2002 Boloco Annual Report
NOTE: Boloco was known as Under Wraps in 1997, The Wrap from 1998-2004 and Boloco thereafter. Clearly we are comfortable with change!
To Our Stockholders,
We are pleased to present you with the Fiscal 2002 Annual Report for Stellar Restaurant Group, Inc. (“SRG”). SRG’s fiscal year consisted of the 52-week period ending September 29, 2002.
Despite an economic climate that continued to litter the business world with hundreds of struggling and failed companies, 2002 was another very successful year for SRG. In fact, by most every measure, it was our most successful by great margins.
Financial Performance
Make it stand out
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Gross sales rose to $6.05 million from $5.68 million a year earlier. While this is notable, more important is the fact that same-store sales, our most important indicator, rose by over 8%. Same-store sales measure how well restaurants open 12 months or more fared relative to the prior year. As we had no new store openings during all but two weeks of 2001 and all of 2002, the great majority of our company sales growth this past year came in the form of samestore sales gains.
Company EBITDA, an imperfect but often used measure of profitability and company value, rose by 34% from 430K to 576K. For clarity, EBITDA represents earnings before interest, taxes, depreciation and amortization.
Net income, which includes everything I excluded above, rose to $246K for 2002, up from $34K in 2001 which most of you recall was our first profitable year. NI represented 4.2% of net sales in 2002.
Turning to the balance sheet, we made major improvements here as well. In addition to converting $805K of shareholder debt to preferred stock, we paid down an additional $400K of debt and obligations. Total liabilities were reduced to $375K as of year-end 2002, versus nearly $1.6M at year-end 2001.
Back in Expansion Mode
In 2003, we will be expanding again. Cautiously, of course. Our performance during the last few years allowed us to secure a sizeable Revolving Line of Credit from Fleet Bank in Boston, which, when combined with continuing profits from operations, should allow SRG to open up to three restaurants per year. Not coincidentally, we have three openings planned in2003 – details described later in this report.
It is important to note that our renewed expansion efforts will bring new expenses and obstacles, some of which I can not predict with any real degree of accuracy. I have tried in the past, as do the CEOs and CFOs of other companies, and most of us fail quite consistently. To give you a tad of confidence in my abilities, please recall that the original projections of our last two openings (Northeastern and Newbury in 2000) were surprisingly close to how the stores actually performed. While I hope that such accuracy can be repeated, it obviously can’t be guaranteed. We must hope that daily attention to the details of the business combined with frequent glances at our goals for the future lead to long-term profitability and financial strength.
Future Quarterly and Annual Shareholder Reports
In my continual effort to become more efficient, future quarterly shareholder reports will be posted in a special section of our updated website – www.thewrap.com. From the home page, go to “Corporate”, then to “Shareholder Log-In” and enter your username and password. In order to receive a password, please contact me at pepper@thewrap.com. If I do not hear from you, I will assume you are satisfied with simply receiving an Annual Report, which will continue to be mailed out in paper format, as well as be available on-line.
Annual Meeting
This year’s Annual Meeting, open to all shareholders, will be held on Monday, March 10, 2003 at 20 Park Plaza, 4th Floor, Boston, Massachusetts at 11:00 a.m. The meeting will last approximately 2 hours. While the legal purpose of the meeting will be to “conduct business according to the by-laws of the company”, the true purpose will be for shareholders to ask questions, give feedback, and voice concerns.
Lunch from The Wrap will be provided, and gourmet dessert items from Finale (my officemates) will be available at a substantial discount (I’m trying to get them to provide for free!
I sincerely hope that you will make the effort to attend the meeting. An RSVP to 617-266-2200 x206 or pepper@thewrap.com would be greatly appreciated, however, do not be surprised if you hear from me before then encouraging you to attend! In addition, if you would like to call in, please contact me for the 1-800 conference-call .
PEOPLE FIRST
We continue to believe that the key to any future success lies in finding and keeping excellent people – those who continue to display passion, intelligence, creativity, and a strong work ethic.
At the time of this writing, over 60% of the Company’s eighty employees have been with the company for over one year. In any business, this is an extraordinary feat. Retaining people in an industry that fights to keep minimum wages down, offers few benefits, and provides, on average, a very low quality of life for its workers, is indeed nothing to scoff at.
However, the danger in retaining such a great number of people for years at a time is that staid, complacent workers can potentially claim jobs for which motivated, intelligent outsiders might be better suited. We have seen too many cases of this during the past 12 months – you should rest assured that we are on top of the issue.
The perks of gaining employment at SRG are many, especially as compared to most of our competitors.
- Starting wages at $8/hour. Our goal is to gradually increase starting wages so that by 2004, new employees start at $10/hour. Average wages, including overtime, were approximately $11/hour in 2002.
