Collins President to Lead Rescue Effort : Naugles’ Losses Rise; Firm Makes Several Big Changes

Greater-than-expected losses have forced Naugles Inc., the troubled fast-food chain, to pare its far-flung chain of restaurants, change presidents and halt interest payments on some of its debt.

Naugles on Thursday reported a loss of $4.5 million for the fiscal third quarter ended April 3, bringing nine-month losses to $8.7 million.

The Fullerton-based owner of 214 Mexican-American fast-food restaurants also will put $22 million in reserves to cover write-downs for closed and unprofitable stores, said Wayne Withers, chairman and chief executive.

Withers also said in a prepared statement that continuing losses have depleted Naugles’ cash reserves and that the company does not intend to make its semiannual interest payment of nearly $2.1 million on its senior subordinated debentures. The payment is due April 30.

Series of Changes

Withers could not be reached for comment. But in his statement, he announced a series of changes that industry analysts said should bolster the flagging company, which has lost nearly $23 million since July, 1983:

- Richard Bermingham, president of Los Angeles-based Collins Foods International, which owns 50.13% of Naugles, has been elected president of Naugles, replacing Michael Mooslin, who resigned last month as president, chief operating officer and a director. Bermingham will serve at “a nominal compensation.”

- Naugles has closed all 11 of its restaurants in Florida and both of its outlets in Kansas City, Mo., and plans to close as many as 57 outlets in Utah, Nevada, Chicago, St. Louis and California by the end of the fiscal year June 30.

- The company has signed a management consulting agreement with a Collins Foods subsidiary for operating and marketing management.

Withers said that profits in Naugles’ moneymaking units have declined and that the number of units operating at a loss increased during the quarter. Neither Withers nor Bermingham could be reached to elaborate on the firm’s announcement.

Michael G. Mueller, a restaurant industry analyst for Montgomery Securities in San Francisco, said Naugles’ officials previously told analysts that losses could be expected to stay in the range of $2 million to $2.5 million.

Although Naugles’ revenue has continued to rise--to $126.4 million last year from $86.7 million in fiscal 1983--its last profitable year was fiscal 1983, when it posted net earnings of $3.1 million.

At the same time, the number of restaurants has seesawed. Naugles began the 1984 fiscal year with 172 outlets, grew to 213 units seven months later, fell back to 186 at the end of the year and then increased to 218 units and seven franchisees by last July. If it shuts down all units marked for closure, Naugles will be left with only 144 restaurants.

Despite the bad financial news, analysts seemed upbeat about Collins Foods apparently exercising its recently acquired majority stake in Naugles.

Successful Operator

“If I were a stockholder, I’d be very happy that Collins is moving in,” said Sarah Stack, an analyst with the Los Angeles brokerage firm of Bateman Eichler, Hill Richards. “Naugles can do nothing but benefit from Collins’ leadership.”

Collins Foods is a successful operator of fast-food establishments, said Steven M. Sullivan, an analyst with the Seattle brokerage house of Cable Howse & Ragen.

Collins founded the Sizzler chain of family steak restaurants and is the nation’s largest franchisee of Kentucky Fried Chicken restaurants. It also owns about a dozen Josephina’s restaurants in California.

“Collins Foods has recognized that what Naugles has is a system they (Collins officials) think they can develop,” Sullivan said.

Mueller praised Collins Foods efforts.

“Naugles’ problem was that it expanded way too aggressively, added too many units outside its core market area (California), and they were not performing as well as those inside the core area,” he said. Stack said Naugles management also had lost its grip on expenses and was unable even to say what it cost the company to prepare and serve an average meal. Collins Foods is so cost-conscious, she said, that “flags will go up if costs go up 1/10th of 1%.”

Naugles has been a victim of rapid growth that overtook management’s ability to control its far-flung operations, according to analysts and a company spokesman.

Naugles’ founder, Harold Butler, who sold his interest to Collins Foods last fall, was the founder of the Denny’s restaurant chain, which analysts said got into financial trouble with rapid growth policies while Butler was still an owner. He also owned the Jojo’s restaurant chain, which he sold to W. R. Grace & Co. in 1981.

In 1984, Butler started Herschel’s Deli & Bakery in San Bernardino. Herschel’s now has three restaurants with several others in the planning stages.

Withers said Naugles now is trying to raise working capital and expects to sell surplus assets, primarily land. Naugles directors also are considering other alternatives, including debt restructuring, business combinations and reorganization.

Given the amount of effort Collins Foods is putting into reviving Naugles, Stack said, any reorganization in bankruptcy court is unlikely unless all other approaches are exhausted. NAUGLES INC. AT A GLANCE Naugles Inc., Fullerton, is a holding company for a chain of Mexican-American fast-food restaurants. It operates about 200 restaurants in five states, but has closed 14 so far this year and plans to close as many 56 in the next few months. Collins Foods International, Los Angeles, owns 50.1% of Naugles’ stock.

9 mos. ended April 3, Year ended June 30 (in millions) 1986* 1985 1984 1983 1982 1981 Revenue 10 126 115 87 56 40 Net income (8.7) (9.2) (5.1) 3.1 2.4 0.9

* estimate

Employees: 5,000 Shares outstanding: 4.43 million 12-mo. price range (OTC): $1.37 1/2 -- $7 Thursday’s close: $3.50, down 12 1/2 cents