance with the secured loan
agreement (Note 4). However, no discretionary distributions shall be made to
common members if any preferred member units are outstanding.
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.
(3) SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Property, equipment and other related assets:
Buildings and improvements........................... $4,197,928 $ 679,438
Furniture, fixtures, equipment and software.......... 3,392,139 825,881
ADA and franchise fees............................... 927,953 752,953
Preopening costs..................................... 214,759 19,573
---------- ----------
8,732,779 2,277,845
Less accumulated depreciation and amortization....... (686,258) (159,050)
---------- ----------
Total property, equipment and other related assets,
net............................................... $8,046,521 $2,118,795
========== ==========
Other assets:
Prepaid franchise fees............................... $ 275,000 $ 300,000
Investment in BCI warrants........................... -- 754,977
Other................................................ -- 19,464
---------- ----------
Total other assets, net............................ $ 275,000 $1,074,441
========== ==========
Accrued expenses:
Accrued payroll and fringe benefits.................. $ 437,789 $ 225,631
Accrued sales tax.................................... 176,592 54,267
Accrued personal and real property taxes............. 160,435 199,446
Accrued store closure costs.......................... 85,035 --
Accrued interest..................................... 56,266 17,956
Deferred gain on equipment sales..................... -- 643,978
Accrued other........................................ 78,538 13,603
---------- ----------
$ 994,655 $1,154,881
========== ==========
</TABLE>
F-122
<PAGE>
BC HEARTLAND, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) DEBT
The Company has entered into a secured loan agreement (the "Agreement") with
BCI which provides BCI the right to convert all or any portion of the loan
into common units of members' capital at $2.4533 per common member unit. The
specified percentage of members' capital to be acquired on conversion is
dependent on the amount of financing to be provided in relation to the total
capital and rights outstanding, but would constitute at least a majority of
the capital of the Company on a fully diluted basis in the event all of the
loan was converted. The loan may be converted by BCI at any time up to April
2008. Additionally, during this same time period, to the extent the loan is
not fully drawn or has been drawn and repaid, BCI has the option to acquire,
at the loan conversion price, as defined, the amount of additional common
units it could have acquired by conversion of the loan had it been fully
drawn. In the event BCI's exercised conversion and option rights represent a
majority of the outstanding member units, BCI will become the manager of the
Company. BCI has announced its intention to convert the loan into equity
subject to acquiring the preferred membership units.
Interest is based upon the reference rate of the Bank of America National
Trust and Savings Association (8.50% as of December 28, 1997) plus 1%.
Interest-only payments are required through October 2005, at which time the
loan converts to an amortizing term loan payable through November 2007, with a
final balloon payment. The Agreement provides for a line of credit of
$3,680,000, all of which was outstanding at December 28, 1997.
The Company has also entered into a nonconvertible secured loan agreement
with BCI providing for borrowings of up to $6,000,000, of which $3,943,160 was
outstanding at December 28, 1997. Interest is based upon the reference rate of
Bank of America National Trust and Savings Association plus 1%. Interest only
payments are required through October 2007, at which time the principal
balance is due.
The loans are collateralized by substantially all of the assets of the
Company and a pledge of the voting members' capital of the Company. The loan
agreements contain various restrictive covenants including restricting cash
distributions and limiting additional indebtedness.
As of December 28, 1997, principal maturities were as follows:
<TABLE>
<S> <C>
1998......................................................... $ --
1999......................................................... --
2000......................................................... --
2001......................................................... --
2002......................................................... --
Thereafter................................................... 7,623,160
----------
$7,623,160
==========
</TABLE>
(5) PREFERRED MEMBERSHIP UNITS
The preferred membership units bear dividends at a rate equal to 8% of the
issue price. This rate will increase to a maximum of 20% under certain
circumstances. Dividends are payable semi-annually, in cash.
In 1997, the Company distributed warrants to acquire 51,784 shares of BCI
common stock, which it had previously purchased from BCI, to holders of the
preferred units.
The preferred membership units are redeemable at the option of the Company
at any time for a redemption price equal to the Adjusted Issue Price, plus a
redemption premium equal to 4% of the initial issue price.
In the event of liquidation, the preferred membership units will be entitled
to a liquidation preference equal to the Redemption Price, as defined.
F-123
<PAGE>
BC HEARTLAND, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The holders of preferred membership units have the right to require the
Company to redeem the preferred membership units at the Redemption Price in
certain circumstances.
The preferred members have no voting rights or rights to manage the business
and affairs of the Company other than those specific rights described in the
Operating Agreement.
(6) EMPLOYEE UNIT OPTION PLAN
A maximum of 350,000 common units are available for grant to employees
pursuant to the Employee Unit Option Plan (the "Option Plan"). The option price
is equal to the fair market value on the date of grant, as determined by the
manager. All unit options granted under the Option Plan are exercisable up to
10 years from the date of grant. The options generally vest at a rate of 10% at
the end of the first year, an additional 20% at the end of the second year, an
additional 30% at the end of the third year and the balance at the end of the
fourth year from the date of grant. No stock options had been granted prior to
fiscal 1997.
The Company accounts for employee options using the intrinsic value based
method under which no compensation cost has been recognized in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation". If a fair value based accounting method had been adopted,
the Company's pro forma net loss would have been $2,536,103 for the year ended
December 28, 1997.
The following table summarizes stock option activity and the related weighted
average exercise price of the options.
<TABLE>
<CAPTION>
1997
--------------
SHARES PRICE
-------- -----
<S> <C> <C>
Outstanding, beginning of year.................................. -- $--
Granted....................................................... 295,000 1.00
Exercised..................................................... --
Canceled...................................................... --
Expired....................................................... --
--------
Outstanding, end of year........................................ 295,000 $1.00
========
Exercisable, end of year........................................ 62,000 $1.00
========
Weighted average fair value of options granted.................. $ 0.27
========
</TABLE>
At December 28, 1997, the weighted average remaining contractual life of the
options was approximately 9 years.
The fair value of each option is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions used for 1997 grants; risk-free interest rate of 6.20%; expected
life of 5 years.
(7) COMMITMENTS
The Company has entered into sale/lease back transactions whereby store
equipment was sold to a third party and subsequently subleased by the Company
from BCI who leased the equipment from the third party.
The Company also leases store premises under various noncancelable operating
lease agreements. Lease terms are generally five to ten years with one or more
five-year renewal options. Most of the leases contain escalation clauses and
common area maintenance charges.
F-124
<PAGE>
BC HEARTLAND, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 28, 1997:
<TABLE>
<S> <C>
1998.............................................................. $1,072,155
1999.............................................................. 1,066,751
2000.............................................................. 1,043,012
2001.............................................................. 994,146
2002.............................................................. 1,011,262
Thereafter........................................................ 4,422,498
----------
$9,609,824
==========
</TABLE>
Total rent expense under operating leases, including common area maintenance
charges, was $1,800,000, $1,625,000 and $441,000 for 1997, 1996 and 1995,
respectively.
The Company obtains a majority of its proteins, produce and other supplies
from a limited number of vendors. Management believes that, if necessary, the
Company would be able to replace any of its sources of supply with other
vendors without a disruption in service.
F-125
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Market Partners, L.L.C.:
We have audited the accompanying statements of assets and liabilities of
Market Partners, L.L.C. (a Delaware limited liability company) as of December
29, 1996 and December 28, 1997, including the schedules of investments, and the
related statements of operations, members' equity and changes in net assets for
the period from July 18, 1996 (date of inception) through December 29, 1996 and
for the year ended 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.
As explained in Note 2, the financial statements include securities valued at
$35,850,970 and $57,928,211 at December 29, 1996 and December 28, 1997,
respectively (91% and 99% of total assets, respectively), whose values have
been estimated by the Manager in the absence of readily ascertainable market
values. We have reviewed the procedures used by the Manager in arriving at the
estimate of value of such securities and have inspected underlying
documentation, and, in the circumstances, we believe the procedures are
reasonable and documentation appropriate. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly from
values that would have been used had a ready market for the securities existed,
and the differences could be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Market Partners, L.L.C. as of
December 29, 1996 and December 28, 1997, and the results of its operations and
its changes in net assets for the period from July 18, 1996 (date of inception)
through December 29, 1996 and for the year ended December 28, 1997 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
April 10, 1998
F-126
<PAGE>
MARKET PARTNERS, L.L.C.
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER DECEMBER
29, 1996 28, 1997
----------- -----------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 2,541,172 $ 494,200
Dividends receivable................................. 714,963 --
Interest receivable.................................. 10,624 2,841
----------- -----------
Total current assets............................... 3,266,759 497,041
Investments, at fair value (cost of $35,552,175 in
1996 and $67,858,190 in 1997)....................... 35,850,970 57,928,211
Organization costs, net of accumulated amortization
of $12,912 in 1996 and $89,199 in 1997.............. 239,307 285,079
----------- -----------
Total assets....................................... $39,357,036 $58,710,331
=========== ===========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Accounts payable....................................... $ 10,552 $ --
----------- -----------
Total liabilities.................................. 10,552 --
----------- -----------
Net assets......................................... $39,346,484 $58,710,331
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-127
<PAGE>
MARKET PARTNERS, L.L.C.
SCHEDULE OF INVESTMENTS
AS OF DECEMBER 29, 1996
<TABLE>
<CAPTION>
SHARES ISSUER COST FAIR VALUE
------ ------ ----------- -----------
<C> <S> <C> <C>
JUNIOR PREFERRED INVESTMENTS:
13,299,346 R&A Food Services, L.P................ $13,299,346 $13,396,754
4,433,115 BC Boston, L.P........................ 4,433,115 4,498,345
5,541,394 BCE West, L.P......................... 5,541,394 5,572,930
1,625,000 BC Heartland, L.L.C................... 1,625,000 1,638,896
5,541,394 P&L Food Services, L.L.C.............. 5,541,394 5,622,932
4,433,115 BC Northwest, L.P..................... 4,433,115 4,458,344
----------- -----------
Total Junior Preferred Investments.... 34,873,364 35,188,201
WARRANTS TO PURCHASE COMMON UNITS:
BC New York, L.L.C.................... 539,844 529,206
Finest Foodservice, L.L.C............. 10,610 10,138
Mayfair Partners, L.P................. 18,621 17,853
R&A Food Services, L.P................ 94 86
BC Northwest, L.P..................... 8,914 8,524
Platinum Rotisserie, L.L.C............ 15,304 14,420
P&L Food Services, L.L.C.............. 7,044 6,720
BC Boston, L.P........................ 1,883 1,784
BCE West, L.P......................... 5,903 5,545
BC Superior, L.L.C.................... 3,465 3,542
BC GoldenGate, L.L.C.................. 67,129 64,951
----------- -----------
Total Warrants to Purchase Common
Units................................. 678,811 662,769
----------- -----------
Total Investments..................... $35,552,175 $35,850,970
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
schedule.
F-128
<PAGE>
MARKET PARTNERS, L.L.C.
SCHEDULE OF INVESTMENTS
AS OF DECEMBER 28, 1997
<TABLE>
<CAPTION>
SHARES ISSUER COST FAIR VALUE
------ ------ ----------- -----------
(NOTE 2)
<C> <S> <C> <C>
JUNIOR PREFERRED INVESTMENTS:
16,624,183 R&A Food Services, L.P................ $14,999,999 *
4,433,115 BC Boston, L.P........................ 4,000,001 *
11,082,788 BCE West, L.P......................... 9,999,999 *
5,178,433 BC Heartland, L.L.C................... 4,672,504 *
11,082,788 P&L Foods Services, L.L.C............. 9,999,999 *
6,649,673 BC Northwest, L.P..................... 5,999,996 *
4,433,115 BC GoldenGate, L.L.C.................. 4,000,001 *
3,324,837 Finest Foodservice, L.L.C............. 3,000,004 *
2,216,558 BC Superior, L.L.C.................... 1,999,996 *
BCBM Southwest, L.P. (formerly BC
4,433,115 Texas, Inc.).......................... 4,010,669 *
5,541,394 BC Tri-States, L.L.C.................. 5,013,298 *
----------- -----------
Total Junior Preferred Investments.... 67,696,466 $57,928,211
WARRANTS TO PURCHASE COMMON UNITS:
BC Great Lakes, L.L.C................. 41,378 --
Finest Foodservice, L.L.C............. 10,610 --
R&A Food Services, L.P................ 94 --
BC Northwest, L.P..................... 8,914 --
Platinum Rotisserie, L.L.C............ 15,304 --
P&L Food Services, L.L.C.............. 7,044 --
BC Boston, L.P........................ 1,883 --
BCE West, L.P......................... 5,903 --
BC Superior, L.L.C.................... 3,465 --
BC GoldenGate, L.L.C.................. 67,129 --
----------- -----------
Total Warrants to Purchase Common
Units................................. 161,724 --
----------- -----------
Total Investments..................... $67,858,190 $57,928,211
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
schedule.
F-129
<PAGE>
MARKET PARTNERS, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JULY 18, 1996
(DATE OF INCEPTION) YEAR ENDED
THROUGH DECEMBER 28,
DECEMBER 29, 1996 1997
------------------- ------------
<S> <C> <C>
Investment Income:
Dividend income............................ $ 714,963 $ 8,150,043
Interest income............................ 105,894 101,877
---------- ------------
Total income............................. 820,857 8,251,920
Expenses:
General and administrative................. 23,168 158,312
---------- ------------
Investment income, net....................... 797,689 8,093,608
Realized and Unrealized Gain (Loss) on
Investments:
Realized gain on sale of investments....... -- 2,365,610
Unrealized appreciation (depreciation) on
investments............................... 298,795 (17,574,896)
---------- ------------
Net gain (loss) on investments........... 298,795 (15,209,286)
---------- ------------
Net Income (Loss)............................ $1,096,484 $ (7,115,678)
========== ============
Basic and Diluted Earnings (Loss) Per Unit... $71,665.62 $(259,696.28)
========== ============
Weighted Average Number of Membership Units
Outstanding................................. 15.3 27.4
========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-130
<PAGE>
MARKET PARTNERS, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JULY 18, 1996
(DATE OF
INCEPTION) THROUGH
DECEMBER 29, 1996
AND YEAR ENDED
DECEMBER 28, 1997
------------------
UNITS AMOUNT
----- ------------
<S> <C> <C>
Balance, July 18, 1996 (inception).......................... -- $ --
Member contributions...................................... 15.3 38,250,000
Net income................................................ -- 1,096,484
---- ------------
Balance, December 29, 1996.................................. 15.3 39,346,484
Member contributions...................................... 15.3 38,249,985
Distribution to members................................... -- (11,770,460)
Net loss.................................................. -- (7,115,678)
---- ------------
Balance, December 28, 1997.................................. 30.6 $ 58,710,331
==== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-131
<PAGE>
MARKET PARTNERS, L.L.C.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JULY 18, 1996
(DATE OF INCEPTION) YEAR ENDED
THROUGH DECEMBER 28,
DECEMBER 29, 1996 1997
------------------- ------------
<S> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income, net..................... $ 797,689 $ 8,093,608
Net realized gain on investments........... -- 2,365,610
Unrealized appreciation (depreciation) on
investments............................... 298,795 (17,574,896)
----------- ------------
Net increase (decrease) in net assets
from operations......................... 1,096,484 (7,115,678)
Distributions to members................... -- (11,770,460)
Member contributions....................... 38,250,000 38,249,985
----------- ------------
Total increase........................... 39,346,484 19,363,847
Net assets, beginning of period............ -- 39,346,484
----------- ------------
Net assets, end of year.................... $39,346,484 $ 58,710,331
=========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-132
<PAGE>
MARKET PARTNERS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Market Partners, L.L.C. (the "Company"), a Delaware limited liability
company, was formed on July 18, 1996, primarily for the purpose of investing in
certain financed area developers ("FADs") of Boston Chicken, Inc. ("BCI"). BCI
FADs operate Boston Market franchise stores that specialize in fresh,
convenient meals featuring home-style entrees, sandwiches, vegetables, salads
and other side dishes in the United States. Organizational expenses of $250,000
were paid to BCI during 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit, and highly
liquid instruments purchased with original maturities of three months or less.
Investments
All investments held by the Company are in privately held businesses. The
investments are stated at estimated fair value. The fair value of the preferred
investments as of December 29, 1996 was determined by the Manager based on
anticipated discounted future cash flows. The fair value of the preferred
investments as of December 28, 1997 was determined in aggregate based upon the
consideration to be received in the proposed merger of the Company with BCI
(See Note 5). The estimated market value of the common stock was determined
based upon the market value of BCI's common stock measured over a period of
time prior to and after the agreement in principle to acquire the Company 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 BCI's publicly-traded debentures
measured over a period of time prior to and after the agreement in principle to
acquire the Company was reached and publicly announced. The fair value of the
warrants to purchase common units was computed using the Black-Scholes option
pricing model.
