Boston Chicken Inc.

“… There is nothing particularly new about rotisserie chicken – those

birds have been turning succulently in delicatessen windows for
generations. But Boston Chicken is not really about poultry – it is about
developing a market-winning formula for picking real estate, designing
stores, organizing a franchise operation and analyzing data. These are
Boston Chicken’s innovations – trade secrets that can be every bit as
valuable as a new drug or computer chip design. With them, Boston
Chicken has not only developed the secret for delivering generous
quantities of home-cooking at affordable prices, but also transformed
what has been a mom-and-pop business into a new national category –
take-out home-cooked food.”
The Washington Post, July 4, 1994

A Brief History

Boston Chicken Inc. (BOST) was co-founded by a duo of top executives from the
video rental outfit Blockbuster, Scott Beck and Saad Nadhir, on March 9, 1988. Other
top executives in the company included the former president and vice-presidents of
Kentucky Fried Chicken (KFC), Taco Bell, Baker’s Square, Red Lobster, and Chili’s.
The original concept was planned to capitalize on two trends in 1980s: A growing
population of working women meant less time for home cooking and a higher level of
demand in healthier eating habits meant more chicken on the table. BOST originally
operated and franchised food service restaurants that specialized in complete meals
featuring rotisserie roasted chicken. The number of stores grew from 33 in 1988 to 175
in 1993 throughout 16 states, of which more than 80 percent of stores were franchise-
operated. Only 28 stores were BOST solely owned and operated. By the end of 1994,
BOST operated more than 530 stores. BOST was voted “America’s Favorite Chicken
Chain” in 1995 by Restaurant and Institutions magazine. The annual rate of growth was
about 500% each year. As reported in Exhibit 1, revenues increased substantially from
$8.3 million in 1992 to $462.4 million in 1997.

© 2002 (rev. 2006), Jim Hsieh, GMU 1

 On September 21, 1993, BOST decided to change its state of incorporation from
Massachusetts to Delaware.1 On November 9, 1993, BOST went public, a major event
led by a group from Merrill Lynch, Pierce, Fenner & Smith Inc., and Alex, Brown &
Sons Inc., Baltimore, MD. The initial offer price was $20 per share with 1.9 million new
common shares in total. The prospectus indicated that “…. Net proceeds from the initial
public offerings will be used to finance the development of additional “Boston Chicken”
stores and to repay bank debt incurred for such purposes.” BOST’s common stock was
regarded as one of the hottest initial public offerings in U.S. history. Its first-day closing
price soared to a peak of $48.50 and settled at $26.50 after the shares were publicly
traded on NASDAQ National Market system. The company conducted a seasoned equity
offering for two millions shares at $18.5 in August, 1994. Since this second stock
offering was oversubscribed, the company increased the offer to six million shares and
raised $105 million of capital.

After a Hot IPO

Subsequent to the management’s initial investment, BOST started to engage in an

aggressive expansion program and a new strategy of turning the takeout stores into full-
scale dine-in restaurants. By the end of the 1994 fiscal year, BOST had 534 stores
(solely-owned and franchised) in 23 major markets throughout the U.S. Around the same
time, the company introduced more entrees to complement its signature rotisserie chicken
and to add variety to its dinner-based offerings.

In addition to the menu, BOST also grew in new market development. For
instance, the company employed more than 180 real estate professionals in 1995 to
maintain its growing strategy and maintain a high standard of new store site selections.
Also in 1995, most analysts covering restaurant business were enthusiastic about BOST’s
future operating and financial performance. Most of analysts rated the stock to be a
strong buy or a buy, and projected that EPS would grow by at least 40% per year.
Further, management reported that the average weekly store revenues were about
$22,200 for the 2nd quarter of 1995 and $23,400 for the 3rd quarter. The stock price closed
at $32.13 on December 29, 1995, up from $17.38 in the end of 1994.

In 1996, BOST began expansion of its lunch offerings through the introduction of
high quality sandwiches under the brand of Boston Carver. The new lunch offerings
placed the company to compete directly with other fast-food franchises such as
McDonald’s, Wendy’s and local stores. This strategy, however, was not as effective as
the management had originally anticipated. Beginning the first quarter of 1997, the
company had to determine whether its new marketing strategy worked as planned due to
staggered sales figures. The stock price also hovered around $35 in 1996.

