Pro Forma Provision Computations
•Setting the Provision for Bad Debts at 10% of notes
receivable issued during the period, we have:
Provision = 10% of 1,467,065*= 146,707
*This amount is found in the investing section of the statement of cash flows
consolidation computations
Future Events That Will Cause
Problems to Surface
⚫Capital markets recognize problems with business
strategy and refuse to provide additional capital on
⚫Auditors recognize poor performance of area
developers is likely to continue and require a provision
to be charged against notes receivable
Extracts From Boston Chicken’s
1997 Annual Report (MD&A section)
RESULTS OF OPERATIONS
expenses for 1997 were special charges of $15.5 million incurred by ENBC
primarily in connection with its transition to a company-owned system. Included
in general and administrative expenses for 1996 were special charges of $38.0
million for asset write-downs and a provision to purchase certain store
equipment from Boston Market area developers. Absent these items, general and
special charges, included $61.5 million associated with operating a larger
Company store base and $23.0 million of greater depreciation and amortization
expense resulting primarily from the acquisition of Company stores and ENBC’s
conversion to a company-owned system.
Extracts From Boston Chicken’s
1997 Annual Report (MD&A section)
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared to Fiscal Year 1996
Provision for Loan Losses. The Company established a $128.0 million
provision for potential loan losses in 1997 after a determination that portions
of its loans to certain of its area developers may not be recoverable. The
provision for potential loan losses was based upon a number of factors that
management deemed relevant, including the use of loan proceeds, the form and
amount of consideration proposed in the acquisition of BCEF and Market Partners,
and evaluations regarding the cost and availability of capital and the value of
the collateral securing the loans. There can be no assurance that the Company’s
Extracts From Boston Chicken’s
1997 Annual Report (MD&A section)
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared to Fiscal Year 1996
Losses of Boston Chicken, Inc.’s Area Developers. Since October 1997, the
Company has recognized, in a single line item on its statement of operations,
the net losses of the area developers in which BCEF and Market Partners have
interest not recognized by the Company) of the area developers commencing from
the date the Company announced its intent to acquire BCEF and Market Partners in
October 1997. The Company will continue to recognize the area developer net
losses in a single line item on its statement of operations until it has
acquired a majority equity interest in such area developers through conversion
of its convertible loans to such area developers or other acquisition by the
Key Takeaways
⚫Make sure you understand the nature of the business
strategy. Some business are not what they first seem.
⚫Do not assume that rapid sales growth reflects a viable
business strategy. It is easy to grow when you are
selling something for less than it cost.