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."