In April 1996, the Company delivered 450,640 shares of common stock with a
market value of approximately $15.0 million and a $6.8 million promissory note
to acquire the equity interests of certain investors in Mid–Atlantic Restaurant
Systems L.P. (“Mid–Atlantic”), its Boston Market area developer for the
developer for the southern New Jersey area (“New Jersey Rose”) for a purchase
price of $13.4 million, including the assumption of $1.1 million in liabilities
owed to third parties. Also, in June 1996, the Company converted its $120.0
million loan to ENBC into shares of common stock of ENBC and subsequently
invested an additional $45.9 million in ENBC common stock, resulting in an
ownership interest of approximately 53% of the outstanding shares of common
stock of ENBC as of March 7, 1997. These transactions have been accounted for
as purchases, and, accordingly, the purchase prices were allocated to
identified assets and liabilities based upon their fair values at the date of
the transactions, resulting in goodwill of $110.1 million on the ENBC
transactions and $81.4 million on the Mid–Atlantic transactions, both of which
are being amortized over a 35–year life. The operating results of each
Conversion of MidAtlantic, NJ and
ENBC loans to equity
Conversion of MidAtlantic, NJ
and ENBC loans to equity
goodwill (81.4+110) 191.5M
Assets (plug) 130.2M
3rd party debt (38.5 MidA +1.1 NJ) 39.6
Cash (13.4 in NJ and 45.9 in ENBC) 59.3
97.2M.
321.7
As Reported Consolidate AD Allowance
Total revenue………………………….. 264508 1058972 264508
Income From Operations………………………. 91329 –105768 –68775
Other Income (Expense):
Interest expense, net........................... –14446 –14446 –14446
Gain on issuances of subsidiary‘s stock......... 38163 0 0
Other income, net…………………………. 137 –191000 –191000
Income Before Income Taxes and Minority Interest................
115183 –311214 –274221
Income Taxes (37.3% ETR)……………………………….. 42990 –116083 –102284
Minority Interest in (Earnings) of Subsidiary..........................
BOSTON CHICKEN INC 1996 Income Statement Restated
Remove the gain on sale of ENBC stock and write off $191 in
goodwill from conversions/acquisitions.
What Happened in the company
stores?
December 29, 1996 December 28, 1997
———-————-—— ——–—–—————-–
Number of Company stores
at year end……….………… 104 306
Net weekly revenue per store for the year. $ 23,643 $ 20,181
Net sales…………..……….. $ 73,512.7 100.0% $231,248.4 100.0%
Store cash flow………………. $ 13,862.8 18.9% $ 34,830.4 15.1%
========== ======== ========== ========
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
Interest income………………….…… 33,251 65,048 83,434
——-————- ——————– ———————-
Total revenue……………………… 159,479 264,508 462,368
Costs and Expenses:
Cost of products sold…………………. 19,737 31,160 94,736
—————–— ——————– ———————-
Total costs and expenses……………. 92,241 173,179 674,046
————-——- ——————– ———————-
Income (Loss) from Operations……………. 67,238 91,329 (211,678)
Other Income (Expense):
Total other income (expense)………… (12,865) 23,854 (36,414)
————-——- ——————– ———————-
Income (Loss) Before Income Taxes
and Minority Interest………………. 54,373 115,183 (248,092)
Income Taxes (Benefit)………………….. 20,814 42,990 (8,415)
Basic Earnings (Loss) Per Share.…………. $0.71 $1.07 $(3.32)
Exploiting Information in
Accruals
•Accruals represent the difference between
earnings and cash flows, so earnings consists
are susceptible to manipulation.
Measuring Operating Accruals
•Operating Accruals =
total assets, so
Operating Accruals
manipulation?
Cash flows from operating activities:
Net income………………………………………………….. $ 30,210 $ 17,523 $ 10,263
by operating activities:
Provision for stock grant, stock transfer and associate stock
options………………………………………………… – 644 1,122
Provision for deferred income taxes………………………….. 11,122 12,293
Depreciation and amortization……………………………….. 2,944 2,026 533
Net changes in asset and liability accounts, net of effects of
purchase of UFL:
Increase in accrued Membership income………………………. (1,196) (689) (672)
Increase in commission advances……………………………. (28,142) (22,891) (18,381)
Increase in other assets………………………………….. (304) (678) (1,360)
Increase in inventories…………………………………… (472) (489) (1,270)
Decrease (increase) in prepaid product commissions…………… 752 (513) (622)
(Decrease) increase in deferred revenue…………………….. (805) 771 1,390
Increase in Membership benefits……………………………. 1,159 787 315
(Decrease) increase in accounts payable and accrued expenses….. (5,373) 5,688 1,914
——– ——–
Prepaid legal SCF 1998 1997
Earnings Performance Mean
Reverts Slowly
⚫⚫⚫⚫
⚫
⚫
⚫
⚫
⚫⚫⚫
-5 -4 -3 -2 -1 0 1 2 3 4 5
-0.1
0
0.05
0.1
0.15
0.2
Event Year
Low Earnings
⚫High Earnings
Portfolio