SHORT FORM – INVESTMENT PROPOSAL

INVESTMENT PROPOSAL

PROPRIETARY AND CONFIDENTIAL

This material is being provided for your private information. Neither ABC Investment Company or its principals, employees or agents (collectively “ABC”) are soliciting any action based upon it. This material is not to be construed as an offer to sell or the solicitation of any offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This material is based on information that ABC considers reliable, but ABC makes no representations that it is accurate or complete and it should not be relied upon as such. By accepting this material, the recipient agrees that it will not distribute or provide the material to any other person without the express written approval of ABC. The information contained in this material may be based on assumptions regarding market conditions and other matters as reflected therein. ABC makes no representations regarding the reasonableness of such assumptions or the likelihood that any of such assumptions will coincide with actual market conditions or events, and this material should not be relied upon for such purposes. Information contained in this material is current as of the date appearing on this material only. Information in this material regarding any assets discussed herein supersedes all prior information regarding such assets. Any information in the material, whether regarding the assets backing any securities discussed herein or otherwise, will be superseded by the information contained in any final prospectus or private placement memorandum for any securities actually sold.

SECTION I -EXECUTIVE SUMMARY

A. The Opportunity

ABC Investment Company (“ABC”) has identified an opportunity to acquire a well established, high quality quick service restaurant company with a strong regional franchise network. FLATBURGERS of North America, Inc. (“FLATBURGERS”) is a 35 unit chain that is well positioned for national growth. FLATBURGERS specializes in high quality hamburgers and enjoys a strong presence in Los Angeles, Las Vegas and other West Coast cities. The company can be purchased for $7 million dollars. The acquisition will include all franchise and trademarks rights related to the 35 existing restaurants (13 of which are company owned) as well as the licensing rights associated with 8 franchise units that are currently under development.

Originally established in 1952, FLATBURGERS is well known for its freshly made, high quality hamburgers, milk shakes and onion rings and has established an extremely strong regional reputation. In the past 2 years FLATBURGERS has been named as the best hamburger in both Orange County, California and Las Vegas. The chain will soon move into Seattle where a new development agreement has recently been executed. FLATBURGERS is presently owned by Island Entertainment, a diversified entertainment company with significant interests in movie and record distribution. Island’s principal owner is Chris Blackwell, a well known leader in the entertainment industry whose accomplishments include developing the careers of Bob Marley and other significant musicians. Island Entertainment has determined that the food service industry falls outside of its core competency and has therefore decided to sell the FLATBURGERS division and focus on other business lines. This presents an opportunity to create substantial value through the commitment and dedication of a new management team that can take this exciting franchise nationwide. Preliminary indications are that the company may be acquired quickly through the facilitation of a management buy-out.

ABC is seeking debt and equity investors to allow it to take control of FLATBURGERS and expand and reinvigorate the brand. While the fast food industry is competitive, FLATBURGERS’ high quality product and established infrastructure, systems, training programs and reputation provides an outstanding platform for growth. ABC brings an experienced management team with strong backgrounds in finance, restaurant operations and marketing that will recapitalize the company and grow the brand throughout the United States. Due to the relatively small number of existing franchisees, even modest expansion will allow management to quickly realize substantial economies of scale and dramatically improve financial results. ABC believes that within 3 to 5 years, FLATBURGERS will be significantly expanded, restructured and well positioned for an IPO.
B. Transaction Highlights
➢ Opportunity to acquire a company with strong current cash flow that is undervalued and poised for growth
➢ FLATBURGERS is an established concept in a proven growth industry.
➢ Unencumbered territorial rights will allow for fast expansion.
➢ Opportunity to grow a substantial licensing and royalty income stream to position the company for an IPO or other capital exit.
➢ Repositioning and sale of select corporate owned stores should provide fast return of equity investors’ initial capital investment.
➢ Committed and focused new management team will provide:
1. Established restaurant and retail experience and contacts.
2. Significant financial experience and contacts.
3. Strong real estate and site selection expertise
4. Pre-identified franchisee candidates that will allow for immediate targeted growth.

SECTION II – INDUSTRY OVERVIEW

FLATBURGERS is part of the growing $ 354 billion dollar per year food service industry. As the American workplace has become more diversified with an increased number of single parent and dual wage earning households, Americans have become more accustomed to “eating out” on a regular basis. As this has occurred, the restaurant industry and the quick service segment in particular have taken on increasing importance in everyday life. Under this new paradigm, the quick-service segment enjoys a competitive advantage based upon its ability to provide consumers with a family meal at a reasonable price in a short period of time. As a result, quick-service restaurants have done particularly well over the past two years and have enjoyed significant sales growth.

