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Stanford University Law School - Securities Class Action Clearinghouse

UNITED STATES DISTRICT COURT

DISTRICT OF COLORADO

 
 

Civil Action No. 97-WM-1435

GEORGE GENNA, On Behalf of Himself and All Others Similarly Situated,

Plaintiff,

           vs.

BOSTON CHICKEN, INC., SCOTT A. BECK, MARK W. STEPHENS, SAAD NADHIR, ALEX. BROWN & SONS, INC., MERRILL LYNCH & CO. and MORGAN STANLEY & CO., INC.,

Defendants,


CLASS ACTION COMPLAINT FOR VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 AND JURY DEMAND


SUMMARY OF ACTION

1. This is a class action on behalf of all persons who purchased the publicly traded equity and debt securities of Boston Chicken, Inc. ("Boston Chicken" or the "Company") between February 6, 1995 and May 28, 1997 (the "Class Period"), seeking to remedy violations of the federal securities laws by Boston Chicken, its CEO Scott Beck ("Beck"), its Vice Chairman Saad Nadhir ("Nadhir"), its CFO Mark Stephens ("Stephens") (collectively the "Boston Chicken Defendants"), and its investment bankers Alex. Brown & Sons, Inc., Merrill Lynch & Co. and Morgan Stanley & Co., Inc. (collectively the "Underwriter Defendants"), which underwrote over $800 million of Boston Chicken securities sold during the Class Period. During the Class Period, the defendants artificially inflated the price of Boston Chicken's publicly traded equity and debt securities (the "Publicly Traded Securities") by:
(a) concealing the operating losses of the stores operated by area developers, which represented the vast majority of Boston Chicken's stores, to created the impression that Boston Chicken's stores were operating successfully and profitably and that Boston Chicken's prospects were extremely favorable as the Company's expansion was leading to better and better earnings;

(b) improperly reporting as revenue, franchise fees from Boston Chicken's area developers, the source of which was money provided to the area developers by Boston Chicken itself, which had the effect of overstating and inflating Boston Chicken's reported revenues and earnings;

(c) representing that the stores owned by area developers would later be converted to company owned stores and that the conversion would be additive to Boston Chicken's earnings, and

(d) representing that as a result of the success of its new Boston Market "concept" and the success of the area developers, Boston Chicken would be able to increase its growth rates even more and was achieving strong growth in net income and earnings per share ("EPS")

2. These positive statements drove Boston Chicken's stock from $14-1/2 per share at the beginning of the Class Period to a Class Period high of $41 and enabled the defendants to achieve their objective of raising hundreds of millions of dollars from public investors.1 The defendants sales of Boston Chicken securities included: 3. On May 29, 1997, after raising over $800,000,000 from the public based upon Boston Chicken's stellar revenue and earnings growth, Boston Chicken Finally revealed information which it had concealed for years but which had begun leaking into the market, i.e., that Boston Chicken would not grow anywhere near the rates asserted by defendants; that its expansion would have to be curtailed; that its lunch menu had largely failed and had in fact, substantially cannibalized its higher margin dinner menu; and that its area developers had not been providing the expertise and operating efficiencies claimed by defendants and would have to be consolidated. Upon these revelations, securities analysts downgraded Boston Chicken stock from "strong buy" to "market perform" and "neutral" and the price of Boston Chicken common stock fell to $16 per share, thereafter falling to as low as $14 per share, a decline of more than 60% from its Class Period high of $41 per share!

4. The first Boston Chicken store was opened in 1985 in Massachusetts, and by the end of 1991 there were a total of thirty-four Boston Chicken stores in existence. In 1993 the Company successfully completed its initial public offering, selling stock to the public and raising $65 million. However, despite a "hot" IPO, in which Boston Chicken was able to sell 3.8 million shares at more than twice the offering price, the stock did not perform well over the following year, as earnings growth did not keep pace with store expansion growth. In fact by late 1994, the price of Boston Chicken stock was trading at less than $15 per share, a decline of approximately 40% from its post-offering high of $26 per share. The insiders at Boston Chicken, including Beck, Nadhir and Stephens (who had joined the Company immediately prior to the IPO in October 1993) were gravely concerned about the lackluster stock performance as Boston Chicken's poor stock performance made it much more difficult, if not impossible, to raise the necessary funds to fund the expansion which they had set the Company upon. One of the primary problems with the Boston Chicken "story" was that new stores were performing poorly. Thus, the defendants knew that if they wanted to successfully grow Boston Chicken's operations, Boston Chicken would have to report strong earnings growth while at the same time opening many new stores. To achieve their objective, defendants concocted the scheme complained of herein. Fundamental to the defendants' scheme was expanding the use of financed area developers. Beginning in 1993, Boston Chicken had utilized area developers (who controlled a large number of franchises) to open stores with Boston Chicken financing as much as 70% of the costs of opening up new stores. In 1994, Boston Chicken greatly increased this program and offered to finance 70% of the costs of opening up new stores. In 1994, Boston Chicken greatly increased this program and offered to finance 70% of the costs the area developers incurred to open hundreds of stores. These area developers were technically not subsidiaries so Boston Chicken did not recognize the losses of these entities during the start-up phase in its financial statements. By loaning hundreds of millions of dollars to the area developers, Boston Chicken was able to greatly increase the number of stores that could be opened. Boston Chicken included a provision in loan agreements with area developers that Boston Chicken could convert its debt interest into an equity interest two years after the area developer opened stores. Part of Boston Chicken's plan was to keep these area developers as separate entities until such time as they became profitable at which time Boston Chicken would convert its debt or its note receivable from the area developers into an equity interest wherein Boston Chicken would then include in its own financial statements the earnings of these entities. Because the participation of the area developers was instrumental to defendants' scheme, they clandestinely secured the help of affiliated parties to serve as several of these area developers. In fact, defendant Beck's father, Lawrence Beck, was an investor in at least one-third of the area developers. One area developer, BC Great Lakes, had as investors Jeffrey Shearer, a director and Vice Chairman of the Board of Boston Chicken, and Peer Peterson, the son of another director of the Company.

5. Utilizing the area developers allowed Boston Chicken to:

(a) remove from its consolidated financial results the stores owned by the area developers since those entities were not technically subsidiaries of Boston Chicken, meaning that the enormous losses which these entities were incurring would not be included in Boston Chicken's reported financial results;

(b) re-acquire the franchises when they became profitable, thus improving its earnings without having to ever show the losses occurring during the start-up phase;

(c) conceal the operating losses of the area developers to create the impression that Boston Chicken's store operations were successful and profitable and that Boston Chicken's prospects were extremely favorable as the expansion was leading to better and better earnings;

(d) report fictitious franchises fees from the area developers -- the source of which was money proved to the franchisees by Boston Chicken itself -- which allowed defendants to overstate and inflate Boston Chicken's reported revenues and earnings;

(e) represent that Boston Market "concept" was successful and was capable of continuing its huge growth; and

(f) raise $800,000,000 from the sale of securities to the public, allowing Boston Chicken to loan more and more money to area developers to increase its growth rates even more.

6. By early 1995 it was apparent to defendants that substantially expanding the area developer program was the only way Boston Chicken could grow while simultaneously showing the income growth necessary to raise money from public investors. Consequently, Boston Chicken, its insiders and the Underwriter Defendants began to prime the market for the great growth that it projected for the future. In early 1995, the Company announced a new initiative, the Boston Market "concept", which involved changing the names of the stores to "Boston Market" and introducing new menu items. In fact the Boston Chicken's stores were hemorrhaging cash, as the excessive use of coupons and free meals, which increased traffic, were having a negative impact on operations. However, defendants could not disclose the truth about Boston Chicken's poor unit operating performance, as revealing the truth would have made it impossible for Boston Chicken to raise the necessary funds to continue defendants' expansion plans. To conceal these adverse facts and to inflate the price of Boston Chicken's stock defendants issued false financial statements and made the false and misleading statements complained of herein.

7. By the beginning of the Class Period there were rumors in the financial community about Boston Chicken's accounting practices. Boston Chicken responded to these allegations stating that its accounting was "as straight forward as it could be," and its accounting was "fine." When rumors surfaced that the stores owned by the area developers were losing money, the Company refuted such allegations stating that its stores were doing "great." The Company also touted its infrastructure and the success of its "concept" which included changing the name of the stores from Boston Chicken to Boston Market and the introduction of a new lunch menu which included additional sandwiches and other menu items.

8. During the summer of 1995, Boston Chicken continued to refute reports that Company stores were losing money and continued to report system-wide store revenue of hundreds of millions of dollars while concealing the operating losses that the insiders knew were both material to investors and a major hindrance to the growth and future profitability of the Company.

9. As part of the scheme complained of herein, during the Class Period, the Company filed misleading reports with the SEC. The Company touted its area developer structure emphasizing the value and expertise added to Boston Chicken's operations by these area developers. The Company concealed information regarding the close ties many of these area developers had to Boston Chicken, including family members of directors of the Company and the large losses being incurred by Boston Chicken Stores. In fact, in its prospectus used to sell the May 1995 LYONs offering, the Company represented that it had recently begun to achieve profitability and also referred to individual stores owned by area developers within the same paragraph, but concealed that these stores owned by area developers continued to lose vast amounts of money. Simply put, Boston Chicken was bleeding cash. In its Form 10-K for 1995, filed in March of 1996, the Company finally made a partial disclosure that stores owned by its area developers had incurred "substantial losses." This disclosure was misleading as defendants concealed that these losses exceeded all the net income the Company had ever reported and the fact that these losses were increasing! Despite having all the necessary information available, the Company intentionally continued to omit reporting the huge losses incurred by it.

10. In 1996 Boston Chicken continued to report false revenues and earnings by including revenues from franchisees which should have been deferred pursuant to generally accepted accounting principles ("GAAP"). The Company also reported false system-wide revenue figures, by including in its revenue calculations free employee meals in the total and grossing up the amount to exclude the material effect of numerous coupon programs and other promotions. This had the effect of overstating system-wide revenues by 5-10%.

11. In April 1997, as part of a large debt offering, Boston Chicken was forced to amend its recently filed Form 10-K for 1996 to include information on the cash flow deficit of the stores operated by area developers. However, in the offering documents, the defendants represented the stores had experienced same store sales increase between Q1 1996 and Q1 1997, when in fact the Company had suffered a decrease in same store sales.

12. Defendants used Boston Chicken's risky expansion during 1994-1996 to pursue the financial scheme detailed above. Despite its assertion that Boston Chicken experienced huge growth in revenues and earnings, Boston Chicken had not, in fact, achieved sustained store-wide profitability in 1994-1996 as represented by defendants. Had Boston Chicken honestly accounted for its operations and/or disclosed its store operating losses at year-end 1994 or 1995, or revealed during 1994-1995 the problems it was having with many of its new stores, Boston Chicken would have reported much lower earnings between 1994-1997 and defendants would not have been able to pursue their scheme.

