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 September 24, 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 November 6, 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 the 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

AMERIKING, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 24, 2001 and December 25, 2000

See notes to consolidated financial statements. AMERIKING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

See notes to consolidated financial statements. AMERIKING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT For the Three Quarters Ended September 24, 2001 and the Fiscal Years Ended December 25, 2000 and December 27, 1999

See notes to consolidated financial statements. AMERIKING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Quarters Ended September 24, 2001 and September 25, 2000 (unaudited)

See notes to consolidated financial statements. 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 September 24, 2001, the results of operations for the quarter and three quarters ended September 24, 2001 and September 25, 2000 and cash flows for the three quarters ended September 24, 2001 and September 25, 2000. These financial statements should be read in conjunction with the Company's 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 quarter and three quarters ended September 24, 2001 and September 25, 2000 are not necessarily indicative of the results to be expected for the full fiscal year. 2. Summary of Significant Accounting Policies 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 three quarters ended September 24, 2001 and September 25, 2000 due to the antidilutive effect of the stock options and warrants in the respective quarters. New Accounting Standards--In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 establishes accounting and reporting standards for the use of the purchase method in all future business combinations as well as assignment of purchase price for goodwill and other intangible assets. SFAS No. 142 establishes accounting and reporting standards for goodwill and other intangible assets. For identified intangible assets, the estimated useful lives are to be reassessed and the remaining amortization periods adjusted accordingly. SFAS 142 also states that no future amortization of goodwill will occur. Goodwill and other intangible assets will remain subject to impairment tests, however, SFAS 142 requires that such impairment tests be performed using independent measures of fair value (i.e. independent appraisals, listed market prices, etc.) in comparison with reporting unit net asset values (including goodwill). Any excess of the carrying value of a reporting unit or units over the fair value will be recorded as an impairment loss. Statements No. 141 and 142 are effective for the Company, beginning with the first quarter in fiscal 2002 and will result in a change in accounting method. The Company can not reasonably estimate at this time what the impairment effect will be upon the adoption of these new standards and has not had any independent appraisals of its reporting units performed as of October 2001, but does intend to obtain independent appraisals during fiscal 2002. Amortization expense for the nine months ended September 24, 2001 and September 25, 2000 was $3,835,000 and $4,002,000, respectively. Accounting for the Impairment of Long-Lived Assets-the Company accounts for impairment of long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. In accordance with SFAS No. 121, we use an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. During the first three quarters of 2001 and 2000, we wrote down approximately $16.5 million and $2.7 million of long-lived assets, respectively. These write downs consisted primarily of goodwill recorded as part of the acquired restaurant. The remaining write-down consisted of restaurant equipment, signage and other related store assets. 3. 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 to be closed as a result of canceling its previous growth plans. This represents 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 three quarters ended September 24, 2001, the Company paid $498,000 related to the aforementioned employee terminations, $133,000 to terminate lease agreements and $99,000 for other restructuring costs that were accrued for at year end. All remaining restructuring commitments will be paid by the end of the first quarter 2002. 