I-f •

IiIN THE UNITED STATES DISTRICT COURT fl' "

FOR THE DISTRICT OF COLORADO

.97 fl IN 23 !3 :27

Civil Action No. 97 WO* 1 3 081E; R. Pl,"F'F-IW:R

LESLIE GENE CONE, Personally, and on behalf of all others similarly situated,

V.

BOSTON CHICKEN, INC., SCOTT A. BECK and MARK W. STEPHENS,

Defendants.

CLASS ACTION COMPLAINT AND JURY DEMAND

Plaintiff, by his undersigned attorneys, for his class action complaint, states and alleges as

follows:

NATURE OF THE ACTION

1. This is a securities class action on behalf of all persons, other than defendants and

affiliated persons as described below (the "Class"), who purchased or otherwise acquired the

common stock of Boston Chicken, Inc. ("BCI" or the "Company") between August 13, 1996

and May 30, 1997, inclusive (the "Class Period").

2. BCI operates and franchises food service stores that specialize in meals featuring

rotisserie roasted chicken, turkey, ham, meatloaf, vegetables, and other side dishes. As of

December 1996, the system included 1,087 Boston Market stores located in 38 states and the

District of Columbia. Of these stores, 105 are company-operated, 964 are operated by fourteen

"Area Developers" and 18 are operated by other franchisees.

3. This action arises out of a scheme by BCI and its corporate insiders to

misrepresent the success and financial condition of BCI in order to inflate artificially the share

price of BCI which would, in turn, enable the company to complete several offerings of

securities on favorable terms.

4. The main value in any franchise is a unique and workable "concept" which the

market perceives to be economically viable and profitable. The long-term profitability of the

"concept" obviously includes the profitability of the individual franchised units — for without the

franchisees to pay royalties and fees, there would be no long-term profitability for the franchisor.

Boston Chicken became wildly successful because the market believed that its "concept" was

viable, based on its reported financial results and forecasts.

5. BCI had experienced dramatic increases in its share price following its initial

public offering in 1993. These increases in share price directly reflected the fact that BCI's

earnings were escalating at a spectacular rate — thereby purporting to demonstrate the viability of

the Boston Market "concept."

6. Prior to the beginning of the Class Period, and intensifying during the Class

Period, Boston Market franchises were losing vast amounts of money. In order to prop up the

share price of BCI and allow the Company to obtain debt and equity financing at preferred terms,

BCI created the false illusion of escalating earnings BCI established its "financed franchise"

system whereby it was able to hide the huge losses that its Boston market stores were incurring

from BCI's financial statements by improperly shifting these losses to the financial statements of

supposedly non-public companies called "Area Developers"-- companies which were, in reality,

controlled by BCI. BCI set up these fourteen entities to be, in form, separate entities. In

substance, however, these entities were always controlled by BCI, and their results should have

been consolidated with BCI's reported financial results. Demonstrating the substance of the

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transaction, the majority of the entities' financing came directly from BCI. Additionally, BCI

owned, and planned to exercise, an option to take majority control of each entity in the event that

the entity started showing profits — thus not harming BCI's financial statements.

7. Although the Boston Market locations were losing money hand over fist, BCI

showed paper "profits" from charging new stores royalty payments, additional charges and

interest — regardless of that store's profitability, or lack thereof.

8. This scheme worked remarkably well through December of 1996 — BCI stock was

appreciating rapidly. However, the Area Developers were losing money rapidly, and had to be

propped up with additional financing, or they would go out of business — and not be able to make

any more royalty payments to BCI. This system was, essentially, a Ponzi scheme whereby BCI

had to keep raising more and more money to bail out the Area Developers in order to sustain the

appearance of outstanding earnings for BCI. The Area Developers desperately needed financing

to offset their massive losses, which it was up to BCI to provide. BCI could only provide such

financing through the issuance of new debt and equity securities.

9. In order to be able to issue such convertible debt, stock and other securities at

favorable prices, BCI needed to artificially inflate its share price to obtain such financing on

preferred terms. If the Area Developers could not expand, or in fact had to reduce stores, BCI's

income would decrease — making it harder or impossible to issue new securities. If BCI could

not bail out the unprofitable Area Developers, they would be forced to close more stores.

Eventually, this downward spiral would kill the Company. This scenario provided a powerful

incentive to manipulate the earnings of BCI to allow the issuance of these securities on terms

favorable to the company.

10. These accounting manipulations drove BCI's share price from $28.63 per share

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onn„

prior to the Class Period to a Class Period high of $41.50 per share on December 4, 1996.

Shortly following this peak share price, news of these manipulations began to become public —

albeit in small pieces by various financial publications — and through disclosures of BCI itself.

By the time that the market was able to piece together the fall story from this patchwork of

sources and disclosures, BCI shares had tumbled to $16.75 per share causing hundreds of

millions of dollars in losses to unsuspecting shareholders.

JURISDICTION AND VENUE

11. Plaintiff brings this action pursuant to §§10(b) and 20(a) of the Securities

Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j and 78t, and Rule 10b-5

promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. §240.10b-5, as a

result of false and/or misleading statements defendants made to the marketplace in connection

with the public trading of BCI'S common stock during the Class Period.

12. This Court has jurisdiction in this action pursuant to §27 of the Exchange Act,

15 U.S.C. §78aa, and 28 U.S.C. §1367.

13. Venue is proper in this District pursuant to §27 of the Exchange Act, 15 U.S.C.

§78aa, and 28 U.S.C. §§1391(b) and (c). A substantial part of the events and omissions giving

rise to the claims alleged herein, including the dissemination of the various public statements and

reports that contained materially false and misleading information, occurred in this district.

BCI's corporate headquarters and executive offices are located within this District.

14. In connection with the acts and conduct alleged in this complaint, defendants,

directly and indirectly, used the means and instrumentalities of interstate commerce, including

the mails and telephone communication systems, and the facilities of a national securities

markets.

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THE PARTIES11 Plaintiff Leslie Gene Cone purchased 500 shares of the common stock of BCI on

January 22, 1997 at $37.75 per share, and has been damaged as a result of defendants' conduct

as described herein.

16. Defendant BCI, Inc. is a Delaware corporation that maintains its principal offices

at 14103 Denver West Parkway, Golden, Colorado 80401-4086. Its stock trades on the

NASDAQ System under the symbol "BOST."

17. (a) Defendant Scott A. Beck ("Beck") was Chief Executive Officer and Co-

Chairman of the Board of Directors of the Company throughout the Class Period. Because of

defendant Beck's position with the Company, he had access to the adverse non-public

information about BCI'S finances, and had access to internal corporate documents (including the

Company's operating plans, budgets and forecasts and reports of actual operations compared

thereto). Because of his position with the Company, defendant Beck controlled the contents of

BCI'S quarterly reports, filings with the SEC, financials, press releases and presentations to

securities analysts. Defendant Beck was responsible for the major decisions involving BCI.

Defendant Beck was provided with copies of the Company's reports, financials and press

releases alleged herein to be misleading prior to or shortly after their issuance and had the ability

and opportunity to prevent their issuance or cause them to be corrected. Because of his position

and access to material non-public information available to them but not the public, defendant

Beck knew that the adverse facts specified herein had not been disclosed to and were being

concealed from the public and thus knew that the positive representations which were being

made were then false and misleading. As a result, defendant Beck is responsible for the accuracy

of the public reports and releases detailed herein and is therefore responsible and liable for the

representations contained therein.

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(b) Defendant Mark W. Stephens ("Stephens") was Vice-Chairman and Chief

Financial Officer of the Company throughout the Class Period. Because of defendant Stephens'

position with the Company, he had access to the adverse non-public information about BCFS

finances, and had access to internal corporate documents (including the Company's operating

plans, budgets and forecasts and reports of actual operations compared thereto). Because of his

position with the Company, defendant Stephens controlled the contents of BCI'S quarterly

reports, filings with the SEC, financials, press releases and presentations to securities analysts.

