BOSTON CHICKEN CASE

1. The business strategy Boston Chicken used during the period presented in the
case is that of home meal replacement. These home meal replacements consist of a
variety of food including rotisserie-cooked chicken, fresh vegetables, and salads. These
meals are associated with traditional home cooking and come at a great value.
Marketing-wise, this was genius because people want to eat meals that were traditionally
cooked in the home.
Strategies that led to growth for the company included opening franchises of
Boston Market. By the end of 1994 the company had 1100 stores open nationwide and
employed 16,500 workers. The franchises expanded their menus with new sides, entrees,
and desserts to reach more customers. The company also strategized in selling franchises
to large regional developers instead of selling to a large number of small franchisees.
Another key to the success for growth was developing computer software that linked all
of Boston Chicken's operations. This enhanced operating performance for all the stores
because, for example, overstocking on inventory became less likely and reordering more
items was easier. This system could also provide employees with their schedules. The
previous success strategies mentioned kept customers satisfied with quality products,
made things easier for employers and employees, and allowed the company to expand
itself with less risk.
Some of the risk factors for the company included expanding on too large of a
scale. A good portion of the expansion money came from franchise fees, public
offerings, interest, and loans from the company itself. This led to the company not
making much a profit because they were constantly putting the money they were raising
back into their company. Today the company has shut down many stores throughout the
country. Because the company went from just providing home meal replacements to
opening franchises with little revenue coming in, they have faced hard financial times.

2. Today Boston Chicken is owned by a private equity firm from Florida called Sun
Capital Partners. The company is no longer publicly traded; it was when this article was
written. At the time of the case, the company's financial statements and information was
available to the public. When looking up the company on the SEC website, no current
information is listed for the company.

3. There are several accounting practices and policies that could be seen as
controversial. One of the standout components that seemed controversial was the
financial statement did not show an area for allowance of bad debt. How the company
accounted for loans can also be seen as controversial because they were converted into
equity after two years and loans that were not paid back by franchises was not shown on
the financial statements. Also, nowhere on the financial statements showed how many
franchises were included in the company, which means there financial statements were
not consolidated to show true operating profits and/or losses.

4. In order to show the true financial condition of Boston Chicken, all of the
financial statements for all the franchises should be combined. The financial statements
of the company do not show the true financial status of the company if they do not
include these numbers. When looking at the assets of the financial statements, most were
from notes receivable and accounts receivable which are from the franchises and the
financed area developers. Investors cannot rely on the given financial statements in order
to see the full picture of the company. In addition, by not estimating for allowance for
bad debt, which happens often, Boston Chicken, again, is over estimating net income by
not having this contra asset account. They do not take into account the ability of the
franchisees to pay back the loans given to them. It also does not it take into accounting
the royalties from franchises based on revenues that were depleting. The current financial
statements given in the case are not the true financial condition of this company.

5.

Write Off of % of
Notes Tax Change in NI b/f
Assumption Receivable Change Adjusted NI NI Taxes
1,855,94 389,7
1% 0 47 14,706,807 (1,466,193) -7%
9,279,70 1,948,7
5% 0 37 8,842,037 (7,330,963) -36%
18,559,4 3,897,4 (14,661,926
10% 00 74 1,511,074 ) -72%
27,839,1 5,846,2 (21,992,889
15% 00 11 (5,819,889) ) -108%

(p. 64) 1994 Materiality 1,022,500

5% of NI b/f
Notes Taxes
Receivable 185,594,000

(p. 65) 1994

Income b/f
Taxes 20,450,000
Taxes 4,277,000
Net Income 16,173,000
Taxes/ NI=
Tax Rate 21%

After reviewing the FASB guidelines on materiality, there is a rule of 5% in

determining materiality. The 5% rule expresses that investors would not be influenced in
their investment decisions by a change in net income before taxes of 5% or less. When
looking at 1994’s Net Income before Taxes of $20,450,000, 5% of that is $1,022,500.
Based on this numbers, all 4 assumptions would fall in the category of materiality. From
the table, one can see that the net change to net income for 1% write off is $1,466,193,
which is a change in Net Income Before Taxes of 7%. For 5% write off, it has a change
of$7,330,963 which is 36% change in Net Income Before Taxes. For 10% write off, it
has a change of $14,661,926, which has a net change of 72% of Net Income Before
Taxes. Finally to have a write off of 15%, the change to NI would be $21,992,889, which
is a 108% change in Net Income Before Taxes.

