The Year of Living DANGEROUSLY.

How one restaurant perservered through the crucial first 12 months in business

IT'S 12:15 ON FRIDAY AFTERNOON AT 'FILE FUSION CAFE AND THE RESTAURANT IS PACKED. IN the small kitchen three cooks are preparing smothered pork chops, jerk chicken, Jamaican rice and peas, Cajun wings, boudin (Cajun sausages), oxtails, and red beans and rice. Busy waiters quickly pick up the orders and take them to the customers, who pay on average $7 per entree. A capacity crowd of about 75 is crammed into this Houston eatery that specializes in Jamaican, Creole, and Southern food. The restaurant, located in a revitalized section of this Texas metropolis known as Midtown, is just a stone's throw from the city's downtown area, attracting diners who are mostly urban professionals and workers from the nearby Texas Medical Center.

Overseeing the food preparation and customer service are the general manager, Cedric Fletcher, and the manager, Lora Sims, who, in addition to their regular duties, act as the eyes and ears of owners Greg Phillips and Chris Lowe. Phillips, 35, is an associate general counsel for Compaq Computer Corp., and Lowe, 34, is manager of aircraft maintenance and engineering for Southwest Airlines. The two still hold down full-time jobs while working at the restaurant and planning for the future of the business.

For Phillips and Lowe, Fusion is a dream come true, although neither has received a dime from the enterprise since it opened. Both have always wanted to become entrepreneurs, and at one point they were involved in separate ventures, each being part-owner of a nightclub and bar. But before they opened Fusion along with another partner, they knew nothing about the restaurant business.

There have been a few rough periods since the business was started. The suicide of the third partner almost forced them to close the doors a few months after opening the cafe They also had other problems, including a shortage of experienced personnel, theft, waste, and--oddly enough--too much initial success.

Today, however, Fusion Cafe is doing just fine: the owners are expanding the original location, preparing to open a second establishment, and actively planning a third. In 1998, revenues were $320,000, and in 1999 the venture earned more than $370,000. There is also a catering business that currently accounts for about 5% of sales.

How did these entrepreneurs overcome the obstacles and move their business forward? This is how it happened.

A REASON TO START

It all began one night following an incident at a white-owned restaurant. After being turned away, long-time buddies Greg Phillips and Craig Allen decided it was time to open their own restaurant. Allen had lots of experience in the business and had even owned his own eatery at one time.

"When we went to that restaurant we were told they were having a private party and that we couldn't get in," explains Phillips. "But as we were leaving, we noticed they were letting some whites in who were not there for the party. We left and said, `The heck with it. Let's go create our own restaurant where people we know, and people like us, can go into a very casual atmosphere and have good food and fun.'"

Phillips and Allen drove around looking at several sites until they discovered a shuttered Mexican restaurant just a few miles from downtown Houston. That was in August of 1997. From that point on, Phillips, Allen, and friend, Chris Lowe, began making the plans to open their own cafe.

The plan was for Phillips and Lowe to be silent partners and let Allen manage the business since he had more than a dozen years experience in that field. The three raised approximately $90,000 from family and friends and leased the 1,500 square feet space for $1,100 a month. Much of the initial investment was spent on equipment, expanding the space, acquisition of inventory, and operating capital. The partners saved about $80,000 because Lowe, a handyman, built a lot of the furniture.

"I built the bar, the tables, the condiment station, and even laid the tile on the counter tops," says Lowe. "I also taught Greg how to build some of the things. I had him cutting and laying bricks so we could save money."

When it came to deciding on the menu, the three went back to their roots. Lowe, a Jamaican, treasured his mother's traditional Jamaican fare. Phillips, from East Texas, grew up enjoying his mother's specialized Southern dishes. Allen, who was from Louisiana, revered his mother's grand Creole foods. The three had their mothers prepare their favorite meals and then invited family members and friends down to the restaurant to vote on which ones they thought were best.

"We gave them survey cards to write down what they thought were the best items and we decided from that what our menu would consist of," says Phillips.

The partners then had their mothers teach the chefs how to prepare the meals. "We fused Southern, Creole, and Jamaican foods together. That's also how we came up with the name Fusion Cafe," explains Lowe.

