BostonChicken,Inc.

:
NoChickenAboutAggressiveFranchising
BostonChicken,Inc.franchisesandoperatesretailfoodservicestoresunderthenameBostonMarketThesestores
specializeinfresh,convenientmealsfeaturinghomestyleentreesofchicken,turkey,ham,andmeatloaf,aswellasa
varietyoffreshlypreparedvegetables,salads,andothersidedishes.Itproductlinealsoincludessandwiches,soups,and
holiday home replacement meals. The total number of stores in the Boston Market system increased from 83 on
December27,Year12to829onDecember31,Year15. Grosssystemwidestorerevenuesincreasedfrom$42.7
millionduringtheYear12fiscalyearto$792.9millionduringtheYear15fiscalyear.Franchiseesownedandoperated
allbutthreeoftheBostonMarketstoresopenattheendofYear15.Thecompanyretainsownershipofthreestoresto
testmarketnewentrees,assessnewoperatingprocedures,andtrainemployees.

AreaDevelopers
The company relies on area developers to achieve rapid penetration of targeted markets. Area developers are
independentlyownedcompaniestowhichBostonMarketgrantsanexclusivefranchiseinaparticulargeographicalarea
todevelopandoperateBostonMarketstores.Anexperiencedretailfoodserviceveteranwithsubstantialinvestedequity
capitalheadseachfirmthatisanareadeveloper.Thecompanycurrentlyhas22areadevelopers.Thereare829stores
openattheendofYear15.Theareadevelopershavecommittedtoopeninganadditional934storeswithinthenext
severalyears. Theseareadevelopershaveincurredsubstantialnetlossesduringtherecentrapidexpansionofstores
($51.3millioninYear14and$148.3millioninYear15),andmosthavenegativenetworth.Thecompanybelievesthat
the area developers will recover such losses as the rate of expansion moderates by reduction or elimination of
developmentcosts,increasedoperationalefficienciesasaresultofpostexpansionoperationalfocus,greatereconomies
ofscale,increasedadvertisingefficiencies,andincreasedstorerevenue.Thecompanyanticipatesdomesticexpansionof
theBostonMarketconcept.Thecompanydoesnot,therefore,seekadditionaldomesticareadevelopersorfranchisees.

DevelopmentAgreements
Development agreementsprovideforthedevelopment ofaspecifiednumberofstoreswithinadefinedgeographic
territoryinaccordancewithascheduleofdates. Thedevelopmentschedulegenerallycoverstwotofiveyearsand
typicallyhasstoreoperationbenchmarksforthenumberofstorestobeopenandinoperationatsixmonthintervals.
Areadeveloperscurrentlypayanonrefundabledevelopmentfeeof$5,000perstoretobedevelopedandmakeadeposit
of $5,000 per store to be developed towards the store initial franchise fee (discussed below). Failure to meet
developmentschedulesorotherbreachesoftheareadevelopmentagreementmayleadtoterminationoftheexclusivity
providedbytheagreement.

FranchiseAgreements
Oncethecompanyandtheareadeveloperexecuteanacceptableleaseforanapprovedstoresite,theyenterinto
afranchiseagreementunderwhichtheareadeveloperbecomesthefranchiseeforthespecificstoretobedevelopedat
thesite.Thecompanyassiststheareadeveloperwithsiteselectionandconstructioncoordination,forwhichitreceivesa
realestatefee.Currentfranchiseagreementstypicallyprovideforpaymentofa$35,000perstoreinitialfranchisefee
(lessthe$5,000deposit),a5percentroyaltyongrossstorerevenue,anda$10,000minimumgrandopeningexpenditure.
Inaddition,thefranchiseagreementprovidesthatthecompanymayfromtimetotimespecifycomputersoftwareforuse
inthestores,forwhichthefranchiseepaysanupfrontlicensefeeplusanongoingmaintenancefee.Integratedhardware
and software permit the company to closely monitor the operations of each store as well as communicate new
developments.Thecompanymayowntheequipmentofaparticularstore,forwhichitreceivesperiodicleaserevenue
fromfranchisees.

