1.

Should Sam, Fred, and Erica sign the franchise and option agreements 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) Assuming that some or all team members wish to proceed with the venture, what actions should they take between March 9 and the end of June 1995? (20% of exam grade)

2.

Feel free to attach any supporting materials.

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MAY 12, 2009

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 rights to Cafe Gelato, a European-style cafe/ice cream shop selling a variety of frozen desserts and beverages. 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, including securing additional financing. Other issues loomed. Was the Florida franchise really attractive? Was the venture right for them at this point in their careers? Would the same factors that made them friends 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 just prior 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 that would 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 an existing company in an industry of interest, gradually build expertise and management skills, and keep an eye out for opportunities. They would be making their mistakes as employees rather than owners. Within four or five years, they were bound to spot an opportunity. Alternatively, still following 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 and make 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 the collective talent to manage. Further, in four or five years, pursuing this path would be harder. They would become accustomed to the financial security that came with big pay packages in professional
________________________________________________________________________________________________________________
HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations 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 be reproduced, 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.

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service firms or established corporations. Likewise, with a spouse, family, car payments, a mortgage and 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 more specific about their objectives, so they pulled together a sheet describing the types of businesses that were of interest to them. The process continued through the fall with little progress. People were generally helpful and encouraging but provided few leads. In late November, Sams father, Frank Rogers, mentioned that an investor group had recently purchased the Cafe Gelato franchise for California. He had heard that the Florida franchise might be available. The three classmates were excited about this idea, even though retail food service had not been among the industries targeted in their specification sheet. The skills required to run a food franchise seemed within their range of abilities. It sounded like a fun business that might offer attractive financial rewards.

Cafe Gelato
Cafe 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 companyowned stores in the New England areaprimarily in Bostonwith several more scheduled to open during 1995. Cafe Gelato had sold its first franchise rights (for California) in June 1994, and the first of these 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 in appearance 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 ice creams. 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 intense flavors. Likewise, less fat meant that gelato was less solidly frozen than traditional ice cream, so it melted in the mouth and imparted flavor faster. Finally, discerning consumers considered gelato to be a healthier alternative to traditional American ice cream because it was made from natural ingredients and had less fat and fewer calories per serving. Most rivals that sold high-quality ice cream or gelato made their product on premises. Through engineering and experimentation, Cafe Gelato had perfected the difficult process of freezing gelato for storage and shipment without compromising quality. This enabled Cafe Gelato to manufacture its products centrally, freeze and ship them, and then sell them in store locations. By positioning its stores as cafs, Cafe Gelato derived sales throughout the day from coffee and pastry as well as ice cream 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 and earned an average of $30,000 per year, including salary plus a bonus for store performance) or, when the store manager was not on site, an assistant manager who worked part-time and earned an average of $10 per hour. Staffing typically included two additional workers who earned minimum wage ($4.25) plus tips. In New England, Cafe Gelato had no trouble finding well-qualified individuals with food service experience to fill store manager positions. Average wages and turnover for employees tracked industry averages.

