Money woes, legal battles signal crisis for parent of Shakey's pizza chain

 
Sept. 23, 2003

Mounting debts, costly lawsuits and large sell-offs of stock by directors of Inno-Pacific Holdings (IPH), the Singapore-based parent company of Shakey's, Inc., signal the company is in great financial distress.

Multiple IPH documents published on the Web site of the Singapore Stock Exchange (SSE) show its mounting losses and debt liabilities far outweigh its assets. The company is battling a $20 million lawsuit filed against it last December by a group of Shakey's franchisees (see related story Franchisees of Shakey's pizza chain sue corporation for $20 million). And the tax authority of Singapore claims IPH owes it millions, which, according to independent auditors' reports (see related story Audit of Inno-Pacific, Shakey's parent, reveals financial strain), could end the company as a going concern, should it be forced to pay.

For years Shakey's franchisees have complained IPH has used their royalty payments to patch up its own financial and business mistakes instead of reinvesting the money into the Shakey's system. The financial clouds gathering above IPH, said franchisee Chuck Wilburn, confirms the accusations of IPH's fiscal misdeeds.

"They need to reimburse us for a long history of damages inflicted upon us," said Wilburn, who runs one store in Redlands, Calif. "We need to be made whole by a judgment to reimburse us for the loss of our investment in our businesses, and the devaluation of our assets due to their poor management."

Attempts to contact Chin-Yong Wong, interim chairman and chief operating officer for Shakey's Inc., and an IPH director, weren't acknowledged.

Chin-Yong is the latest in a string of officials appointed to run Shakey's since IPH bought it in 1989. Shakey's last president, Sean Flynn, resigned last June, following the settlement of a protracted lawsuit involving two franchisees (see related story Flynn, president of Shakey's Pizza, resigns).

Mounting losses

Multiple SSE reports detail an ongoing string of losses suffered by IPH. According to one report, of the 28 companies IPH lists as its own, 17 are dormant and only one, Shakey's Inc., produces revenue.

In 2002, Shakey's generated $3.31 million in royalties, down 24 percent from 2001, when the system generated $4.25 million.

Nine restaurants left the Shakey's system in 2002, while it opened its first new franchise store in eight years. An additional franchise store opened in March, while another closed in June, for a total of 63 in operation.

In January 2002, IPH sold Shakey's International Ltd. (SIL), a licensing company for hundreds of Shakey's outlets spread throughout the Far East, for $728,000. According to an SSE filing, to that point, IPH had lost $15.7 million on the venture, and expected to lose another $350,000 annually if it didn't sell SIL.

In December of 2002, IPH took a $4.6 million dollar loss on the sale of development property owned by its Sawyer

Falls subsidiary in Washington state.

All told, according to an April 22 independent auditor's report filed with the SSE, IPH lost $8.5 million in 2002, and $6.8 million in 2001. Its total assets are valued at less than $1 million.

In the same report, IPH hinted that it could lose its contest with the Singapore Comptroller of Income (the country's tax authority) over unpaid tax on revenues for 1988, '90 and '97. The report stated that about $4.1 million has been allocated to an "Other Debtors" category on the company's profit and loss statement "until the final determination of the Company's tax liability."

Taking stock ... and selling it

On May 30, 2002, IPH said it wanted to generate funds for its Singapore operations and for investment into Shakey's Inc., through the sale of nearly 35 million shares of steeply discounted (costing less than penny a share) stock for sale on the SSE.

This year, on May 30, the company placed another 69.5 million shares of stock up for discounted sale.

The company hasn't disclosed the success of either sale.

On the other hand, at least two IPH directors sold nearly all their company stock. On March 14, director Tay Yong Hua sold 9 million shares of IPH stock for $131,000 (he retains 7,000 shares), and from May 28 to June 5, director Quek Chek Lan sold all of his 4.4 million shares of IPH stock in four separate transactions for $97,234. Both men remain directors of the company.

As reported by PizzaMarketplace last year, the 2002 stock sale was expected to raise about $1.2 million -- $385,000 of which IPH said it earmarked for Shakey's (see related story Inno-Pacific earmarks possible $385k for Shakey's).