Defendant Stephens was responsible for the major decisions involving BCI. Defendant Stephens

was provided with copies of the Company's reports, financials and press releases alleged herein

to be misleading prior to or shortly after their issuance and had the ability and opportunity to

prevent their issuance or cause them to be corrected. Because of his position and access to

material non-public information available to them but not the public, defendant Stephens knew

that the adverse facts specified herein had not been disclosed to and were being concealed from

the public and thus knew that the positive representations which were being made were then false

and misleading. As a result, defendant Stephens is responsible for the accuracy of the public

reports and releases detailed herein and is therefore responsible and liable for the representations

contained therein.

18. Defendants Beck and Stephens are sometimes referred to hereinafter collectively

as the "Individual Defendants."

19. The Individual Defendants engaged in the wrongful conduct alleged herein so that

they could inflate the price of the Company's stock in order to: (i) issue massive quantities of

debt and equity securities to an unsuspecting market at artificially inflated prices; (ii) enhance the

value of their stock holdings, options and warrants in BCI; and (iii) protect and enhance their

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executive positions and the substantial compensation and prestige they obtained thereby.

CLASS ACTION ALLEGATIONS

20. Plaintiff brings this case as a class action pursuant to Rule 23(a) and (b)(3) of the

Federal Rules of Civil Procedure on behalf of a Class consisting of all persons and entities who

purchased BCI common stock during the period from August 13, 1996 through May 30, 1997,

inclusive (the "Class Period"). Excluded from the Class are the defendants herein, any

subsidiaries or affiliates of BCI, members of the defendants' immediate families, the officers and

directors of BCI during the Class Period, and each of their heirs, successors and assigns.

21. During the Class Period, thousands of shares of common stock of BCI were

traded on an efficient and developed securities market. Thousands of brokers nationwide have

immediate access to trading information about BCI through the system. Within minutes of any

transaction taking place, this system displays the most recent trades and prices.

22. The members of the Class are so numerous that joinder of all members is

impracticable. BCI had more than 65 million shares outstanding as of May 16, 1997. During the

Class Period, millions of shares of BCI stock were purchased by many thousands of persons

located throughout the United States. The exact number of Class members can be determined by

appropriate discovery.

23. Plaintiffs claims are typical of the claims of the members of the Class. Plaintiff

and all members of the Class sustained damages as a result of defendants' wrongful conduct

complained of herein.

24. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

Plaintiff has no interests that are adverse or antagonistic to those of the Class.

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25. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy. Because the damages suffered by many individual Class

members may be relatively small, the expense and burden of individual litigation make it

virtually impossible for the Class members individually to seek redress for the wrongful conduct

alleged herein.

26. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. Among the

questions of law and fact common to the Class are:

a. whether the federal securities laws were violated by defendants' acts as

alleged herein;

b. whether statements disseminated to the investing public and securities

markets by the defendants misrepresented and/or omitted material facts about BCI, its business

and its prospects;

c. whether defendants acted willfully or recklessly in misrepresenting and/or

omitting to state material facts;

d. whether the market price of BCI'S common stock during the Class Period

was artificially inflated due to the misrepresentations and/or non-disclosures complained of

herein; and

e. whether the members of the Class have sustained damages, and, if so,

what is the proper measure thereof.

27. Plaintiff will rely, in part, upon the presumption of reliance established by the

fraud-on-the-market doctrine in that:

a. defendants made public misrepresentations or omitted material facts

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during the Class Period, as alleged herein;

b. the misrepresentations and/or omissions were material;

c. BCI' s common stock was traded in an efficient market;

d. the misrepresentations and/or omissions alleged tended to induce

reasonable investors to misjudge the value of BCI shares; and

e. plaintiff and members of the Class acquired their shares between the time

defendants made the misrepresentations and/or omissions and the time the truth was revealed,

without knowledge of the falsity of the misrepresentations.

28. Based upon the foregoing, plaintiff and members of the Class are entitled to a

presumption of reliance upon the integrity of the market for, at least, the purposes of class

certification, as well as for ultimate proof of the claims on their merit. Similarly, plaintiff and

members of the Class are entitled to a presumption of reliance with respect to the omissions

alleged herein.

29. Plaintiff envisions no difficulty in the management of this litigation as a class

action.

BACKGROUND FACTS

30. The main value in any franchise is a unique and workable "concept" which the

market perceives to be economically viable and profitable. The long-term profitability of the

"concept" obviously includes the profitability of the individual franchised units — for without the

franchisees to pay royalties and fees, there would be no long-term profitability for the franchisor.

Boston Chicken became wildly successful because the market believed that its "concept" was

viable, based on its reported financial results and forecasts.

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A. The Boston Market Concept

31. BCI operates and franchises food service stores under the name "Boston Market"

that specialize in fresh, convenient meals featuring "home style" entrees. In order for the market

to approve of the stock of BCI, it was imperative that the concept of Boston Market be accepted

as a profitable concept.

32. BCI is the leader in the "home meal replacement" segment of the restaurant

industry, a category believed to be $20-30 billion in size. More women in the workforce has led

to an increasing number of dual-income households, the primary driver of the home meal

replacement trend. More women in the workforce coupled with hectic life-styles has created the

need for good take-out food. The Boston Market concept aims to combine the speed of quick

service restaurants (fast food) with the freshness and quality of a home-cooked meal, all at a very

reasonable value. The company changed the name of its restaurants from Boston Chicken to

Boston Market in 1995 after adding turkey, ham, and meatloaf to its chicken-only format.

33. The average Boston Market store is 3,000-3,500 square feet in size with about 60

seats per unit. The average meal cost is between $4.00-5.00. The average transaction is about

$8.75. The menu is primarily focused on complete meals, although "a la carte" is also available.

Lunch, dinner, and evening dayparts represent approximately 30%, 50%, and 20% of sales,

respectively. While it varies from store to store, carry-out, on average, represents 60% of

transactions.

34. The first Boston Chicken store was opened in 1985 in Newton, Massachusetts.

The Company's primary entree was rotisserie chicken, accompanied by a dozen or so high

quality side dishes, all made from scratch. In 1992, members of BCI's current management

acquired control of the Company. At the end of 1994, there were 534 restaurants.

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35. BCI has been uniquely structured into several operating units -- the headquarters

unit (BCI) and fourteen regional franchise companies called "Area Developers." As of

December, 1996, there were more than 1,000 Boston Market stores located in 38 states and the

District of Columbia. 964 of these stores were owned by these "Area Developers." Each Area

Developer is purportedly a separate entity, but is financed in large part by BCI, pursuant to its

unique "Financed Franchise" Structure.

B. The "Financed Franchise" Structure is Established

36. In order to keep large losses from operations off of BCI's financial statements,

BCI concocted a scheme whereby it would establish subsidiaries -- purportedly technically

unowned by BCI — that would incur huge losses, while BCI would show outstanding

profitability. Although BCI was, in effect, totally responsible for these losses, they did not

appear anywhere in BCI's financial statements. As described in the July 7, 1997 issue of

FORTUNE magazine by Wayne Daniels, an analyst following BCI, this financial structure "is

designed to deeouple reported earnings from economic reality."

37. Area Developers pay substantial nonrefundable fees for the privilege of opening a

Boston Market location. In addition, there is an ongoing royalty fee of 5% of revenues, and a

mandatory contribution of an additional 5% to a company-wide advertising fund. BCI also

charges various additional fees for software and support.

38. Additionally, BCI provides Area Developers with 75% of the initial capitalization

of the franchise in the form of a convertible loan. This loan is convertible into a majority

position in the equity of the franchisee at only a 12-15% premium over the initial value of the

franchise. Significantly, the company may convert the total amount of the line of credit into

equity even if the loan is never drawn upon or is repaid. Thus, BCI does not consolidate its

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results with those of the franchisee until the loan is fully converted into equity.

39. Under this structure, BCI recognized substantial and consistently increasing

revenues and earnings related to the royalties, fees and interest payments received from

franchised restaurants. More restaurants — no matter how unprofitable — would result in

increased earnings for BCI, no matter how much money was lost by the franchisees.

40, Under BCI's method of accounting, the fact that the restaurants were losing

money at an alarming rate was never fully disclosed to the market -- BCI kept these losses

hidden in the "privately held" Area Developers. This served to dramatically overstate BCI's

revenues, income, earnings per share and net assets for the quarters ending July 14, 1996 through

April 20, 1997 and the fiscal year ending December 29, 1996.