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Cafe Gelato store operations were not complex: customers ordered at a counter where 20 flavors of 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 their dessert, but Cafe Gelato did not have waiters who took table orders or brought food and beverage to the tablesin other words, it was not really a caf. If all the tables were occupied, customers who would prefer to eat on premises seemed happy to order anyway and carried away the product. Tasks for 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 store manager was responsible for tracking inventory, reporting results to headquarters, and recruiting and 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 typically included restaurant and cinema venues). The key to success was high traffic throughout the day. Cafe Gelatos average order was $11; most orders were for parties of two or more. Although Cafe Gelato commanded 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 was more apparent in locations that were frequented by families. Affluent parents were more likely to buy gelato than traditional American ice cream for their children because the parents viewed it as healthier 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 franchise requests for Florida. He mentioned several candidates with extensive experience in either the fastfood industry or Florida real estate who clearly had the financial resources required to develop the Florida franchise. He added that Cafe Gelato was stretched to its capacity, and he was unsure how quickly the company should expand. To date, Cafe Gelato had grown slowly and carefully, with a commitment to high quality operations. Managing their current locations and planned expansion while simultaneously providing assistance to the new West Coast franchisee would likely consume all available resources over the near term. Andrews said that the Boston market alone could support a total of twenty Cafe Gelato stores, and he hoped to achieve that level of market penetration within two years. Following this meeting, the group met with the president and chief operating officer of Cafe Gelato, 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 and Erica expressed their enthusiasm for the business and their desire to get involved in the hands-on operations of Cafe Gelato. They left impressed with Cafe Gelatos management, the companys profitability, and its potential for growth. Cafe Gelato had developed an impressive organization. Their standardization of production, training, accounting systems, control systems, store management, store design, and construction 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 a Winter 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 members abilities and their willingness to get involved in day-to-day operations, which Andrews and Gross saw as crucial to maintaining quality. Other candidates for the Florida franchise had all been interested in purchasing the franchise as an investment, and would not be directly involved in store operations. 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 in Boston. The Cafe Gelato executives said that they wanted to negotiate a franchise agreement for Florida. However, they also wanted the legal flexibility to terminate the agreement if they subsequently 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 some security that the deal would proceed, since they had to make career decisions soon. So, Andrews and Gross 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 20 years (with an option for the franchisee to renew for another 20 years, provided the franchisee 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 for 32% of the suggested retail price, train the franchisees and one manager per store opened, and provide them with assistance in selecting locations and constructing stores. In effect, Cafe Gelato would provide the first few locations as turnkey operations. Other franchise agreement termsfor example, regarding monitoring by the franchisor and penalties for persistent violation of quality standardswere consistent with food service franchising norms. Because Cafe Gelato did not wish to be legally obliged to proceed if they determined that their operations were stretched to capacity, these terms would be subject to an option structured as follows: 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 plus interest and the agreement would be terminated. Once Cafe Gelato agreed to proceed, the franchisee would have one month to pay the remaining $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 their response 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 approaching them 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 data that would allow them to generate pro forma financials and estimate required financing. First, they compared 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, it appeared to offer excellent profit potential, and they were obtaining rights for the entire state of Florida. The team also tried to get some idea of the franchise potential that Florida offered, and pulled together 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 stronglyand adjustments for operating in Florida (e.g., differences in shipping expenses and in Florida vs. Boston area 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 $70,000 for working capital. The team also analyzed Cafe Gelatos corporate overhead structure. With nine stores, Cafe Gelatos current corporate General & Administrative expense was 15% of revenue, but Gross 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 much outside equity to raise, and how much debt to take on. Could they keep enough equity to make the venture financially rewarding for themselves and still attractive enough for investors? Would the operation require ongoing cash infusions with growth? After running pro formas (Exhibit 6), they decided that their firm could support a high debt-toequity. 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 and unsecured debentures that paid a high interest rate. Mr. Rogers contacts had said they were enthusiastic about the concept, but over the two-week period, he was unable to get any firm commitments. Mr. Rogers himself, however, had agreed to invest $75,000 in the venture on the same terms as outside investors. The enthusiasm that his contacts had expressed convinced Sam, Fred and Erica they would be able to raise money. On January 25, they met with Andrews and told him that his proposed terms were acceptable. They agreed that their lawyers would be in touch to draw up papers.

Financing
That weekend, Sam, Fred and Erica raced to produce a prospectus for Cafe Gelato Florida. The document presented the concept for the business, financial projections, and a proposed capital structure. Over the next three weeks, they presented their business plan to Mr. Rogers friends and associates. 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 have to give up more of their firms equity in order to raise additional funds. After several meetings with investors, 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 excerpts from 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 control rights during this phase; and 2) long-term capital gains with reduction in outside investor control once the original investment was repaid. The team had structured their offering to reflect these preferences, specifying that outside investors representation on the board would be reduced from three 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 liked the proposal and agreed to invest with few questions or objections. For others, a detailed analysis of investors versus founders risk and reward was required. Some prospective investors also raised questions about the Florida franchise: Was it really promising for this business? To date, the team had conducted due diligence without spending time and money on a trip to Florida. The data they had obtained on real estate trends and potential rivals from Baker Library and a few phone interviews was incomplete and inconclusive. As the team raised money, the second-year recruiting season was in full swing. Because they were emotionally committed to the idea, and because it was consuming so much of their time, none of the three pursued other employment opportunities. Each could still return to their summer employer or rejoin a company where they had worked before HBS, but these offers would not remain open much longer.