Income Taxes
The Company is a flow-through entity for federal and state income tax
purposes. Any taxable income or loss is reported by the members on their
individual tax returns in accordance with the Company's Amended and Restated
Limited Liability Company Agreement.
Allocation of Profits and Losses
Profits and losses for any fiscal year shall be allocated among the members
in proportion to their number of units held.
Distributions
Distributions generally shall be made at such times and in such amounts as
determined by the Manager, as defined, and shall be made in proportion to the
number of units held by each member. However, any proceeds received from the
sale or redemption of securities after September 30, 1997 must be distributed
currently.
Organization Costs
Organization costs are being amortized on a straight-line basis over a sixty-
month period.
Earnings (Loss) per Share
Basic and diluted earnings (loss) per share are computed based upon the
weighted average number of membership units outstanding. The Company does not
have any potential dilutive securities outstanding.
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
F-133
<PAGE>
MARKET PARTNERS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
3. INVESTMENTS
Dividends accrue on the preferred investments at the rate of 8% per annum on
the outstanding face amount of the preferred investments, payable semi-annually
in cash. The Company was paid only one of the semi-annual dividends in 1997 and
did not accrue the second dividend payment. Unless all dividends on the
preferred investments have been paid in full, no other dividends can be
declared or paid on the FAD's common equity securities. In the event the FAD
has not redeemed the preferred investments prior to the expiration date of
BCI's conversion and/or option rights under the applicable FAD secured loan
agreements ("Conversion Right") as of the date of the initial investment in the
preferred investments of the FAD (without regard to any subsequent amendment
thereof by the FAD and BCI), the dividends rate will increase by 2%
immediately, and by an additional 2% every six months thereafter, to a maximum
dividend rate of 20%.
In the event BCI exercises its Conversion Right, otherwise acquires a
controlling interest in such FAD, or acquires a certain percentage of Boston
Market stores owned by such FAD (each, a "Controlling Interest Acquisition"),
the Company has the right to require the FAD to repurchase the preferred
investment at its liquidation preference, plus a redemption premium equal to 4%
of the liquidation preference, plus any accrued but unpaid dividends to the
date of redemption. The liquidation preference is equal to the face amount of
the preferred investment. Generally, the investments were purchased at a
discount equal to the cost of the warrants to purchase common units in the FAD.
The preferred investments are redeemable at any time by the issuing FAD at
its liquidation preference, plus a redemption premium equal to 4% of the
liquidation preference, plus any accrued but unpaid dividends to the date of
redemption.
The preferred investments are junior to any BC Equity Funding, L.L.C.
preferred equity and any other existing preferred equity of a FAD with respect
to distribution rights and rights upon dissolution. In the event of
liquidation, the preferred investments have a liquidation preference over
common equity equal to their face amount.
In addition to cash dividends, in 1997, the FADs distributed warrants to
purchase 750,000 shares of BCI's common stock at an exercise price of $25.00
per share. The fair value of the warrants are recorded as dividend income. The
Company distributed the warrants to its members in 1997.
The Company has purchased warrants from certain FADs entitling the Company to
purchase 7% of each FAD's common equity on a fully diluted basis, exercisable
only in the event of a Controlling Interest Acquisition of the FAD. The
exercise price of each warrant is equal to the weighted average
conversion/option exercise price per unit on the maximum amount of the
convertible loan commitment under such FAD's secured loan agreement with BCI as
of the date such FAD warrant was issued. The warrant may be exercised within 10
business days after a Controlling Interest Acquisition of a FAD, subject to
BCI's Call Right described below. Each FAD warrant expires at the same time as
BCI's Conversion Right for such FAD expires, provided that all FAD warrants
terminate as provided below. BCI has the right to purchase the FAD warrant at
any time within two business days after the Company has indicated its intention
to exercise the FAD warrant in a particular FAD (the "Call Right"), at a
purchase price based on the FAD Value. The FAD Value is equal to the product of
(i) the FAD's earnings before interest, taxes, depreciation and amortization
("EBITDA") for the preceding thirteen accounting periods, and (ii) the greater
of (A) eight, or (B) 50% of BCI's EBITDA multiple. The product of the foregoing
calculation is adjusted by (y) subtracting the aggregate exercise price of the
FAD warrant and any indebtedness of the FAD (excluding the convertible loan to
BCI), and (z) adding any cash of the FAD. The FAD Value is payable in cash, or
at BCI's option, in registered shares of BCI.
F-134
<PAGE>
MARKET PARTNERS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In 1997, the Company sold its warrant to purchase common units in BC New
York, L.L.C., to BCI, for proceeds of $2.9 million, resulting in a gain of $2.4
million.
After a Controlling Interest Acquisition of a particular FAD in which the
Company has exercised the FAD warrant and BCI has not exercised its Call Right,
no distributions are permitted to be made on the common equity of such FAD held
by BCI, and the FAD will not be permitted to make repayments of loans,
intercompany transfers, or other advances to BCI if (a) the FAD warrant in such
FAD has been exercised and (b) the Call Right has not been exercised.
After a Controlling Interest Acquisition of a particular FAD in which the
Company has exercised the FAD warrant and BCI has not exercised its Call Right,
in the event BCI offers to purchase the equity from the other minority equity
holders of the FAD, BCI must offer to purchase the common equity acquired by
the Company through exercise of the FAD warrant at the higher of the FAD Value
or the same terms offered to the minority holders.
At such time as BCI has exercised its Call Right (or acquired the Company's
interest in a FAD as described immediately above) in FADs owning an aggregate
of 1,500 Boston Market stores, all of the remaining FAD warrants outstanding on
such date automatically terminate.
F-135
<PAGE>
MARKET PARTNERS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY FINANCIAL INFORMATION
The following tables set forth certain combined financial information as of
the dates indicated provided to the Company by the Boston Market financed area
developers in which the Company holds equity investment (in thousands)
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
<S> <C> <C>
Balance sheet data:
Total gross assets............................. $588,029 $436,400
Total debt:
To Boston Chicken, Inc....................... 490,078 612,512
To third parties (including capital lease
obligations)................................ 16,040 10,167
Total other liabilities (including trade
payables)..................................... 86,303 97,478
Total stockholder/partner/member deficit....... (52,798) (347,180)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
<S> <C> <C>
Statement of operations data:
Gross revenue................................... $721,945 $694,239
Income (loss) from continuing operations........ (130,764) (292,565)
</TABLE>
5. SUBSEQUENT EVENT
In March 1998, the Company entered into an agreement with BCI that calls for
BCI to acquire the Company through a merger of the Company into a wholly-owned
subsidiary of BCI in consideration for $66.6 million aggregate liquidation
preference of 10% Series A Exchangeable Preferred Stock of BCI (the "Preferred
Stock"), 1,946,000 shares of common stock of BCI and $5.6 million in cash, to
be allocated among the members. The 10% quarterly dividend on the Preferred
Stock is payable, at BCI'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 BCI 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, which is equal to the face amount of the
security. The transaction is subject to the approval of holders owning at least
two-thirds of the interest of each BC Equity Funding, L.L.C. and the Company
and final documentation.
F-136
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of BC Equity Funding, L.L.C.:
We have audited the accompanying statements of assets and liabilities of BC
Equity Funding, L.L.C. (a Delaware limited liability company) as of December
29, 1996 and December 28, 1997, including the schedules of investments, and the
related statements of operations, members' equity and changes in net assets for
the period from February 15, 1995 (date of inception) through December 31, 1995
and for the fiscal years ended 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.
As explained in Note 2, the financial statements include securities valued at
$76,305,786 and $50,841,054 at December 29, 1996 and December 28, 1997,
respectively (99% of total assets at each date), whose values have been
estimated by the Manager in the absence of readily ascertainable market values.
We have reviewed the procedures used by the Manager in arriving at the estimate
of value of such securities and have inspected underlying documentation, and,
in the circumstances, we believe the procedures are reasonable and
documentation appropriate. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from values that
would have been used had a ready market for the securities existed, and the
differences could be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BC Equity Funding, L.L.C. as
of December 29, 1996 and December 28, 1997, and the results of its operations
and its changes in net assets for the period from February 15, 1995 (date of
inception) through December 31, 1995 and for the fiscal years ended December
29, 1996 and December 28, 1997 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Denver, Colorado
April 10, 1998
F-137
<PAGE>
BC EQUITY FUNDING, L.L.C.
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER DECEMBER 28,
ASSETS 29, 1996 1997
------ ----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 573,403 $ 230,140
Interest receivable................................. 2,361 969
Other receivables................................... 3,349 --
----------- -----------
Total current assets.............................. 579,113 231,109
Investments, at fair value (cost of $65,340,222 in
1996 and $72,096,820 in 1997)........................ 76,305,786 50,841,054
Organization costs, net of accumulated amortization of
$21,172 in 1996 and $38,094 in 1997.................. 59,796 42,874
----------- -----------
Total assets...................................... $76,944,695 $51,115,037
=========== ===========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Accounts payable...................................... $ 2,000 $ --
Distributions payable................................. 325,000 --
----------- -----------
Total liabilities................................. 327,000 --
----------- -----------
Net assets........................................ $76,617,695 $51,115,037
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-138
<PAGE>
BC EQUITY FUNDING, L.L.C.
SCHEDULE OF INVESTMENTS
AS OF DECEMBER 29, 1996
<TABLE>
<CAPTION>
SHARES ISSUER (NOTE 4) COST FAIR VALUE
---------- --------------- ----------- -----------
<C> <S> <C> <C>
PREFERRED INVESTMENTS, INCLUDING ACCRUED DIVIDENDS:
BCBM Southwest, L.P. (formerly BC Texas,
10,000 Inc.)................................... $10,420,610 $12,622,063
10,000 R&A Food Services, Inc................... 11,855,756 12,622,063
10,000,000 Finest Holdings, Inc..................... 9,845,604 12,208,108
9,200,000 BC GoldenGate Holdings, Inc.............. 8,947,753 10,657,227
5,000,000 BC Boston Holdings, Inc.................. 5,743,620 5,923,748
3,500,000 BCE West Holdings, Inc................... 3,909,998 4,022,504
4,000,000 P&L Foods Holdings, Inc.................. 4,474,414 4,528,339
2,500,000 EFM Holdings, Inc. (a)................... 2,677,436 2,911,127
2,500,000 BC Northwest Holdings, Inc............... 2,762,891 2,752,722
----------- -----------
Total Preferred Investments................... 60,638,082 68,247,901
WARRANTS TO PURCHASE COMMON STOCK OR UNITS:
BCBM Southwest, L.P. (formerly BC Texas,
158,000 Inc.)................................... 1,434,640 4,271,246
4,750,000 Finest Foodservice, L.L.C................ 1,805,000 2,323,484
3,750,000 BC GoldenGate, L.L.C..................... 1,462,500 1,463,155
----------- -----------
Total Warrants to Purchase Common Stock or
Units........................................ 4,702,140 8,057,885
----------- -----------
Total Investments............................. $65,340,222 $76,305,786
=========== ===========
</TABLE>
- --------
(a) Represents investment in BC Superior, L.L.C.
The accompanying notes to financial statements are an integral part of this
schedule.
F-139
<PAGE>
BC EQUITY FUNDING, L.L.C.
SCHEDULE OF INVESTMENTS
AS OF DECEMBER 28, 1997
<TABLE>
<CAPTION>
SHARES ISSUER (NOTE 4) COST FAIR VALUE
---------- --------------- ----------- -----------
(NOTE 2)
<C> <S> <C> <C>
PREFERRED INVESTMENTS, INCLUDING ACCRUED DIVIDENDS:
10,000 W.M.J. Texas, Inc........................ $11,636,255 *
10,000 R&A Food Services, Inc................... 13,083,909 *
10,000,000 Finest Holdings, Inc..................... 11,053,313 *
9,200,000 BC GoldenGate Holdings, Inc.............. 10,026,927 *
5,000,000 BC Boston Holdings, Inc.................. 6,339,026 *
3,500,000 BCE West Holdings, Inc................... 4,315,323 *
4,000,000 P&L Foods Holdings, Inc.................. 4,935,683 *
2,500,000 EFM Holdings, Inc. (a)................... 2,954,973 *
2,500,000 BC Northwest Holdings, Inc............... 3,049,271 *
----------- -----------
Total Preferred Investments................... 67,394,680 $50,841,054
WARRANTS TO PURCHASE COMMON STOCK OR UNITS:
BCBM Southwest, L.P. (formerly BC Texas,
158,000 Inc.)................................... 1,434,640 --
4,750,000 Finest Foodservice, L.L.C................ 1,805,000 --
3,750,000 BC GoldenGate, L.L.C..................... 1,462,500 --
----------- -----------
Total Warrants to Purchase Common Stock or
Units........................................ 4,702,140 --
----------- -----------
Total Investments............................. $72,096,820 $50,841,054
=========== ===========
</TABLE>
- --------
(a) Represents investment in BC Superior, L.L.C.
The accompanying notes to financial statements are an integral part of this
schedule.
F-140
<PAGE>
BC EQUITY FUNDING, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM FEBRUARY 15, 1995
(DATE OF INCEPTION) YEAR ENDED
THROUGH -----------------------------------
DECEMBER 31, 1995 DECEMBER 29, 1996 DECEMBER 28, 1997
---------------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Income:
Dividend income....... $ 2,913,483 $ 5,976,112 $ --
Interest income....... 1,133,734 247,307 14,197
----------- ----------- ------------
Total income............ 4,047,217 6,223,419 14,197
Expenses:
General and
administrative....... 493,519 295,829 52,123
----------- ----------- ------------
Investment income
(loss), net............ 3,553,698 5,927,590 (37,926)
Realized and Unrealized
Gain (Loss) on
Investments:
Realized gain on
redemption of
investments.......... -- 500,000 --
Unrealized
appreciation
(depreciation) on
investments.......... 7,944,090 16,624,961 (25,464,732)
----------- ----------- ------------
Net gain (loss) on
investments........ 7,944,090 17,124,961 (25,464,732)
----------- ----------- ------------
Net Income (Loss)....... $11,497,788 $23,052,551 $(25,502,658)
=========== =========== ============
Basic and Diluted
Earnings (Loss) per
Unit................... $191,629.80 $384,209.18 $(425,044.30)
=========== =========== ============
Weighted Average Number
of Membership Units
Outstanding............ 60 60 60
=========== =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-141
<PAGE>
BC EQUITY FUNDING, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM FEBRUARY 15, 1995
(DATE OF INCEPTION) YEAR ENDED
THROUGH -----------------------------------
DECEMBER 31, 1995 DECEMBER 29, 1996 DECEMBER 28, 1997
---------------------- ----------------- -----------------
<S> <C> <C> <C>
Balance, beginning of
period................. $ -- $ 71,493,631 $ 76,617,695
Member contributions.. 60,000,000 -- --
Tax distributions..... (4,157) (325,000) --
Other distributions... -- (17,603,487) --
Net income (loss)..... 11,497,788 23,052,551 (25,502,658)
----------- ------------ ------------
Balance, end of year.... $71,493,631 $ 76,617,695 $ 51,115,037
=========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-142
<PAGE>
BC EQUITY FUNDING, L.L.C.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM FEBRUARY 15, 1995
(DATE OF INCEPTION) YEAR ENDED
THROUGH -----------------------------------
DECEMBER 31, 1995 DECEMBER 29, 1996 DECEMBER 28, 1997
---------------------- ----------------- -----------------
<S> <C> <C> <C>
Increase (decrease) in
net assets from
operations:
Investment income,
net.................. $ 3,553,698 $ 5,927,590 $ (37,926)
Net realized gain on
investments.......... -- 500,000 --
Unrealized
appreciation
(depreciation) on
investments.......... 7,944,090 16,624,961 (25,464,732)
----------- ------------ ------------
Net increase in net
assets from
operations......... 11,497,788 23,052,551 (25,502,658)
Distribution to
members.............. (4,157) (17,928,487) --
Member contributions.. 60,000,000 -- --
----------- ------------ ------------
Total increase
(decrease)......... 71,493,631 5,124,064 (25,502,658)
Net assets, beginning
of period............ -- 71,493,631 76,617,695
----------- ------------ ------------
Net assets, end of
period............... $71,493,631 $ 76,617,695 $ 51,115,037
=========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-143
<PAGE>
BC EQUITY FUNDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
BC Equity Funding, L.L.C. (the "Company"), a Delaware limited liability
company, was formed on February 15, 1995 for the purpose of investing in
cumulative preferred stock or the partnership or limited liability company
equivalent thereof in certain financed area developers ("FADs") of Boston
Chicken, Inc. ("BCI") or investing in entities which invest in BCI FADs. BCI
FADs operate Boston Market franchise stores that specialize in fresh,
convenient meals featuring home-style entrees, sandwiches, vegetables, salads
and other side dishes in the United States. As manager of the Company, BCI was
paid management fees of $375,000 in 1995 and $125,000 in 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit, and highly
liquid instruments purchased with original maturities of three months or less.