- Health care insurance.
- Simple IRA investment plan with company match.
- Free language lessons to all employees in both English and Spanish
- Overtime hours and appropriate pay encouraged
- Vacation benefits to all employees
- The opportunity to make a real difference and help design the future of a growing company (We wish more of our employees would actively do this – finding those that want the responsibilities inherent in leadership are harder to come by than we ever imagined. Too many people have been told what to do for too long, and find it difficult to believe that we actually need their ideas and input)
If any of you reading this report have any people who would benefit from working at SRG, by all means send them my way. We are always looking for excellent, driven people with integrity – when I get an opportunity to meet one, I drop everything else.
DISCUSSION ON YOUR INVESTMENT IN SRG
Unfortunately, as you all know very well, there is no public market for SRG shares at this time. I wish this was not the case, mainly because I don’t believe in trapping people’s capital in a place where they may not want it. Indeed, I have re-invested myself multiple times over the past 6 years, during times when the company was in need of capital, but also when various shareholders wanted to sell at a fair price. If you have any worries that management’s interests are not aligned with its shareholders, you shouldn’t. Adam Liebman and I have the great majority of our net worth invested in SRG, and both of us invested further in 2002 by helping others divest.
Speaking of shareholders who want to find liquidity for their SRG investments, when one stops and considers the seven transactions that took place during the past 12 months, there is, in fact, a small market for SRG shares. Of those seven shareholders who desired to sell, we had six other shareholders, including myself, step in and show interest in taking the other side of the transaction.
The average price per share for these transactions was $0.43. To put this figure in perspective for the two groups of shareholders of the original companies merged in 2000, the average “Wrap” shareholder (excluding sweat equity provided to co-founders Liebman and Harris) bought his/her shares at approximately $0.40 per share, and the average “Jera’s” shareholder (excluding sweat equity provided to co-founders Pedulla and Holland) bought his/her shares at approximately $2.08 per share. The good news for the latter group is that the performance of their investments has been no worse than investments made in the NASDAQ in February
2000 (when our merger was completed)!
My point in discussing this in detail is to inform you that there are opportunities for each of you in our “market”, regardless of your original position. If you are one of those who fit into the $2.08/share average, and would like to lower your average cost per share by helping to buy-out other shareholders, please let me know sooner rather than later. Or, as some have done, if you are interested in selling just to offset capital gains taxes in other investments by taking a loss, I understand that reasoning as well. And of course, if you have a lower per share average but would like to own a larger piece of SRG, we welcome that as well.
Our goal is to one day have 100% partner-owners. By partner-owners, I mean active, involved shareholders who want to help SRG grow and become prosperous, and watch their investment grow in value simultaneously.
DISTRIBUTIONS TO SHAREHOLDERS
I have always hoped that distributions to owners would be possible in the form of dividends. While not always a popular form of income, recent proposals by President Bush may soon make dividends a far more attractive means of distributing profits. Dividends, of course, require profits (at least in my opinion). And while we had our fair share of profits in 2002, our growth initiatives in 2003 will most likely bring our Net Income for the year back into negative territory (see projections at end of report).
Nonetheless, I am proposing to the Board that we distribute a small dividend ($10,000 in total) to our shareholders of record as of January 31, 2003. With good performance and a lot of good fortune, this payment of distributions will become an annual habit that grows significantly in size. I, like you, would like to see patience rewarded.
We will vote on these distributions at the Annual Meeting, and assuming it passes, they will be distributed shortly thereafter.
MOVING FORWARD
In last year’s SRG Annual Report, I elaborated on a few strategies for the future. It seems appropriate to do so again, this year, however, adding “New Concepts” to the list of items.
Expansion:
We have been actively seeking new sites for over a year. Our efforts produced a
number of candidates, three of which now have signed leases. Their opening will be
staggered in the coming months, as described below:
1) The Wrap
Children’s Hospital, 283 Longwood Avenue, Boston, MA
Expected opening in late March 2003. This space is 1200 square feet, adjacent to the parking garage across the street from the Main Entrance of Children’s Hospital. Our next door neighbor, under the same structure, is a brand new Starbucks, which will open in late February. Starbucks has been trying to open this location since the mid- 90s.
2) The Wrap
Pearl Street (Financial District), 125 Pearl Street (corner of High), Boston, MA
Expected opening in early April 2003. This space is slightly less than 1000 square feet, and was operating as Café au Lait until January 31, 2003. SRG purchased the assets of Café au Lait, and little work will need to be done to open the store. We await proper permits, which can often be a painful process, though all indications show that we will make reasonable headway with the powers-to-be. We expect Pearl Street to be a solid contributor to SRG’s bottom-line, though its financial performance will most likely be inferior to most of our current locations due to its small size and 5-day per week business.