C. The "Financed Franchise" Ponzi Scheme Required Constant and EscalatingGrowth Which Required BC! to Continually Offer New Securities and Provided aPowerful Motive to Manipulate BCI's Share Price

41. During the Class Period, the Boston Market concept was proving to be

unprofitable systemwide. The individual restaurants were losing vast amounts of money.

However, as described above, new units -- no matter how unprofitable -- would aid in increasing

BCI's net income -- in the short term at least. If the tremendous growth in the number of

operating units of the Company ever slowed down, the growth of SCI's net income would slow

down proportionately as well.

42. If it were not for the financing arranged by BCI for the Area Developers, they

would surely be in dire financial straits, and unable to make their royalty and interest payments

to BCI. This would have the effect of lowering BCf's net income — thus depressing its share

price.

43. Essentially, the scheme was circular for BCI: More restaurants meant more

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royalty payments from the Area Developers and thus higher net income for BCI. Higher net

income for BC1 meant a higher share price, and the ability to issue debt and equity securities to

an unsuspecting market at inflated prices. However, more restaurants also meant larger

systemwide unprofitability for Boston Market stores, requiring more loans from BCI to the Area

Developers. And the only way these loans could be made was if BCI's share price remained

strong — allowing the Company to issue more debt and equity securities.

44. On the other hand, if the Company slowed down its pace of growth, its earnings

growth would slow down correspondingly, and its share price would fall. It would no longer be

able to raise the tremendous amount of capital required to finance the unprofitable Boston

Market system of restaurants. Without additional financing, the unprofitable Area Developers

could not continue in business. If the stores closed, BCI would no longer receive the royalty and

interest payments which comprised most of its revenues. In short, the Company was faced with a

classic "grow or die" scenario.

45. In response to this scenario, BCI and the Individual Defendants orchestrated a

scheme whereby they improperly recognized vast quantities of revenues in order to artificially

"prop-up" their quarterly and annual financial statements to give the appearance that the

Company was dramatically increasing its revenues and earnings. This, in turn, fueled the

confidence of investors that BCI and the Boston Market concept had become wildly profitable

for its investors. This scheme was successful, causing BCI's share price to escalate, and

allowing the Company to issue at least $362.5 million in securities during the Class Period, as

well as obtaining a line of credit of $300 million from Bank of America and GE Capital.

46. On August 12, 1997, the day before the commencement of the Class Period, BCI

shares closed trading at $28.63 per share.

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FALSE AND MISLEADING STATEMENTSMADE DURING THE CLASS PERIOD

47. On August 13, 1996, the Class Period commences with BCI reporting outstanding

financial results over the BUSINESS WIRE for the quarter ended July 14, 1996:

Aug. 13, 1996--BCI, Inc. (NASDAQ-NMS:BOST) todayreported financial results for its second quarter and year-to-dateended July 14, 1996, compared with results for the second quarterended July 9, 1995. Highlights include:

Second Quarter — Company revenue increased 86% to$64,561,000 from $ 34,800,000. Operating income increased107% to $ 29,860,000 from $ 14,412,000. -- Net income increased115% to $ 15,916,000 from $ 7,420,000. -- Earnings per shareincreased 60% to $ .24 from $ .15. Boston Market® systemwidegross revenue increased 52% to $ 260.472,000 from$ 171,374,000.

Year-to-date -- Company revenue increased 49% to$ 111,908,000 from $ 74,907,000. -- Operating income increased109% to $ 58,407,000 from $ 27,939,000. -- Net income increased117% to $ 31,565,000 from $ 14,536,000. -- Earnings per shareincreased 60% to $ .48 from $ .30. -- Boston Market systemwidegross revenue increased 59% to $ 572,270,000 from$ 358,822,000.

***

Scott Beck, co-chairman and chief executive officer ofBoston Chicken, said, The composition of Boston Chicken'sincome statement reflects our first experience in convertingBoston-Market area developer stores into company stores. Our 78Philadelphia-area company stores are performing very well.

This press release was false and misleading because BCI's financial statements were

materially false and misleading for the reasons set forth below. In addition, the dissemination of

seemingly outstanding Boston Market "systemwide gross revenue" was itself false and

misleading because it tended to portray the franchisees as performing well financially, while

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omitting to disclose that systemwide profitability for Boston Market was atrocious — and was in

fact a dramatic loss. On the day following the announcement of these seemingly outstanding

financial results, an unsuspecting market caused BCI shares to climb to $30.25 per share.

48. The second quarter results were warmly received by the market and analysts, as

described in an August 14, 1996 article in the DENVER POST:

Boston Market said its restaurants reported average weeklysales of $ 23,800, up 7.2 percent from the same period last year.Cash flow, a measure of profitability, also improved, reaching 17.2percent of sales.

[An analyst] said the company's profitability will rapidlygrow as it opens new restaurants. Because Boston Chicken istrying to grow rapidly, it has used "area developers," franchiseeswho take responsibility for opening dozens of restaurants inregional markets, instead of a traditional strategy of using hundredsof individual franchisers. The firm finances the developers andretains the right to take a majority stake in the stores after they arefinished.

49. On August 22, 1996, BCI announced over the BUSINESS WIRE that, based on its

outstanding reported second quarter results, it would be able to implement the second prong of

its scheme — to dramatically increase its planned growth:

-- Following strong second quarter unit level performance,Boston Chicken, Inc. (NASDAQ-NMS: BOST) said today theBoston Market store development pace is increasing and that itsarea developers have indicated their intention to triple theirremaining commitments to open additional stores.

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

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Boston Chicken anticipates that the revised schedules willaccelerate the Boston Market development pace to an annual rateof 300 to 350 stores in 1997, up from a current development rate of250 to 275. The development pace could increase even further in1998.

The Company also said that its area developers are in theprocess of closing private equity financings to be used by them tosupport store development.

Our strong unit level economics, as shown in secondquarter results, means that every dollar invested in a new store cangenerate substantial returns, said Scott Beck, Co-Chairman andCEO of Boston Chicken, Inc. (Emphasis Supplied).

This disclosure was false and misleading when made because the unit level economics

were anything but strong — the stores were losing vast amounts of money, as detailed below. The

market reacted favorably to this expansion -- which was conditioned on the outstanding financial

results announced on August 13, 1996 -- by driving BCI's share price up to close at $32.25 per

share on August 22, 1996.

50. On August 28, 1996, BCI filed its quarterly Form 10-Q with the Securities and

Exchange Commission. This 10-Q disclosed the same financial information contained in the

August 22, 1996 press release, and was false and misleading for exactly the same reasons. As of

the close of trading August 28, 1996, BCI shares traded at $34.31 per share.

51. To help finance their aggressive growth BCI next announced that it would require

$350 million in additional financing, as reported in the September 2, 1996 edition of NATION'S

RESTAURANT NEWS:

GOLDEN, Colo. -- Boston Chicken Inc. is putting togethera $350 million financial package to triple the projecteddevelopment of its Boston Market concept, increasing the currenttotal of 900 units to 3,600 over the next five to seven years.

***

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The new domestic expansion plan will use, in part, some$40 million to $60 million in private capital commitments to areadevelopers who already have committed to increase their buildoutactivity, to 2,700 new units, from the 900 they initially had agreedto build in that period.

***

The decision to ramp up expansion plans and disclose moreinformation takes square aim at critics who have continued to castdoubts on the viability of the individual units' abilities to generateongoing profits. Those critics have pointed out that "preroyaltycash flow" does not present a true picture of profitability.

Boston Chicken officials conceded that there are additionalcosts and that, in fact, most of the area developers have been losingmoney. But they contend that fact is the result of rapid expansionand that improved sales, cash flow and investment by the companyand private-venture partners are working to turn the entire systemaround.

Thus,

52. On September 18, 1996, BCI announced over REUTERS a $75 million private

placement to raise funds to try to keep the hapless Boston Market franchisees afloat.

Boston Chicken Inc <BOST.0> said Wednesday thatMarket Partners LLC completed a $75 million private placement toraise funds for investments in Boston Market franchises.

The proceeds will be used to build new stores, said KarenRugen, spokeswoman for Boston Chicken, owner of BostonMarket.

