10-Q 1 d10q.txt FORM 10-Q ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 26, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to Commission file number 333-04261 AmeriKing, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 2215 Enterprise Drive, Suite 1502 Westchester, Illinois (Address of principal executive offices) 36-3970707 (I.R.S. employer identification no.) 60154 (Zip code) Registrant's telephone number, including area code 708-947-2150 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the registrant's classes of common stock as of May 9, 2001 was 902,992 of common stock, $.01 par value per Share (the "Common Stock"). ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- TABLE OF CONTENTS

PART I Certain statements in this Form 10-Q may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements of AmeriKing, Inc. ("AmeriKing" or the "Company") to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; competition; success of operating initiatives; development and operating costs; advertising and promotional efforts; brand awareness; adverse publicity; acceptance of new product offerings; availability, locations, and terms of sites for store development; changes in business strategy or development plans; quality of management; availability, terms, and deployment of capital and bank debt; business abilities and judgment of personnel; availability of qualified personnel; food, labor, and employee benefit costs; changes in, or the failure to comply with, governmental regulations; regional weather conditions; construction schedules; and other factors referenced in this Form 10-Q. Item 1. Financial Statements and Supplementary Data INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AMERIKING, INC. AND SUBSIDIARY

4 AMERIKING, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 26, 2001 and December 25, 2000 (unaudited)

Current liabilities: Accounts payable and other accrued expenses...... $ 18,396,000 $ 19,183,000 Accrued payroll and related expenses............. 7,591,000 8,848,000 Accrued taxes payable............................ 2,945,000 3,698,000 Current portion of long-term debt................ 933,000 983,000 Debt subject to acceleration..................... 224,474,000 224,715,000 ------------ ------------ Total current liabilities...................... 254,339,000 257,427,000 Long-term debt--less current portion and debt subject to acceleration........................... 600,000 600,000 Other long-term liabilities........................ 15,541,000 16,635,000 ------------ ------------ Total liabilities.............................. 270,480,000 274,662,000 Senior preferred stock............................. 52,101,000 50,444,000 Commitments and contingencies Stockholders' deficit: Preferred stock.................................. 75 75 Common stock..................................... 9,030 9,030 Accumulated deficit.............................. (49,270,105) (38,549,105) ------------ ------------ Total stockholders' deficit.................... (49,261,000) (38,540,000) ------------ ------------ Total.............................................. $273,320,000 $286,566,000 ============ ============

See notes to consolidated financial statements. 5 AMERIKING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the Quarters Ended March 26, 2001 and March 27, 2000 (unaudited)

See notes to consolidated financial statements. 6 AMERIKING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT For the Quarter Ended March 26, 2001 and the Fiscal Years Ended December 25, 2000 and December 27, 1999

See notes to consolidated financial statements. 7 AMERIKING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Quarters Ended March 26, 2001 and March 27, 2000 (unaudited)