AreaDeveloperFinancing
Thecompanybelievesthatthedevelopmentandoperationofstoresinatargetedmarketisenhancedwhenthe
areadevelopernothavetospendtimeraisingcapital.Accordingly,thecompanyextendssecureddebtfinancingtoarea
developerstopartiallyfinancestoredevelopmentandworkingcapitalneedsinmaximumamountsequaltothreetofour
timestheareadeveloperspaidincapital..AsoftheendofYear15,Thecompanyhadagreementstoprovidesecured
financingto17ofitsareasdevelopers. Suchcommitmentsaggregated$621.5million,ofwhich$471.0millionwas
outstanding.
Thecompanysloanagreementwithitsareadevelopersgenerallyrequirestheareadevelopertoexpendatleast
75percentofitscontributedcapitaltowarddevelopingstorespriortodrawingonitsrevolvingloan.Thedrawperiodis
approximatelytwothethreeyears. Onexpirationofthedrawperiod,theloanconvertstoanamortizingtermloan
payableoverfourtofiveyearsinperiodicinstallments,generallywithafinalballoonpayment.(Theterm amortizing
termloanmeansthattheborrowermakespaymentseachperiodforinterestandforprincipal.Theprincipalpayments
arelargeenoughinthiscasethattheborrowerpaysofftheentireloaninfiveyearsorless. Thefactthattheloan
involves a final balloon payment means that the last payment is larger, usually much larger, than the preceding
payments.)Theborrowerpaysinteresteachperiodat1percent overtheapplicablereferencerateoftheBankof
AmericanIllinoisasestablishedfromtimetotime. Apledgeofsubstantiallyalloftheassetsoftheareadeveloper
securestheloan.Someloanshaveaconversionfeatureinwhichthecompanymayconvertunpaidamountsoftheloan
intoanequityinterestintheareadeveloper.Thecompanycanexercisetheconversionfeatureonlyafteramoratorium
periodhaselapsed(generallytwoyearsafterexecutionoftheloan)ortheareadeveloperdefaultsontheloan.The
conversionpriceissetata12percentto15percentpremiumovertheperunitequitypricepaidbytheareadeveloperfor
itsequityinterestintheareadevelopmententity.

Marketing
Thecompanymarketsthroughtelevision,radio,newspapers,andotherprintmedia,directmail,andinstore
pointofpurchasedisplays.Franchiseespayanationaladvertisingfeeof2percentofgrossstorerevenuesandalocal
advertisingfeeof4percentofgrossstorerevenues.

FinancialStatementsandNotes
Exhibit1presentsbalancesheets,Exhibit2presentincomestatements,andExhibit3presentsstatementsof
cashflowsforBostonChicken,Inc.fortheYear13throughYear15fiscalyears.Selectednotestothesefinancial
statementsappearbelow.