4. Business Condition- At December 25, 2000, the Company was not in compliance with certain financial covenants of its Revolving Credit Facility and Acquisition Credit Facility (collectively the Credit Facilities). The Company obtained a waiver from its banks of these Credit Facilities as of December 25, 2000, however, the Company was out of compliance at the end of each of the first two quarters of fiscal 2001. Because of these covenant violations, the Company classified the long-term portion of its Credit Facilities and Senior Notes currently payable (collectively Affected Debt)- subject to acceleration. As a result of the Affected Debt being subject to acceleration, the Company had negative working capital of $224.1 million as of December 25, 2000. The negative working capital includes $224.7 million of Affected Debt. In addition, during fiscal 2000, the Company incurred a net loss of $19.0 million. On June 29, 2001, the Company completed an exchange offer for approximately 99.5% of its outstanding Ameriking Senior Notes and amended its bank credit agreement (see "Exchange Offer" below). In the process effective June 29, 2001, the Company and its subsidiaries were in compliance with all financial covenants of the amended credit facility and bond indentures. Though the Company was in compliance with all financial covenants as of September 24, 2001, the Company is not in compliance with its monthly measure of EBITDA based on results for the four-week period ended October 22, 2001. As a result, the Company is no longer in compliance with its bank covenants and the bank debt is subject to acceleration under the credit agreement. After adjusting for the Affected Debt being subject to acceleration, the Company had negative working capital of $236.0 million at September 24, 2001. The negative working capital includes $114.3 million of Affected Debt and 115.5 million due June 2002 under its bank credit agreement. The Company has also incurred a net loss of $39.6 million for the three quarters ended September 24, 2001. The Company is currently considering financing alternatives that would potentially reduce existing cash obligations for capital expenditures. The Company has also discussed preliminary opportunities for long-term capital with its lending group, BKC and other investment advisors. During fiscal year 2001, management has been holding meetings with various lessors representing approximately 70% of restaurants leased. These meetings are intended to seek reduced base rent payments, percentage rent payments or other methods of rent relief to better reflect the existing restaurant economics of many of our restaurants. To date, we have no formal commitments for any reductions in our lease commitments, but believe that we will be able to achieve reduced rent levels in a select group of our restaurants. 5. Exchange Offer- On June 29, 2001, the Company completed an exchange offer for its 10 3/4% Senior Notes due December 2006 (the "AmeriKing Senior Notes"). Of the $100 million in AmeriKing Senior Notes, approximately 99.5% were exchanged for bonds issued by National Restaurant Enterprise Holdings, Inc. ("NRE Holdings"), a new subsidiary of the Company. NRE Holdings is the sole stockholder of National Restaurant Enterprises, Inc., the subsidiary through which the Company conducts its operations. For each $2,000 principal amount of AmeriKing Senior Notes (or portion thereof) tendered, NRE Holdings exchanged $1,000 principal amount of its 10 3/4% Senior Notes ("NRE Senior Notes") due November 15, 2007 and a unit consisting $1,000 of its 13% Senior PIK Notes ("NRE Senior PIK Notes") due May 15, 2008 and a warrant to purchase a pro rata portion of 19.99% of NRE Holdings' common stock. In lieu of the payment of cash interest on the AmeriKing Senior Notes for the period from December 1, 2000 to June 1, 2001, NRE Holdings paid interest in respect of the NRE Senior Notes and the NRE Senior PIK Notes, as if each had been outstanding since November 15, 2000 to May 15, 2001. From and after May 15, 2001, the NRE Senior Notes bear interest at the rate of 10 3/4% per year. Payments of interest on the NRE Senior Notes will be payable semi-annually in cash in arrears on November 15 and May 15 in each year, beginning November 15, 2001, to holders of record of NRE Senior Notes at the close of business on the May 1 or November 1 immediately preceding such interest payment date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. From and after May 15, 2001, the NRE Senior PIK Notes bear interest at the rate of 13% per year. Payments of interest on the NRE Senior PIK Notes is payable semi-annually in kind in arrears on November 15 and May 15 in each year, beginning November 15, 2001, to holders of record of NRE Senior PIK Notes at the close of business on the May 1 or November 1 immediately preceding such interest payment date. The outstanding principal amount of the NRE Senior PIK Notes will be increased on May 15 and November 15, beginning May 15, 2001, by an amount equal to the interest payable for the preceding semi-annual period. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The NRE Holdings' securities have not been registered under the Securities Act of 1933 and are being offered only to holders of the Senior Notes that are "accredited investors" as defined in Regulation D under the Securities Act of 1933. NRE Holdings has agreed to file a registration statement relating to an offer to exchange identical securities issued by NRE Holdings for the NRE Senior Notes and the NRE Senior PIK Notes, or if an exchange offer cannot be made, a registration statement that will enable holders of the NRE Senior Notes and the NRE Senior PIK Notes to offer or sell those securities in compliance with the Securities Act of 1933. If NRE Holdings will be required to pay liquidated damages to the holders of the notes if it is unable to complete these registrations within specified