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Bones of Contention : Pioneer Looks for Buyer to Take Out Whole Company as Sales Decline, Franchisees Accuse Founder of Fraud and Regulators Step In

August 28, 1987|NANCY YOSHIHARA | Times Staff Writer

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.

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