RevenueRecognition Revenuefromcompanyoperatedstoresisrecognizedintheperiodforwhichrelated
foodandbeverageproductsaresold. Royaltiesarerecognizedinthesameperiodrelatedfranchisestorerevenueis
generated.Revenuederivedfrominitialfranchisefeesandareadevelopmentfeesisrecognizedwhenthefranchisestore
opens. Interest, real estate services, and software maintenance fees are recognized as earned. Lease income is
recognizedoverthelifeoftheleaseonastraightlinebasis.Softwarelicenseincomeisrecognizedasthesoftwareis
placedinservice.
Accounts Receivable Accounts receivable includes amounts currently due from area developers and
franchiseesotherthanforloans(seediscussionofNotesReceivablebelow).TheamountsappearinginExhibit1arenet
ofanallowanceforuncollectibleaccountsof$77,000onDecember27,Year12,$323,000onDecember26,Year13,
$246,000onDecember25,Year14,and$1,043,000onDecember31,Year15. Baddebtexpensewas$321,000for
Year13,$187,000forYear14,and$797,000forYear15.
NotesReceivableNotesreceivableincludeamountspayablebyareadevelopersandfranchiseesundermulti
yearlendingarrangements(seediscussionofareadeveloperfinancingabove).Thecompanymaintainsanallowancefor
loanlossesatalevelthatinmanagementsjudgmentisadequatetoprovideforestimatedpossibleloanlosses. The
companybasestheamountoftheallowanceonmanagementsreviewofeachareadevelopersuseofloanproceeds,
adherencetoitsstoredevelopmentschedule,storeperformancetrends,typeandamountofcollateralsecuringtheloan,
prevailingeconomicconditions,andotherfactorswhichmanagement deemsrelevantatthetime. Baseduponthis
reviewandanalysis,noallowancewasrequiredattheendoftheYear12,Year13,Year14,orYear15fiscalyears.
National and Local Advertising Funds The company administers a National Advertising Fund to which
companyoperatedstoresandfranchiseesmakecontributionsbasedonindividualfranchiseagreements(2percentof
storerevenues). Collected amountsarespent primarilyondevelopingmarketingandadvertisingmaterials foruse
systemwide.TheNationalAdvertisingFundisaccountedforseparatelyandnotincludedinthefinancialstatementsof
the company. The company maintains Local Advertising Funds that provide comprehensive advertising and sales
promotionsupportfortheBostonMarketstoresinparticularmarkets.Periodiccontributionsbycompanyownedstores
andfranchisees(generally4percentofstorerevenues)financelocaladvertisingandpromotionexpenditures.TheLocal
AdvertisingFundisaccountedforseparately andnotincludedinthefinancial statementsofthecompany. Actual
expendituresonnationalandlocaladvertisingasofDecember31,Year15haveexceededtheamountscollectedfrom
franchiseesby$9.6million.Thecompanyincludesthisexcessamountinothercurrentassetsonitsbalancesheet.
RelatedPartyTransactionsThecompanyandcertainareadevelopershaveenteredintosecuredloanandarea
developmentagreementswithcertainareadevelopersinwhichcertaindirectorsandcertaincurrentandformerofficers
ofthecompanyandmembersoftheirfamilieshaveadirectorindirectequityinterest.Thecompanyhasreceivedfrom
these entities in Year 13, Year 14, and Year 15, approximately $6.6 million, $30.9 million, and $46.0 million,
respectively, in development, franchise, royalty, software license, software maintenance, accounting and other
miscellaneous fees, rent, and interest on their loans with the company. In addition, these entities have paid
approximately$3.5million,$11.3million,and$20.0millioninnationalandlocaladvertisingcontributionsduringthe
sameperiods.ThecompanyhasalsosoldtocertainoftheseentitiesBostonMarketstores,inventory,equipment,and
othermiscellaneousassets,includingreimbursementoftheCompanysgeneralandadministrativecostsandexpensesof
operatingthestores,forwhichitreceived$5.0million,$47.1million,and$14.6millioninYear13,Year14,andYear
15respectively.Thecompanybelievesthatthetermsoftheseagreementsareasfavorabletothecompanyasthosewith
otherareadevelopers.Thecompanyhaspaidtooneoftheseareadevelopers$146,000inYear14and$100,000inYear
15forvariousservices.DuringYear13,theCompanyschiefexecutiveofficerreceivedfromtheCompany$107,066as
reimbursementforpaymentshemadetoBowanaAviation,Inc.fortheCompanysuseofanaircraftownedbyBowana.
DuringYear14andYear15,theCompanypaid$527,744and$661,960,respectively,toBowanafortheuseofaircrafts.
ThecompanyschiefexecutiveofficerandarelativeownBowana.Thecompanybelievesthattheamountschargedare
atratescomparabletothosechargedbythirdparties.
RelocationInSeptemberYear14,theCompanyconsolidateditsfourChicagobasedsupportcenterfacilities
intoasinglefacilityandrelocatedtoGolden,Colorado. Thecostoftherelocation,includingmovingpersonneland
facilities,severancepayments,andthewriteoffofvacatedleaseholdimprovements,was$5.1million.

