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1. Should Sam, Fred, and Erica sign the franchise and optionagreements on March 25 and launch Cafe Gelato Florida?

Assuming they do launch, which financing approach should

they pursue: the offering described in Exhibit 7, or the Angel

Food Ventures deal? (80% of exam grade)

2. Assuming that some or all team members wish to proceedwith the venture, what actions should they take between

March 9 and the end of June 1995? (20% of exam grade)

Feel free to attach any supporting materials.


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-TEM FINAL EXAM

M A Y 1 2 , 2 0 0 9

________________________________________________________________________________________________________________

HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, orillustrations of effective or ineffective management.

Copyright 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may bereproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical,photocopying, recording, or otherwisewithout the permission of Harvard Business School.

Cafe Gelato

On March 9, 1995, Sam Rogers, Fred Bottino and Erica Meyer walked out of a negotiating session.The three second-year students at Harvard Business School were seeking the Florida franchise rightsto Cafe Gelato, a European-style cafe/ice cream shop selling a variety of frozen desserts andbeverages.

The session had gone fairly well: they had gotten most of the concessions that they wanted. Yet,mixed with their excitement was a sense of trepidation. A great deal of work remained, includingsecuring additional financing. Other issues loomed. Was the Florida franchise really attractive? Wasthe venture right for them at this point in their careers? Would the same factors that made themfriends make them good business partners?

The Search

Sam, Fred and Erica had been section mates during their first year at HBS (see resumes, Exhibit 1).The idea of starting or buying their own business took hold during a vacation week on Cape Cod justprior to the start of second-year classes. The friends had discussed their summer experiences and

personal priorities. They were all drawn to the challenges, independence, and financial rewards thatwould come with creating and managing their own business. Their focus turned to the question,How do we get there?

This surfaced two different approaches. The first path was more conservative. They could join anexisting company in an industry of interest, gradually build expertise and management skills, andkeep an eye out for opportunities. They would be making their mistakes as employees rather thanowners. Within four or five years, they were bound to spot an opportunity. Alternatively, stillfollowing the conservative path, they could wade into the deal flow by working in venture capital,private equity, or the M&A area of an investment bank. They would learn how to evaluate deals andmake contacts. Then they could buy something and run it.

The second path was, Why wait? The classmates felt that they had the skills and abilities to run

a businessperhaps not a high tech firmbut surely there were some businesses that they had thecollective talent to manage. Further, in four or five years, pursuing this path would be harder. Theywould become accustomed to the financial security that came with big pay packages in professional


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service firms or established corporations. Likewise, with a spouse, family, car payments, a mortgageand a summer home on the way, the risks of failure would become greater.

As school began, Sam, Fred and Erica decided to try to find a business to buy. They spoke with

professors, classmates, and business acquaintances. They realized that they needed to be morespecific about their objectives, so they pulled together a sheet describing the types of businesses thatwere of interest to them. The process continued through the fall with little progress. People weregenerally helpful and encouraging but provided few leads.

In late November, Sams father, Frank Rogers, mentioned that an investor group had recentlypurchased the Cafe Gelato franchise for California. He had heard that the Florida franchise might beavailable. The three classmates were excited about this idea, even though retail food service had notbeen among the industries targeted in their specification sheet. The skills required to run a foodfranchise seemed within their range of abilities. It sounded like a fun business that might offerattractive financial rewards.

Cafe GelatoCafe Gelato was a Boston-based chain selling a variety of frozen desserts, pastries, chocolates, and

beverages both for carryout and on-premises consumption. There were currently nine company-owned stores in the New England areaprimarily in Bostonwith several more scheduled to openduring 1995. Cafe Gelato had sold its first franchise rights (for California) in June 1994, and the first ofthese stores was scheduled to open in the summer of 1995.

Cafe Gelato sold an Italian gelato-style ice cream that was extremely rich and homemade inappearance and taste. Italian gelato was different than traditional American ice cream in two ways.First, it had less than half the fat content of ice cream. Despite lower fat content, gelato had a rich,creamy taste that came from using fresh milk cream rather than the industrial butter used in many icecreams. Second, gelato was produced in small batches with equipment that allowed little air into the

mixture. This yielded higher density than traditional American ice cream and thus more intenseflavors. Likewise, less fat meant that gelato was less solidly frozen than traditional ice cream, so itmelted in the mouth and imparted flavor faster. Finally, discerning consumers considered gelato tobe a healthier alternative to traditional American ice cream because it was made from naturalingredients and had less fat and fewer calories per serving.