Before the business opened, Phillips and Lowe spent hours at upscale restaurants in the Houston area, taking note of how customers interacted with waiters and cashiers, and how the cooks interacted with the wait staff. They also read everything they could about the success of Starbucks, their self-described model for how to invest in employees in a high turnover business.

The partners spent about $4,000 on print advertising and mailed information to 4,000 prospective customers. They also put flyers on cars in the downtown area, advertising the opening of the new establishment.

Fusion Cafe began operations in February 1998, and from the moment the doors swung open, the crowds poured in. Word-of-mouth helped to spread the news, and before the owners knew it, people were gathering outside. The lines got longer and then the problems began. The fledgling business had become too successful too soon.

"We had a single, manual cash register and we couldn't process the orders fast enough," recalls Phillips. "The cashiers would write down the order and that took time. Then they'd walk it back and put it in a basket for the chefs, and that took time. Sometimes the orders were wrong and the service was stow. Customers had to wait 20 to 30 minutes just to get to the register, then another 20 to 30 minutes to get their food. Most people had only an hour for lunch. People loved the food, but the service was not good."

At all times the three partners made an effort to be honest with their customers, telling them why the service was slow and offering them free entrees or desserts.

They also had problems keeping good workers. "Staffing is always a big problem," says Phillips. "The job market and the economy are booming and people are finding jobs more easily. It's hard to find good staff because people can find other opportunities. Our cook staff has been pretty stable, but we have a very hard time keeping the wait staff."

"I am always telling our employees to think about the customers," says Lowe. "If you go into a restaurant and you're not satisfied, you don't go back. When that plate comes out to you sloppy, what do you think is going on in the kitchen? Good managers and good staff are so hard to find. It's common in the restaurant industry. That's the biggest problem. Every restaurateur I've talked to says the same thing."

Despite the fact that Allen was working at the restaurant full-time, Phillips and Lowe found themselves pressed into duty more often than they had planned. They took turns opening and closing the place, and they soon found themselves spending as much as 40 hours a week at Fusion. Lowe was the operations manager and also waited tables. Phillips was responsible for growth strategy, financial systems, and providing financials to the accountants and investors.

WITHSTANDING A CRISIS

A few months after the cafe opened, Phillips and Lowe noticed that partner Craig Allen was having family and personal problems. They suggested he take a leave of absence and come back when he had a handle on things. A few months later, Allen committed suicide.

They were devastated and Lowe even suggested they close the restaurant. But Allen's parents told the remaining partners that Craig would have wanted them to keep the business going. They did.

While Phillips and Lowe had started off as silent partners they were now running the business on a full-time basis, in addition to holding down their regular jobs.

Their first order of business was to tackle the service issue. In February 1999, they automated the business with a point-of-sale (POS) system (a computerized cash register system that expedites service and collects daily sales data that is used to monitor the status of the business) installed at a cost of $15,000.

"That improved things dramatically," admits Phillips. "That hour to an hour and fifteen minutes serve time was cut drastically. With the new system, we were able to get the order within five minutes or less, and the order came out within another five to 10 minutes." The POS also helped to keep track of the foodstuff, thereby eliminating the problem of employees wasting food or taking it home.

The business had also begun to experience cash flow problems. "We had months when there was a big cash flow problem," remembers Phillips. "We had a weekly payroll of between $7,500 to $8,000, and at times we only had half of that in the bank We were pretty tight. I'm glad to say we never missed a payroll, but it was scary at times."

Phillips and Lowe went to several banks to try to get a $30,000 line of credit, but they were unsuccessful. "We couldn't get it," says Phillips. "They said our business was too new at the time. We were able to get a $10,000 credit card but not the $30,000 line of credit we wanted."

With some of the more troubling issues out of the way, the partners began discussing the expansion of the small restaurant, a plan that had been in the cards since the start of the enterprise. "Our customers asked us to expand," discloses Phillips. "We had loyal customers who said they would not come back to Fusion unless we expanded because they didn't like coming down and then having to turn away because of the crowds."

One of the cafe's regular customers heard about the planned expansion and told the partners about his employer, the Enron Corp., and its Houston Economic Opportunity fund. The fund provides venture capital for start-ups and existing businesses--like Fusion--in alliance with major banks, including Wells Fargo, Bank of America, and Washington Mutual.