3) The Wrap
Dartmouth College, 35 South Main Street, Hanover, NH
In late January, we signed a lease on Main Street in Hanover, New Hampshire, the town that is home to my alma maters, Dartmouth College and the Tuck School of Business. In addition, 25% of our shareholders are alums of either Dartmouth or Tuck, so I expect each of you to make special trips to Big Green to support our restaurant. The restaurant will be in the old Peter Christian’s space, which is undergoing major renovations at this very moment. Expected opening is late summer 2003.
We are currently looking for sites in and around Boston to be opened in 2004. Please let us know if you have any information on sites that you believe would be good fits for SRG and The Wrap.
New Concepts:
We have spent a good deal of time evaluating other restaurant concepts that might add value to SRG. At present, we are seriously considering two start-up opportunities in the booming “fast-casual” segment. The main criteria are strong skills and great integrity shown by founders, the market demand for the proposed concept, and a deal structure that puts SRG in a preferred status, protecting it to some extent from total failure, but allowing it to share in the majority of any upside.
Partnerships:
We have been approached by a number of companies, both large and small, looking to work with our brand name and/or management team to open new restaurants all around the country.
In 2002, we lost a deal with McDonald’s that would have allowed us to open 5 locations along the Mass Turnpike. While this was unfortunate, we were honored to be considered for such a significant project. We remain open to working with groups that could enhance our brand and ultimately add value to our Company and to our shareholders.
Franchising:
Although we are approached multiple times each month by interested, and increasingly qualified franchisees, we have not yet invested in the legal documents or systems that would make franchising a possibility. In addition, we want to protect our brand, still fragile in my opinion, as much as possible, and must be careful not to allow a third-party to damage what we have built.
Sale:
We are not actively searching for a buyer of SRG. While we are always open to discussing terms of a sale with potential buyers, we continue to operate our business with long-term success as our top motivator.
COMMENTS ON FISCAL 2003:
As I’ve said for a number of years, as The Wrap continues to mature, it becomes increasingly difficult to realize same-store sales gains. This year, we are again working hard to continue making the most out of our current real estate locations:
• We are testing two new marketing programs to boost traffic. In 2002, we worked with a “grass-roots” marketing company, and though our results were strong in 2002, we were unable to measure how much of this was attributable to the program. We continue to work with our own people and with outside agencies to find the right program for The Wrap.
• With the help of one of our shareholders, Fred Alper, we are working with Kettle Cuisine, based in Chelsea, MA to take our 6-soups-a-day program to the next level. We are testing the product at Water Street between February and April of 2003, and if all goes well, will do a full implementation in the fall of 2003. Their marketing department has taught our team quite a few things about a successful product launch,which will benefit us far more than the gains we hope to realize in soup sales.
Details of the following summary projections for F2003 are attached at the end of this report.
Notable items include:
Same-store sales growth of 0.3%
Due to new competition, we had project negative growth for two locations. Harvard
Square saw the opening of Real Taco less than a block away. Water Street continues to
suffer from the continued slump in the Financial District (no catering, access doors to
key buildings closed, etc.). We expect both trends to reverse themselves by the end of
2003.
COGS rising to 33.1% of sales, versus 32.5% in 2002
Increases in paper costs, and the higher sales of ancillary products (soups, etc.) may
negatively affect our Cost of Goods Sold.
G&A increasing to 13.4% of sales from 11.4%
This year, unlike prior years, we will separate Store-Level General and Administrative
expenses from Overhead G&A. As a result, overhead G&A will seem to drop slightly in
2003, and store-level G&A will seem to increase significantly. While this will put more
pressure on the individual stores’ income statements, it will more accurately reflect the
resources utilized daily to successfully operate each. Overhead G&A will be
approximately 8% of sales, while store-level G&A will be approximately 5.4% of sales.
Breakdowns will follow in 2003 quarterly reports.
Net Income projected to be -70K
While our growth and higher expenses may force us to show a loss in 2003, please be
assured that I have grown allergic to red ink from prior years, and will do my best to see
a 3rd straight year of profitability.
FINAL WORDS
2002 was an excellent year, and one that we always hoped and believed could happen. We’re proud that SRG has been profitable for 2 years in a row. We’re proud that we beat the odds and turned a concept that was considered passé into a healthy, growing business. Most importantly, we still enjoy doing what we do. Like any business, not every day is fun and rewarding, but the idea that we might be making a difference in this challenging industry keeps us motivated. Not to mention the fact that we work on behalf of 20 shareholders who expect us to one day provide a very healthy return on their investment!
Thanks for sticking with us. I hope to see each of you at the Annual Meeting on March 10!
Don’t forget to RSVP
Sincerely,
John S. Pepper
Chairman and CEO
pepper@thewrap.com
