LDB Corporation

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LDB Corporation

444 Sidney Baker Street South
Kerrville, Texas 78028
U.S.A.
Telephone: (830) 257-2000
Fax: (830) 257-2003
Web site: http://www.mrgattis.com

Private Company
Incorporated: 1970
Employees: 1,200
Sales: $118 million (2001)
NAIC: 422490 Other Grocery and Related Products Wholesalers

LDB Corporation, operating out of Kerrville, Texas, is a privately held company that operates through its Mr. Gatti’s subsidiary, a family-oriented pizza restaurant chain. Mr. Gatti’s is a major regional player in the pizza industry, with more than 200 units located primarily in the Southwest and Southeast, most of which are franchised. In addition to pizza, Mr. Gatti’s features a selection of Italian dishes. In recent years the company has concentrated its efforts on its GattiTown concept, pizza superstores that offer a variety of eating and entertainment features, including bumper cars, a carousel, and other rides; Italian-style buffet and salad bars; and individual party rooms.

L.D. Brinkman Founding the Business in 1970

LDB Corporation took its name from the initials of its founder, and current chairman, president, and CEO, Texas entrepreneur Lloyd D. Brinkman. The grandson of Danish immigrants, Brinkman started his business career raising Brangus cattle in the Dallas area, as well as running a successful carpet distribution business. In 1970 he traded a 1.8 percent stake in his distributorship to acquire Miami-based Giffen Industries, which he renamed LDB Corporation. In 1971 he moved its headquarters to Dallas, and then in 1975 relocated to Kerrville in central Texas, some 100 miles west of Austin and close to the cattle ranches where he raised his purebred Brangus cattle. Originally a roofing company, Giffen in the late 1960s evolved into a freewheeling conglomerate, with scores of unrelated and generally unprofitable companies cobbled together, involving such products as snowmobiles, boats, and lawn furniture. Brinkman was immediately besieged by creditors, and only a $15 million consolidation loan from the Banque Canadienne Nationale allowed him to avoid bankruptcy court. For the next eight years Brinkman unloaded or liquidated the unprofitable businesses, while retaining some of the floor-covering assets to complement his previous holdings, and rearranged debt. By 1978 LDB was once again liquid, although it consisted of little more than Brinkman’s original carpet business. He now began to rediversify, in the process gaining minor stakes in two trucking companies, as well as buying into a mobile and modular home business, which he renamed Brinkcraft. He also spent some of his cash to acquire the Mr. Gatti’s pizza chain.

Mr. Gatti’s was founded in 1964 by a retired Air Force Lieutenant Colonel named James Eure. Although pizza had been sold since the early decades of the 20th century, mostly in the major East Coast cities with large concentrations of Italian Americans, a major pizza craze swept the country after World War II, resulting in a large number of mom-and-pop operations and, eventually, companies with bigger plans. In 1958, Frank and Dan Carney opened the first Pizza Hut in Wichita, Kansas, and a year later they incorporated and opened their first franchise unit in Topkea, Kansas. Whereas Pizza Hut was devoted to a table and chairs concept, Detroit native Tom Monaghan founded Domino’s Pizza in 1960 and pioneered the pizza delivery chain. A short time later Michael Hitch, also from Detroit, founded Little Caesars, which focused on the carry-out of inexpensive pizza. Each of the three future pizza magnates unknowingly carved out a unique share of the market and for many years were dominant in the industry.

Second-tier players, such as Dallas-based Pizza Inn and Mr. Gatti‘s, got their start in the early 1960s. Because he traveled widely while in the Air Force, Eure was able to collect pizza recipes, settle on a favorite, and make plans for opening a pizza restaurant when he retired from the service. His approach to the business was to concentrate on high-quality ingredients, offering fresh meats and dairy products. Sauce and pizza dough were to be made according to his recipe and the dough was required to be rolled by hand. In 1964 he opened his first restaurant, called “The Pizza Place,” in a former Austin, Texas convenience store.

LDB’s Acquisition of Mr. Gatti’s in 1978

Eure did just $71,000 in sales during his first year in operation, but as business improved steadily he began opening more stores and initiated a franchising program. By 1969 the aspiring chain had grown to 18 stores. In 1973 Eure drew upon his wife’s maiden name, Gatti, to provide the operation with a new name: Mr. Gatti’s. A year later, however, Eure sold the chain to a group of investors headed by George Baker, a former president of Kentucky Fried Chicken. Under Baker’s leadership Mr. Gatti’s enjoyed even greater growth, expanding to 88 restaurants by 1978 when Brinkman and his LDB Corporation bought the Austin-based operation. The terms of the deal called for an initial payment of $3 million, followed by a number of deferred payments based on earnings. In the end Brinkman paid $10.5 million for Mr. Gatti’s.