13. On May 29,1997, after the Boston Chicken Defendants issued and sold over $800,000,000 to the investing public, Boston Chicken was finally forced to disclose the horrible problems that had been adversely impacting its operations. Boston Chicken finally began to acknowledge the severe problems it was having, admitting that the high level of discounts and promotions were hurting operational results and that sales growth was unsatisfactory. Beck stated:

"In the last year or so, we have drifted away from our core brand attributes as we aggressively built our lunch business. While we are very happy with our Boston Carver sandwich line and how it has substantially driven lunch sales, byproducts of this success are the high level of promotion and discounting necessary to compete at lunch . . . . The issue is that we've begun to see this lunch-driven discounting negatively impact our dinner sales. Further, the customer experience, the hallmark of our brand positioning, is not where we would like it to be."
The announcement indicated that Larry Zwain, president and CEO, had resigned and the Company would be restructuring its organization with area developers.

14. The price of Boston Chicken stock dropped to as low as $16 per share on the release of this news and later fell to as low as $14 as layoffs were announced an the Company acknowledged that its lunch sales initiative had hurt overall results due to discounting. Karen Rugen, Boston Chicken VP of Communications stated:

"'The prolonged marketing strategy on discounting has hurt sales because it hasn't driven the business enough to make up for some of the effect it's having on dinner. We're changing our marketing strategy because we don't like the direction our sales are going.'"
15. Boston Chicken later told analysts that same store sales were expected to suffer an additional %6 decrease in Q2 1997 and 4% in Q3 1997, and that store expansion would be only half the rate as previously reported for 1997 and 1998. It also indicated that reserves for losses might be necessary for the Notes Receivable from area developers due to the operating problems at the developers. A June 25, 1997 Morgan Stanley report on management's comments, confirmed this fact, stating:
That sales decline, combined with the high financing costs of the company's latest foray into the capital markets, precipitated a substantial decline in the stock price. And, that is what necessitated the review of unit development plans. Recognizing how sensitive its stock price is to net sales changes, BOST was alarmed by the cannibalization the newly launched (and, heavily discounted) Extreme Carvers was having on individual meal sales during the dinner daypart. Sales of traditional dinner fare tend not be as promotionally-driven. To redirect consumer attention back to having dinner at dinner, the company launched its $1 chicken promotion. The combined effect of the two promotions was that Boston Market's coupon rate soared to 6.7% in 1Q97.
16. The statements issued by defendants during the Class Period concerning Boston Chicken were each false or misleading when made. The true facts, which were known to defendants due to their access to internal Boston Chicken data, were:
(a) That Boston Chicken's financial results for the years ended December 31, 1994, 1995 and 1996, and for the interim periods during 1995 and 1996 and the quarter ended April 20, 1997, were misleading due to the Company's failure to disclose the large operating losses being incurred by the area developers as the losses from these operations were more than triple the net income Boston Chicken reported for 1994;

(b) That Boston Chicken's reported 1994, 1995 and 1996 revenues and earnings were materially overstated in violation of GAAP due to the inclusion of millions of dollars worth of franchise fees which should have been deferred as described in ¶¶90-98;

(c) That the Boston Market "concept" was not as successful as described, as Boston Chicken was only able to attract sufficient customers to generate the revenue and same store sales growth claimed by defendants through the excessive use of coupons, discounts and free food;

(d) That the repeated references to Boston Chicken's strong or improving financial condition were false and misleading, as defendants were concealing that Boston Chicken area developers/franchisees were for the most part losing money;

(e) That the system-wide revenue reported by Boston Chicken during the Class Period was materially overstated in violation of GAAP due to the grossing up of the revenues to include coupons, discounts and employee food, as described in ¶¶90-92, 110-112;

(f) That Boston Chicken's foray into the lunch market was not encountering widespread acceptance, but rather, was only able to generate revenue growth through defendants use of coupons and other promotional programs which were cannibalizing Boston Chicken's higher margin dinner sales;

(g) That Boston Chicken had not achieved operational excellence, but rather had embarked upon a scheme to expand reliance upon its financial area developers, concealing the operating losses which were occurring at most of the new stores and inflating revenues through the inclusion of franchise fees which were paid for by loans made by Boston Chicken to its area developers; and

(h) That, as a result of the foregoing negative factors, there was no basis in fact for defendants' forecasts that Boston Chicken would achieve a 5-year growth rate of 40% annually, and the defendants knew those forecasts were false and misleading when made.

17. The chart below shows the price movement of Boston Chicken stock as the defendants pursued their scheme to conceal the true facts about Boston Chicken's operations in order to raise almost $1 billion through the sale of debt and equity to the public. The chart below also demonstrates the price action of Boston Chicken's shares during the Class Period and the collapse of Boston Chicken's share price as the truth about Boston Chicken and its diminished financial condition emerged:

Boston Chicken, Inc.
November 9, 1993 - June 27, 1997
Daily Stock Prices

JURISDICTION AND VENUE

18. Jurisdiction exists pursuant to §27 of the Securities Exchange Act of 1934 ("Exchange Act":, 15 U.S.C. §78aa, and 28 U.S.C. §1331. The claims asserted arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. §240.10b-5. Defendants used the instrumentalities of interstate commerce, the U.S. mails and the facilities of the national securities markets.

19. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts giving rise to the violations complained of occurred in this District.

THE PARTIES

20. Plaintiff George Genna purchased 500 shares of Boston Chicken common stock on May 5, 1997 at $25 per share and was damaged thereby.

21. Defendant Boston Chicken is incorporated in the state of Delaware and headquartered in Golden, Colorado with more than 1,100 Boston Market stores in the United States. During the Class Period, Boston Chicken's 65.3 million shares of outstanding common stock, its 130,000 convertible subordinated debentures due in June 2015, its 774,400 LYONs and its 200,000 convertible subordinated debentures due in May 2004, were traded on the NASDAQ National Market System. All these securities traded in efficient markets during the Class Period.

22. (a) Defendant Scott A. Beck ("Beck") was President, Chief Executive Officer and Chairman of the Board of Boston Chicken during the Class Period. Because of defendant Beck's positions, he knew the adverse non-public information about Boston Chicken's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection herewith.

(b) Defendant Mark W. Stephens ("Stephens") was Chief Financial Officer and Vice Chairman of the Board of Directors of Boston Chicken during the Class Period. Because of defendant Stephens' position, he knew the adverse non-public information about Boston Chicken's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith.

(c) Defendant Saad Nadhir ("Nadhir") was Vice Chairman of the Board of Directors of Boston Chicken during the Class Period. Because of defendant Nadhir's position, he knew the adverse non-public information about Boston Chicken's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith.

23. Defendant Alex. Brown & Sons, Inc. ("Alex. Brown"), Merrill Lynch & Co. ("Merrill Lynch"), and Morgan Stanley & Co., Inc. ("Morgan Stanley") (collectively the "Underwriter Defendants") are investment bankers and broker dealers who specialize in underwriting public offerings of securities and making markets in those securities. Merrill Lynch, Alex. Brown and Morgan Stanley served as lead underwriters of the Boston Chicken LYONs offering of May 26, 1995, which generated $4.5 million for the underwriting syndicate. Merrill Lynch and Alex. Brown served as co-lead underwriters of the Boston Chicken secondary stock offering of December 5, 1995, which generated $12.42 million for the underwriting syndicate. Merrill Lynch, Alex. Brown and Morgan Stanley served as co-lead underwriters of the April 22, 1997 convertible subordinated debt offering, which generated an additional $6.25 million for the underwriting syndicate.

DEFENDANTS MOTIVE AND OPPORTUNITY TO COMMIT THE FRAUD

24. Defendants Beck, Stephens and Nadhir were each aware of and approved the false statements issued by or on behalf of Boston Chicken during the Class Period and actually knew they were false. Beck was a controlling person of Boston Chicken due to his executive and Board positions. Each of these defendants had the opportunity to commit and participate in the fraud described herein. The Individual Defendants were top officers of Boston Chicken and they controlled its press releases, corporate releases, SEC filings, preparation of its financial statements and its communications with analysts. Thus, they controlled the public dissemination of, and could falsify, the information about Boston Chicken's business, store operating results, and finances that reached the public and impacted the price of Boston Chicken's Publicly Traded Securities.

25. Beck, Stephens and Nadhir each had a motive to commit and to participate in the fraud described herein. They wanted to conceal the operating losses at stores owned by the area developers as long as they could so that the public market would favorably perceive the Company's rapid expansion program which would allow the defendants to be able to continue to raise money from the public through equity and debt offerings and thereby continue the expansion program because of the perceived success of the Boston Market "concept." They also wanted to make it appear that Boston Chicken's business was succeeding and growing, that it was experiencing significant earnings growth and that the conversion of the area developer stores to company-owned stores would be additive to earnings in order to inflate the price of Boston Chicken's stock so they could raise hundreds of millions of dollars in new capital by completing:

26. Public offerings of Boston Chicken securities were essential to Boston Chicken's expansion plans, as the stores were cash flow negative throughout the Class Period. During 1996, the stores used $128 million in operations while at the same time Boston Chicken provided more than $1.4 billion to area developers so they could open stores and fund operating losses. Consequently, raising funds in the public markets was the lifeblood of defendants' expansion plans and to raise funds defendants had to portray Boston Chicken as experiencing growth in revenues and earnings so that Boston Chicken's stock price would stay high enough to allow Boston Chicken to continue to issue securities at prices that would not dilute Boston Chicken's EPS. Boston Chicken was hemorrhaging cash so badly that just prior to the Company's April 1997 offering, Boston Chicken's cash had declined to a mere $2 million, a 98% decline from the prior quarter, and Boston Chicken was forced to draw $65 million against a newly obtained revolving credit facility.

27. Alex. Brown, Merrill Lynch and Morgan Stanley each agreed to participate in the fraudulent scheme, as detailed in this Complaint, in order to earn millions of dollars of underwriting discounts and/or commissions from Boston Chicken's May 1995 LYONs offering, the December 1995 secondary offering and the April 22, 1997 debt offering and in order to obtain millions of dollars more by acting as primary marketmakers of Boston Chicken's publicly traded securities. Merrill Lynch had additional incentive to participate in the scheme because one of the Merrill Lynch Investment Banking Group managing directors, Charles Lewis, and his family had an interest in one million shares of Boston Chicken stock, owned indirectly through their interest in Boston Chicken Midwest L.P. As a result of their retention to underwrite Boston Chicken's offerings, these underwriters had constant and virtually unlimited access to Boston Chicken's internal corporate information, including the adverse information concealed by defendants. Each of these firms issued false and misleading research reports on Boston Chicken during the Class Period and all of the Underwriter Defendants assisted in drafting and disseminating the false and misleading prospectuses in which they served as lead or co-lead underwriters as part of the overall fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Boston Chicken stock.

28. Each of the defendants is liable for making materially false and misleading statements, participating in a fraudulent scheme and course of business that operated as a fraud on class members.

