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Watch List: Distressed Franchisors Struggling with Insolvency

Below is a list of franchisors that have either stated that they are considering filing for bankruptcy or that we estimate are in such a weakened position that we are paying especial attention to their solvency. To include a company on the Watchlist, please include a link to a press release that indicates their weakened state or a statement by the company that they are considering bankruptcy.

  1. Blockbuster; about 60,000 employees; stock down 57%. Newman writes, "The video-rental chain has burned cash while trying to figure out how to maximize fees without alienating customers. Its operating income has started to improve just as consumers are cutting back, even on movies. Video stores in general are under pressure as they compete with cable and Internet operators offering the same titles. A key test of Blockbuster’s viability will come when two credit lines expire in August. One possible outcome, according to Valueline, is that investors take the company private and then go public again when market conditions are better."

  2. COSI - This chain expanded rapidly for revenue despite sub-par profitability. in troubled economic times, it is now paying the price. Ann Northrop, CFA, reports on March 12, 2009, "Years of operating losses have drained Cosi's cash reserves, casting substantial doubt on its ability to survive the worst recession in decades. The bakery-café chain has generated negative free cash flow every year since going public in 2002, leaving few resources to fall back on."

  3. Cuppy's Coffee / Java Jo'z - a distressed, young start-up franchise system of 200 or fewer units faced with controversy, shuffling leadership and companies, disputes over non-returned franchise buyer deposits, the lay off of most of the head office staff, a buyout, a move of the head office from Florida to Alabama, a coffee war that the start-up franchisor heads into, lawsuits for lack of payments, a consumer-base pulling away from premium priced coffee, a brand website that has been pulled down. Need we say more?

  4. Chrysler. (Privately owned; about 55,000 employees). Chief business correspondent for US News, Rick Newman, writes in Seeking Alpha, a financial news site, "It’s never a good sign when management insists the company is not going out of business," which is what CEO Bob Nardelli has been doing in February 2009. He adds, "The company is quickly burning through $4 billion in government bailout money, and with car sales down 40 percent from recent peaks, Chrysler may be the weakling that can’t cut it in tough times."

  5. Dollar Thrifty Automotive Group; about 7,000 employees; stock down 95%).  Newman writes, "Dollar Thrifty is also closely tied to Chrysler, which supplies 80 percent of its fleet. Moody’s predicts that if Chrysler declares Chapter 11, Dollar Thrifty would suffer deeply as well."

  6. El Pollo Loco; Moody's Investors Service published a list of its riskiest 15 percent of all companies it tracks called the Bottom Rung on March 9, 2009 that had El Pollo Loco among those it considers likely to default on its loans. That doesn't necessarily mean bankruptcy for the first default but it doesn't look good.

  7. Jamba Juice - Like COSI, Jamba is also suffereing the effects of uncontrolled growth that has led to under-performing franchisees being opened. On March 12, Ann Northrop, CFA, observes, "Although management has formulated a turnaround plan that includes innovating new menu offerings, it would take a long time for new day-parts, such as breakfast or lunch, to become meaningful contributors... and beverage sales alone cannot support the stores. A costly $25 million cash infusion should buy it some time, but not much, as consumers cut spending and cash flow falls."

  8. Krispy Kreme; about 4,000 employees; stock down 50%. Newsman again comments, "The donuts might be good, but Krispy Kreme overestimated Americans' appetite - and that's saying something. This chain overexpanded during the donut heyday of the 1990s - taking on a lot of debt - and now requires high volumes to meet expenses and interest payments. The company has cut costs and closed underperforming stores, but still hasn't earned an operating profit in three years. And now that consumers are cutting back on everything, such improvements may fail to offset top-line declines, leading Krispy Kreme to seek some kind of relief from lenders over the next year." The good news for the firm is that in March 2009, the SEC let Krispy Kreme off the hook telling them to not cook the books again.

  9. Mrs. Fields Brands Inc.- Mrs. Fields brands, franchisor to TCBY and Mrs. Fields Cookies has been losing money for years. The firm made arrangements to forgive large parts of their bond payment to get them out of a couple of monthis in bankruptcy court, but the company is weak heading into tough economic times in 2009.

  10. NexCen Brands Inc. - NexCen bit off more than it could chew when it acquired a mountain of debt in the beginning of 2008 to purchase yummy The Great American Cookie brand from Mrs. Fields - along with the earlier purchase of Pretzel Time and Pretzelmaker. Out went the old CEO Robert W. D'Loren and in came Kenneth Hall, who managed the Herculean feat of lowering debt interest rates, selling brands for cash, lowering the conglomerate's massive debt obligations and merging franchise chains Pretzel Time and Pretzelmaker. The firm did this without the help of any bankruptcy court! Hats off to Mr. Hall. But like Mrs. Fields, the franchise conglomerate is weak as the economy heads into tough times. On Feb 13, 2009, NexCen Brands stocks were delisted by NASDAQ.

  11. Pizzeria Uno - With some 76 franchised pizzarias and 118 company-owned units, the franchisor announced that it is likely to miss its bond payment on August 14, 2008. The private equity-backed company anticipates a 30-day grace period before needing to file for bankruptcy protection.

  12. Westaff - Westaff staffing services is working hard to cut costs and negotiate with its lenders to forgive its debts. Its bank has said they will temporarily but it may not be so charitable in the long term.