As a part of LDB, Mr. Gatti’s enjoyed explosive growth over the next three years. In June 1982 the number of Mr. Gatti’s restaurants totaled 258, about a third owned by LDB. By the mid-1980s the chain grew to more than 300 and cracked the top five pizza chains in total units. In fiscal 1986 chainwide sales totaled $130 million. The franchise fee stood at $10,000 per unit, with a royalty of 4 percent of gross sales. Mr. Gatti’s also grew via acquisitions, buying existing operations to expand into such markets as Tennessee and Arkansas.

Mr. Gatti’s also was displaying an innovative spirit. In 1982, to take advantage of the big-screen televisions its stores offered, the chain began experimenting in a few of its restaurants with a free videotaping service, The Instant Replay Program, which concentrated on sporting events such as little league games, children’s soccer games, and adult softball games, as well as high school plays. Customers called in with the date and location of the event, the store arranged for someone to do the filming, and by the time people arrived at their local Mr. Gatti’s restaurant the videotape was ready to air and tables set up. No minimum charge was required. Patrons ordered off the regular menu and received a 10 percent discount. For parties of 30 or more, buffets were made available. Copies of the videotaped event also were available for sale. Recording equipment required about a $4,000 investment from each store, the taping cost the restaurant around $50, and overall the initiative was just a break-even offer. Nevertheless, it resulted in excellent community relations and served to stimulate business in general. Within a couple of years all of the LDB owned stores offered the taping service and about 90 percent of the franchised operations.

In 1984 Mr. Gatti’s launched an advanced computerized ordering system for pizza delivery in Austin dubbed Call 1. It relied on a single telephone number suffix, 2222, and was easily remembered by customers. All calls were received at a central location and the order was routed electronically to the closest Mr. Gatti’s unit. Because of the efficiency of the system Mr. Gatti’s was able to offer a 30-minute delivery guarantee in keeping with the standard set by Domino’s. Moreover, the system used order-takers who were trained to encourage the sale of extra toppings and drinks. As a result, the average delivery check grew to $11 while in-store checks totaled $8. Call 1 also quickly provided the order-taker with information on the customer’s previous transactions, which not only helped in the selling but insured that delivery information was accurate. The system, using the 2222 suffix, was rolled out successfully to the Louisville, Kentucky market in 1985, followed by Nashville, Tennessee, and other larger cities. In some markets Mr. Gatti’s implemented what it called “Hot Zones,” limited areas where traffic conditions permitted a 30-minute delivery guarantee.

Although Mr. Gatti’s opened a number of delivery-only units, the emphasis of the chain remained on its full-service restaurants. A major facet of this strategy was the three-room arrangement of its restaurants, offering different atmospheres for different customers. The main dining room, with its big-screen television, provided entertainment as a complement to the dining experience. A quieter area could be found in the “Garden Room,” where diners were provided with a more adult décor. The third room, the “good times room,” was set up theater-style and was where the videotaped sporting and other events were replayed for private parties. In general usage it was geared toward children, entertaining them with cartoons and movies. In the late 1980s the Mr. Gatti’s chain made a concerted effort to upgrade its older one-room stores to the three-room format. Although the conversion did not result in an increased number of seats, it generally boosted revenues by some 20 percent. The chain also expanded a lunchtime all-you-can-eat buffet to the evenings, Monday through Thursday. Instead of being limited to doing the bulk of its business on Friday and Saturday evenings, Mr. Gatti’s was now able to make inroads on other nights of the week.

Key Dates:

1964:: James Eure establishes his first pizza restaurant.
1970:: Lloyd Brinkman acquires Giffen Industries, renaming it LDB Corp.
1973:: Eure names his pizza chain Mr. Gatti’s.
1978:: LDB acquires Mr. Gatti’s.
1987:: LDB sells off its carpet and flooring businesses.
1994:: LDB is taken private.