BACKGROUND TO THE CLASS PERIOD

29. The first Boston Chicken store was opened in 1985 in Massachusetts, and by the end of 1991 there were a total of thirty-four Boston Chicken stores in existence. In the spring of 1992, Beck and persons affiliated with him made a series of investments in Boston Chicken to gain effective control of the Boston Chicken Corporation. In 1993, the Company was able to open additional stores for a total of 217 stores. In 1993, the Company also reincorporated in Delaware and successfully completed its initial public offering, selling stock to the public and raising $65 million. Despite the "hot" IPO, in which Boston Chicken was able to sell 3.8 million shares, the price of which immediately jumped from $10 per share to as high as $26 per share, the stock did not perform well over the next year, as earnings growth did not keep pace with store expansion growth. In fact, by late 1994, the price of Boston Chicken stock was trading at less than $15 per share, a decline of approximately 40% from its post-offering high of $26 per share. The insiders at Boston Chicken, including Beck, Nadhir and Stephens (who had joined the Company immediately prior to the IPO in October 1993), were gravely concerned about the lackluster stock performance as Boston Chicken's poor stock performance made it much more difficult, if not impossible, to raise the necessary funds to fund the expansion plans which the Company had set out upon. One of the primary problems with the Boston Chicken "story" was that new stores were performing poorly and were generating losses. Thus, the defendants knew that if they wanted to successfully grow Boston Chicken's operations, the Company would have to report strong earnings growth while opening many new stores. To achieve their objective, defendants concocted the scheme complained of herein. Fundamental to defendants scheme was to immediately expand the use of franchise area developers. The insiders had discovered early on that it was difficult to sign up significant numbers of franchisees due to the heavy capital requirements needed to open a store as well as the long delays in (and uncertainty about) reaching profitability. They had begun in 1993 to use area developers who controlled a large number of franchises and Boston Chicken began to finance as much as 70% of the area developers' costs of opening up new stores, which greatly increased the number of stores the area developers could open. Boston Chicken included a provision in its loan agreements with area developers that granted Boston Chicken the option to convert its debt interest into equity two years after the area developers stores opened, ideally when the stores became profitable. Part of Boston Chicken's plan was to keep these area developers as separate entities until such time as they became profitable, at which time Boston Chicken would exercise its option to convert its note receivable from the area developers into an equity interest and Boston Chicken would then include the earnings of these entities in its own earnings.

30. The insiders secured the help of affiliated parties to serve as several of these area developers to insure compliance with this scheme. In fact, defendant Beck's father, Lawrence Beck, was an investor in at least one-third of the area developers. One area developer, BC Great Lakes, had investors, including Jeffrey Shearer, a director and Vice Chairman of the Board of Boston Chicken and Peer Peterson, the son of another director of the Company.

31. This financed area development arrangement provided several benefits to Boston Chicken including that Boston Chicken could:

(a) remove from its consolidated financial results the stores owned by the area developers since those entities were not technically subsidiaries of Boston Chicken, meaning that the enormous losses which these entities were incurring would not be included in Boston Chicken's reported financial results;

(b) re-acquire the entities when they became profitable, thus improving the entities when they became profitable, thus improving its earnings without having to ever show the losses occurring during the start-up phase;

(c) conceal the operating losses of these entities to create the impression that its store operations were successful and profitable and that Boston Chicken's prospects were extremely favorable as the expansion was leading to better and better earnings;

(d) report fictitious franchise fees from the area developers -- the source of which was money provided to the franchisees by Boston Chicken itself -- which allowed defendants to overstate and inflate Boston Chicken's reported revenues and earnings;

(e) represent that the Boston Market "concept" was successful and was capable of continuing its huge growth; and

(f) raise $800,000,000 from the sale of securities to the public, allowing Boston Chicken to loan more and more money to area developers to increase its growth rates even more.

32. Thus, the insiders in early 1995 began to prime the market for the great growth that it projected for the future. On January 1, 1995, Beck defended the Company's financing of its area developers and the accounting used by Boston Chicken, stating:
"The idea that we provide financing to our franchisees is a good idea for us, and it's a good idea for them.... We have no accounting issues, and our books are as straight forward as can be."
33. At the beginning of the Class Period, the defendants were introducing a new Boston Market "concept" which involved changing the name of the stores to "Boston Market" and introducing new menu items. At the same time, defendants were aware of severe margin pressures and operating losses at stores operated by area developers. The excessive use of coupons and free meals, which increased traffic, were having a negative impact on operations. Moreover, the prices for Boston Market food were high compared to other fast-food type establishments. However, defendants could not disclose the truth about Boston Chicken's poor unit operating performance, as revealing Boston Chicken's actual results would have made it impossible for Boston Chicken to raise the necessary funds to continue defendants' expansion plans. To conceal these adverse facts and to inflate the price of Boston Chicken's Publicly Traded Securities, defendants issued false financial statements and made false and misleading statements during the Class Period.

DEFENDANTS' FRAUDULENT SCHEME AND UNLAWFUL COURSE OF BUSINESS

34. On February 6, 1995, Boston Chicken issued a release containing its results for the year and quarter ended December 25, 1994, including an 882% increase in annual net earnings to $0.38 per share from $0.06 in 1993. The release quoted Beck as stating:
"We ended fiscal 1994 very strongly -- exceeding both our original goal of 450 total stores and our revised goal of 525 stores open at fiscal year end. I couldn't be more pleased with the quality of sites added in 1994. Great real estate plays a key role in our successful evolution of the concept."
35. After the release of the Company's 1994 results, Peter Cakes of Merrill Lynch wrote a report on Boston Chicken in which he estimated a 5-year growth rate of 40%. Boston Chicken's stock responded to the favorable February 1995 statements, jumping from $16-1/4 per share on February 3, 1995 to a high of $18-3/4 on February 8, 1995 on exceptionally heavy volume.

36. On February 16, 1995, Boston Chicken conducted an analyst meeting to update the investment community on its strategies. At this meeting in which Stephens, Beck and Nadhir participated, the Company stated the following:

37. On March 27, 1995, Boston Chicken filed with the SEC its 1994 Report on Form 10-K which was signed by Beck, Stephens and Nadhir and which reported Boston Chicken's 1994 results, including revenues of $96.1 million compared to 42.5 million in 1993 -- and its net income per share of $0.38, compared to $0.06. The Form 10-K reported that Boston Chicken's number of stores operated by financed area developers had grown to 314, up from only 3 just two years earlier. With regard to these area developers, the Form 10-K represented:
The Company believes that having a relatively small group of area developers, each led by an experienced retail food service veteran with substantial equity invested in his market, is a superior means to achieve market leadership than more traditional franchising approaches which utilize a large number of franchisees. By concentrating future development efforts through these focused area development organizations, the Company believes it is able to achieve more control over systemwide expansion, facilitate operational and advertising effectiveness, and develop more substantial competitive advantage more quickly. The Company provides convertible debt financing to 12 of its 22 area developers, which typically enable the Company, after a moratorium period (generally two years), to convert into a controlling equity interest in the developer.
38. The reported results showed a dramatic increase in franchise fee and royalty revenue from area developers. However, the initial franchise fees being recognized by Boston Chicken as revenue were essentially "recycled capital" which Boston Chicken had provided to the area developers in the form of loans and which loans it was planning to convert to equity once the stores became profitable.

39. In March 1995, Boston Chicken issued its 1994 Annual Report to Shareholders in which it included the same results it had previously included in its Form 10-K. Within the 1994 Annual Report, Boston Chicken reported what is called "systemwide store revenue" which represented revenues earned from all the stores, company-owned as well as franchiser-owned, of $383.7 million for 1994, compared to $152.1 million for 1993. the 1994 Annual Report concealed information on the losses experienced company wide by Boston Chicken. The 1994 Annual Report included a letter to shareholders from the Senior Management team (which included Beck, Nadhir and Stephens), and stated:

Not only did we do what many said couldn't be done... our dedicated area developers and employees did more. We achieved our goal to become the recognized leader in the home meal replacement category. We're now aggressively evolving our concept in ways we believe will widen our lead and further distinguish us as a store of choice for fresh convenient meals. We ended the year with 534 stores systemwide and established the development momentum that enables one new store to open nearly every day. . . . We doubled revenue and increased net earnings almost tenfold . . . exceeding all expectations.

Our ability to achieve these results is a testament to our strong concept, great people and the effectiveness of our business strategies.

Our decentralized organizational structure, where area developers focus primarily on developing and operating stores, enabled us to install an enterprise-wide communications infrastructure, form $375 million in new capital, and move 80 percent of our support center employees while simultaneously opening 317 new stores.

Our ability to rapidly move knowledge across the enterprise, greatly facilitated our ability to screen, test and roll out new products all in less than six months.

In addition, our concentrated market development activity positions our area developers to reap the benefits of media and overhead efficiency and capture the opportunities presented by our new flagship production technique.

40. The statements contained in ¶¶ 34-39 issued by defendants between February 1995 and March 1995 concerning Boston Chicken were each false or misleading when made. The true facts, which were known to defendants due to their access to internal Boston Chicken data, were:
(a) That Boston Chicken's financial results for the year ended December 31, 1994, were misleading due to the Company's failure to disclose the large operating losses being incurred by the area developers as the losses from these operations were more than triple the net income Boston Chicken reported for 1994;

(b) That Boston Chicken's reported 1994 revenues and earnings were materially overstated in violation of GAAP due to the inclusion of millions of dollars worth of franchise fees which should have been deferred as described in ¶¶90-98;

(c) That the Boston Market "concept" was not as successful as described, but that Boston Chicken was only able to attract customers through the excessive use of coupons, discounts and free food;

(d) That the repeated references to Boston Chicken's strong or improving financial condition were false and misleading in the context of concealing that Boston Chicken franchisees/area developers were for the most part losing money;

(e) That the system-wide revenue Boston Chicken reported was materially overstated in violation of GAAP due to the grossing up of the revenues to include coupons, discounts and employee food, as described in ¶¶90-92, 110-112;

(f) That Boston Chicken had not achieved operational excellence, but rather was participating in a scheme to conceal the operating losses which were occurring at most of the new stores and inflating revenues through the inclusion of franchise fees which were paid for by loans by Boston Chicken to its area developers; and

(g) That, as a result of the foregoing negative factors, there was no basis in fact for defendants' forecasts that Boston Chicken would achieve a 5-year growth rate of 40% annually, and the defendants knew those forecasts were false and misleading when made.

41. On or about May 8, 1995, the Company hosted an analyst meeting in Pittsburgh and represented that its "Flagship" program, a modified commissary program, would provide 4% costs of sales savings, and that its new menu items were highly successful. The analysts reported this information to the market, including in a May 9, 1995 Alex. Brown report, authored by Rockwell.

42. On May 9, 1995, Boston Chicken issued a release reporting its financial results for the first quarter ended April 16, 1995. An increase in earnings of 178% from $2.6 million, or $0.06 per share in 1994, to $7.1 million, or $0.15 per share in 1995. The Company also reported system-wide store revenue of $187.4 million, at an increase of 121% from the prior year. The release quoted Nadhir as stating:

"We have made substantial strides in the evolution of the Boston Chicken concept in the first quarter."
Stephens was quoted as follows:
The equity base of our financed area developers is now nearly $138 million -- $57 million more than at the end of 1994. This increase is a result of new equity investments into BC Texas, R&A Food Services, Northstar Restaurants and the equity based established in the Boston West transaction. Boston West was formed by CKE Restaurants, Inc. to continue development in southern California. This new financed area developer will have total capital resources of over $100 million at full funding including assets contributed by CKE and financing to be provided by Boston Chicken. The southern California stores have consistently been among the stores with the highest average weekly volumes in the Boston Chicken system. We are pleased that this new agreement gives us the ability through out conversion option to have a majority interest in what we think could be one of the best markets in the country."
43. The market reacted favorably to these reported results and the price of Boston Chicken's stock increased from $20-3/8 on May 8 to $22-3/4 on May 11, 1995.

