-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AZMDRMEFE2cTowFuVMJxiCPTVdHjyAxPNJwl/3beCO7tlvLQMB7/Z73rfbL5mVr0 JN0PSUUQyWRZPp4lojWx8Q== 0000950152-97-008849.txt : 19971229 0000950152-97-008849.hdr.sgml : 19971229 ACCESSION NUMBER: 0000950152-97-008849 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971224 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNATURE BRANDS USA INC CENTRAL INDEX KEY: 0000883327 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC HOUSEWARES & FANS [3634] IRS NUMBER: 363635286 STATE OF INCORPORATION: DE FISCAL YEAR END: 1002 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19912 FILM NUMBER: 97744705 BUSINESS ADDRESS: STREET 1: 7005 COCHRAN ROAD CITY: GLENWILLOW STATE: OH ZIP: 44139-4312 BUSINESS PHONE: 2165424200 MAIL ADDRESS: STREET 1: 7005 COCHRAN ROAD CITY: GLENWILLOW STATE: OH ZIP: 44139-4312 FORMER COMPANY: FORMER CONFORMED NAME: HEALTH O METER PRODUCTS INC /DE DATE OF NAME CHANGE: 19930328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNATURE BRANDS INC CENTRAL INDEX KEY: 0000925252 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 363330781 STATE OF INCORPORATION: DE FISCAL YEAR END: 0929 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-80000-01 FILM NUMBER: 97744706 BUSINESS ADDRESS: STREET 1: 7005 COCHRAN ROAD CITY: GLENWILLOW STATE: OH ZIP: 44139-4312 BUSINESS PHONE: 2165424200 MAIL ADDRESS: STREET 1: 7005 COCHRAN ROAD CITY: GLENWILLOW STATE: OH ZIP: 44139-4312 FORMER COMPANY: FORMER CONFORMED NAME: HEALTH O METER INC DATE OF NAME CHANGE: 19940613 10-K 1 SIGNATURE BRANDS USA/SIGNATURE BRANDS INC. 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 28, 1997 ----------------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Not Applicable to Not Applicable --------------------- ------------------------ Commission file number 0-19912 --------------------------------------------------------- SIGNATURE BRANDS USA, INC. - ------------------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 36-3635286 - --------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7005 Cochran Road, Glenwillow, Ohio 44139-4312 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (440) 542-4000 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value - ------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of December 1, 1997 was approximately $17,516,958, computed on the basis of the last reported sale price per share ($4.375) of such stock on the Nasdaq National Market. For purposes of this information, shares of Common Stock which were owned beneficially by executive officers, Directors and persons who may be deemed to own 10% or more of the outstanding Common Stock were deemed to be held by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the Registrant's Common Stock outstanding as of December 1, 1997 was 9,081,784. Documents Incorporated by Reference: Form 10-K Reference Documents - -------------------- ---------- Part III (Items 10, 11, 12 and 13) Portions of the Registrant's Definitive Proxy Statement to be used in connection with its Annual Meeting of Stockholders to be held on March 5, 1998. Except as otherwise stated, the information contained in this Form 10-K is as of September 28, 1997 2 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 28, 1997 ---------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Not Applicable to Not Applicable --------------------- ----------------------- Commission file number 33-80000 --------------------------------------------------------- SIGNATURE BRANDS, INC. - ------------------------------------------------------------------------------- Exact name of Registrant as specified in its charter) Ohio 36-3330781 - ------------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7005 Cochran Road, Glenwillow, Ohio 44139-4312 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (440) 542-4000 --------------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The Registrant is a wholly-owned subsidiary of Signature Brands USA, Inc. Accordingly, none of its equity securities are owned by non-affiliates. The Registrant meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format permitted thereunder. Except as otherwise stated, the information contained in this Form 10-K is as of September 28, 1997. 3 PART I ITEM 1. BUSINESS GENERAL - ------- Signature Brands USA, Inc. (the "Company"), is a holding company, which through its wholly-owned subsidiary, Signature Brands, Inc. ("Signature Brands"), designs, manufactures, markets and distributes a comprehensive line of consumer and professional products. The Company's consumer products, marketed under the Mr. Coffee(R) and Health o meter(R) brand names include automatic drip coffeemakers, iced and hot teamakers, coffee filters, water filtration products, accessories and other kitchen countertop appliances, as well as bath, kitchen and gourmet scales and therapeutic devices. Professional products include the Pelouze(R) and Health o meter(R) brands of office, foodservice and medical scales. The Company attributes its leading market position to its strong brand name recognition, distribution in major domestic high volume retail outlets, marketing and sales promotion efforts, electronic data interchange (EDI) capabilities, merchandise flow systems and established relationships with its retail customers. The Company, founded in 1919, is one of the oldest and largest domestic manufacturers of scales for home and medical use, based upon both dollar volume and unit sales. The Company offers consumer products through a combination of direct sales and independent manufacturers' representatives to distributors and major retail outlets, including mass merchants, national hardware chains, drugstore chains, catalogue showrooms, warehouse clubs, retail grocery chains, specialty stores, department stores and various mail order companies. Consumer products are promoted primarily through network and cable television advertising, consumer magazines, network radio, cooperative advertising with retailers and consumer promotions. The Company offers a variety of scales for hospitals, physicians, nursing homes, clinics, home healthcare and foodservice as well as a line of small business and home office scales. Professional products are promoted through a combination of trade shows, trade advertising, catalogues, in-store merchandising, customized displays and new product brochures. Professional products are marketed through a combination of direct sales and independent manufacturers' representatives to distributors, dealers, office mega-stores, mail order companies and major buying groups. In November 1992, the Company purchased certain operating assets of Pelouze Scale Co. ("Pelouze") for cash plus the assumption of certain operating liabilities. Pelouze developed, manufactured and sold digital and mechanical postal scales, food service scales and other related products. In May 1994, the Company purchased certain operating assets of McShirley Products, Inc., a manufacturer and distributor of therapeutic devices, for $400,000 in cash. -2- 4 In August 1994, the Company acquired all of the outstanding shares of common stock of Mr. Coffee, inc. (the "Acquisition"). Mr. Coffee, inc. ("Mr. Coffee") has been the leading producer of automatic drip coffeemakers in the United States since 1975. In addition, Mr. Coffee offered an extensive line of teamakers, coffee filters, replacement decanters, accessories and other kitchen countertop appliances. The aggregate purchase price in connection with the Acquisition was approximately $133.5 million. The Acquisition was financed through a combination of