Most rivals that sold high-quality ice cream or gelato made their product on premises. Throughengineering and experimentation, Cafe Gelato had perfected the difficult process of freezing gelatofor storage and shipment without compromising quality. This enabled Cafe Gelato to manufacture itsproducts centrally, freeze and ship them, and then sell them in store locations. By positioning itsstores as cafs, Cafe Gelato derived sales throughout the day from coffee and pastry as well as icecream in the afternoon and evening. Most Cafe Gelato stores were open daily from 11:30 am until 10

pm. They were staffed at all times by either a store manager (who worked in a single store andearned an average of $30,000 per year, including salary plus a bonus for store performance) or, whenthe store manager was not on site, an assistant manager who worked part-time and earned anaverage of $10 per hour. Staffing typically included two additional workers who earned minimumwage ($4.25) plus tips. In New England, Cafe Gelato had no trouble finding well-qualifiedindividuals with food service experience to fill store manager positions. Average wages and turnoverfor employees tracked industry averages.


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Cafe Gelato store operations were not complex: customers ordered at a counter where 20 flavorsof gelati (e.g., black raspberry, hazelnut, maple pecan) and sorbet (e.g., lemon, mango peach,pomegranate) were on display along with other dessert items. The stores dcorincluding counters,awnings, and tables and chairsinvoked the look and feel of an Italian gelateria. Posters of Italy

enhanced the ambience. Each store had a seating area where about 25% of customers consumed theirdessert, but Cafe Gelato did not have waiters who took table orders or brought food and beverage tothe tablesin other words, it was not really a caf. If all the tables were occupied, customers whowould prefer to eat on premises seemed happy to order anyway and carried away the product. Tasksfor the manager and workers were straightforward: fill orders in a prompt and courteous manner;clear tables quickly; and keep the premises spotless. Besides running store operations, the storemanager was responsible for tracking inventory, reporting results to headquarters, and recruitingand training new workers.

In New England, Cafe Gelato stores had prospered in a range of different types of locations,including Bostons Fanueil Hall (which drew a mix of office workers and tourists), Bostons Back Bay(a popular destination for young professionals and tourists), town centers in affluent communities

such as Wellesley, college areas such as Harvard Square, and several shopping malls (which typicallyincluded restaurant and cinema venues). The key to success was high traffic throughout the day. CafeGelatos average order was $11; most orders were for parties of two or more. Although Cafe Gelatocommanded premium prices that were similar to those of other high-quality ice cream outlets,demand for its products appealed to a fairly broad range of income groups. An upscale skew wasmore apparent in locations that were frequented by families. Affluent parents were more likely tobuy gelato than traditional American ice cream for their children because the parents viewed it ashealthier and preferred its taste when consuming dessert themselves.

First Contact

Sam, Fred, Erica and Mr. Rogers met with Cafe Gelatos senior management team on December

10. Bob Andrews, Cafe Gelatos chairman, revealed that they had received dozens of franchiserequests for Florida. He mentioned several candidates with extensive experience in either the fast-food industry or Florida real estate who clearly had the financial resources required to develop theFlorida franchise. He added that Cafe Gelato was stretched to its capacity, and he was unsure howquickly the company should expand. To date, Cafe Gelato had grown slowly and carefully, with acommitment to high quality operations. Managing their current locations and planned expansionwhile simultaneously providing assistance to the new West Coast franchisee would likely consumeall available resources over the near term. Andrews said that the Boston market alone could supporta total of twenty Cafe Gelato stores, and he hoped to achieve that level of market penetration withintwo years.

Following this meeting, the group met with the president and chief operating officer of CafeGelato, Herb Gross. He, too, stressed Cafe Gelatos commitment to slow growth to ensure high

quality. Gross felt, however, that a deal for the Florida franchise might be worked out. Sam, Fred andErica expressed their enthusiasm for the business and their desire to get involved in the hands-onoperations of Cafe Gelato.

They left impressed with Cafe Gelatos management, the companys profitability, and its potentialfor growth. Cafe Gelato had developed an impressive organization. Their standardization ofproduction, training, accounting systems, control systems, store management, store design, andconstruction convinced Sam, Fred and Erica that they would receive a great deal of support as a


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franchisee. The classmates felt that an opportunity was finally within their grasp and organized aWinter Term field study to evaluate the opportunity (see Exhibit 2 for field study proposal).