The Decision
It was now February 22, and the team had a preliminary set of documents to review. On March 25 they 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 had gotten caught up in our enthusiasm about the project and had not been as hard-nosed about business decisions as we should have been. First, we had not even been to Florida. Erica lived there and was home during Winter break, but we never thoroughly investigated the franchise. We didnt know if there was competition there. Even if there were other gelato shops, how were they doing? Who knew if the Florida franchise would be attracted to our rich style of ice cream? Finally, Floridas economy 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 large share of Floridas major shopping malls. Would that make it easier or harder to get good store locations? Second, I worried about our agreement and relationship with Cafe Gelato. It seemed to me that we were critically dependent on them for real estate and product. We didnt have the credibility, contacts or track record to get the prime real estate that we needed. We were dependent on Bob Andrews for that. Similarly, one of our real competitive advantages was the cost 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 franchise agreement, they were under no legal obligation to do so. Furthermore, we had no right to build our own production facility using their equipment and proprietary processes. What happened if 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 our agreements should recognize this dependency and that Cafe Gelato should take 25% of our companys equity instead of $200,000 up front. This would give them a stronger financial incentive 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 about how this might affect our working relationship. I was uncomfortable with the notion that I could be outvoted on a decision and committed to a course of action that I wasnt comfortable with. At this time, Mr. Rogers was in Florida and reported that there were a small number of ice cream shop/cafes serving gelato. One of these shops was not doing very well; others seemed to be faring better. Obviously, there were a great many typical ice cream shops, including Haagen-Dazs, BaskinRobbins, and several local chains. Overall, Mr. Rogers felt that there were many promising locations for a fast-growing new business. The team appreciated this information, but resolved that they would go 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 on gelatoGelateria Italia and Gelatoramaboth of which were centered in California. Both had recently 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 to provide further assurances that they would be able to deliver real estate support and product. To prepare 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 had received. The CEO, a veteran operator of food service franchises, confirmed that Cafe Gelato Californias terms were identical to those proposed for the Florida franchise, other than the option to abandon the agreement. He was very positive about the technical support and training provided by Cafe Gelato. The California franchisees CEO had extensive experience with finding real estate for food outlets, so he did not require assistance from Cafe Gelato for that function. The CEO seemed surprised when Fred asked whether he worried about securing product from Cafe Gelato. It seemed not 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 their stores, which initially would be clustered only in Los Angeles and San Francisco. The CEO also noted that in addition to royalties, Cafe Gelato was almost certainly earning some profit by selling product at 32% of suggested retail price. Finally, although the team had revised the deal, they had now exhausted all of Mr. Rogers contacts and they were now $285,000 short of their $750,000 funding goal. Two investors commitments had evaporated during the past few weeks. They had a meeting with a newly formed group of angels just prior to their March 9 meeting. This group indicated that they were very interested in the venture, but they would require more equity for their investment. The group proposed providing the entire $750,000 in outside funding in exchange for 50% of Cafe Gelato Floridas equity. The investment would be structured as convertible preferred stock. No debt would be 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 principals had 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 with one suitable location and the lease had been signed. Further, Cafe Gelato agreed that the franchisee would have the right to build a production facility with technical assistance from Cafe Gelato if Cafe Gelato ever became unable to supply them with product. The closing date for the deal was set for March 25; on that date, they would have to put up $75,000 and sign the franchise and option agreements. During the two weeks that remained, the team had to decide whether or not to proceed. If they did, should they fund initial operations from the $465,000 in outside capital they had raised up to this point, 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 very uncomfortable feelings. First, the prospects in Florida are still unclear to me. I have greater confidence that we will find some attractive locations. But in order to meet our projections and investors expectations, we will have to grow very quickly. Second, even if the business does well, we are still critically dependent on Cafe Gelato. And if they dont perform, our only remedy is to sue. It really scares me to think that we will be responsible for $750,000 of other peoples money, but we cant control our productthe most important 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, it hasnt 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 were not interested in this proposition. Like Fred, Im concerned about our prospects in Florida; I want more than just a gut feel that the franchise will work there. This issue is particularly pressing because the closing date of March 25 will come before we can get to Florida during our April break. We need better research before then. Erica and I proposed cutting class to go to Florida next week. Fred refused. Hes on track to be a Baker Scholar, and he says that if he misses a week of class hes sure to miss that goal. If he goes back to consulting, academic honors might matter, but who cares 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 $750,000 needed; experience has taught us that these are often more informal than they are commitments. An angel group has expressed strong interest in a straight equity investment of $750,000, but weve grown skeptical of verbal commitments. So, were still looking for other investors.