senior and subordinated indebtedness and a common stock rights offering to existing shareholders. See Notes 8 and 9 to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K. The Company's results of operations for fiscal 1994 reflect the inclusion of Mr. Coffee's operating results for the period subsequent to August 17, 1994. In September 1994, the Board of Directors of the Company determined to change its fiscal year from one ending on December 31 in each year to a 52-53 week fiscal year ending on the Sunday closest to the last day of the month of September in each year. On March 6, 1997, the stockholders of the Company approved an amendment to the Company's Certificate of Incorporation to change the name of the Company to "Signature Brands USA, Inc." In view of the Company's name change, on April 30, 1997, Health o meter, Inc., the Company's operating subsidiary, was merged with and into a wholly-owned subsidiary of the Company, Signature Brands, Inc., an Ohio corporation, formed by the Company solely for the purpose of changing the name of Health o meter, Inc. to "Signature Brands, Inc." CONSUMER PRODUCTS DIVISION - -------------------------- COFFEEMAKERS ------------ The Company produces and markets an extensive line of Mr. Coffee(R) brand automatic drip coffeemakers and espresso/cappuccino makers which are sold at retail prices ranging from approximately $14 to $129. Sales of automatic drip coffeemakers accounted for approximately 43 percent of the Company's net sales in 1997, compared with approximately 40 percent in 1996 and 43 percent in 1995. The Company offers several lines of coffeemakers. Each line offers a combination of features on several models of either 4-cup, 8-cup, 10-cup or 12-cup capacity designed to help retailers differentiate their product offerings from other retailers. Some of the most popular features are "Pause 'n Serve", which permits the decanter to be removed during the brewing cycle allowing a cup of coffee to be poured prior to the end of the brewing process, digital timer, swing-out brew basket and automatic shut-off. In 1997, the Company introduced the Mr. Coffee(R) Commuter(TM) coffeemaker, which brews coffee directly into an insulated travel mug. The Company also produces and markets specialty coffeemakers at the higher end of the retail price range, including an under-the-cabinet coffeemaker and a variety of steam Espresso/Cappuccino makers. During fiscal 1997, the Company introduced two new specialty coffeemakers, the Mr. Coffee(R) Thermal Gourmet(TM) coffeemaker, which brews coffee directly into a thermal carafe; and the Mr. Coffee(R) Speedbrew(TM) coffeemaker, featuring a restaurant-style displacement brewing system. In addition, during 1997, the Company introduced a special -3- 5 holiday gift pack which combines an espresso/cappuccino maker with several popular accessories. The Company has an upscale line of coffeemakers and accessories marketed under the brand name Details(R) by Mr. Coffee(R). This line of premium priced products is designed to increase distribution through department and specialty stores and increase market share by offering further product differentiation. During 1996, the Company introduced an Elite version of the Accel(R) coffeemaker with several unique features including: audio indicators for brewing, automatic shut-off and cleaning cycles, variable warming plate temperature and 10 karat gold accents on both the decanter and coffeemaker. ICED TEAMAKERS -------------- The Iced Tea Pot(TM), introduced in 1989, brews two quarts of iced tea or iced coffee in less than 10 minutes. Since 1989, the Company has expanded this category by introducing a full line of 2-quart, 2 1/2-quart and 3-quart iced teamaker models. During 1996, the Company introduced the TM5, iced teamaker model, which makes 2 1/2 quarts of iced tea using a unique pour through design which saves counter space. During 1997, the Company introduced its first iced teamaker holiday gift pack featuring brand name tea bags and iced tea serving accessories. Sales of iced teamakers accounted for approximately 8 percent of the Company's net sales in 1997, compared with approximately 9 percent in 1996 and 10 percent in 1995. HOT TEAMAKERS ------------- In September 1995, the Company introduced Mrs. Tea(TM) by Mr. Coffee(R) automatic hot teamaker, which makes 30 ounces of fresh brewed hot tea in about eight minutes and features a ceramic tea pot and a steeping lever to regulate steeping time. During 1996, Mrs. Tea for Two(TM) by Mr. Coffee(R) automatic hot teamaker was introduced, featuring a 15 ounce ceramic tea pot. In addition, a hot teamaker model with a digital timer was introduced in 1996. The Company's hot teamaker models are frequently purchased as gifts, consequently, the Company introduced in 1997 a hot teamaker gift pack which features a hot teamaker with brand name tea bags and tea accessories. COFFEE FILTERS -------------- Mr. Coffee(R) is the leading brand of basket-type coffee filters in the United States. The Company produces and sells a wide variety of paper coffee filters, including basket, cone, disc and wrap-around filters for the household market. REPLACEMENT DECANTERS AND ACCESSORIES ------------------------------------- The Company assembles and markets a variety of replacement decanters which are designed to fit competing brands of coffeemakers as well as Mr. Coffee(R) products. The Company also markets replacement pitchers for all iced teamaker models, as well as replacement ceramic teapots for the Mrs. Tea(TM) automatic hot teamaker. Accessory products marketed by the Company include: mug warmers which are activated by the placement of the mug on the unit's -4- 6 warming surface; coffee mills and grinders; permanent gold-toned filters which fit most 4 cup and 10-12 cup basket and cone filter coffeemakers; and a thermal carafe. CONSUMER SCALES --------------- The Company manufactures a comprehensive line of Health o meter(R) brand analog (mechanical) and digital (electronic) floor scales, waist-high and eye-level scales. Analog scales are available with either rotating dial or speedometer readouts, while digital scales utilize LED and LCD displays. In 1998 the Company plans to introduce digital scales which feature a luminescent back lit display. In general, scale accuracy is a function of the weighing mechanisms employed. Signature Brands offers analog, digital strain gauge and various types of professional quality mechanisms, which are marketed as "good", "better", "best" or "professional" quality alternatives at the point of sale. Other product features which differentiate the Company's scales include color, texture, size and dial features. The Company's consumer scales are sold at retail prices ranging from $10 to $199. In 1989, the Company introduced its Big Foot(R) professional quality floor scale product line for home use. The Big Foot(R) product line, currently consisting of various analog or digital models, has become the most successful new scale line introduced in the Company's history and continues to be a major source of revenue. The Company is currently producing the second generation Big Foot(R) scale which retains the same high quality mechanism and offers design improvements over the original models. The Big Foot(R) scales are sold at retail prices ranging from $40 to $99. During 1996, the Company introduced three new lithium battery powered electronic scale models featuring either 3 or 4 digit displays. The Company's permanent lithium battery powered digital scales represent an important and rapidly growing scale line. Also introduced in 1996 was the Health o