1
A majority of companies in the US are currently incorporated in Delaware even though they do not
operate in the state of Delaware. Each state has different corporate laws such as election of board of
directors, mergers & acquisitions, bankruptcy protections, …, and so on. Companies are required to abide
by the state laws from their states of incorporation.

© 2002 (rev. 2006), Jim Hsieh, GMU 2

New Strategies2

To respond to the decline in sales, the management eliminated several product

lines and closed 74 underperforming stores. To help increase future productivity, BOST
experimented with a new store prototype that began with the conversion of an existing
Boston Market store in Charlotte, NC. Based on the success of the first store in NC, the
company converted six other stores in the Charlotte market. These prototype stores
offered a dedicated dessert and bakery case, pre-packaged products and the full selection
of traditional ready-to-heat Boston Market product offerings. The stores also provided a
variety of grilled entrees and sandwiches, and a tossed salad station. The positive
response from consumers to these stores led the company to plan on testing the same
prototype in other markets before featuring a nation-wide conversion to this new style of
stores.

In addition, in October 1997, BOST’s board of directors recommended that the

company eliminate the area developer structure (franchising stores) and change to a
structure in which Boston Market stores are solely owned by the company. The board of
directors predicted that a simplified legal and financial policy structure would increase
managerial control, reduce annual taxes, and provide the company’s better ability to
deliver products to customers.3

In May, 1998, the company not only was challenged by the new operation
strategies, but also faced financial crisis as well. Both co-founders Beck and Nadhir
resigned, and BOST hired a new CEO, J. Michael Jenkins, with 37 years of experience in
the restaurant industry. Mr. Jenkins’ first task was to consolidate the franchising stores.
This assignment was completed in July 1998, and resulted in the acquisition of 527
franchise area developer stores. The total number of company-owned restaurants
increased to 936. The stores were acquired from BC Equity Funding, L.L.C. and Market
Partners, L.L.C., for $10 million in cash, 3.5 million common shares, and $126.8 million
of preferred stock. The next step in the resurrection of operations was to restructure the
company’s debt. BOST engaged BT Alex Brown to help restructure $623 million of its
subordinated debt, which was included in the total debt of about $900 million.

On October 6, 1998, BOST was unable to re-negotiate new terms with its
creditors. Thus, the management decided to seek federal bankruptcy-law protection
(Chapter 11), lay off 500 employees and close 178 stores. At the same time, NASDAQ
reported that Boston Chicken’s ticker symbol was changed to BOSTQ from BOST after
the company filed for Chapter 11 protection. On December 11, 1998, Boston Chicken
began trading on the NASD OTC Bulletin Board system under the ticker symbol
BOSTQ.

On December 2, 1999, McDonald’s Corp. formed a subsidiary, Golden Restaurant

Operations Inc., and made an offer to purchase 850 Boston Market restaurants for $173.5

2
Source: S&P Compustat Company profile.
3
By the end of December 1997, BOST also owned a 52% interest in Einstein/Noah Bagel Corp.
(NASDAQ: ENBX), which operates specialty retail bagel stores.

© 2002 (rev. 2006), Jim Hsieh, GMU 3

million. On May 13, 2000, A federal bankruptcy court approved Boston Chicken's
amended reorganization plan, which included the sale of the company to Golden
Restaurant Operations (GRO). In addition to the original sale price of $ 173.5 million in
cash and liabilities, GRO agreed to contribute an additional $2.6 million to pay off the
debt. The deal was completed on May 27, 2000. Currently, Boston Market Corp. is a
wholly owned subsidiary of McDonald’s Corp., and operates more than 650 stores
nationwide in 28 states.

© 2002 (rev. 2006), Jim Hsieh, GMU 4

Questions:

1. Evaluate BOST’s business strategy. What are its critical success and failure factors
over time? Explore the relation between those factors and the objective of the firm
discussed in class.

2. Compare the financial performance of Boston Chicken (BOST) with the performance
of the benchmark firm. Comment on BOST’s financial strength and weakness. Be
explicit about any assumptions you are making.

3. If you were financial analysts covering restaurant business, what questions would you
ask management about the company’s financial and operating performance?

Note that the data of the benchmark firm are the industry averages. Therefore, the data
items do not follow the same calculations as for a typical firm. For example, EBT minus
Tax might not be equal to NI. In addition, the balance sheet is not balanced.
Nonetheless, you should be able to calculate financial ratios and growth rates of
accounting items without any difficulties.

Ethical Rules: Group members are permitted open communications within groups.
Indeed, this report is a group exercise. But, group member CANNOT discuss the case, or
in any way communicate about the case, with members of other groups.