The company currently has 985 Boston Market stores in theUnited States. Last month the company's franchisees increasedtheir commitment to build new stores, saying they will openanother 2,700 in the next five to seven years.

53. On October 30, 1996, BCI announced strong financial results for the third quarter

ended October 6, 1996 over the BUSINESS WIRE:

Oct. 30 1996 -- Boston Chicken, Inc. (Nasdaq-NMS:

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BOST) today reported financial results for its third quarter andyear-to-date ended October 6, 1996. Highlights include: -0- ThirdQuarter — Company revenue increased 92% to $74,310,000 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® systemwide gross revenue increased46% to $288,850,000 from $197,496,000.

Year-to-date -- Company revenue increased 64% to$186,218,000 from $113,578,000. -- Net income increased 109%to $48,865,000 from $23,350,000. -- Earnings per share increased57% to $0.74 from $0.47. -- Boston Market systemwide grossrevenue increased 55% to $861,120,000 from $556,318,000.

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 -- reachedrecord levels; our area developers committed to build 2,700 moreBoston Market stores; and $75 million in new private equity wasraised at the financed area developer level to partially finance thisexpanded store development schedule."

This press release was false and misleading because BCI's financial statements were

materially false and misleading for the reasons set forth below. In addition, the dissemination of

seemingly outstanding Boston Market "systemwide gross revenue" was itself false and

misleading because it tended to portray the franchisees as performing well financially, while

omitting to disclose that systemwide profitability for Boston Market was atrocious — and was in

fact a dramatic loss.

54. On November 20, 1996, BC1 filed Form 10-Q for the quarter ending October 6,

1996. This Form 10-Q disclosed the same financial information contained in the October 30,

1996 press release, and was false and misleading for exactly the same reasons.

55. On December 4, 1996, based on the ongoing manipulation and reporting of strong

financial results and plans of continued growth predicated on these outstanding financial results,

BCI shares reached an all-time high of $41.50 per share.

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56. On December 18, 1996, the DENVER POST reported that BCI had secured a $300

million line of credit:

Boston Chicken Inc. has secured a $300 million line of credit thatwill help the Golden-based company quadruple its restaurants by2003, the company announced yesterday.

***

The refinancing package includes about $110 million inrevolving credit for Boston Chicken Inc. and another $190 millionin credit structured as leases for franchisees — called areadevelopers -- who want to build more stores. Of the total, $160million is new financing, company officials said yesterday.

***

And given the company's growth schedule, it won't be thelast, said Melissa Marsden, vice president of investor relations.She couldn't say how many stores the $300 million would build.

"We can't really look at it on a per-store basis because youwouldn't finance everything from the ground up using this kind offinancing," she said.

BCI shares closed trading at $36.13 per share on December 18, 1996.

57. On January 28, 1997, BCI reported strong fourth quarter and fiscal year results for

the quarter and year ended December 29, 1996 over the BUSINESS WIRE:

Tan. 28, 1997--Boston Chicken, Inc. (NASDAQ-NMS:BOST) today reported financial results for the fourth quarterand fiscal year ended December 29, 1996. Highlights include:

Fourth quarter:

-- Company revenue increased 71% to $78,290,000 from$45,901.000.

— Net income increased 77% to $18,093,000 from$10,209,000.

— Earnings per share increased 42% to $0.27 from $0.19.-- Boston Market® systemwide gross revenue increased to

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$305,471,000.

Fiscal year:

-- Company revenue increased 66% to $264,508,000 from$159,479,000.

-- Net income increased 100% to $66,958,000 from$33,559,000.

-- Earnings per share increased 53% to $1.01 from $0.66.-- Boston Market systemwide gross revenue increased 47%

to $1,166,591.00.

Scott Beck, BCI co-chairman and chief executive officer,said, "1996 was another year of record-setting achievement forBoston Chicken Inc. and the Boston Market system. Weaccomplished our goals for both store level revenue and profits. .

***

Mark Stephens, BCI vice chairman and chief financialofficer, said, "During 1996 we significantly strengthened thecapital resources available to the system. In the fourth quarter, wecompleted the most sizable senior debt financing in the history ofthe Boston Market system — totaling $300 million. We werepleased to welcome a number of new participants to these seniorcredit facilities, many of whom are among the premier lendinginstitutions in the U.S. and abroad. Earlier in the year, MarketPartners, L.L.C., completed a private placement of $75 million tobe used to make equity investments in Boston Market areadevelopers."

This disclosure was false and misleading when made because the financial results

reported by the company did not comply with Generally Accepted Accounting Principles or SEC

regulations, as detailed below.

58. Based on the outstanding reported financial results and predicted growth because

of these strong results, BCI shares were still sustaining a high share price. The market had not

yet been made aware of the accounting trickery being employed by the Company. However, this

lack of knowledge was about to be corrected, in a piecemeal fashion by several leading financial

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publications, and by BCI disclosures.

59. For example, the March, 1997 edition of ESQUIRE magazine outlined some of the

problems at BCT:

Lately, the shorts are betting that NASDAQ-traded BostonChicken is heading for a fall, with more than sixteen million sharesbeing sold short. The reason for the pessimism: questionableearnings. The five-year-old fast-food franchiser has more than athousand outlets up and running and expects to see that numbergrow to more than thirty-five hundred in the next seven years.That would make Boston Chicken easily the fastest-growingcompany of its kind in America today.

But a close look at Boston Chicken's SEC reports showthat, on an operating basis, the individual franchises are hugemoney losers and are being kept afloat only by loans from theparent company. The interest on those loans plus all sorts of feesand other payments from the franchisees are Boston Chicken'sonly significant sources of revenue and thus earnings. To keep itsearnings rising, the company has to open more and more stores --it's financing through loans and stock sales on Wall Street. (Emphasis Supplied).

60. On March 4, 1997, BLOOMBERG NEWS reported that BCI was exercising its option

to purchase a majority stake in one of the Area Developers:

Boston Chicken Inc. said it will acquire an 84 percent stake in itsNew York area franchisee by converting an $80 million loan andbuying out some the franchisee's investors.

The franchisee, BC New York LLC, operates 118 Boston Marketstores in New York, New Jersey and Connecticut. The remaining16 percent stake will be held by BC New York's management andother investors.

"We expect these 118 stores to begin to add to earningsimmediately upon closing of the transaction," Vice Chairman andChief Financial Officer Mark Stephens said in a statement. Hesaid the stores will add 3 to 4 cents a share to fiscal 1997 earningsand 4 to 5 cents for fiscal 1998.

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• _

The purchase, which will give Boston Chicken a total of 223company-owned stores, should be complete in the next severalweeks, the company said.

The loan conversion will reduce its outstanding loans tofranchisees to $572 million, Boston Chicken said.

Thus, BCI exercised its option to purchase one of the Area Developers pursuant to its

standard financed franchise agreement.

61. On March 6, 1997, BCI announced over the BUSINESS WIRE that it planned to

issue $250 million in debt to help prop up the hapless franchisees:

Boston Chicken, Inc. (NASDAQ-NMS:BOST) todayannounced the filing of a Registration Statement with theSecurities and Exchange Commission for the offering by theCompany of $250 million principal amount of convertiblesubordinated debentures due 2004.

The net proceeds of the offering will be used by theCompany primarily for development of the Boston Market®system, including providing partial financing for certain of its areadevelopers and Boston Market International.

By March 6, 1997, in response to the bad news disclosed by BCI and leading financial

publications, BCI shares had sunk to close at $32.00 per share.