meter(R) Precious Metals(TM) specialty scale line, which features a polished brass or chrome platform with fashion accent mats. The Health o meter(R) Precious Metals(TM) scale line was further expanded with the addition of analog and digital chrome models in 1997 Sales of consumer scales accounted for approximately 19 percent of the Company's net sales in 1997, compared with approximately 17 percent in 1996 and 16 percent in 1995. NEW CONSUMER PRODUCTS --------------------- The development and introduction of new products are key to the continued success of the Company. The Company continually introduces new products in its core coffeemaker and scale business. The Company believes that the strong Mr. Coffee(R) and Health o meter(R) brand name recognition, coupled with the Company's distribution, marketing and sales promotion efforts, and established relationships with its retail customers, assist the Company in introducing new products. During fiscal 1998, the Company plans to introduce new -5- 7 Mr. Coffee(R) products as well as an array of products which represent modifications and/or enhancements of existing Mr. Coffee(R) products. Planned new products for 1998 include a new line of upscale coffeemakers featuring models with and without digital timers. The Company plans to enhance an existing line of coffeemakers by adding models with a programmable digital timer and automatic shut-off. To further differentiate its product offerings to various distribution channels, the Company plans to add to its product offerings by redesigning the appearance of its most popular line of coffeemakers. During 1997, the Company acquired the exclusive rights to the Counselor(R) and Borg(R) scale brands. During 1998, the Company will introduce for department and specialty stores a new line of Borg(R) scales that are distinctly European in design with simple clean lines that give the scales an air of sophistication. Counselor(R) scales to be introduced in 1998 will represent opening price point scales for the mass market. All consumer products and production tools are designed by or under the direction of the Company's engineers, product managers, draftsmen and laboratory technicians. The Company also tests its prototypes, designs its own packaging and conducts market research. The Company employs independent engineers and designers on an as needed basis. The Company devotes considerable attention to the design and appearance of its consumer products, as well as their packaging, in order to enhance their appeal to consumers and to promote differentiation of its products from other brands on retailers' shelves. The Company conducts research and development on an ongoing basis in recognition of the importance of new product development and the need to provide innovative products and features to its customers. A combination of market research and feedback from key retailers is used to identify market trends and changing consumer preferences. This information provides the basis for new product development. In virtually all cases the Company engages outside design firms to assist in creating new products and modifying existing products to incorporate features and styling that the Company anticipates consumers will purchase. Substantially all products produced by the Company involve, to some degree, the service of such firms. Research and development costs charged to operations were approximately $1.8 million in 1997 and 1996, and $1.6 million in 1995. The Company believes that the strength of the Health o meter(R) brand name combined with its market research allows it to introduce a whole range of new products associated with health and wellness. During 1997, the Company introduced several new Focus Zone(TM) chair, back and full body cushion massage pads. Retail prices range from $10 for the Hot and Cold Mini Wrap to $130 for the Focus Zone(TM) Full Body Massager with heat. The Company anticipates further growth in this category and plans on introducing additional therapeutic devices in fiscal 1998 including rechargeable, fully portable Hands Free(TM) Therapy massage pads and neck and back massage pads with 12 volt power adapters. -6- 8 PROFESSIONAL PRODUCTS DIVISION - ------------------------------ MEDICAL SCALES -------------- The Company's reputation for quality and its brand name recognition have been based on its participation in the medical scale market for over 75 years. Products sold as professional products include analog and digital scales for a full range of medical uses, including traditional balance beam scales, pediatric scales, wheelchair ramp scales, chair and sling scales for non-ambulatory patients, and home healthcare scales. The suggested end user prices for the Company's traditional medical products range from $80 to $1,200. The Company has developed several variations of its traditional balance beam scale to complement the original product design. Additionally, the Pro Series(TM) and Pro Plus Series(TM) product lines were developed by the Company to address specialized markets and applications, and generally command higher sale prices than Health o meter's other medical products. The Company's Pro Series(TM) of scales consists of physician, pediatric and chair scales which, in some models, feature advanced electronics (for example, laser trimmed load cells) for greater accuracy. The Pro Series(TM) scales' end-user prices range from $350 to $1,100. The Company's Pro Plus Series(TM) line of scales consists of hydraulic sling scales, neonatal scales, pediatric scales and ramp scales for weighing wheelchair patients. The Pro Plus Series(TM) scales range in price from $1,100 to $3,300 and are used primarily by hospitals and nursing homes. The Company recently introduced an electronic line of fitness scales for health clubs, as well as an entirely new line of portable platform electronic scales for visiting nurse organizations and home healthcare. OFFICE SCALES ------------- Since 1990, the Company has manufactured and marketed a full line of letter and parcel scales under the Health o meter(R) brand name. The Pelouze acquisition in November 1992 added another respected brand name in addition to significantly broadening the Company's office products and food service business. As a result, shortly after the Pelouze acquisition, the Company began marketing its office and food service products exclusively under the Pelouze(R) brand name. The Company's office products include analog and digital scales designed for small, commercial establishments, home offices and departments within larger companies that process a small to medium volume of letters and packages daily. The suggested retail prices range from $8 to $295. Under the Pelouze(R) brand name, the Company has a commanding share of the office scale market. During fiscal 1997, the Company introduced a new 6 lb. capacity rate calculating scale which has the ability to compare the cost of sending mail through the major carriers. During fiscal 1998, the Company plans to expand its office line beyond scales to include new products for mailing solutions. Planned new products include personal computer rate calculating software that works with straight weight scales in computing the best rates -7- 9 available among six postal carriers. Other planned new ancillary products to be introduced in 1998 include a battery operated letter opener and a self adhesive stamp machine. FOOD SCALES ----------- The Company's Pelouze(R) foodservice group offers analog and digital portion control scales, thermometers and timers for commercial and non-commercial applications. End-user prices range from $6 for