Selling the Carpet and Flooring Assets in 1987

In 1987 Brinkman elected to sell his carpet and flooring business for $57 million to John Crowther Group PLC, a British manufacturing and distribution company. At the time, it was reported that Brink planned to use the proceeds to accelerate the growth of Mr. Gatti’s. Rather than focus solely on his pizza business, however, Brinkman and LDB invested in more than a dozen publicly held companies over the next several years, many of which proved to be poor choices that resulted in LDB losing $64 million from 1988 to 1992. Mr. Gatti’s, in the meantime, also endured a difficult stretch. Early in 1990 Brinkman assumed the presidency and initiated cost-cutting measures that included reduced pay for senior officers and relocating the pizza chain’s headquarters from Austin to Brinkman’s offices in Kerrville. By eliminating duplicate administrative functions, LDB saved about $1 million in annual payroll. In addition, the business was reorganized, split into two divisions, Northern and Southern, each headed by a division president who reported directly to Brinkman.

In October 1991 Mr. Gatti’s filed for bankruptcy, although LDB was not affected. Brinkman maintained that the subsidiary was a profitable business with considerable assets but that it sought court protection because of a problem with a real estate loan with NCNB Texas National Bank. In fact, Mr. Gatti’s listed assets of $51.6 million and liabilities of just $13.2 million. The roots of the problem reached back six years when Mr. Gatti’s took out a $10 million loan with RepublicBank Dallas, which subsequently merged with Interfirst, becoming First RepublicBank. When NCNB acquired the assets of First RepublicBank in 1988, Mr. Gatti’s loan was included. Although, according to Brinkman, Mr. Gatti’s was current on its payments, the bank began to treat the loan as a bad debt. It charged that a provision of the loan had been breached because Mr. Gatti’s had advanced funds to LDB. Brinkman claimed that he attempted to provide more collateral to back the loan, but NCNB not only insisted on regular note payments but also wanted a percentage of the company’s profits to pay off the debt, a move that would have hampered the chain’s ability to remodel older stores and grow the business. When negotiations broke down, NCNB filed suit seeking immediate repayment of the loan, prompting Brinkman to file for Chapter 11 reorganization.

Little more than a year after it filed for protection Mr. Gatti’s emerged from bankruptcy a significantly smaller chain. Although the number of franchised stores remained around 170, company-owned units dropped to 59 from 156 just four years earlier, as less productive stores were sold off or closed. As a result, LDB rebounded, returning to profitability in 1993, earning $131,000. The company’s stock, which at one point dipped below $1, also began to show improvement. Nevertheless, the business, by the estimation of many, was undervalued. In September 1994 Brinkman decided to take LDB private, offering to buy outstanding shares at $5.50 each, which placed a $10.2 million value on the company, less than 25 percent of the $41.8 million in sales LDB posted the previous year. Moreover, the corporation boasted cash and securities worth $5.2 million, which offset $2.80 per share of Brinkman’s offer. Despite questions in the press about the deal, there was never a chance that the offer would be rejected because Brinkman and his partner in the deal, Tom Thomas, together owned 69 percent of the stock.

Also not included in the financials of Mr. Gatti’s, which had a bearing on the future worth of LDB, was the chain’s success with a new type of store it called GattiLand, which was set to rival the pizza-game room operations of Showbiz Pizza Time and Chuck E. Cheese. GattiLand offered what Brinkman termed “eatertainment” and moved the chain away from the fast-food arena. Mr. Gatti’s began experimenting with the GattiLand concept around 1987, and for the next several years sought to determine the ideal size and the proper mix of entertainment and food. Unlike some of his competition, Brinkman did not want GattiLand to be exclusively a children’s operation. Instead he wanted to attract the entire family, from toddlers to grandparents. To maintain the proper image and avoid becoming a teen arcade hangout it banned anyone wearing cutoffs or tank tops. Moreover, smoking was prohibited and no alcoholic beverages were sold. Patrons were charged a flat fee, based on age, that entitled them entry to GattiTown’s midway and other entertainment areas, as well as all the food and drink they wished from an extensive menu of items, available from a buffet and custom-prepared in front of customers on stoves. The midway offered games and rides, such as bumper cars and a carousel. Moreover, a GattiGear shop sold T-shirts and other memorabilia.

With LDB taken private, the financial picture of Mr. Gatti’s became closely guarded, making it difficult to determine how effective the GattiLand concept was in helping the chain to keep pace in the highly competitive pizza industry.