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Daphne's Greek Cafe files for Ch. 11

SAN DIEGO The fast-casual Daphne’s Greek Cafe chain filed for Chapter 11 bankruptcy protection this week, but the company’s founder pledged Thursday the reorganization would be short.

George Katakalidis, who founded the 69-unit chain in 1991 and is now president and chief executive of parent Fili Enterprises Inc., said the company breached a loan covenant about a year and a half ago and attempted to renegotiate terms. The bank, however, “wouldn’t budge,” he said, and the combination of punitive default rates and slowing sales as a result of the economy completed a “triple whammy” that resulted in the decision to seek bankruptcy protection.

“It has been like trying to sprint uphill with a gale wind in your face,” said Katakalidis, a former professional soccer player. “It hasn’t been a fun year.”

Though many fast-casual players have benefited from the economic downturn as cash-strapped consumers traded down to their lower-priced concepts, Daphne’s has struggled with slipping sales, Katakalidis said.

Daphne’s is known for its contemporary Greek menu, which includes hummus, grilled meats, salads, kababs and pita sandwiches. With an average check of about $7, the concept offers healthful dishes and a great value, Katakalidis said, but sales were hurt as consumers gravitated away from ethnic dining.

“People in tough times tend to revert to comfort food,” Katakalidis said. “Ethnic is not considered comfort food.”

Over the past year, the once more than 80-unit chain has closed about 14 stores. Some were closed because leases were up, and others were low-performing stores in neighborhoods that struggled during the recession, such as hard-hit Southern California, where unemployment and home foreclosure rates are among the nation’s highest.

“We could have stayed and waited it out, but some of these neighborhoods will take some time to come back,” Katakalidis said. “We didn’t have time to wait.”

All but one of Daphne's restaurants -- a licensed location at the University of Southern California -- are company-owned, and only three units are outside California. The chain has one unit each in Colorado, Arizona and Washington state.

In 2007, Daphne’s tapped industry veteran Steve Fricker as its first-ever president, which allowed Katakalidis to focus more on strategic planning. Fricker, a former Panera Bread franchisee who also has worked with Jack in the Box and OSI Restaurant Partners Inc., launched a franchising plan for Daphne’s that never got off the ground.

“Steve came on board to grow the company, but you can’t grow the company when no one is lending money,” Katakalidis said.

Fricker left Daphne’s in January 2009 and is now a franchisee of the Corner Bakery brand as partner in S&B Development Inc. in Del Mar, Calif.

Looking forward, Katakalidis said growth is on hold and the company is focusing on operations.

The chain plans to test an overhaul of dining options soon that will include “simplifying the menu and giving consumers more choices,” he said.

Katakalidis declined to give sales figures, but court documents indicated that Fili Enterprises has assets between $10 million and $50 million, and liabilities within the same range. Among the largest unsecured creditors is supplier U.S. Foodservice Inc., which listed a claim of $1.1 million.

Katakalidis noted that the company’s vendors, some of which have been working with Daphne’s for 20 years, have been “phenomenal” as the chain has struggled with economic headwinds.

“They have stuck by us, believed in us and it’s a great thing,” he said.

Contact Lisa Jennings at [email protected].

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