Queen Essays

9-898-196 R E V : J U L Y 3 1 , 2 0 0 3

________________________________________________________________________________________________________________ Senior Lecturer Michael J. Roberts prepared this case. 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 © 1998 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 means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

M I C H A E L J . R O B E R T S

ICEDELIGHTS

On March 10, 1995, Paul Rogers, Mark Daniels and Eric Garfield walked out of their final negotiating session with ICEDELIGHTS. The three were negotiating for the Florida franchise rights to ICEDELIGHTS, a European-style cafe/ice cream shop selling a variety of beverages and frozen desserts.

The session had gone fairly well, and they felt as though they had gotten most of the concessions that they wanted. Yet, mixed with this air of excitement was a sense of trepidation. There was a great deal of work that remained to be done on the deal, not the least of which was the securing of additional financing. In addition, other issues remained: Did the Florida market offer good potential for an ice cream business? Did the deal make good business sense? Was it right for them personally at this point in their careers? Did they have the skills and resources to make the business work, assuming that the deal came off? Did the same factors that made them good friends make them good business partners?

Background

Paul Rogers, Mark Daniels and Eric Garfield were three second-year students at the Harvard Business School (HBS) who had all been section mates in their first year. (See resumes, Exhibit 1.) The idea of starting, or buying, their own business arose during the week just prior to the start of second-year classes. The three had rented a house on Cape Cod for a week. Fresh from their summer jobs, they naturally shared their views of what their summer experiences had been like, and what impact these experiences would have on their career choices.

� Paul, 26, had spent two and a half years with State Street Bank in Boston. He had worked for the summer as an associate with the New York investment bank of Bear Stearns, and had enjoyed the experience. Paul, however, was excited by the challenge and rewards of creating and managing an enterprise of his own at an early stage in his career.

� Mark, 25, had spent two years with McKinsey & Co., and had also turned to investment banking for the summer. While he had enjoyed this experience, Mark felt a genuine desire for the independence and satisfaction of owning and managing his own business.

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He was unsure how additional work in either consulting or investment banking would bring him closer to this goal.

� Eric, 30, had spent five years with Celanese in the international finance area. After pursuing positions with investment banks and consulting firms, Eric accepted a position with McKinsey’s Atlanta office. Although he enjoyed the experience a great deal, Eric also felt drawn towards owning his own business. The independence, financial rewards, and opportunity to manage and truly create an organization seemed unequaled in any other career.

During that week on Cape Cod they spent a great deal of time on the beach and in the local bars discussing their experiences, and speculating on what lay ahead. They talked about what they were looking for in a career: each of them wanted a job he would truly enjoy, independence and great financial rewards. In addition, there was something incredibly appealing about building and managing an organization—really creating a business—being an entrepreneur. Moreover, it was clear that none of the “traditional” opportunities offered this. The idea of “having our own business” took hold.

Each of them had, at different times, thought that running his own business might be fun. During that week, they realized that this opportunity was the only option that would truly satisfy their objectives. Slowly, the focus of their thought turned to “How do we get there?”

Their discussion surfaced two fundamentally different approaches:

� The first approach, the “conservative” one, had two possibilities:

! They could pick an industry, really try to learn a business, develop their management skills and keep an eye out for opportunities; they were bound to learn a great deal, and they would be making their mistakes on someone else’s money. In four or five years, they were bound to spot an opportunity and could then obtain the financing. Everyone always says, “the money’s there if you have a good idea.”

! Or, they could get into the deal flow; go to work for a venture capital firm or the M&A area of an investment bank. They would learn how to evaluate deals and make contacts with people that could provide financing. Then they would buy something for themselves and run it!

� The second approach was, “Why wait?” They argued that they had the skills and abilities to run a business. Not a high tech or sophisticated manufacturing firm, but surely there were some businesses that they had the collective talent to manage—all they had to do was find one. Further, in four or five years, it would be much harder to do. One would be used to the financial security and life-style of corporate life; it wouldn’t be easy to go back to $40,000 or $50,000 and 80-hour weeks. Finally, with a spouse, family, car payments, a mortgage and a summer home or ski house on the way, the risks associated with failure would be far greater down the road.

As school began, they decided that it was certainly worth trying to find a business to buy.

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The Search

The three began talking with professors at the Business School, lawyers and business contacts. They asked for advice, and mentioned that they were in the market to buy a company. It soon became clear that they needed some concrete specifications regarding the businesses they were interested in, both as a guide to potential sources of information and to show a minimum level of commitment to the project. A brief specifications sheet was pulled together (Exhibit 2) which described the businesses they would be interested in, and included their resumes.

The process proceeded through October and November with little in the way of results. People were generally helpful and encouraging, but it was very tough to get specific leads.

In late November, Paul’s father, Mr. Rogers, mentioned that some friends of the family had recently purchased the ICEDELIGHTS franchise for Oregon and California; he had heard that Florida might be available. The three were excited about the possibility even though retailing had not been one of the industries targeted in their specifications sheet. The skills required to run a food franchise seemed within their range of abilities. It sounded like a fun business, and the potential financial rewards seemed to be great.