62. The March 31, 1997 issue of FORTUNE shed some more light on the earnings

manipulation at 13CI in an article entitled "Learn to Play the Earnings Game (And Wall Street

Will Love You): The Pressure to Report Smooth, Ever Higher Earnings Has Never Been

Fiercer. You Don't Want to Miss the Consensus Estimate By a Penny -- And You Don't Have

To):

Boston Chicken bespeaks an altogether different and morecommon phenomenon. It is a business that isn't successful yet buthas used accounting to help convince investors that it already is, orat least will be soon. This has enabled it to raise more than $800

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million in stock and convertible debt offerings, money which has been essential not only to the company's rapid growth -- from 175 Boston Chicken restaurants when it went public in one of thedecade's hottest IPOs in November 1993 to 1,100 restaurants(rechristened Boston Markets) and 325 Einstein Brothers andNoah's bagel stores today -- but to its very survival. That'sbecause, economically speaking, Boston Chicken is still a bigmoney loser, as probably can be expected of a startup restaurantchain. All the losses, however, have been incurred by "financedarea developers," or FADs, which is Boston Chicken lingo forlarge-scale franchisees that act a lot like subsidiaries but aren't. Ifthey were, their losses would have to be reported on BostonChicken's income statement (they are instead disclosed, on anannual basis only, deep in the text of the company's SEC filings).The FADs get 75% of their startup capital in loans from BostonChicken, and with that money they pay the company the royalties,franchise fees, and interest that allow it to report ever-rising profits.Once the restaurants start making money, Boston Chickenexercises its right to convert the loans into equity, officiallydubbing the FADs subsidiaries and allowing their profits to flow to its bottom line.

***

Boston Chicken CFO Mark Stephens says his company wasstructured not to please Wall Street but to provide flexibility andmotivate its franchisees. But he acknowledges that "a byproduct ofwhere we are with the structure is that we have a public entity withan earnings complexion that is attractive." He adds: "It's likesausage. I love the product: just don't show me how its made."

***

Says Wharton School accounting professor Richard Sloan,referring to both Boston Chicken and AOL: "They just viewaccounting as another marketing tool that they should use to tryand promote their ideas."

Thus, even Mr. Stephens acknowledged that the structure of the Company served to

distort earnings from economic reality. Unfortunately for Mr. Stephens and BCI, despite their

obvious reluctance to show investors "how its made," the market was beginning to unravel the

mysteries contained in their accounting "sausage." By the date of this article, BCI shares had

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sagged to $30.50 per share.

63. On April 10, 1997, Herb Greenberg of the SAN FRANCISCO CHRONICLE discussed

some of the problems at BCI in an article titled "Are the Feathers Getting Ready to Fly at Boston

Chicken?":

Boston Chicken has a huge appetite for cash.

The Golden, Colo., company wants to more than double itsstore count over the next few years to more than 2,000 units.

To finance past expansion, the company has raisedhundreds of millions of dollars through a series of stock and bondofferings. It's now trying to raise another $250 million through aconvertible bond offering.

However, there's one small glitch: When the dealoriginally was announced a month ago, Chicken's stock wastrading at $32. Two days ago it slipped beneath $28, and that'swhen the clucking started.

As part of its bond offering, Chicken had planned toconvert $130 million in convertible bonds from a prior offeringinto stock. When you have a big need for cash, you need to keepyour balance sheet as debt-free as possible.

And everything would have been fine if Chicken's stockhadn't fallen. But to convert the bonds into stock, the shares haveto trade above $28. Yesterday, they fell $1 to close at $26.88.

Where does that leave Chicken? A spokeswoman concedesthat as long as the stock stays below $28, the conversion can't takeplace. "We do end up with more debt," she says, "but it's still atlevels we're comfortable with."

Maybe so, but in recent weeks analysts have been trimmingestimates on Chicken's same-store sale growth, suggesting thecompany's underlying business could be showing signs ofsoftening.

This article demonstrates the market's uneasiness with BCI during the Class Period, and

further demonstrates the problems BCI encounters in new securities offerings when its share

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—

price declines.

64. BCI announced on April 22, 1997 over the BUSINESS WIRE that it had completed

the sale of $250 million in convertible bonds:

-- Boston Chicken, Inc.: (Nasdaq:BOST) today announcedit has completed the sale of $250 million of ConvertibleSubordinated Debentures due 2004.

Proceeds from the offering will be used primarily fordevelopment of the Boston Market system, including providingpartial financing for certain of its area developers and BostonMarket International, Inc., for repayment of borrowings under theCompany's revolving credit facility and for general corporatepurposes. (Emphasis added.)

65. On May 13, 1997, the DENVER POST reported dramatically increased profits for

BCI's first quarter of fiscal 1997 ended April 20, 1997:

Boston Chicken Inc. laid another golden egg during thefirst quarter of this year with an increase in net income of 37percent over the same period last year.

For the quarter ended April 20, net income increased to$21.4 million from $15.6 million during the first quarter of 1996.Earnings per share increased 33 percent to 32 cents per share from24 cents per share for the first quarter of 1996.

This disclosure was false and misleading when made because the financial results

reported by the company did not comply with Generally Accepted Accounting Principles or SEC

regulations, as detailed below.

66. On May 29, 1997, BCI announced the firing of Boston Market CEO Larry Zwain

over the BusrNEss WIRE:

May 29, 1997 -- Boston Chicken, Inc.(NASDAQ/NMS:BOST) said today that Saad Nadhir will berenamed co-chairman of the board, and Scott Beck, co-chairman

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. .

and CEO of the company, will assume day-to-day management ofBoston Market. Nadhir and Beck will refocus the company on itscore home meal replacement business.

The company also said it was not satisfied with currentsales momentum in Boston Market stores or the level of discountsand promotions that currently characterize the system's marketingefforts.

The continuing trend of bad news caused BCI shares to sink to $16.75 per share.

67. The May 30, 1997 edition of the SAN FRANCISCO CHRONICLE detailed how BCI's

accounting manipulations, which had previously allowed the stock price to soar, were finally

catching up with the company:

Headline here April 10: "Are the Feathers Getting Readyto Fly at Boston Chicken?"

It was about how the company was having trouble raisingcash through a convertible debenture offering, and how its balancesheet was going to wind up with more debt than it expected.

At the time, its stock was around $26. A week late, as itbecame apparent that the company's business and stock weresputtering, the cash-starved Chicken cut the amount it was trying toraise to $200 million from $250 million. But to lure investors, theChicken offered an eye-popping (for a convertible) 7.75 percentyield -- roughly one full percentage point higher than it originallyplanned to pay.

At that price, investors clamored for its debt, and when thedeal finally closed, the Chicken wound up with $287.5 million.

The Chicken crowed that it got more than it originallywanted, while skeptics (and there are a lot of them) clucked that itshowed how badly the company needs the loot (never a good sign.)

Then, yesterday the Chicken announced the departure ofthe head of its restaurants unit, a concession that it's not happywith its sales growth. In addition, and perhaps most importantly,the company said it is changing its strategy -- scrapping its focuson sandwiches and lunch in favor of its original focus on takeoutdinners.

-26-

Short-sellers, who've helped make the Chicken one of themost heavily shorted of all stocks, say this is proof how rightthey've been. The stock slid $1.63 yesterday to close at $16.34, anew 52-week low.

They add its going lower, as the company's controversialaccounting, which allows it to pawn off losses on franchises,eventually comes home to roost in the form of even lowerearnings.

The Chicken's execs may have done the right thing bymoving quickly to slaughter a money-losing strategy. But anytimea restaurant company has to start flip-flopping its strategies,investors often wind up getting plucked.

Thus, the Class Period ends with Herb Greenberg's analysis of the widespread financial

fraud at BCI. Unfortunately, by the time shareholders had adequate notice of this massive

financial fraud, BCI's share price had sunk to $16.75 per share — causing millions of dollars of

losses to unsuspecting shareholders.

BOSTON CHICKEN'S FALSE AND MISLEADING FINANCIAL STATEMENTS

68. In order to inflate BCI's revenues, earnings and assets improperly during the

Class Period, defendants undertook a scheme whereby they: i) failed to consolidate the results of

the Area Developers into BCI's financial statements; ii) failed to disclose related party

transactions; iii) improperly capitalized expenses at the franchisee level; and iv) improperly

booked revenues at the franchisee level which had not been earned by the franchisees.

69. These improper accounting practices and manipulations were in direct violation of

GAAP and SEC rules, as described below, and resulted in materially overstated revenues from

product sales, total revenues, net income and net assets for the quarters ended July 14, 1996,

October 6, 1996, December 29, 1996 and April 20, 1997.

70. GAAP is the set of conventions, rules and procedures which constitute the

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professional standards of the accounting profession. Regulation S-X (17 C.F.R. §210.4-01(a)(1))

provides that financial statements filed with the SEC which are not prepared in compliance with

GAAP are presumed to be misleading or inaccurate. Financial Accounting Standards ("FAS")

are promulgated by the Financial Accounting Standards Board ("FASB") and, along with

opinions of the Accounting Principles Board ("APB") are considered to be the highest authority

of GAAP. Accounting Research Bulletins (ARB") are also an authoritative source of GAAP.