Investments
All investments held by the Company are in privately held businesses. These
investments are stated at estimated fair value. The fair value of the
preferred investments as of December 29, 1996 was determined by the Manager
based on anticipated discounted future cash flows. The fair value of the
preferred investments as of December 28, 1997 was determined in aggregate
based upon the consideration to be received in the proposed merger of the
Company with BCI (See Note 5). The estimated market value of the common stock
was determined based upon the market value of BCI's common stock measured over
a period of time prior to and after the agreement in principle to acquire the
Company 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 BCI's publicly-
traded debentures measured over a period of time prior to and after the
agreement in principle to acquire the Company was reached and publicly
announced. Dividends declared but not distributed are included in both the
cost basis and fair value of investments. The fair value of the warrants to
purchase common stock or units was computed using the Black-Scholes option
pricing model.
Income Taxes
The Company is a flow-through entity for federal and state income tax
purposes. Any taxable income or loss is reported by the members on their
individual tax returns in accordance with the Company's Amended and Restated
Limited Liability Company Agreement.
Allocation of Profits and Losses
Profits and losses for any fiscal year shall be allocated among the members
in proportion to their number of units held.
Distributions
Distributions generally shall be made at such times and in such amounts as
determined by the Manager and shall be made in proportion to the number of
units held by each member. However, any proceeds received from the sale or
redemption of securities after March 31, 1997 must be distributed currently.
Organization Costs
Organization costs are being amortized over a sixty month period using the
straight-line method.
Earnings (Loss) per Share
Basic and diluted earnings (loss) per share are computed based upon the
weighted average number of membership units outstanding. The Company does not
have any potentially dilutive securities outstanding.
F-144
<PAGE>
BC EQUITY FUNDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
3. INVESTMENTS
Each preferred equity investment earns dividends (or is entitled to receive
preferential distributions, in the case of a partnership or a limited liability
company investment) at a per annum rate equal to 10% of its Adjusted Issue
Price. The Adjusted Issue Price of the preferred equity investment is equal to
the amount initially paid for the instrument, increased semiannually, by the
amount of dividends accrued but not paid during the period. Dividends accrue,
but are not paid currently, until the fifth anniversary of the issue date.
Thereafter, the preferred equity investments provide for current payment of
semi-annual cash dividends or distributions. Dividends were not accrued in
1997.
The preferred equity securities may be redeemed at the option of the FAD at
any time for the Adjusted Issue Price, plus a redemption premium initially
equal to 10% of the initial issue price, increased by 2% each year, up to a
maximum of 20% (the "Redemption Price"). In the event of liquidation, the
preferred equity interests will be entitled to a liquidation price equal to the
Redemption Price.
The Company has the right to require a FAD to redeem the preferred interest
at the Redemption Price in the event (i) BCI exercises any of its conversion
and/or option rights under such FAD's secured loan agreement with BCI, (ii)
there is a change in control of the FAD, (iii) sale of 30% of the FAD's assets,
or (iv) there is an uncured monetary default by the FAD under its secured loan
agreement with BCI.
In the event the FAD has not redeemed the preferred investment prior to the
date on which BCI's conversion and/or option rights under the FAD's secured
loan agreement with BCI expire unexercised, the Company will have the right to
require, subject to certain conditions, including BCI's prior consent, that the
FAD undertake a firm commitment underwritten public offering of equity of the
FAD. Any preferred interests held by the Company will be automatically
converted into shares of common equity determined by dividing the applicable
Redemption Price by the price per share of the common shares in the public
offering. In the event BCI does not consent to the FAD public offering, BCI
will be obligated to purchase the preferred investments at the Redemption
Price.
The Company holds warrants to purchase 158,000 shares of common stock of BCBM
Southwest, L.P. at $20 per unit; 4,750,000 common membership units of Finest
Foodservice, L.L.C. at $1.00 per unit; and 3,750,000 common membership units of
BC GoldenGate L.L.C. at $1.00 per unit. The warrants expire in November 2003,
June 2004 and July 2003, respectively.
During April 1996, the Company purchased from BCI a 3.33% participation in
BCI's $120.0 million secured convertible loan with Einstein/Noah Bagel Corp.
("ENBC") for $4.0 million. The Company's participation in the secured
convertible loan was converted into 510,246 shares of ENBC common stock in June
1996. All of the ENBC shares of common stock were distributed to the members of
the Company during fiscal 1996.
F-145
<PAGE>
BC EQUITY FUNDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY FINANCIAL INFORMATION
The following tables set forth certain combined financial information as of
the dates indicated provided to the Company by the Boston Market financed area
developers in which the Company holds equity investment (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
<S> <C> <C>
Balance sheet data:
Total gross assets............................. $382,324 $339,528
Total debt:
To Boston Chicken, Inc....................... 357,907 508,281
To third parties (including capital lease
obligations)................................ 2,768 1,984
Total other liabilities (including trade
payables)..................................... 69,154 89,791
Total stockholder/partner/member deficit....... (81,331) (315,483)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
<S> <C> <C>
Statement of operations data:
Gross revenue................................. $531,367 $609,572
Income (loss) from continuing operations...... (108,599) (251,867)
</TABLE>
5. SUBSEQUENT EVENT
In March 1998, the Company entered into an agreement with BCI that calls for
BCI to acquire the Company through a merger of the Company into a wholly-owned
subsidiary of BCI in consideration for $60.2 million aggregate liquidation
preference of 10% Series A Exchangeable Preferred Stock of BCI (the "Preferred
Stock"), 1,554,000 shares of common stock of BCI and $4.4 million in cash, to
be allocated among the members. The 10% quarterly dividend on the Preferred
Stock is payable, at BCI'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 BCI 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, which is equal to the face amount of the
security. The transaction is subject to the approval of holders owning at least
two-thirds of the interest of each Market Partners, L.L.C. and the Company and
final documentation.
F-146
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS 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 statement of operations 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 pro forma consolidated statement of
operations does not reflect provisions of $110.2 million for additional asset
impairments or $4.2 million of debt issuance costs recorded in conjunction with
the restructuring by the Company of certain masterlease agreements effective
July 15, 1998. The adjusted pro forma consolidated statement of operations for
the Company gives effect to 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 statement of operations is based upon
the assumptions set forth in the accompanying notes to such statement. The pro
forma results of operations assumes the transactions occurred at the beginning
of the period presented. The pro forma statement of operations should be read
in conjunction with the related historical financial statements and is not
necessarily indicative of the results that would have actually occurred had the
transactions been consummated during the period indicated or which may occur in
the future.
F-147
<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 $103,712 $ --
Royalties and
franchise
related fees.... 117,857 -- -- -- (44,843)(1) 66,187 10,210 (10,210)(14)
(6,827)(2)
Interest income. 83,434 -- -- -- (33,099)(1) 47,435 9,623 (9,623)(14)
(2,900)(2)
--------- -------- -------- --------- -------- --------- -------- -------
Total revenue. 462,368 -- -- 546,559 (87,669) 921,258 123,545 (19,833)
--------- -------- -------- --------- -------- --------- -------- -------
Costs and
Expenses:
Store
operations:
Food and
paper........... 94,712 -- -- 207,473 -- 302,185 47,894 --
Labor......... 69,298 -- -- 147,291 -- 216,589 32,085 --
Other
controllable
costs........... 24,934 -- -- 76,764 -- 101,698 17,036 --
Rent,
occupancy and
related......... 24,290 -- -- 75,895 (16,792)(1) 62,041 14,182 (2,873)(14)
(21,352)(3)
Contractual
and
discretionary
marketing....... 25,441 -- -- 76,546 -- 101,987 17,283 --
General and
administrative.. 212,124 52 158 64,467 (29,644)(1) 247,443 13,967 (9,531)(14)
-- -- -- -- 286 (2) -- -- --
Depreciation and
amortization.... 37,333 -- -- 25,395 (13,677)(4) 56,195 5,306 --
7,144 (3)
Goodwill
amortization.... 8,562 -- -- 6,093 5,917 (4) 20,572 1,542 --
Provision for
store closures.. -- -- -- 63,501 -- 63,501 -- --
Provision for
loan losses..... 128,000 -- -- -- (92,020)(5) 35,980 -- --
Losses of Boston
Chicken, Inc.'s
area developers. 49,352 -- -- -- (42,806)(6) 16,959 -- --
10,413 (2)
--------- -------- -------- --------- -------- --------- -------- -------
Total costs
and expenses.... 674,046 52 158 743,425 (192,531) 1,225,150 149,295 (12,404)
--------- -------- -------- --------- -------- --------- -------- -------
Loss from
Operations....... (211,678) (52) (158) (196,866) 104,862 (303,892) (25,750) (7,429)
Other Income
(Expense):
Investment
income.......... -- 14 10,618 -- (10,516)(7) 116 -- --
Interest
expense, net.... (38,209) -- -- (41,130) 40,755 (1) (56,027) (9,712) 9,623 (14)
(17,443)(8)
Gain on
issuances of
subsidiary's
stock........... 192 -- -- -- -- 192 -- --
Other income
(expense), net.. 1,603 -- -- (8,363) (10,674)(1) (17,434) (1,819) --
Unrealized
depreciation on
investments..... -- (25,465) (17,575) -- 43,040 (9) -- -- --
--------- -------- -------- --------- -------- --------- -------- -------
Total other
income
(expense):...... (36,414) (25,451) (6,957) (49,493) 45,162 (73,153) (11,531) 9,623
--------- -------- -------- --------- -------- --------- -------- -------
Loss Before
Income Taxes and
Minority
Interest......... (248,092) (25,503) (7,115) (246,359) 150,024 (377,045) (37,281) 2,194
Income Tax
Benefit.......... 8,415 -- -- -- 2,600 (10) 11,015 -- --
Minority Interest
in Losses of
Subsidiaries..... 15,785 -- -- -- 14,392 (11) 30,177 -- 4,354 (15)
--------- -------- -------- --------- -------- --------- -------- -------
Net Loss......... (223,892) (25,503) (7,115) (246,359) 167,016 (335,853) (37,281) 6,548
Dividends on
Preferred Stock.. -- -- -- -- (11,921)(12) (11,921) -- --
--------- -------- -------- --------- -------- --------- -------- -------
Net Loss
Applicable to
Common Stock..... $(223,892) $(25,503) $ (7,115) $(246,359) $155,095 $(347,774) $(37,281) $ 6,548
========= ======== ======== ========= ======== ========= ======== =======
Basic Loss Per
Share........... $ (3.32) $ (5.00)(12)
========= =========
Diluted Loss Per
Share........... $ (3.32) $ (5.00)(12)
========= =========
Weighted Average
Number of Common
Shares
Outstanding:
Basic........... 67,339 3,500 (13) 70,839
========= ======== =========
Diluted......... 67,339 3,500 (13) 70,839
========= ======== =========
<CAPTION>
ADJUSTED
PRO FORMA
----------
<S> <C>
Revenue:
Stores.......... $ 911,348
Royalties and
franchise
related fees.... 66,187
Interest income. 47,435
----------
Total revenue. 1,024,970
----------
Costs and
Expenses:
Store
operations:
Food and
paper........... 350,079
Labor......... 248,674
Other
controllable
costs........... 118,734
Rent,
occupancy and
related......... 73,350
Contractual
and
discretionary
marketing....... 119,270
General and
administrative.. 251,879
--
Depreciation and
amortization.... 61,501
Goodwill
amortization.... 22,114
Provision for
store closures.. 63,501
Provision for
loan losses..... 35,980
Losses of Boston
Chicken, Inc.'s
area developers. 16,959
----------
Total costs
and expenses.... 1,362,041
----------
Loss from
Operations....... (337,071)
Other Income
(Expense):
Investment
income.......... 116
Interest
expense, net.... (56,116)
Gain on
issuances of
subsidiary's
stock........... 192
Other income
(expense), net.. (19,253)
Unrealized
depreciation on
investments..... --
----------
Total other
income
(expense):...... (75,061)
----------
Loss Before
Income Taxes and
Minority
Interest......... (412,132)
Income Tax
Benefit.......... 11,015
Minority Interest
in Losses of
Subsidiaries..... 34,531
----------
Net Loss......... (366,586)
Dividends on
Preferred Stock.. (11,921)
----------
Net Loss
Applicable to
Common Stock..... $(378,507)
==========
Basic Loss Per
Share........... $ (5.43)
==========
Diluted Loss Per
Share........... $ (5.43)
==========
Weighted Average
Number of Common
Shares
Outstanding:
Basic........... 70,839
==========
Diluted......... 70,839
==========
</TABLE>
F-148
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
NOTES TO 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.
1. To eliminate intercompany transactions between the Company, Market
Partners, BC Equity Funding, the Boston Chicken area developers, the Local
Advertising Fund and the National Marketing Fund.
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 reverse rent expense previously recognized by the Boston Chicken area
developers due to the restructuring of the 1996 Facilities Master Lease
Program on July 15, 1998. Additionally, as a result of the restructuring
of the facility into a long term debt instrument, the assets have been
reflected in the accompanying balance sheet at fair market value which has
resulted in a corresponding adjustment to the depreciation and
amortization expense.
4. 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.
5. To reverse the provision for loan losses for the Boston Chicken area
developers whose loans are being converted. In lieu of such loan losses,
the pro forma financial statements will reflect the losses of the area
developers.
6. 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.
7. To eliminate the investment income earned from the Boston Chicken 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 (See note 2)
or, as a result of the loan conversions, consolidates their results of
operations.
8. To record interest expense on the debt facility recorded in conjunction
with the restructuring of the 1996 Facilities Master Lease Program.
9. 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.
10. To adjust the income tax benefit as a result of the consolidated loss.
11. To allocate the portion of the Boston Chicken area developers' losses
applicable to the minority interests.
12. To record the dividend on and the accretion of the Series A exchangeable
preferred stock issued in the transactions. The net loss has been
increased by $6.3 million in the calculation of basic and diluted loss per
share for the year ended December 28, 1997, as the result of the accretion
of the Series A exchangeable preferred stock to its redemption value.
13. To record the issuance, at estimated market value, of the consideration
for the acquisition of Market Partners and BC Equity Funding and adjust
acquired assets to their estimated market value. The estimated 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 BC Equity Funding 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 principal payments of the instrument.
The analysis utilized a discount rate equal to the yield on the Company's
publicly-traded debentures measured over a period of time prior to and
after the agreement in principle to acquire BC Equity Funding and Market
Partners was reached and publicly announced.
14. To eliminate intercompany transactions between the Company and BC Great
Lakes.
15. To allocate the portion of BC Great Lakes' losses applicable to the
minority interests.
F-149
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT 99.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
B.C.B.M. SOUTHWEST, L.P. (FORMERLY B.C. TEXAS, INC.)
Financial Statements:
Balance Sheets at July 12, 1998 and December 28, 1997................... F-3
Statements of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-4
Statements of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-5
Notes to Financial Statements........................................... F-6
R&A FOOD SERVICES, L.P. (FORMERLY R&A FOOD SERVICES, INC.)
Financial Statements:
Balance Sheets at July 12, 1998 and December 28, 1997................... F-7
Statements of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-8
Statements of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-9
Notes to Financial Statements........................................... F-10
FINEST FOODSERVICE, L.L.C.
Financial Statements:
Balance Sheets at July 12, 1998 and December 28, 1997................... F-11
Statements of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-12
Statements of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-13
Notes to Financial Statements........................................... F-14
P&L FOOD SERVICES, L.L.C.
Financial Statements:
Balance Sheets at July 12, 1998 and December 28, 1997................... F-15
Statements of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-16
Statements of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-17
Notes to Financial Statements........................................... F-18
BC BOSTON, L.P.
Financial Statements:
Balance Sheets at July 12, 1998 and December 28, 1997................... F-19
Statements of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-20
Statements of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-21
Notes to Financial Statements........................................... F-22
BCE WEST, L.P.
Financial Statements:
Balance Sheets at July 12, 1998 and December 28, 1997................... F-23
Statements of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-24
Statements of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-25
Notes to Financial Statements........................................... F-26
BC GOLDENGATE, L.L.C.
Financial Statements:
Balance Sheets at July 12, 1998 and December 28, 1997................... F-27
Statements of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-28
Statements of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-29
Notes to Financial Statements........................................... F-30
BC TRI-STATES, L.L.C.
Financial Statements:
Balance Sheet at July 12, 1998 and December 28, 1997.................... F-31
Statement of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-32
Statement of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-33
Notes to Financial Statements........................................... F-34
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
BC SUPERIOR, L.L.C.