ICEDELIGHTS

ICEDELIGHTS was a Boston-based chain of food outlets selling a variety of beverages, pastries, and frozen desserts. There were currently nine stores in the New England area (primarily Boston), with several more scheduled to be opened during 1995. ICEDELIGHTS had sold its first franchise rights (Oregon and California) in June 1994, and the first of these stores was scheduled to open in the summer of 1995.

The four of them met with ICEDELIGHTS on December 10. Bob Andrews, the chairman, revealed that they had received dozens of franchise requests for Florida. He mentioned seven individuals in particular, each with extensive experience in either the fast-food industry or Florida real estate and who clearly had the financial resources required. Yet he felt that, at this time, ICEDELIGHTS was stretched to its capacity. They had grown slowly and carefully, and were committed to maintaining a quality operation. Managing their existing locations and their own expansion, as well as providing a high level of assistance to the California franchise, would consume their available resources for the near future.

ICEDELIGHTS’ conservative approach was due in large part to problems the company had had in its early years. Bob Andrews purchased ICEDELIGHTS when it had two locations. Early expansion resulted in financial problems when the company did not have the necessary organization and control systems in place.

Following this meeting, they met with the president of ICEDELIGHTS—Herb Gross. As the chief operating officer, he provided the group with a more detailed description of the ICEDELIGHTS operation. He, too, stressed ICEDELIGHTS’s commitment to slow, quality growth. He felt, however, that there was some possibility that a deal could be worked out. Paul, Mark and Eric expressed their enthusiasm for the business, and their desire to really get involved in the day-to-day, hands-on operations of ICEDELIGHTS. they left impressed with the quality of ICEDELIGHT’s management and its potential for growth.

During this conversation, Paul, Mark and Eric gained a better understanding of how ICEDELIGHTS worked. The heart of the concept revolved around several factors: first,

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ICEDELIGHTS sold an Italian “gelati” type ice cream which was extremely rich and “homemade” looking and tasting. Yet, through a great deal of effort, ICEDELIGHTS had been able to perfect the process of freezing this homemade ice cream. This enabled ICEDELIGHTS to manufacture each of the products centrally, freeze them, and then sell on the premises of each store location. Most shops with a high-quality ice cream made the product on the premises. Moreover, ICEDELIGHTS had built and developed a very impressive organization. Their ongoing standardization of production, training, accounting, and control systems, store management and store design and construction convinced Paul, Mark and Eric that they would receive a great deal of support as a franchise. Finally, by marketing the concept as a cafe, this chain was able to derive sales throughout the day from coffee, pastry and light snacks as well as ice cream in the afternoon and evening.

At this point, Paul, Mark and Eric felt that a real opportunity was finally within their grasp. They realized that a great deal of work lay ahead if they were to have any chance of pulling the deal off. The opportunity to do a field study in the Entrepreneurship area seemed to be an excellent vehicle to both accomplish this effort and get some advice from a knowledgeable advisor. They put together a proposal (Exhibit 3) which was accepted.

The group met briefly with ICEDELIGHTS again in early January. Bob Andrews and Herb Gross indicated that they were interested in pursuing the Florida franchise further. They were very impressed with Paul’s, Mark’s and Eric’s abilities and willingness to get involved in the day-to-day operations of the franchise. The other groups had all been interested in purchasing the franchise as an investment. They viewed the desire to be involved in the operations as crucial to maintaining the quality of the operation. A dinner was scheduled for January 11 to discuss how to proceed.

The Deal

On January 11, Paul, Mark, Eric and Mr. Rogers met Bob and Herb at a restaurant in Boston. ICEDELIGHTS indicated that they did want to go ahead with the Florida franchise, but because they were so stretched, they did not want to be legally bound to proceed. Nonetheless, they recognized that, because of their job search situation, Paul, Mark, and Eric did need some security that the deal would come off. So ICEDELIGHTS proposed the following terms:

The franchisee (Paul, Mark, Eric and Mr. Rogers) would:

� Pay $200,000 up front.

! $100,000 development fee for the State of Florida; and, ! $100,000 in 5 prepaid franchise fees of $20,000 each.

This was prepayment for the first five stores. � Pay $20,000 per store opened (after the first five, which were prepaid as above).

� Pay a 5% royalty on sales.

In exchange, ICEDELIGHTS would allow them to use the ICEDELIGHTS name, sell them product for roughly 32% of suggested retail price, train them and one manager per store opened, and would provide them with assistance in finding real estate, selecting locations and constructing stores. In effect, ICEDELIGHTS would provide them with the first few locations as “turnkey” operations.

Because ICEDELIGHTS did not wish to be legally obligated to proceed if they felt that their operation was still stretched to capacity, these terms would be subject to an option. The parties would sign an option which specified the terms of the franchise agreement (as above):

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� The franchisee (Paul, Mark, Eric and Mr. Rogers) would make a deposit of $75,000. If ICEDELIGHTS did not agree to proceed within nine months, the group would get back its $75,000 plus interest.

� If ICEDELIGHTS did agree to proceed, the franchisee would pay the remainder of the up-front fee ($125,000) and proceed.

� If the franchisee did not agree to pay the remaining fee and proceed, they would forfeit the $75,000 deposit.