The group met with Cafe Gelato again in early January. Andrews and Gross indicated that they

were interested in pursuing the Florida franchise. They were impressed with the team membersabilities and their willingness to get involved in day-to-day operations, which Andrews and Grosssaw as crucial to maintaining quality. Other candidates for the Florida franchise had all beeninterested in purchasing the franchise as an investment, and would not be directly involved in storeoperations. A dinner was scheduled for January 11 to discuss how to proceed.

The Deal

On January 11, Sam, Fred, Erica and Frank Rogers met Andrews and Gross at a restaurant inBoston. The Cafe Gelato executives said that they wanted to negotiate a franchise agreement forFlorida. However, they also wanted the legal flexibility to terminate the agreement if theysubsequently determined that they were stretched too thinly to fulfill responsibilities to their

California franchisee. At the same time, they recognized that Sam, Fred, and Erica needed somesecurity that the deal would proceed, since they had to make career decisions soon. So, Andrews andGross proposed that the franchisee (i.e., Sam, Fred, and Erica) would:

- Pay $200,000 up front.

$100,000 development fee for exclusive rights to the entire state of Florida for 20years (with an option for the franchisee to renew for another 20 years, provided thefranchisee was in compliance with standards specified in the agreement); and, $100,000 in 5 franchise fees of $20,000 each as prepayment for the first five stores.

- Pay an additional $20,000 per store after the first five.

- Pay a 5% royalty on sales.

In exchange, Cafe Gelato would allow them to use the Cafe Gelato name, sell them product for32% of the suggested retail price, train the franchisees and one manager per store opened, andprovide them with assistance in selecting locations and constructing stores. In effect, Cafe Gelatowould provide the first few locations as turnkey operations. Other franchise agreement termsforexample, regarding monitoring by the franchisor and penalties for persistent violation of qualitystandardswere consistent with food service franchising norms.

Because Cafe Gelato did not wish to be legally obliged to proceed if they determined that theiroperations were stretched to capacity, these terms would be subject to an option structured asfollows:

- The franchisee would make a deposit of $75,000 on or before March 25. If Cafe Gelato did

not agree to proceed within nine months, the franchisee would get back its $75,000 plusinterest and the agreement would be terminated.

- Once Cafe Gelato agreed to proceed, the franchisee would have one month to pay theremaining $125,000 of the up-front fee. If the franchisee did not pay the remaining fee,they would forfeit their $75,000 deposit and the agreement would be terminated.

Another dinner was scheduled for January 25, when Sam, Fred, and Erica would deliver theirresponse to Cafe Gelato.


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The main issue now seemed to be financing. As the former president of a Boston-area bank, Mr.Rogers had many friends and associates who could fund the venture. Mr. Rogers began approachingthem in hopes of finding one or two individuals to back the entire deal.

In the meantime, Sam, Fred and Erica met again with Cafe Gelato managers to get financial datathat would allow them to generate pro forma financials and estimate required financing. First, theycompared the terms of the Cafe Gelato franchise with those of other leading franchises (Exhibit 3).On one hand, Cafe Gelato seemed somewhat expensive for a new and unproven franchise. Yet, itappeared to offer excellent profit potential, and they were obtaining rights for the entire state ofFlorida.

The team also tried to get some idea of the franchise potential that Florida offered, and pulledtogether the data shown in Exhibit 4. Next, they developed a store-level income statement (Exhibit 5)based on averages for Cafe Gelatos existing storesall of which were performing stronglyandadjustments for operating in Florida (e.g., differences in shipping expenses and in Florida vs. Bostonarea rents). The operation appeared to be very profitable and required modest upfront investment. At$160,000 investment per store, they estimated that they would require $750,000 in initial financing:$200,000 for the upfront franchise fee; $480,000 for construction of the first three stores; and $70,000for working capital. The team also analyzed Cafe Gelatos corporate overhead structure. With ninestores, Cafe Gelatos current corporate General & Administrative expense was 15% of revenue, butGross expected this to decline to about 8% once Cafe Gelato operated 20 stores.

Next, they had to think about how to structure the deal: how much equity to keep, how muchoutside equity to raise, and how much debt to take on. Could they keep enough equity to make theventure financially rewarding for themselves and still attractive enough for investors? Would theoperation require ongoing cash infusions with growth?

After running pro formas (Exhibit 6), they decided that their firm could support a high debt-to-equity. They could keep a large fraction of the companys equity and still deliver an attractive return

to outside investors by offering them investment units comprised of a bundle of common shares andunsecured debentures that paid a high interest rate.