Required:
a. DiscusstheappropriatenessofthetimingofrevenuerecognitionbyBostonChickenforeachofthe
following:
(1) developmentfranchisefee
(2) initialfranchisefee
(3) royalties
(4) interestonloanstoareadevelopers
(5) realestateserviceandleasingfees
(6) softwarelicenseandmaintenancefee
(Hint:AnalyzethechangesintheallowanceforuncollectibleaccountsforYear13,Year14,andYear
15toassessthecollectibilityofoutstandingaccountsandnotesreceivable.)

b. SuggestpossiblereasonswhyBostonChickenmightchoosetodevelopandoperateitsstoresthrough
nonownedareadevelopersandfranchiseesinsteadofoutrightownership.

c. SuggestpossiblereasonswhyBostonChickenmightchoosetostructureitsmarketingactivitiesusing
theNationalAdvertisingFundandtheLocalAdvertisingFund.

d. Exhibit4presentsselectedoperatingdataandfinancialstatementratiosforBostonChicken(inaddition
tothecommonsizeincomestatementinExhibit2).Analyzethechangesintheprofitabilityandriskof
BostonChickenbetweenYear13andYear15.
 Exhibit 1

Boston Chicken, Inc. Balance Sheets

(amounts in thousands)

`
December 27, ```````December 26, December 25 December 31,
Assets Year 12 Year 13 Year 14 Year 15
Cash................................................. $ 9,709 $ 4,537 $ 25,304 $ 310,436
Accounts Receivable, net................ 859 5,202 13,002 23,059
Notes Receivable............................. 83 1,512 16,906 5,462
Other Current Assets........................ 364 1,843 4,117 4,858
Total Current Assets................. $ 11,015 $ 13,094 $ 59,329 $ 343,815
Property, Plant & Equipment (net). . 9,934 51,331 163,314 258,550
Notes Receivable-Noncurrent......... 690 44,204 185,594 450,572
Other Assets..................................... 1,031 1,435 18,745 20,940
Total Assets............................... $ 22,670 $ 110,064 $ 426,982 $ 1,073,877

Liabilities and Shareholders Equity

Accounts Payable............................ $ 1,383 $ 6,216 $ 15,188 $ 12,292
Accrued Liabilities.......................... 835 1,835 6,587 9,095
Deferred Franchise Revenue........... 981 2,255 5,505 8,945
Total Current Liabilities........... $ 3,199 $ 10,306 $ 27,280 $ 30,332
Long-term Debt............................... -- -- 130,000 307,178
Deferred Franchise Revenue........... 1,177 3,139 5,815 2,072
Deferred Income Taxes.................... -- -- 3,011 16,631
Other Noncurrent Liabilities............ 1,257 1,713 1,061 833
Total Liabilities......................... $ 5,633 $ 15,158 $ 167,167 $ 357,046
Common
Stock............................................... $ 112 $ 347 $ 447 $ 591
Additional Paid-in Capital............... 27,675 103,662 252,298 675,611
Retained Earnings............................ (10,750) (9,103) 7,070 40,629
Total Shareholders Equity....... $ 17,037 $ 94,906 $ 259,215 $ 716,831
Total Liabilities and
Shareholders Equity.............. $ 22,670 $ 110,064 $ 426,982 $ 1,073,877
 Exhibit 2

Boston Chicken, Inc. Income Statement

(amounts in thousands)

Year 13 Year 14 Year 15

Revenues
Royalties.......................................... $ 5,464 12.8% $ 17,421 18.1% $ 34,841 21.8%
Initial Development &
Franchisee Fees............................. 5,230 12.3 13,057 13.6 13,712 8.6
Interest on Area Developer
Financing....................................... 1,130 2.7 11,632 12.1 33,251 20.9
Real Estate and Lease Services....... 253 .6 5,361 5.6 17,939 11.3
Software Fees.................................. -- -- 6,480 6.7 7,723 4.8
Other................................................ 604 1.4 1,284 1.3 447 .3
Total from Developers
and Franchises........................ $ 12,681 29.8% $ 55,235 57.4% $ 107,913 67.7%
Company-owned Stores................... 29,849 70.2 40,916 42.6 51,566 32.3
Total Revenues......................... $ 42,530 100.0% $ 96,151 100.0% $ 159,479 100.0%