thermometers to $750 for a digital scale. Pelouze(R) foodservice products are specified for use by some of the leading national chain restaurants in America. During 1997, Pelouze(R) foodservice obtained National Sanitation Foundation (NSF) certification for a line of value oriented portion control scales. This certification enhances the perceived value of Pelouze(R) portion control scales. To address the growing need for precision foodservice tools to control food quality, safety and cost, the Company plans on introducing in 1998 new analog foodservice scales as well as digital thermometers and timers. COMMERCIAL COFFEE BREWERS ------------------------- The Company has also leveraged its brand name with an entrance into the commercial coffee brewer market. This product line is presently being marketed through membership clubs and office mega-stores. Core products in the commercial line include a Two-Station Stainless Steel Brewer, a 24-cup Automatic Drip Coffeemaker, several models of 4-cup and 12-cup coffeemakers as well as a line of complimentary accessories. All commercial models contain unique features designed to serve this industry, including grounded power cords and automatic shut off. PRODUCT WARRANTIES - ------------------ Mr. Coffee(R) products are generally sold with a limited one-year warranty. Pursuant to the terms of its warranty arrangements with independent service centers, in cases of defects in material or workmanship, the Company agrees to repair or replace the defective product without charge. Approximately 193 independent appliance service centers throughout the United States and Canada are authorized to repair Mr. Coffee(R) products under such warranties. Health o meter(R) consumer scale warranties range from limited five-year warranties to lifetime warranties. Pelouze(R) digital scales, thermometers and timers are warranted for one year from the date of purchase against defects in materials or workmanship. Therapeutic devices are sold with a limited two-year warranty. Health o meter(R) physician and certain professional scales as well as Pelouze(R) mechanical scales are generally sold with a lifetime limited warranty. Costs for product returns under warranties estimated to be incurred are charged against revenues at the time of sale based on experience factors. The reserve for product returns under warranties on the Company's balance sheet at September 28, 1997 was $6.0 million, which the Company believes is adequate. -8- 10 CUSTOMERS AND MARKETING - ----------------------- CONSUMER PRODUCTS ----------------- The Company distributes and sells its consumer products primarily to distributors and major retail outlets, including mass merchants, national chains, national hardware chains, drugstore chains, catalogue showrooms, warehouse clubs, retail grocery chains, specialty stores, department stores and various mail order catalogue companies. While the Company does not have long-term contracts with any of its customers, it has been doing business with its five largest customers continuously for over 10 years. Wal-Mart Stores, Inc. and Kmart Corporation accounted for approximately 27 percent and 12 percent respectively, of the Company's net sales in 1997. The Company emphasizes the Mr. Coffee(R) and Health o meter(R) brand names, principally through a variety of advertising and promotional channels, including network and cable television advertising, consumer magazines and consumer promotions, network radio and cooperative advertising with retailers. To complement its emphasis on the Mr. Coffee(R) and Health o meter(R) brand names, the Company concentrates on maintaining a strong distribution system for its products by engaging a network of experienced independent manufacturers' representatives, food brokers and premium and military representatives. The Company's sales management personnel are responsible for direct sales to key accounts, supervising the activities of its independent manufacturers' representatives, as well as consulting and assisting customers in planning sales strategy, including customized point-of-sale merchandising, cooperative advertising programs and product mix designed to reach a specific retailer's customer base. Customized sales programs have been instrumental in the Company's penetration of the consumer scale market. The variety of models the Company produces and distributes permits competing retailers to stock different models of Mr. Coffee(R) and Health o meter(R) products. The Company offers tie-in promotions in which Mr. Coffee(R) products are sold in packages with free Mr. Coffee(R) accessories or with related products, such as tea, coffee and coffee beans from other manufacturers. The Company typically enters into specific marketing programs of three to six months in duration with its major customers covering such matters as product mix, pricing and advertising assistance. In recent years, certain retailers have required stock adjustments in which the Company accepts the return of unsold merchandise in exchange for placing a new product with the retailer. Stock adjustments were not significant in 1997. -9- 11 PROFESSIONAL PRODUCTS --------------------- The Company supports its retail office products customers with coordinated packaging and promotional materials, including displays customized to fit the respective customer's marketing plans. The Company markets its office products through a combination of direct sales and independent manufacturers' representatives to wholesalers such as United Stationers and S.P. Richards, superstores such as Staples, Office Depot and OfficeMax and mail order catalogue companies such as Quill, Viking and Reliable. Pelouze(R) foodservice products are sold by independent manufacturers' representatives to dealers, distributors such as SYSCO Corp., Edward Don, Pampered Chef, and major buying groups such as ABC Group, Pride Buy Group and SEFA Buy Group, who in turn sell to restaurants, healthcare providers, hotels, cafeterias, colleges and schools. The Company promotes its medical scale products through trade advertising, trade shows, catalogues and new product brochures. The Company markets its medical products through independent manufacturers' representatives, primarily to medical dealers such as McKesson General Medical, Bergen Brunswig, Allegiance, PSS, and Owens and Minor. Medical dealers sell the Company's medical products to hospitals, physicians, nursing homes, free standing clinics and home healthcare customers. In addition to the domestic market, the Company distributes medical products internationally. The Company also sells its coffeemaker products to hotels for use in providing in-room coffee service and to other commercial customers. In order to more fully develop its commercial business, the Company has a joint venture with S & D Coffee, Inc., a leading regional coffee company whereby each joint venture partner owns 50 percent of Mr. Coffee Concepts, Inc. ("MCCI"). MCCI is engaged in the business of selling commercial coffeemakers and accessories principally to office mega-stores, hotels and small businesses in the United States and Canada. SEASONALITY - ----------- Historically, Mr. Coffee(R) brand products have achieved their highest sales during the months preceding the December gift-giving season. A significant percentage of Mr. Coffee(R) products are given as gifts and, therefore, sell at larger volumes during the holiday season. Additionally, the time surrounding Mother's Day has typically been a period of somewhat higher sales. During fiscal 1997 and 1996, net sales for the fourth calendar quarters ended December 29, 