See notes to consolidated financial statements. 8 AMERIKING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation and Summary of Significant Accounting Policies In the Company's opinion, the accompanying unaudited consolidated financial statements contain all of the adjustments necessary (consisting of normal and recurring accruals) to present fairly our financial position as of March 26, 2001 and December 25, 2000, the results of operations for the quarters ended March 26, 2001 and March 27, 2000 and cash flows for the quarters ended March 26, 2001 and March 27, 2000. These financial statements should be read in conjunction with the our annual report on Form 10-K for the fiscal year ended December 25, 2000 filed on March 26, 2001. The results of operations for the quarters ended March 26, 2001 and March 27, 2000 are not necessarily indicative of the results to be expected for the full fiscal year. Inventories--Inventories consist primarily of restaurant food and supplies and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Net Loss Per Common Share--In calculating earnings per share, earnings available to common stockholders is the same for both the basic and diluted calculations. Diluted earnings per share was the same as basic earnings per share during the quarters ended March 26, 2001 and March 27, 2000 due to the antidilutive effect of the stock options and warrants in the respective quarters. Reclassifications--Certain information in the consolidated financial statements for the quarter ended March 27, 2000 have been reclassified to conform to the current reporting format. New Accounting Standards--In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Statement requires the Company to recognize all derivatives as either assets or liabilities in the balance sheet and measure those derivative instruments at fair value. At March 26, 2001, the Company had no derivative instruments or hedging activities. Restructuring--In November 2000 the Company restructured its development and field marketing functions as well as re-evaluated its restaurant development plans to reduce costs associated with previous plans to rapidly grow upon anticipated refinancing in fiscal 2000. As a result, the Company terminated 16 employees for a total cost of $711,000. This represented salary continuation plus benefits and outplacement services. The Company is also in the process of exiting excess leased space used or to be closed as a result of cancelling its previous growth plans. This represented an estimate of $576,000 to terminate such lease agreements. The Company determined that $3,036,000 in capitalized costs associated with certain development plans and certain software costs associated with discontinued upgrades to existing restaurant systems as well as refinancing costs associated with planned acquisitions should be written off. The restructuring liability is included as a component of accounts payable and other accrued expenses. During the quarter ended March 26, 2001, the Company paid $331,000 related to the aforementioned employee terminations, $99,000 to terminate lease agreements and $50,000 for other restructuring costs that were accrued for at year end. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Restaurant sales include food sales and merchandise sales. Merchandise sales include convenience store sales at the Company's dual-use facilities (of which the Company currently has nine), as well as sales of promotional products at the Company's restaurants. On an annual basis, merchandise sales have contributed less 9 than 3.8% of total historical restaurant sales. Promotional products, which account for the majority of merchandise sales, are generally sold at or near cost. Earnings before interest, taxes, depreciation and amortization (EBITDA) represents operating income plus depreciation and amortization of goodwill and franchise agreements, pre-opening costs and other operating expenses. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with accounting principles generally accepted in the United States of America, EBITDA is included to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. In addition, management believes that certain investors find EBITDA to be a useful tool for measuring the ability of the Company to service its debt. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. See the Consolidated Statements of Cash Flows of the Company and the related notes to the Consolidated Financial Statements included herein. The Company includes in the comparable restaurant sales analysis discussed below only those restaurants that have been in operation for a minimum of twelve months (including pro-forma sales for acquired restaurants). For a restaurant not operating for the entire prior annual period, the sales for the interim period in the prior year are compared to that for the comparable interim period in the indicated year. Quarter ended March 26, 2001 Compared to Quarter ended March 27, 2000 Restaurant Sales. Total sales decreased $2.7 million or 2.9% during the quarter ended March 26, 2001, to $90.0 million, from $92.7 million during the quarter ended March 27, 2000. Sales at the comparable restaurants, including only those restaurants owned by us at March 26, 2001, decreased 6.8% for the quarter primarily due to a decrease in customer traffic as BKC's national marketing program did not generate incremental traffic versus that of the prior year. The decline in comparable sales was partially offset by the additional sales generated from the purchase of 5 restaurants in late March of 2000 and the development of 20 restaurants during 