In 1998, quick-service restaurants accounted for 46% of total restaurant sales showing a 5.1% growth over the prior year. Sales are expected to top $110.4 billion in 2000, a 4.6 percent increase above the strong 1998 growth. Despite some perceptions that the American consumer has grown disenchanted with “fast food”, recent surveys have found that consumers are increasingly satisfied with the products offered by the quick-service industry. According to the National Restaurant Association’s 1998 Consumer Survey, 76 percent of consumers feel that the value they receive for the price they pay at quick-service restaurants meets or exceeds their expectations. This represents an 11% increase over the Association’s 1995 Consumer Survey. As consumers have expanded their regular use of the quick-service product for every day meals, “freshly made food” has emerged as the current marketing strategy that quick-service restaurants are using to attempt to reinvent themselves. McDonalds and Jack in the Box provide two examples of companies that are trying to deliver a new “cook to order” message. The “freshly made” strategy that these established industry giants have ignored for years and are just now attempting to develop has been the core strategy that has defined FLATBURGERS for over 40 years.

SECTION III – FLATBURGERS – OPERATIONAL OVERVIEW

A. The Concept

One day back in 1952, an enterprising young woman named Lovie Yancey had one of those deep gnawing cravings we all occasionally get–a craving for a big juicy hamburger. Alas-none was to be found-at least not quickly-so Lovie went to the grill and created her own huge juicy hamburger to the rave reviews of her friends and family. Lovie christened her creation the “FLATBURGERS” and encouraged by family and friends opened the first FLATBURGERS restaurant “The Last Great Hamburger Stand” in Los Angeles. In the 1950’s the word “Fat” meant you’d really made it – Fat Ciy- Fat Times- Fat Cat. Word of Lovie’s burgers grew throughout the LA scene. The only thing Lovie loved as much as her burgers was music. Lovie filled her restaurants with jukeboxes playing the sounds of rhythm and blues, jazz and classic soul which have captured the hearts and tastes of generations of pop culture legends from Elvis Presley to Will Smith. FLATBURGERS’ customers exhibit fierce loyalty to the brand. Leaving FLATBURGERS behind made it to the top of David Letterman’s list of the most painful things about leaving Los Angeles. Half a century later while other places are just discovering taste, FLATBURGERS is still making hamburgers the way Lovie did. Not puny fast food patties, but fresh USDA choice domestic beef, cooked to order, every time with real hand scooped ice cream milk shakes and fresh squeezed lemonade.

Although FLATBURGERS is marketed as a quick-service restaurant, it does not operate like the typical fast food franchise. FLATBURGERS’ freshly made, high quality hamburgers, thick onion rings and steak fries provide its customers with higher quality products that more closely resemble those from the old fashioned hamburger stands which existed before the term “Fast Food Restaurant” was recognizable. FLATBURGERS’ current prototype restaurant is approximately 1,800 square feet and provides the public with an exhibition view of FLATBURGERS’ famous hamburger-cooking grill which freshly cooks each burger to order. Each restaurant has both counter seating facing the exhibition grill and table seating. The fresh open cooking and counter seating recreates the hamburger stand atmosphere that Lovie Yancie established back in 1952 without sacrificing quality or service. Each FLATBURGERS restaurant also features a well stocked juke box that must meet uniform franchise standards and offers a selection of rhythm and blues and classic soul music to create a distinct, bluesy atmosphere that draws its customers in, in a way that the plain vanilla offerings of the typical quick-service hamburger chain could never recreate.

The fresh not frozen quality of the FLATBURGERS food experience has created its brand value. While restaurant chains have come and gone over the past 40 years, this small but well loved chain has established its own enduring concept by delivering a simple, high quality and inexpensive meal, amidst a background of some of the greatest American pop music ever written

B. FLATBURGERS Menu

FLATBURGERS—————————————$2.49
King Burger—————————————$3.49
The Baby Fat————————————–$1.35
All Beef Grilled Hot Dogs————————-$1.89
All Beef Grilled Chili Dogs———————–$2.49
Grilled Chicken Breast Sandwich——————-$3.69
Turkey Burger————————————-$2.49
Bacon & Egg Sandwich——————————$1.89
Fat or Skinny Fries——————————-$1.39
Home made Onion Rings—————————–$1.75
Chili Cheese Fries——————————–$2.69
Real Ice Cream Milk Shakes————————$2.29
Fresh Lemonade————————————$1.39
Assorted Soft Drinks——————————$0.99

FLATBURGERS restaurants are typically open from 10AM until 11PM. In certain markets they have been successful in 24-hour operations. The FLATBURGERS menu is simple. Although there are approximately 8 different main menu selections, they are made with only four different core products. This small inventory is extremely critical in mitigating the risk of a restaurant operation’s most variable expense exposure; product waste. The hamburger, which is clearly the cornerstone of the restaurant, utilizes 100% steer beef, made fresh –not frozen. Notwithstanding its name, the FLATBURGERS is anything but fat. In fact, it is a high quality burger with a relatively low fat content of 18% that is comparable to the same low fat, high quality burger that is used by major first class hotels and restaurants.