ICEDELIGHTS stressed that they were personally committed to going ahead with the Florida franchise as soon as California was running smoothly. They said that it was in everyone’s best interest that they not be obligated to proceed if they did not feel that they could provide the franchisee with the level of support required. They further felt that by locking in the terms of the franchise, they were contributing something to the deal.

Another dinner was scheduled for January 25, two weeks hence, when Paul, Mark, Eric and Mr. Rogers would deliver their decision to ICEDELIGHTS.

Paul, Mark and Eric had two weeks to make a decision. The main issue now seemed to be financing. As the former president of a Boston-area bank, Mr. Rogers had a great many friends and associates who were potential sources of financing. Mr. Rogers began approaching them in hopes of finding one or two individuals to back the entire deal.

In the meantime, Paul, Mark and Eric met with ICEDELIGHTS to get some financial data which would allow them to generate pro forma financials and estimate both the financing required and the attractiveness of the operation.

First, they compared the terms of the ICEDELIGHTS franchise with those of other leading franchises (Exhibit 4). On one hand, ICEDELIGHTS seemed expensive for a new and unproven franchise. Yet, it appeared to offer excellent profit potential, and they were obtaining the rights to the entire state of Florida.

They did try to get some idea of the market potential which Florida offered, and pulled together the data shown in Exhibit 5.

Next, they looked at the store-level income statement (Exhibit 6). The operation appeared to be incredibly profitable, particularly in light of the investment required. At $160,000 investment per store, they estimated that they would require $750,000 in financing, as follows:

Up-front fee $200,000 First 3 stores 480,000 Working capital 70,000 $750,000

Next, they had to think about how to structure the deal and how much equity to keep: Could they

keep enough to make it financially rewarding to them and attractive enough for investors? Would the operation require continued infusions of cash for growth?

They knew that the more debt they could put in the capital structure, the better, due to the deductibility of interest payments, and the nondeductibility of dividends. Further, debt and fixed interest payments would both restrict their growth and increase the riskiness of the venture.

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After running some preliminary pro formas (Exhibit 7), they decided on a first cut at the deal capital structure. It seemed as though they could give 25% of their company away, and still give investors an attractive return.

Mr. Rogers’ contacts had said they were enthusiastic about the concept, but in the two-week period, they were unable to get any firm commitments. Mr. Rogers himself, however, had agreed to invest $75,000 in the venture.

On further reflection, Paul, Mark and Eric decided that the deal was attractive to them even if they had to give up a good deal more than the 25% which they had projected. The enthusiasm which Mr. Rogers’ contacts had expressed convinced them they would be able to raise the money. They decided to proceed.

On January 25, they met with ICEDELIGHTS and indicated that the terms were acceptable, and that they wanted to go ahead with the deal. They agreed that their lawyers would be in touch to draw up the papers.

Financing

The following weekend, Paul, Mark and Eric raced to produce a prospectus. The document, excerpted in Exhibit 8, presented the concept for the business, and the proposed financing and capital structure. During the next three weeks, they spoke to friends and associates of Mr. Rogers’, presenting their business plan. At the end of three weeks, they had informal “commitments” for 15 units, or $405,000 ($375,000 of debt and 30,000 of equity). With Mr. Rogers’ $75,000, they had $480,000, and were only $270,000 shy.

During this time, it became clear that they would have to give up more than the original 25% they had planned. Not surprisingly perhaps, potential investors were somewhat put off by the 75/25 split in the deal. Paul, Mark and Eric decided that as long as they were giving up more of the company they could raise a bit more money, and revised the deal as shown in Exhibit 9.

In the process of determining the original deal structure, the three thought that investors would primarily be concerned with their overall return—ROI, IRR, or NPV. But, in fact, their requirements were more complex:

� Short-term repayment of original investment, with significant control during this phase.

� Long-term capital gain with reduction in investor control once original investment repaid.

There were also significant differences in the level of sophistication of potential investors. Some liked the concept, and that was sufficient. For others, a detailed analysis of investors’ versus founders’ risk and reward was required. In addition, there were several other issues which remained to be settled, including:

� Form of organization. They had made a preliminary decision to use a straight corporation, but it was possible that a Sub-S, Limited Partnership, or LLC made more sense.

� Legal counsel. They had decided to use Ernest Brooke, an acquaintance of Mr. Rogers’ who had indicated an interest in investing. Yet, a few weeks had gone by and he now

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seemed more hesitant. Further, he did not have any particular expertise in securities or corporate law, and had not been particularly helpful.

� The market. Was Florida really a good spot for this business? Throughout, they had attempted to obtain market information on Florida without spending the time and expense on a lengthy trip. The data they had obtained seemed inconclusive.

Throughout this period, 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 was actively pursuing other opportunities. Each of them had the opportunity to return to the firm where they had worked for the summer, as well as one or two other possibilities.

The Decision

It was now February 22, and they had gotten a preliminary set of documents to review. The time when they would actually have to sign papers and put down their $75,000 seemed to be drawing near. A meeting was set for March 10 to put the finishing touches on the agreement.