time periods. Concurrent with the exchange, National Restaurant Enterprises entered into a $115,500,000 amended and restated senior secured revolving credit facility with Fleet National Bank, as agent. The credit agreement contains several financial covenants, which will require National Restaurant Enterprises to maintain certain financial ratios and restrict National Restaurant Enterprises' ability to incur indebtedness and pay dividends. The commitment fee on the unused portion of the revolver will be 1/2% per year, payable quarterly. As part of the terms of the credit facility, the Company made a principal payment of $3.326 million to reduce the outstanding credit facility balance from $118.8 million. The Company also incurred $2.2 million in amendment and closing fees paid and payable to its bank group, with $1.7 million payable no later than June 30, 2002. The repayment of borrowings under the credit facility is guaranteed by AmeriKing, NRE Holdings and certain subsidiaries of National Restaurant Enterprises and will be secured by a perfected first priority security interest in all of the assets of each such entity, and the pledge of 95% of the outstanding capital stock or 100% of the outstanding non-voting capital stock of each such entity (other than AmeriKing). Mandatory commitment reductions will be required in the event that there are any proceeds from the sale of assets or securities by AmeriKing with additional commitment reductions tied to the availability of cash in excess of certain thresholds. The borrowings under the credit facility bears interest at a rate per year equal to the Base Rate (as defined in the new credit agreement) plus 3.00%. The new credit agreement also contains standard representations, warranties and covenants, including certain financial covenants, such as a leverage ratio, a debt service coverage ratio, a minimum EBITDA requirement and a limit on annual capital expenditures. As mentioned above, the Company is not in compliance with the monthly measure of EBITDA based on results for the four-week period ended October 22, 2001. 6. Extraordinary loss on early extinguishment of debt- As described above, on June 29, 2001, the Company completed an exchange offer for its 10 3/4% Senior Notes due December 2006 (the "AmeriKing Senior Notes"). In conjunction with this transaction, the Company recorded an extraordinary loss of $2.9 million. This extraordinary loss represents the write-off of deferred financing costs related to the notes prior to the exchange. (As the Company has a net loss, there is no associated tax benefit relating to the loss.) Due to the Company's Valuation allowance for deferred tax assets, there is no associated tax benefit relating to the loss. 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 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 generally accepted accounting principles, EBITDA is included to provide additional information with respect to our ability to meet our future debt service, capital expenditure and working capital requirements. In addition, we believe that certain investors find EBITDA to be a useful tool for measuring our ability to service our debt. EBITDA is not necessarily a measure of our ability to fund our cash needs. See the Consolidated Statements of Cash Flows 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 September 24, 2001 Compared to Quarter ended September 25, 2000 Restaurant Sales. Total sales decreased $8.9 million or 8.6% during the quarter ended September 24, 2001, to $94.9 million, from $103.8 million during the quarter ended September 25, 2000. Sales at the comparable restaurants, including only those restaurants owned by us at September 24, 2001, decreased 8.2% 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. Restaurant Operating Expenses. Total restaurant operating expenses increased $2.0 million, or 2.0% during the quarter ended September 24, 2001, to $99.5 million from $97.5 million in the quarter ended September 25, 2000. This increase was primarily due to significantly higher write-downs of long-lived assets offset by the variable nature of certain expenses such as cost of food sales, labor, occupancy, advertising and royalties which were lower as a direct result of lower sales volumes. As a percentage of sales, restaurant operating expenses increased 10.9%, to 104.8% during the quarter ended September 24, 2001 from 93.9% during the quarter ended September 25, 2000. The majority of this percentage increase is due to higher write-downs of long-lived assets. Cost of sales decreased $2.1 million and increased .6% as a percentage of sales to 31.4% during the quarter ended September 24, 2001 from 30.8% during the quarter ended September 25, 2000. Cost of food sales decreased $1.1 million and increased 1.4% as a percentage of sales to 29.1% during the quarter ended September 24, 2001 from 27.7% during the quarter ended September 25, 2000. The decrease in cost of food sales dollars is the result of the variable nature of food costs on lower sales volumes. The decline in gross margin percentage is primarily due to higher commodity costs, specifically beef and cheese, more discounting of menu prices