To readers and members: Please look at our list of franchisors. The community needs your help. If you see a firm that has announced it is looking into bankruptcy or unable to pay creditors, please add their name in your comment along with a link to a credible site that reports it. Otherwise, it will not be added.

Comments that speculate or quote rumors will be moved into the appropriate forum discussion area.

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franchises in distress


economic indicator

The global economic crisis has prompted a number of franchisors to implement more stringent risk identification and reduction schemes. Franchisors must be vigilant to ensure that their franchisees experiencing financial uncertainty are identified early and dealt with appropriately. JN0-350 braindumps The collapse of a franchisee may affect the public perception of strength in a franchise system and in extreme circumstances can affect the franchisors market position and financial stability. Closely monitoring franchisees (particularly multi-unit operators) becomes more important where the affect of franchisee collapse on a franchise system is significant. In most circumstances the collapse of a franchisee will require the franchisor to work together with the franchisee and other stakeholders (particularly the landlord and the franchisee's bank, E20-361 braindumps which often has a charge over the fitout) to reach a commercial resolution of the matter. This can result in the franchised business being sold as a going concern to enable the stakeholders and franchisor to realise as much value as possible from the sale to minimise the outstanding debt. The Franchising Code of Conduct (the Code) allows franchisors to immediately terminate (upon giving notice in accordance with the Code) a franchise agreement if a franchisee becomes bankrupt, insolvent, under administration or under an externally administered body corporate. Despite this provision, 000-433 braindumps nsolvency can be difficult to substantiate in practice which leads franchisors to terminate on other grounds (such as abandonment).

Re: Distressed Franchisors

Add Westaff to Watch List
Submitted by Dan Maizner on Sun, 2008/08/10 - 12:33.


AUGUST 05, 2008

WALNUT CREEK, Calif.--(BUSINESS WIRE)--Westaff, Inc. (NASDAQ:WSTF), a leading provider of staffing services, announced today that it has entered into a Forbearance Agreement with U.S. Bank National Association and Wells Fargo Bank, National Association, effective July 31, 2008. This agreement relates to bank covenant defaults which occurred on April 19, 2008 under the Financing Agreement dated February 14, 2008. Under the terms of this Forbearance Agreement, the banks have agreed to forebear from exercising any remedies that they may have against the Company as a result of such events of default through August 26, 2008.

"We are actively working with our banks to develop a longer-term agreement and we are confident that we will be able to complete a long-term solution by the expiration of August 26, 2008. Additionally, we are continuing to streamline our costs, build our leadership team and focus on growth and improved financial performance," commented Westaff CEO and Chairman Michael T. Willis.

"Westaff continues to focus on delivering quality, innovative services to our client companies and positive growth to our investors," added Mr. Willis. "I am confident that under this agreement we have the working capital resources we need to deliver on our long- and short-term objectives."
About Westaff

Westaff provides staffing services and employment opportunities for businesses in global markets. Westaff annually employs in excess of 125,000 people and services more than 20,000 client accounts from 204 offices located throughout the United States, Australia and New Zealand. For more information, please visit the company Web site at

This press release contains forward-looking statements within the meaning of the U.S. securities laws. Forward-looking statements in this release are generally identified by words such as "expects," "believes," "will," "should" and similar expressions that are intended to identify forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. All forward-looking statements are qualified in their entirety by this cautionary statement. Forward-looking statements contained herein include, but are not limited to, statements regarding (i) Westaff's expectations regarding the company's growth prospects; (ii) Westaff's expectations that the banks will enter into a longer-term agreement; (iii) Westaff's expectation that it will be able to complete a long-term solution; (iv) that Westaff continues to streamline its costs, build its leadership team and focus on growth and improved financial performance; and (v) Westaff's belief that it has the working capital resources needed to deliver on its long and short-term objectives. The forward-looking statements contained herein involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Many of these risks and uncertainties cannot be controlled by the Company. These risks and uncertainties include, but are not limited to: an intensely priced competitive market; Westaff's ability to continue to obtain a forbearance or that such forbearance would be on terms acceptable to Westaff; our significant working capital needs and our ability to borrow to meet those needs; our ability to borrow under our credit facilities and our compliance with their debt covenants; variability of the amount of collateral that we are required to maintain to support our workers' compensation obligation; the sufficiency of our workers' compensation claims reserve; variability of employee-related costs, including workers' compensation liabilities; possible adverse effects of fluctuations in the general economy; our ability to collect on our accounts receivable; risks related to franchise agent operations; risks related to international operations and fluctuating exchange rates; reliance on executive management and key personnel; our ability to attract and retain the services of qualified temporary personnel; the ability of our customers to terminate our service agreement on short notice; variability of the cost of unemployment insurance for our temporary employees; any difficulty with our information technology system; government regulation; potential exposure to employment-related claims; the volatility of the Company's stock price; increased regulatory compliance costs; and litigation and other claims. Additional information concerning the risks and uncertainties listed above, and other factors you may wish to consider, is contained in the Company's filings with the Securities and Exchange Commission, including the Company's most recent Annual Report on Form 10-K for the year ended November 3, 2007 and Quarterly Report on Form 10-Q for the quarterly period ended April 19, 2008.

Forward-looking statements are based on the beliefs and assumptions of the Company's management and on currently available information. The Company undertakes no responsibility to publicly update or revise any forward-looking statement except as required by applicable laws and regulations.

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