At this point, Mark began having some strong doubts about the advisability of proceeding. He expressed them this way:

I started getting these funny feelings in the pit of my stomach. I guess it was fear. It seemed to me that we had all gotten very caught up in the enthusiasm of the project, and had not been as hard-nosed about the business decisions as we should have been.

First, we had not even been to Florida. Eric lived there, and was home at Christmas, but we never thoroughly investigated the market. We didn’t know if there was competition there, and if there were other ice cream shops/cafes, how were they doing? Who knew if the Florida market would be attracted to the rich and different style of ice cream we offered? Finally, this was a “mall-based” retail economy. Who knew how we would do in the malls?

Second was the nature of our agreement and relationship with ICEDELIGHTS. It seemed to me that we were absolutely, critically dependent on them for real estate and product. We didn’t 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. They were under no legal obligation to supply us, and we had no right to build our own production facility. What happened if they decided to expand their own operation, and couldn’t supply us? Gelati is not like a hamburger bun —you can’t just pick it up anywhere. I thought that our agreements should recognize this dependency and that ICEDELIGHTS should take 25% of our company instead of the $200,000 up front. This would give them a real financial incentive to act in our best interests.

Finally, there was my relationship with Paul and Eric. 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 wasn’t comfortable with.

At this time, Mr. Rogers was in Florida and reported that there were a small number of ice cream shop/cafes serving gelati. Further, one of these shops was not doing too well. Obviously, there were a great many of the typical ice cream shops, including Haagen-Dazs, Baskin-Robbins, and several

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local chains. Still, he felt that there were ample locations to provide for a fast-growing business. They also learned that there were two other operations with a similar focus on gelati—Gelateria Italia and Gelato Classico—which were centered in California, but had recently started to franchise.

In preparation for their March 10 meeting, they decided that they would:

! Go to Florida over spring break to thoroughly investigate the market.

! Press ICEDELIGHTS to provide further assurances that they would be able to deliver the real estate support and product that they needed.

The issue relative to their attorney was still dragging on. Mark had mentioned his concerns about Ernest Brooke to a friend, John Stors, who was an attorney with a prominent local law firm. John had offered to check with other lawyers in his firm to see if anyone had ever dealt with Brooke. Sure enough, a half-dozen or so lawyers in the office knew Brooke and had dealt with him on tax, real estate, divorce and estate issues. One mentioned that he had won a case in court over Brooke, a case that Brooke should not have lost. And, most damaging of all was the revelation that Brooke was known to be a very close, personal friend of Bob Andrews, ICEDELIGHTS chairman.

Based on this, they decided to use Evan Post and risk alienating Brooke, who seemed willing to invest $30,000 maximum. Post had a reputation as an excellent counsel for small start-ups, as well as good contacts with potential investors. They spoke with Brooke, who was quite accommodating, and who agreed that the lure of potential investors was attractive, and a legitimate reason for including Evan Post.

Finally, they had exhausted all of Mr. Rogers’ contacts and were still about $400,000 short; some investors’ “commitments” had evaporated over the past month. They had a meeting with a newly formed group of “angels” just prior to their March meeting. This group indicated that they were extremely interested, but they would require more ownership in the company for their investment. The group was a particularly attractive partner because its principals had extensive experience running a Kentucky Fried Chicken franchise.

At the March 10 meeting, ICEDELIGHTS responded to their concerns. First, they agreed that the franchisee wouldn’t have to pay the remaining $125,000 until ICEDELIGHTS had furnished them with one suitable location and the lease had been signed. Further, ICEDELIGHTS agreed that the franchisee would have the right to build a production facility if ICEDELIGHTS became unable to supply them with product. The closing date for the deal was set for March 25; in two weeks they would have to put up their $75,000 and sign the franchise and option agreements. During this time, they had to decide whether to proceed or not:

� Was there real potential for this business in the Florida market?

� Did the option and franchise agreement make good business sense?

� Did the returns justify the risks?

If they did decide to proceed, they had to resolve the remaining financial issues:

� How much of the company could they give up and have the deal still be attractive to them? They had revised the deal as shown in Exhibit 9, but knew that they might have to give up even more of the company.

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� Should they go ahead and commit $75,000 under the option agreement before they had the full $825,000 of financing secured, hoping to obtain the remainder before the option was exercised?

� Should they go with less than $825,000 and plan a second offering after the first store was up and running?

Finally, they each had their own personal feelings about the deal:

Mark

ICEDELIGHTS’s concessions did reassure me to a certain extent, but I still have some very uncomfortable feelings.

First, the prospects for the business in Florida are still unclear to me; we haven’t been to Florida yet, but I have the sense that we will find some attractive locations. But in order to meet our projections and investors expectations, we have to grow extraordinarily quickly.

Second, even if the business does well, we are still critically dependent on ICEDELIGHTS. I think that real estate and product are our two key factors for success, and we really can’t control them—they are in ICEDELIGHTS’ hands. And if they don’t perform, our only remedy is to sue. It really scares me to think that we will have the responsibility for $825,000 of other people’s money, but can’t control the two most important elements 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 so far, and very much caught up in the excitement of actually doing a deal. Fortunately, it hasn’t cost any money and we’ve learned a lot.