"They are an investor, a partner, just like my Aunt Martha," explains Phillips. "They said, `We don't want to buy any of your partners out.' But they do get a preferred liquidation right, which means that at the end of the day, if we have to liquidate assets, they would get paid back before anybody else. And that's it."

So instead of going to a bank, the partners went to the fund with expansion plans in hand. At the beginning of July 1999, Phillips and Lowe received $270,000 in capital funding.

In September 1999, they were able to hire a general manager with restaurant experience to help run the business. That's when things finally stabilized and they were both able to step back and concentrate on their expansion efforts.

PLANNING FOR EXPANSION

Work is now under way on the remodeling of the original restaurant site. They were able to lease an additional 1,500 square feet next door, and the build-out is moving ahead. They plan to triple the size of the kitchen and add additional tables that will seat about 50 customers. The exterior of the restaurant has been spruced up with new paint, awnings, and more lights. It will take about $70,000 to complete the renovations.

The partners also surveyed their customers and asked where they would like to see another Fusion Cafe set up. Some 62% of the respondents were in favor of the area near Rice University--where a number of eclectic shops and restaurants are located--as the ideal spot.

In February 2000, with a $100,000 loan from Sterling Bank (a locally owned community bank), the partners set out to find the perfect location. In less than two months they found what they say will be the right place for their second restaurant. They've leased a former bird feed store in the heart of trendy Rice Village. The space is 1,850 square feet at a cost of $2,700 a month. Build-out costs will reach about $150,000.

The restaurant's general manager, Cedric Fletcher, recently attended two auctions: one at a restaurant that was closing down, the other at an organic grocery store that had built a new facility. He picked up several relatively new ovens, steam tables, freezers, coolers, and other restaurant equipment for $5,000. The new Fusion, which will seat about 85, is scheduled for a September 2000 opening.

Phillips and Lowe, who plan to keep their full-time jobs for the time being, already have their sights set on opening another cafe in downtown Houston. Under that section of the city is a tunnel that snakes along for several miles. The tunnel has several restaurants, shops, and stores that cater to thousands of office workers who use the underground passageway on a daily basis. The restaurateurs are looking for space there to open a smaller version of their cafe They have allocated $120,000 for that site, which will be a take-out location or, as Phillips calls it, "a virtual kitchen concept."

The food for the tunnel spot will be prepared at the original Fusion, and will arrive hot and ready to go. The costs to run the tunnel cafe should be minimal since there will be limited cooking at the site. Phillips says that with the constant traffic in the tunnel, revenues should rival those of the original restaurant.

To ensure a steady clientele at the new sites and the remodeled eatery in Midtown, the partners will soon launch a public relations campaign. They will do an extensive mail-out to more than 5,000 people, place circulars in the newspapers, advertise on billboards, and put thousands of flyers on cars and in the hands of prospective customers. They expect to spend about $25,000 on the campaign.

"We want to create something that all people can experience," says Phillips. "We want to bring together different types of people to experience what we have to offer, and that's good food from our backgrounds."

At some point Phillips would like to expand the Fusion concept to other major cities across the nation, but Lowe wants to take it more slowly. "I'd rather have three Fusions running well and being successful," explains Lowe. "That's better than having 20 Fusions with chaos and disorganization."

Since entering the restaurant business just over two years ago, both Phillips and Lowe say they have learned a great deal about one of the hardest industries around.

"Most restaurants don't make it because a lot of restaurateurs come in and they're cooks and chefs first and they are businessmen and businesswomen second," explains Phillips. "They think the food and the fluff will make the business. But it's a business first, and you've got to be lucky enough to have the right food and the right service to take care of the restaurant part. But you have to come into it understanding the business aspect, the food, and the service aspects. If you don't have all those in line, and if those aren't really working together, you're going to run into trouble."

Helpful Advice

BE asked two experts. Earl E. Allen Jr., a Houston-based CPA, and Mark Hanna of Customer First, a restaurant market research and public relations organization. also in Houston, to review Fusion Cafe's performance and recommend strategies for the future.

Their main recommendations:

* Change the price structure. "They are at the lower end as it relates to price." says Allen, "Their margins are very tight and they have not raised prices since they opened, in spite of the fact that their vendors have raised prices."

Just a few days after this recommendation the owners took Allen's advice and raised the prices across the board.