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Both Erica and I have picked up on Freds concerns and feel that we are dealing with them as best we can. I start to get the impression, though, that Fred is veiling his personal concerns about the venture in terms of business risk. As far as Im concerned, weve been lucky so farthings have gone smoothly. Now its time to start running fast, tying up all the loose ends. Im exhilarated because we are really right 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 and managing our own organization. It is a fairly simple business and Cafe Gelato has done a great deal to standardize the operation. With their systems and support, Im confident that we can be successful. I spent Winter break in Florida, and I believe that the franchise prospects are strong. The state 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 estate support that we need. After we get a few stores up and running, we will have developed a name 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 are manageable, and the ventures high returns justify them. Frankly, I really dont feel that any additional assurances will satisfy Freds doubts. His lack of commitment is a real problem at this point, and needs to be cleared up before it becomes a personal and business problem for all of us.

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Exhibit 1 xxx Resumes Sam Rogers

education 1993-1995 HARVARD BUSINESS SCHOOL BOSTON, MA

Candidate for the degree of Master in Business Administration in June 1995. 1986-1990 HARVARD COLLEGE CAMBRIDGE, MA Bachelor of Arts degree in June 1990. Majored in modern European history. Vice president of the Delphic Club; presently serves as graduate treasurer. BEAR, STEARNS NEW YORK, NY

work experience summer 1994

Corporate finance. Summer associate. Worked on the initial public offering of a manufacturer 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 prospective clients. summer 1993 NEWBURY, ROSEN & CO., INC. BOSTON, MA Corporate Finance. Wrote the prospectus for a $600,000 private placement for a start-up venture in the electronic test equipment rental industry. Performed industry, competitive, and market analyses. STATE STREET BANK AND TRUST COMPANY, INC. BOSTON, MA 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 of services to a large high-technology firm. Corporate Services Department. Senior analyst. Assisted vice president of department in establishing a Eurodollar loan syndication portfolio, in which State Street acted as lead manager and agent. Marketed this service to prospective clients. Made both individual and joint presentations to foreign banks interested in joining syndicates. Managed negotiations among the client, legal counsel, and the banking syndicate for a $10 million revolving loan syndication to a major toy manufacturer. Helped bring to a closing two additional term loan syndications totaling $14 million. Commercial Credit Training Program. Trainee. Completed the training program in eighteen instead of the stipulated twenty-four months. HASTY PUDDING THEATRICALS CAMBRIDGE, MA Producer of this Broadway-like musical comedy show. Selected script, hired professional director, set designer, music arranger, and costume designer, and coordinated an eightyperson company. Improved financial controls and initiated a fund drive. Raised in Boston. Have lived and traveled extensively abroad. Flexible on relocation. Fluent in French. Personal references available upon request.

1990-1993 1993

1992-1993

1990-1992

1987-1990

personal background references

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Exhibit 1 (continued) FRED BOTTINO

education 1993-1995 HARVARD BUSINESS SCHOOL BOSTON, MASSACHUSETTS

Candidate for the degree of Master in Business Administration. General Management Curriculum. Awarded first year honors. 1987-1991 HARVARD COLLEGE CAMBRIDGE, MASSACHUSETTS

Awarded Bachelor of Arts, cum laude, in Economics, June 1991. Wrote Senior Honors Thesis on strategic implications of cost and market structure in the publishing industry. Served as Editor-in-Chief, Harvard Yearbook Publications; Treasurer, D.U. Club; Class Representative, 1991 Class Committee; Executive Committee member, Harvard Fund. Elected Trustee of Yearbook. business experience summer 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 clients shipping subsidiary. Assisted in the defense of an oil services client engaged in a hostile takeover.

1991-1993

McKINSEY & COMPANY

NEW YORK & TOKYO

Functioned as a consultant to top management of McKinseys clients in the telecommunications, computer and office products industries. Assessed the competitive cost position of a major international manufacturer of telecommunications products. Managed internal research project on Japanese competition in high technology industries. Transferred to 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 in London. current activities Kirkland House fellow (an undergraduate residence) and admissions counselor at the Harvard Business School. Specific responsibilities include: Tutor, Harvard College Economics Department, teaching Managerial Economics and Decision Theory. Teaching Assistant, Harvard College General Education Department, teaching Business in American Life. Nonresident Business Tutor, Kirkland House, advising undergraduates on careers and graduate education. Counselor, Harvard Business School Admissions Office, interviewing prospective students. personal background references Enjoy sailing, racquet sports, travel and photography.

Personal references available upon request.