1996 and December 31, 1995, were approximately 32 percent and 34 percent, respectively, of the Company's annual net sales. Although seasonality is not as significant in the consumer scale market, sales during the fourth calendar quarter have historically been slightly higher than the other three quarters. Customers' order patterns vary from year to year, largely because of differences in consumer acceptance of product lines, product availability, marketing strategies, retailers' inventory levels and differences in overall economic conditions. -10- 12 PRODUCTION - ---------- MR. COFFEE(R) APPLIANCES ------------------------ Mr. Coffee(R) appliance production is comprised of three types: assembled, procured domestically and procured internationally. The Company has a balanced combination of domestic and offshore production capability which is flexible enough to handle the large, seasonal swings in production. The percentage of Mr. Coffee(R) brand appliance units produced domestically increased to approximately 50 percent of total appliance units produced in 1995 for two reasons. First, several new domestically produced products were introduced in 1995 to supplant existing foreign sourced products. Second, to meet demand for several existing products, domestic production began in 1995 for items that had previously only been sourced offshore. In 1996, increased domestic production of the recently introduced TR line of coffeemakers along with reduced volumes of certain imported coffeemaker models resulted in approximately 52 percent of its Mr. Coffee(R) brand appliance units being procured or assembled domestically. In 1997, increased domestic production of the Accel(R) line of coffeemakers resulted in approximately 56 percent of the Company's Mr. Coffee(R) brand appliance units being procured or assembled domestically. Domestic procurement and assembly enables the Company to react quickly to meet the just-in-time requirements of its retailers. Products manufactured at the Company's facilities in Cleveland, Ohio are assembled from parts produced by both domestic and foreign component contract manufacturers. Additionally, the Company outsources a portion of its domestic assembly and sub-assembly operations to several subcontractors in northeast Ohio. Offshore production includes products that are produced, assembled and packed in ready-to-sell condition in the People's Republic of China, Hong Kong and Taiwan using design engineering and tooling which are the property of the Company. Additionally, the Company has purchased limited quantities of several different products from offshore sources that were produced using design engineering and tooling which are the property of the supplier. Offshore production is governed by written contracts with manufacturers pursuant to which the Company submits purchase orders. The Company does not have any other agreements with manufacturers obligating it to purchase any specified quantities of products over a period of time. The Company believes that alternative sources of supply could be developed if any foreign supplier should cease to be an available source. However, the loss of a supplier could, in the short-term, adversely affect the Company's business until alternative supply arrangements are secured. Mr. Coffee(R) basket-type paper coffee filters are currently produced at the Company's facilities near Cleveland, Ohio. Paper used in coffee filter production and paperboard used in connection with packaging are purchased annually from various domestic and Canadian suppliers pursuant to competitive bidding. Certain coffee filters, which represent approximately 18 percent of coffee filter sales volume, are purchased from a vendor in Canada. Mr. Coffee(R) replacement decanters are assembled at the Company's facilities in Cleveland, Ohio as well as at a subcontractor in northeast Ohio. The glass vessel portions of the decanters are supplied by various companies located in the United States, Europe and Japan. The -11- 13 Company believes that the multiple sources existing for its glass decanters reduce the risk of shortages. A majority of the raw materials used in appliance production are commodities, such as plastic, paper, paperboard and electrical components, which are available from numerous suppliers. The Company purchases the components used in the domestic assembly of Mr. Coffee(R) appliances from contract manufacturers. The Company has a primary source for timers which are used in approximately 32 percent of its coffeemaker units. The Company is continuing the process of developing a second source for these items, but does not believe that it is dependent on any single source for any other significant portion of its raw material or component purchases. The Company believes that it has good relationships with its suppliers and has not experienced any raw material or component shortages. In order to improve its ability to provide products on a timely basis, the Company will continue to increase its use of outside sources for detail engineering and production of its appliance products. The Company believes that increased utilization of outside vendors to manufacture products to its specifications will enable it to reduce the level of its investment in capital equipment and inventory as well as provide needed flexibility in manufacturing and surge capacity. HEALTH O METER(R) CONSUMER AND PROFESSIONAL SCALES -------------------------------------------------- A portion of the Company's consumer and professional scale products are manufactured at the Company's facility in Bridgeview, Illinois near Chicago. The Company's Bridgeview plant, built in 1972, was designed specifically to manufacture scales. Most domestic manufacturing activity, from the initial stamping and welding of steel, to painting and assembling the finished product, is performed at the Bridgeview plant. The Company's manufacturing process is designed to provide flexibility in the production of scales. The Bridgeview plant with its multiple production lines is developing cellular manufacturing processes, which enable the Company to quickly and efficiently produce large or small quantities of products or change production runs depending on customer demand. In addition, workers are cross-trained to perform various jobs on the production line providing greater flexibility. Certain medical scales are produced by domestic subcontractors. The Company maintains an extensive tooling inventory that enables it to react quickly to shifts in production requirements. Continuous upgrading and modernization of the Company's tooling over the past several years has resulted in significantly improved production efficiency and cost reductions. The Company's production capacity has increased steadily and management believes that production capacity is adequate to meet production requirements in the foreseeable future. In addition to its domestic operations, the Company has contracts with suppliers headquartered in Taiwan, Hong Kong, Germany and Hungary for the purchase of some finished scales and therapeutic devices as well as certain component parts used in the assembly of certain of the Company's products. During 1997, approximately 49 percent of the Company's consumer and professional scale net sales were comprised of finished products manufactured by foreign -12- 14 suppliers to the Company's specifications, usually using tooling owned by or committed exclusively to the Company. The majority of these finished products and component parts are manufactured at facilities located in the People's Republic of China. The Company believes that