2000. BKC has hired new advertising agencies and their advertising programs are scheduled to roll out during the second quarter of 2001. Restaurant Operating Expenses. Total restaurant operating expenses increased $1.3 million, or 1.5% during the quarter ended March 26, 2001, to $87.0 million from $85.7 million in the quarter ended March 27, 2000. The majority of this increase was due to an increase in the number of stores that have been acquired and developed since the same quarter last year. As a percentage of sales, restaurant operating expenses increased 4.2%, to 96.7% during the quarter ended March 26, 2001 from 92.5% during the quarter ended March 27, 2000. This increase was due primarily to the fixed nature of many expenses offset by declining same store sales as discussed below. Cost of sales decreased $0.8 million and remained at 31.5% as a percentage of sales during the quarter ended March 26, 2001 compared to the quarter ended March 27, 2000. Cost of food sales decreased $0.2 million and increased 0.7% as a percentage of sales to 29.3% during the quarter ended March 26, 2001 from 28.7% during the quarter ended March 27, 2000. The decrease in cost of food sales dollars is the result of higher supplier rebates, partially offset by an increase in the number of stores that have been acquired and developed since the same quarter last year. The percentage of sales increase is the result of slightly higher commodity costs and the greater discounting of food prices as compared to the same time period last year. Cost of non-food sales decreased $0.7 million during the quarter ended March 26, 2001, and decreased 0.7% as a percentage of sales to 2.2% during the quarter ended March 26, 2001 from 2.8% in the quarter ended March 27, 2000. The decrease in cost of non-food sales is a direct result of the decrease in non-food sales. Non-food promotional items, typically designed to drive customer traffic into the restaurants, are sold at or near cost. Restaurant labor and related costs increased $0.8 million during the quarter ended March 26, 2001, and increased 1.6% as a percentage of restaurant sales to 29.0% during the quarter ended March 26, 2001 from 27.3% in the quarter ended March 27, 2000. The increase in restaurant labor and related costs was primarily due to the 10 increased number of stores and the additional labor associated with them. In addition, the percentage increase is the result of lower average store sales volumes negatively impacting the fixed component of salaries and benefit costs. Depreciation and amortization decreased $0.2 million during the quarter ended March 26, 2001, to $3.9 million from $4.1 million in the quarter ended March 27, 2000. As a percentage of sales, depreciation and amortization expense remained at 4.4% during the quarter ended March 26, 2001 and the quarter ended March 27, 2000. Occupancy and other restaurant operating expenses including advertising and royalties increased $1.5 million during the quarter ended March 26, 2001 and increased 2.6% as a percentage of sales to 31.9% in the quarter ended March 26, 2001 from 29.3% in the quarter ended March 27, 2000. Occupancy expense increased $0.7 million during the quarter ended March 26, 2001 and increased 1.1% as a percentage of sales to 11.8% during the quarter ende March 26, 2001 from 10.7% during the quarter ended March 27, 2000. The dollar increase in occupancy expense is due to the inclusion of newly acquired and developed restaurants. Other restaurant operating expenses, including advertising and royalties, increased $0.8 million and increased 1.5% as a percentage of sales to 20.1% during the quarter ended March 26, 2001 from 18.6% during the quarter ended March 27, 2000. This increase is primarily due to the inclusion of newly acquired and developed restaurants, additional operating leases related to the new Frozen Coke machines and new Point of Sales devices leased in early 2000, as well as higher repair and maintenance expenses and higher utility costs attributable to rising natural gas prices. The Company recorded pre-opening costs relative to new restaurant developments in other expense which was $0.2 million for the quarter ended March 27, 2000. General and Administrative Expenses. General and administrative expenses increased $0.8 million during the quarter ended March 26, 2001 and increased 1.0% as a percent of sales to 5.6% during the quarter ended March 26, 2001 from 4.5% during the quarter ended March 27, 2000. The increase in general and administrative expenses is due to staff increases and related costs associated with the newly acquired and developed restaurants. Other Operating Expenses. Other operating expenses increased $0.1 million for the quarter ended March 26, 2001 compared to the quarter ended March 27, 2000. As a percentage of sales, other operating expenses remained flat at 0.5% during the quarter ended March 26, 2001 and March 27, 2000. Other Income (Expense). Other income (expense) increased $0.1 million during the quarter ended March 26, 2001 to $5.8 million from $5.7 million in the quarter ended March 27, 2000. The increase in other income (expense) is due to higher interest expense related to the increase in borrowings under the line of credit due to the 2000 acquisition and new restaurant developments, as well as higher interest rates than experienced in the same quarter last year. Income taxes. Despite a net loss, the Company incurred income tax expense of $0.7 million due to a reduction in net deferred tax assets for the quarter. This reduction is due primarily to an increase in the valuation allowance of over $3.0 million associated