as evidenced by the Triple Play promotion ($.49 cheeseburger/ $.99 double cheeseburger and $1.49 triple cheeseburger) and higher costs associated with the Cravers menu introduced in the fourth quarter last year. This decline in gross margin was partially offset by lower chicken costs and the implementation in the 1st quarter 2001 of a three tier value meal menu option which allows the customer to select between three drink and french fry sizes. Cost of non-food sales decreased $1.0 million during the quarter ended September 24, 2001, and decreased 0.8% as a percentage of sales to 2.3% from 3.1% during the quarter ended September 25, 2000. The decrease in cost of non-food sales is the direct result of the decrease in non-food sales. Non-food promotional items, designed to drive customer traffic into the restaurants, are sold at or near cost. Restaurant labor and related costs decreased $0.1 million during the quarter ended September 24, 2001, and increased 2.4% as a percentage of total sales to 29.0% during the quarter ended September 24, 2001 from 26.6% in the quarter ended September 25, 2000. The percentage increase in labor and related costs is the result of lower average sales volumes negatively impacting the fixed component of salaries and benefit costs. Operating margin (defined as total sales less total cost of sales and less restaurant labor and related costs) decreased $6.6 million during the quarter ended September 24, 2001, to $37.6 million from $44.3 million in the quarter ended September 25, 2000. As a percentage of sales, operating margin decreased 3.1% to 39.6% during the quarter ended September 24, 2001 from 42.7% in the quarter ended September 25, 2000. The majority of the decrease is the result of lower average sales volumes negatively impacting the fixed component of salaries and benefit costs. Depreciation and amortization decreased $1.6 million during the quarter ended September 24, 2001, to $3.7 million from $5.3 million in the quarter ended September 25, 2000. As a percentage of sales, depreciation and amortization expense decreased 1.3% to 3.8% during the quarter ended September 24, 2001 from 5.1% in the quarter ended September 25, 2000. The decrease is due primarily to the prior year acceleration of depreciation on those assets which were being replaced in accordance with our leasehold improvement obligations from the funding we received from our soft drink suppliers. Write-down of long-lived assets increased $8.2 million during the quarter ended September 24, 2001, to $10.8 million from $2.6 million in the quarter ended September 25, 2000. As a percentage of sales, write-down of long-lived assets increased 8.9% to 11.4% during the quarter ended September 24, 2001 from 2.5% in the quarter ended September 25, 2000. The increase in the write-down of long-lived assets is attributable to an increase in the number of stores whose cash flows are not sufficient to cover the remaining net book value of each affected store's long-lived assets. Occupancy and other restaurant operating expenses including advertising and royalties decreased $2.3 million during the quarter ended September 24, 2001 and increased .2% as a percentage of sales to 29.2% in the quarter ended September 24, 2001 from 29.0% in the quarter ended September 25, 2000. Occupancy expense decreased $0.4 million during the quarter ended September 24, 2001 and increased 0.6% as a percentage of sales to 11.1% during the quarter end September 24, 2001 from 10.5% during the quarter ended September 25, 2000. The percentage increase in occupancy expense is due to the fixed portion of rents on lower sales volumes. Other restaurant operating expenses, including advertising and royalties, decreased $1.9 million and decreased 0.4% as a percentage of sales to 18.1% during the quarter ended September 24, 2001 from 18.5% during the quarter ended September 25, 2000. This decrease in other restaurant operating expense dollars is primarily due to the reduction in advertising and royalty expenses and the decline in pre-opening costs as no new stores opened in the third quarter this year. General and Administrative Expenses. General and administrative expenses decreased $2.2 million to $2.5 million during the quarter ended September 24, 2001 and decreased 1.8% as a percent of sales to 2.7% during the quarter ended September 24, 2001 from 4.5% during the quarter ended September 25, 2000. The decrease in general and administrative expenses is due to a $1.8 million reversal of accrued bonuses due to the unlikelihood of hitting financial targets to achieve bonus payments. The remaining portion is due to reduced discretionary spending and staff reductions. Other Operating Expenses. Other operating expenses increased $.4 million to $1.0 million during the quarter ended September 24, 2001 from $.6 million for the quarter ended September 25, 2000. The increase in other operating expenses is due to higher losses this year on the disposal of fixed assets. Other Income (Expense). Other income (expense) increased $2.8 million to $8.4 million during the quarter ended September 24, 2001 from $5.6 million for the quarter ended September 25, 2000. The majority of