44. On May 24, 1995, Boston Chicken filed its Form 10-Q for the quarter ended April 16, 1995 and included therein the results previously reported. The report also included a footnote discussing the Company's $223.4 million of outstanding notes receivable to area developers, stating:

(c) Credit Risk and Allowance for Loan Losses

The allowance for loan losses is maintained at a level that in management's judgment is adequate to provide for estimated possible losses. The amount of the allowance is based on management's review of each area developer's financial condition, store performance, store opening schedules, and other factors, as well as prevailing economic conditions. Based upon this review and analysis, no allowance was required as of December 25, 1994 and April 16, 1995.
Thus, Boston Chicken represented that no allowance was required based on its review of each area developer's store performance as well as other factors. This representation confirmed that store performance was satisfactory and gave no indication of the large losses then being incurred at the area developer's stores.

45. On May 26, 1995, Boston Chicken filed a registration statement in connection with the issuance of $172.5 million of LYONs. The lead underwriter was Merrill Lynch. The registration statement and prospectus included the Company's previously reported results for the year ended December 25, 1994, and the quarter ended April 16, 1995, as well as that Boston Chicken's system-wide revenues for the quarter exceeded $187.4 million. Nowhere did the prospectus disclose the large operating losses being received at the store level. While the prospectus included certain "risk factors," these were misleading in and of themselves. Far from disclosing the system-wide operating losses being incurred by area developer stores, the risk factors implied that stores had reached profitability:

Limited Operating History and Recent Losses

A majority of the Boston Chicken and Boston Market stores operated by the Company and its franchisees have been open for less than two years. Consequently, operating results achieved to date may not be indicative of the results that may be achieved in the future by any new or existing store. In addition, the Company first achieved profitability in the second quarter of fiscal 1993 and previously incurred significant operating losses. There can be no assurance that the Company's recent results of operations are indicative of its future results of operations or that its recent profitability will continue in the near future on a sustained basis. If the Company is unable to sustain an adequate level of profitability, its ability to meet its obligations on the LYONs could be impaired. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and the Notes thereto.

This "risk factor" implies that store level operations were then achieving profitability which was far from true. System-wide stores were losing millions of dollars.

46. The statements contained in ¶¶41-42 and 44-45 issued by defendants in May 1995 concerning Boston Chicken were each false or misleading when made. The true facts, which were known to defendants due to their access to internal Boston Chicken data, were:

(a) That Boston Chicken's financial results for the year ended December 31, 1994 and quarter ended April 16, 1995, were misleading due to the Company's failure to disclose the large operating losses being incurred by the area developers as the losses from these operations were more than triple the net income Boston Chicken reported for 1994;

(b) That Boston Chicken's reported 1994 and Q1 1995 revenues and earnings were materially overstated in violation of GAAP due to the inclusion of millions of dollars worth of franchise fees which should have been deferred as described in ¶¶90-98;

(c) That the Boston Market "concept" was not as successful as described, but that Boston Chicken was only able to attract customers through the excessive use of coupons, discounts and free food;

(d) That the repeated references to Boston Chicken's strong or improving financial condition were false and misleading, in the context of concealing that Boston Chicken franchisees/area developers were for the most part losing money;

(e) That the system-wide revenue Boston Chicken reported was materially overstated in violation of GAAP due to the grossing up of the revenues to include coupons, discounts and employee food, as described in ¶¶90-92, 110-112;

(f) That Boston Chicken had not achieved operational excellence, but rather was participating in a scheme to conceal the operating losses which were occurring at most of the new stores and inflating revenues through the inclusion of franchise fees which were paid for by loans by Boston Chicken to its area developers; and

(g) That Boston Chicken had no reasonable basis to project a 4% costs of sales savings from the Flagship program as many of its stores were having such severe operating problems that there was no basis to assume the Flagship program would be successful in many of the regions.

47. On June 12, 1995, an article appeared in Business Week, citing comments by Roger Lipton, a restaurant analyst who believed that "Boston Chicken's franchisees are actually losing money, based on his analysis of stores in operation a year or more." The article quoted Boston Chicken spokesman Greg Gerdemann as one who "debunks all of Lipton's arguments," stating that "'I don't know where Lipton gets his figures. We're doing great.'"

48. On June 21, 1995, based on discussions with Boston Chicken management, Wertheim Schroder & Company issued a report on the restaurant industry. The report, authored by J.J. Rohs, projected 3-5 year annual growth rates of 35% for Boston Chicken.

49. On August 1, 1995, Boston Chicken issued a release reporting its results for the second quarter ended July 9, 1995, including net income of $7.4 million or $.15 per share compared to $3.4 million, or $.08 a share in the second quarter 1994. The release also reported systemwide growth revenues of $171.4 million for the second quarter. The release stated:

"We are extremely pleased with the trend in average weekly volume.... Consumers clearly have embraced the Boston Market concept and while we expect to continue aggressively opening new stores, our major focus will be on effectively marketing the changes in the concept and achieving operational excellence at the stores."
50. On August 2, 1995, based on conversations with Boston Chicken management, Merrill Lynch issued a report. The report, authored by Peter Oakes, stated that "the concept continues to evolve, operating results reflect the system's progress."

51. On August 11, 1995, based on conversations with Company management, Schroder Wertheim & Co. issued a report, authored by J.J. Rohs, which stated:

We believe that the prospects are excellent for improving unit returns to a level that will make conversion of the loans that BOST has made to area developers accretive to EPS. (These loans, in the form of a convertible debenture, are convertible at BOST's option into an equity state in the area developer's organization.) First, average weekly sales volumes should continue to improve. The progress seen in 2Q was without the benefit of a full quarter of the new entree sales, and in spite of continued heavy cannibalization.
52. On August 22, 1995, Boston Chicken filed with the SEC its Report on Form 10-Q for the quarter ended July 9, 1995. The Form 10-Q, which was signed by Beck and Stephens, included the results which had previously been reported for the quarter and six months ended July 9, 1995. As the Company had in its first quarter Form 10-Q, the Company again represented that based on "management's review of each area developer's financial condition, store performance, store opening schedules, collateral value, and other factors" no allowance was necessary for the $286.4 million in notes receivable from the area developers as of July 9, 1995.

53. On September 20, 1995, based on conversations with Boston Chicken management, Lehman Brothers issued a report, authored by M.T. Moe, which projected a 45% annual five-year EPS growth rate and stated the following:

54. On September 29, 1995, Boston Chicken hosted an analyst meeting to update the investment community on the progress of two New York area franchisees. At the meeting, Boston Chicken represented the following: Securities analyst reports conveyed this information to the market, including a Merrill Lynch report dated October 4, 1995, authored by Peter Oakes.

55. On October 3, 1995, Boston Chicken issued a press release which announced the completion of a $75 million equipment leasing program with General Electric Capital Corporation and quoted Stephens as stating:

"'The ability of our financed area developers to obtain this financing at attractive rates and terms, speaks directly to the strength of the area developer organizations in the Boston Market concept.'"
56. On October 23, 1995, Alex. Brown issued a report based on conversations with management at Boston Chicken. The report, which was authored by S.A. Rockwell, rated Boston Chicken a "strong buy" and stated: The report projected 1997 EPS of $1.15 per share.

57. On October 24, 1995, Boston Chicken issued a release announcing its results for the third quarter ended October 1, 1995, including net earnings of $8.8 million, or $.17 per share, up from $4.7 million, or $.11 per share for the third quarter of 1994. System-wide gross revenues were reported to be $197.5 million.

58. After releasing its third quarter results, Stephens, Beck and Nadhir spoke to analysts, including Peter Oakes of Merrill Lynch and S.A. Rockwell of Alex. Brown, representing that:

59. On October 24, 1995, Merrill Lynch issued a report authored by Peter Oakes which projected a 40% five-year EPS growth rate and rated Boston Chicken a "buy."

60. On October 24, 1995, Alex. Brown issued a report which also rated Boston Chicken a "strong buy" and confirmed that Boston Chicken operational performance remained strong.

61. On November 3, 1995, Boston Chicken announced that it had filed with the SEC to sell 7 million Boston Chicken common shares through an underwriting syndicate managed by Merrill Lynch and Alex. Brown.

62. On December 5, 1995, because of heightened investor interest due to a national roadshow orchestrated by defendants, Boston Chicken was able to raise over $342.5 million, selling 10.35 million Boston Chicken shares at $34-1/2 per share using a prospectus which contained the results the Company had previously reported for the year-end December 25, 1994 and for the three quarters ended October 1, 1995, including the "systemwide revenues" of $556.3 million for those first three quarters of 1995. These results were represented to "present fairly" the Company's financial position and results of operation as of October 1, 1995. The prospectus also included certain "risk factors" which were misleading in and of themselves. One risk factor relating to expansion was stated as follows:

The opening and success of stores will depend on various factors, including the availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules, the financial and other capabilities of the Company and its area developers and franchisees, the ability of the system to hire and train qualified personnel, and general economic and business conditions. Not all of the foregoing factors are within the control of the Company or its area developers and franchisees. In addition, a majority of the Boston Market stores operated the Company and its franchisees have been open for less than two years. Consequently, operating results achieved to date may not be indicative of the results that may be achieved in the future by any new or existing store.
This statement implied that operating results to date of the new stores had been favorable, whereas in actuality the stores were experiencing enormous operating losses. In fact, for the year ended December 31, 1995, (which was to end just three weeks after the date of the prospectus) Boston Chicken experienced a loss from operations of nearly $150 million.

63. On January 8, 1996, Boston Chicken announced the introduction of Boston Carver sandwiches, which were designed to stimulate Boston Chicken's lunch sales. The release stated:

"We expect our new sandwich line to significantly impact lunch sales, which now account for approximately one-third of our business," said Saad J. Nadhir, Co-Chairman and President of Boston Chicken, Inc. "Boston Carver sandwiches has been successfully test-marketed and consumer response have been outstanding."
64. On January 23, 1996, Boston Chicken issued a release containing its results for the quarter and year ended December 31, 1995. Claiming a 107% year-to-year increase in net income, the release stated:
Boston Chicken, Inc. today reported financial results for the fourth quarter and fiscal year ended December 31, 1995. Highlights include:

Fourth Quarter:

-- Net earnings increased 84% to $10,209,000, or $.19 per share, from $5,550,000, or $.12 per share in 1994.

-- Operating income increased 117% to $20,418,000 from operating income of $9,410,000 in 1994.

-- Systemwide store revenue more than doubled to $236,630,000 from $116,807,000 in 1994.

Fiscal Year:

-- Net earnings increased 108% to $33,559,000, or $.66 per share, from net earnings of $16,173,000, or $.38 per share in 1994.

-- Operating income increase 173% to $67,238,000, from operating income of $24,611,000 in 1994.