Paul

The concessions that we won from ICEDELIGHTS reassured me of their continuing commitment to the Florida franchise. We would have preferred giving ICEDELIGHTS a small equity stake in the company, but they were not interested in this proposition.

Like Mark, I was concerned about the market; I did want more than just a “gut feel” that the market was there. This issue was particularly pressing because the closing date of March 25 would come before we had a chance to get to Florida over spring break. We needed some concrete research before that.

Money was also still a problem. We had “informal commitments” for about $300,000 of the $825,000 needed; experience had taught us that these were often more “informal” than they were commitments. A venture capital firm had expressed very strong interest in a $400,000 to $500,000 investment, but we’d grown skeptical of verbal commitments, and were still looking for other investors.

Both Eric and I had picked up on Mark’s concerns and felt that we were dealing with them. I started to get the impression, though, that Mark was veiling a lot of his more personal concerns about the venture in terms of business risk.

As far as I was concerned, we’d been lucky so far—things had gone very smoothly. Now it was time to start running fast, tying up all the loose ends. I was exhilarated by the prospect of this, and thought that we were really right on the verge of finally having our own company.

Eric

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I feel that we really have a great opportunity here. I’m really excited by the idea of creating and managing our own organization. It is a fairly simple business and ICEDELIGHTS has done a great deal to build and standardize the organization. With their systems and support, I am very confident that we can be successful.

I spent Christmas break in Florida, and I believe that the market prospects are very good. The population base is an Eastern, upscale, sophisticated one. The economies of the business are such that we can be profitable even with a small volume. Finally, all of our investors believe that Florida is an attractive market.

I think that ICEDELIGHTS’ concessions assured us of the product supply and real estate support that we needed. After we get a few stores up and running, we will have developed a name for ourselves, and won’t need their real estate assistance anyway.

I understand Mark’s concerns, but there are always going to be risks. In this case, they are manageable, and the return justifies them. There is little to be gained by waiting to start our own business; in a few years the risks will seem even greater. Now we have very little to lose.

I really don’t feel that any additional assurances will satisfy Mark’s doubts. In fact, I think that Mark would be uncomfortable with any deal. 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

Paul 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.

work experience summer 1994

BEAR, STEARNS NEW YORK, NY

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.

1990-1993 STATE STREET BANK AND TRUST COMPANY, INC. BOSTON, MA 1993 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.

1992-1993 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.

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

1987-1990 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 eighty- person company. Improved financial controls and initiated a fund drive.

personal background

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

references Personal references available upon request.

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Exhibit 1 (continued)

MARK DANIELS

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 client’s 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 McKinsey’s clients in the tele- communications, 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 McKinsey’s 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 (an undergraduate residence), and working as an 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

Enjoy sailing, racquet sports, travel and photography.

references Personal references available upon request.

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ICEDELIGHTS 898-196

13

Exhibit 1 (continued)

ERIC GARFIELD

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. Awarded COGME Fellowship.

1982-1986 UNIVERSITY OF FLORIDA GAINESVILLE, FLORIDA

Earned a Bachelor of Science degree in Accounting with additional concentration in Economics. Awarded membership in Beta Alpha Psi and Phi Eta Sigma, two honorary scholastic fraternities.

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 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 in cost 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 versus budget.

1988-1990 International Auditor. Supervised audit team in performing operational audits. Developed audit programs for foreign installations.

1987-1988 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.

1986-1987 PRICE WATERHOUSE & CO. MIAMI, FLORIDA

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

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

references Personal references available upon request.

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898-196 ICEDELIGHTS

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Exhibit 2 xxx Specifications Sheet

Dear

We are currently second-year students at the Harvard Business School and are interested in acquiring a company. We have the skills and abilities necessary to successfully manage a going concern and to create value for our backers and ourselves.

As explained in the attached specification sheet, we seek to acquire a medium-size firm. We feel our skills are applicable to a broad range of industries—from general industrial to consumer goods.

As the accompanying resumes indicate, the three of us have varied and complementary skills. We have backgrounds in planning, finance, control, operations, and general management. We believe that our abilities, combined with hard work and intense commitment, will enable us to succeed in such a venture.

We would greatly appreciate the opportunity to discuss our ideas with you and would be grateful for any suggestions you might have.

Sincerely,

SPECIFICATIONS

General Established manufacturing firms engaged in the production of Industrial and/or Consumer Goods

Sales Volume 5,000,000-$10,000,000

Location Preferably, but not exclusively, Northeast

Product Basic product with established market

Examples Include, but are not limited to the following:

Industrial Equipment Food Packaging and Processing Control Systems and Equipment Electronic Equipment Plastic Molding Construction Equipment Oil Field Machinery Sporting and Athletic Goods Precision Instruments

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ICEDELIGHTS 898-196

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Exhibit 3 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 4 Food Franchises—Terms

Franchise Fee per Location

($000)

Royalty

(% of Sales) ICEDELIGHTS 20 5 Gelateria Italia 15 0 Gelato Classico 30 0 Baskin-Robbins 0 0 Carvel 20 Varies Swensen’s 20 5.5 Haagen-Dazs 20 $0.60/gallon Long John Silver Seafood 10 4 H. Salt Fish & Chips 10 Varies Kentucky Fried Chicken 10 4 Church’s Fried Chicken 15 4 McDonald’s 12.5 11.5 Wendy’s 15 4 Burger King 40 3.5 Burger Chef 10 4 Taco Bell 45 5 Domino’s Pizza 10 5.5 Pizza Inn 15 4 Shakey’s Pizza 15 4.5 Orange Julius 18 6