the increase in other expenses is due to higher interest rates on the Ameriking Senior Notes and the Bank Credit Facilities in conjunction with the exchange offer and new credit facility. Extraordinary loss on early extinguishment of debt- As described above, on June 29, 2001, the Company completed an exchange offer for its 10 3/4% Senior Notes due December 2006 (the "AmeriKing Senior Notes"). In conjunction with this transaction, the Company recorded an extraordinary loss of $2.9 million. This extraordinary loss represents the write-off of deferred financing costs related to the Ameriking Senior Notes. Due to the Company's valuation allowance for deferred tax assets, there is no associated tax benefit relating to the loss. Income taxes. Despite a net loss, the Company incurred income tax expense of $0.7 million. This expense is due primarily to an increase in the valuation allowance associated with net deferred tax assets. EBITDA. As defined in Item 2, EBITDA decreased $2.3 million to $7.4 million for the quarter ended September 24, 2001 from $9.7 million for the quarter ended September 25, 2000. As a percentage of total sales, EBITDA decreased 1.6%, to 7.8% for the quarter ended September 24, 2001 from 9.4% for the quarter ended September 25, 2000. The decline in EBITDA is the result of the factors discussed above. Three Quarters ended September 24, 2001 Compared to Three Quarters ended September 25, 2000 Restaurant Sales. Total sales decreased $18.7 million or 6.3% during the three quarters ended September 24, 2001, to $280.7 million, from $299.4 million during the three quarters ended September 25, 2000. Sales at the comparable restaurants, including only those restaurants owned by the Company at September 24, 2001, decreased 7.8% for the three quarters 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 March 2000 and the development of 21 restaurants during 2000. This development was partially offset by the closing of 1 store in 2000 and 5 in 2001. Restaurant Operating Expenses. Total restaurant operating expenses increased $5.5 million, or 2.0% during the three quarters ended September 24, 2001, to $281.4 million from $275.9 million in the quarter ended September 25, 2000. This increase was primarily due to significantly higher write-downs of long-lived assets offset by the variable nature of certain expenses such as cost of food sales, labor, occupancy, advertising and royalties which were lower as a direct result of lower sales volumes. As a percentage of sales, restaurant operating expenses increased 8.1%, to 100.2% during the quarter ended September 24, 2001 from 92.1% during the quarter ended September 25, 2000. The majority of this percentage increase is due to higher write-downs of long-lived assets. Cost of sales decreased $6.1 million and decreased 0.2% as a percentage of sales to 31.0% during the three quarters ended September 24, 2001 from 31.2% during the three quarters ended September 25, 2000. Cost of food sales decreased $3.8 million and increased 0.5% as a percentage of sales to 28.9% during the three quarters ended September 24, 2001 from 28.4% during the three quarters ended September 25, 2000. The decrease in cost of food sales dollars is the result of the variable nature of food costs on lower sales volumes, partially offset by the additional stores that were acquired and developed in the same three quarters last year. The decline in gross margin percentage is due to higher commodity costs, specifically beef and cheese, and the introduction of the Cravers menu in the fourth quarter last year partially offset by lower chicken costs and the implementation of a three tier value meal menu option which allows the customer to select between three drink and french fry sizes. Cost of non-food sales decreased $2.4 million during the three quarters ended September 24, 2001, and decreased 0.7% as a percentage of sales to 2.1% from 2.8% during the three quarters ended September 25, 2000. The decrease in cost of non-food sales is the 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 $1.3 million to $81.1 million during the three quarters ended September 24, 2001, and increased 2.3% as a percentage of total sales to 28.9% during the three quarters ended September 24, 2001 from 26.6% during the three quarters ended September 25, 2000. The increase in restaurant labor and related costs was primarily due to the increased number of stores and the additional labor associated with them. In addition, the percentage increase is the result of lower average sales volumes negatively impacting the fixed component of salaries and benefit costs. Operating margin (defined as total sales less total cost of sales and less restaurant labor and related costs) decreased $13.9 million during the three quarters ended September 24, 2001, to $112.5 million from $126.4 million during the three quarters ended September 25, 2000. Operating margin decreased 2.1% as a percentage of sales to 40.1% from 42.2% during the three quarters ended September 25, 2000 primarily due to the percentage increase in labor and related costs (as explained above). Depreciation and amortization decreased $2.1 million during the three quarters