Mr. Rogers contacts had said they were enthusiastic about the concept, but over the two-weekperiod, he was unable to get any firm commitments. Mr. Rogers himself, however, had agreed toinvest $75,000 in the venture on the same terms as outside investors. The enthusiasm that his contactshad expressed convinced Sam, Fred and Erica they would be able to raise money. On January 25, theymet with Andrews and told him that his proposed terms were acceptable. They agreed that theirlawyers would be in touch to draw up papers.

Financing

That weekend, Sam, Fred and Erica raced to produce a prospectus for Cafe Gelato Florida. Thedocument presented the concept for the business, financial projections, and a proposed capitalstructure. Over the next three weeks, they presented their business plan to Mr. Rogers friends andassociates. They had secured informal commitments for $450,000. With Mr. Rogers $75,000, they had$525,000still $225,000 shy of the $750,000 in outside funding that they had targeted.

As they sold their proposal to prospective investors, it had become clear that the team would haveto give up more of their firms equity in order to raise additional funds. After several meetings withinvestors, Sam, Fred and Erica revised the prospectus, reducing their target equity stake from 75% to


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62.5% and reducing the interest rate on the debentures from 15% to 10% (see Exhibit 7 for excerptsfrom the revised prospectus).

In structuring the proposal, the team had thought that investors would primarily be concerned

with their overall returnROI, IRR, or NPV. In fact, investors requirements were more complex.They were seeking both: 1) short-term repayment of their original investment, with significant controlrights during this phase; and 2) long-term capital gains with reduction in outside investor controlonce the original investment was repaid. The team had structured their offering to reflect thesepreferences, specifying that outside investors representation on the board would be reduced fromthree to two seats (out of six total seats) once all investor debt had been repaid.

There were significant differences in the level of sophistication of potential investors. Some likedthe proposal and agreed to invest with few questions or objections. For others, a detailed analysis ofinvestors versus founders risk and reward was required. Some prospective investors also raisedquestions about the Florida franchise: Was it really promising for this business? To date, the team hadconducted due diligence without spending time and money on a trip to Florida. The data they hadobtained on real estate trends and potential rivals from Baker Library and a few phone interviewswas incomplete and inconclusive.

As the team raised money, the second-year recruiting season was in full swing. Because they wereemotionally committed to the idea, and because it was consuming so much of their time, none of thethree pursued other employment opportunities. Each could still return to their summer employer orrejoin a company where they had worked before HBS, but these offers would not remain open muchlonger.

The Decision

It was now February 22, and the team had a preliminary set of documents to review. On March 25they would have to sign papers and put down $75,000. A meeting with Cafe Gelato was set for March

9 to put finishing touches on the agreement.

At this point, Fred began having strong doubts about proceeding. He said:

I started getting knots in my stomach. I guess it was fear. It seemed to me that we hadgotten caught up in our enthusiasm about the project and had not been as hard-nosed aboutbusiness decisions as we should have been.

First, we had not even been to Florida. Erica lived there and was home during Winterbreak, but we never thoroughly investigated the franchise. We didnt know if there wascompetition there. Even if there were other gelato shops, how were they doing? Who knew ifthe Florida franchise would be attracted to our rich style of ice cream? Finally, Floridaseconomy is more dependent on malls than New Englands. How would we do in Floridas

malls? Compared to other regions, a relatively small number of developers controlled a largeshare of Floridas major shopping malls. Would that make it easier or harder to get good storelocations?

Second, I worried about our agreement and relationship with Cafe Gelato. It seemed to methat we were critically dependent on them for real estate and product. We didnt have thecredibility, contacts or track record to get the prime real estate that we needed. We weredependent on Bob Andrews for that. Similarly, one of our real competitive advantages was thecost and quality of our product. The royalties and profits Cafe Gelato could earn by selling us


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product gave them a strong incentive to supply us, but under the terms of our franchiseagreement, they were under no legal obligation to do so. Furthermore, we had no right to buildour own production facility using their equipment and proprietary processes. What happenedif they decided to expand and they simply couldnt supply us any more? Gelato is not like a

hamburger bunyou cant just snap your fingers and find another supplier. I thought that ouragreements should recognize this dependency and that Cafe Gelato should take 25% of ourcompanys equity instead of $200,000 up front. This would give them a stronger financialincentive to act in our best interests.

Finally, there was my relationship with Sam and Erica. There had been some tension lately.It was obvious that I was more conservative, more risk-averse than they. I was worried abouthow this might affect our working relationship. I was uncomfortable with the notion that Icould be outvoted on a decision and committed to a course of action that I wasnt comfortablewith.