71. Statements of Financial Accounting Concepts ("FAC") are also promulgated by

the FASB, and establish the objectives that the FASB uses to develop standards of financial

accounting and reporting.

a. Failure to Consolidate the Results of Area Developers into BCI'sFinancial Statements

72. To further exacerbate their overstatement of earnings, BCI intentionally did not

consolidate the results of the Area Developers, entities which were, at all times, under the control

of BCI. By excluding the Area Developers from their results of operations, BCI avoided

recognition of the huge losses being suffered by the individual stores, thereby causing earnings to

be materially overstated.

73. The relevant provision of GAAP concerning consolidations or combinations of

related companies is ARB 51, 1 which provides that related party must be consolidated if one

party establishes "control" over the other:

there is a presumption that consolidated statements are moremeaningful than separate statements and that they are necessary fora fair presentation when one of the enterprises in the group directlyor indirectly has a controlling financial interest in the otherenterprises.

The concept of "control" is applied broadly under GAAP and in a manner to emphasize

I I CONSOLIDATED FINANCIAL STATEMENTS, Accounting Research Bulletin No. 51.

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the economic substance of the transaction, rather than a strict adherence to technical form, as

described in APB Statement No. 4:

Financial accounting emphasizes the economic substance of eventseven though their legal form may differ from the economicsubstance and suggest different treatment.

74. "Control" is similarly defined by SEC regulations as "the possession, direct or

indirect, or the power to direct or cause the direction of the management and policies of a person,

whether through the ownership of voting shares, by contract, or otherwise." Regulation S-X (17

C.F.R. §210.1-02(g)).

75. A company that holds 75% of the total capitalization of another company, along

with an option to covert such financing to a majority equity interest, plainly exercises "control"

over that company under GAAP and applicable SEC regulations.'76. Defendants' scheme, which extracted money from the public via BCI's offering of

securities in order to pay the losses of its affiliates created false appearances in two ways. First,

BCI was able to give the false appearance that the Boston Market concept was hugely profitable .

when, in fact, the retail outlets were losing bast quantities of money. Second, BCI recorded

substantial earnings from interest expense and other fees charged to related parties. In essence,

BCI was loaning money to itself and at the same time recognizing income associated with the

borrowing.

77. Defendants' scheme to create the Area Developers and not consolidate it with

BCI's financial statements caused the financial statements of BCI to be materially misstated in

violation of GAAP. Thus, by reporting the financial condition and results of operations for the

2 The Securities and Exchange Commission has consistently interpreted Regulation S-Xand GAAP to require consolidation of related entities such as the Area Developers. See SEC Inthe Matter of Coopers & Lybrand and M. Bruce Cohen, Auditing and Enforcement Release NT45 (1984); In re Laventhal 4 Horwath, Fed. Sec. L. -Rel. (CCH) 'I 72,249 (Sept. 21, 1977); In rcAtlantic Research Corporation, Fed. Sec. L. Rep. (CCL) (Dec. 6, .1963). In fact, Auditing andEnforcement Release No. 45 addressed a virtually identical situation and held that convertiblebonds which, when exercised, would lead to majority ownership constituted the requisite"control" requiring consolidation.

-29-

Area Developers separately from BCI, defendants schemed to keep the financial statements of

BCI free from significant operating losses, debt and related interest expense reflected only on the

non-public financial statements of the Area Developers. The debt and related interest expense

reported by the Area Developers was debt and interest incurred on a consolidated basis with BCI

and should have been reported on the financial statements of BC1.

Defendants' scheme was to substitute the debt owed to BCI by making it owed to the

Area Developers, allowing defendants to knowingly create the false appearance that BCI's debt

obligations had been reduced. Had defendants properly consolidated the financial statements of

BCI and the Area Developers, as they were required to do under GAAP, the Area Developer's

obligations to BCI would have been properly reflected on the financial statements of BCI, not the

Area Developers. Defendants' knew that this scheme would and did cause the market to falsely

believe that BCI was extremely profitable. This had the effect of artificially inflating the

financial statements of BCI for the quarters ended July 14, 1996, October 6, 1996, December 29,

1996 and April 20, 1997.

b. Failure to Disclose Related Party Transactions

78. Even if BCI were not required to consolidate its operations with the franchisees

for financial reporting purposes, BCI's financial statements for the quarters ended July 14, 1996

and October 6, 1996, were materially false and misleading in that they failed to disclose

adequately related party transactions with the Area Developers, as required by GAAP. The

relevant accounting standard addressing this topic is FAS 57 3 , which requires sufficient detail to

allow the reader of the financial statements to be able to fully understand the effects of the related

3 RELATED PARTY DISCLOSURES, Statement of Financial Accounting Standards No. 57,Financial Accounting Standards Board (1982).

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party transaction on the financial statements. This provision states, in pertinent part:

Financial statements shall include disclosure of material relatedparty transactions . . . . These disclosures shall include:

a. The nature of the relationship(s) involved;

b. A description of the transactions, including transactions towhich no amounts or nominal amounts were ascribed, for each ofthe periods for which income statements are presented, and suchother information deemed necessary to an understanding of theeffects of the transactions on the financial statements;

c. The dollar amounts of transactions for each of the periodsfor which income statements are presented and the effects of anychange in the method of establishing the terms from that used inthe preceding period;

d. Amounts due from or to related parties as of the date ofeach balance sheet presented and, if not otherwise apparent, theterms and manner of settlement.

79. The footnotes to BCI's July 14, 1996 and October 6, 1996 quarterly financial

statements describe only skeletal financial information, including a calculation of "gross assets,"

and did nothing to disclose the massive losses being suffered by the individual stores and Area

Developers. Neither set of financial statements sets forth the financial results of the franchisees.

80. The existence of the large investment in the franchisees, coupled with the option

to convert the investment to a majority equity interest clearly constitutes a related party

relationship, as defined by FAS 57, which states:

Related Parties. Affiliates of the enterprise; entities for whichinvestments are accounted for by the equity method by theenterprise; trusts for the benefit of employees, such as pension andprofit-sharing trusts that are managed by or under the trusteeship ofmanagement; principal owners of the enterprise; its management;members of the immediate families of principal owners of theenterprise and its management; and other parties with which theenterprise may deal if one party controls or can significantly

-31-

influence the management or operating policies of the other to anextent that one of the transacting parties might be prevented fromfully pursuing its own separate interests. Another party also isrelated party if it can significantly influence the management oroperating policies of the transacting parties or if it has anownership interest in one of the transacting parties and cansignificantly influence the other to an extent that one or more ofthe transacting parties might be prevented from fully pursuing itsown separate interests.

A party which has a right to purchase all of the shares of another company exerts "control" or

"significant influence" over that company. Similarly, Regulation S-X (17 C.F.R. § 210.1-02(g))

defines "control" as "the possession, direct or indirect, or the power to direct or cause the

direction of the management and policies of a person, whether through the ownership of voting

shares, by contract, or otherwise." An option to purchase a majority of the outstanding shares of

an Area Developer clearly constitutes "control" under the SEC's definition.

81. AICPA Technical Practice Aid § 1400.07 further provides that BCI, having an

option to acquire control of the Area Developers, was required to disclose the material terms of

the relationship of the companies in the footnotes to the financial statements:

[A company with an option to acquire another] should disclose inits financial statements the terms under which it may obtaincontrolling stock ownership of [the optionee company], the amountof interest received.. . It should also present summarizedinformation as to the assets, liabilities, and operating results of [theoptionee company], or include [the optionee's] financial statementswith its report.

BCI completely failed to disclose any such information in its July 14, 1996 and October

6, 1996 quarterly financial statements.

c. Improper Capitalization of Expenses

82. In order to give the appearance that the Area Developers were more profitable

than they actually were, BCI caused the Area Developers financial information to improperly

-32-

capitalize certain expenses so that net income would be improperly inflated. Many annual

operating expenses, such as advertising, food and labor costs were capitalized as "overhead costs

for development" rather than as period costs. Specifically, for example, BCI's accounting

policies mandate that all advertising costs that exceed 6% of revenues are capitalized and booked

as development overhead. Since many of the franchisees spend 9% or more for advertising,

capitalizing the amounts over 6% materially overstates the profitability of the franchises.

