New owner stokes Italian Oven; investors sift ashes

Nation's Restaurant News, Feb 24, 1997 by Mark Hamstra

LATROBE, Pa. -- With a slate of more upscale menu items in the wings and a search for a new prototype under way, the Minneapolis-based investment firm that acquired The Italian Oven chain from bankruptcy has begun resuscitating an effort to position the value-driven concept more squarely in the casual-dining segment.

To launch the turnaround attempt, The Whitecliff Group not only tapped a Pittsburgh public-relations agency to try to erase the public's negative perceptions that accrued during the bankruptcy but also is funding the repositioning effort. In addition to bringing in a marketing vice president -- Pizza Hut veteran Ralph DePalma -- Whitecliff also has elevated chief operating officer Mike Understein to the additional role of president to run day-to-day operations of the chain, which, after the sale, comprises 13 company-owned and 69 franchised restaurants.

Understein, who spent five years as vice president of operations at Applebee's Neighborhood Grill & Bar, was brought on as senior vice president of operations just before The Italian Oven went public in late 1995. "Our primary focus right now is on the marketing end and providing support to our franchisees," he said, adding that the company will attempt to grow through franchising but may open additional company restaurants.

"The Italian Oven represents for us an entry into the franchise business" said William Brown, managing director of Whitecliff, a leveraged-buyout specialist whose other holdings include hotels. He added that some of The Italian Oven's franchisees invested "a significant amount" in the buyout of the chain. That says a lot about the viability of the concept going forward," he said.

The first phase of the turn-around effort involves the out of a new menu featuring larger-portion sizes, a central menu panel labeled "pasta your way" and separate sections for seafood, chicken and house specialties. New items include Sicilian steak, broiled salmon fillet, Italian french fries with rosemary and Italian chicken wings. Franchisees will be able to select from several approved entries to create regional menu variations.

Whitecliff also tapped a consulting firm to design a new prototype that would create a more traditional casual-dining ambience, possibly including a full-service bar. A spokesman for the firm said a new prototype is expected to open this year.

"We're not abandoning the concept," said DePalma, who had observed the rapid expansion of The Italian Oven while he was a director of marketing for a Pizza Hut franchisee in western Pennsylvania. "The menu will still focus on value."

Meanwhile creditors and investors will have to wait to see what their returns will be from the chain's former parent, The Italian Oven Inc., which filed bankruptcy in October after years of losses. The company, which has since been renamed Store Liquidation Co. Inc., will use the $3.5 million proceeds from the sale of its assets to repay creditors when it files a reorganization plan, expected by the end of March. The 10 restaurants not included in the sale, none of which is operating currently, are four in the Columbus, Ohio, market; three in western Pennsylvania; one in North Carolina and two in Kansas City, Mo. Proceeds from the sales of those restaurants also will be used to repay creditors. Unsecured creditors are owed about $5.4 million, according to the bankruptcy filing. In addition, Whitecliff will pay 10 percent of development fees from the sale of franchises during the next two years as part of its acquisition agreement.

The company's stock was dropped by Nasdaq and will be worth only what investors can reap from lawsuits, attorneys said. Three class-action shareholder suits filed after the chain's 1995 initial public offering are being consolidated, according to attorney Jeffrey Letwin of Doepkin, Keevican and Weis, which represents The Italian Oven. Two additional suits -- filed by investors who acquired a stake in the chain at $10 to $20 per share before its initial public offering at $8 per share -- also are pending.

James Frye, the founder and former chief executive who was ousted last year by an interim management company, also is named in the suits. He had a personal debt to the company for a cash advance of $435,000, of which $103,000 was repaid.

Franchisees, who operate 69 of the chain's restaurants throughout the eastern third of the United States, are eager to put the distressed financial history of their former parent behind them and are welcoming the initiatives of the new parent company, operating as Italian Oven LLC. Many franchisees report that sales dropped while Italian Oven Inc.'s problems were disgorged in local newspapers throughout the company's operating area.

"When the public offering came out at $8 and dropped to a buck, the newspaper put it on the front page of the Sunday business section and used it as the quintessential example of how a stock can go downhill," said Jim Crivits, president of Oven Restaurants of Kentucky Inc., which franchises six units in the Louisville area and in Bowling Green.