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898-196 ICEDELIGHTS

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Exhibit 5 xxx Population Growth and Income Levels in Florida

1/1/94 Population

(000)

1988-1994 Growth

(%)

1993 Median Per Capita

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

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

Exhibit 6 xxx Financials

Pro Forma Income Statement: Store Level

Sales $550,000 Fixed costs: Rent (1000 to 1200 square feet) $ 25,000 Management salaries 30,000 Variable costs: Cost of product 192,500 Payroll 52,500 Royalty 27,500 Shipping 16,500 Advertising 5,500 Other 11,000 Rent overridea 13,500 Total costs 374,000 Pretax store contribution $176,000

Capital Requirements per Store

Construction, leasehold improvements $ 60,000 Equipment costs 85,000 Fees & 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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898-196 -17-

Exhibit 7 xxx Preliminary Pro Forma Cash Flow Statement ($000)

Year 1 2 3 4 5 6 7 8 9 10 Number of stores, total 2 6 10 15 20 20 20 20 20 20 New stores 2 4 4 5 5 – – – – – Existing stores 0 2 6 10 15 20 20 20 20 20 Sales 800 2,600 4,600 7,000 9,500 10,000 10,000 10,000 10,000 10,000 Operating income 130 470 890 1,375 1,900 2,100 2,100 2,100 2,100 2,100 Store opening expenses 100 200 200 250 250 – – – – – Franchise fees 40 80 80 95 75 – – – – – Corporate overhead 115 205 425 575 725 800 800 800 800 800 Income (125) (15) 185 455 850 1,300 1,300 1,300 1,300 1,300 Tax 0 0 35 200 380 580 580 580 580 580 After tax income

(125) (15) 150 255 470 720 720 720 720 720

– Store investment (250) (500) (500) (625) – – – – – – – Corporate investment (10) (20) (50) (50) (50) – – – – – + Depreciation 40 120 200 300 400 400 400 400 400 400 + Franchise fees (prepaid) 40 80 80 – – – – – – – Annual Cash (+ or -) (305) (335) (120) (120) 295 1,120 1,120 1,120 1,120 1,120 Cumulative cash (+ or -) (305) (640) (760) (880) (585) 535 1,655 2,775 3,895 5,015

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898-196 ICEDELIGHTS

18

Exhibit 8xxx Excerpts from Prospectus

THE OFFERING

Terms of the Offering

The Company is offering 25 Investment Units. Each Unit consists of 100 shares of its Class A Common Stock (zero par value), offered for $2,000 and $25,000 of the Company's Debentures.

Per Unit Total Equity $ 2,000 $ 50,000 Debentures 25,000 625,000 Total $27,000 $675,000

All subscriptions shall be for at least one full unit. The Company currently plans to call for each

subscription according to the following schedule:

Approximate Timing

Amount per Unit

Description

Immediately $2,000 Equity July 1-September 1, 1995 15,000 Debentures January 1-March 1, 1996 10,000 Debentures

The Company reserves the right to accelerate or delay the timing of these contributions as its

business requires, and will give investors thirty (30) days’ written notice of such requirements. Investors who are unable to meet subsequent contribution requirements will forfeit their contributions to date unless a suitable substitute can be found by the investor.

THE SECURITIES OFFERED HEREBY ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF BY AN INVESTOR UNLESS SO REGISTERED OR, IN THE OPINION OF COUNSEL FOR THE COMPANY, REGISTRATION IS NOT REQUIRED UNDER SAID ACT.

Capitalization

The capitalization of the Company consists of the $675,000 raised from the Offering plus $75,000 contributed by the Founders. The Founders will purchase 7,500 shares of the Company's Class B Common Stock for $25,000, and will also contribute $50,000 in debt. Thus, at the conclusion of the Offering, assuming all units are sold, capitalization will be as follows:

Debt $675,000

Equity $ 75,000

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ICEDELIGHTS 898-196

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The resulting capitalization is detailed below:

Debt Investors $625,000 Founders 50,000

$675,000 Equity

Investors $ 50,000 Founder 25,000

$ 75,000 Total Capital $750,000

Description of Shares and Debentures

The investment units each consist of 100 shares of the Company's Class A Common Stock (zero par value) representing 1% of the total outstanding Common Shares of the Company. In total, the Class A stockholders will have representation on the Board of Directors equal to 50% of the total number of directors. When the Debentures have been repaid in full, the Class A board representation will be reduced to a pro rata share.

The Founders' Class B stock will be restricted as to dividends until the Debentures have been repaid in full.

The Debentures will be issued with a face value of $5,000 each, and will pay interest at 15% per annum, cumulative with the first payment deferred until the end of Year Two. Interest payments will be made annually. The Debentures will have a maturity of five (5) years, and will be callable.