Expenses
Cost of Goods Sold.......................... $ (11,287) (26.5) $ (15,876) (16.5) $ (19,737) (12.4)
Salaries & Benefits.......................... (15,437) (36.3) (22,637) (23.5) (31,137) (19.5)
Administrative................................. (13,879) (32.6) (27,930) (29.1) (41,367) (25.9)
Interest............................................. (640) (1.5) (5,827) (6.1) (15,352) (9.6)
Income Taxes................................... -- (4,277) (4.4) (20,814) (13.1)
Provision for Relocation.................. -- (5,097) (5.3) --
Other (net)....................................... 360 .8 1,666 1.7 2,487 1.5
Net Income...................................... $ 1,647 3.9% $ 16,173 16.8% $ 33,559 21.0%
 Exhibit3

BostonChicken,Inc.StatementofCashFlows
(amountsinthousands)

Year13 Year14 Year15

Operations
NetIncome........................................................ $ 1,647 $ 16,173 $ 33,559
Depreciation...................................................... 1,970 6,074 11,442
DeferredIncomeTaxes..................................... 4,277 12,133
DeferredFranchiseRevenue............................. 3,236 5,926 (303)
InterestonZeroCouponBorrowing.................. 8,075
Loss(Gain)onSaleofAssets........................... (150) (368) 231
(Inc.)Dec.inAccountsReceivable................... (4,343) (7,800) (10,057)
(Inc.)Dec.inOtherCurrentAssets................... (1,479) (2,274) (741)
Inc.(Dec.)inAccountsPayable........................ 4,833 8,972 (2,896)
Inc.(Dec.)inAccruedLiabilities...................... 1,000 4,752 2,508
Other..................................................................
1,332

186
1,525
CashFlowfromOperations............................... $
8,046 $
35,918 $
55,476

Investing
SaleofAssets.................................................... $ 6,161 $ 62,342 $ 80,910
PurchaseofProperty,Plantand
Equipment.......................................................... (49,151) (163,622) (145,756)
IssuanceofNotesReceivable............................ (45,690) (225,282) (661,033)
RepaymentofNotesReceivable....................... 747 68,498 407,499
AcquisitionofOtherAssets............................... (1,093)
(12,790)
(9,788)

CashFlowfromInvesting................................. $
(89,026) $(270,854) $(328,168)

Financing
BorrowingUnderCreditFacility....................... $ 32,275 $ 96,130 $ 229,240
IncreaseinLongtermDebt............................... 9,658 130,000 172,464
IssuanceofCommonStock............................... 66,150 125,703 385,360
RepaymentsunderCreditFacility..................... (32,275)
(96,130)
(229,240)

CashFlowfromFinancing................................ $
75,808 $
255,703 $
557,824
ChangeinCash.................................................. $ (5,172) $ 20,767 $ 285,132
CashBeginningofYear..................................
9,709
4,537 25,304

CashEndofYear............................................ $
4,537 $
25,304 $
310,436
 Exhibit4

BostonChicken,Inc.SelectedData

Year13 Year14 Year15

SystemWideRevenuesofAllBostonMarket
Stores(000s)................................................... $ 152,056 $ 383,691 $ 792,948
NumberofStoresinOperationatYearEnd:
Companyoperated..................................... 38 41 3
FinancedAreaDevelopers......................... 78 314 712
NonFinancedAreaDevelopers................. 101 179 114
Total....................................................... 217 534 829

ProfitMarginforROA...................................... 4.9% 20.8% 27.3%

AssetsTurnover................................................. .6 .4 .2
RateofReturnonAssets................................... 3.1% 7.4% 5.8%
LeverageRatio................................................... 1.0 1.5 1.5
RateofReturnonCommonShareholders
Equity.............................................................. 2.9% 9.1% 6.9%
CurrentRatio..................................................... 1.3 2.2 11.3
QuickRatio........................................................ .5 2.0 11.2
CashFlowfromOperations/Average
CurrentLiabilities............................................ 119.4% 191.1% 192.6%
Liabilities/Assets............................................... 13.8% 39.2% 33.2%
LongtermDebt/Assets...................................... 30.4% 28.6%
CashFlowfromOperations/AverageTotal
Liabilities......................................................... 77.5% 39.4% 21.2%
InterestCoverageRatio..................................... 3.6 4.5 4.5
CashFlowfromOperations/Capital
Expenditures.................................................... .2 .2 .4