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The incredible shrinking ice cream company Add to ...

July 28, 2004, 3:23 p.m.: "CoolBrands International Inc. announced today that, as a result of the inability of Weight Watchers International and CoolBrands to conclude an extension of their existing licence agreement on mutually agreeable terms, the licence agreement will end on September 28, 2004. CoolBrands has the right to continue to market Smart Ones frozen desserts using the Weight Watchers name on its packaging for approximately the next one year and two months until September 28, 2005."

There wasn't much more to the press release than those two sentences, but the market grasped their importance within minutes-the cornerstone of CoolBrands' expansion had been yanked away. In the final half-hour of trading on the Toronto Stock Exchange that day, more than a million shares changed hands as the price plunged to $10.30 from $16.90 before closing at $12.35. After the market closed, regulators took the unusual step of cancelling every trade during the closing half-hour, noting that the company should have requested a trading halt itself.

Just a week earlier, Michael Serruya and Stein had held a conference call with analysts to discuss CoolBrands' third-quarter results. The day after the stock slump, Stein was back on the phone with analysts, saying that the company still had plenty of other brands and lots of time to pursue new ones. "We have options and we have time to develop them," he said. Investors weren't buying it, and the shares closed at $12 that day. A couple of weeks later, they sank below $10.

Yet Smith and Stein didn't seem distressed. "They felt the company would continue to go forward," said a source within the company. "Yeah, we could change, bring on some new licences and so on, and focus on different brands." Another source close to CoolBrands says that Smith was more than blasé, he was cocky: The Weight Watchers relationship had come undone because he'd pushed hard for higher royalties. "Basically, he overplayed his hand," says the source. "He didn't think they had anywhere to go for the manufacturing capacity, and they did." For the sake of a small hike in the royalty rate, Smith "destroyed the stock." In retrospect, "it was about as dumb as a sack of hammers."

As CoolBrands' share price continued to drift below $10 in the fall of 2004, analysts and investor activists resumed firing at the company's governance. CoolBrands finished last in the Globe's governance rankings for the second year in a row. In a scathing report entitled "We're Outta Here," Dundee Securities announced that it was dropping its analyst coverage of CoolBrands. One of its complaints concerned lucrative side deals that insiders had with the company. Smith's Calip Dairies, for instance, had a management contract with CoolBrands that was worth $1.3 million (U.S.) annually as of 2003.

Worried about the barrage of criticism in general, and, specifically, how the company's increasingly American shareholder base would feel about a board so dominated by insiders, in the fall of 2004 CoolBrands nominated five new directors. The expanded board of 11 would have six independent members. "We're going to listen and respond to the input from our independent directors," promised Stein.

He and Smith also scrambled to replace Weight Watchers. In December, they bought licences to create four frozen dessert brands-Care Bears, Justice League, No Pudge! and Snapple. A few weeks later, CoolBrands said it would spend $59 million (U.S.) to buy Kraft Food Inc.'s yogurt lines, including Breyers Fruit on the Bottom, Breyers Light and Breyers Creme Savers. The brands had generated about $90 million (U.S.) a year in revenue for Kraft-roughly what Weight Watchers had been worth to CoolBrands at its peak.

Weary shareholders could be forgiven for thinking that perhaps now, finally, there would not be another shoe to drop in the CoolBrands story. But then came the biggest footwear fall of all: Smith died in January, 2005, at age 62, from complications due to an undisclosed surgical procedure. At CoolBrands' annual meeting the following month, the board was reduced to nine members. The company dropped two independents, but hired another one to replace Smith, meaning there was still a majority of independents. Stein carried on as solitary CEO.

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