alternative sources of supply could be developed if any foreign supplier of finished scales, electronic boards or other raw materials or finished goods should cease to be an available source. However, the loss of a supplier could, in the short-term, adversely affect the Company's business until alternative supply arrangements were secured. The Company does not have long term purchase contracts with manufacturers and component parts suppliers and operates principally on a purchase order basis. The Company purchases raw materials from a number of suppliers, including several steel distributors. The Company's plant in Bridgeview is located within one of the largest steel markets in the country and, therefore, the Company has ready access to many steel suppliers. Packaging materials, including cartons, are purchased from vendors in the Chicago area. Although most electronic components are purchased from vendors based in Taiwan and Hong Kong, the Company is continuing developing domestic sources of electronic parts. The existing vendors produce component parts based on the Company's specifications with respect to function and design. Pricing and delivery are negotiated based upon the Company's estimated requirements for a twelve-month period. Management believes that alternate sources of supply are available for substantially all raw materials, component parts and finished goods. The Company believes that it currently has an adequate supply of raw materials and component parts to meet its manufacturing requirements and that the loss of any one of its suppliers would not have a long-term material adverse effect on the Company. However as noted above, the loss of a supplier could, in the short-term, adversely affect the Company's business until alternative supply arrangements were secured. Because of the overseas location of certain manufacturers and component part suppliers, the Company may be subject to potential production delays due to the lack of availability of components resulting from factors such as political unrest or import restrictions. The Company believes that because of its good relationships with its suppliers as well as its detail attention to forecasting and scheduling, it has maintained a sound level of raw material and component inventories and has not experienced significant raw material or component shortages to date. BACKLOG ------- The Company ships products to customers only after receipt of a bona-fide purchase order. Backlog as of any particular date is not significant to the Company as orders are generally filled no later than 30 days from the customer's requested delivery date. The Company has not experienced any significant order cancellations or delivery rescheduling. -13- 15 TRADEMARKS AND PATENTS - ---------------------- The Company holds trademarks and patents registered in the United States and in other countries for various products, processes and designs. The Company has a number of foreign and domestic trademarks, including the Mr. Coffee(R) name and logo as well as Health o meter(R), Pelouze(R) and other names and logos used in connection with the sale of its products. The Company considers the Mr. Coffee(R), Health o meter(R) and Pelouze(R) trademarks to be critical to its business. No challenges to its rights to these trademarks have arisen and the Company has no reason to believe that any such challenges will arise in the future. United States trademarks issued prior to November 1989 generally expire 20 years after the date of registration, unless renewed. United States trademarks issued subsequent to that date generally expire 10 years after the date of registration, unless renewed. Trademarks may be renewed for an unlimited number of 10 year periods subsequent to the original expiration date, upon the showing of use. Although the duration of foreign trademarks vary, such trademarks are also generally renewable. The Company has design and utility patents on several of its scales, coffeemakers and iced teamakers, while several patents are pending on the Mrs. Tea(TM) by Mr. Coffee(R) automatic hot teamaker and other products. The Company believes that none of its product lines is dependent upon any single patent or group of patents and that patents are not material to its business as a whole. The Company's American utility patents issued prior to June 8, 1995 generally have a duration of 17 years from the date of issue, while patents based on applications filed after that date have a duration of 20 years from the date of filing. The expiration dates for its existing patents range through November 2015. COMPETITION - ----------- All product categories in which the Company participates are extremely competitive. Competition is based upon price, quality, brand name recognition and design innovation, as well as marketing and distribution strategies. The Company competes with established companies, several of which are more diversified and have substantially greater resources. The Company's most significant competitors in the automatic drip coffeemaker industry are Hamilton Beach < > Proctor-Silex, Black & Decker, and Braun. Other competitors include Krups, Bunn, Regal, West Bend, Melitta and control labels from White-Westinghouse, Magic Chef, Swift, Betty Crocker, Farberware and Chef Mate. Melitta is the Company's principal competitor in the branded coffee filter business while Rockline is the Company's principal competitor in the private label coffee filter business. A few other manufacturers offer products that compete with the Company's iced teamakers. Competition in the iced teamaker business is based primarily on price. During September 1995, The Company introduced Mrs. Tea(TM) by Mr. Coffee(R) automatic hot teamaker. Cuisinart and T-Fal have introduced hot teamakers to compete with the Mrs. Tea(TM) automatic hot teamaker. The principal negative factors affecting Mr. Coffee(R) appliances competitive position are the maturity of the coffeemaker and teamaker industries, which makes significant -14- 16 sales gains more difficult. This environment requires significant expenditures for new products in order to increase revenues. In addition, intense price competition encountered from other manufacturers also negatively affects the competitive position of Mr. Coffee(R) appliances. Competition for purchases of consumer scales comes primarily from Metro Corporation and Sunbeam Corp. The Company believes that the Health o meter(R) brand name recognition and established reputation in the medical scale market have enabled the Company to successfully establish itself in the mid- to high-end consumer scale market. The Company believes that the most important positive factors in its competitive position for all of its products are brand name recognition among consumers and its presence in major retail outlets. Over the past several years, the Company has made significant investments in retail-link technology and merchandise flow systems to enhance both its ability to serve and, in turn, its presence at, major retail outlets. The Company's medical products compete domestically primarily with Detecto, a subsidiary of Cardinal Scale Mfg. Co., and Scaletronix, Inc. The Company's major competitor in the international medical scale market is SECA Corporation, a German manufacturer. The Company's office products compete with those of Sunbeam Corp. and Micro General. Pelouze had been the Company's major competitor in the office products market prior to its acquisition by the Company in November 1992. The Company now markets office products as well as food service products exclusively under the Pelouze(R) brand