-- Systemwide store revenue more than doubled to $792,948,000 from $383,691,000 in 1994.

* * *

"We are very pleased with the continued revenue momentum at Boston Market. With fourth quarter systemwide sales of nearly $237 million, Boston Market is generating approximately at $1 billion in annualized sales, the first quick service restaurant concept to achieve this level in 25 years," Saad Nadhir, co-chairman and president of Boston Chicken, Inc. said.

Mark Stephens, vice chairman and chief financial officer, added... "Our area developers ability to drive the business throughout 1995 helped us to successfully raise $343 million -- one of the largest public equity offerings ever in the retail food industry."

Scott Beck, co-chairman and chief executive officer, said, "In 1995, we gained momentum on several important fronts. First, the Boston Market brand really caught on with consumers. Second, we made significant revenue and profitable gains at the stores."

65. The statements issued by defendants between June 1995 and January 1996 concerning Boston Chicken were each false or misleading when made. The true facts, which were known to defendants due to their access to internal Boston Chicken data, were:
(a) That Boston Chicken's financial results for the quarter ended July 6, 1995 and October 1, 1995, were misleading due to the Company's failure to disclose the large operating losses being incurred by the area developers as the losses from these operations were more than triple the net income Boston Chicken reported for 1994;

(b) That Boston Chicken's reported second and third quarter 1995 revenues and earnings were materially overstated in violation of GAAP due to the inclusion of millions of dollars worth of franchise fees which should have been deferred as described in ¶¶90-98;

(c) That the Boston Market "concept" was not as successful as described, but that Boston Chicken was only able to attract customers through the excessive use of coupons, discounts and free food;

(d) That the repeated references to Boston Chicken's strong or improving financial condition were false and misleading in the context of concealing that Boston Chicken franchisees and area developers were for the most part losing money;

(e) That the system-wide revenue Boston Chicken reported was materially overstated in violation of GAAP due to the grossing up of the revenues to include coupons, discounts and employee food, as described in ¶¶90-92, 110-112;

(f) That Boston Chicken's foray into the lunch market was not encountering widespread acceptance and, in fact, was beginning to cannibalize Boston Chicken's more profitable dinner sales; and

(g) That, as a result of the foregoing negative factors, there was no basis in fact for defendants' forecasts that Boston Chicken would achieve a 5-year growth rate of 40% annually, and the defendants knew those forecasts were false and misleading when made.

66. On March 4, 1996, Boston Chicken filed its Form 10-K for the year ended December 31, 1995, and included the results the Company had previously released for the year then ended. The form 10-K contained a schedule reporting the financial results of Boston Chicken for each of the five years ended December 31, 1995, including system-wide revenues of $792.9 million for 1995. However, this schedule contained no data on the losses from system-wide stores which exceeded $100 million. The reports also included a table showing average weekly revenue per store for each quarter during 1995:
 
Quarter Ended Amount
April 16 $20,695
July 9 22,227
October 1 23,388
December 31 23,844

Nevertheless, despite the detailed information the Company had available concerning the operating results of the stores owned by area developers, Boston Chicken included only a partial disclosure which in no way suggested the hundreds of millions of dollars the area developers stores were losing:

The Company's area developers have incurred, and the Company anticipates that its area developers will continue to incur, substantial net losses during their expansion phase which is anticipated to result, and in the majority of cases has resulted, in negative net worth. The Company believes that such losses can be recovered as the rate of expansion moderates by reduction or elimination of development costs, increased operational efficiencies, greater economies of scale, increased advertising efficiencies, increased store revenue, and reduced effects of cannibalization. However, there can be no assurance that such losses will be recovered. The failure of an area developer to achieve a sufficient level of profitability subsequent to the completion of its expansion phase could have a material adverse impact on the Company's financial position and results of operations.
67. On March 11, 1996, in an effort to halt investor's concern over the fact that Boston Chicken's Report on Form 10-K noted that area developers were incurring substantial losses, Boston Chicken spokesperson Karen Rugen told reporters that the fact that the area developers were reporting losses
doesn't mean the restaurants themselves are losing money. The area developers, who often are responsible for opening almost 100 restaurants, must open their own corporate headquarters, which is taxing financially.
This statement indicated that the losses were merely related to overhead and were not the enormous losses the stores were actually experiencing and misrepresented the severe operating problems then existing at the area developer stores.

68. In March 1996, Boston Chicken issued its Annual Report to Shareholders, including a letter to shareholders from senior management, which stated in part:

We had a great year. With the hard work of store personnel, our area developers and Support Center employees during 1995, we changed the name of nearly 600 Boston Chicken stores to Boston Market, added three new entrees and launched two new brands -- Hearth Honey ham and Boston Carver sandwiches. As [sic] the same time, our area developers increased the store base by more than 50 percent -- adding nearly 300 new Boston Market stores.

As a result of these activities and the growing popularity of the Boston Market brand, our area developers increased average weekly store revenue by 15 percent during the year. In the fourth quarter, our systemwide run rate reached $1 billion in annualized sales . . . which we believe makes Boston Market the first retail food service chain created in the last 20 years to attain such a milestone. A great year, indeed.

69. On May 13, 1996, Boston Chicken issued a release containing the Company's results for the quarter ended April 21, 1996. Boston Chicken reported a 120% increase in net income and EPS of $0.24, stating:
Boston Chicken, Inc. today reported financial results for its first quarter ended April 21, 1996 (sixteen weeks, compared with results of the comparable period ended April 16, 1996. Highlights include:

Systemwide gross revenue increased 66% to $311,798,000 from $187,448,000.

Operating income increased 111% to $28,547,000 from $13,527,000.

Net income increased 120% to $15,649,000 from $7,116,000.

* * *

Mark Stephens, vice chairman and chief financial officer, said, "The Boston Market system is very focused on store performance and operations and systemwide performance has begun to reflect that focus. Weekly per store average revenue increased 10% to $22,762 versus the same period last year, despite the severe winter weather that affected many of our best markets. Excluding the first four weeks of the year, the period most affected by the weather, weekly per store average revenue was $23,489. Store cash flow also improved nicely, even though many of the initiatives underway are expected to have a more significant impact later in the year."

"During the quarter, we launched two key sales drivers," said Larry Zwain, president and chief executive officer of Boston Market. "In January, we began television advertising of our new Boston CarverTM sandwiches and consumer response has been great. This successful introduction has helped our lunch business grow from about 35% to just over 40% of sales.

70. On June 4, 1996, Boston Chicken's Chairman, Beck, made a presentation to securities analysts, brokers and institutional investors at the Piper Jaffray Securities Conference in Minneapolis. Beck confirmed that Boston Chicken would be opening 300-350 new stores annually in 1996 and 1997. Stephens also stated that Boston Chicken would earn $0.95 per share in 1996 and $1.25 per share in 1997.

71. On July 3, 1996, Merrill Lynch analyst Oakes issued a report designed to stem the declining price of Boston Chicken stock. Discounting concerns about Boston Chicken's most recent financial results as "misguided," Oakes "strongly" recommended the purchase of Boston Chicken stock and reiterated his "buy" rating. Oakes further noted that the substantial increase in loans to area developers during 1Q 1996 was only a "temporary surge" and that the growth in Boston Chicken's outstanding loan balance to area developers would moderate.

72. On August 13, 1996, Boston Chicken issued a release containing Boston Chicken results for the quarter ended July 14, 1996. The release stated:

Boston Chicken, Inc. today reported financial results for its second quarter and year-to-date ended July 14, 1996, compared with results for the second quarter ended July 9, 1995. Highlights include:

Second Quarter

-- Company revenue increased 36% to $64,561,000 from $34,800,000.

* * *

-- Net income increased 115% to $15,916,000 from $7,420,000.

-- Earnings per share increased 60% to $.24 from $.15.

-- Boston Market(R) systemwide gross revenue increased 52% to $260,472,000 from $171,374,000.

* * *

Larry Zwain, president and chief executive officer of Boston Market, said, "Boston Market continues to reap the rewards of the system's focus on store performance and operations. In the second quarter, gross weekly per store average revenue increased 7.2% over least year to $23,826, with associated increases in store level performance. Boston Market's increase in store revenue is particularly impressive given the generally flat-to-down trends through the quick service restaurant industry. We've never been more exited by the momentum we're seeing in the system and the long-term potential of the brand," added Zwain.

73. On August 21, 1996, in an effort to reinflate the price of Boston Chicken stock, Boston Chicken's management, including Beck and Stephens, conducted a meeting with analysts in New York, at which defendants stated: 74. On August 22, 1996, in an effort to deflect attention away from the Company's Report on Form 10-Q for the quarter ended July 9, 1996, which defendants Beck and Stephens had finalized the day before and in which, for the first time, defendants planned to disclose some of the negative information about the area developers' losses, including the fact that during 1995 the area developers had suffered losses of $149.1, defendants issued a release titled, "Boston Market Increasing Development Pace" which stated:
Following strong second quarter unit level performance, Boston Chicken, Inc. said today the Boston Market store development pace is increasing and that its area developers have indicated their intention to triple their remaining commitments to open additional stores.

The Company said its area developers are tripling their current commitments to open approximately 900 additional stores to new commitments to open approximately 2700 additional stores. Construction of these newly committed stores, which is expected to occur over the next five to seven years, would bring the total of Boston Market stores in the U.S. to approximately 3600. The Company is also evaluating international store development, which would add to the 3600 store count total.

Boston Chicken anticipates that the revised schedules will accelerate the Boston Market development pace to an annual rate of 300 to 350 stores in 1997, up from a current development rate of 250 to 275. The development pace could increase even further in 1998.

The Company also said that its area developers are in the process of closing private equity financing to be used by them to support store development.

Our strong unit level economics, as shown in second quarter results, means that every dollar invested in a new store can generate substantial returns, said Scott Beck, Co-Chairman and CEO of Boston Chicken, Inc.

"We see the returns, or area developers see the returns and increasing development is the logical way to take full advantage of these economics," said Larry Zwain, Vice-Chairman of Boston Chicken, Inc. and President and CEO of Boston Market.

75. Also, on August 22, 1996, Bloomberg Business News reporter Shannon Stevens penned a story reiterating the comments of Stephens. The story was titled "Boston Chicken Triples Number of Planned Restaurant Openings" and stated:
Boston Chicken Inc. said it is tripling to 2,700 the number of restaurants it plans to open in the next five to seven years, part of the chain's biggest expansion push since going public four years ago.

* * *

Boston Chicken's franchisees, called area developers, have agreed to open 2,700 restaurants, up from 900, in the next few years. That'll raise the total number of stores to 3,600 from 970 now. Boston Chicken had 83 stores in 1993.

"It's a big vote of confidence driven by these franchisees," said Stephens.

To help fund the expansion, area developers will receive $40 million to $60 million through private placements during the next few weeks, Stephens said.

* * *

"There is a lot less risk ahead of us than there was behind us," Stephens said.

Profit Push

The company plans to take its stores outside the U.S. in the next six to 18 months.

Boston Chicken will team up with a joint venture partner who can roll out restaurants at the same rate the company has in the U.S., Stephens said.