Financial Statements:
Balance Sheets at July 12, 1998 and December 28, 1997................... F-35
Statements of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-36
Statements of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-37
Notes to Financial Statements........................................... F-38
BC HEARTLAND, L.L.C.
Financial Statements:
Balance Sheets at July 12, 1998 and December 28, 1997................... F-39
Statements of Operations for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-40
Statements of Cash Flows for the two quarters ended July 12, 1998 and
July 13, 1997.......................................................... F-41
Notes to Financial Statements........................................... F-42
</TABLE>
<TABLE>
<S> <C>
MARKET PARTNERS, L.L.C.
Financial Statements:
Statements of Assets and Liabilities at December 28, 1997 and July 12,
1998.................................................................. F-43
Schedule of Investments at December 28, 1997 and July 12, 1998......... F-44
Statements of Operations for the two quarters ended July 13, 1997 and
July 12, 1998......................................................... F-46
Statements of Changes in Net Assets for the two quarters ended July 13,
1997 and July 12, 1998................................................ F-47
Notes to Financial Statements.......................................... F-48
BC EQUITY FUNDING, L.L.C.
Financial Statements:
Statements of Assets and Liabilities at December 28, 1997 and July 12,
1998.................................................................. F-51
Schedule of Investments at December 28, 1997 and July 12, 1998......... F-52
Statements of Operations for the two quarters ended July 13, 1997 and
July 12, 1998......................................................... F-54
Statements of Changes in Net Assetss for the two quarters ended July
13, 1997 and July 12, 1998............................................ F-55
Notes to Financial Statements.......................................... F-56
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.
Unaudited Pro Forma Consolidated Statement of Operations for the two
quarters ended July 12, 1998.......................................... F-60
Unaudited Pro Forma Consolidated Balance Sheet as of July 12, 1998..... F-61
Notes to Unaudited Pro Forma Consolidated Financial Statements......... F-63
</TABLE>
F-2
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
BALANCE SHEETS
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
ASSETS 1998 1997
------ ----------- ------------
<S> <C> <C>
Current Assets:
Cash................................................ $ 467,655 $ 710,301
Inventories......................................... 1,300,574 1,471,343
Prepaid expenses and other current assets........... 24,508 170,053
----------- -----------
Total current assets.............................. 1,792,737 2,351,697
Property, Equipment and Other Related Assets, net..... 20,597,534 25,689,691
Other Assets.......................................... 317,477 317,477
----------- -----------
Total assets...................................... $22,707,748 $28,358,865
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 1,610,827 $ 1,885,460
Accrued expenses.................................... 3,314,770 3,655,132
----------- -----------
Total current liabilities......................... 4,925,597 5,540,592
Convertible Debt...................................... 59,806,444 54,753,847
Other Liabilities..................................... 2,564,137 2,664,555
Commitments
Partners' deficit..................................... (44,588,430) (34,600,129)
----------- -----------
Total liabilities and partners' deficit........... $22,707,748 $28,358,865
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
B.C.B.M SOUTHWEST, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
------------------------
JULY 12, JULY 13,
1998 1997
----------- -----------
<S> <C> <C>
Revenue.............................................. $34,704,041 $39,415,951
Costs and Expenses:
Store operations:
Food and paper................................... 12,618,592 15,138,075
Labor............................................ 9,562,626 10,389,790
Other controllable costs......................... 4,614,881 4,927,500
Rent, occupancy and related...................... 5,200,238 4,579,197
Contractual and discretionary marketing.......... 3,364,324 5,662,123
General and administrative........................... 4,787,114 4,473,753
Depreciation and amortization........................ 1,552,942 1,437,467
----------- -----------
Total costs and expenses....................... 41,700,717 46,607,905
----------- -----------
Loss from operations................................. (6,996,676) (7,191,954)
Other Income (Expense):
Interest expense................................... (3,008,169) (2,155,771)
Other income (expense)............................. 5,905 10,390
----------- -----------
Total other expense............................ (3,002,264) (2,145,381)
----------- -----------
Net Loss............................................. $(9,998,940) $(9,337,335)
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY 13,
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss......................................... $ (9,998,940) $ (9,337,335)
Adjustments to reconcile net loss to net cash
used in
operating activities:
Depreciation and amortization.................. 1,552,942 1,437,467
Provision for asset impairment................. 2,329,663 --
Changes in assets and liabilities:
Inventories.................................. 170,769 22,487
Prepaid expenses and other current assets.... 145,545 (648,580)
Accounts payable and accrued expenses........ (550,160) (1,914,936)
Other assets and liabilities................. (89,779) 1,039,819
------------ ------------
Net cash used in operating activities...... (6,439,960) (9,401,078)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property, equipment and other related
assets.......................................... (190,952) (8,427,821)
Sale of property, equipment and other related
assets.......................................... 1,335,669 --
------------ ------------
Net cash from (used in)investing
activities................................ 1,144,717 (8,427,821)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from equity issuance.................... -- 4,433,115
Proceeds from convertible debt................... 25,978,393 40,551,370
Repayments of convertible debt................... (20,925,796) (28,973,741)
------------ ------------
Net cash provided by financing activities.. 5,052,597 16,010,744
------------ ------------
Increase (Decrease) in Cash........................ (242,646) (1,818,155)
Cash, beginning of year............................ 710,301 1,907,155
------------ ------------
Cash, end of period................................ $ 467,655 $ 89,000
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
B.C.B.M. SOUTHWEST, L.P.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by B.C.B.M. Southwest, L.P. the
("Partnership") and are unaudited. The financial statements and notes thereto
have been prepared in accordance with the instructions under Regulation S-X
for interim financial statements and, therefore, do not necessarily include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Partnership's accounting policies and other
financial information are included in the audited financial statements.
2. ASSET IMPAIRMENT
For the two quarters ended July 12, 1998, as a result of declining store
performance, the Partnership recognized a $2.3 million asset impairment on
property, equipment and other related assets, which had a net book value of
$2.3 million. The asset impairment is classified in general and administrative
expenses in the accompanying statement of operations.
3. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12, 1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the foreseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in
such restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-6
<PAGE>
R & A FOODSERVICES, L.P.
BALANCE SHEETS
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
1998 1997
------------ ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash............................................... $ 907,252 $ 122,625
Inventories........................................ 1,780,682 2,100,741
Prepaid expenses and other current assets.......... 566,488 561,130
------------ ------------
Total current assets............................. 3,254,422 2,784,496
Property, Equipment and Other Related Assets, net.... 30,452,746 36,564,962
Other Assets......................................... 2,033,446 2,390,453
------------ ------------
Total assets..................................... $ 35,740,614 $ 41,739,911
============ ============
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 2,470,204 $ 3,835,310
Accrued expenses................................... 5,690,527 10,838,076
------------ ------------
Total current liabilities........................ 8,160,731 14,673,386
Convertible Debt..................................... 102,635,735 93,219,935
Other Liabilities.................................... 6,945,377 1,898,638
Commitments
Partners' Deficit.................................... (82,001,229) (68,052,048)
------------ ------------
Total liabilities and partners' deficit.......... $ 35,740,614 $ 41,739,911
============ ============
</TABLE>
F-7
<PAGE>
R&A FOOD SERVICES, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
----------------------------
JULY 12, JULY 13,
1998 1997
------------- -------------
<S> <C> <C>
Revenue........................................... $ 54,871,580 $ 59,191,006
Costs and Expenses:
Store operations:
Food and paper................................ 19,634,622 22,551,192
Labor......................................... 14,415,054 15,397,031
Other controllable costs...................... 8,293,410 8,581,759
Rent, occupancy and related................... 7,296,511 7,491,111
Contractual and discretionary marketing....... 4,577,775 8,093,917
General and administrative........................ 7,163,096 5,703,981
Depreciation and amortization..................... 2,320,172 2,413,060
------------- -------------
Total costs and expenses.................... 63,700,640 70,232,051
------------- -------------
Loss from operations.............................. (8,829,060) (11,041,045)
Other Income (Expense):
Interest expense................................ (5,054,344) (4,083,578)
Other income (expense).......................... 44,132 11,891
------------- -------------
Total other expense......................... (5,010,212) (4,071,687)
------------- -------------
Net Loss.......................................... $ (13,839,272) $ (15,112,732)
============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-8
<PAGE>
R & A FOODSERVICES, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY 13,
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss......................................... $(13,839,272) $(15,112,732)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 2,320,172 2,413,060
Provision for asset impairment................. 2,987,423 --
Changes in assets and liabilities:
Inventories................................... 320,059 607,122
Prepaid expenses and other current assets..... 68,965 726,117
Accounts payable and accrued expenses......... 858,130 (2,055,560)
Other assets and liabilities.................. (1,499,509) 2,254,937
------------ ------------
Net cash used in operating activities........ (8,784,032) (11,167,056)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property, equipment and other related
assets.......................................... (217,096) (3,553,598)
Proceeds from sale of assets..................... 443,702 11,885
------------ ------------
Net cash from (used in) investing activities. 226,606 (3,541,713)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from equity issuances................... -- 3,324,837
Dividends........................................ (39,416) (543,057)
Proceeds from convertible debt................... 39,637,869 45,595,187
Repayments of convertible debt................... (30,256,400) (33,650,035)
------------ ------------
Net cash from financing activities........... 9,342,053 14,726,932
------------ ------------
Increase (Decrease) in Cash........................ 784,627 18,163
Cash, beginning of year............................ 122,625 1,664,778
------------ ------------
Cash, end of period................................ $ 907,252 $ 1,682,941
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-9
<PAGE>
R&A FOODSERVICES, L.P.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by R&A Foodservices, L.P. (the
"Partnership") and are unaudited. The financial statements and notes thereto
have been prepared in accordance with the instructions under Regulation S-X
for interim financial statements and, therefore, do not necessarily include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Partnership's accounting policies and other
financial information are included in the audited financial statements.
2. ASSET IMPAIRMENT
For the two quarters ended July 12, 1998, as a result of declining store
performance, the Partnership recognized a $2.9 million asset impairment on
property, equipment and other related assets, which had a net book value of
$2.9 million. The asset impairment is classified in general and administrative
expenses in the accompanying statement of operations.
3. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12, 1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the foreseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in
such restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-10
<PAGE>
FINEST FOODSERVICE, L.L.C.
BALANCE SHEETS
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
ASSETS 1998 1997
------ ----------- ------------
<S> <C> <C>
Current Assets:
Cash............................................... $ 209,970 $ --
Inventories........................................ 1,218,501 1,512,569
Prepaid expenses and other current assets.......... 36,133 340,827
----------- -----------
Total current assets............................. 1,464,604 1,853,396
Property, Equipment and Other Related Assets, net.... 10,476,906 19,699,916
Costs in Excess of Net Assets Acquired, net.......... 10,626,660 20,009,547
Other Assets, net.................................... 318,675 899,970
----------- -----------
Total assets..................................... $22,886,845 $42,462,829
=========== ===========
<CAPTION>
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 354,663 $ 1,978,067
Accrued expenses................................... 3,872,721 9,313,599
----------- -----------
Total current liabilities........................ 4,227,384 11,291,666
Long-Term Debt....................................... 88,046,807 78,120,503
Other Liabilities.................................... 6,534,823 2,228,811
Commitments
Members' Deficit..................................... (75,922,169) (49,178,151)
----------- -----------
Total liabilities and members' deficit........... $22,886,845 $42,462,829
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-11
<PAGE>
FINEST FOODSERVICE, L.L.C.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY 13,
1998 1997
------------ ------------
<S> <C> <C>
Revenue ........................................... $ 29,180,040 $ 38,011,364
Costs and Expenses:
Store operations:
Food and paper................................. 10,922,903 15,467,548
Labor.......................................... 8,516,958 11,049,508
Other controllable costs....................... 4,616,119 5,472,666
Rent, occupancy and related.................... 7,142,440 7,199,866
Contractual and discretionary marketing........ 2,343,519 5,510,768
General and administrative......................... 15,429,316 6,602,392
Depreciation and amortization (excluding goodwill
amortization)..................................... 935,124 1,223,658
Goodwill amortization.............................. 762,551 911,924
------------ ------------
Total costs and expenses..................... 50,668,930 53,438,330
------------ ------------
Loss from operations............................... (21,488,890) (15,426,966)
Other Income (Expense):
Interest expense................................. (4,434,783) (2,788,078)
Other income (expense)........................... (207,270) (39,371)
------------ ------------
Total other expense.......................... (4,642,053) (2,827,449)
------------ ------------
Net Loss........................................... $(26,130,943) $(18,254,415)
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-12
<PAGE>
FINEST FOODSERVICE, L.L.C.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY 13,
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss......................................... $(26,130,943) $(18,254,415)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 1,697,675 2,135,582
Provision for asset impairment................. 13,920,394 49,839
Changes in assets and liabilities:
Inventories.................................. 294,068 (40,391)
Prepaid expenses and other current assets.... 191,616 643,782
Accounts payable and accrued liabilities..... (730,393) (543,423)
Other assets and liabilities................. (1,526,712) 847,557
------------ ------------
Net cash used in operating activities...... (12,284,295) (15,161,469)
------------ ------------
Cash Flows from Investing Activities:
Purchases of property, equipment and other
related assets.................................. (120,650) (5,799,468)
Proceeds from sale of property and equipment..... 2,688,611 --
------------ ------------
Net cash provided by (used in) investing
activities................................ 2,567,961 (5,799,468)
------------ ------------
Cash Flows from Financing Activities:
Issuance of preferred units...................... -- 3,324,508
Proceeds from long-term debt..................... 25,753,604 41,590,107
Repayments on long-term debt..................... (15,827,300) (24,465,191)
------------ ------------
Net cash provided by financing activities.. 9,926,304 20,449,424
------------ ------------
Net Increase in Cash............................... 209,970 (511,513)
Cash, beginning of year............................ -- 638,513
------------ ------------
Cash, end of period................................ $ 209,970 $ 127,000
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-13
<PAGE>
FINEST FOODSERVICE, L.L.C.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by Finest Foodservice, L.L.C.
(the "Company") and are unaudited. The financial statements and notes thereto
have been prepared in accordance with the instructions under Regulation S-X
for interim financial statements and, therefore, do not necessarily include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Company's accounting policies and other
financial information are included in the audited financial statements.
2. ASSET IMPAIRMENT
For the two quarters ended July 12, 1998, as a result of declining store
performance, the Company recognized a $13.9 million asset impairment on
property, equipment and other related assets and goodwill, which had a net
book value of $13.9 million. The asset impairment is classified in general and
administrative expenses in the accompanying statement of operations.
3. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12, 1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the foreseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in
such restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-14
<PAGE>
P&L FOODSERVICE, L.L.C.
BALANCE SHEETS
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER
ASSETS 1998 28, 1997
------ ----------- -----------
<S> <C> <C>
Current Assets:
Cash................................................ $ 359,802 $ 389,568
Inventories......................................... 1,003,850 1,168,315
Prepaid expenses and other current assets........... 276,512 239,953
----------- -----------
Total current assets.............................. 1,640,164 1,797,836
Property, Equipment and Other Related Assets, net..... 20,590,343 28,074,145
Costs in Excess of Net Assets Acquired, net........... 1,389,830 1,694,389
Other Assets, net..................................... 366,326 366,326
----------- -----------
Total assets...................................... $23,986,663 $31,932,696
=========== ===========
<CAPTION>
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 703,247 $ 1,322,297
Accrued expenses.................................... 2,678,916 4,514,934
----------- -----------
Total current liabilities......................... 3,382,163 5,837,231
Debt.................................................. 52,034,099 49,674,999
Other Liabilities..................................... 3,019,961 528,466
Commitments...........................................