* Examine expansion plans carefully, Hanna thinks that there could be problems with rapid expansion. "The big danger in opening a second location is the fear that you might take away business from the original [location]," he says. "The proximity of the two restaurants is limiting. They're going after a nighttime crowd which they don't have at the original Fusion, and they need to be careful with that." Hanna notes that the new restaurant will need to have "more than just good food, People go to restaurants for the entertainment value. The place has to make you feet good. They want ambience, which is what the original Fusion has,"

* Allen cautions against stretching their management talent with the opening of the new cafe. "Can Greg and Chris handle the manage merit tasks of both locations?" he asks, "They need to make sure that they can keep the consistency of the food and the management."

* Expand the customer base. Allen suggests expanding the customer base to ensure steady traffic at the new Fusion Cafe. "What they don't want to do is to pull customers from the original location," he says. "To accomplish this, they need to do a major advertising campaign. The food business in Houston is extremely competitive, so they will need to spend at least $15,000 to $20,000 for that media campaign,"

What is Fusion Cafe doing right?

Hanna stressed that Fusion's owners know who their customers are. "They've done a tot of comment cards and they are very much service-oriented," he says "Overall, they do a great job, and that [providing good service] is a major obstacle for most restaurants."

He also states, "[The partners at Fusion] have done an incredible job of marketing themselves. There has been a lot of publicity, Their products are totally consistent. They have terrific food one week and it's just as good the next week, Consistency of food is a big problem for restaurants; it's good one week and the next week it's not, and that runs customers away."

Cash Flow Statement

                                          CURRENT         YEAR TO
                                           MONTH           DATE

Cash flows from operating
 activities:
Net Income                               <$3,716.07>    <$20,841.77>
Adjustments to reconcile net
income with net cash provided
by operating activities:
Accumulated Depreciation                    $678.79       $2,715.16
Credit Card Clearing Account                   0.00            0.00
Inventory                                      0.00            0.00
Sales Tax Payable                          2,788.83        5,140.71
Accounts Payable                          <3,780.82>           0.00
Wages Payable                              6,202.49        6,202.49
Note Payable                              10,000.00       10,000.00

Total Adjustments                        $15,889.29      $24,058.36

Net cash provided by operations          $12,173.22       $3,216.59

Cash flows from investing activities
Used for:
Renovations in progress                 <$16,143.35>    <$16,143.35>
Machinery and Equipment                        0.00       <1,320.00>

Net cash provided by operations         <$16,143.35>    <$17,463.35>

Cash flows from financing activities
Proceeds from:
Partners Capital                              $0.00           $0.00
Capital Contributions                          0.00        8,259.72
Beginning Balance Equity                       0.00            0.00
Used for:
Partner Capital                                0.00            0.00
Capital Contributors                           0.00       <5,000.00>
Beginning Balance Equity                       0.00            0.00

Net cash used in financing                    $0.00       $3,259.72

Net increase <decrease> in cash          <$3,970.13>    <$10,987.04>

Summary
Cash end of period                      $210,590.31     $210,590.31
Cash beginning of period               <$205,555.75>   <$221,577.35>

Net Increase <decrease> in cash           $5,034.56      $10,978.04

Balance Sheet

                            ASSETS

Current Assets
Bank of America                   $ 5,534.56
Enron Cash Fund                   205,055.75
Inventory                           2,500.00
Total Current Assets                            $213,090.31

Property and Equipment
Leasehold Improvements            $22,150.00
Renovations in Progress            16,143.35
Machinery and Equipment            79,345.00
Accumulated Depreciation          <27,153.82>
Total Property and Equipment                     $90,484.53

Other Assets
Deposits                           $1,180.00
Total Other Assets                                $1,180.00

Total Assets                                    $304,754.84

                     LIABILITIES AND CAPITAL

Current Liabilities
Sales Tax Payable                 $18,041.37
Wages Payable                       6,202.49
Note Payable                       10,000.00
Total Current Liabilities                        $34,243.86

Long-term Liabilities
Total Long-term Liabilities                           $0.00

Total Liabilities                                $34,243.86

Capital
Partner's, Capital                $59,102.00
Capital Contributions             247,361.41
Net Income/<Loss>                 <35,952.43>
Total Capital                                   $270,510.98

Total Liabilities and Capital   $304,754.84