John McNulty, a one-store El Monte, Calif., franchisee, and president of the Shakey's Franchised Dealers Association, said recently that he's seen no sign of reinvestment in the U.S. system, despite Shakey's promises it would. He also said that such large sales by IPH directors are not only unsettling, but bear proof IPH is in grave trouble.

"When two major shareholders trade out such huge positions, that's not good," said McNulty. "They continue to do what they've done since they bought the company, and that's take our royalties back to Singapore."

Fleeing of the guard

According to multiple franchisees, though Chin-Yong Wong is in charge of Shakey's, his U.S. visits are infrequent, and his liaison in Garden Grove, Sonia Barajas-Najera, rarely returns franchisee's calls or

"They're obviously not happy with the way things turned out, and so their answer is to sue their lawyers. It all really baffles the mind."

John McNulty
Shakey's franchisee

responds to written correspondence.

Additionally, both Wilburn and McNulty said continual layoffs of Shakey's corporate support staff have left a skeleton crew at its headquarters (calls to the office are answered only by a message machine), and field support for operators is virtually non-existent.

"The company continues to do nothing a franchisor should do," said Wilburn, "but they sure continue cashing the (royalty) checks."

The loss-of-leadership situation is similar in Singapore. Last July, director Lim Teck Hui resigned form IPH's board. And on Feb. 11, 2003, Phang Ian Cher, IPH's executive director and CEO, resigned. No reason was given for Phang's departure and no one has assumed his position, though he remains an IPH non-executive director.

Lawsuits outstanding

In a Statement of Material Facts filed June 2 by IPH with the SSE, the company noted a $20 million lawsuit filed against Shakey's last December by a group of its franchisees. The complaint accuses Shakey's of breach of contract, breach of the covenant of good faith and fair dealing, fraud and negligent misrepresentation.

On April 16, Shakey's filed a demurrer in hopes the Superior Court of the State of California would dismiss the complaint. According to IPH's portrayal of the event in its Statement of Material Facts, the presiding judge admitted the complaint, and the franchisee group was forced to re-file its complaint.

Wilburn, however, said IPH's phrasing in the document doesn't reflect what really happened.

"That's just them putting their spin on it," said Wilburn. "The only things that were changed were some technicalities, like the spelling of some names. But we prevailed in every area; the entire complaint was accepted after we re-filed."

The next phase, Wilburn said, is a state-mandated mediation hearing, in which parties are encouraged to settle the case without a trial. Wilburn vowed that won't happen.

"We are steadfast and determined to see this through to a jury trial," he said. "This won't wind up in a settlement."

Interestingly, Shakey's Inc. is filing a suit of its own, charging Chicago-based law firm Piper Marbury with malpractice. The law firm represented Shakey's in a suit filed against it in 2001 by two Shakey's franchisees, McNulty, and Mick Clark, who operates five stores.

The suit ended in a sealed settlement last June.

"They're obviously not happy with the way things turned out, and so their answer is to sue their lawyers," McNulty said. "It all really baffles the mind."

"Keep moving forward"

Despite Shakey's alleged dereliction of duties, Wilburn said the remaining franchisees are committed "to keep moving forward regardless. These are our businesses, our livelihoods. We have no choice."

A recent step taken by the franchisees to regain some control was to resume its governance of Shakey's annual franchisee convention, where operators gather to share best practices. The event also generated funding for the Shakey's Franchised Dealers Association (SFDA).

According to Wilburn, the SFDA used to run the event, but several years ago, a former Shakey's president convinced the SFDA to let the company handle it, and promised to pay the SFDA $20,000 a year in return.

The last franchisee convention the company held, however, was on Sept. 11, 2001, and it hasn't paid the SFDA the agreed-upon stipend.

"Running the convention was a way we used to fund (the SFDA)," Wilburn said, adding that a date for the next event isn't set. "And they say they're not going to pay us because we've acted badly, meaning the lawsuits that have been filed.

"Legally though, not every franchisee has been involved in the lawsuits, which makes (Shakey's) in violation of our contract."


Topics: Operations Management , Shakey's


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