C. Sales/Site Locations

The following data has been provided to date with respect to corporate sales for the period from July 1, 1998 thru June 30, 1999:

Corporate Franchised
Units Units Systemwide
Total # 13 15 28
Total Sales $ 8,251,126 $10,477,547 $18,728,673
Avg. Sales/Unit $ 634,702 $ 698,503 $ 668,881

The sales reportedly vary widely between stores, with older smaller stores averaging between $300,000 and $650,000 per unit, while newer stores have enjoyed sales ranging from $750,000 to $1,500,000 per unit.

Consistent with the Los Angeles youth demographics of the late 1950s and early 1960s, original FLATBURGERS stores were located primarily in urban in-line retail locations. As the LA population has migrated into more suburban locations, FLATBURGERS has focused new development in these areas. The Company’s recent expansion to Orange County, California provides an example of the potential strength of the free standing suburban location model as these newer free standing stores have generated higher average sales than the older urban in-line locations. Going forward, ABC’s site selection criteria will revolve around 4 basic prototypes:

(a) Suburban Free –Standing
(b) Urban In-line
(c) Entertainment/Mixed Use Complexes
(d) College campuses

D. Existing Franchise Structure

FLATBURGERS currently offers two franchise opportunities. The first is a non-exclusive right to operate a FLATBURGERS business. The second is a designation as a Developer with the exclusive right to own and operate FLATBURGERS in a specific region. As a single restaurant franchise applicant, a $30,000 franchise fee is required. As a designated Developer, a deposit of $10,000 for each proposed restaurant is required in addition to the $30,000 franchise fee per restaurant.

Developers are required to establish at least 3 restaurants during the first 5 years of their development agreement. All franchisees must agree to the following franchise guidelines:

1. Uniformity: All FLATBURGERS franchise restaurants must be constructed and operated under certain guidelines as indicated in the franchise agreement, including restrictions on sources of products and services.

2. Training: All franchisees (and key employees) are required to enroll and complete a four to seven week training program at the company’s training facility in Santa Monica, California.

3. Operating Manual: Each franchisee will be required to follow guidelines indicated in a FLATBURGERS Corporate Operating Manual

4. Advertising Program: The franchisee will contribute 2% of gross sales toward regional promotional/advertising activities. The franchisee will also contribute 1% of gross sales toward local promotional/advertising activities.

5. Financing: The franchisee is required to obtain any financing necessary to construct, equip, supply and operate the restaurant. Financing is limited to 75% of total project expenditures. This can be waived in certain circumstances where franchisees own more than one restaurant. To date, FLATBURGERS has made no efforts to work with national lenders to design a customized third party lending program that it could offer to potential franchisees. Establishing a relationship with a recognized franchise lender and developing a specific FLATBURGERS’ financing program would be one of the first priorities of ABC.

E. Operational Overview Summary

Strengths
➢ High quality food.
➢ Efficient store level economics.
➢ Relatively small menu results in low inventory levels.
➢ Simple operational layout and preparation systems.
➢ Operational systems and infrastructure in place.
.
Weaknesses
➢ Older stores are in average to poor repair.
➢ Improved franchise quality control is needed.
➢ Newer updated kitchen equipment is needed to reduce cooking time.
➢ Point of Sale technology and management’s control systems need to be evaluated.
➢ There is no active sales effort to grow franchises.
➢ No financing programs provided for franchisees.

SECTION IV – BRAND IMPROVEMENT& EXPANSION STRATEGY

A. Strategic Overview

Over the last several years, FLATBURGERS has emphasized austerity as opposed to growth. Despite existing management’s efforts, the lack of financial commitment from the parent company, has significantly affected FLATBURGERS’ ability to grow franchises and maintain operations in good repair. To build brand awareness and grow the company, FLATBURGERS will have to develop a reputation within the franchise community as a company that will support its franchisees with first class training, marketing, and quality control

The FLATBURGERS brand is well known and established in California. It has recently expanded into Nevada and has entered into franchise development agreements with franchisees in Seattle. However, with just 22 franchised and 35 total restaurant units, FLATBURGERS does not enjoy the economy of scale benefits that typically accrue to a quick-service restaurant franchisor. The current royalty revenue stream is insufficient to support management overhead and develop a strong broad based marketing program. Moreover, FLATBURGERS has not secured significant bulk purchasing contracts or strong financing opportunities for its franchisees. It is ABC’s goal to expand the FLATBURGERS brand to a minimum of 200 units over the next 5 years.