Use of Proceeds

The amount to be received by the Company from the sale of the Investment Units offered herein is $675,000. The Company intends to use these funds, in addition to the $75,000 contributed by the Founders, for the following purposes:

Development rights for the State of Florida – $100,000 Prepaid franchise rights for the first five stores – $100,000 Capital for three ICEDELIGHTS stores – $480,000 Working capital – $ 70,000 $750,000

Dividends

The Company plans to pay no dividends for a period of five (5) 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 its investors. No assurance can be made, however, that the Company will, in fact, be able to pay such dividends. Such payment is a matter to be determined from time to time by the Board of Directors and, of necessity, will be based upon the then existing earnings and cash position of the Company, as well as other related matters.

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898-196 ICEDELIGHTS

20

Reports to Stockholders

The Company will furnish its shareholders audited financial statements on an annual basis as well as unaudited quarterly reports of operations and financial condition.

Financial Projections

Following a period of identifying suitable real estate, negotiating loans, and equipping locations, the Company anticipates commencing retail operations no later than early 1996. Ten-year financial projections (attached) are based on the following assumptions.

Store Openings

The Company anticipates opening stores according to the following schedule:1

Year 1 2 3 4 5 6 7 8 9 10 Number of stores opened 3 4 5 5 5 2 2 2 1 1 Cumulative number of stores

in operation

3

7

12

17

22

24

26

28

29

30

Sales Level and Growth

Based on its knowledge of sales volumes in existing ICEDELIGHTS locations, and its knowledge of the Florida market, the Company estimates $550,000 in base-level sales. This base level for new stores inflates at the rate of 5% per year. Store-level sales grow as follows:

Year

Total Rate of Growth

Real Growth

Inflation

1 15% 10% 5% 2-10 13 8 5

Capital Requirements

Based on its knowledge of existing ICEDELIGHTS locations, the Company estimates a cost per store of $160,000. This breaks down as follows:

Construction costs $60,000 Equipment costs 85,000 Fees and miscellaneous expenses 15,000 Total Capital Costs $160,000

The capital costs are depreciated or expensed as follows:

! Construction costs over ten years, the assumed life of a lease. ! Equipment costs over five years ! Architectural fees and other expenses are expensed in the year incurred.

1 The decline in the rate of openings after Year Five reflects the Company’s desire to show ten-year financial projections, and does not serve to indicate the Company’s estimate of the total potential of the Florida market.

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ICEDELIGHTS 898-196

21

Store Expenses

The Company estimates store level operating expenses as follows (as a percentage of sales):

(%) • Cost of product (including packaging) 35 • Payroll 15 • Rent (1000 to 1200 square feet required)

7

• Royalty 5 • Shipping 3 • Advertising 1 • Other (telephone, cleaning, etc.) 2 Total Expenses 68%

Amortization

The $100,000 development rights are amortized over the twenty-year life of the agreement.

THE ATTACHED PROJECTIONS REPRESENT OUR ASSESSMENT OF THE POTENTIAL FOR THE FLORIDA MARKET. THESE ESTIMATES ARE BASED ON DISCUSSIONS WITH MANAGEMENT AND OUR OWN INVESTIGATION OF THE EXISTING OPERATION. WE BELIEVE THAT THESE FIGURES ARE REPRESENTATIVE OF CURRENT OPERATIONS AND DO FAIRLY REFLECT THE LEVEL OF OPERATIONS ANTICIPATED IN FLORIDA. NONETHELESS, THEY ARE ONLY PROJECTIONS, AND MUST BE VIEWED AS SUCH.

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898-196 -22-

Exhibit 8 (continued) xxx Projected Income Statement

1 2 3 4 5 6 7 8 9 10 Net sales 962 3,340 6,617 10,815 15,719 20,392 24,580 29,386 34,482 39,839

Store level expenses:

Variables 654 2,271 4,500 7,354 10,689 13,867 16,714 19,982 23,448 27,091

Fixed 53 174 330 521 730 900 1,025 1,160 1,784 1,398

Depreciation 69 165 295 430 575 585 574 545 480 415

Operating income 186 730 1,492 2,510 3,725 5,040 6,267 7,699 8,770 10,935

Start-up expenses 103 140 180 173 162 67 69 71 36 37

Corporate overhead 105 215 415 580 680 810 906 1,017 1,110 1,203

Amortization 5 5 5 5 5 5 5 5 5 5

Earnings before interest & taxes (27) 370 892 1,752 2,878 4,158 5,287 6,606 7,619 9,690

Interest expense:

