Monterey Pasta denies TV report of SEC probe

Monterey Pasta denies TV report of SEC probe

Bill Carlino

DANVILLE, Calif. – Monterey Pasta Co. is reacting angrily to a television news report that the quick-serve gourmet pasta operator and retailer is the subject of an investigation by the Securities and Exchange Commission.

“I’m unaware of any investigation, and I or anybody in the company certainly has never been contacted about it,” said Monterey Pasta Co. chairman Lance Mortensen about the regulatory inquiry. “There is no basis for this report.”

CNBC Network correspondent Dan Dorfman told viewers recently that the SEC was investigating Monterey Pasta for possibly misrepresenting itself to shareholders in statements and press releases.

An SEC official in Washington would neither confirm nor deny the existence of an ongoing investigation.

In an interview with Nation’s Restaurant News, Dorfman stood by his on-air statements, adding, “I have determined conclusively there is an SEC probe under way against Monterey Pasta and its chairman, Lance Mortensen. I have not been able to determine specifically what the investigation centers on.”

Although the nature of the probe has not been disclosed, an article appearing last month in the Contra Costa Times of Walnut Creek, Calif., quoted Robert Singletary, a regulator from the usually tight-lipped SEC, voicing concerns of possible legal violations at Monterey Pasta. Singletary’s comments were directed toward reports of Monterey’s former investor relations officer Kevin Skislocick’s allegedly leaking news of a potential co-branding partnership with Pizza Hut, which is owned by PepsiCo Inc.

Less than one month later, Monterey Pasta entered into an agreement to co-brand its quick-serve pasta concept with four to six of Pizza Hut’s “red roof” restaurants and Pizza Hut delivery units in Northern California.

But Skislock, whose departure coincided with Monterey’s year-end earnings results in which the company posted fourth-quarter and year-end losses of $2.3 million and $3 million, respectively, said he was originally slated to leave the chain in December and dismissed any possible connection between himself and an SEC probe.

“I can tell you in no uncertain terms that my leaving Monterey Pasta had nothing to do whatsoever with any alleged investigation,” Skislock said. “I had planned to open a business of my own, and my original target date to leave was December. But I agreed to stay on longer. I am leaving at a time when we’ve made some positive announcements.”

The tenuous atmosphere at the 40-unit operator offers stark contrast to the recent portrait of a rising growth company, which over the last month sealed a pair of large area development pacts and added Taco Bell veteran Timothy Ryan to its management in addition to the branding test with Pizza Hut.

“There was a lot of speculation about a deal with PepsiCo,” Mortensen said. “But nobody in this company said anything to anybody or gave out any information.”

Monterey Pasta sought to add foodservice experience to a management staff short on industry experience with the addition of Ryan, who had headed both marketing and full-service dining for Irvine, Calif.-based Taco Bell, a PepsiCo division. He was initially brought aboard as a consultant but was later appointed acting chief operating officer.

“Lance approached me to help facilitate with the Pizza Hut test,” Ryan explained. “He was concerned that his company would not be able to support the test. At the time I was not aware that Monterey and Pizza Hut had been in discussions. But the test gives them an advantage against competitors, such as Little Caesars.”

“We spent 1994 building the infrastructure,” Mortensen added. “A year ago we had 65 employees; now we have 550. We have no debt. I feel the progress we made is very positive. But anybody with a young and growing company isn’t going to make a perfect decision every time.”

Monterey Pasta earned $61,000 in the fourth quarter of 1993 and $172,000 for the year. The chain operates 40 quick-serve units in addition to distributing its proprietary line of pastas and sauces to more than 1,300 grocery and discount club stores.

Skislock is a former analyst who tracked Monterey Pasta for Minneapolis-based Dain Bosworth, a firm once slated to co-underwrite the company in a secondary offering, which was subsequently terminated.

A press release issued by Monterey Pasta at the time cited “adverse market conditions” as the reason for its retreat from the equity offering.

The $7.5 million secondary offering was eventually underwritten by Los Angeles-based Seidler Cos.