At this time, Mr. Rogers was in Florida and reported that there were a small number of ice creamshop/cafes serving gelato. One of these shops was not doing very well; others seemed to be faringbetter. Obviously, there were a great many typical ice cream shops, including Haagen-Dazs, Baskin-Robbins, and several local chains. Overall, Mr. Rogers felt that there were many promising locationsfor a fast-growing new business. The team appreciated this information, but resolved that they wouldgo to Florida over spring break in early April to thoroughly investigate the franchise opportunity.

The team also learned that nationwide, there were two other operations with a similar focus ongelatoGelateria Italia and Gelatoramaboth of which were centered in California. Both hadrecently started to franchise beyond California but had not yet reached Florida.

In preparation for their March 9 meeting, the team decided they would press Cafe Gelato toprovide further assurances that they would be able to deliver real estate support and product. Toprepare for this negotiation, they contacted with permission from Bob Andrews the CEO of

Cafe Gelatos California franchisee to compare terms and learn about the level of support they hadreceived. The CEO, a veteran operator of food service franchises, confirmed that Cafe GelatoCalifornias terms were identical to those proposed for the Florida franchise, other than the option toabandon the agreement. He was very positive about the technical support and training provided byCafe Gelato. The California franchisees CEO had extensive experience with finding real estate forfood outlets, so he did not require assistance from Cafe Gelato for that function. The CEO seemedsurprised when Fred asked whether he worried about securing product from Cafe Gelato. It seemednot to have occurred to him that supply interruptions were a risk. He suggested that, if necessary,they could produce fresh gelato at an off-site location in each metropolitan area, then truck it theirstores, which initially would be clustered only in Los Angeles and San Francisco. The CEO also notedthat in addition to royalties, Cafe Gelato was almost certainly earning some profit by selling productat 32% of suggested retail price.

Finally, although the team had revised the deal, they had now exhausted all of Mr. Rogerscontacts and they were now $285,000 short of their $750,000 funding goal. Two investorscommitments had evaporated during the past few weeks. They had a meeting with a newly formedgroup of angels just prior to their March 9 meeting. This group indicated that they were veryinterested in the venture, but they would require more equity for their investment. The groupproposed providing the entire $750,000 in outside funding in exchange for 50% of Cafe GelatoFloridas equity. The investment would be structured as convertible preferred stock. No debt wouldbe included in the deal, and the angels expected Sam, Fred and Erica to contribute $75,000 for their


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share of the equity. The angel group was a particularly attractive partner because some its principalshad extensive experience running a Kentucky Fried Chicken franchise.

At the March 9 meeting, Cafe Gelato responded to their concerns. First, they agreed that the

franchisee wouldnt have to pay the remaining $125,000 until Cafe Gelato had furnished them withone suitable location and the lease had been signed. Further, Cafe Gelato agreed that the franchiseewould have the right to build a production facility with technical assistance from Cafe Gelato if CafeGelato ever became unable to supply them with product. The closing date for the deal was set forMarch 25; on that date, they would have to put up $75,000 and sign the franchise and optionagreements.

During the two weeks that remained, the team had to decide whether or not to proceed. If theydid, should they fund initial operations from the $465,000 in outside capital they had raised up to thispoint, then plan a second offering after their first store was up and running?

The team members reflected on their personal feelings about the deal:

Fred

Cafe Gelatos concessions do reassure me to some extent, but I still have some veryuncomfortable feelings. First, the prospects in Florida are still unclear to me. I have greaterconfidence that we will find some attractive locations. But in order to meet our projections andinvestors expectations, we will have to grow very quickly.

Second, even if the business does well, we are still critically dependent on Cafe Gelato. Andif they dont perform, our only remedy is to sue. It really scares me to think that we will beresponsible for $750,000 of other peoples money, but we cant control our productthe mostimportant element of the business.

Finally, I do question whether we have the skills to really make this work. I think that we

have been pretty naive and caught up in the excitement of actually doing a deal. Fortunately, ithasnt cost any money yet and weve learned a lot.

Sam

We would have preferred giving Cafe Gelato an equity stake in the company, but they werenot interested in this proposition.

Like Fred, Im concerned about our prospects in Florida; I want more than just a gut feelthat the franchise will work there. This issue is particularly pressing because the closing date ofMarch 25 will come before we can get to Florida during our April break. We need betterresearch before then. Erica and I proposed cutting class to go to Florida next week. Fredrefused. Hes on track to be a Baker Scholar, and he says that if he misses a week of class hessure to miss that goal. If he goes back to consulting, academic honors might matter, but whocares if an entrepreneur is a Baker Scholar? His head is not in the game!

