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Overall Evaluation of Boston
Chicken’s Business Strategy
⚫Financing business is lackluster, but has
important synergies for franchising business.
Credit risk is a big concern here.
Overall Evaluation of Boston
Chicken’s Business Strategy (cont.)
BUT:
⚫ADs can only pay Boston Chicken so long as Boston
Chicken lends cash to ADs. Boston Chicken can only
lend cash to ADs as long as it raises cash from capital
markets. It can only raise cash from capital markets if
its financial performance looks healthy.
Boston Chicken look healthy?
Quality Issues with Boston
Chicken’s Earnings
⚫Two issues:
⚫The poor performance of the franchised stores is not
Earnings Restatement
⚫There are two ways to account for the poor
performance of the franchised stores:
⚫A ‘pro forma’ consolidation of the franchised stores’
operating results. From an economic perspective, Boston
a turnaround, a generous allowance would seem
appropriate –say 10% of new originations. This would be
consistent with GAAP, but the absence of prior defaults
gives Boston Chicken and the auditors leeway to book no
provision for bad debts.
Revenue:
Royalties and franchise related fees............ 115,510 0 115,510
Company stores.................................. 83,950 83,950 83,950
Interest income................................. 65,048 0 65,048
Area Developer Revenues 975,022
Provision for relocation........................ 0 0 0
Area Developer Costs and Expenses 991,561
Total costs and expenses..................... 173,179 1,164,740 319,886
Income From Operations............................ 91,329 -105,768 -55,378
Interest expense, net........................... -14,446 -14,446 -14,446
Gain on issuances of subsidiary's stock.........
38,163 38,163 38,163
Other income, net............................... 137 137 137
Total other income (expense)................. 23,854 23,854 23,854
Income Before Income Taxes and Minority Interest
115,183 -81,914 -31,524
Income Taxes...................................... 42,990 0 0
Minority Interest in (Earnings) of Subsidiary...........
-5,235 5,940 2,286
Net Income........................................ 66,958 -75,974 -29,238
Net Income Per Share $1.01 -$1.14 -$0.44
Shares Outstanding............................… 66,501 66,501 66,501
Pro Forma Consolidation
= 264,508 + 865,082 + 109,940 –115,510 –65,048
= 1,058,972
Restated Costs and Expenses
= Reported Costs and Expenses + Expenses of Boston Market
Financed Area Developers + Expenses of ENBC Financed Area
Pro Forma Consolidation
Computations (continued)
Restated Income Taxes
Income taxes are set to zero, as Boston Chicken is making pre-tax
losses, and it is not reasonably certain that they will be able to
restated minority interest = -7.25% of -81,914 = 5,940