Members' Deficit...................................... (34,449,560) (24,108,000)
----------- -----------
Total liabilities and members' deficit............ $23,986,663 $31,932,696
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-15
<PAGE>
P & L FOOD SERVICES, L.L.C.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY 13,
1998 1997
------------ ------------
<S> <C> <C>
Revenue ........................................... $ 25,967,540 $ 29,292,248
Costs and Expenses:
Store operations:
Food and paper................................. 9,288,543 11,644,276
Labor.......................................... 7,418,500 7,983,071
Other controllable costs....................... 3,957,573 4,051,346
Rent, occupancy and related.................... 3,320,780 3,050,428
Contractual and discretionary marketing........ 2,055,723 4,302,991
General and administrative......................... 6,370,347 2,217,084
Depreciation and amortization (excluding goodwill
amortization)..................................... 1,305,832 1,303,355
Goodwill amortization.............................. 64,560 69,083
------------ ------------
Total costs and expenses..................... 33,781,858 34,621,634
------------ ------------
Loss from operations............................... (7,814,318) (5,329,386)
Other Income (Expense):
Interest expense................................. (2,687,440) (2,011,702)
Other income (expense)........................... 160,199 (16,284)
------------ ------------
Total other expense.......................... (2,527,241) (2,027,986)
------------ ------------
Net Loss........................................... $(10,341,559) $ (7,357,372)
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-16
<PAGE>
P&L FOOD SERVICES, L.L.C.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
-------------------------
JULY 12, JULY 13,
1998 1997
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.......................................... $(10,341,559) $(7,357,372)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 1,370,392 1,372,438
Provision for asset impairment.................. 4,896,547 --
Changes in assets and liabilities:
Inventories................................... 164,465 (71,766)
Prepaid expenses and other current assets..... 765,314 696,441
Accounts payable and accrued expenses......... (728,891) (382,026)
Other assets and liabilities.................. (1,018,532) 1,244,171
------------ -----------
Net cash (used in) provided by operating
activities................................. (4,892,264) (4,498,114)
------------ -----------
Cash Flows from Investing Activities:
Purchase of property, equipment and other related
assets........................................... (174,785) (6,753,464)
Proceeds from sale of property, equipment and
other related assets............................. 1,197,410 895,797
------------ -----------
Net cash from (used in) investing
activities................................. 1,022,625 (5,857,667)
------------ -----------
Cash Flows from Financing Activities:
Proceeds from issuance of member units............ -- 5,541,396
Proceeds from debt................................ 18,262,771 26,616,403
Payments on debt.................................. (14,422,898) (21,154,223)
Dividends paid.................................... -- (277,069)
------------ -----------
Net cash provided by financing activities... 3,839,873 10,726,507
------------ -----------
Net (Decrease) Increase in Cash..................... (29,766) 370,726
Cash, beginning of period........................... 389,568 272,459
------------ -----------
Cash, end of period................................. $ 359,802 $ 643,185
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-17
<PAGE>
P&L FOODSERVICE, L.L.C.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by P&L Foodservice, L.L.C. (the
"Company") and are unaudited. The financial statements and notes thereto have
been prepared in accordance with the instructions under Regulation S-X for
interim financial statements and, therefore, do not necessarily include all
information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Company's accounting policies and other
financial information are included in the audited financial statements.
2. ASSET IMPAIRMENT
For the two quarters ended July 12, 1998, as a result of declining store
performance, the Company recognized a $4.9 million asset impairment on
property, equipment and other related assets and goodwill, which had a net
book value of $4.9 million. The asset impairment is classified in general and
administrative expenses in the accompanying statement of operations.
3. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12, 1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the foreseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in
such restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-18
<PAGE>
BC BOSTON, L.P.
BALANCE SHEETS
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash............................................... $ 10,933 $ --
Inventories........................................ 962,879 1,114,710
Prepaid expenses and other current assets.......... 128,889 264,052
------------ ------------
Total current assets............................. 1,102,701 1,378,762
Property, Equipment and Other Related Assets, net.... 16,619,411 20,725,955
Costs in Excess of Net Assets Acquired, net.......... 4,332,152 5,800,498
Other Assets, net.................................... 40,000 115,153
------------ ------------
Total assets..................................... $ 22,094,264 $ 28,020,368
============ ============
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 995,233 $ 973,325
Accrued expenses................................... 1,961,716 2,958,278
------------ ------------
Total current liabilities........................ 2,956,949 $3,931,603
Long-Term Debt....................................... 51,262,151 46,687,421
Other Liabilities.................................... 2,270,430 739,920
Commitments
Partners' Deficit.................................... (34,395,266) (23,338,576)
------------ ------------
Total liabilities and partners' deficit.......... $ 22,094,264 $ 28,020,368
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-19
<PAGE>
BC BOSTON, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY 13,
1998 1997
------------ ------------
<S> <C> <C>
Revenue ........................................... $ 26,864,375 $ 32,224,598
Costs and Expenses:
Store operations:
Food and paper................................. 9,767,678 12,572,364
Labor.......................................... 7,322,138 8,613,610
Other controllable costs....................... 4,419,575 4,313,875
Rent, occupancy and related.................... 3,476,406 3,053,661
Contractual and discretionary marketing........ 2,179,639 4,992,773
General and administrative......................... 6,724,344 2,199,866
Depreciation and amortization (excluding goodwill
amortization)..................................... 1,173,495 1,412,512
Goodwill amortization.............................. 237,590 259,433
------------ ------------
Total costs and expenses..................... 35,300,865 37,418,094
------------ ------------
Loss from operations............................... (8,436,490) (5,193,496)
Other Income (Expense):
Interest expense................................. (2,567,334) (2,016,575)
Other income (expense)........................... (2,362) (6,245)
------------ ------------
Total other expense.......................... (2,569,696) (2,022,820)
------------ ------------
Net Loss........................................... $(11,006,186) $ (7,216,316)
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-20
<PAGE>
BC BOSTON, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
-------------------------
JULY 12, JULY 13,
1998 1997
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.......................................... $(11,006,186) $(7,216,316)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 1,411,085 1,671,946
Provision for asset impairment.................. 4,818,581 --
Changes in assets and liabilities:
Inventories................................... 151,831 (95,438)
Prepaid expenses and other current assets..... 135,163 948,939
Accounts payable and accrued expenses......... 348,936 (2,561,650)
Other assets and liabilities.................. 172,567 1,492,631
------------ -----------
Net cash used in operating activities....... (3,968,023) (5,759,888)
------------ -----------
Cash Flows from Investing Activities:
Purchase of property, equipment and other related
assets........................................... (595,774) (651,880)
------------ -----------
Net cash used in investing activities....... (595,774) (651,880)
------------ -----------
Cash Flows from Financing Activities:
Proceeds from long-term debt...................... 19,043,631 27,650,704
Payments on long-term debt........................ (14,468,901) (20,914,271)
Dividends paid.................................... -- (186,191)
------------ -----------
Net cash from financing activities.......... 4,574,730 6,550,242
------------ -----------
Increase (Decrease) in Cash......................... 10,933 138,474
Cash, beginning of year............................. -- 755,535
------------ -----------
Cash, end of period................................. $ 10,933 $ 894,009
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-21
<PAGE>
BC BOSTON, L.P.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by BC Boston, L.P. (the
"Partnership") and are unaudited. The financial statements and notes thereto
have been prepared in accordance with the instructions under Regulation S-X
for interim financial statements and, therefore, do not necessarily include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Partnership's accounting policies and other
financial information are included in the audited financial statements.
2. ASSET IMPAIRMENT
For the two quarters ended July 12, 1998, as a result of declining store
performance, the Partnership recognized a $4.8 million asset impairment on
property, equipment and other related assets and goodwill, which had a net
book value of $4.8 million. The asset impairment is classified in general and
administrative expenses in the accompanying statement of operations.
3. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12, 1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the foreseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in
such restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-22
<PAGE>
BCE WEST, L.P.
BALANCE SHEETS
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash............................................... $ 240,101 $ 95,857
Inventories........................................ 794,926 912,061
Prepaid expenses and other current assets.......... 57,021 262,537
------------ ------------
Total current assets............................. 1,092,048 1,270,455
Property, Equipment and Other Related Assets, net.... 11,322,252 15,667,653
Costs in Excess of Net Assets Acquired, net.......... 2,151,981 2,975,629
Other Assets, net.................................... 120,000 213,300
------------ ------------
Total assets..................................... $ 14,686,281 $ 20,127,037
============ ============
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 594,241 $ 233,322
Accrued expenses................................... 2,083,436 4,036,490
------------ ------------
Total current liabilities........................ 2,677,677 4,269,812
Debt................................................. 47,006,720 43,337,487
Other Liabilities.................................... 1,919,262 763,855
Commitments
Partners' Deficit.................................... (36,917,378) (28,244,117)
------------ ------------
Total liabilities and partners' deficit.......... $ 14,686,281 $ 20,127,037
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-23
<PAGE>
BCE WEST, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
------------------------
JULY 12, JULY 13,
1998 1997
----------- -----------
<S> <C> <C>
Revenue ............................................. $20,722,098 $37,320,302
Costs and Expenses:
Store operations:
Food and paper.................................... 7,172,676 14,096,281
Labor............................................. 5,572,556 9,491,455
Other controllable costs.......................... 3,175,494 4,487,026
Rent, occupancy and related....................... 3,863,131 4,565,083
Contractual and discretionary marketing........... 1,697,519 5,955,656
General and administrative......................... 4,467,144 3,807,627
Depreciation and amortization (excluding goodwill
amortization)..................................... 954,963 1,561,800
Goodwill amortization.............................. 131,059 136,046
----------- -----------
Total costs and expenses......................... 27,034,542 44,100,974
----------- -----------
Loss from operations................................. (6,312,444) (6,780,672)
Other Income (Expense):
Interest expense................................... (2,373,161) (2,122,785)
Other income (expense)............................. 12,345 22,750
----------- -----------
Total other expense.............................. (2,360,816) (2,100,035)
----------- -----------
Net Loss............................................. $(8,673,260) $(8,880,707)
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-24
<PAGE>
BCE WEST, L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
------------------------
JULY 12, JULY 13,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss........................................... $(8,673,260) $(8,880,707)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 1,086,022 1,697,846
Provision for asset impairment................... 3,783,317 --
Changes in assets and liabilities:
Inventories.................................... 117,135 98,652
Prepaid expenses and other current assets...... 205,516 782,214
Accounts payable and accrued expenses.......... (458,103) (4,011,961)
Other assets and liabilities................... 28,744 2,295,880
----------- -----------
Net cash used in operating activities........ (3,910,629) (8,018,076)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property, equipment and other related
assets............................................ (127,380) (5,057,313)
Proceeds from sale of property and equipment....... 513,020 13,182
----------- -----------
Net cash provided by (used in) investing
activities.................................. 385,640 (5,044,131)
----------- -----------
Cash Flows from Financing Activities:
Borrowings on debt................................. 20,595,822 35,661,634
Payments on debt................................... (16,926,589) (28,922,324)
Dividends paid..................................... -- (268,450)
Proceeds from issuance of preferred partnership
units............................................. -- 5,541,394
----------- -----------
Net cash provided by financing activities.... 3,669,233 12,012,254
----------- -----------
Net Decrease in Cash................................. 144,244 (1,049,953)
Cash, beginning of year.............................. 95,857 1,242,953
----------- -----------
Cash, end of period.................................. $ 240,101 $ 193,000
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-25
<PAGE>
BCE WEST, L.P.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by BCE West, L.P. (the
"Partnership") and are unaudited. The financial statements and notes thereto
have been prepared in accordance with the instructions under Regulation S-X
for interim financial statements and, therefore, do not necessarily include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Partnership's accounting policies and other
financial information are included in the audited financial statements.
2. ASSET IMPAIRMENT
For the two quarters ended July 12, 1998, as a result of declining store
performance, the Partnership recognized a $3.8 million asset impairment on
property, equipment and other related assets and goodwill, which had a net
book value of $3.8 million. The asset impairment is classified in general and
administrative expenses in the accompanying statement of operations.
3. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12, 1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the foreseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in
such restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-26
<PAGE>
BC GOLDENGATE, L.L.C.
BALANCE SHEETS
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
ASSETS 1998 1997
------ ----------- ------------
<S> <C> <C>
Current Assets:
Cash............................................... $ 147,144 $ 171,029
Inventories........................................ 1,003,567 1,151,503
Prepaid expenses and other current assets.......... 84,647 381,984
----------- -----------
Total current assets............................. 1,235,358 1,704,516
Property, Equipment and Other Related Assets, net.... 11,773,521 24,188,945
Costs in Excess of Net Assets Acquired, net.......... 1,679,955 3,224,537
Other Assets, net.................................... 515,589 1,116,236
----------- -----------
Total assets..................................... $15,204,423 $30,234,234
=========== ===========
<CAPTION>
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 1,029,403 $ 2,220,982
Accrued expenses................................... 2,232,529 3,669,478
----------- -----------
Total current liabilities........................ 3,261,932 5,890,460
Debt................................................. 57,477,008 49,992,626
Other Liabilities.................................... 3,209,952 1,866,076
Commitments
Members' Deficit..................................... (48,744,469) (27,514,928)
----------- -----------
Total liabilities and members' deficit........... $15,204,423 $30,234,234
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-27
<PAGE>
BC GOLDENGATE, L.L.C.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY 13,
1998 1997
------------ ------------
<S> <C> <C>
Revenue ........................................... $ 24,413,477 $ 33,397,442
Costs and Expenses:
Store operations:
Food and paper................................. 8,549,905 12,895,191
Labor.......................................... 6,980,554 8,469,269
Other controllable costs....................... 4,149,571 4,583,287
Rent, occupancy and related.................... 5,560,425 5,277,250
Contractual and discretionary marketing........ 2,753,849 6,115,187
General and administrative......................... 13,098,782 3,049,709
Depreciation and amortization (excluding goodwill
amortization)..................................... 1,170,236 1,610,180
Goodwill amortization.............................. 121,639 135,358
------------ ------------
Total costs and expenses..................... 42,384,961 42,135,431
------------ ------------
Loss from operations............................... (17,971,484) (8,737,989)
Other Income (Expense):
Interest expense................................. (2,771,216) (1,718,694)
Other income (expense)........................... 113,158 37,339
------------ ------------
Total other expense.......................... (2,658,058) (1,681,355)
------------ ------------
Net Loss........................................... $(20,629,542) $(10,419,344)
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-28
<PAGE>
BC GOLDENGATE, L.L.C.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY 13,
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss......................................... $(20,629,542) $(10,419,344)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 1,291,875 1,745,538
Provision for asset impairment................. 11,025,507 --
Changes in assets and liabilities:
Inventories.................................. 147,936 40,264
Prepaid expenses and other current assets.... 297,337 1,702,265
Accounts payable and accrued expenses........ (895,181) (1,971,512)
Other assets and liabilities................. (221,529) 435,432
------------ ------------
Net cash used in operating activities...... (8,983,597) (8,467,357)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property, equipment and other related
assets.......................................... (208,068) (5,682,741)
Proceeds from sale of equipment.................. 1,683,398 49,129
------------ ------------
Net cash from (used in) investing
activities................................ 1,475,330 (5,633,612)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of members' units......... -- 4,433,115
Proceeds from debt............................... 21,544,675 37,725,313
Payment on debt.................................. (14,060,293) (28,060,861)
------------ ------------
Net cash provided by financing activities.. 7,484,382 14,097,567
------------ ------------
Increase (Decrease) in Cash........................ (23,885) (3,402)
Cash, beginning of period.......................... 171,029 1,029,504
------------ ------------
Cash, end of period................................ $ 147,144 $ 1,026,102
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-29
<PAGE>
BC GOLDENGATE, L.L.C.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by BC GoldenGate, L.L.C. (the
"Company") and are unaudited. The financial statements and notes thereto have
been prepared in accordance with the instructions under Regulation S-X for
interim financial statements and, therefore, do not necessarily include all
information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Company's accounting policies and other
financial information are included in the audited financial statements.
2. ASSET IMPAIRMENT
For the two quarters ended July 12, 1998, as a result of declining store
performance, the Company recognized a $11.0 million asset impairment on
property, equipment and other related assets and goodwill, which had a net
book value of $11.0 million. The asset impairment is classified in general and
administrative expenses in the accompanying statement of operations.
3. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12, 1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the foreseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in
such restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-30
<PAGE>
BC TRI-STATES, L.L.C.
BALANCE SHEET
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash................................................ $ 2,323,592 $ 7,908
Inventories......................................... 269,174 344,660
Prepaid expenses and other current assets........... 3,021,863 116,319
----------- -----------
Total current assets.............................. 5,614,629 468,887
Property, Equipment and Other Related Assets, net..... 11,024,280 14,454,557
Costs in Excess of Net Assets Acquired, net........... 19,297,502 27,541,127
Other Assets, net..................................... 676,971 676,971
----------- -----------
Total assets...................................... $36,613,382 $43,141,542
=========== ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
-----------------------------------------
Current liabilities:
Accounts payable.................................... $ 239,650 $ 1,123,617
Accrued expenses.................................... 6,546,410 1,690,200
----------- -----------
Total current liabilities......................... 6,786,060 2,813,817
Debt.................................................. 39,169,716 38,011,758
Other Liabilities..................................... 4,138,673 --
Commitments
Members' Equity (Deficit)............................. (13,481,067) 2,315,967
----------- -----------
Total liabilities and members' equity............. $36,613,382 $43,141,542
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-31
<PAGE>
BC TRI-STATES, L.L.C.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
-------------------------
JULY 12, JULY 13,
1998 1997
------------ -----------
<S> <C> <C>
Revenue ............................................ $ 9,145,922 $ 3,551,734
Costs and Expenses:
Store operations:
Food and paper.................................. 3,282,105 1,306,367
Labor........................................... 2,514,659 968,948
Other controllable costs........................ 1,511,479 508,051
Rent, occupancy and related..................... 1,075,393 342,383
Contractual and discretionary marketing......... 710,911 296,880
General and administrative.......................... 11,806,282 1,093,185
Depreciation and amortization (excluding goodwill
amortization)...................................... 901,470 229,771
Goodwill amortization............................... 913,973 636,547
------------ -----------
Total costs and expenses...................... 22,716,272 5,382,132
------------ -----------
Loss from operations................................ (13,570,350) (1,830,398)
Other Income (Expense):
Interest expense.................................. (2,119,440) (712,060)
Other income (expense)............................ (107,243) 1,659
------------ -----------
Total other expense........................... (2,226,683) (710,401)
------------ -----------
Net Loss............................................ $(15,797,033) $(2,540,799)
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-32
<PAGE>
BC TRI-STATES, L.L.C.
STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
-------------------------
JULY 12, JULY 13,
1998 1997
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss........................................... $(15,797,033) $(2,540,799)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 1,815,444 866,318
Provision for asset impairment ................... 10,025,543 --
Changes in assets and liabilities:
Inventories...................................... 75,486 (126,938)
Prepaid expenses and other current assets........ (2,905,544) (168,997)
Accounts payable and accrued expenses............ 4,616,393 642,509
Other assets and liabilities..................... 593,029 52,335
------------ -----------
Net cash used in operating activities........... (1,576,682) (1,275,572)
------------ -----------
Cash Flows from Investing Activities:
Purchase of property, equipment and other related
assets............................................ (265,591) (6,865,106)
------------ -----------
Net cash used in investing activities........... (265,591) (6,865,106)
------------ -----------
Cash Flows from Financing Activities:
Proceeds from issuance of member units............. -- 5,541,395
Proceeds from debt................................. 14,450,957 13,055,576
Payments on debt................................... (10,293,000) (7,337,126)
------------ -----------
Net cash provided by financing activities....... 4,157,957 11,259,845
------------ -----------
Net increase (decrease) in cash..................... 2,315,684 3,119,167
Cash, beginning of period........................... 7,908 --
------------ -----------
Cash, end of period................................. $ 2,323,592 $ 3,119,167
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-33
<PAGE>
BC TRI-STATES, L.L.C.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by BC Tri-States, L.L.C. (the
"Company") and are unaudited. The financial statements and notes thereto have
been prepared in accordance with the instructions under Regulation S-X for
interim financial statements and, therefore, do not necessarily include all
information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Company's accounting policies and other
financial information are included in the audited financial statements.
2. ASSET IMPAIRMENT
For the two quarters ended July 12, 1998, as a result of declining store
performance, the Company recognized a $10.0 million asset impairment on
property, equipment and other related assets and goodwill, which had a net
book value of $10.0 million. The asset impairment is classified in general and
administrative expenses in the accompanying statement of operations.
3. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12,1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the forseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in its
restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-34
<PAGE>
BC SUPERIOR, L.L.C.
BALANCE SHEETS
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash................................................. $ 1,639,224 $ --
Inventories.......................................... 746,306 854,506
Prepaid expenses and other current assets............ -- 35,863
----------- -----------
Total current assets............................... 2,385,530 890,369
Property, Equipment and Other Related Assets, net...... 7,174,081 14,351,713
Costs in Excess of Net Assets Acquired, net............ 6,588,640 20,089,370
Other Assets........................................... 340,000 340,000
----------- -----------
Total assets....................................... $16,488,251 $35,671,452
=========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
Current Liabilities:
Accounts payable.................................... $ 305,357 $ 1,205,004
Accrued expenses.................................... 4,134,914 15,629,784
----------- -----------
Total current liabilities......................... 4,440,271 16,834,788
Debt.................................................. 56,495,864 46,967,714
Other Liabilities..................................... 11,889,870 904,569
Commitments
Members' Deficit...................................... (56,337,754) (29,035,619)
----------- -----------
Total liabilities and members' equity (deficit)... $16,488,251 $35,671,452
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-35
<PAGE>
BC SUPERIOR, L.L.C.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY13,
1998 1997
------------ ------------
<S> <C> <C>
Revenue ........................................... $ 14,380,867 $ 22,900,067
Costs and Expenses:
Store operations:
Food and paper.................................. 5,451,095 9,012,684
Labor........................................... 4,898,237 6,973,493
Other controllable costs........................ 2,683,355 3,543,840
Rent, occupancy and related..................... 3,470,869 3,713,290
Contractual and discretionary marketing......... 1,003,234 3,635,577
General and administrative....................... 19,912,931 4,489,200
Depreciation and amortization (excluding goodwill
amortization)................................... 737,102 1,111,100
Goodwill amortization............................ 658,837 963,039
------------ ------------
Total costs and expenses....................... 38,815,660 33,442,223
------------ ------------
Loss from operations............................... (24,434,793) (10,542,156)
Other Income (Expense):
Interest expense................................. (2,872,146) (1,840,629)
Other income (expense)........................... 4,846 31,786
------------ ------------
Total other expense............................ (2,867,300) (1,808,843)
------------ ------------
Net Loss........................................... $(27,302,093) $(12,350,999)
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-36
<PAGE>
BC SUPERIOR, L.L.C.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
--------------------------
JULY 12, JULY 13,
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.......................................... $(27,302,093) $(12,350,999)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 1,395,939 2,074,139
Provision for asset impairment................... 18,538,390 --
Changes in assets and liabilities:
Inventories..................................... 108,200 (227,273)
Prepaid expenses and other current assets....... 320,423 1,047,649
Accounts payable and accrued expenses........... 1,069,473 (1,376,464)
Other assets and liabilities.................... (2,807,122) 744,098
------------ ------------
Net cash used in operating activities.......... (8,676,790) (10,088,850)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property, equipment and other related
assets........................................... (95,948) (6,945,058)
Proceeds from sale of assets...................... 501,874 2,444
------------ ------------
Net cash provided by (used in) investing
activities.................................... 405,926 (6,942,614)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of preferred units......... -- 2,216,562
Proceeds from debt................................ 23,629,250 30,997,745
Payments on debt.................................. (13,719,162) (15,495,204)
------------ ------------
Net cash provided by financing activities...... 9,910,088 17,719,103
------------ ------------
Increase in Cash................................... 1,639,224 687,639
Cash, beginning of period.......................... -- 336,713
------------ ------------
Cash, end of period................................ $ 1,639,224 $ 1,024,352
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-37
<PAGE>
BC SUPERIOR, L.L.C.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by BC Superior, L.L.C. (the
"Company") and are unaudited. The financial statements and notes thereto have
been prepared in accordance with the instructions under Regulation S-X for
interim financial statements and, therefore, do not necessarily include all
information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Company's accounting policies and other
financial information are included in the audited financial statements.
2. ASSET IMPAIRMENT
For the two quarters ended July 12, 1998, as a result of declining store
performance, the Company recognized a $18.5 million asset impairment on
property, equipment and other related assets and goodwill, which had a net
book value of $18.5 million. The asset impairment is classified in general and
administrative expenses in the accompanying statement of operations.
3. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12,1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the forseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in its
restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-38
<PAGE>
BC HEARTLAND, L.L.C.
BALANCE SHEETS
AS OF JULY 12, 1998 AND DECEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 12, DECEMBER 28,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash................................................. $ 126,514 $ 92,120
Inventories.......................................... 308,035 367,736
Prepaid expenses and other current assets............ 13,392 11,203
---------- ----------
Total current assets............................... 447,941 471,059
Property, Equipment and Other Related Assets, net...... 6,312,372 8,046,521
Other Assets, net...................................... 270,000 275,000
---------- ----------
Total assets....................................... $7,030,313 $8,792,580
========== ==========
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
Current liabilities:
Accounts payable..................................... $ 356,383 $ 222,451
Accrued expenses..................................... 845,042 994,655
---------- ----------
Total current liabilities.......................... 1,201,425 1,217,106
Debt................................................... 7,387,400 7,623,160
Other Liabilities...................................... 368,086 294,696
Commitments
Members' Deficit....................................... (1,926,598) (342,382)
---------- ----------
Total liabilities and members' deficit............. $7,030,313 $8,792,580
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-39
<PAGE>
BC HEARTLAND, L.L.C.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
------------------------
JULY 12, JULY 13,
1998 1997
----------- -----------
<S> <C> <C>
Revenue ............................................. $ 8,675,677 $ 7,529,548
Costs and Expenses:
Store operations:
Food and paper................................... 3,134,938 3,059,259
Labor............................................ 2,427,499 1,985,667
Other controllable costs......................... 1,220,398 981,671
Rent, occupancy and related...................... 1,353,547 1,075,680
Contractual and discretionary marketing.......... 672,618 763,924
General and administrative........................... 554,092 1,083,953
Depreciation and amortization (excluding goodwill am-
ortization)......................................... 506,979 131,126
----------- -----------
Total costs and expenses....................... 9,870,071 9,081,280
----------- -----------
Loss from operations................................. (1,194,394) (1,551,732)
Other Income (Expense):
Interest expense................................. (393,534) (111,042)
Other income (expense)........................... 3,712 456,871
----------- -----------
Total other expense............................ (389,822) 345,829
----------- -----------
Net Loss............................................. $(1,584,216) $(1,205,903)
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-40
<PAGE>
BC HEARTLAND, L.L.C.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
------------------------
JULY 12, JULY 13,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................ $(1,584,216) $(1,205,903)
Adjustments to reconcile net loss to net cash from
(used in) operating activities:
Depreciation and amortization...................... 506,980 131,127
Changes in assets and liabilities:
Inventories....................................... 59,701 (11,750)
Prepaid expenses and other current assets......... (2,189) (95,803)
Accounts payable and accrued expenses............. 70,764 7,431
Other assets and liabilities...................... (6,645) 164,559
----------- -----------
Net cash provided by (used in) operating
activities...................................... (955,605) (1,010,339)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property, equipment and other related
assets............................................. (41,619) (3,680,776)
Proceeds from the sale of assets.................... 1,267,378 16,242
----------- -----------
Net cash from (used in) investing activities..... 1,225,759 (3,664,534)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of member units.............. -- 3,553,433
Dividends paid...................................... -- (76,000)
Proceeds from debt.................................. 6,658,372 7,937,829
Payments on debt.................................... (6,894,132) (6,838,761)
----------- -----------
Net cash provided by (used in) financing
activities...................................... (235,760) 4,576,501
----------- -----------
Increase (Decrease) in Cash.......................... 34,394 (98,372)
Cash, beginning of period............................ 92,120 383,612
----------- -----------
Cash, end of period.................................. $ 126,514 $ 285,240
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-41
<PAGE>
BC HEARTLAND, L.L.C.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements have been prepared by BC Heartland, L.L.C. (the
"Company") and are unaudited. The financial statements and notes thereto have
been prepared in accordance with the instructions under Regulation S-X for
interim financial statements and, therefore, do not necessarily include all
information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of July 12, 1998 and for all
periods presented have been made. The statements are subject to audit
adjustment. A description of the Partnership's accounting policies and other
financial information are included in the audited financial statements.
2. GOING CONCERN
The Partnership has experienced significant losses since its inception,
which has resulted in a capital deficiency as of July 12, 1998. Such losses
have been funded primarily by capital contributions and cash advances from
Boston Chicken, Inc. ("BCI") pursuant to a secured loan agreement.
Furthermore, the Partnership anticipates that it will continue to generate
cash flow deficits for the foreseeable future.
On July 15, 1998, BCI converted its loan in the Partnership into a majority
equity interest. In order to continue its operations, the Partnership will
require additional cash advances, which it expects to obtain through a loan
from BCI. BCI is currently attempting to restructure its outstanding publicly
traded convertible subordinated debt and to raise additional debt and/or
equity financing. There can be no assurance that BCI will be successful in
such restructuring efforts. Should BCI be unable to refinance its senior debt,
restructure its outstanding publicly traded convertible subordinated debt and
raise additional debt and/or equity, it may be unable to fund the
Partnership's cash flow deficits. As a result, the Partnership may be forced
to seek protection under applicable bankruptcy law. Consequently, there is
substantial doubt about the Partnership's ability to continue as a going
concern and to satisfy its obligations as they become due.
F-42
<PAGE>
MARKET PARTNERS, L.L.C.
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER JULY 12,
28, 1997 1998
----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 494,200 $ 508,462
Interest receivable.................................. 2,841 934
----------- -----------
Total current assets............................... 497,041 509,396
Investments, at fair value (cost of $67,858,190 in
1997 and $67,876,812 in 1998)....................... 57,928,211 15,575,408
Organization costs, net of accumulated amortization
of $89,199 in 1997 and $112,252 in 1998............. 285,079 244,736
----------- -----------
Total assets....................................... $58,710,331 $16,329,540
=========== ===========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Accounts payable....................................... $ -- $ --
----------- -----------
Total liabilities.................................. -- --
----------- -----------
Net assets......................................... $58,710,331 $16,329,540
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-43
<PAGE>
MARKET PARTNERS, L.L.C.
SCHEDULE OF INVESTMENTS
AS OF DECEMBER 28, 1997
<TABLE>
<CAPTION>
SHARES ISSUER COST FAIR VALUE
------ ------ ----------- -----------
(NOTE 2)
<C> <S> <C> <C>
JUNIOR PREFERRED INVESTMENTS:
16,624,183 R&A Food Services, L.P................ $14,999,999 *
4,433,115 BC Boston, L.P........................ 4,000,001 *
11,082,788 BCE West, L.P......................... 9,999,999 *
5,178,433 BC Heartland, L.L.C................... 4,672,504 *
11,082,788 P&L Foods Services, L.L.C............. 9,999,999 *
6,649,673 BC Northwest, L.P..................... 5,999,996 *
4,433,115 BC GoldenGate, L.L.C.................. 4,000,001 *
3,324,837 Finest Foodservice, L.L.C............. 3,000,004 *
2,216,558 BC Superior, L.L.C.................... 1,999,996 *
BCBM Southwest, L.P. (formerly BC
4,433,115 Texas, Inc.).......................... 4,010,669 *
5,541,394 BC Tri-States, L.L.C.................. 5,013,298 *
----------- -----------
Total Junior Preferred Investments.... 67,696,466 $57,928,211
WARRANTS TO PURCHASE COMMON UNITS:
BC Great Lakes, L.L.C................. 41,378 --
Finest Foodservice, L.L.C............. 10,610 --
R&A Food Services, L.P................ 94 --
BC Northwest, L.P..................... 8,914 --
Platinum Rotisserie, L.L.C............ 15,304 --
P&L Food Services, L.L.C.............. 7,044 --
BC Boston, L.P........................ 1,883 --
BCE West, L.P......................... 5,903 --
BC Superior, L.L.C.................... 3,465 --
BC GoldenGate, L.L.C.................. 67,129 --
----------- -----------
Total Warrants to Purchase Common
Units................................. 161,724 --
----------- -----------
Total Investments..................... $67,858,190 $57,928,211
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
schedule.
F-44
<PAGE>
MARKET PARTNERS, L.L.C.
SCHEDULE OF INVESTMENTS
AS OF JULY 12, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES ISSUER COST FAIR VALUE
------ ------ ----------- -----------
(NOTE 2)
<C> <S> <C> <C>
JUNIOR PREFERRED INVESTMENTS:
16,624,183 R&A Food Services, L.P................ $14,999,999 *
4,433,115 BC Boston, L.P........................ 4,000,001 *
11,082,788 BCE West, L.P......................... 9,999,999 *
5,178,433 BC Heartland, L.L.C................... 4,672,504 *
11,082,788 P&L Foods Services, L.L.C............. 9,999,999 *
6,649,673 BC Northwest, L.P..................... 5,999,996 *
4,433,115 BC GoldenGate, L.L.C.................. 4,000,001 *
3,324,837 Finest Foodservice, L.L.C............. 3,000,004 *
2,216,558 BC Superior, L.L.C.................... 1,999,996 *
BCBM Southwest, L.P. (formerly BC
4,433,115 Texas, Inc.).......................... 4,010,669 *
5,541,394 BC Tri-States, L.L.C.................. 5,013,298 *
----------- -----------
Total Junior Preferred Investments.... 67,696,466 $15,575,408
WARRANTS TO PURCHASE COMMON UNITS:
Finest Foodservice, L.L.C............. 10,610 --
R&A Food Services, L.P................ 94 --
BC Northwest, L.P..................... 8,914 --
Platinum Rotisserie, L.L.C............ 15,304 --
P&L Food Services, L.L.C.............. 7,044 --
BC Boston, L.P........................ 1,883 --
BCE West, L.P......................... 5,903 --
BC Superior, L.L.C.................... 3,465 --
BC GoldenGate, L.L.C.................. 67,129 --
----------- -----------
Total Warrants to Purchase Common
Units................................. 120,346 --
----------- -----------
Total Investments..................... $67,816,812 $15,575,408
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
schedule.