with net deferred tax assets to reflect deferred tax assets at amounts that are more likely than not to be realized. EBITDA. As defined in Item 2, EBITDA decreased $5.1 million to $1.9 million for the quarter ended March 26, 2001 from $7.0 million for the quarter ended March 27, 2000. As a percentage of restaurant sales, EBITDA decreased 5.5%, to 2.1% for the quarter ended March 26, 2001 from 7.6% for the quarter ended March 27, 2000. Liquidity and Capital Resources Net cash flows from operating activities decreased $13.2 million during the quarter ended March 26, 2001, to a use of cash of $6.4 million, from a source of cash of $6.8 million during the quarter ended March 27, 2000. The decrease is primarily due to receiving a $9.9 million, one-time vendor incentive in the first quarter of 2000. The other contributing factor was an increase in net loss. The Company received two installments of one-time vendor incentives from its soft drink suppliers totaling approximately $20.0 million in March and August of 11 2000. These vendor incentives are being amortized over 10 years. In return for receipt of these monies, the Company is currently obligated to make certain leasehold improvements to existing stores over the next twelve months. Some of the improvements are still subject to design changes which could slightly extend the obligation completion dates. Net cash flows used by investing activities for the quarter ended March 26, 2001 were $0.6 million. These capital expenditures were for equipment replacement in the Company's existing facilities as well as investments in new technologies to improve store and Company communications. For the quarter ended March 26, 2001, the Company made principal reductions totaling approximately $0.3 million related to the 1995, 1996, and 1998 FAC Notes. The Company anticipates capital expenditures in fiscal 2001 to be approximately $5.1 million related to equipment replacement and remodeling of existing facilities. There are no plans for new restaurant development. AmeriKing has contractual obligations for restaurants subject to franchise renewal and other commitments for exterior image changes. The capital expenditures for these restaurants are estimated to be $10.4 million. These commitments represent obligations related to renewed franchise agreements in fiscal 2000 and anticipated in fiscal 2001. AmeriKing is also obligated for store improvements related to the receipt of vendor incentives in fiscal 2000. AmeriKing is in the process of completing the approved changes to signage, restaurant grounds and drive-thrus and anticipates these remaining obligations to be approximately $10.0 million. The Company is in discussions with BKC to seek deferral on these obligations, should it be necessary. The actual amount of the Company's cash requirements for capital expenditures presently depends on, among other things, the costs associated with ongoing equipment replacement and remodeling of existing restaurants and the number of franchised restaurants subject to renewal, including the costs associated with bringing the related restaurants up to BKC's then current design specifications in connection with these franchise renewals. The Company is structured as a holding company with no independent operations, as the Company's operations are conducted exclusively through its wholly owned subsidiaries. The Company's only significant assets are the capital stock of its subsidiaries. As a holding company, the Company's cash flow, its ability to meet its debt service requirements and its ability to pay cash dividends on the Senior Preferred Stock are dependent upon the earnings of its subsidiaries and their ability to declare dividends or make other intercompany transfers to the Company. Under the terms of the indenture pursuant to which the Senior Notes were offered (the "Indenture"), the Company's subsidiaries may incur certain indebtedness pursuant to agreements that may restrict the ability of such subsidiaries to make such dividends or other intercompany transfers necessary to service the Company's obligations, including its obligations under the Senior Notes, the Senior Preferred Stock and any 13% Subordinated Exchange Debentures due 2008 (the "Exchange Debentures") the Company may exchange pursuant to the Indenture. The Indenture restricts, among other things, the Company's and its Restricted Subsidiaries' (as defined in the Indenture) ability to pay dividends or make certain other restricted payments, including the payment of cash dividends on or the redemption of the Senior Preferred Stock, to incur additional indebtedness, to encumber or sell assets, to enter into transactions with affiliates, to enter into certain guarantees of indebtedness, to make restricted investments, to merge or consolidate with any other entity and to transfer or lease all or substantially all of their assets. In addition, the Company's Amended and Restated Credit Agreement (as defined) and Acquisition Credit Agreement (as defined) with BBNA and other lenders thereto contain other and more restrictive covenants and prohibit the Company's subsidiaries from declaring dividends or making other intercompany transfers to the Company in certain circumstances. The Company may, from time to time, use cash, including cash generated from borrowings under its credit agreements or cash from equity investments in the Company, to purchase either its Senior Notes, its Senior Preferred Stock, or its Common Stock, or any combination thereof, through open market purchases, privately negotiated purchases or exchanges, tender offers, redemptions or otherwise, and may, from