Money remains a problem. We have informal commitments for $465,000 of the $750,000needed; experience has taught us that these are often more informal than they arecommitments. An angel group has expressed strong interest in a straight equity investmentof $750,000, but weve grown skeptical of verbal commitments. So, were still looking for otherinvestors.


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Both Erica and I have picked up on Freds concerns and feel that we are dealing with themas best we can. I start to get the impression, though, that Fred is veiling his personal concernsabout the venture in terms of business risk.

As far as Im concerned, weve been lucky so farthings have gone smoothly. Now itstime to start running fast, tying up all the loose ends. Im exhilarated because we are reallyright on the verge of finally having our own company.

Erica

I feel that we really have a great opportunity here. Im excited by the idea of creating andmanaging our own organization. It is a fairly simple business and Cafe Gelato has done a greatdeal to standardize the operation. With their systems and support, Im confident that we canbe successful.

I spent Winter break in Florida, and I believe that the franchise prospects are strong. Thestate has a large population of upscale, sophisticated consumers. The economics of the

business are such that we can be profitable even with a small volume.

I think that Cafe Gelato concessions have assured us of product supply and the real estatesupport that we need. After we get a few stores up and running, we will have developed aname for ourselves, and we wont need their real estate assistance anyway.

I understand Freds concerns, but there are always going to be risks. In this case, they aremanageable, and the ventures high returns justify them. Frankly, I really dont feel that anyadditional assurances will satisfy Freds doubts. His lack of commitment is a real problem atthis point, and needs to be cleared up before it becomes a personal and business problem forall of us.


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Exhibit 1xxx Resumes

Sam Rogers

education1993-1995

HARVARD BUSINESS SCHOOL BOSTON, MA

Candidate for the degree of Master in Business Administration in June 1995.

1986-1990 HARVARD COLLEGE CAMBRIDGE, MABachelor of Arts degree in June 1990. Majored in modern European history. Vice presidentof the Delphic Club; presently serves as graduate treasurer.

work experiencesummer 1994

BEAR, STEARNS NEW YORK, NY

Corporate finance. Summer associate. Worked on the initial public offering of amanufacturer of computer memory devices. Assisted in the preparation of the prospectus,due diligence investigations, and marketing of this successful offering. In addition,

performed preliminary debt rating analysis and lease-versus-buy analysis for prospectiveclients.

summer 1993 NEWBURY, ROSEN & CO., INC. BOSTON, MACorporate Finance. Wrote the prospectus for a $600,000 private placement for a start-upventure in the electronic test equipment rental industry. Performed industry, competitive,and market analyses.

1990-1993 STATE STREET BANK AND TRUST COMPANY, INC. BOSTON, MA1993 Corporate Finance Department. Senior analyst. Worked with three-person team in

structuring private placements and assembling prospectuses. Co-authored prospectus for$10 million private placement to regional retailing chain. Participated in presentations ofservices to a large high-technology firm.

1992-1993 Corporate Services Department. Senior analyst. Assisted vice president of department inestablishing a Eurodollar loan syndication portfolio, in which State Street acted as leadmanager and agent. Marketed this service to prospective clients. Made both individual and

joint presentations to foreign banks interested in joining syndicates. Managed negotiationsamong the client, legal counsel, and the banking syndicate for a $10 million revolving loansyndication to a major toy manufacturer. Helped bring to a closing two additional term loansyndications totaling $14 million.

1990-1992 Commercial Credit Training Program. Trainee. Completed the training program in eighteeninstead of the stipulated twenty-four months.

1987-1990 HASTY PUDDING THEATRICALS CAMBRIDGE, MAProducer of this Broadway-like musical comedy show. Selected script, hired professional

director, set designer, music arranger, and costume designer, and coordinated an eighty-person company. Improved financial controls and initiated a fund drive.

personalbackground

Raised in Boston. Have lived and traveled extensively abroad. Flexible on relocation. Fluentin French.

references Personal references available upon request.


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Exhibit 1 (continued)

FRED BOTTINO

education1993-1995

HARVARD BUSINESS SCHOOL BOSTON, MASSACHUSETTS

Candidate for the degree of Master in Business Administration. General ManagementCurriculum. Awarded first year honors.