F-45
<PAGE>
MARKET PARTNERS, L.L.C.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
------------------------
JULY 13, JULY 12,
1997 1998
----------- ------------
<S> <C> <C>
Investment Income:
Dividend income.................................... $ 9,803,589 $ --
Interest income.................................... 84,251 17,434
----------- ------------
Total income..................................... 9,887,840 17,434
Expenses:
General and administrative......................... 105,923 45,422
----------- ------------
Investment income (loss), net........................ 9,781,917 (27,988)
Realized and Unrealized Gain (Loss) on Investments:
Realized gain on sale of investments............... 2,365,610 --
Unrealized appreciation (depreciation) on
investments....................................... -- (42,352,803)
----------- ------------
Net gain (loss) on investments................... 2,365,610 (42,352,803)
----------- ------------
Net Income (Loss).................................... $12,147,527 $(42,380,791)
=========== ============
Basic and Diluted Earnings (Loss) Per Unit........... $ 607,376 $ (1,384,993)
=========== ============
Weighted Average Number of Membership Units
Outstanding......................................... 20 30.6
=========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-46
<PAGE>
MARKET PARTNERS, L.L.C.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
-------------------------
JULY 13, JULY 12,
1997 1998
----------- ------------
<S> <C> <C>
Increase (decrease) in net assets from operations:
Investment income (loss), net..................... $ 9,781,917 $ (27,988)
Net realized gain on investments.................. 2,365,610 --
Unrealized appreciation (depreciation) on
investments...................................... -- (42,352,803)
----------- ------------
Net increase (decrease) in net assets from
operations..................................... 12,147,527 (42,380,791)
Distributions to members.......................... (11,770,460) --
Member contributions.............................. 38,249,985 --
----------- ------------
Total increase (decrease)....................... 38,627,052 (42,380,791)
Net assets, beginning of period................... 39,346,484 58,710,331
----------- ------------
Net assets, end of period......................... $77,973,536 $ 16,329,540
=========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-47
<PAGE>
MARKET PARTNERS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Market Partners, L.L.C. (the "Company"), a Delaware limited liability
company, was formed on July 18, 1996, primarily for the purpose of investing
in certain financed area developers ("FADs") of Boston Chicken, Inc. ("BCI").
BCI FADs operate Boston Market franchise stores that specialize in fresh,
convenient meals featuring home-style entrees, sandwiches, vegetables, salads
and other side dishes in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been prepared by the Company and are unaudited
except for the balance sheet at December 28, 1997 and notes related thereto.
The financial statements and notes thereto have been prepared in accordance
with the instructions under Regulation S-X for interim financial statements
and, therefore, do not necessarily include all information and footnotes
required by generally accepted accounting principles. In the opinion of the
Company, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's financial position, results of
operations and changes in net assets as of July 12, 1998 and for all periods
presented have been made. The statements are subject to year-end audit
adjustment. A description of the Company's accounting policies and other
financial information is included in the audited financial statements for the
year ended December 28, 1997. The results of operations for the two quarters
ended July 12, 1998 are not necessarily indicative of the results expected for
the full year.
Investments
All investments held by the Company are in privately held businesses. The
investments are stated at estimated fair value. The fair value of the
preferred investments as of December 28, 1997 and July 12, 1998 was determined
in aggregate based upon the consideration to be received in the proposed
merger of the Company with BCI (See Note 5). The estimated market value of the
common stock at December 28, 1997 was determined based upon the market value
of BCI's common stock measured over a period of time prior to and after the
agreement in principle to acquire the Company was reached and publicly
announced. The estimated market value of the series A exchangeable preferred
stock at December 28, 1997 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 BCI's publicly-traded
debentures measured over a period of time prior to and after the agreement in
principle to acquire the Company was reached and publicly announced. The
estimated market value of BCI's common stock and the Series A exchangeable
preferred stock at July 12, 1998 used the same measurement assumptions using
the market value of BCI's common stock and publicly-traded debentures as of
July 12, 1998. The fair value of the warrants to purchase common units was
computed using the Black-Scholes option pricing model.
F-48
<PAGE>
MARKET PARTNERS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS
Dividends accrue on the preferred investments at the rate of 8% per annum on
the outstanding face amount of the preferred investments, payable semi-
annually in cash. The Company was paid only one of the semi-annual dividends
in 1997 and did not accrue the second dividend payment. The Company did not
accrue the dividend payment which was not paid during the first quarter of
1998. Unless all dividends on the preferred investments have been paid in
full, no other dividends can be declared or paid on the FAD's common equity
securities. In the event the FAD has not redeemed the preferred investments
prior to the expiration date of BCI's conversion and/or option rights under
the applicable FAD secured loan agreements ("Conversion Right") as of the date
of the initial investment in the preferred investments of the FAD (without
regard to any subsequent amendment thereof by the FAD and BCI), the dividends
rate will increase by 2% immediately, and by an additional 2% every six months
thereafter, to a maximum dividend rate of 20%.
In the event BCI exercises its Conversion Right, otherwise acquires a
controlling interest in such FAD, or acquires a certain percentage of Boston
Market stores owned by such FAD (each, a "Controlling Interest Acquisition"),
the Company has the right to require the FAD to repurchase the preferred
investment at its liquidation preference, plus a redemption premium equal to
4% of the liquidation preference, plus any accrued but unpaid dividends to the
date of redemption. The liquidation preference is equal to the face amount of
the preferred investment. Generally, the investments were purchased at a
discount equal to the cost of the warrants to purchase common units in the
FAD.
The preferred investments are redeemable at any time by the issuing FAD at
its liquidation preference, plus a redemption premium equal to 4% of the
liquidation preference, plus any accrued but unpaid dividends to the date of
redemption.
The preferred investments are junior to any BC Equity Funding, L.L.C.
preferred equity and any other existing preferred equity of a FAD with respect
to distribution rights and rights upon dissolution. In the event of
liquidation, the preferred investments have a liquidation preference over
common equity equal to their face amount.
The Company has purchased warrants from certain FADs entitling the Company
to purchase 7% of each FAD's common equity on a fully diluted basis,
exercisable only in the event of a Controlling Interest Acquisition of the
FAD. The exercise price of each warrant is equal to the weighted average
conversion/option exercise price per unit on the maximum amount of the
convertible loan commitment under such FAD's secured loan agreement with BCI
as of the date such FAD warrant was issued. The warrant may be exercised
within 10 business days after a Controlling Interest Acquisition of a FAD,
subject to BCI's Call Right described below. Each FAD warrant expires at the
same time as BCI's Conversion Right for such FAD expires, provided that all
FAD warrants terminate as provided below. BCI has the right to purchase the
FAD warrant at any time within two business days after the Company has
indicated its intention to exercise the FAD warrant in a particular FAD (the
"Call Right"), at a purchase price based on the FAD Value. The FAD Value is
equal to the product of (i) the FAD's earnings before interest, taxes,
depreciation and amortization ("EBITDA") for the preceding thirteen accounting
periods, and (ii) the greater of (A) eight, or (B) 50% of BCI's EBITDA
multiple. The product of the foregoing calculation is adjusted by (y)
subtracting the aggregate exercise price of the FAD warrant and any
indebtedness of the FAD (excluding the convertible loan to BCI), and (z)
adding any cash of the FAD. The FAD Value is payable in cash, or at BCI's
option, in registered shares of BCI.
F-49
<PAGE>
MARKET PARTNERS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY FINANCIAL INFORMATION
The following tables set forth certain combined financial information as of
the dates indicated provided to the Company by the Boston Market financed area
developers in which the Company holds equity investment (in thousands).
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
<S> <C> <C>
Balance sheet data:
Total gross assets............................. $588,029 $436,400
Total debt:
To Boston Chicken, Inc....................... 490,078 612,512
To third parties (including capital lease
obligations)................................ 16,040 10,167
Total other liabilities (including trade
payables)..................................... 86,303 97,478
Total stockholder/partner/member deficit....... (52,798) (347,180)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
<S> <C> <C>
Statement of operations data:
Gross revenue................................... $721,945 $694,239
Income (loss) from continuing operations........ (130,764) (292,565)
</TABLE>
5. MERGER
On July 15th, 1998, the Company closed an agreement with BCI that called for
BCI to acquire the Company through a merger of the Company into a wholly-owned
subsidiary of BCI in consideration for $66.6 million aggregate liquidation
preference of 10% Series A Exchangeable Preferred Stock of BCI (the "Preferred
Stock"), 1,946,000 shares of common stock of BCI and $5.6 million in cash, to
be allocated among the members. The 10% quarterly dividend on the Preferred
Stock is payable, at BCI'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 BCI 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, which is equal to the face amount
of the security.
F-50
<PAGE>
BC EQUITY FUNDING, L.L.C.
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 28, JULY 12,
ASSETS 1997 1998
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 230,140 $ 236,947
Interest receivable................................. 969 423
----------- -----------
Total current assets.............................. 231,109 237,370
Investments, at fair value (cost of $72,096,820 in
1997 and in 1998).................................... 50,841,054 13,234,828
Organization costs, net of accumulated amortization of
$38,094 in 1997 and $43,301 in 1998.................. 42,874 33,762
----------- -----------
Total assets...................................... $51,115,037 $13,505,960
=========== ===========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Accounts payable...................................... $ -- $ --
Distributions payable................................. -- --
----------- -----------
Total liabilities................................. -- --
----------- -----------
Net assets........................................ $51,115,037 $13,505,960
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-51
<PAGE>
BC EQUITY FUNDING, L.L.C.
SCHEDULE OF INVESTMENTS
AS OF DECEMBER 28, 1997
<TABLE>
<CAPTION>
SHARES ISSUER (NOTE 4) COST FAIR VALUE
---------- --------------- ----------- -----------
(NOTE 2)
<C> <S> <C> <C>
PREFERRED INVESTMENTS, INCLUDING ACCRUED DIVIDENDS:
10,000 W.M.J. Texas, Inc........................ $11,636,255 *
10,000 R&A Food Services, Inc................... 13,083,909 *
10,000,000 Finest Holdings, Inc..................... 11,053,313 *
9,200,000 BC GoldenGate Holdings, Inc.............. 10,026,927 *
5,000,000 BC Boston Holdings, Inc.................. 6,339,026 *
3,500,000 BCE West Holdings, Inc................... 4,315,323 *
4,000,000 P&L Foods Holdings, Inc.................. 4,935,683 *
2,500,000 EFM Holdings, Inc. (a)................... 2,954,973 *
2,500,000 BC Northwest Holdings, Inc............... 3,049,271 *
----------- -----------
Total Preferred Investments................... 67,394,680 $50,841,054
WARRANTS TO PURCHASE COMMON STOCK OR UNITS:
BCBM Southwest, L.P. (formerly BC Texas,
158,000 Inc.)................................... 1,434,640 --
4,750,000 Finest Foodservice, L.L.C................ 1,805,000 --
3,750,000 BC GoldenGate, L.L.C..................... 1,462,500 --
----------- -----------
Total Warrants to Purchase Common Stock or
Units........................................ 4,702,140 --
----------- -----------
Total Investments............................. $72,096,820 $50,841,054
=========== ===========
</TABLE>
- --------
(a) Represents investment in BC Superior, L.L.C.
The accompanying notes to financial statements are an integral part of this
schedule.
F-52
<PAGE>
BC EQUITY FUNDING, L.L.C.
SCHEDULE OF INVESTMENTS
AS OF JULY 12, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES ISSUER (NOTE 4) COST FAIR VALUE
---------- --------------- ----------- -----------
(NOTE 2)
<C> <S> <C> <C>
PREFERRED INVESTMENTS, INCLUDING ACCRUED DIVIDENDS:
10,000 W.M.J. Texas, Inc........................ $11,636,255 *
10,000 R&A Food Services, Inc................... 13,083,909 *
10,000,000 Finest Holdings, Inc..................... 11,053,313 *
9,200,000 BC GoldenGate Holdings, Inc.............. 10,026,927 *
5,000,000 BC Boston Holdings, Inc.................. 6,339,026 *
3,500,000 BCE West Holdings, Inc................... 4,315,323 *
4,000,000 P&L Foods Holdings, Inc.................. 4,935,683 *
2,500,000 EFM Holdings, Inc. (a)................... 2,954,973 *
2,500,000 BC Northwest Holdings, Inc............... 3,049,271 *
----------- -----------
Total Preferred Investments................... 67,394,680 $13,234,828
WARRANTS TO PURCHASE COMMON STOCK OR UNITS:
BCBM Southwest, L.P. (formerly BC Texas,
158,000 Inc.)................................... 1,434,640 --
4,750,000 Finest Foodservice, L.L.C................ 1,805,000 --
3,750,000 BC GoldenGate, L.L.C..................... 1,462,500 --
----------- -----------
Total Warrants to Purchase Common Stock or
Units........................................ 4,702,140 --
----------- -----------
Total Investments............................. $72,096,820 $13,234,828
=========== ===========
</TABLE>
- --------
(a) Represents investment in BC Superior, L.L.C.
The accompanying notes to financial statements are an integral part of this
schedule.
F-53
<PAGE>
BC EQUITY FUNDING, L.L.C.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
-----------------------
JULY 13, JULY 12,
1997 1998
---------- ------------
<S> <C> <C>
Investment Income:
Dividend income..................................... $3,562,622 $ --
Interest income..................................... 8,444 6,760
---------- ------------
Total income.......................................... 3,571,066 6,760
Expenses:
General and administrative.......................... 24,300 9,611
---------- ------------
Investment income (loss), net......................... 3,546,766 (2,851)
Unrealized Gain (Loss) on Investments:
Unrealized appreciation (depreciation) on
investments........................................ -- (37,606,226)
---------- ------------
Net gain (loss) on investments.................... -- (37,606,226)
---------- ------------
Net Income (Loss)..................................... $3,546,766 $(37,609,077)
========== ============
Basic and Diluted Earnings (Loss) per Unit............ $ 59,112 $ (626,818)
========== ============
Weighted Average Number of Membership Units
Outstanding.......................................... 60 60
========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-54
<PAGE>
BC EQUITY FUNDING, L.L.C.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
------------------------
JULY 13, JULY 12,
1997 1998
----------- ------------
<S> <C> <C>
Increase (decrease) in net assets from operations:
Investment income (loss), net...................... $ 3,546,766 $ (2,851)
Unrealized appreciation (depreciation) on
investments....................................... -- (37,606,226)
----------- ------------
Net increase in net assets from operations....... 3,546,766 (37,609,077)
----------- ------------
Total increase (decrease)........................ 3,546,766 (37,609,077)
Net assets, beginning of period.................... 76,617,695 51,115,037
----------- ------------
Net assets, end of period.......................... $80,164,461 $ 13,505,960
=========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-55
<PAGE>
BC EQUITY FUNDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
BC Equity Funding, L.L.C. (the "Company"), a Delaware limited liability
company, was formed on February 15, 1995 for the purpose of investing in
cumulative preferred stock or the partnership or limited liability company
equivalent thereof in certain financed area developers ("FADs") of Boston
Chicken, Inc. ("BCI") or investing in entities which invest in BCI FADs. BCI
FADs operate Boston Market franchise stores that specialize in fresh,
convenient meals featuring home-style entrees, sandwiches, vegetables, salads
and other side dishes in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been prepared by the Company and are unaudited
except for the balance sheet at December 28, 1997 and notes related thereto.
The financial statements and notes thereto have been prepared in accordance
with the instructions under Regulation S-X for interim financial statements
and, therefore, do not necessarily include all information and footnotes
required by generally accepted accounting principles. In the opinion of the
Company, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's financial position, results of
operations and changes in net assets as of July 12, 1998 and for all periods
presented have been made. The statements are subject to year-end audit
adjustment. A description of the Company's accounting policies and other
financial information is included in the audited financial statements for the
year ended December 28, 1997. The results of operations for the two quarters
ended July 12, 1998 are not necessarily indicative of the results expected for
the full year.
Investments
All investments held by the Company are in privately held businesses. These
investments are stated at estimated fair value. The fair value of the
preferred investments as of December 28, 1997 and July 12, 1998 was determined
in aggregate based upon the consideration to be received in the proposed
merger of the Company with BCI (See Note 5.) The estimated market value of the
common stock at December 28, 1997 was determined based upon the market value
of BCI's common stock measured over a period of time prior to and after the
agreement in principle to acquire the Company was reached and publicly
announced. The estimated market value of the series A exchangeable preferred
stock at December 28, 1997 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 BCI's publicly-traded
debentures measured over a period of time prior to and after the agreement in
principle to acquire the Company was reached and publicly announced. The
estimated market value of BCI's common stock and the series A exchangeable
preferred stock at July 12, 1998 used the market value of BCI's common stock
and publicly-traded debentures as of July 12, 1998. Dividends declared but not
distributed are included in both the cost basis and fair value of investments.
