Sun and Sea Magazine

Custom Grills, Inc. FY02 Operations Review

OVERVIEW

Fiscal Year 2002 (FY02) was a banner year for our company in many respects. Not only have sales reached record levels in all categories, but we opened new distribution channels by partnering with a nationwide chain of grill specialty stores. A new pricing structure has produced tremendous benefits by increasing profits while taking advantage of declines in key operating expenses.

Internally, head count grows steadily while turnover has been held to a minimum. This stability has enabled us to develop improved employee benefit and profit-sharing plans, which have had both tangible and intangible benefits on productivity.

Externally, competitive forces actually declined as our key competitor ceased operations following a reputed accounting scandal. This event is prompting new distributors to contact us to fill the gap suddenly left by our now-defunct competitor.

FY02 also brought big news and a great source of pride to Custom Grills, as the U.S. Patent Office finally granted us a patent for our ArcSpot welding process. The patent not only proves the unique nature of our construction process, but protects us from competitors who would try to steal or modify our proprietary process.

Finally, Custom Grills proudly unveiled its new Web site ( which provides complete product and process information to customers and distributors. The site also offers secure ordering capabilities for our distributors and resellers, allowing them to order any product from our line without contacting a sales representative.

TESTIMONIALS

The year was good for us because it was good for our distributors and customers. Here are some comments that speak well of our company’s commitment to customer satisfaction:

“I’m a professional chef who happens to use charcoal grills as my primary cooking method. In nearly 20 years, I have never used a product as durable, reliable, and flexible as my RanchMaster custom grill.”

--Ron White, Chef, Montana Chop House, Billings, MO

“Your custom, built-in grill and workstation were the perfect addition to my home’s patio. The construction is first-rate.”

--Ethel Hansford, Homemaker, Ferguson, CA

“My organization manages a group of summer camp facilities. Over the years, we have wasted thousands of dollars on grill systems that couldn’t meet our demands. Congratulations on such a fine product and for achieving such masterful craftsmanship.”

--Mike Hudson, President, Youth Camps of America, Inc.

NOTE

To see dozens of testimonials from satisfied customers and happy distributors, visit our Web site at and click the Testimonials link.

SALES[MSOffice1]

Sales were brisk throughout the year; surprisingly we did not experience the seasonal downturns of years past. This consistent year-long performance is due to our expansion into all areas of the country, including regions where outdoor grilling seasons are not shortened by cold weather. As the following table shows, overall sales increased 12% over Fiscal Year 2001.

1Revenues for FY01 are adjusted for product recall.

Unit sales demonstrated similar improvement, year over year, with consistent growth across all major product categories, as shown in the following table.

PRICING

Standard$432.00

Custom$283.00

Combination$259.00

Prices shown here are averages for each category, per unit.

MARKETS

Although Custom Grills has developed a broad line of standard and custom grilling products and sells them through an ever-growing number of distributors and resellers, we believe the key to our growth and success can be summarized in one word: focus. We have consistently focused our attention on the market segments that show the greatest promise for growth:

Professional cooks and chefs working at larger or specialty restaurants, such as those specializing in outdoor or open-flame cooking. Restaurants currently account for 48 percent of overall revenues.

Facilities offering catering services to large groups, such as fairgrounds, campgrounds, resorts, and others. These facilities account for 31 percent of revenues.

Private clubs and membership organizations. These organizations account for 15 percent of revenues.

Homeowners who want professional-quality grilling systems for use in their homes. Although this group currently accounts for 6 percent of revenues, it is one of our hottest growth areas.

NEW DISTRIBUTORS

During FY02, we expanded into several new distribution channels by adding many new franchise distributors to our family of partners.

Alaska:

Outdoor Cooking Specialties, Inc.

California:

Barbeque Systems, LLC.

Grill Anything, Inc.

The GrillWorks

Florida:

The Open Flame, Inc.

The Patio Chef

Hawaii:

Kona Grills Corp.

Luau Grilling, Inc.

Kentucky:

My Old Kentucky Grill

Hardwood Cookery, Inc.

Grills and More, LLC.

ORGANIZATION

Custom Grills, Inc. is pleased to announce that all members of the management team have signed employment agreements committing them to serve in their current positions until January 1, 2008.

Management Team

Ellen Gregg, VP Sales and Marketing. Ellen joined Custom Grills in 1996 as a Marketing Manager and oversaw successful marketing campaigns for each of our standard lines. She pioneered efforts to educate distributors about our unique ability to customize product for any customer’s special needs, leading to a substantial increase in our custom fabrication business. She was promoted to the VP position in 2002. Before coming to Custom Grills, Ellen was a Product Manager for Kingston Electronics, Inc.

Peter Sears, VP Operations. Peter came to Custom Grills in 1995 as a Business Manager and quickly earned his stripes, becoming VP in 1997. Peter has continually worked to gain efficiency in every aspect of our operations and has single-handedly reduced our operating expenses through his innovative approach to our production process.

Kelly Ryan, VP Human Resources. In addition to running the company’s Human Resources Department, Kelly acts as our Facilities Manager and has overseen the development of our ever-expanding Information Technology Department. Kelly has championed efforts to improve employee benefits and constantly looks for cost-effective ways to put new tools in the hands of our workers. She joined Custom Grills as VP in 1998, after working as Human Resources Director for Intelligent Systems, Inc.

[MSOffice1]Please double-check the adjusted total revenue figures for the last quarter of 2002