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BK franchisee Duke and King files for Ch. 11

Company closes five of its 92 restaurants and seeks buyer

Duke and King Acquisition Corp., a Burnsville, Minn.-based operator of 87 franchised Burger King units, has filed for Chapter 11 bankruptcy protection and is seeking a buyer.

Chief executive Rodger Head told Nation’s Restaurant News on Monday that Duke and King has retained Mastodon Ventures to facilitate a sale, saying, “It would be our desire to downsize significantly or in total all of our Burger King holdings.”

Duke and King had 92 locations going into the Dec. 4 bankruptcy filing, but since has closed five stores in collaboration with Burger King Corp. and Bank of America, its largest secured lender, Head said.

“Our position is to work with Burger King and Bank of America to maximize the value of the asset,” Head said, “but the most important thing is to preserve the jobs of the people working with us, and we want to make sure we protect their interests to the extent that we can.”

Duke and King said in court documents that macroeconomic headwinds from the recession, combined with threats to operating margins like commodity price inflation and Burger King Corp.’s decision to sell certain items like a double cheeseburger for $1, contributed to the bankruptcy filing. The $1 double cheeseburger promotion was a source of contention between Burger King and many of its franchisees, a group of which filed suit against the franchisor last year over the deal. (EARLIER: BK suit highlights franchisee friction)

“The total environment — our sales were down going into the filing, and the whole system’s that way,” Head said. “Our margins were down significantly, so the two compounded to the point that we couldn’t meet our financial obligations.”

According to court documents, Duke and King’s same-store sales year-to-date had fallen 4 percent compared with 2009, and earnings before interest, depreciation, amortization and rent had declined 9 percent over the past two years.

Duke and King was incorporated in 2006 with investments of $11.2 million from Kinderhook Capital Fund and $17 million in debt provided by Bank of America, and the company acquired 88 Burger King franchises from the Nath Companies. Duke and King then bought 24 more restaurants in Missouri from the Swisshelm Group.

Several of the locations purchased in those agreements were out of date and poorly run, Duke and King said in court documents, requiring large capital expenditures. The company had hoped to buy 66 restaurants in Iowa and Nebraska from Simmonds Restaurants that were more profitable, in the hopes that cash flow from those new units could fund improvements at Duke and King’s roster of restaurants, but Burger King Corp. did not approve the deal.

Duke and King called the capital expenditures for its restaurants a “constant drain on the company” in its bankruptcy filing.

“Since its inception, the company has reinvested all of its excess cash flow into the restaurants and spent over $8.75 million on capital expenditures,” including $600,000 year-to-date in 2010, Duke and King wrote. The company also performed sale-leaseback transactions on 10 stores in 2008 and three stores in 2009, generating about $13.3 million — $10.5 million of which was used to pay down debt and $2.8 million of which went back into the restaurants.

Duke and King’s remaining 87 locations are in Minnesota, Missouri, Illinois, Wisconsin, Iowa and Kansas. The company still owes nearly $11 million of its secured loan to Bank of America, and it will continue to work in collaboration with the bank and Burger King Corp. to bring the reorganization to a successful close, Head said.

“It’s an unfortunate situation, but with the economic times we’re in, we believe we fought a good battle,” he said. “We wanted to make the best decision for our business, and we think this is it.”

Head will remain president and chief executive of bd’s Mongolian Grill, the casual-dining concept in which he has invested through his involvement with Kinderhook.

Contact Mark Brandau at [email protected]

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