The fair value of the warrants to purchase common stock or units was computed
using the Black-Scholes option pricing model.
F-56
<PAGE>
BC EQUITY FUNDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS
Each preferred equity investment earns dividends (or is entitled to receive
preferential distributions, in the case of a partnership or a limited
liability company investment) at a per annum rate equal to 10% of its Adjusted
Issue Price. The Adjusted Issue Price of the preferred equity investment is
equal to the amount initially paid for the instrument, increased semiannually,
by the amount of dividends accrued but not paid during the period. Dividends
accrue, but are not paid currently, until the fifth anniversary of the issue
date. Thereafter, the preferred equity investments provide for current payment
of semi-annual cash dividends or distributions. Dividends were not accrued in
1998.
The preferred equity securities may be redeemed at the option of the FAD at
any time for the Adjusted Issue Price, plus a redemption premium initially
equal to 10% of the initial issue price, increased by 2% each year, up to a
maximum of 20% (the "Redemption Price"). In the event of liquidation, the
preferred equity interests will be entitled to a liquidation price equal to
the Redemption Price.
The Company has the right to require a FAD to redeem the preferred interest
at the Redemption Price in the event (i) BCI exercises any of its conversion
and/or option rights under such FAD's secured loan agreement with BCI, (ii)
there is a change in control of the FAD, (iii) sale of 30% of the FAD's
assets, or (iv) there is an uncured monetary default by the FAD under its
secured loan agreement with BCI.
In the event the FAD has not redeemed the preferred investment prior to the
date on which BCI's conversion and/or option rights under the FAD's secured
loan agreement with BCI expire unexercised, the Company will have the right to
require, subject to certain conditions, including BCI's prior consent, that
the FAD undertake a firm commitment underwritten public offering of equity of
the FAD. Any preferred interests held by the Company will be automatically
converted into shares of common equity determined by dividing the applicable
Redemption Price by the price per share of the common shares in the public
offering. In the event BCI does not consent to the FAD public offering, BCI
will be obligated to purchase the preferred investments at the Redemption
Price.
The Company holds warrants to purchase 158,000 shares of common stock of
BCBM Southwest, L.P. at $20 per unit; 4,750,000 common membership units of
Finest Foodservice, L.L.C. at $1.00 per unit; and 3,750,000 common membership
units of BC GoldenGate L.L.C. at $1.00 per unit. The warrants expire in
November 2003, June 2004 and July 2003, respectively.
F-57
<PAGE>
BC EQUITY FUNDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY FINANCIAL INFORMATION
The following tables set forth certain combined financial information as of
the dates indicated provided to the Company by the Boston Market financed area
developers in which the Company holds equity investment (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
<S> <C> <C>
Balance sheet data:
Total gross assets............................. $382,324 $339,528
Total debt:
To Boston Chicken, Inc....................... 357,907 508,281
To third parties (including capital lease
obligations)................................ 2,768 1,984
Total other liabilities (including trade
payables)..................................... 69,154 89,791
Total stockholder/partner/member deficit....... (81,331) (315,483)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
<S> <C> <C>
Statement of operations data:
Gross revenue................................. $531,367 $609,572
Income (loss) from continuing operations...... (108,599) (251,867)
</TABLE>
5. MERGER
On July 15, 1998, the Company closed an agreement with BCI that called for
BCI to acquire the Company through a merger of the Company into a wholly-owned
subsidiary of BCI in consideration for $60.2 million aggregate liquidation
preference of 10% Series A Exchangeable Preferred Stock of BCI (the "Preferred
Stock"), 1,554,000 shares of common stock of BCI and $4.4 million in cash, to
be allocated among the members. The 10% quarterly dividend on the Preferred
Stock is payable, at BCI'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 BCI 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, which is equal to the face amount
of the security.
F-58
<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 pro forma consolidated financial
information does not reflect provisions of $110.2 million for additional asset
impairments or $4.2 million of debt issuance costs recorded in conjunction
with the conversions and the restructuring by the Company of certain
masterlease agreements effective July 15, 1998. The adjusted pro forma
consolidated financial information for the Company gives effect to 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 are based upon the assumptions set forth in
the accompanying notes to such statements. The pro forma balance sheet assumes
that transactions occurred as of July 12, 1998 and the pro forma results of
operation assumes the transactions occurred at the beginning of the period
presented. 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-59
<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 TWO QUARTERS ENDING JULY 12, 1998
(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............ $ 374,512 $ -- $ -- $ 248,926 $ -- $ 623,438 $23,585 $ --
Royalties and
franchise related
fees.............. 4,687 -- -- -- -- 4,687 1,109 (1,109)(10)
Interest income... 3,221 -- -- -- -- 3,221 879 (879)(10)
--------- -------- -------- --------- -------- --------- ------- ------
Total revenue... 382,420 -- -- 248,926 -- 631,346 25,573 (1,988)
Costs and Expenses:
Store operations:
Food and paper.. 131,674 -- -- 89,823 -- 221,497 9,328 --
Labor........... 110,426 -- -- 69,629 -- 180,055 6,787 --
Other
controllable
costs........... 36,507 -- -- 38,642 -- 75,149 3,807 --
Rent, occupancy
and related..... 39,248 -- -- 41,760 (21,437)(1) 47,519 3,375 --
(12,052)(2)
Contractual and
discretionary
marketing....... 21,156 -- -- 21,359 -- 42,515 1,797 --
General and
administrative.... 120,865 10 45 90,313 (13,643)(1) 197,590 3,711 (3,219)(10)
Depreciation and
amortization
(excluding
goodwill
amortization)..... 29,550 -- -- 11,558 (3,171)(3) 41,772 1,209 (672)(3)
3,835 (2)
Goodwill
amortization...... 10,693 -- -- 2,890 2,080 (3) 15,663 360 57 (3)
Provision for
loan losses....... 212,000 -- -- -- (99,328)(4) 112,672 -- --
Losses of Boston
Chicken, Inc.'s
area developers... 93,337 -- -- -- (80,705)(5) 12,632 -- --
--------- -------- -------- --------- -------- --------- ------- ------
Total costs and
expenses........ 805,456 10 45 365,974 (224,421) 947,064 30,374 (3,834)
--------- -------- -------- --------- -------- --------- ------- ------
Loss from
Operations......... (423,036) (10) (45) (117,048) 224,421 (315,718) (4,801) 1,846
Other Income
(Expense):
Investment
income............ -- 7 17 -- -- 24 -- --
Interest expense,
net............... (30,692) -- -- (28,282) 27,966 (1) (38,611) (2,551) 2,553 (10)
(7,603)(6)
Loss on issuances
of subsidiary's
stock............. (17) -- -- -- -- (17) -- --
Other income
(expense), net.... (2,930) -- -- 27 -- (2,903) 38 --
Unrealized
depreciation on
investments....... -- (37,606) (42,353) -- 79,959 (12) -- -- --
--------- -------- -------- --------- -------- --------- ------- ------
Total other
income
(expense)....... (33,639) (37,599) (42,336) (28,255) 100,322 (41,507) (2,513) 2,553
--------- -------- -------- --------- -------- --------- ------- ------
Loss Before Income
Taxes and Minority
Interest........... (456,675) (37,609) (42,381) (145,303) 324,743 (357,225) (7,314) 4,399
Minority Interest
in Losses of
Subsidiaries....... 19,624 -- -- -- 8,557 (7) 28,181 -- 1,097 (11)
--------- -------- -------- --------- -------- --------- ------- ------
Net Loss........... (437,051) (37,609) (42,381) (145,303) 333,300 (329,044) (7,314) 5,496
Dividends on
Preferred Stock.... -- -- -- -- (6,419)(8) (6,419) -- --
--------- -------- -------- --------- -------- --------- ------- ------
Net Loss Applicable
to Common Stock.... $(437,051) $(37,609) $(42,381) $(145,303) $326,881 $(335,463) $(7,314) $5,496
========= ======== ======== ========= ======== ========= ======= ======
Basic Loss Per
Share.............. $ (6.09) $ (4.50)(8)
========= =========
Diluted Loss Per
Share.............. $ (6.09) $ (4.50)(8)
========= =========
Weighted Average
Number of Common
Shares Outstanding:
Basic............. 71,809 3,500 (9) 75,309
========= ======== =========
Diluted........... 71,809 3,500 (9) 75,309
========= ======== =========
<CAPTION>
ADJUSTED
PRO FORMA
----------
<S> <C>
Revenue:
Stores............ $ 647,023
Royalties and
franchise related
fees.............. 4,687
Interest income... 3,221
----------
Total revenue... 654,931
Costs and Expenses:
Store operations:
Food and paper.. 230,825
Labor........... 186,842
Other
controllable
costs........... 78,956
Rent, occupancy
and related..... 50,894
Contractual and
discretionary
marketing....... 44,312
General and
administrative.... 198,082
Depreciation and
amortization
(excluding
goodwill
amortization)..... 42,309
Goodwill
amortization...... 16,080
Provision for
loan losses....... 112,672
Losses of Boston
Chicken, Inc.'s
area developers... 12,632
----------
Total costs and
expenses........ 973,604
----------
Loss from
Operations......... (318,673)
Other Income
(Expense):
Investment
income............ 24
Interest expense,
net............... (38,609)
Loss on issuances
of subsidiary's
stock............. (17)
Other income
(expense), net.... (2,865)
Unrealized
depreciation on
investments....... --
----------
Total other
income
(expense)....... (41,467)
----------
Loss Before Income
Taxes and Minority
Interest........... (360,140)
Minority Interest
in Losses of
Subsidiaries....... 29,278
----------
Net Loss........... (330,862)
Dividends on
Preferred Stock.... (6,419)
----------
Net Loss Applicable
to Common Stock.... $(337,281)
==========
Basic Loss Per
Share.............. $ (4.52)
==========
Diluted Loss Per
Share.............. $ (4.52)
==========
Weighted Average
Number of Common
Shares Outstanding:
Basic............. 75,309
==========
Diluted........... 75,309
==========
</TABLE>
F-60
<PAGE>
BOSTON CHICKEN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
GIVING EFFECT TO ACQUISITION OF MARKET PARTNERS, L.L.C.,
BC EQUITY FUNDING, L.L.C. AND CERTAIN AREA DEVELOPERS
OF BOSTON CHICKEN, INC.
JULY 12, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BC
BOSTON EQUITY MARKET
CHICKEN, FUNDING, PARTNERS, TOTAL AREA PRO FORMA
INC. L.L.C. L.L.C. DEVELOPERS ADJUSTMENTS PRO FORMA
---------- -------- --------- ---------- ----------- ----------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents.......... $ 24,549 $ 237 $ 509 $ 1,562 $ (9,256)(9) $ 14,770
(2,831)(13)
Accounts receivable,
net.................. 5,922 -- -- 3,115 (2,786)(1) 6,251
Inventories........... 16,716 -- -- 9,388 -- 26,104
Prepaid expenses and
other current assets. 3,914 -- -- -- -- 3,914
Deferred income taxes. 2,353 -- -- -- -- 2,353
---------- ------- ------- -------- -------- ----------
Total Current
Assets............. 53,454 237 509 14,065 (14,873) 53,392
Property and Equipment,
net.................... 533,327 -- -- 146,343 (50,262)(13) 685,279
55,871 (2)
Investment in Boston
Chicken, Inc.
Area Developers........ -- 13,235 15,575 -- (28,810)(13) --
Notes Receivable, net... 232,139 -- -- -- (170,570)(13) 61,569
Deferred Financing
Costs, net............. 21,986 -- -- -- -- 21,986
Goodwill, net........... 694,862 -- -- 46,067 226,849 (13) 967,778
Other Assets, net....... 71,399 34 246 2,814 (25,243)(1) 48,970
(280)(9)
---------- ------- ------- -------- -------- ----------
Total Assets........ $1,607,167 $13,506 $16,330 $209,289 $ (7,318) $1,838,974
========== ======= ======= ======== ======== ==========
</TABLE>
F-61
<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.
JULY 12, 1998 (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BC
BOSTON EQUITY MARKET
CHICKEN, FUNDING, PARTNERS, TOTAL AREA PRO FORMA
INC. L.L.C. L.L.C. DEVELOPERS ADJUSTMENTS PRO FORMA
---------- -------- --------- ---------- ----------- ----------
LIABILITIES AND
STOCKHOLDERS'/PARTNERS'/
MEMBERS' EQUITY (DEFICIT)
-------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable.................. $ 15,939 $ -- $ -- $ 12,436 $(11,270)(1) $ 17,105
Accrued expenses.................. 84,957 -- -- 48,270 (4,096)(1) 131,631
2,500 (13)
Other current liabilities......... 11,171 -- -- 925 (925)(13) 11,171
Short-term debt obligation........ -- -- -- -- 166,119 (2) 166,119
Senior secured revolver 48,000 -- -- -- -- 48,000
---------- ------- ------- -------- -------- ----------
Total Current Liabilities....... 160,067 -- -- 61,631 152,328 374,026
Deferred Franchise Revenue.......... 5,268 -- -- -- (3,265)(13) 2,003
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........... 205,955 -- -- -- -- 205,955
Senior Term Loan--Einstein/Noah
Bagel Corp......................... 25,825 -- -- -- -- 25,825
Other long-term debt -- -- -- 566,372 (561,322)(13) 5,050
Other Noncurrent Liabilities........ 47,905 -- -- 11,879 10,000 (13) 58,446
(11,338)(1)
Deferred Income Taxes............... 2,353 -- -- -- -- 2,353
Mandatorily Redeemable Preferred
Stock.............................. -- -- -- -- 82,923 (9) 82,923
Minority Interests.................. 244,510 -- -- -- 16,255 (13) 260,765
Stockholders'/Partners'/Members'
Equity (Deficit):
Common stock...................... 723 -- -- -- 35 (9) 758
Additional paid-in capital........ 925,896 -- -- -- 16,557 (9) 942,453
Partners'/Members'
equity/(deficit)................. -- 13,506 16,330 (430,593) 430,593 (13) --
(29,836)(9)
Accumulated deficit............... (553,355) -- -- -- (110,248)(2) (663,603)
---------- ------- ------- -------- -------- ----------
Total Equity (Deficit).......... 373,264 13,506 16,330 (430,593) 307,101 279,608
---------- ------- ------- -------- -------- ----------
Total Liabilities and
Stockholders'/Partners'/Members'
Equity (Deficit)............... $1,607,167 $13,506 $16,330 $209,289 $ (7,318) $1,838,974
========== ======= ======= ======== ======== ==========
</TABLE>
F-62
<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.
1. To eliminate intercompany transactions between the Company, Market
Partners, BC Equity Funding, the Boston Chicken area developers, the Local
Advertising Fund and the National Marketing Fund.
2. To reverse rent expense previously recognized by the Boston Chicken area
developers due to the restructuring of the 1996 Facilities Master Lease
Program on July 15, 1998. Additionally, as a result of the restructuring
of the facility into a long term debt instrument, the assets have been
reflected in the accompanying balance sheet at fair market value which has
resulted in a corresponding adjustment to the depreciation and
amortization expense.
3. 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.
4. To reverse the provision for loan losses for the Boston Chicken area
developers whose loans are being converted. In lieu of such loan losses,
the pro forma financial statements will reflect the losses of the area
developers.
5. 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.
6. To record interest expense on the debt facility recorded in conjunction
with the restructuring of the 1996 Facilities Master Lease Program.
7. To allocate the portion of the Boston Chicken area developers' losses
applicable to the minority interests.
8. To record the dividend on and the accretion of the Series A exchangeable
preferred stock issued in the transactions. The net loss has been
increased by $3.4 million in the calculation of basic and diluted loss per
share for the two quarters ended July 12, 1998, as the result of the
accretion of the Series A exchangeable preferred stock to its redemption
value.
9. To record the issuance, at estimated market value, of the consideration
for the acquisition of Market Partners and BC Equity Funding and adjust
acquired assets to their estimated market value. The estimated 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 BC Equity Funding 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 principal payments of the instrument.
The analysis utilized a discount rate equal to the yield on the Company's
publicly-traded debentures measured over a period of time prior to and
after the agreement in principle to acquire BC Equity Funding and Market
Partners was reached and publicly announced.
10. To eliminate intercompany transactions between the Company and BC Great
Lakes.
11. To allocate the portion of BC Great Lakes' losses applicable to the
minority interests.
12. 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 or, as a result of the loan
conversions, consolidates their results of operations.
13. To record the conversion of the outstanding balance of the convertible
secured loans and eliminations of the nonconvertible loans from the
Company to the area developers (reflected as $561.3 million of the balance
sheet of the area developers and reflected as $170.6 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. The fair value of the assets acquired is subject to
adjustment based upon final appraisals. Additionally, the $28.8 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.
F-63