83. In fact, none of the advertising costs should have been capitalized at all. GAAP

(specifically SOP 93-74) requires that all advertising costs be recognized as expenses in the

period in which the costs are incurred,

84. The improper capitalization of these period costs also violates one of the

fundamental concepts of financial reporting — the "matching concept" — as described in FAC 5.

The matching concept requires that revenues and related costs be matched in determining net

income for a specific period. Capitalizing obvious period costs such as advertising serves to

improperly push these expenses into subsequent periods, thus artificially inflating current

income. Failing to follow this accounting pronouncement served to overstate the franchisees

income as reported in the footnotes to BCI's financial statements for the quarter and year ended

December 29, 1996 and the quarter ended April 20, 1997

d. Improperly Booking Revenues Which Had Not Been Earned

85. A basic accounting principle is that the revenue cannot be recognized until the

seller has substantially completed everything he must do to be entitled to the revenue. Statement

4 REPORTING ON ADVERTISING COSTS, Statement of Position No. 93-7, AccountingStandards Division of the American Institute of Certified Public Accountants (1993).

-33-

of Concepts No. 5 5 ("FAC 5") provides that revenue should not be recognized until it is (1)

realized or realizable and (2) earned. Revenue is realized or realizable when products (goods or

services) are exchanged for cash or for assets that are readily convertible to cash. Revenue is

earned when the entity has substantially accomplished what it must do (generally including

delivery to the customer) to be entitled to the benefits represented by the revenue.

86. In order to make the franchisees appear more profitable in the notes to BCI's

December 29, 1996 and April 20, 1997 financial statements, BCI improperly included as

"revenues" items such as free-meal coupons for employees, promotions, and other discounts —

items which are typically not included in the calculation of revenues by restaurants. These

"revenues" were recognized in violation of FAC 5 because BCI was not entitled to receive

benefits from these "sales," and such revenue was never realized or realizable. These improper

manipulations served to overstate the franchisees revenues by approximately 10% during the

quarter and year ended December 29, 1996 and the quarter ended April 20, 1997

COUNT!

FOR VIOLATIONS OF SECTION 10(B) OF THE EXCHANGE ACTAND RULE 10B-5 OF THE SEC AGAINST ALL DEFENDANTS

87. Plaintiff Cone incorporates by reference and realleges the preceding paragraphs as

though fully set forth herein. This Count is asserted against all defendants.

88. The defendants knew, or were reckless in failing to know, of the material

omissions from, and material misrepresentations contained in the statements as set forth above.

The defendants also knew, or were reckless in failing to know at the time of these material

5 RECOGNITION AND MEASUREMENT IN FINANCIAL STATEMENTS OF BUSINESSENTERPRISES, Statement of Financial Accounting Concepts No. 5, Financial AccountingStandards Board (1984).

-34-

omissions and misrepresentations that they caused a false and misleading presentation of BCI.

Because of their Board membership and/or their executive and managerial positions with BCI

and/or their personal and/or professional relationships, each of the defendants: (a) knew or had

access to the material, adverse non-public information about BCI'Sadverse financial outlook and

then-existing business conditions which were not disclosed; and (b) drafted, reviewed, ratified

and/or approved the misleading statements, releases, reports and this public representations of

and about BCI.

89. Throughout the Class Period, defendants, with knowledge of or reckless disregard

for the truth, disseminated or approved releases, statements and reports, referred to 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.

90. During the Class Period, defendants, individually and in concert, directly and

indirectly, engaged in and employed acts and a fraudulent scheme to conceal material adverse

information regarding BCI's then-existing business conditions and financial outlook of BCI as

specified herein, and pursued a course of business that operated as a fraud or deceit on the

purchasers of BCI stock. Defendants employed devices, schemes and artifices to defraud and

engaged in acts, practices and a course of conduct as herein alleged to commit a fraud on the

integrity of the market for the Company's stock and to maintain artificially high market prices

for the common stock of BCI. This included the formulation, making of ancUor participation in

the making of untrue statements of material facts and the omission to state material facts

necessary in order to make the statements made, in light of the circumstances under which they

were made, not misleading, and engaging in acts, practices and a course of conduct which

-35-

operated as a fraud and deceit upon plaintiff and the Class, all of the above in connection with

the purchase of BCI common stock by plaintiff and members of the Class.

1. False and Misleading Statements Are Made By Defendants

91. By reason of the conduct alleged herein, defendants knowingly and/or recklessly,

directly and indirectly, have violated §10(b) the Exchange Act and Rule 10b-5 promulgated

thereunder 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 BCI common stock

during the Class Period.

92. Specifically, BCI made, inter alia, the following misrepresentations:

a) That the Area Developers were separate entities with which BCT was not

required to consolidate its financial statements;

b) That BCI's net income for the quarter ended July 14, 1996 was

$7,420,000;

c) That BCI's net income for the six-month period ended July 14, 1996 was

$14,536,000;

d) That BCI's net income for the quarter ended October 6, 1996 was

$8,814,000;

e) That BCI's net income for the nine-month period ended October 6, 1996

was $23,350,000;

f) That BCI's net income for the quarter ended December 29, 1996 was

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$18,093,000;

That BCI's net income for the fiscal year ended December 29, 1996 was

$33,559,000; and

h) That BCI's net income for the quarter ended April 20, 1997 was $21.4

million.

93. Each of the statements set forth above was materially false and misleading when

made in that the financial results were not prepared in accordance with Generally Accepted

Accounting Principles.

2. Defendants acted with seienter

94. At all relevant times, BCI and the Individual Defendants had actual knowledge

that the statements and documents complained of herein were materially false and misleading as

set forth herein and intended to deceive plaintiffs and the other members of the Class. In the

alternative, those defendants acted in reckless disregard for the truth in that they failed or refused

to ascertain and disclose such facts as would have revealed the materially false and misleading

nature of the statements and documents complained of herein although such facts were readily

available to defendants, Said facts and omissions of defendants were committed willfully or with

reckless disregard for the truth. In addition, BCI and the Individual Defendants knew or

recklessly disregarded that material facts were being misrepresented or omitted as alleged herein.

95. Information showing that the defendants acted knowingly or with reckless

disregard for the truth is peculiarly within defendants' knowledge and control. As senior

corporate officers of BCI, the Individual Defendants had knowledge of the details of the

Company's financial affairs and results. Plaintiff, a purchaser of BCI common stock on the open

market, did not have knowledge of the details of the Company's internal corporate affairs.

-37-

However, the following facts, among others, indicate a strong inference that BCI and the

Individual Defendants acted with scienter:

a) In view of Boston Market's systemwide poor financial performance, it was

essential to the Company that massive amounts of debt and equity securities be issued to the

market in order to offset losses incurred by the Area Developers. These securities could not have

been issued at favorable prices to BCI without BCI's share price being artificially inflated.

b) Management, including the Individual Defendants, was responsible for

BCI's system of financial reporting and the accuracy of its financial statements. Although BCI

was required to consolidate the losses of the Area Developers in its financial results, the

company failed to do so. Particularly in the fact of defendant Stephen's concession that this

approach provided an "earnings complexion which is attractive," the Individual Defendants

either must have known, or recklessly disregarded that these financial manipulations would

improperly inflate BCI's share price.

96. Plaintiff and the Class have suffered substantial damages in that, in reliance on the

integrity of the market, they paid artificially inflated prices for BCI common stock as a result of

defendants' violations of §10(b) of the Exchange Act and Rule 10b-5. Plaintiff and the Class

would not have purchased BCI stock 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

and concealment.

97. Defendants Beck and Stephens were controlling persons of the Company within

the meaning of Section 20 of the Exchange Act during the Class Period. By reason of their

executive position or positions as Chairman of the Board, and as the owners, directly and/or

indirectly of their shares of the Company's common stock issued and had the power and

-38-

authority to cause the Company to engage in the wrongful conduct complained of herein.