6.

Consolidated Balance
Sheet
Amounts in thousands December 31
199 1993 1994 1995 1996 1997
2
Assets
Cash and equivalents 4,537 25,304 310,436 100,800 90,559
Accounts receivables, net 3,588 23,446 13,445 22,438 13,894
Notes receivables -- short- - - 5,462 - -
term
Due from affiliations 3,126 6,462 9,614 10,246 -
Prepayments 1,843 2,282 1,536 4,050 17,568
Deferred income tax - 1,835 3,322 8,928 2,353
Total current assets 13,094 59,329 343,815 146,462 124,374
Net property 51,331 163,314 258,550 334,748 530,582
Notes receivables 44,204 185,594 450,572 800,519 609,175
Deferred financing costs 358 8,346 15,745 13,361 24,570
Goodwill - - - 190,439 639,364
Other assets 1,077 10,399 5,195 58,087 77,062
Total assets 110,06 426,982 1,073,87 1,543,61 2,005,12
4 7 6 7

Liabilities & Shareholders' Equity

Accounts payable 6,216 15,188 12,292 40,430 33,205
Accruals 1,835 6,587 9,095 36,547 99,326
Deferred revenue 2,255 5,505 8,945 10,656 -
Total current liabilities 10,306 27,280 30,332 87,633 132,531
Subordinated debentures - 130,000 129,872 129,841 542,020
Notes payable - - 177,306 182,613 197,442
Deferred revenue -- long- 3,139 5,815 2,072 7,740 5,723
term
Loans payable - - - - 24,000
Deferred income tax - 3,011 16,631 40,216 2,353
payable
Other liabilities 1,713 1,061 833 6,292 44,753
Minority interest payable - - - 153,441 253,630
Total liabilities 15,158 167,167 357,046 607,776 1,202,45
2
Common stock (par $0.01) 347 447 591 642 714
Paid-in capital 103,66 252,298 675,611 827,611 918,266
 2
Retained earnings (9,103) 7,070 40,629 107,587 (116,305
)
Total shareholders' equity 94,906 259,815 716,831 935,840 802,675
Total liabilities & 110,06 426,982 1,073,87 1,543,61 2,005,12
shareholders' equity 4 7 6 7

Consolidated Income Statement

Amounts in thousands Years Ended December 31
1992 1993 1994 1995 1996 1997
96,15 159,47
Revenues 8,283 42,530 264,508 462,368
1 9
60,36
Cost and expenses 13,910 37,800 80,799 150,292 578,798
9
(5,627 35,78 (116,430
Operating income 4,730 78,680 114,216
) 2 )
Interest income 271 200 1,592 2,173 6,427 5,706
Gain on issuance of subsidiary's
- - - - 38,163 192
stock
Other income 189 160 74 314 137 1,603
(5,167 37,44 (108,929
Total income 5,090 81,167 158,943
) 8 )
Depreciation and Amortization 260 1,970 6,074 11,442 22,887 45,896
Provision for relocation - - 5,097 - - -
Provision for loss on closings 424 833 - - - 49,352
Interest expense - 640 5,827 15,352 20,873 43,915
Income tax - - - 8,681 28,931 27,653
Deferred Income tax - - 4,277 12,133 14,059 (36,068)
Minority Interest - - - - 5,235 (15,785)
(5,851 16,17 (223,892
Net income 1,647 33,559 66,958
) 3 )