Mortensen defended the chain’s poor earnings, attributing much of the red ink to a $507,000 reversal of a tax benefit and weather-related opening delays of an expansion to its manufacturing plant in Salinas, Calif.

But as late as October, Mortensen reportedly told securities analysts attending a conference in New York that he was “comfortable” with fourth-quarter earnings projections of 5 cents per share.

“We expected a better October and November,” he said. “But our institutional holders seem to be happy with the direction we’re going.”

He declined to project if Monterey Pasta Co. would be profitable in 1995.

The tandem of its earnings results and the alleged SEC probe sent the stock tumbling nearly 19 percent, to $6. In mid-March, the stock was trading in the $6.25 range vs. a 52-week high of $19.25.

Founded in 1987 as a supplier of fresh pastas and sauces through retail distribution channels, Monterey Pasta added a series of mall-based quick-serve units in 1993 before its $14.5 million initial public offering in December of that year.

During Monterey Pasta’s first six weeks as a public entity, its share price jumped about 125 percent, ranking it fourth among the best performing IPOs over the prior six months, even higher on a percentage basis than Boston Chicken, the restaurant industry’s high-flyer of that period.

Before entering the restaurant industry, Mortensen, 42, operated aquatic-manufacturing and retail businesses.

In 1981, Aquatic Fiberglass, the manufacturing subsidiary of a still-intact holding company called Aquatic Innovations, filed for Chapter 7 bankruptcy.

However, a July 1994 Dain Bosworth research report written by Skislock shortly before coming aboard Monterey Pasta, said Mortensen sold the business “at a seven-figure profit.”

Mortensen explained the retail portion of the business was the cash cow, and Skislock’s research report failed to distinguish between the two.

Mortensen later became a quasi-celebrity in the Bay Area by building “turnkey” fully furnished mansions.

However, his company Morweg Development became embroiled in lawsuits filed by former NFL coach-turned-commentator John Madden, who purchased a Morweg home, and several other owners, who alleged Mortensen’s homes were defective. The cases were eventually settled out of court.

“At that time, I was one of the most successful homebuilders in the country,” Mortensen explained. “My homes won awards, and I appeared on the show 20/20. You can’t show me one homebuilder in this country who hasn’t been sued.”

Mortensen was initially a Monterey Pasta Co. investor and director before assuming the chief executive post in 1993.

In February, Monterey Pasta signed a 75-unit development pact with MPC Rocky Mountains, a Denver-based licensee, to erect units throughout Colorado, Arizona, New Mexico and Utah and a similar 50-unit pact with a Dallas-based consortium.

“We’re going to run a parallel course in 1995,” Mortensen pointed out. “We’ll stick to our development schedule and also our co-branding.”

Originally slated to open 80 company-run stores in 1995, Monterey Pasta currently is braking the number of corporate store openings in light of its earnings report and is siting them in other venues, such as strip centers, in lieu of the chain’s tradition of in-line mall locations.

But a Wall Street source who spoke on the condition of anonymity said the strategic change in venue was more a factor of poor head-to-head performance against entrenched Italian competitors in malls like Sbarro than any visionary shift in strategy.

“They can’t compete on a price-to-value relationship with competitors in the malls,” said the source.

Monterey’s check average is about $5, about $1 higher than Sbarro’s. But Mortensen attributes the disparity to the fact that “Sbarro is primarily a pizza restaurant, whereas Monterey is a pasta specialist.”

Mortensen declined to disclose Monterey’s per-unit sales average, claiming not enough “mature units.” But in an article published in the Sept. 4, 1994, issue of Nation’s Restaurant News, Mortensen quoted unit volumes to run between $300,000 and $600,000. However, some analysts say the figure is closer to $250,000.

“They’re going to have a hard time in strip centers because quick-service pasta and sauces are more suited to the convenience of shopping malls,” the insider observed. “It’s not something people will drive out of their way to get.”

Mortensen, however, remains confident.

“The one strip center we have open currently does 50 percent of its business in takeout. When we open more and begin our co-branding with the Pizza Hut delivery units, we’ll have a better idea.”

COPYRIGHT 1995 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

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