He wouldn't say which country will be the first or when the first store will open. But the plans call for a sizable overseas presence; it wants to have $10 billion in international sales.

"Wherever we go, I want to go really big," he said.

In the U.S., the expansion to 3,600 stores would give Boston Chicken about $5 billion in sales, Stephens said.

* * *

Boston Chicken plans to buy more stores from its franchisees, which gets the company closer to the operational side of the business and lets investors see how the stores are doing. It expects to have as many as 400 company-owned stores by the end of next year, up from 91 now, said Stephens.

76. On October 4, 1996, Boston Chicken CFO Stephens confirmed to investors attending the Montgomery Securities Conference that he was "comfortable" with EPS estimates for Boston Chicken of $0.25 for 3Q 1996 and that because of its strong unit economics Boston Chicken would have 2,000 stores in operation by 1999.

77. On October 30, 1996, Boston Chicken issued a release containing the Company's results for the quarter ended October 6, 1996. The release was titled "Boston Chicken Reports 96% Increase in Third Quarter Net Income" and stated:

Boston Chicken, Inc. today reported financial results for its third quarter and year-to-date ended October 6, 1996. Highlights include:

Third Quarter

-- Company revenue increased 92% to $74,31?,000 from $38,671,000.

-- Net income increased 96% to $17,300,000 from $8,814,000.

-- Earnings per share increased 53% to $0.26 from $0.17.

-- Boston Market(R) systemwide gross revenue increased 46% to $288,850,000 from $197,496,000.

* * *

Scott Beck, BCI co-chairman and chief executive officer, said, "This was truly a quarter full of significant achievement. Store performance -- at both the top and bottom lines -- reached record levels; our area developers committed to build 2,700 more Boston Market stores; and $75 million in new private equity was raised at the financed area developer level to partially finance this expanded store development schedule."

* * *

Mark Stephens, BCI vice chairman and chief financial officer added . . . "[t]he strength of store economics and the success of operating initiatives at Boston Market have enabled area developers to continue to attract new capital.

78. On January 28, 1997, Boston Chicken issued a release containing Boston Chicken results for the period ended December 31, 1996. Announcing EPS of $0.27 for 1996 and a net income increase of 100%, the release stated:
Boston Chicken, Inc. today reported financial results for the fourth quarter and fiscal year ended December 29, 1996. Highlights include:

Fourth quarter:

-- Company revenue increased 71% to $78,290,000 from $45,901,000.

-- Net income increase 77% to $18,093,000 from $10,209,000.

-- Earnings per share increased 42% to $0.27 from $0.19.

-- Boston Market (R) systemwide gross revenue increased to $305,471,000.

* * *

Scott Beck, BCI co-chairman and chief executive officer, said, "1996 was another year of record-setting achievement for Boston Chicken Inc. and the Boston Market system. We accomplished our goals for both store level revenue and profits, further developed the unique position of the Boston Market brand with consumers across the U.S. and established the Boston Carver(TM) sandwich brand, which helped create a meaningful lunch business in the stores. . . .

Beck continued, "Also during the year, our area developers tripled their development commitments, with plans to have open approximately 3,600 Boston Markets in the U.S. in the next five to seven years. These commitments were supported by additional equity and debt financings at the area developer level. All in all, a year of significant accomplishment."

"In fiscal 1997 the momentum continues with the formation of Boston Market International (BMI), a new venture that will license the Boston Market brand outside the U.S. BMI has signed a letter of intent with its first international financed area developer who plans to build up to 600 stores in Taiwan and the People's Republic of China over the next ten years," Beck continued.

John Todd, chief financial officer of Boston Market, said, "Store performance continued to improve in the fourth quarter, normally a seasonally lower period for much of the industry, as a result of both strong sales of Boston Hearth (TM) Specialty Foods for the holidays and continued growth in the base business. Weekly per store average revenue reached $25,239 in the fourth quarter, up 5.9% over the fourth quarter of 1995. Holiday-related sales were up 77% over last year on a per-store basis, driven by the popularity of our holiday banquet meals. We ended 1996 with 1,087 stores, up 31% over last year, with weekly per store average revenue for the full year of $24,064, up 6.6% over 1995."

"The system continued to show healthy margin improvement with the initiatives started earlier in the year more than offsetting the lower margins for holiday products. Our company stores in the Philadelphia area, which numbered 104 at year end, showed solid top line and margin performance, with store-level cash flow margins coming in at 19.0% in the fourth quarter," Todd added.

79. On January 29, 1997, based on conversations with Boston Chicken management, Morgan Stanley issued a report entitled "Boston Chicken: What's All The Skepticism About?" with a rating of "Strong Buy" and a price target of 47. The report, authored by Howard Penney, stated:
As we recently wrote, a new company -- Boston Market International (BMI) -- has been formed to start sub-franchising Boston Market stores internationally. BMI's relationship to BOST is similar to that of Einstein/Noah Bagel Corp. The only difference is that in addition to any support functions BOST provides BMI, BOST will be receiving licensing fees from BMI as it grants BMI franchising rights to specific countries. The only countries to which BMI has been granted licenses are Taiwan and China at this point; the first international Boston Market unit is expected to open in late 1997/early 1998 in Taipei, Taiwan. Clearly, international opportunities are part of BOST's future plans. BOST believes this business could eventually be on the order of $10 billion.
80. On March 18, 1997, Boston Chicken filed its Form 10-K for the year ended December 29, 1996, which was signed by Beck and Stephens. This Form 10-K included Boston Chicken's previously reported results, stating:
Area development agreements provide for the opening of a specified number of stores within the defined geographic territory in accordance with a schedule of dates. As of December 29, 1996, the Company had entered into area development agreements that provide for the development of 2,494 additional stores. An area developer's development schedule generally covers three to seven years and typically has benchmarks for the number of stores to be opened and in operation at six-month intervals.
81. On April 22, 1997, Boston Chicken priced $288 million of 7-3/4% convertible debentures pursuant to a registration statement and prospectus declared effective on that date. Although defendants had filed a registration statement with the SEC more than six weeks before, because of SEC concerns and questions regarding Boston Chicken's accounting and disclosure practices, defendants were not allowed to actually price the offering until April 22, 1997. This delay was of grave concern to the Boston Chicken insiders, because the Company was in dire need of the money and Boston Chicken was experiencing declining weekly per store average revenue, which defendants knew would scare away investors if disclosed prior to the sale of the debentures. Consequently, when the defendants filed the initial registration statement to sell the debentures on March 7, 1997, they intentionally omitted the fact that Boston Chicken's weekly per store average revenue was negative, hoping that the debenture offering would close before they disclosed the truth about Boston Chicken's sales problems. Because the offering did not price until April 22, 1997 -- two days after the end of 1Q 1997 -- the defendants were forced to address the same store sales problems, but even then could not bring themselves to tell the truth, instead they implied that Boston Chicken's weekly per store average revenue for the quarter ended two days before was a "forward-looking statement," stating:
RECENT DEVELOPMENTS

The Company expects that, based on current available data, Boston Market systemwide weekly per store average ("WPSA") revenue for the quarter ending April 20, 1997 will be approximately $23,250 to $23,500 compared to $22,762 for the comparable period in 1996. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7.

82. On April 23, 1997, Boston Chicken was forced to amend its 1996 Form 10-K and include certain disclosures omitted from the previously filed Form 10-K. These new disclosure [sic] included the following: Thus, more than two and half years after Boston Chicken claimed it had begun its successful operating expansion, it revealed the large cash flow losses from operations that these entities, under the umbrella of the area developers, were actually incurring.

83. Despite this disclosure, Boston Chicken stock continued to trade at artificially inflated levels throughout the remainder of the Class Period as defendants continued to assert that Boston Chicken's expansion was going well.

84. On May 12, 1997, Boston Chicken issued a release reporting net income and EPS of $21.5 million and $0.32 respectively for the quarter ended April 20, 1997. The release stated:

Scott Beck, chairman, chief executive officer and president of Boston Chicken, Inc., said, "The first quarter was marked by several significant events. We increased our company store base through the 118-store conversion of BC New York, which is already having a positive contribution to earnings; we completed installation of our Boston Carver line with the introduction of Extreme CarverTM sandwiches; and we began to explore the potential for Boston Market (R) branded, ready-to-heat meals."

Larry Zwain, president and chief executive officer of Boston Market, said "The introduction of Extreme Carver sandwiches further reinforced our position as the quality leader in the quick-serve sandwich business. Extreme Carvers contributed to the 3.4% increase in weekly per store average (WPSA) revenue, despite an intensely competitive environment, particularly at lunch, and the opening of 30% more stores in existing markets. Systemwide WPSA revenue for the quarter was $23,528. Store cash flow also improved over the first quarter of last year, reflecting the system s focus on store performance and operations. Company stores, which now account for approximately 20% of systemwide stores, also achieved strong store-level cash flow margins of 18.3% in the quarter," Zwain added.

85. The statements detailed herein, issued by defendants between March 1996 and May 1997 concerning Boston Chicken were each false or misleading when made. The true facts, which were known to the defendants due to their access to internal Boston Chicken data, were:
(a) That Boston Chicken's financial statements for the quarter ended April 21, 1996, were misleading due to the Company's failure to disclose the large operating losses being incurred by the area developers as the losses from these operations were more than triple the net income Boston Chicken reported for 1995;

(b) That Boston Chicken's financial statements for the quarters ended July 14 and October 6, 1996 and December 29, 1996, (as originally reported) were misleading due to the Company's failure to disclose the amounts of the cash flow deficit from the area developer's stores;

(c) That Boston Chicken's reported 1996 and Q1 1997 revenues and earnings were materially overstated in violation of GAAP due to the inclusion of millions of dollars worth of franchise fees which should have been deferred as described in ¶¶90-98;

(d) That the Boston Market "concept" was not as successful as described, but that Boston Chicken was only able to attract customers through the excessive use of coupons, discounts and free food;

(e) That the repeated references to Boston Chicken's strong or improving financial condition were false and misleading in the context of concealing that Boston Chicken franchisees/area developers were for the most part losing money;

(f) That the system-wide revenue Boston Chicken reported was materially overstated in violation of GAAP due to the grossing up of the revenues to include coupons, discounts and employee food, as described in ¶¶;90-92, 110-112;

(g) That by at least February 1997, same store sales comparisons had turned negative, contradicting defendants' positive statements regarding average weekly sales growth; and

(h) That, as a result of the foregoing negative factors, there was no basis in fact for defendants' forecasts that Boston Chicken would achieve a 5-year growth rate of 30-40% annually, and the defendants knew those forecasts were false and misleading when made.

86. Ultimately, prior to the opening of the market on May 29, 1997, the Company was forced to reveal that the expansion had severe problems and would have to be curtailed. Boston Chicken finally acknowledged the severe problems it was having, admitting the high level of discounts and promotions were hurting operating results and that sales growth was unsatisfactory. Beck stated:
"In the last year or so, we have drifted away from our core brand attributes as we aggressively built our lunch business. While we are very happy with our Boston Carver sandwich line and how it has substantially driven lunch sales, byproducts of this success are the high level of promotion and discounting necessary to compete at lunch . . . . The issue is that we've begun to see this lunch-driven discounting negatively impact our dinner sales. Further, the customer experience, the hallmark of our brand positioning, is not where we would like it to be."

