Agreement Not So Sweet for Heidi’s : Takeover by Steve’s Ice Cream Turns Sour for Yogurt Chain Founder
When Heidi’s Frogen Yozurt was acquired by Steve’s Homemade Ice Cream three years ago, founder Heidi Miller thought the arrangement was a sweet deal.
Steve’s--which had a line of high-quality ice-cream products and a network of 400 ice-cream parlors, including the Swensen’s chain--would gain access to about 100 Heidi’s yogurt stores nationwide and its yogurt offerings--favorites of health-conscious dessert eaters.
And Heidi’s, which had been languishing in the ever-competitive yogurt market and hit hard by the 1987 stock market crash, would get a needed boost from a large corporate parent as well as a chance to put Heidi’s products in nearly 4,000 shops and supermarkets across the country.
But for Heidi Miller, the colorful and charismatic Laguna Beach champion bodybuilder and health promoter, the deal has turned sour.
In a lawsuit recently filed in Orange County Superior Court, Miller and business partner Brian Pallas say that they were virtually shut out of the proceeds from the sale of their 86% share of Heidi’s. The other shares were publicly held. So far, they said they each received 25,000 shares of Steve’s, then worth about $75,000, when the deal was completed in January, 1989, but little else. The two entrepreneurs, who are seeking $2.5 million plus unspecified punitive damages, said that it was not until this year that they gave up on getting their money and decided to sue.
“Steve’s was a company that had the financial ability to take Heidi’s to the next level,” said Miller, 37. “It was a pretty good sales pitch. . . . We got sold so well by powerful, powerful people. They had avenues that we didn’t have.”
The entrepreneurs maintain that Steve’s, based in Lindenhurst, N.Y., has manipulated its financial records to show its Heidi’s subsidiary was losing money and has made it difficult--if not impossible--to determine how much they are owed. They also argue that Steve’s breached an agreement that guaranteed them 5% each of Heidi’s pretax profits through Dec. 31, 1993. Together, they also were to get up to 150,000 more shares of Steve’s stock provided, in part, that Heidi’s reached certain income levels.
Still, at the time Heidi’s was sold, the company had lost money for every quarter but one since 1984. More than two dozen franchisees had gone into arbitration against the company, accusing the owners of everything from mismanagement of company finances to failure to advertise. Steve’s officials had estimated in 1989 that Heidi’s had $3.6 million in debts and assets of $1.6 million when it was purchased.
Miller was also to receive $40,000 a year for five years of consulting services, and Pallas $25,000 a year for three years, according to the agreement. Pallas and Miller say that they stopped consulting several months after the sale when they were not being paid.
Steve’s also was to consult with Miller about the distribution of products bearing her name, voice or likeness, she said, but began using her name and a photo of her on pints of ice cream being sold at supermarkets and convenience stores, all without her prior review.
Indeed, sales of prepackaged frozen yogurt products have been lucrative, more than doubling in one year to $356 million in 1990, according to the International Ice Cream Assn. in Washington. Overall, 119 million gallons of frozen yogurt were produced in 1990, up from 82 million gallons the year before.
“I got a phone call from some friends who saw the products and who said I must be getting filthy rich,” Miller said. “. . . I (told them) I don’t even know what they are selling. I don’t know if it’s yogurt, if it’s pudding, or what.”
Gary E. Shoffner, an Irvine attorney for Miller and Pallas, pointed to recent Steve’s press releases that reported company profits of $554,000 in the third quarter of 1991. The company said that the profits were “primarily due” to the addition of new products and “increased sales of Heidi’s frozen yogurt products.”
Randolph T. Moore, an Irvine-based attorney representing Steve’s, denied the allegations in a general response that was filed last week with the court. He also chided Shoffner’s firm for seeking publicity about the case.
“We’re going to decline (Gary) Shoffner’s invitation to make a media event out of this,” Moore said. “I must stress that the allegations in their complaint are all unverified. . . . We want to try a case in court. We don’t want to try a case in the newspapers.”
But Miller--who has gone on to build a chain of women’s fitness clothing stores called Tight Assets--has been no stranger to publicity. Since she opened the first Heidi’s in Irvine 10 years ago, Miller has appeared on talk shows and in magazine articles, and given speeches to business groups and to college classes.
“I was unbelievably lucky to get the press that I got,” Miller said. “I was the Heidi behind Heidi’s, just like Dave Thomas behind Wendy’s and Carl Karcher behind Carl’s Jr.”
In the first few years of her business, before customers could get the dessert anywhere from grocery stores to gas stations, selling yogurt was a novel enterprise. A professional bodybuilder, Miller always reflected her hard-body workouts in her stores--pictures of her sculpted physique on the walls and her books and exercise videos available for sale.
But Heidi’s, in the excitement over its success, seemed to grow too fast. Two years after opening, it had two stores, but by 1988, there were more than 80 stores, mostly in Southern California.
Competition with Heidi’s stores was getting fiercer. Some franchisees complained that as other competitors, such as Penguin’s, offered candy toppings, including candy bears and Oreos, Miller insisted that such confections were inconsistent with her health-conscious fare.
Disagreements with franchisees are “the nature of the beast,” said Pallas, 43. “In every franchise company there will be disgruntled people. But a lot of franchisees were pleased with us.”
Several franchisees also filed lawsuits claiming that Heidi’s executives spent little on advertising and misled them about potential store sales. Others simply said that Miller would not let go of a company that had gotten too big for her to manage.
“She had the concept of giving the public what it needed, not what it wanted,” said Gerald T. Grenert, an attorney who once represented 24 franchisees who owned 51 Heidi’s shops. “They became known as sort of a specialty shop in the yogurt industry.”
Grenert said that in 1987 a group of franchisees offered to give Miller and Pallas $1 million each for their shares in the company, provided that the two left the company altogether. But he said that they rejected the offer, which was never put in writing, he said.
“The biggest mistake Heidi Miller made was to turn down the offer before the warfare (with the franchisees) started,” Grenert said. “The offer was turned down, and everybody lost.”
Miller and Pallas said that no offer of such magnitude was made, and laughed at the suggestion that they would turn down such a sum.
Instead, they said, they were looking for a larger company that would have enough capital to expand. Heidi’s had gone public in February, 1987, and raised $400,000. But the stock market crash that October dashed their hopes to turn management over to others while keeping a stake in the company, Miller and Pallas said.