98. By reason of their positions of control over the Company, as alleged above,

defendants are liable jointly and severally with and to the same extent as BCI is liable to plaintiff

and the members of the Class as a result or the wrongful conduct alleged herein.

COUNT II

FOR VIOLATIONS OF COLORADO REVISED STATUTES

SECTIONS 11-51-501 AND 11-51-604

99. Plaintiff Cone incorporates by reference and alleges the preceding paragraphs as

though fully set forth herein. This Count is asserted against all defendants.

100. The defendants knew, or were reckless in failing to know, of the material

omissions from, and material misrepresentations contained in the statements as set forth above.

The defendants also knew, or were reckless in failing to know at the time of these material

commissions and misrepresentations that the caused a false and misleading presentation of BCI.

Because of their Board membership and/or their executive and managerial positions with BCI

and/or their personal and/or professional relationships, each of the defendants: (a) knew or had

access to the material, adverse non-public information about BCI'Sadverse financial outlook and

then-existing business conditions which were not disclosed; and (b) drafted, reviewed, ratified

and or approved the misleading statements, releases, reports and this public representations of

and about BCI.

101. Throughout the Class Period, defendants, with knowledge of or reckless disregard

for the truth, disseminated or approved release, statements and reports, referred to above, which

were misleading in that they contained misrepresentations and failed to disclose material facts

-39-

necessary in order to make the statements made, in light of the circumstances under which they

were made, not misleading.

1. False and Misleading Statements Are Made By Defendants

102. During the Class Period, defendants, individually and in concert, directly and

indirectly, engaged in and employed acts and fraudulent scheme to conceal material adverse

information regarding BCI's then-existing business conditions and financial outlook of BC1 as

specified herein, and pursued a course of business that operated as a fraud or deceit on the

purchasers of BCI stock. Defendants employed devices, schemes and artifices to defraud and

engaged in acts, practices and a course of conduct as herein alleged to commit a fraud on the

integrity of the market for the Company's stock and to maintain artificially high market prices for

the common stock of BCI. This included the formulation, making of and/or participation ion the

making of untrue statements of material facts and the omission to state material facts necessary

in order to make the statements made, in light of the circumstances under which they were made,

not misleading, and engaging in acts, practices and a course of conduct which operated as a fraud

and deceit upon plaintiff and the Class, all of the above in connections with the purchase of BCI

common stock by plaintiff and members of the Class.

103. Specifically, BCI made, inter alia, the following misrepresentations:

a) That the Area Developers were separate entities with which BCI was not

required to consolidate its financial statements;

b) That BCI's net income for the quarter ended July 14, 1996 was $7,420,000;

c) That BCI's net income for the six-month period ended July 14, 1996 was

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$14,536,000;

d) That BCI's net income for the quarter ended October 6, 1996 was

$8,814,000;

e) That BCI's net income for the nine-month period ended October 6, 1996 was

$23,350,000;

f) That BCI's net income for the quartet ended December 29, 1996 was

$18,093,000;

g) That BCI's net income for the fiscal year ended December 29, 1996 was

$33,559,000; and

h) That BCI's net income for the quarter ended April 20, 1997 was $21.4

million.

104. Each of the statements set forth above was materially false and misleading when

made in that the financial results were not prepared in accordance with Generally Accepted

Accounting Principles.

2. Defendants Acted With Scienter

105. At all relevant times, BCI and the Individual Defendants had actual knowledge

that the statements and document complained of herein were materially false and misleading as

set forth herein and intended to deceive plaintiffs and the other members of the Class. In the

alternative, those defendants acted in reckless disregard for the truth in that they failed or refused

to ascertain and disclose such facts as would have revealed the materially false and misleading

-41-

w

nn••n

nature of the statements and documents complained of herein although such facts were readily

available to defendants. Said facts and omissions of defendants were committed willfully or with

reckless disregard for the truth. In addition, BCI and the Individual Defendants knew or

recklessly disregarded that material facts were being misrepresented or omitted as alleged herein.

106. Information showing that the defendants acted knowingly or with reckless

disregard for the truth is peculiarly within defendants' knowledge and control. As senior

corporate officers of BCI, the Individual Defendants had knowledge of the details of the

Company's financial affairs and results. Plaintiff, a purchaser of BCI common stock on the open

market, did not have knowledge of the details of the Company's internal corporate affairs.

However, the following facts, among others, indicate a strong inference that BCI and the

Individual Defendants acted with scienter:

a) In view of Boston Market's systemwide poor financial performance, it was

essential to the Company that massive amounts of debt and equity securities be issued to the

market in order to offset losses incurred by the Area Developers. The securities could not have

been issues at favorable prices to BC! without BCI's share price being artificially inflated.

b) Management, including the Individual Defendants, was responsible for BCI's

system of financial reporting and the accuracy of its financial statements. Although BCI was

required to consolidate the losses of the Area Developers in its financial results, the company

failed to do so. Particularly in the fact of defendant Stephen's concession that this approach

provided an "earnings complexion which is attractive," the Individual Defendants either must

have know, or recklessly disregarded that these financial manipulations would improperly inflate

BCI's share price.

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107. By reason of the conduct alleged herein, defendants knowingly andJor recklessly,

directly and indirectly, have violated C.R.S. §§ 11-51-501 and 11-51-604 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 BCI common stock during the Class Period.

108. Plaintiff and the Class have suffered substantial damages in that, in reliance on the

integrity of the market, they paid artificially inflated prices for BCI common stock as a result of

defendants' violations of C.R.S. §§ 11-51-501 and 11-51-604. Plaintiff and the Class would not

have purchased BCI stock at the prices they paid, or at all, if they had been award that the market

prices had been artificially and falsely inflated by defendants' misleading statements and

concealment.

BASIS OF ALLEGATIONS

109. Plaintiff has alleged the foregoing based upon the investigation of his counsel,

which included a review of BCI'S SEC filings, securities analysts reports and advisories about

the Company, press releases issued by the Company, media reports about the Company and

discussions with consultants, and believe that substantial evidentiary support will exist for the

allegations set forth above after a reasonable opportunity for discovery.

WHEREFORE, plaintiff, and the Class, pray for judgement as follows:

A. Declaring this action to be a proper class action pursuant to Rules 23(a) and

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nmr.

..•••n•n=imm

23(b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein:

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

C. Awarding plaintiff and the members of the Class prejudgment and post-judgment

interest, as well as their reasonable attorneys' fees, expert witness fees and other costs;

D. 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, including attaching, impounding, imposing a constructive trust

on or otherwise restricting the proceeds of the Individual Defendants' open market sales in the

hands of defendant to assure that the Class has an effective remedy; and

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

JURY DEMAND

Plaintiff demands a trial by jury

DATED: June 23, 1997

DYER D

By:

Robert J. Dyer III

825 Logan Street

Denver, CO 80203-3114

(303) 861-3003

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HAGENS & BERMAN

1301 Fifth Avenue, Suite 2929

Seattle, WA 98101

(206) 623-7292

KAUFMAN MALCHMAN KIRBY & SQUIRE

919 Third Avenue, 11 th Floor

New York, NY 10022

(212) 371-6600

Plaintiffs Address:

6 Dobbins Road

Westford, MA 01886

-45-

CERTIFICATION OF NAMED PLAINTIFFPURSUANT TO FEDERAL SECTIRITIES LAWS

LESLIE GENE CONE ("plaintiff'') declares, as to the

claims asserted under the federal securitiea laws, that

1. Plaintiff has reviewed the complaint and

authorized ite filing.

2. PlainLiff did not purchase the security that is

the subject of this action at the direction of 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's sole transaction in the security that

is the subject of this action during the class period set forth

in the complaint was a purchase of 500 shares at $37.75 per share

on January 22, 1997.

5. During the three years prior to the data of this

certification, plaintiff has not served or sought to serve as a

representative party for a class in any action filed under the

federal securities laws.

6. 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 class recovery, except as

ordered or approved by the Court.

__----nnnnnnmmnnnMh.

_ .

- ,

I declare under penalty of perjury that the foregoing

is true and correct. Executed this day of nne, 1957, at

Westford, Massachusetts.

' t---r".21!) (.41-LZSLIE GENE CONE

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ci\c\pn.Rs\aossoNncsaTurc.com/061997.

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