time to time, pursue various refinancing or financial restructurings, including pursuant to consent solicitations and waivers involving 12 those securities, in each case, without announcement or prior notice to the holders thereof, and if initiated or commenced, such purchases or offers to purchase may be discontinued at any time. Such purchases may be made by the Company alone or together with, its affiliates, or by its affiliates separately. In addition, the Company's affiliates may engage in purchases and sales of the Senior Notes, Senior Preferred Stock and Common Stock, or any combination thereof, in the secondary markets from time to time. The Company believes that available cash on hand, together with its forecast of increased EBITDA in fiscal 2001 (compared with fiscal 2000) will be sufficient to meet current debt service obligations. The Company is in discussions with BKC to defer capital obligations should its available cash not be sufficient to meet these obligations. If the Company is unable to fund its capital improvement obligations and does not reach an agreement with BKC on deferment of the timing of these obligations, the Company may be in technical default of its franchise agreements for those affected restaurants. AmeriKing was not in compliance during the quarter ended March 26, 2001 and believes it will not be in compliance during the fiscal year ending December 31, 2001 with existing financial covenants set forth in the Bank Credit Agreements if there are no changes to the Bank Credit Agreements or if other refinancing efforts are unsuccessful. The Company did not seek a waiver of its covenants for the quarter ended March 26, 2001 as it is in discussions to amend its Bank Credit Agreements though no assurances can be given as to the outcome of such discussions which may be discontinued at any time without prior notice or announcement. If sought, the Company cannot be certain of obtaining future waivers from its lenders. If no future waivers are obtained, the Company will likely remain in technical default and subject to acceleration for repayment of its long-term debt at any time. In the case of default, the Company may be prohibited to make interest payments on the Senior Notes. The Company has entered into discussions and negotiations with its lenders and certain holders of the Senior Notes and the Senior Preferred Stock and certain of its stockholders with respect to amending, restating, refinancing or restructuring its credit agreements and/or the terms of its Senior Notes and Senior Preferred Stock and other obligations. In addition, the Company has entered into discussions with certain equity holders and other parties, including its business partners with respect to, among other things, potential debt and/or equity investments in the Company or other accommodations, support or transactions with the Company. However, no agreements, commitments or promises as to the foregoing have been made by such business partners or any one else at this time, and no assurances can be given as to the outcome of such discussions, which may be discontinued at any time without prior notice or announcement. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are subject to market risk associated with fluctuations in interest rates. Interest rate risk is primarily limited to our variable rate debt obligations, which totaled $121.4 million at March 26, 2001. Of this balance, the BankBoston revolver comprised $118.8 million bearing an interest rate calculated at BankBoston's base rate plus 1.25%, and the 1995 Franchise Acceptance Corporation ("FAC") Note comprised $1.1 million bearing an interest rate of 2.75% above FAC's program rate, and the 1998 FAC Note comprised $1.5 million bearing an interest rate of 2.5% above FAC's program rate. Assuming a 20% increase in interest rates, we would experience an increase in interest expense of approximately $0.5 million. We do not hold any market risk sensitive financial instruments for trading purposes. 13 PART II Item 6. Exhibits, Financial Statement Schedules Exhibits The following exhibits are filed as part of this report. 11 Statement Re: Computation of Earnings Per Share 12 Statement Re: Computation of Ratios A list of exhibits included as part of this Form 10-Q or incorporated by reference is set forth in the Index to Exhibits. Included in the Index to Exhibits are the following exhibits which constitute management contracts or compensatory plans or arrangements. 1. TJC Consulting Agreement 2. Jaro Employment Agreement 4. Hothorn Employment Agreement Reports on Form 8-K On April 10, 2001, the Company filed a Current Report on Form 8-K, announcing under Item 5 the resignation of Mr. Joel Aaseby as Chief Financial Officer, Corporate Secretary and Director. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Westchester, State of Illinois. Ameriking, Inc. _______________________________ _____________________________________ Date Lawrence E. Jaro Managing Owner, Chairman and Chief Executive Officer _______________________________ _____________________________________ Date Augustus F. Hothorn President, Chief Operating Officer and Director _______________________________ _____________________________________ Date John C. Clark Corporate Controller (Principal Financial and Accounting Representative) INDEX TO EXHIBITS

* Previously filed. ++The schedules and exhibits to these agreements have not been filed pursuant to Item 601(b)(2) of Regulation S-K. Such schedules and exhibits will be filed supplementally upon the request of the Securities and Exchange Commission. ++++Superseding exhibit.

AMERIKING INC 10-Q