Bones of Contention : Pioneer Looks for Buyer to Take Out Whole Company as Sales Decline, Franchisees Accuse Founder of Fraud and Regulators Step In
When marshals appeared at some of Pioneer Take Out’s company-owned fried-chicken restaurants not long ago, they did not stop for food. Instead, they emptied the cash registers.
It was just one notable symbol of Pioneer’s recent troubles, including declining sales, intense competition and major unhappiness among the ranks of its franchise holders.
The marshals, acting under a court judgment, were collecting part of $160,000 that Pioneer owed to Cummings Inc., a sign company.
A few weeks later, the Internal Revenue Service took legal steps to collect directly from Pioneer’s franchisees part of the $484,728.82 that Pioneer owed the federal government in overdue taxes. And then last week, the California Department of Corporations ordered Pioneer to stop selling franchises until it can prove that it is solvent.
Pioneer says it has since cleared up the federal tax problem and expects state regulators to rescind their cease-and-desist order soon, but admits to having serious cash-flow problems. Pioneer, which once had more than 300 stores--both company-owned and franchised--has been scaling down its operations since 1985.
Officials of the privately held company blame the situation partly on a group of dissident franchisees who, the officials say, have refused to pay thousands of dollars in royalties and advertising fees to the company. Meanwhile, sales have been dropping in the increasingly competitive fast-food market.
The dissidents, who operate 44 of Pioneer’s current 225 stores, have sued the company, maintaining that they bought their franchises on the basis of misleading and fraudulent information supplied by Pioneer. Their suit also alleges that Pioneer funds were inappropriately loaned to other enterprises of H. R. (Rick) Kaufman, Pioneer’s founder, president and chairman.
The upheaval caused by the internal struggle has been such a headache for Kaufman that he says he is speeding up his search for a buyer. He has been considering selling the chain since early this year.
Kaufman said in an interview this week that he has received offers from three firms, which he would not identify. A sale to a well-financed and financially capable company, he said, is the “best thing to straighten things out in one swoop. . . . A company with new management, with a new broom to sweep clean.”
“It’s time to move on,” he said. “I feel bad because most of the . . . (dissidents) do not know what they are doing.” He insists that there is no substance to their suit.
Meanwhile, Kaufman, who built his first Pioneer fried-chicken take-out store in Echo Park 26 years ago, said he is trying to refinance some of his personal properties to come up with $4.5 million to $5 million in temporary operating capital for Pioneer, a subsidiary of his privately held Transpacific Industries.
Transpacific’s property holdings, which include an extensive development at Blue Jay in the San Bernardino Mountains near Lake Arrowhead and a hotel at Lake Havasu on the Colorado River, have been the subjects of complaints by franchisees who claim that profits from Pioneer have been used for Kaufman’s personal investments.
As of Dec. 28, the end of Pioneer’s fiscal year, Pioneer reported that Transpacific owed it $4.5 million. Pioneer also had been paying dividends--$400,000 in 1985--to the parent firm until last year.
Of another criticism, that Kaufman might have spent too much time on other investments, he said, “There is some validity to that.” Last year, he stepped down as chairman of troubled Arrowhead Pacific Savings Bank, in which Transpacific holds a 24% stake.
The S&L; developed a negative net worth during 1985, Kaufman said, because of a severely depressed market for vacation homes and some ill-advised development deals and joint ventures. He added that Arrowhead Pacific made no loans to his Blue Jay development.
The controversy between Kaufman and the dissident franchisees, who have formed an independent association, has been simmering since 1985 and came to a boil last December when the franchisees sued Pioneer. The company promptly countersued.
“I don’t feel there is any substance to the (franchisees’) suit,” Kaufman said. But the suit and discord within the company have already hurt sales and the value of Pioneer, he and his lawyers acknowledged. Rumors that Pioneer might file for protection from creditors under Chapter 11 of the U.S Bankruptcy Code have haunted the firm, although Kaufman says he has no such intention.
The rumors, stirred in part by the dissidents, have prompted other franchisees who are not party to the litigation to withhold royalty payments, Kaufman said.
If Pioneer had not been tarnished by the lawsuit, Kaufman said, “the company would have been sold.” He maintains that the dissidents, led by Marilyn Lu Gordon, president of the Independent Pioneer Operators Assn., want to take over Pioneer.
The state ordered Pioneer to stop selling franchises because it failed to disclose its “liquidity problems” and to prove that it has the net worth of $5 million that is legally required for a company to be exempt from registering its franchise offerings with the state Department of Corporations.
Judy Hartley, corporation counsel at the department, said the order was based on Pioneer’s unaudited 1986 financial results, which listed the company’s net worth at $8.3 million. Hartley said there is a some question whether Pioneer can collect the $4 million-plus owed to it by Transpacific and another $3 million Pioneer said it is owed by its franchisees. If the money is deemed uncollectible, Pioneer’s net worth falls well below $5 million.
Kaufman expects the problem to be cleared up when Pioneer presents audited 1986 results, which he admitted are “a little later than usual.” He said the amount due from the parent represents a bookkeeping reallocation of his salary and expenses to Pioneer from Transpacific. His attorneys maintain that the parent company is “extremely solvent.”
Pioneer’s cash-flow problems began in 1985, partly because of poor sales at outlets in the Fresno area, where Pioneer has since closed 28 stores. The firm suffered its first loss--$951,397--in 1985.
Acknowledges Sales Decline
Kaufman has since pared the number of company-owned stores to the current 34 from the high of 95 outlets, which were scattered from Phoenix to Hawaii. About half of the other 61 were sold and the others were closed. Pioneer kept outlets that were within easy driving distance of Los Angeles.
Two factors helped the company return to profitability in 1986, according to Satish Desai, a franchisee: the sale of company-owned outlets and the high rate of failure among franchisees, enabling the company to resell franchises. One of Desai’s two franchises failed and was taken back by Pioneer.
“The company made money by selling company-owned stores to franchisees at unreasonably high prices without informing them about the bad financial situation of the company,” Desai said.
Kaufman acknowledges that sales are down at many stores but that the principal reason is poor in-store management.
The majority of Pioneer’s franchisees are immigrant entrepreneurs like Desai, who is from India. They claim they have been easy prey for Pioneer’s sales tactics. In retrospect, Kaufman says Pioneer should have been more selective in its choice of franchisees and eliminated “people who shouldn’t be in the food business.”
Meanwhile, Pioneer has cut back on advertising, because of a shortage of funds, even though advertising is crucial in the competitive fast food business. But Kaufman continues to make strategic moves for the company.
He is attempting to steer Pioneer back to basics by planning mini-units of 745 square feet, versus 1,500 to 1,600 square feet for most of the older stores. The little fried-chicken stores would feature drive-through service, he said, “like a glorified Fotomat.”