Investor 0 216 101 101 75 0 0 0 0 0

Bank 15 15 15 0 0 0 0 0 0

Profit before taxes (27) 139 776 1,636 2,803 4,158 5,287 6,606 7,619 9,690

Taxes 0 52 357 753 1,289 1,913 2,432 3,039 3,505 4,457

Net income

(27) 87 419 883 1,514 2,245 2,855 3,567 4,114 5,233

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898-196 -23-

Exhibit 8 (continued) xxx Projected Balance Sheet

1 2 3 4 5 6 7 8 9 10

Assets

Cash 320 105 24 225 936 3,400 6,445 10,153 14,537 19,964

Prepaid fee 40 0 0 0 0 0 0 0 0 0

Development agreement 95 90 85 80 75 70 65 60 55 50

Net fixed assets 268 715 1,220 1,632 1,940 1,726 1,541 1,405 1,140 951

Total assets 723 910 1,329 1,937 2,951 5,196 8,051 11,618 15,732 20,965

Liabilities

Bank debt 0 100 100 0 0 0 0 0 0 0

Investor debt 675 675 675 500 0 0 0 0 0 0

Total liabilities 675 775 775 500 0 0 0 0 0 0

Equity

Paid-in capital 75 75 75 75 75 75 75 75 75 75

Retained earnings (27) 60 479 1,362 2,876 5,121 7,976 11,543 15,657 20,890

Total equity 48 135 554 1,437 2,951 5,196 8,051 11,618 15,732 20,965

Total liabilities and equity 723 910 1,329 1,937 2,951 5,196 8,051 11,618 15,732 20,965

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898-196 -24-

Exhibit 8 (continued) xxx Projected Cash Flow

1 2 3 4 5 6 7 8 9 10

Net income (27) 87 419 883 1,514 2,245 2,855 3,567 4,114 5,233

Depreciation 69 165 295 430 575 585 574 545 480 415

Amortization 5 5 5 5 5 5 5 5 5 5

Prepaid expense 60 40 0 0 0 0 0 0 0 0

Cash from operations 107 297 719 1,318 2,094 2,835 3,434 4,117 4,599 5,653

Capital expenditures:

Development agreement (100) – – – – – – – – –

Prepaid fees (100) – – – – – – – – –

Store construction and equipment (337) (612) (800) (842) (883) (371) (389) (409) (215) (226)

Cash generated/ used

Surplus/(deficit) (430) (315) (81) 476 1,211 2,464 3,045 3,708 4,384 5,427

Financing:

Equity 75 0 0 0 0 0 0 0 0 0

Debentures 675 0 0 (175) (500) 0 0 0 0 0

Bank debt 0 100 0 (100) 0 0 0 0 0 0

Net cash flow 320 (215) (81) 201 711 2,464 3,045 3,708 4,384 5,427

Beginning casha 0 320 105 24 225 936 3,400 6,445 10,153 14,537

Ending casha 320 105 24 225 936 3,400 6,445 10,153 14,537 19,964

a Note: Assumes no distributions paid to shareholders

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898-196 -25-

Exhibit 8 (continued) xxx Cash Flow and Internal Rate of Return to One Unit Shareholder

Year 0 1 2 3 4 5 6 7 8 9 10

Investment $27 – – – – – – – – – –

Interest – – 8 4 4 3 – – – – –

Return of Principal – – – – 4 21 – – – – –

Share of Cash Flow (1%)a – – – – – – 25 30 37 44 54

Share of Estimated Market Value at 10 Times Earningsb – – – – – – – – – – 523

Net Cash Flow to Investor ($27) – 8 4 8 24 25 30 37 44 577

Annualized Internal Rate of Return = 49%. aAssumes distributions paid to shareholders beginning in year six. bFor illustrative purposes only.

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898-196 ICEDELIGHTS

26

Exhibit 9 xxx Summary of Changes to the Offering

The Offering

The Company is offering 25 investment units. Each unit consists of 150 shares of its Class A Common Stock (no par value), offered for $5,000 and $25,000 of the Company's 10% debentures.

Per Unit Total Equity $ 5,000 $125,000

Debentures 25,000 625,000 Total $30,000 $750,000

All subscriptions shall be for at least one full unit. The Company currently plans to call for each

subscription according to the following schedule:

Approximate Timing

Amount Per Unit

Description

Immediately 2,500 Equity

July 1-September 1, 1995 17,500 Equity and 3 Debentures January 1-March 1, 1996 10,000 2 Debentures

The Company reserves the right to accelerate or delay the timing of these contributions as its

business requires, and will give investors thirty (30) days written notice of such requirements. Investors who are unable to meet subsequent contribution requirements will forfeit their contributions to date, unless a suitable substitute can be found by the investor.

The securities offered herein are not registered under the Securities Act of 1933, as amended and may not be sold, transferred, hypothecated or otherwise disposed of by an investor unless so registered or, in the opinion of counsel for the Company, registration is not required under said Act.

Capitalization

The capitalization of the Company, as of the conclusion of the offering, assuming all units are sold, will be as follows:

Debt $675,000 Equity 150,000 Total $825,000

The capital consists of $750,000 raised by 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 contribute $50,000 in debt.

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898-196 -27-

Exhibit 9 (continued) xxx Cash Flow and Internal Rate of Return to One Unit Shareholder ($000s)

Year 0 1 2 3 4 5 6 7 8 9 10

Investment $30 – – – – – – – – – –

Interest – – 5 3 3 3 – – – – –

Return of Principal – – – – 5 20 – – – – –

Share of Cash Flow (1-1/2%) – – – – – – 37 46 56 66 82

Share of Estimated Market Value at 10 Times Earningsa – – – – – – – – – – 785

Net Cash Flow to Investor

($30) – 5 3 8 23 37 46 56 66 867

Annualized Internal Rate of Return = 52%.

aFor illustrative purposes only.

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