Dean Vlahos faces a double whammy -- the economy and his tight association with the jailed Tom Petters -- as he scales back expansion of his restaurant chain.
A year ago, prospects burned bright for Redstone American Grill and its founder, Dean Vlahos.
Vlahos finally had triumphed after a six-month courtship to lure David Goronkin away from Famous Dave's of America. And he'd just raised $26.5 million to help expand the concept that serves truffled root vegetables and $100 bottles of cabernet.
Vlahos, who made his name and fortune in the local restaurant industry founding the sports bar Champps in the 1990s, had his sights set on growing from five restaurants in three states to hundreds nationwide.
Now both the man and his dream are back to the drawing board.
Vlahos and his estranged wife, Michelle, are two of the biggest creditors in the Tom Petters fraud case, owed nearly $16 million. They recently put their homes up for sale, seeking a combined $33.6 million for their mansion in Deephaven, Minn., and two others in Palm Beach, Fla.
Meanwhile a main source of Redstone's expansion fund pulled $10 million of its promised loan. The restaurant chain has cut expansion plans, and its new star CEO, Goronkin, resigned Oct. 10 after less than a year on the job.
Both Vlahos, 57, and Goronkin, 45, declined to comment for this report.
"There's no doubt that Dean has taken one on the chin," said Redstone's attorney, Bill Mower. He said Vlahos is "a big victim" in the Petters case.
Indeed, Petters was a trusted friend to Vlahos. Vlahos invested heavily in Petters. Petters owned 16 percent of Redstone.
Petters remains in jail without bond on charges of running a Ponzi scheme that authorities say bilked investors of more than $3 billion. Petters denies the charges, though four alleged coconspirators have pleaded guilty.
The past year has been a big comedown for Vlahos, a man some describe as a restaurant savant and who once bragged to a reporter that his personal financial goal was to have a net worth of $100 million.
A native of New Jersey, Vlahos grew up in diners and restaurants. He moved to Minnesota in the late 1970s at the invitation of a Minneapolis nightclub owner to whom he had sold a yacht in Florida. His first gig was in a college bar in St. Cloud. He later ran promotions at the Cabooze in Minneapolis and in the 1980s created Champps, starting in St. Paul.
When Redstone opened in Minnetonka in 1999, Vlahos had an immediate hit. The restaurant, with leather and stone decor, had hourlong weekend waits from the beginning for its pricey meals. By the time he hired Goronkin last December, Goronkin had taken Famous Dave's from 80 restaurants to nearly 160. At the time, Vlahos said Goronkin "has the talents to take this thing from six to 100 locations."
The money was in place, with $10 million from existing shareholders, and a $16.5 million loan from GE Capital Corp., the Fairfield, Conn.-based financial services unit of General Electric Co. As late as March, Goronkin was talking about Redstone easily being a "200- to 300-unit brand."
But forced to downsize amid the credit crunch, GE Capital this fall pulled back on restaurant lending and put $10 million of the Redstone loan on hold, Mower said. That happened before the Petters investigation was made public in late September, when authorities raided Petters' home and headquarters.
The Redstone developments just happened to coincide with the Petters investigation, said Mower and another person with close knowledge of Redstone's operations. Goronkin left, they said, only because of Redstone's truncated expansion plans.
"David didn't sign up to be the head of a chain of five," the person said.
Several Redstone directors declined to comment for this report, including Craig Oberlander, a major Redstone investor, Allan Hickok, who heads the restaurant industry group in the Minneapolis office of Houlihan Lokey Howard & Zukin and veteran restaurant investor Walter S. Henrion of Dallas.
A reassuring letter
Vlahos recently had to reassure Redstone's 80-some shareholders that Petters' ownership wouldn't trouble its operations.
"Mr. Petters has never had any involvement in the affairs of Redstone other than that of a shareholder," Vlahos said in a Nov. 20 letter to shareholders obtained by the Star Tribune.
Vlahos noted that some people have questioned the status of the shares of Redstone stock owned by Petters, as well as his history with the company. He explained that Petters had pledged his Redstone stock as collateral for a bank loan in 2007 and to Edgebrook Inc., a Wayzata company owned by Oberlander. Both loans "are in good standing," Vlahos wrote.
He said that Petters gave him and Oberlander voting rights on the 1.3 million shares of common stock that Petters holds in Redstone, and that Petters has no voting control over his 833,333 shares of preferred stock.
Mower downplayed the impact of Goronkin's abrupt departure, saying Redstone simply pulled back from plans to add four to six restaurants a year.
Although Redstone, based in Wayzata, is still doing better than many restaurants in its category, it has also been hurt as even well-heeled diners clutch their wallets in the current recession. Redstone had sales of $33 million in 2007 and $24.6 million through the first nine months of this year. Redstone's same-store sales were down 2.2 percent in the third quarter compared with last year, and are down 3.6 percent year to date, according to the company's latest letter to shareholders.
Nicole Miller Regan, an analyst for Piper Jaffray who follows the restaurant sector, said that the group of upscale casual restaurants she tracks -- such as Cheesecake Restaurant Inc. and California Pizza Kitchen -- sank anywhere from 5 to 10 percent in October from a year ago. Go one notch higher to Morton's Restaurant Group and McCormick & Schmick's Seafood Restaurants and same-store sales dropped 10 to 15 percent, she said.
Redstone's numbers look relatively good in this economy, said Phil Roberts, head of Edina-based Parasole Restaurant Holdings, which includes Salut Bar Americain, Chino Latino, and Filio. Roberts said his restaurants have kept traffic steady by offering nightly dinner specials.
"It's a bloodbath out there. It's been trending down the last eight or nine months and then two months ago everything just fell off a cliff," Roberts said. "In times like this, you see people trading down from high-end restaurants."
Mower, however, insisted that the Redstone restaurant chain remains strong. It never counted on Vlahos for its financing, Mower said, adding that Petters' legal problems and debts to Vlahos don't significantly affect the chain.
Mower said the sixth restaurant, in Chevy Chase, Md., is on schedule and Redstone could open possibly a seventh in an undisclosed location if the chain's revenue improves.
"We have enough financing to do one to two more," he said. "We're actively pursuing those right now. They could build a lot more restaurants if they could get the money."
David Phelps • 612-673-7269 Jennifer Bjorhus 612-673-4683