"As a result of these factors, we are going to refocus the brand on what made Boston Market so successful in the first place, serving the home meal replacement market with great food and great service supported by marketing programs that emphasize quality, convenience and value at dinner. Dinner will be the centerpiece, with lunch as a sideline as opposed to lunch as the centerpiece, with dinner as a sideline."

The announcement indicated that Larry Zwain, president and CEO, had resigned and that the Company would be restructuring its organization with area developers.

87. The stock dropped to as low as $16 per share on the release of this news and later fell to as low as $1 as layoffs were announced and the Company acknowledged that its lunch sales initiative had hurt overall results due to discounting. Karen Rugen, Boston Chicken VP of Communications stated:

"The prolonged marketing strategy on discounting has hurt sales because it hasn't driven the business enough to make up for some of the effect it's having on dinner. . . We're changing our marketing strategy because we don't like the direction our sales are going."
88. Boston Chicken later told analysts that same store sales decreased in the first quarter, the first decline since pre-Boston Market (1994), and were expected to decrease 6% in Q2 1997 and 4% in Q3 1997, and that store expansion would be only half the rate as previously reported for 1997 and 1998. It also indicated that reserves for losses might be necessary for the Notes Receivable from area developers due to the operating problems at the developers. Morgan Stanley reported on management's comments, stating:
That sales decline, combined with the high financing costs of the company's latest foray into the capital markets, precipitated a substantial decline the stock price [sic]. And, that is what necessitate the review of unit development plans. Recognizing how sensitive its stock price is to net sales changes, BOST was alarmed by the cannibalization the newly launched (and, heavily discounted) Extreme Carvers was having on individual meal sales during the dinner daypart. Sales of traditional dinner fare tend not be as promotionally-driven. To redirect consumer attention back to having dinner at dinner, the company launched its $1 chicken promotion. The combined effect of the two promotions was that Boston Market's coupon rate soared to 56.7% in 1Q97.
89. Admitting the truly serious nature of the problems facing Boston Chicken, the defendants disclosed that its Boston Market "concept" would have to be reworked.

FALSE FINANCIAL INFORMATION

90. In order to portray a falsely favorable picture of the Company's financial condition during the Class Period, the defendants caused Boston Chicken to report false financial results. The Company artificially inflated the revenues due to the inclusion of franchise fees from area developers, the same area developers for whom Boston Chicken had the option to acquire a majority equity interest and an understanding existed that Boston Chicken would exercise the option. Additionally, the financial statements were false because the defendants were aware of, and yet failed to adequately disclose, that the majority of its area developers' stores were losing large amounts of money from operations. The Company concealed these losses until it released its 1995 Form 10-K in March of 1996, failed to disclose the amount of the losses until it filed its Q2 1996 Form 10-Q and failed to disclose the cash flow operating deficit from these operations until it filed its amended 1996 Form 10-K on April 23, 1997. Boston Chicken also presented false revenue amounts in its system-wide store figures and failed to disclose significant related party relationships. All of these factors caused the Company's 1994, 1995 and 1996 financial statements and accompanying disclosures to be presented in violation of GAAP and SEC rules.

91. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at the particular time. Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other disclosure.

92. The Company included its financial results in the various registration statements and prospectuses filed during the Class Period, namely: (1) the prospectus for the May 26, 1995 offering included the financial statements for 1994 and the quarter ended April 16, 1995; (2) the prospectus for the December 5, 1995 secondary stock offering included the financial statements for 1994 and for the three quarters ended October 1, 1995; and (3) the prospectus for April 22, 1997 debt offering included the financial statements for 1994, 1995 and 1996. Boston Chicken also included interim financial information in its Form 10-Q reports, which were signed by both Beck and Stephens. With respect to the Form 10-Qs filed for each quarter during 1995, 1996 and the first quarter of 1997, Boston Chicken represented that "in the opinion of management, all adjustments (consisting of normal adjustments) necessary to present fairly the Company's consolidated financial position, the results of operations and cash flows" have been made. The 1994, 1995 and 1996 Form 10-Ks were similarly presented in conformity with GAAP. The representations, as well as the financial information included in the Form 10-Qs and Form 10-Ks and reported to the public, were false and misleading due to the Company's improper reporting of revenue from area developers, its failure, in violation of GAAP, to disclose the severe operating problems at area developer owned stores, and failure to adequately disclose related parties.

The Company's Improper Reporting Of Revenue From Franchise Fees

93. In order to show increasing revenues and earnings, the Company improperly included franchise fees as revenue due to the fact that the Company had provide the capital to the area developers who were paying these franchise fees and the Company had an option to convert such financing into an equity interest and an understanding existed that Boston Chicken would eventually exercise such option. In a sense, the Company was paying itself the franchise fee and recording it as revenue.

94. GAAP, as set forth in FASB Statement of Accounting Standard ("SFAS") No. 45, Accounting for Franchise Fee revenue, dictates the rules for revenue recognition related to franchise fees. Where a relationship exists between franchisor and franchisee, such that the franchisor has the option to acquire the franchise, SFAS No. 45, ¶ 11 prescribes the following accounting:

A franchise agreement may give the franchisor an option to purchase the franchisee's business. For example, a franchisor may purchase a profitable franchised outlet as a matter of management policy, or purchase a franchise outlet that is in financial difficulty or unable to continue in business to preserve the reputation and goodwill of the franchise system. If such an option exists, the likelihood of the franchisor's acquiring the franchised outlet shall be considered in accounting for the initial franchise fee. If, at the same time the option is given, an understanding exists that the option will be exercised or it's probable that the franchisor ultimately will acquire the franchised outlet, the initial franchise fee shall not be recognized as revenue but shall be deferred. When the option is exercised, the deferred amount shall reduce the franchisor's investment in the outlet.
95. During the Class Period, the Company reported as initial franchise fee revenue approximately the following amounts:
 
Year ended
12/25/94
Year ended
12/31/95
Year ended
12/29/96
Quarter ended
04/20/97
Franchise Fee
Initial
Revenue
$5.5 million $10.5 million $7 million $1.1 million

96. These amounts were undoubtedly material to Boston Chicken's financial results as the initial franchise fee income added directly to the operating income. In connection with its loans to area developers, which totaled as much as $800 million by April 1997, Boston Chicken had the option to convert all or any portion of this loan amount at its election, after the second anniversary of the agreement, into equity in the area developers.

97. It was the understanding of Boston Chicken and its area developers that ultimately Boston Chicken would exercise its option to convert the financing and equity ownership, as illustrated by the following:

98. Due to the probability that Boston Chicken would convert much of its notes receivable from area developers into equity interests, pursuant to SFAS No. 45, Boston Chicken should have deferred revenue on the portion of the equity interest it would be acquiring. However in order to overstate its earnings and report favorable results, the Company reported these fees as revenue in contradiction to GAAP as set forth in SFAS No. 45. One commentator has referred to this revenue as "recycled capital".

Boston Chicken's Failure To Adequately Disclose The Operating Losses From The Area Developer Stores

99. In violation of GAAP and SEC rules, the Company failed to adequately disclose the losses it was incurring at most of its area developer operated stores throughout most of the Class Period.

100. An underlying objective of financial reporting is that it provides useful information in assessing cash flow prospects:

Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the amounts, timing and uncertainty of prospective cash receipts from dividends or interests in the proceeds from the sale, redemption, or maturity of securities or loans. The prospects for those cash receipts are affected by an enterprise's ability to generate enough cash to meet its obligations when due and its other cash operating needs, to reinvest in operations, and to pay cash dividends and also may be affected by perceptions of investors and creditors generally about that ability, which affects the market prices of the enterprise's securities. Thus, financial reporting should provide information to help investors, creditors and others assess the amounts, timing and uncertainty of prospective net cash inflows to related enterprise.
101. Moreover, where a related party relationship exists, SFAS No. 57 requires that financial statements include disclosures of material related party transactions, including descriptions of the nature of the relationship, the nature of the transactions, the dollar amount of the transactions and the amount due/from related parties as of each balance sheet date. SFAS No. 57 defines related parties as affiliates of the enterprise, members of the immediate family and other parties "with which the enterprise may deal if one party controls or can significantly influence the management or operating policies of the other to extent that the transacting parties might be prevented from pursuing its own separate interest."

102. Several of the area developers were related parties due to the ownership interest of family members of the directors of the Company and/or the direct ownership of the Company itself. Additionally, due to the Company's option to convert its financing into an equity interest in those area developers, all of those distributors were related parties because Boston Chicken was in a position to exercise some degree of control over the area developers.2

103. Thus, pursuant to several different accounting pronouncements, Boston Chicken was required to provide detailed and adequate disclosure with respect to the operating results of the area developers' stores. The operating results of the stores were clearly relevant and essential information for an investor to understand the financial statements:

104. Boston Chicken claimed to have the ability to gather the detailed information necessary to closely monitor the operations of all of its stores. The 1993 Form 10-K includes the following representation:
The Company makes extensive use of computer systems and electronic data transmission in managing the Boston Chicken system, polling a majority of its stores daily by modem to gather revenue and other financial and statistical information. The Company is currently involved in an extensive project to improve its capabilities to meet its future needs in such matters and anticipates implementing and enhanced store, computer software system, and new area developer computer software system in 1994.
The 1996 Form 10-K stated:
The Company believes that its integrated hardware and licensed software systems facilitate better communications with, and monitoring of, the Boston Market system. The Company makes extensive use of computer systems and electronic data transmission in evaluating the results of the Boston Market system, polling a majority of its stores daily by modem to gather revenue and other financial and statistical information.
Thus, according to the Company's representations, it had the ability to gather detailed store information on a daily basis, and accordingly there is no reason the Company could not provide store operating information to investors on, at the very least, a quarterly basis.

105. Despite these requirements, and the Company's ability to comply with them, Boston Chicken failed to disclose the losses its stores incurred during 1994, which exceeded $51.3 million. The Form 10-Qs prepared during 1995 similarly failed to disclose that any loss had been incurred by these stores. At the same time, however, Boston Chicken did report system-wide revenue from these stores throughout the Class Period in an effort to show that the "concept" was succeeding, when in fact the losses would have demonstrated that it was not succeeding.

106. In its Form 10-K for the year ended December 31, 1995, the Company included a disclosure that:

[T]he area developers have incurred, and the Company anticipates that its area developers will continue to incur, substantial net losses during their expansion phase which is anticipated to result, and in the majority of cases has resulted in a negative net worth. The Company believes that such losses can be recovered as the rate of expansion moderates by reduction or elimination of development costs, increased operational efficiencies as a result of post-expansion operational focus, greater economies of scale, increased advertising efficiencies, increased store revenue, and reduced effects of cannibalization. However, there can be no assurance that such losses will be recovered.
This partial disclosure was willfully inadequate and false and misleading in that it did not reveal the amount of losses incurred from the area developer stores during 1995, i.e., that the losses exceeded all the operating income the Company had reported in its existence.