ended September 24, 2001, to $11.4 million from $13.5 million during the three quarters ended September 25, 2000. Depreciation and amortization decreased 0.4% as a percentage of sales to 4.1% from 4.5% during the three quarters ended September 25, 2000 primarily due to the prior year acceleration of depreciation on those assets which were being replaced in accordance with our leasehold improvement obligations from the funding we received from our soft drink suppliers. Write-down of long-lived assets increased $13.8 million during the three quarters ended September 24, 2001, to $16.5 million from $2.7 million during the three quarters ended September 25, 2000. As a percentage of sales, write-down of long-lived assets increased 5.0% to 5.9% during the three quarters ended September 24, 2001 from .9% during the three quarters ended September 25, 2000. The increase in the write-down of long-lived assets is attributable to an increase in the number of stores whose cash flows are not sufficient to cover the remaining net book value of each affected store's long-lived assets. Occupancy and other restaurant operating expenses including advertising and royalties decreased $1.4 million to $85.2 million during the three quarters ended September 24, 2001 and increased 1.5% as a percentage of sales to 30.4% during the three quarters ended September 24, 2001 from 28.9% during the three quarters ended September 25, 2000. Occupancy expense increased $0.2 million during the three quarters ended September 24, 2001 and increased 0.8% as a percentage of sales to 11.3% during the three quarters ended September 24, 2001 from 10.5% during the three quarters ended September 25, 2000. The percentage increase in occupancy expense is due to the fixed portion of rents on lower sales volumes. Other restaurant operating expenses, including advertising and royalties, decreased $1.6 million and increased .6% as a percentage of sales to 19.1% during the three quarters ended September 24, 2001 from 18.5% during the three quarters ended September 25, 2000. This decrease in other operating expense dollars is primarily due to the variable nature of advertising and royalties and improved cash controls offset by increases in insurance costs and utilities. In addition, the Company recorded pre-opening costs relative to new restaurant developments in other expense which were $0.1 million and $0.6 million for the three quarters ended September 24, 2001 and September 25, 2000, respectively. General and Administrative Expenses. General and administrative expenses decreased $1.2 million to $12.2 million during the three quarters ended September 24, 2001 and decreased 0.1% as a percent of sales to 4.4% during the three quarters ended September 24, 2001 from 4.5% during the three quarters ended September 25, 2000. The decrease in general and administrative dollars is due to a $1.8 million reversal of accrued bonuses due to the unlikelihood of hitting financial targets to achieve bonus payments. The remaining portion is due to reduced discretionary spending and staff reductions. Other Operating Expenses. Other operating expenses increased $.4 million to $2.0 million during the three quarters ended September 24, 2001 from $1.6 million for the three quarters ended September 25, 2000. The increase in other operating expenses is due to higher losses this year on the disposal of fixed assets. Other Income (Expense). Other income (expense) increased $3.1 million during the three quarters ended September 24, 2001 to $19.8 million from $16.7 million during the three quarters ended September 25, 2000. The majority of the increase in other expenses is due to higher interest rates on the Ameriking Senior Notes and the Bank Credit Facilities. Extraordinary loss on early extinguishment of debt- As described above, on June 29, 2001, the Company completed an exchange offer for its 10 3/4% Senior Notes due December 2006 (the "AmeriKing Senior Notes"). In conjunction with this transaction, the Company recorded an extraordinary loss of $2.9 million. This extraordinary loss represents the write-off of deferred financing costs related to the Ameriking Senior Notes. Due to the Company's valuation allowance for deferred tax assets, there is no associated tax benefit relating to the loss. Income taxes. Despite a net loss, the Company incurred income tax expense of $2.0 million. This expense is due primarily to an increase in the valuation allowance associated with net deferred tax assets. EBITDA. As defined in Item 2, EBITDA decreased $11.8 million to $15.1 million for the three quarters ended September 24, 2001 from $26.9 million for the three quarters ended September 25, 2000. As a percentage of total sales, EBITDA decreased 3.6%, to 5.4% for the three quarters ended September 24, 2001 from 9.0% for the three quarters ended September 25, 2000. The decline in EBITDA is a result of the factors discussed above. Liquidity and Capital Resources Net cash flows from operating activities decreased $21.9 million during the three quarters ended September 24, 2001, to a use of cash of $2.7 million, from a source of cash of $19.2 million during the three quarters ended September 25, 2000. The