1987-1991 HARVARD COLLEGE CAMBRIDGE, MASSACHUSETTS

Awarded Bachelor of Arts, cum laude, in Economics, June 1991. Wrote Senior Honors Thesison strategic implications of cost and market structure in the publishing industry. Served asEditor-in-Chief, Harvard Yearbook Publications; Treasurer, D.U. Club; ClassRepresentative, 1991 Class Committee; Executive Committee member, Harvard Fund.Elected Trustee of Yearbook.

businessexperiencesummer 1994

MORGAN STANLEY & CO. NEW YORK, NEW YORK

Worked as a summer associate in corporate finance and mergers and acquisitions areas.Assisted in the development and implementation of a strategy for divesting a clientsshipping subsidiary. Assisted in the defense of an oil services client engaged in a hostiletakeover.

1991-1993 McKINSEY & COMPANY NEW YORK & TOKYO

Functioned as a consultant to top management of McKinseys clients in the tele-communications, computer and office products industries. Assessed the competitive costposition of a major international manufacturer of telecommunications products. Managed

internal research project on Japanese competition in high technology industries. Transferredto McKinseys Tokyo office to develop a strategy for a British client seeking to enter the

Japanese office products market. Wrote and presented report to Board of Directors inLondon.

current activities Kirkland House fellow (an undergraduate residence) and admissions counselor at theHarvard Business School. Specific responsibilities include:

Tutor, Harvard College Economics Department, teaching Managerial Economics andDecision Theory.

Teaching Assistant, Harvard College General Education Department, teaching Businessin American Life.

Nonresident Business Tutor, Kirkland House, advising undergraduates on careers and

graduate education. Counselor, Harvard Business School Admissions Office, interviewing prospective

students.

personalbackground

Enjoy sailing, racquet sports, travel and photography.



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Exhibit 1 (continued)

ERICA MEYER

education1993-1995

HARVARD BUSINESS SCHOOL BOSTON, MA

Candidate for the degree of Master in Business Administration in June 1995. Pursuing a generalmanagement curriculum with emphasis on finance.

1982-1986 UNIVERSITY OF FLORIDA GAINESVILLE, FLORIDA

Earned a Bachelor of Science degree in Accounting with additional concentration in Economics.

businessexperiencesummer 1994

McKINSEY & COMPANY, INC. ATLANTA, GEORGIA

Associate. Analyzed financial performance and product-line profitability, as part of strategic

plans and operating budgets. Prepared financial analysis for potential foreign acquisitions anddivestitures. Collaborated in cost reduction project resulting in annual savings of $5 million.

1988-1993 CELANESE CORPORATION NEW YORK, NEW YORK

1991-1993 International Finance

Manager. Supervised the preparation and analysis of strategic plans and operating budgets.Prepared financial analysis for potential foreign acquisitions and divestitures. Collaborated incost reduction project resulting in annual savings of $5 million.

1990-1991 Financial Analyst.

Prepared financial analysis for capital expenditure projects and for actual monthly results versusbudget.

1988-1990 International Auditor.

Supervised audit team in performing operational audits. Developed audit programs for foreigninstallations.

1987-1988 MINNESOTA MINING AND MANUFACTURING (3M) CARACAS, VENEZUELA

Senior Cost Analyst. Prepared a product analysis required by the Venezuelan government for theintroduction of new products. Analysis included marketing, production and financial data.

1986-1987 PRICE WATERHOUSE & CO. MIAMI, FLORIDA

Staff Auditor. Performed financial audits of manufacturing and service organizations.

personalbackground

Fluent in English and Spanish. Enjoy participative sports, reading historical novels andinternational travel.



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Exhibit 2xxx Field Study Proposal

OUTLINE OF PROPOSED FIELD STUDY

Step I Understanding Existing Operations in New England, including: products,manufacturing, distribution, retail location strategy, advertising/merchandising strategy, coststructure, customer profile, management structure and systems, and personnel requirements.

Step II Evaluate Implications for franchise, including: potential profitability and growth,competition, cost impact, tailoring of concept, relations with franchisor, key risks, and financialrequirements.

Step III Evaluate and Structure Deal, including: management structure and responsibilities,form of organization, and legal/tax aspects.

Step IV Prepare Business Plan, including: introduction, company description, risk factors,

products, market, competition, marketing program, management, manufacturing, facilities, capitalrequired and use of proceeds, and financial data and financial forecasts.