Average Com. & com. Equiv. 42,86

28,495 32,667 50,972 71,143 67,339
shares. 1

Boston Market filed their annual report for 1997 in 1998 with the SEC without
any problems. Poor employee training, high operating expenses, and its lending policy to
developer-franchisees had started to take their toll on company finances. Slowing sales,
brought on by changing consumer demand, forced Boston Market's stock to plummet
from $41.50 per share in December 1996 to approximately $17 per share by May 1997.
During the business year of 1998, the numbers that Boston Market would pull in would
be catastrophic for them and they would declare chapter 11 bankruptcy. During the first
three months of 1998, Boston Market posted losses of $312.6 million and company
auditors made public the fact that the company was close to financial ruin. They released
a NT 10-K in 1998 and filed a 10-Q (quarterly report). The problem for investors is that
this report does not include all information and footnotes are not under GAAP guidelines,
required in a 10-K. An NT 10-K states their inability to file an annual report on time.
They said that they needed to audit and restate their 1997 10-K. At the end of the NT 10-
K Boston Market did state that they expect to have a net loss for the year. Stores sales
continued to falter, and by July losses had reached $437.1 million.

7. During the beginning of 1998 Boston Market lost $312.6 million and auditors
announce publicly that the company was close to financial ruin. In July, Boston Market
lost $437.1 million and in October with nearly 1 billion of debt and unable to make loan
payment, it declared Chapter 11 bankruptcy. It closed 400 stores as part to its
reorganization plan.
In December 1999, McDonald’s Corporation announced that it wants to buy Boston
Market. Then in May 2000, McDonalds finally bought it for $176.15 million. It has
helped Boston Market to get out of Chapter 11 as quick as possible. But bondholders and
banks were left with just a fraction of the money they lent to help Boston Market and
shareholders got nothing.
During 2000, it introduced its line of frozen meals in supermarkets through a partnership
with Heinz permitting it to market packaged food under the Boston Market name.
Boston market will receive fees from those sales.

8. Under McDonald’s BM was heading in the right direction. BM was producing

strong financial results since McDonald’s took over. Its sales had improved by eight
percent from 2000 to 2001. Fueled by consistent comparable store sales growth,
restaurants now average $ 1 million in annual unit sales volume.

By 2007 BM was sold to Sun Capital which is a leading private investment firm focused
on leveraged buyouts, equity, debt, and other investment in market-leading companies
that can benefit from its in –house operating professionals and experience. Sun Capital
affiliates have invested in and managed more than 200 companies worldwide with
combined sales excess of $40 billion since 1995. At that time, new president and CEO
named Arra brought the right mix of leadership skills and experience to Boston Market
given his 28-years of service in executive management in the family dining segment of
the restaurant industry.”

“Boston Market has growth opportunities in its unique niche as a healthy meal
replacement alternative for active and working families. Leveraging its strong brand
name and reputation for quality food, we also see significant growth potential in frozen
foods through the Company’s relationship with H.J. Heinz Company (NYSE: HNZ) and
prepared foods sold through grocery stores, two business segments that have enjoyed
double digit growth in the past several years.”
Boston Market will be able to pursue its own strategic objectives and focus on expanding
its national network of stores, while maintaining superlative customer service, and new
product offerings.

In 2010, George Michel was appointed new CEO and announced that BM will upgrades
its restaurant and will add new items to enhance the overall guest experience. The new
leadership transition shift in focus from the development of the vision for the new Boston
Market toward attention to implementation.

Additionally, Keurig brewers are appearing in the dining rooms of Boston Market. They
will be installed in every restaurant by 2011. The company tested the new brewers in 10
restaurants over three months and it was so successful that coffee sales went up 200%.

It became the largest provider of catering servicing by implementing online order entry
and management tool. In consequence, it grew BM’s market’s consumer and national
catering business, reduced costs, improved customer service and allowed consumers to
purchase anytime.

In our opinion, we think that Boston Market has the opportunity to grow and to be
successful in the future again because today people are choosing a healthier choice of fast
food such as Subway that has now more stores than McDonald’s. Also because BM has
changed its strategy such as offering healthier food, giving a new appealing look to their
establishments, delivering food to tables, adding new items on the menu and offering a
better customer service. This has helped BM to position itself as the leader of the fast-
casual restaurant industry. We have looked some of this information in online news
paper article, the company’s website news release, Sun Capital website and also, we
visited and dined at the local store as well. Additionally, we have read some of the
personal review of customers and the local news paper about the local stores and most of
the comments were positive.