Stock Trade Expected to Bolster Ailing Naugles : Move Will Boost Collins Foods’ Share of Mexican Fast-Food Chain to 91.8%

Shareholders of Naugles Inc. are likely to amend their articles of incorporation today to approve a $75-million deal with Collins Foods International Inc. in which Naugles will trade 23 million shares of newly issued preferred stock for 111 Kentucky Fried Chicken restaurants in Southern California.

Prior to the deal, to be considered at a special Naugles shareholders meeting today, Collins owned 50.1% of Naugles. If the agreement is approved, Los Angeles-based Collins will increases its ownership share to 91.8%. The move is designed to bolster the fortunes of Naugles, an ailing operator of approximately 170 Mexican-American fast-food restaurants.

Net Loss of $31.4 Million

For the 1986 fiscal year ended June 30, Naugles--which recently moved its offices to Orange from Fullerton--posted a net loss of $31.4 million, more than triple the $9.2-million net loss recorded in its fiscal 1985. The year-end loss includes a $22-million reserve set aside in the third quarter to cover current and future costs and expenses associated with the closing of 70 Naugles restaurants.

The Collins offer, which includes a guarantee on a $3-million revolving line of credit to help Naugles meet working capital requirements, was approved by the boards of directors of both companies in July.

Even after giving up 111 of its Kentucky Fried Chicken operations, Collins will continue to operate 140 Kentucky Fried Chicken franchises, 506 Sizzler restaurants and six food distribution centers. Approval of the deal by Naugles shareholders is “highly likely,” according to Sarah Stack, an analyst with Bateman Eichler, Hill Richards in Los Angeles. “It’s the best opportunity (Naugles shareholders) have at this time,” she said. Additionally, Collins--which proposed the deal--is Naugles’ single largest shareholder.

Under Collins Guidance

Naugles has been operating under Collins Foods’ guidance since April, when it signed a management consulting agreement with a Collins subsidiary for operating and marketing management.

As a result of that deal, Naugles conducted its first-ever advertising campaign--spending $6 million in an effort to promote its restaurants and carve out a more defined identity for itself. Naugles has also given face lifts to 160 of its restaurants.

Analysts who cover the two companies tend to agree that Naugles will only benefit with Collins at the helm and is likely to inch its way back to profitability. Stack said that Naugles, with Collins maintaining a managerial role for only six months, is “already approaching profitability with most of its units.”

In addition to the stock deal, Collins is expected to further solidify its control of Naugles when Wayne Withers, chairman and chief executive of Naugles, resigns in November, as previously announced. Richard Bermingham, Collins’ president, has been serving as Naugles’ president since April and is considered the most likely replacement for Withers.