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Boston Chicken
Quarterly Data Revenue
1st quarter 23,449
2nd quarter 20,360
3rd quarter 25,186
4th quarter 27,165

Net Income
1st quarter 2,561
2nd quarter 3,383
3rd quarter 4,679
4th quarter 5,550
161
Asset Analysis




4-35 Part 2 Business Analysis and Valuation Tools




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and other current assets, are stated at the lower of
cost (¬rst-in, ¬rst-out) or market and consist of food,
Boston Chicken, Inc., and Subsidiary (the “Com- paper products, and supplies.
pany”) operate and franchise food service stores
that specialize in complete meals featuring home Property and Equipment
style entrees, fresh vegetables, salads, and other
Property and equipment is stated at cost, less accu-
side items. At December 26, 1993, there were 217
mulated depreciation and amortization. The provi-
stores systemwide, consisting of 38 Company-oper-
sion for depreciation and amortization has been
ated stores and 179 franchise stores. At December
calculated using the straight-line method. The fol-
25, 1994, there were 534 stores systemwide, con-
lowing represent the useful lives over which the
Boston Chicken




sisting of 41 Company-operated stores and 493
assets are depreciated and amortized:
franchise stores. In 1992, 1993, and 1994, in con-
nection with its practice of opening new stores to
Buildings and improvements 15“30 years
seed development in targeted markets, the Com- Leasehold improvements 15 years
pany sold 1, 13, and 54 Company-operated stores, Furniture, ¬xtures, equipment and computer software 6“8 years
respectively, to new formed area developers or fran- Pre-Opening costs 1 year
chisees of the Company. During 1994, in connec-
tion with its practice of acquiring stores in markets Property and equipment additions include
with multiple area developers in order to facilitate acquisitions of property and equipment, costs
consolidation of such markets, the Company pur- incurred in the development and construction of
chased 34 stores and resold 26 of them. new stores, major improvements to existing stores,
and costs incurred in the development and purchase
2. Summary of Signi¬cant Accounting Policies of computer software. Pre-opening costs consist pri-
marily of salaries and other direct expenses relating
Principles of Consolidation
to the set-up, initial stocking, training, and general
The accompanying consolidated ¬nancial state-
management activities incurred prior to the opening
ments include the accounts of the Company and its
of new stores. Expenditures for maintenance and
subsidiary. All material intercompany accounts and
repairs are charged to expense as incurred. Devel-
transactions have been eliminated in consolidation.
opment costs for franchised stores are expensed
when the store opens.
Fiscal Year
The Company™s ¬scal year is the 52/53-week period
Deferred Financing Costs
ending on the last Sunday in December. Fiscal years
1992, 1993, and 1994 each contained 52 weeks, Deferred ¬nancing costs are amortized over the
or thirteen four-week periods. The ¬rst quarter con- period of the related ¬nancing, which ranges from
sists of four periods and each of the remaining three two to ten years.
quarters consists of three periods, with the ¬rst, sec-
ond, and third quarters ending 16 weeks, 28 weeks, Revenue Recognition
and 40 weeks, respectively, into the ¬scal year.
Revenue from Company-operated stores is recog-
nized in the period related food and beverage prod-
Cash and Cash Equivalents
ucts are sold. Revenue derived from initial franchise
Cash and cash equivalents consist of cash on hand
fees and area development fees is recognized when
and on deposit, and highly liquid instruments pur-
the franchise store opens. Royalties are recognized
chased with maturities of three months or less.
in the same period related franchise store revenue is
Inventories generated. The components of royalties and fran-
Inventories, which are classi¬ed in prepaid expenses chise-related fees are comprised of the following:
162 Asset Analysis




4-36
Asset Analysis




agreement on an unsecured basis providing for bor-
Dec. 25, Dec. 26, Dec. 27,
(In thousands of dollars) 1994 1993 1992 rowings of up to $75 million through June 30,
1997. Borrowings under the agreement may be
Royalties $17,421 $5,464 $1,491
either ¬‚oating rate loans with interest at the bank™s
Initial franchise and area
development 13,057 5,230 1,136
reference rate of eurodollar loans with interest at the
Interest income from area devel-
eurodollar rate, plus an applicable margin. In addi-
oper ¬nancing (See Note 8) 11,632 1,130 ”
tion, a commitment fee of .25% of the average daily
Lease income 5,361 253 ”
unused portion of the loan is required. The agree-
Software fees 6,480 ” ”
Other 1,284 604 ” ment contains various covenants including restrict-
Total royalties and franchise-
ing other borrowings, prohibiting cash dividends,
related fees $55,235 $12,681 $2,627
and requiring the Company to maintain interest
coverage and cash ¬‚ow ratios and a minimum net
Subject to the provisions of the applicable fran-