ABC’s immediate strategy for FLATBURGERS will be to (i) improve operations in existing restaurants (ii) reduce the real estate and operating restaurant assets on its balance sheet (iii) create a quality assurance program that will uphold franchise standards and protect brand quality (iv) increase brand awareness and expand the number of franchises on the West Coast of the United States and (v) implement an aggressive sales effort to expand the brand to the East Coast and Midwest.

B. Target Markets

ABC will not be dogmatic in its development approach and plans to remain open to new expansion opportunities as they arise. However, to initially implement FLATBURGERS’ expansion ABC plans to use a highly focused target market strategy. ABC will initially focus its growth efforts on the New York metropolitan and Florida markets. This initial focus will benefit the company in a number of ways. First, it will capitalize on existing relationships that the new management team brings to the company. Second, a highly focused development strategy will allow management to control the introduction of the brand in each market through the development of a limited number of corporate owned stores without devoting extensive capital to corporate real estate. As shown in the financial projections attached as Exhibit 1, ABC plans to limit the development of corporate owned stores to 3 new stores in each focus market. This would require approximately $1,000,000 in total equity capital for new store development. This level of equity investment will not overly burden the company’s returns, but should be sufficient to allow the company to create its own high profile stores as it enters new markets. These stores will be used to (i) control the introduction and establishment of the brand (ii) provide a nearby training ground for new franchisees and (iii) provide a foundation and laboratory in which new concepts and operational policies can be tested. Once the product is well established in a region, ABC will be able to sell corporate stores to franchisees and redeploy the capital into developing stores in new markets.

In addition to limiting initial capital requirements, utilizing a specified targeted market approach in growing the brand will allow for focused and effective advertising campaigns. Initially devoting all advertising to a few concentrated areas will prevent dilution of FLATBURGERS’ marketing efforts and establish a stronger brand. By taking a well known Los Angeles brand and introducing it next into highly populated, young and cultural leading edge markets like New York City and South Beach, ABC will create momentum that will spur the introduction of the brand into other parts of the country.

C. Franchise Growth Projections

ABC’s growth plan will commence immediately with the upgrading of the existing 13 company owned stores to prepare some of them for an eventual conversion to franchised units. ABC will also quickly undertake the development of new flagship company stores in each of its 2 new primary target markets. In addition to the 6 new company stores, ABC will endeavor to add 6 new franchised stores in its first year of operation and then increase franchise development to one store per month during the following year. As outlined in the projection attached as Exhibit 1, the development projection grows to 5 new franchised stores per month by the fifth year of ownership. These growth plans appear achievable when one considers the fact that FLATBURGERS has never undertaken any significant sales efforts outside the West Coast. ABC will use its established contacts in the hospitality industry and on Wall Street to identify operators and provide strong financing programs to facilitate the development of new restaurant units. Based upon its Northeast and Florida relationships alone, ABC foresees immediate and significant developer interest in these new markets. As the product develops a reputation for fresh, high quality made to order food in these regions, ABC will pursue an “in fill” strategy as it moves the brand into other markets across the Unites States.

As a general rule, FLATBURGERS will grow the chain through third party franchisees that have strong restaurant, hospitality and franchise backgrounds. It is the intention of ABC to use its’ extensive hospitality and developer relationships to aggressively pursue the existing franchisees of various larger restaurant chains that do not currently have a hamburger concept. Examples could include franchisees for Kentucky Fried Chicken, Taco Bell or Subway. While these existing franchisees may be restricted in their ability to grow their current brand, a fresh new product would allow them to leverage off their existing market presence, especially where their brand is a non-burger product. Corporate development will be limited and pursued on a selective basis as described above to allow ABC to retain control over the initial quality and establishment of the brand in new regions.

SECTION V – ECONOMICS

A. Acquisition/Capitalization

The estimated purchase price for the FLATBURGERS’ trademark, royalty stream and 13 company owned stores is $7 million. An all cash purchase will be required. In addition to the acquisition price, ABC plans to raise an additional $1,875,000 to cover existing store retrofit, equity for new corporate development and a working capital reserve. ABC plans to leverage between 60 and 75% of the acquisition costs with institutional lenders and is looking to raise the additional capital through a convertible preferred equity offering.