name. Pelouze(R) foodservice products compete with those of Edlund, Detecto, Cooper and Taylor. EMPLOYEES - --------- The Company operates two major production facilities, one near Cleveland, Ohio, which produces Mr. Coffee(R) appliances, and the other in Bridgeview, Illinois, which produces consumer and professional scales. Historically, the number of employees at the Cleveland, Ohio facility has fluctuated during the year to meet the demands of the peak selling seasons. Hourly employees at the Cleveland, Ohio production facility are represented by the International Allied Employees Union, Local 473 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America under a collective bargaining agreement which expires on April 17, 1999. The Company's hourly employees at its Bridgeview, Illinois production facility are represented by the Manufacturing, Production and Service Workers Union, Local No. 24, AFL-CIO (Union) under a collective bargaining agreement which expired on November 13, 1997. An agreement has been reached on the terms of a new three year contract and has been ratified by the Union. Currently the Company is in the process of completing a new contract with the Union. As of September 28, 1997, the total number of employees of the Company was 995. The Company considers relations with its employees to be satisfactory. -15- 17 GOVERNMENTAL REGULATION - ----------------------- The Company's facilities are subject to numerous federal, state and local laws and regulations designed to protect the environment from waste emissions and from hazardous substances. The Company is also subject to the Federal Occupational Safety and Health Act and other laws and regulations affecting the safety and health of employees in the production areas of its facilities. The Company is not a party to any investigation or litigation by the Environmental Protection Agency under the Comprehensive Environmental Response Compensation and Liability Act of 1980 for clean-up costs associated with any waste sites. The Company believes that it is in compliance in all material respects with applicable environmental and occupational safety regulations. INSURANCE - --------- The Company purchases occurrence based product liability insurance in excess of self-insured retention on all Mr. Coffee(R) appliance products. The Company is responsible for the first $1.5 million of any individual claim and up to $5 million in the aggregate for all claims in any one year plus legal fees, and accrues the actuarially estimated cost of such self-insurance on an annual basis. Product liability costs for Health o meter(R) and Pelouze(R) products are not significant. The Company believes that, based upon its historical liability experience, the amount of insurance it carries is adequate. The Company maintains a reserve on its balance sheet for its self-insured retention. The amount of such reserve was $4.2 million as of September 28, 1997. ITEM 2. PROPERTIES The Company's corporate headquarters and the Mr. Coffee(R) appliance assembly, manufacturing and distribution facility are located in an approximately 458,000 square foot facility near Cleveland, Ohio pursuant to an operating lease which expires in July 2012. The Company's scale manufacturing facility is located in Bridgeview, Illinois. The facility, which the Company owns, contains approximately 160,000 square feet of space. The Company also leases approximately 24,000 square feet of warehousing space in Bridgeview, Illinois pursuant to a lease which expires in June 1999. The Company utilizes public warehouse facilities in the Chicago area from time to time as business conditions warrant. The Company considers its facilities suitable and adequate for the purposes for which they are used. The Company believes that its facilities have sufficient capacity to support its current and anticipated production and storage needs. Further, greater utilization of outside vendors to manufacture and assemble products lessens the potential need for additional capacity. -16- 18 ITEM 3. LEGAL PROCEEDINGS On May 27, 1994, Mr. Coffee, inc. was served with a complaint in the case captioned Miriam Brown v. Mr. Coffee, inc., et. al. (Civil Action No. 13531), in the Delaware Court of Chancery, New Castle County. The complaint names Mr. Coffee, inc., a former major shareholder of Mr. Coffee, inc. and each member of the Board of Directors of Mr. Coffee, inc. prior to the Acquisition as defendants in a purported class action lawsuit. The complaint alleged that the Director defendants breached their fiduciary duties as Directors of Mr. Coffee, inc. by, among other things, alleged efforts to entrench themselves in office and prevent Mr. Coffee, inc.'s public stockholders from maximizing the value of their holdings, engaging in plans and schemes unlawfully to thwart offers and proposals from third parties, and approving and or causing the major shareholder to agree to vote in favor of the merger with the Company. The plaintiff originally sought to enjoin the merger and to obtain an order requiring the Director defendants to fulfill their fiduciary duties by exploring third party interest and obtaining the highest offer obtainable for the public stockholders. The plaintiff also seeks unspecified compensatory damages and costs and disbursements in connection with the action, including attorneys' and experts' fees, and such other and further relief as the court deems just and proper. In October 1996, the plaintiffs filed a Second Amended Complaint containing the above claims, but focusing on allegations that the Director defendants failed to engage in a process designed to maximize the value of Mr. Coffee, inc. for its shareholders. The Company has filed a Motion to Dismiss the Second Amended Complaint. No briefing schedule has been established as yet for this Motion. Discovery commenced with the filing of this lawsuit. However, no discovery activity by any party has taken place during the 1995, 1996 and 1997 fiscal years or through the time of filing this document. Other than the filing of the Second Amended Complaint, plaintiffs have not taken further action in prosecution of this lawsuit. The Company believes that the plaintiff's allegations are without merit and intends to contest vigorously the allegations in the Second Amended Complaint. Management believes that the ultimate outcome of such matters will not have a material adverse effect upon the operations or financial position of the Company. On January 21, 1997, the Company was served with a summons and complaint in an action captioned Brita Wasser-Filter-Systeme GmbH and The Brita Products Company v. Recovery Engineering, Inc., Health o meter, Inc. and Culligan International Co., filed in the United States District Court for the Northern District of Georgia. The lawsuit alleges that the plaintiffs are owners of U.S. Patent No. 4,969,996 covering a water filtration device, and that the Company, through its manufacture and sale of Health o meter(R) water filtration pitchers and water filtration cartridges, has infringed and induced others to infringe plaintiffs' patent. In addition, plaintiffs seek to recover their costs, attorneys' fees and treble damages, based upon their allegation of willful infringement. The Company has filed an Answer denying the allegations of the complaint and asserting a counterclaim of patent invalidity and non-infringement. On May 21, 1997, the Court granted the Company's Motion for Transfer of Venue to the United States District Court for the Northern District of Illinois, where the matter is now pending. The lawsuit is presently in the discovery phase. The