decrease is primarily due to receiving a $20.2 million, one-time vendor incentive in the first quarter of 2000. The Company received two installments of one-time vendor incentives from its soft drink suppliers totaling $20.2 million in March and August of 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 eighteen to twenty-four months. The other contributing factor was an increase in net loss. Capital spending for the three quarters ended September 24, 2001 was $3.5 million. These capital expenditures were for the replacement of equipment in the Company's existing facilities. For the three quarters ended September 24, 2001, the Company spent $6.2 million on financing activities. In conjunction with the Exhange Offer, the Company made a $3.3 million principal payment towards the bank debt. The Company incurred financing costs of approximately $2.1 million related to the offering. In addition, the Company made principal reductions totaling approximately $0.8 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. Changes to restaurant grounds and drive-thrus must be completed by December 31, 2002, with the deadline for signage changes being June 30, 2003. On June 20, 2001, the Company was notified of another design change which includes a new kitchen. The new kitchen must be installed by June 30, 2002 at an estimated cost of $4.0 million. 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 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. 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 Fleet National Bank 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. On June 29, 2001, the Company completed an exchange offer for its 10 3/4% Senior Notes due December 2006. Of the $100 million in Ameriking Senior Notes, approximately 99.5% were exchanged for bonds issues by National Restaurant Enterprise Holdings, Inc. ("NRE Holdings"), a new subsidiary of the Company. NRE Holdings is the sole stockholder of National Restaurant Enterprises, Inc., the subsidiary through which the Company conducts its operations. Though the Company was in compliance with its financial covenants of the credit facility as of September 24, 2001, the Company is not in compliance with the monthly measure of EBITDA (as defined) based on results for the four-week period ended October 22, 2001. Under the amended and restated senior secured revolving credit facility with Fleet National Bank, as agent, the bank syndicate has the right to curtail payments or dividends to NRE Holdings or Ameriking which could affect the semi-annual payment to the bondholders due November 15, 2001. The Company has notified the bank syndicate that we are not in compliance. The Company is currently considering financing alternatives that would potentially reduce existing cash obligations for capital expenditures. The Company has also discussed preliminary opportunities for long-term capital with its lending group, BKC and other investment advisors. During fiscal year 2001, management has been holding meetings with various lessors representing approximately 70% of restaurants leased. These meetings are intended to seek reduced base rent payments, percentage rent payments or other methods of rent relief to better reflect the existing restaurant economics of many of our restaurants. To date, we have no formal commitments for any reductions in our lease commitments, but believe that we will be able to achieve reduced rent levels in a select group of our restaurants. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk associated with fluctuations in interest rates. Interest rate risk is primarily limited to the Company's variable rate debt obligations, which totaled $117.9 million at September 24, 2001. Of this balance, the Fleet National Bank revolver comprised $115.5 million bearing an interest rate calculated at Fleet National Bank's base rate plus 3.0%, and the 1995 Franchise Acceptance Corporation ("FAC") Note comprised $1.0 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, the Company would experience an increase in interest expense of approximately $0.6 million. The Company does not hold any market risk sensitive financial instruments for trading purposes. 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 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. On June 1, 2001, the Company filed a Current Report on Form 8-K, announcing under Item 5, the intent to exchange its 10 3/4% Senior Notes due December 2006 as well as, enter into a new $115.5 million amended and restated senior secured revoloving credit facility with Fleet National Bank, as agent. On July 12, 2001, the Company filed a Current Report on Form 8-K, announcing under Item 5, the exchange of its 10 3/4% Senior Notes due December 2006, and a new $115.5 million amended and restated senior secured revolving credit facility. 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 Michael J. Nicholas Vice President of Finance, Treasurer and Director Principal Financial Officer Date John C. Clark Vice President of Accounting and Corporate Controller Principal Accounting Officer INDEX TO EXHIBITS

* Previously filed. ++Theschedules 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