Boston Chicken
worth. As of December 25, 1994, no borrowings
chise agreements, the Company is committed and
were outstanding.
obligated to allow franchisees to utilize the Com-
In February, 1994, the Company issued $130
pany™s trademarks, copyrights, recipes, operating
million of 4.5% convertible subordinated debentures
procedures, and other elements of the Boston Mar-
maturing February 1, 2004. Interest is payable
ket system in the operation of franchised Boston
semi-annually on February 1 and August 1 of each
Market stores.
year. The debentures are convertible at any time
Per Share Data
prior to maturity into share of common stock at a
Net income (loss) per common share is computed
conversion rate of $27.969 per share, subject to
by dividing net income (loss), adjusted in 1993 for
adjustment under certain conditions. Beginning Feb-
interest related to the conversion of 7% convertible
ruary 1, 1996, the debentures may be redeemed at
subordinated notes (See Note 9), by the weighted
the option of the Company, provided that through
average number of common shares and dilutive
February 1, 1997, the debentures cannot be
common stock equivalent shares outstanding during
redeemed unless the closing price of the common
the year.
stock equals or exceeds $39.16 per share for at
Common and equivalent share include any
least 20 out of 30 consecutive trading days. The
common stock, options, and warrants issued within
debentures are redeemable initially at 103.6% of
one year prior to the effective date of the Com-
their principal amount and at declining prices there-
pany™s initial public offering, with a price below the
after, plus accrued interest.
initial public offering price. These have been
included as common stock equivalents outstanding,
5. Income Taxes
reduced by the number of shares of common stock
which could be purchased with the proceeds form As of December 25, 1994, the Company has cumu-
the assumed exercise of the options and warrants, lative Federal and state net tax operating loss carry-
including tax bene¬ts assumed to be realized. forwards available to reduce future taxable income
of approximately $30.5 million which begin to
Employee Bene¬t Plan
expire in 2003. The Company has recognized the
The Company has a 401(k) plan for which
bene¬t of the loss carryforwards for ¬nancial report-
employee participation is discretionary and to which
ing, but not for income tax purposes. Certain owner-
the Company makes no contribution.
ship changes which have occurred will result in an
Reclassi¬cation annual limitation of the Company™s utilization of its
Certain amounts shown in the 1992 and 1993 net operating losses.
¬nancial statements have been reclassi¬ed to con- At December 28, 1992, the ¬rst day of ¬scal
form with the current presentation. 1993, the Company adopted SFAS No. 109
“Accounting for Income Taxes” (“SFAS 109”). Upon
4. Debt
adoption of SFAS 109 there was no cumulative
The Company has entered into a revolving credit effect on the Company™s ¬nancial statements
163
Asset Analysis




4-37 Part 2 Business Analysis and Valuation Tools




6. Marketing and Advertising Funds
because the Company™s deferred tax assets
exceeded its deferred tax liabilities and a valuation
The Company administers a National Advertising
allowance was recorded against the net deferred tax
Fund to which Company-operated stores and fran-
assets due to uncertainty regarding realization of the
chisees make contributions based on individual
related tax bene¬ts.
franchise agreements (currently 2% of base reve-
The primary components that comprise the
nue). Collected amounts are spent primarily on
deferred tax assets and liabilities at December 26,
developing marketing and advertising materials for
1993, and December 25, 1994, are as follows:
use systemwide. Such amounts are not segregated
Dec. 25, Dec. 26,
from the cash resources of the Company, but the
(In thousands of dollars) 1994 1993
National Advertising Fund is accounted for sepa-
Deferred tax assets:
rately and not included in the ¬nancial statements of
Accounts payable and accrued expenses $ 794 $ 78
Boston Chicken




the Company.
Deferred franchise revenue 3,469 1,992
The Company maintains Local Advertising
Other noncurrent liabilities 262 623
Net operating losses 11,639 4,844 Funds that provide comprehensive advertising and
Other 173 52
sales promotion support for the Boston Market
Total deferred tax assets 16,337 7,589
stores in particular markets. Periodic contributions
Less valuation allowance ” (3,847)
are made by both Company-operated and franchise
Net deferred taxes 16,337 3,742
stores (currently 3% to 3.75% of base revenue). The
Deferred tax liabilities:
Due from area developers ” (814) Company disburses funds and accounts for all
Property and equipment (17,047) (2,807)
transactions related to such Local Advertising Funds.
Other assets (466) (121)
Such amounts are not segregated from the cash
Total deferred tax liabilities (17,513) (3,742)
resources of the Company, but are accounted for
Net deferred tax liability $ (1,176) $ ”
separately and are not included in the ¬nancial
statements of the Company.
The decrease in the valuation allowance from
The National Advertising Fund and certain
December 26, 1993 to December 25, 1994 was
Local Advertising Funds had accumulated de¬cits at
$3,847,000 and the decrease in the valuation
December 26, 1993, and December 25, 1994,
allowance from December 27, 1992 to December
which were funded by advances from the Company.
26, 1993 was $180,000, which was net of a
Such advances are re¬‚ected in Due from af¬liates,
$446,000 increase related to the tax bene¬t from
net.
the exercise of stock options.

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