Exhibit 3 Food franchisesTerms

Franchise Feeper Location

($000)Royalty

(% of Sales)

Cafe Gelato* 20 5Gelateria Italia* 15 0Gelatorama* 30 0Swensens* 20 5.5Haagen-Dazs* 20 $0.60/gallonCarvel* 20 VariesLong J ohn Silver Seafood 10 4H. Salt Fish & Chips 10 VariesKentucky Fried Chicken 10 4Churchs Fried Chicken 15 4McDonalds 12.5 11.5Wendys 15 4Burger King 40 3.5Burger Chef 10 4Taco Bell 45 5Dominos Pizza 10 5.5Pizza Inn 15 4Shakeys Pizza 15 4.5

Orange J ulius 18 6

* denotes gelato/ice creamfocus


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Exhibit 4xxx Population Growth and Income Levels in Florida

1/1/94Population

(000)

1988-1994Growth

(%)

1993 MedianPer Capita

Income

Bostona

3,255 0.8% $18,354J acksonville 995 9.7 15,561Miami 2,040 5.3 13,758Tampa 2,200 6.4 15,500Ft. Lauderdale 1,421 13.1 16,873Orlando 1,417 15.7 15,979Gainesville 199 9.4 13,703Sarasota 537 9.7 17,788Ocala 230 17.9 12,361Daytona 449 12.4 13,978Naples 188 23.6 22,490Punta Gorda 130 17.2 14,675aFor reference only.

Source: Commercial Atlas and Marketing Guide, Rand McNally, 1995 ed.

Exhibit 5xxx Financials

Pro Forma Income Statement: Store Level

Sales $600,000Fixed costs: Rent (1000 to 1200 square feet) $ 25,000

Store manager compensation 30,000

Variable costs: Cost of product 192,000

Payroll (incl. asst. manager pay) 52,500Royalty 30,000Shipping 16,500Advertising 5,500Other 11,000Rent override

a14,000

Total costs 376,500Pretax store contribution $223,500

Capital Requirements per Store

Construction, leasehold improvements $ 60,000Equipment costs 85,000Fees & miscellaneous expenses, capitalized 15,000

$160,000

aA percent-of-sales bonus to the landlord after a base sales level is reached.


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Exhibit 6xxx Preliminary Financial Projections ($000)

Key Assumptions

New store growth is halted in year six to show impact of steady state on financials; actual planwould be to continue new store growth well beyond 20 units

New stores in each year are assumed to operate for entire year Stores earn $400K in first year and $600K thereafter, plus adjustments for 4% annual inflation Fixed costs per store = $55K in year one, inflated by 4% per year thereafter Variable costs = 53.6% of revenue Corporate overhead is reduced from 15% of revenue in year one to 8% in year five; remains at 8%

thereafter Investment per new store = $160K in year one, inflated by 4% per year thereafter. Store

investment is depreciated over seven years Year one includes Florida franchise development fee of $100K plus prepayment of $100K for first

five stores; franchise development fee is $20K per new store thereafter. Franchise developmentfees are amortized over 20-year life of franchise.

Working capital equals 8.75% of revenue


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Exhibit 7xxx Excerpts from Prospectus

THE OFFERING

The Company is offering 25 Investment Units. Each Unit consists of 150 shares of its Class ACommon Stock offered for $5,000, representing 1.5% of the total outstanding Common Shares of theCompany, and $25,000 of the Company's 10% Debentures.

Per Unit Total

Equity $ 5,000 $ 125,000Debentures 25,000 625,000Total $30,000 $750,000

The capitalization of the Company consists of the $750,000 raised from the Offeringplus $75,000contributed by the Founders. The Founders will purchase 6,250 shares of the Company's Class B

Common Stock for $25,000, and will also purchase $50,000 in 10% Debentures. Thus, at theconclusion of the Offering, assuming all units are sold, capitalization will be as follows:

DebenturesInvestors $625,000Founders 50,000

$675,000

EquityInvestors $ 125,000Founder 25,000

$150,000

Total Capital $825,000

In total, the Class A stockholders will have three of six representatives on the Board of Directors;the founders will hold the other three board seats. When the Debentures have been repaid in full, theClass A board representation will be reduced to two directors and the founders will designate areplacement director.

The Debentures will pay interest at 10% per annum. Interest payments will be made annually,except for the first years payment, which will be deferred until the end of Year Two. The Debentureswill have a maturity of five years, and will be callable.

The Founders' Class B stock will be restricted as to dividends until the Debentures have beenrepaid in full. The Company plans to pay no dividends for a period of five years, and until such timeas the Debentures have been paid in full. Following this five-year period, the Company does have theintention of distributing dividends to investors.

Documents

CafegelatoCafeGelato 51209 Final Case r