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Exhibit 1 (continued) ERICA MEYER

education 1993-1995 HARVARD BUSINESS SCHOOL BOSTON, MA

Candidate for the degree of Master in Business Administration in June 1995. Pursuing a general management 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. business experience summer 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 and divestitures. Collaborated in cost reduction project resulting in annual savings of $5 million. 1988-1993 1991-1993 CELANESE CORPORATION NEW YORK, NEW YORK

International Finance Manager. Supervised the preparation and analysis of strategic plans and operating budgets. Prepared financial analysis for potential foreign acquisitions and divestitures. Collaborated in cost reduction project resulting in annual savings of $5 million. Financial Analyst. Prepared financial analysis for capital expenditure projects and for actual monthly results versus budget. International Auditor. Supervised audit team in performing operational audits. Developed audit programs for foreign installations. MINNESOTA MINING AND MANUFACTURING (3M) CARACAS, VENEZUELA Senior Cost Analyst. Prepared a product analysis required by the Venezuelan government for the introduction of new products. Analysis included marketing, production and financial data. PRICE WATERHOUSE & CO. MIAMI, FLORIDA

1990-1991

1988-1990

1987-1988

1986-1987

Staff Auditor. Performed financial audits of manufacturing and service organizations. personal background references Fluent in English and Spanish. Enjoy participative sports, reading historical novels and international travel. Personal references available upon request.

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Exhibit 2 xxx 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, cost structure, 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 financial requirements. 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, capital required and use of proceeds, and financial data and financial forecasts.

Exhibit 3

Food franchisesTerms
Franchise Fee per Location ($000) 20 15 30 20 20 20 10 10 10 15 12.5 15 40 10 45 10 15 15 18

Cafe Gelato* Gelateria Italia* Gelatorama* Swensens* Haagen-Dazs* Carvel* Long John Silver Seafood H. Salt Fish & Chips Kentucky Fried Chicken Churchs Fried Chicken McDonalds Wendys Burger King Burger Chef Taco Bell Dominos Pizza Pizza Inn Shakeys Pizza Orange Julius * denotes gelato/ice cream focus

Royalty (% of Sales) 5 0 0 5.5 $0.60/gallon Varies 4 Varies 4 4 11.5 4 3.5 4 5 5.5 4 4.5 6

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Exhibit 4 xxx Population Growth and Income Levels in Florida

1/1/94 Population (000) Bostona Jacksonville Miami Tampa Ft. Lauderdale Orlando Gainesville Sarasota Ocala Daytona Naples Punta Gorda
a

1988-1994 Growth (%) 0.8% 9.7 5.3 6.4 13.1 15.7 9.4 9.7 17.9 12.4 23.6 17.2

3,255 995 2,040 2,200 1,421 1,417 199 537 230 449 188 130

1993 Median Per Capita Income $18,354 15,561 13,758 15,500 16,873 15,979 13,703 17,788 12,361 13,978 22,490 14,675

For reference only.

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

Exhibit 5 xxx Financials

Pro Forma Income Statement: Store Level

Sales Fixed costs: $600,000 Rent (1000 to 1200 square feet) Store manager compensation Cost of product Payroll (incl. asst. manager pay) Royalty Shipping Advertising Other a Rent override Total costs Pretax store contribution $ 25,000 30,000 192,000 52,500 30,000 16,500 5,500 11,000 14,000 376,500 $223,500

Variable costs:

Capital Requirements per Store

Construction, leasehold improvements Equipment costs Fees & miscellaneous expenses, capitalized
a

$ 60,000 85,000 15,000 $160,000

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

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Cafe Gelato

TEM Final Exam

Exhibit 6 xxx Preliminary Financial Projections ($000)

Key Assumptions New store growth is halted in year six to show impact of steady state on financials; actual plan would 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 development fees are amortized over 20-year life of franchise. Working capital equals 8.75% of revenue

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TEM Final Exam

Cafe Gelato

Exhibit 7xxx Excerpts from Prospectus

THE OFFERING
The Company is offering 25 Investment Units. Each Unit consists of 150 shares of its Class A Common Stock offered for $5,000, representing 1.5% of the total outstanding Common Shares of the Company, and $25,000 of the Company's 10% Debentures.
Per Unit $ 5,000 25,000 $30,000 Total $ 125,000 625,000 $750,000

Equity Debentures Total

The capitalization of the Company consists of the $750,000 raised from the Offering plus $75,000 contributed 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 the conclusion of the Offering, assuming all units are sold, capitalization will be as follows:
Debentures Investors Founders $625,000 50,000 $675,000 Equity Investors Founder

$ 125,000 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, the Class A board representation will be reduced to two directors and the founders will designate a replacement 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 Debentures will 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 been repaid in full. The Company plans to pay no dividends for a period of five years, and until such time as the Debentures have been paid in full. Following this five-year period, the Company does have the intention of distributing dividends to investors.

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