107. It was not until August of 1996 that the Company finally revealed the amounts of losses incurred in the area development stores on an annual basis. However, this disclosure did not disclose the cash flow deficit from operating activities of those stores, nor did it disclose the information on a quarterly basis, giving the investor misleading appraisal of the stores' success:

As a result of executing the rapid expansion strategy required by the Company, Boston Market area developers have incurred net losses in each of the last three years. The losses incurred over this three year period, aggregating $1498.1 million in 1995, $47.0 million in 1994, and $9.8 million in 1993, include (a) depreciation and amortization charges of approximately $49 million, (b) approximately $86 million attributable to development overhead, scale inefficiencies in operating overhead, and other start-up costs which the Company believes are necessary to establish the Boston Market brand in new territories and open stores at a rate sufficient to gain a competitive advantage over similar concepts, and (c) royalties, interest, and other franchise-related fees that would no longer be incurred in the event the Company were to acquire, or convert its convertible secured loans, to such financed area developers. As a result of the foregoing factors, as well as ongoing improvements to store operating performance, the Company does not consider these start-up losses to be a meaningful financial measure during this rapid expansion phase (i.e., that period during which new stores constitute a significant percentage of stores open in an area of dominant influence). The Company believes the rapid expansion phase for most of its developers should last approximately four to five years from the time significant development commences in such area developer's area of dominant influence. As the rapid expansion phase ends, the size of the area developer's store base should enable the developer to gradually reduce and eventually recover such start-up losses. The reduction in and recovery of losses is expected to be driven primarily by lower development overhead, increased operational and advertising efficiencies, greater economies of scale, and further increases in store revenue through continued product and service enhancements. The point at which losses may be recovered will vary by area developer depending primarily upon the size and timing of the area developer's store development schedule, the achievement of advertising efficiency, the level of interest charges, the intensity of regional competition, and the quality of management, however, there can be no assurance that such losses will be recovered. Because the financed area developers are generally two to three years into significant store development in their respective areas of dominant influence, the Company believes substantially all of its financed area developers will remain in the rapid expansion phase during 1996 in most of their areas of dominant influence and the Company, accordingly, anticipates that such financed area developers will continue to incur start-up losses in 1996. Subsequent to the completion of the rapid expansion phase, the Company expects area developer profitability to be a more meaningful factor in assessing loan recoverability and any future loan commitments. Although the Company believes its current financed area developers will achieve such profitability, in the event the foregoing strategy does not come to fruition or an area developer otherwise fails to achieve a sufficient level of profitability subsequent to its rapid expansion phase, such event could have a material adverse impact on the Company's financial position and results of operations. SEE "SPECIAL REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 10.
This partial disclosure was misleading, as much of the loss Boston Chicken attributed to start-up costs was actually the result of the "concept" not succeeding in many areas as Boston Chicken could not develop a large enough customer base at many locations that was willing to pay full price for operating profits to be generated, thus many of the operating losses were in fact a meaningful financial measure. This footnote was wholly inadequate as it did not report quarterly information despite the fact that this was a quarterly report, and did not disclose the amount of depreciation, overhead and royalties which were included in the looses for each year.

108. Similarly, the third quarter 1996 Form 10-Q filed on November 19,1996 as well as the original 1996 Form 10-K filed on March 18, 1997, did not disclose the cash flow loss from operations of these stores which would have more fully apprised the market of the extreme problems that the stores were having. Nor did the Form 10-Q reports for 1996 or the original 1996 Form 10-K reports include information on the nature of the related party relationship which would have impacted the investor's perception of the success of the stores operated by area developers.

109. Ultimately, Boston Chicken was forced to amend its Form 10-K for 1996 and include disclosures of the cash flow deficit of the stores and detailed information on related parties associated with area developers.

Boston Chicken's Improper Reporting Of System-wide Revenue

110. In yet another scheme to mislead the public as to the success of the Company's stores, Boston Chicken misrepresented and overstated the revenues from its system-wide operations reported to the public. Boston Chicken reported as system-wide revenues $383.7 million, $792.9 million, and $1.2 billion for 1994, 1995, and 1996, respectively. Boston Chicken also reported quarterly system-wide revenues in connection with announcing its quarterly results. These amounts were materially overstated due to the inclusion by the company of free meal coupons for employees, promotions and other discounts which other restaurants typically do not include.

111. Such inclusion of non-cash generating "revenue" violates a basic premise of GAAP in that financial information should be representative of what it purports to represent. FASB Statement of Concept No. 2, ¶ 63 states:

Representational faithfulness is correspondence or agreement between a measure or description and the phenomenon it purports to represent.
112. The inclusion of such items as coupons, discounts and free meal coupons as revenue was misleading and did not represent valid revenue; GAAP requires that revenue represent a claim to cash as a condition to recognition. See FASB Statement of Concepts No. 5, ¶ 83.

113. Due to these improprieties, the Company presented its results for 1994, 1995, and 1996, and the interim periods of 1995, 1996 and Q1 1997, in a manner which violated GAAP. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.

CLASS ACTION ALLEGATIONS

114. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3 on behalf of all persons who purchased or otherwise acquired Boston Chicken's Publicly Traded Securities between February 6, 1995 and May 28, 1997 (the "Class"), excluding the defendants, members of their families and any entity in which a defendant has an interest.

115. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. During the Class Period, Boston Chicken had tens of millions of shares of stock outstanding, owed by thousands of shareholders.

116. There is a well-defined commonality of interest in the questions of law and fact involved in this case. The questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include the following:

(a) Whether the securities laws were violated by defendants;

(b) Whether the defendants omitted and/or misrepresented material facts;

(c) Whether defendants' statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;

(d) Whether defendants knew or recklessly disregarded that their statements were false and misleading;

(e) Whether the price of the Publicly Traded Securities was artificially inflated during the Class Period; and

(f) The extent of damage sustained by Class members and the appropriate measure of damages.

117. Plaintiff's claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants' wrongful conduct.

118. Plaintiff will adequately protect the interests of the Class. He has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests which conflict with those of the Class.

119. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

120. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications.

CLAIM FOR RELIEF I

For Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5 Against All Defendants

121. Plaintiff incorporates by reference ¶¶ 1-120.

122. Each of the defendants: (a) knew or had access to the material adverse non-public information about Boston Chicken's financial results and then existing business conditions, which was not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading statements, releases, reports and other public representations of and about Boston Chicken.

123. During the Class Period, defendants, with knowledge of or reckless disregard for the truth, disseminated or approved the false statements specified above, which were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

124. Defendants violated §10(b) of the Exchange Act and Rule 10b-5 in that they:

(a) Employed devices, schemes and artifices to defraud;

(b) Made untrue statements of material facts or omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or

(c) Engaged in acts, practices and a course of business that operated as a fraud or deceit upon plaintiff and others similarly situated in connection with their purchases of the Publicly Traded Securities during the Class Period.

125. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for the Publicly Traded Securities. Plaintiff and the Class would not have purchased the Publicly Traded Securities at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements.

CLAIM FOR RELIEF II

For Violation Of Section 20(a) Of The Exchange Act Against Defendants Beck, Stephens, Nadhir and Boston Chicken

126. Plaintiff incorporates by reference ¶¶ 1-125.

127. Defendants Beck, Stephens and Nadhir acted as controlling persons of Boston Chicken within the meaning of §20(a) of the Exchange Act. By reason of their positions as directors and/or officers of Boston Chicken, they had the power and authority to cause Boston Chicken to engage in the wrongful conduct complained of herein. Boston Chicken controlled each of the individual defendants and all of its employees.

128. By reason of such wrongful conduct, Boston Chicken and the defendants named herein are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of the Publicly Traded Securities.

BASIS OF ALLEGATIONS

129. Because §21D(c) [15 U.S.C. §78u-4(c)] of the Exchange Act requires complaints to be pleaded in conformation with Federal Rule of Civil Procedure 11, plaintiff has alleged the foregoing based upon the investigation of his counsel, which included a review of Boston Chicken's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company, private investigations, and discussions with consultants, and, pursuant to Rule 11(b)(3), believes that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth at ¶¶ 1, 4-6, 8-12, 16-17, 22, 24-33, 36, 40-41, 45-46, 48, 50-51, 53-54, 56, 58, 62, 65-67, 70-71, 73-74, 76, 81-83, 85, 90, 92-93, 96-99, 102-110, 113, 122-125 and 127-128.

PRAYER FOR RELIEF

WHEREFORE, plaintiff prays for judgment as follows:

1. Declaring this action to be a proper class action pursuant to Rules 23(a) and 23(b) (3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;

2. Awarding plaintiff and the members of the Class compensatory damages;

3. Awarding plaintiff and the members of the Class pre-judgment and post-judgment interest, as well as reasonable attorneys' fees, expert witness fees and other costs;

4. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and the federal statutory provisions sued hereunder pursuant to Rules 64,65 and any appropriate state law remedies; and

5. Awarding such other relief as this Court may deem just and proper.

JURY DEMAND

Plaintiff demands a trial by jury.

DATED: July 2, 1997
 
DYER DONNELLY
ROBERT J. DYER III

           /s/
_______________________________
ROBERT J. DYER III
825 Logan Street
Denver, CO 80203-3114
Telephone: 303/861-3003

MILBERG WEISS BERSHAD
  HYNES & LERACH LLP
WILLIAM S. LERACH
ALAN SCHULMAN
DAVID WALTON

           /s/
_______________________________
for WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058

SCHIFFRIN & CRAIG, LTD.
RICHARD S. SCHIFFRIN
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706

Attorneys for Plaintiff

Address of Plaintiff:
149 Main Avenue, Road #5
Vineland, NJ 08360


1 All per share amounts reflect the August 1994 two-for-one stock split

2 An additional element of the relationship is the fact that Boston Chicken was a landlord for many of the area developer stores


CERTIFICATION OF NAMED PLAINTIFF PURSUANT TO FEDERAL SECURITIES LAWS

GEORGE GENNA ("Plaintiff") declares, as to the claims asserted under the federal securities laws, that:

1. Plaintiff has reviewed the Complaint and authorized its filing.

2. Plaintiff did not purchase the security that is the subject of this action at the direction of the plaintiff's counsel or in order to participate in this private action.

3. Plaintiff is willing to serve as a representative party on behalf of the class, including providing testimony at deposition and trial, if necessary.

4. Plaintiff has made no transaction during the Class Period in the debt or equity securities that are the subject of this action except those set forth below:
 

Security Transaction Date Price
Per Share
Common Stock Purchased 500 shares 05/05/97 $25

5. During the three years prior to the date of this Certification, Plaintiff had sought to serve or served as a representative party for a class in the following actions filed under the federal securities laws: George Genna v. Digital Link Corporation, et al., U.S.D.C., Northern District of California, San Jose Division, No. C-96-20867-RMW(EAI).

6. Plaintiff has sought to serve or served as a representative party for a class in the following actions filed subsequent to December 22, 1995: None.

7. The Plaintiff will not accept any payment for serving as a representative party on behalf of the class beyond the Plaintiff's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the court.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 1st day of July, 1997, at Vineland, New Jersey.
/s/
_______________________________
GEORGE GENNA

21 Dec 1997
Source: Paper copy of court-stamped document