© 2002 (rev. 2006), Jim Hsieh, GMU 5

EXHIBIT 1. Financial Statements of Boston Chicken Inc.

Consolidated Balance Sheet

Amounts in thousands December 31
1992 1993 1994 1995 1996 1997
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-term - - 5,462 - -
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-term 3,139 5,815 2,072 7,740 5,723
Loans payable - - - - 24,000
Deferred income tax payable - 3,011 16,631 40,216 2,353
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

© 2002 (rev. 2006), Jim Hsieh, GMU 6

EXHIBIT 1. (continued)

Consolidated Income Statement

Amounts in thousands Years Ended December 31
1992 1993 1994 1995 1996 1997
159,47
Revenues 8,283 42,530 96,151 264,508 462,368
9
Cost and expenses 13,910 37,800 60,369 80,799 150,292 578,798
Operating income (5,627) 4,730 35,782 78,680 114,216 (116,430)
Interest income 271 200 1,592 2,173 6,427 5,706
Gain on issuance of subsidiary's stock - - - - 38,163 192
Other income 189 160 74 314 137 1,603
Total income (5,167) 5,090 37,448 81,167 158,943 (108,929)
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)
Net income (5,851) 1,647 16,173 33,559 66,958 (223,892)

Average Com. & com. Equiv. shares. 28,495 32,667 42,861 50,972 71,143 67,339

© 2002 (rev. 2006), Jim Hsieh, GMU 7

EXHIBIT 2. Accounting Items of Benchmark Firms
YEAR
Accounting Items 1994 1995 1996 1997 1998 1999 2000
(Amounts in thousands)
Number of Companies 2870 2760 2908 2866 2803 2792 2739

(Income Statement Items)

Sales 156,874.18 171,587.84 181,484.18 189,022.71 227,992.89 237,158.92 232,360.08
COGS 117,474.76 129,437.84 135,105.85 138,936.54 172,679.74 178,429.61 169,127.87
EBITDA 17,595.12 19,039.52 20,455.60 23,523.10 25,611.66 27,119.56 29,454.89
Depreciation 5,920.41 6,046.91 6,502.68 7,068.26 8,092.44 8,873.38 9,795.34
Interest Expense 3,589.10 3,859.05 3,823.12 4,274.70 5,184.42 5,213.30 5,852.71
Income Taxes 3,272.70 3,396.45 3,892.68 4,552.95 4,591.95 5,090.45 5,385.59
Net Income 5,043.31 5,593.48 6,013.57 7,075.49 7,251.87 7,783.35 8,489.75

(Balance Sheet Items)

Cash & Equivalents 12,593.82 12,518.13 15,059.74 16,505.10 16,921.93 18,147.04 17,662.20
Total Receivables 38,324.67 36,272.03 42,403.03 46,638.26 52,114.42 56,975.86 47,084.75
Inventories 20,630.05 21,620.58 22,695.35 24,332.11 27,840.52 27,345.12 25,351.36
Total Current Assets 49,229.32 51,332.92 55,482.44 58,892.55 68,625.82 70,455.45 76,795.03
Net PP&E 50,142.40 52,188.64 56,168.62 60,893.54 70,632.57 74,135.73 80,842.45
Other Assets 15,377.94 16,565.78 18,129.97 20,211.63 25,041.98 29,921.11 36,714.59
Total Assets 167,333.20 173,753.11 191,731.64 211,092.82 240,524.19 263,632.76 271,328.00
Total Current Liabilities 30,346.41 32,373.21 34,819.01 37,935.00 47,535.33 48,802.34 52,206.71
Long-term Debt 35,982.06 36,376.66 39,715.43 44,466.99 53,669.74 61,322.59 63,313.81
Other Liabilities 27,704.21 31,352.98 31,107.08 32,755.01 39,747.89 44,908.04 50,556.92
Total Liabilities 118,241.83 120,824.93 133,274.40 147,887.02 170,549.90 188,367.67 188,470.54
Retained Earnings 27,181.02 30,624.60 33,072.79 36,614.11 36,769.37 36,965.15 38,505.95
Stockholders' Equity 47,756.50 51,378.43 57,123.82 62,939.99 68,218.17 74,069.76 81,882.73

EPS 5.13 7.12 5.88 6.95 7.19 7.82 8.47

© 2002 (rev. 2006), Jim Hsieh, GMU 8