Message to Inno-Pacific: It's time to sell Shakey's

Feb. 3, 2003

On Sept. 3, only three days after August ended, Papa John's International reported that its comparable-store sales for the month fell 5.6 percent.

Refreshing, isn't it?

No, no, not that Papa John's sales were down; the company's honesty is refreshing. How many firms can you name that are so quick to admit to investors that they're still struggling with flat-to-negative sales? By law, such humble pie only has to be eaten quarterly, but Papa John's president and chairman, John Schnatter, has made the tough choice to reveal its figures monthly, even when they're not pretty.

Steve Coomes, Editor

Schnatter also made the shrewd and admirable move earlier this year to end the widely used and highly abused practice of awarding stock options to its executives. How the company will award bonuses to its leaders in the future is unclear, but investors can rest assured that at least these big bosses will be less tempted to fudge fiscal facts in order to inflate their company's value.

Too bad the leadership at Inno-Pacific Holdings hasn't taken similar steps to come clean with not only its investors, but the franchisees of its lone asset, Shakey's Pizza.

Since purchasing the pioneering pizza chain in 1989, Garden-Grove, Calif.-based Shakey's U.S. store count has dropped from around 450 to 61. Franchisees have left the system in droves by refusing to renew their contracts.

Many Shakey's franchisees claim that Singapore-based Inno-Pacific has refused to account for the whereabouts of tens of millions of dollars in franchisee royalty payments, money franchisees say should have been reinvested into the Shakey's system. Those funds, they suspect, were used to line the pockets of Inno-Pacific's board members.

The board of directors of the Shakey's Franchised Dealers Association repeatedly has pressed Inno-Pacific for details, but the company's answer is always the same: no reply at all.

When Inno-Pacific bought Shakey's, it launched a reign of error marked by the appointment, dismissal and/or resignation of a long line of presidents. A string of dubiously dubbed "directors" have come from Singapore to oversee Shakey's, but franchisees say the only impressions any of them left on the company were deep dents in Shakey's bank accounts.

A year-and-a-half ago, Inno-Pacific hired president number 13, Sean Flynn. The number proved truly unlucky for the 41-year-old Canadian.

Though Flynn was inspired by the Shakey's legend and its favorable public perception, he found himself yoked with a company facing two multi-million-dollar breach of contract lawsuits. Shakey's also lacked an updated Uniform Franchise Offering Circular (UFOC), which merely magnified the fact that the brand hadn't signed a new franchisee in seven years.

Despite the efforts of Flynn and his handpicked turnaround team -- a group that was at the February International Pizza Expo in Las Vegas promoting franchise sales -- the headquarters force was too small to serve franchisee needs.

But apparently not small enough for Inno-Pacific.

Just one person from Flynn's nine-man team remains today; the others either were fired or resigned. Flynn quit in June.

Inno-Pacific has yet to explain the departures, or how it expects Shakey's to continue as a company without a full-time leader and support team guiding the ship.

A May 15 independent auditor's report revealed a grim truth: Inno-Pacific's liabilities outnumber its assets. The company's Aug. 28, performance report gave further dark details. For example, on April 29, the company relieved its books of $44.5 million in long-term losses. It also stated that Singapore's Comptroller of Income (CIT), the country's tax authority, is demanding $2.74 million in back taxes. Inno-Pacific has objected to that assessment on the grounds that its taxable revenues during the periods in question came only from the U.S. By Singaporean law, revenues from outside the country aren't taxable.

Shakey's also lacked an updated Uniform Franchise Offering Circular (UFOC), which merely magnified the fact that the brand hadn't signed a new franchisee in seven years.

Still, it even admits it lacks the money to pay the tax bill, and said that its future is in doubt if it's forced to pony up the dough.

Yet in its Aug. 28 report, it blithely promises investors it still wants to build the Shakey's franchise system in the U.S.

It doesn't explain, however, that the Shakey's franchisees want no part of helping Inno-Pacific maintain its house of cards.

According to multiple accounts, the 61 Shakey's stores still operating remain strong, viable entities that, with the right corporate infrastructure and support, could become at least a shadow of the vibrant chain it once was.

But that won't happen unless Inno-Pacific sells Shakey's to a responsible buyer -- which it may be forced to do if the Singapore CIT has its way.

Could Inno-Pacific's leaders finally do the right thing: abandon their hubris, sell Shakey's outright and use the proceeds to pay the taxman and make everyone happy?

Doubtful. As this year's corporate fraud and accounting scandals have proven, pride comes before a fall. And Inno-Pacific is clearly on its way down.

Topics: Commentary

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