ABC intends to redeem 100% of the initial investors’ equity with a 15% return within 2 years of the acquisition by converting selected corporate owned stores to franchise restaurants. Readying these assets for sale will be one of ABC’s first priorities after taking over the company. Although ABC has not yet had an opportunity to fully review the economics of the company owned stores, based on the 1999 fiscal year end sales data that has been provided and a review of industry standards, ABC forecasts that within two years of taking over operations it will be able to generate net cash flow of between $850,00 and $1,300,000 from the company owned stores. Based on this ABC believes that it will be able to sell 9 stores for approximately $6 million. This would be treated as a capital event and proceeds would then be distributed to pay down 100% of the initial investors’ equity plus a 15% return. To the extent that proceeds were insufficient to fully pay back the initial investment and accrued return, the company should at that point have sufficient royalty streams to finance the remainder that would be required to pay back the investors.

The sale of these assets should not only provide the initial investors with a return of all of their capital but will help stabilize FLATBURGERS’ income statement by enabling. the company to rely primarily on predictable recurring franchise royalties. This will place the company in a strong position for future capital raises through either the equity or asset backed debt markets.1

B. Initial Ownership Structure/Investor Returns

ABC is seeking to raise approximately $4.5 million of convertible preferred equity to acquire, reposition and expand the Company. The convertible preferred holders would receive a dividend of 15%. The dividend would accrue and could be paid off at the Company’s option at any time over a 5 year term. At the time of payoff the investors would receive (i) their accrued dividend (ii) the principal amount of their initial investment and (iii) a percentage of the common equity ownership in the company. The amount of the common equity ownership conversion will vary based upon (a) the amount of initial equity raised and (b) the date on which the conversion from preferred to common equity takes place. The conversion formula will be structured to incentivize the Company to repay the preferred stock as quickly as possible by providing for a conversion ratio that will increase for each year that the preferred stock remains outstanding.

Assuming an initial preferred equity raise of $4.5 million, the preferred stock would receive in addition to its principal and accrued dividend, common stock ownership in accordance with the schedule set forth below:

Redemption Year Common Ownership %
1 15%
2 20%
3 25%
4 30%
5 35%

Pursuant to the plan described above, ABC’s current plan is to utilize the proceeds from the asset sales currently anticipated for the end of year 2 to repurchase and convert the Preferred Equity. It is ABC’s intent to return 100% of the investors’ money with a 15% return as quickly as possible. At this point investors will have no basis in the company and will still enjoy the benefits of the value that will be created through expansion of the brand.

C. Public Offering Potential/Quick-Service Competitor Valuations

After growing the FLATBURGERS brand to a 200 plus quick-service restaurant chain with units throughout the United States, the Company should be able to access the public markets. This will provide additional capital for growth. It will also provide the initial investors with liquidity for their remaining interests in what should at that point be a zero basis investment. The chart attached as Exhibit 2 provides comparative valuation data for publicly traded quick-service restaurants that will be competitors to FLATBURGERS.

In the midst of today’s high flying internet based stock market, quick-service restaurants offer investors solid returns and modest valuations. Quick-service restaurants are currently trading at trailing 12 month P/E ratios ranging between 7 and 25 based on the size and national presence of the company with an average of approximately 13. The financial projections in Exhibit 1 have thus used a conservative trailing twelve month P/E ratio of 12 along with the modest store growth rates described above to project a public offering value that would range between $40 and $50 million within 6 years. Even at today’s modest valuation levels, the FLATBURGERS acquisition offers a tremendous value creation opportunity.

D. Financial Projections

The projections provided in Exhibit 1 are based on industry ratios and limited information that has been provided to date by FLATBURGERS. More detailed analysis will be performed during a due diligence period. There can be no guarantee as to financial performance which may vary considerably based on economic conditions, market factors and the operations of the franchisees. Nevertheless, ABC believes that these projections provide a reasonable basis for analyzing the economic opportunity.

A summary of the projections is provided below. The projections are based on the following primary assumptions:

1. Conversion of 9 existing corporate owned units to franchises within 2 years.
2. Growing the chain to 200 stores over a 5 year period.
3. Annual Same Store Sales Growth of 2%
4. A public exit strategy based on Trailing Twelve Month P/E and EBITDA ratios that are consistent with the conservative end of today’s market valuations for quick-service restaurants

Based on these projections ABC believes that it would be able to pay back in its entirety an initial preferred equity investment of approximately $4,500,000 with an accrued return of 15% between 1 and 3 years after the acquisition. Depending on the timing of such payoff and the proposed public offering, the original investors would then have received within 2 to 5 years their initial investment with a 15% return, plus an additional ownership interest in the company that could be worth between $8 and $10 million over a five year period.