• Shakey's parent company crumbling under debt, back taxes

SINGAPORE -- Ongoing financial struggles, including the potential payment of millions of dollars in back taxes, threatens the future of Inno-Pacific Holdings, Ltd., the Singapore-based parent company of Shakey's Inc.

Shakey's Inc. franchises 61 Shakey's Pizza stores in the U.S.

According to an Aug. 28 management analysis of Inno-Pacific's performance published on the Web site of the Singapore Stock Exchange, the company "does not have the resources to pay" back taxes demanded by Singapore's Comptroller of Income (CIT). Should it be forced to pay, "the viability of the Company and the Group will be in doubt," the report said.

The opening remarks of the report paint a picture of a company working feverishly to mend gaping fiscal wounds. Revenue for the first six months of 2002, generated solely by Shakey's Inc., was $1.8 million, 16 percent lower than the same period last year. The reduction is credited to the closure of "several franchise restaurants terminated from the Shakey's system" in 2002, when franchisors didn't pursue contract extensions.

The report cited a 39 percent reduction in operating expenses ($534,248) and a 52 percent drop in general and administrative expenses ($534,820).

Those savings, however, came largely from dismissals and/or resignations of at least one Inno-Pacific board member and an unspecified number of leadership and field support personnel at Garden Grove, Calif.-based Shakey's. (Among those departures was the June resignation of Shakey's president, Sean Flynn.)

The report also detailed an ongoing trail of huge losses at Inno-Pacific:
* In January it disposed of its entire investment in its wholly owned subsidiary, Shakey's International Limited (SIL) for $712,500 in cash. The report said SIL had lost about $15.4 million, lacked the capital to develop the Shakey's franchise system internationally, and that it was in Inno-Pacific's best interest to focus solely on Shakey's U.S. system.

* On April 29, Inno-Pacific wrote off $44.5 million of losses accumulated over nearly a decade.

* An unspecified amount of legal fees connected to the defense of Shakey's Inc. in two lawsuits filed against it by franchisees John McNulty and Sterling Foods, Inc., in March 2001, also were cited as losses. The plaintiffs sought $7 million in damages, declaratory and injunctive relief, and both parties settled on confidential terms this past June.

* A May 15 auditor's report showed Inno-Pacific Holdings' liabilities exceeded its assets by $1.56 million.

It also said that the company had filed an objection to $2.74 million in taxes assessed by Singapore's Comptroller of Income Tax (CIT) for 1988, 1990 and 1997. During those years, Inno-Pacific lost a total of $39.3 million, but the CIT claims taxable revenues were generated in those years.

Inno-Pacific contends, however, that all its revenues for those periods were generated by Shakey's Inc., and in Singapore, revenues generated outside the country are not taxed.

Though the company said it has filed an objection with the CIT over the assessment, the report said the future of Inno-Pacific is in doubt should the objection be overruled.

"In the event that the CIT enforces collection of these taxes," the report said, "Inno-Pacific currently does not have the resources to pay and the viability of the Company and the Group will be in doubt."

In an effort to generate capital, Inno-Pacific made a private placement of 34,850,000 new ordinary shares of the company on the Singapore Stock Exchange on May 30. To date, the sale has netted $1.19 million, and, according to the report, the proceeds are being used to pay off creditors and provide operating cash for Inno-Pacific and Shakey's Inc.

The infusion of cash, however, appears to be too little, too late. According to the report, "barring unforeseen circumstances ... (Shakey's Inc.) expects ... to be marginally profitable." The report said Inno-Pacific still wants to expand its Shakey's franchise store base in the U.S., but it said that doing so will "require further capital." The report did not detail how that capital might be generated.

Something old, nothing new

When asked to comment on the gravity of the report, Bruce Thompsen, a Los Angeles-based advisor to Inno-Pacific's managing director and CEO, Chin-Yong Wong, replied in an e-mail that he would forward questions to Chin-Yong. (Since Flynn's resignation, Chin-Yong also has served as interim chairman and CEO of Shakey's.) Chin-Yong, however, did not respond.

None of the franchisees contacted by PizzaMarketplace were surprised by the report's revelations, stating that they've known all along that Shakey's troubles were rooted in Inno-Pacific's mismanagement of the company, not in its U.S. operations.

Franchisee Mick Clark said he had not read the recent Inno-Pacific report in detail, but that he remained hopeful Inno-Pacific's potential demise wouldn't spell doom for Shakey's.

"The franchisees have said all along that they want to do whatever is necessary to help right the situation and get the company back to where it can grow again," said Clark. His company, Sterling Foods, franchises five Shakey's stores in Southern California.

Whether "whatever is necessary" would involve a franchisee buyout of Shakey's Inc. remains to be seen, Clark added. "We're willing to look at any idea -- whichever way the pieces might fit together -- that keeps the brand moving forward."

A former Shakey's executive, who contacted PizzaMarketplace on the promise of anonymity, believes the sale of Shakey's is highly possible given Inno-Pacific's looming tax liability.

"Inno-Pac ... would be forced to liquidate the company to take care of those liabilities," the former executive said. "And I would suppose that would mean putting Shakey's on the auction block."

Shakey's Pizza

HQ: Garden Grove, Calif.
Founded: 1955
Owner: Inno-Pacific Holdings (Singapore)
Stores: 61 in the U.S. (54 in California)
Estimated Sales: $60 million
Average Check: $7.50
Key pesonnel: Chin-Yong Wong, managing director and CEO, Inno-Pacific Holdings; John McNulty, president of Shakey's Franchised Dealers Association

Sources close to the story say that Los Angeles-based Jacmar Co., a 19-store Shakey's franchisee, was approached in the recent past about purchasing Shakey's, but that Inno-Pacific never completed the deal.

A call placed by PizzaMarketplace to Jacmar president Randy Hill wasn't returned by press time.

In April, however, Hill told PizzaMarketplace that Jacmar "will never be associated beyond the length of our existing contract with Inno-Pacific," and that if there were a "way for us to exit the system prior to expiration we will."

Hill, among many other franchisees, also has accused Inno-Pacific of misusing Shakey's royalties only for its directors' benefit, not the pizza brand's.

"Inno-Pacific has taken money out of the domestic system instead of allowing it to remain here to develop new concepts and plans," he said in an April interview. "We're just totally disgusted with our royalties being squandered by the parent company instead of being used to build the brand."

The former Shakey's executive concurred.

"The main story here has been the Singapore ownership's consistent and continual degradation of the brand," he said. "If they simply had decided to get behind the brand and make the appropriate investments, they would have a tremendous business at this point."

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