Company intends to vigorously defend itself against this lawsuit. Management believes that the lawsuit will not have a material adverse effect upon the operations or financial position of the Company. -17- 19 On July 23, 1997, an action captioned Bunn-O-Matic Corporation v. Signature Brands USA, Inc. et al. was filed in the United States District Court for the Central District of Illinois. The complaint alleges that the Company, through its manufacture and sale of the Speedbrew(TM) displacement-type coffeemakers, has infringed two of plaintiff's patents. The complaint seeks an injunction against further infringement, and also seeks costs, actual damages, attorneys' fees and treble damages, based upon allegations of willful infringement. At this point, the Company has filed an Answer denying the allegations of the complaint and asserting a counterclaim of patent invalidity and non-infringement. No further activity has occurred in the case, and no trial date has been set. The Company intends to vigorously defend this action, and Management does not believe that the ultimate outcome will have a material adverse effect upon the operations or financial position of the Company. The Company is a party to various other claims and items of litigation incident to its normal business. Liability in the event of a final adverse termination of any of these matters, in the opinion of the Company, will not, individually or in the aggregate, have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT* The executive officers are elected each year and serve at the pleasure of the Board of Directors. The following is a list of the executive officers of the Company as of December 19, 1997.
Name Age Position ---- --- -------- Meeta Vyas 39 Vice Chairman of the Board of Directors and Chief Executive Officer S. Donald McCullough 54 President and Chief Operating Officer Steven M. Billick 41 Senior Vice President, Treasurer and Chief Financial Officer Timothy J. McGinnity 46 Senior Vice President, Sales - Consumer Products C. Wayne Morris 53 Senior Vice President - Professional Products
*The information under this Item 4A is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K. -18- 20 MEETA VYAS has served as Vice Chairman of the Board and Chief Executive Office of the Company and Signature Brands since August 1997. Prior to her employment with the Company, Ms. Vyas was a senior executive with General Electric Co. (GE), a diversified technology, manufacturing and services company. Beginning in 1991, Ms. Vyas held several senior positions with GE including; General Manager, GE Corporate Business Development; General Manager, GE Appliances; Manager, GE Corporate Business Development. Prior to 1991, Ms. Vyas was a consultant with McKinsey & Co., an international consulting firm. S. DONALD McCULLOUGH has served as President and Chief Operating Officer of the Company and Signature Brands since April 1994. Prior to his employment with the Company, Mr. McCullough served in various positions with GTE Corporation. From January 1991 to January 1993, Mr. McCullough was Vice President-General Manager of GTE (Sylvania), European Lighting Division; from 1986 to 1990, he served as Vice President-General Manager of the Automotive/Miniature Lighting Division; from 1982 to 1986, he served as Vice President-Controller of Lighting Products Group; and from 1980 to 1982, he served as Vice President-Controller of Lighting Products International. STEVEN M. BILLICK has served as Senior Vice President, Treasurer and Chief Financial Officer of the Company and Signature Brands since June 1996. From July 1991 to June 1996, he was Vice President and Controller of NACCO Industries, Inc., a publicly traded holding company with subsidiaries in the lift truck and small kitchen appliance industries. Prior to July 1991, Mr. Billick was a Partner with the international public accounting firm of Deloitte & Touche LLP. TIMOTHY J. McGINNITY has served as Senior Vice President, Sales - Consumer Products of the Company and Signature Brands since September 1994. From August 1991 to August 1994, Mr. McGinnity served as Vice President - Sales of Mr. Coffee, inc. From October 1985 to June 1991, Mr. McGinnity served as Vice President-Sales, Grocery Division of Mr. Coffee, inc. C. WAYNE MORRIS has served as Senior Vice President, Professional Products of the Company and Signature Brands since October 1996. Prior to his employment with the Company, Mr. Morris was Senior Vice President Marketing of Plasti-Line, Inc., a distributor of corporate identification products to Fortune 500 companies, from 1989 to 1996. From 1979 to 1989, he served in various positions with Black & Decker Corporation, an appliance and power tool manufacturer. From 1986 to 1989, he was Vice President Sales, Industrial Division; from 1983 to 1986, he served as Vice President Field Sales, Consumer Division; and from 1979 to 1983, he was National Retail Sales Manager. -19- 21 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "SIGB". The following table sets forth the range of high and low bid prices for each quarter of the two most recent fiscal years as reported by Nasdaq.
Year Ended September 28, 1997 High Low - ----------------------------- ---- --- First Quarter . . . . . . . . . $ 6-3/8 $ 5-1/4 Second Quarter . . . . . . . . . 5-3/4 3-3/8 Third Quarter . . . . . . . . . 4-3/8 3-1/2 Fourth Quarter . . . . . . . . . 4-5/8 3-1/4 Year Ended September 29, 1996 High Low - ----------------------------- ---- --- First Quarter . . . . . . . . . $ 5-1/8 $ 3-3/8 Second Quarter . . . . . . . . . 5-3/8 3-5/8 Third Quarter . . . . . . . . . 6-7/8 4-3/4 Fourth Quarter . . . . . . . . . 6-3/8 5
As of December 1, 1997 there were approximately 132 holders of record of the Common Stock of the Company. The Company has paid no dividends on the Common Stock and it is the Company's present intention to reinvest earnings internally to finance the expansion of its business. There are certain restrictions to the Company's and Signature Brands' ability to pay dividends as discussed under Item 7 of this Annual Report on Form 10-K. Signature Brands does not have any class of publicly traded equity securities outstanding. -20- 22 ITEM 6. SELECTED FINANCIAL DATA (Amounts in thousands, except per share data)
Year Ended Nine-Months ------------------------------------------- Ended Year ended September 28 September 29 October 2 October 2 December 31 1997 1996 1995 1994 1993 --------- ---------- ----------- ------------ ---------- STATEMENT OF OPERATIONS DATA - ---------------------------- Net sales $ 275,708 $ 282,977 $ 267,887 $ 69,451 $ 67,605 Cost of goods sold (1) 190,083 193,117 184,454 53,794 46,099 Selling, general and administrative expenses 62,578 59,635 56,642 18,394 16,209 Amortization of intangible assets 3,937 4,000 3,961 815 619 Work force reductions and asset write-downs - - - 5,367 - Unusual item (2) 2,350 - - - - Operating income (loss) (1) 16,760 26,225 22,830 (8,919) 4,678 Interest expense 18,638 19,134 19,354 3,889 956 Other income (454) (357) (195) (18) - Income (loss) before income taxes (1) (1,424) 7,448 3,671 (12,790) 3,722 Income tax provision (benefit) (1) 788 4,727 2,687 (4,348) 1,534 Net income (loss) (1) (2,212) 2,721 984 (8,442) 2,188 Net income (loss) per share (1) $ (.24) .30 .11 (1.38) .40 Weighted average shares outstanding 9,081 9,073 9,071 6,134 5,528 BALANCE SHEET DATA - ------------------ Working capital (1) $ 49,021 60,251 53,160 38,573 20,130 Total assets (1) 259,710 273,127 275,010 277,571 62,194 Long-term debt 154,112 170,531 172,858 167,635 13,000 Stockholders' equity (1) $ 46,597 48,644 45,892 44,908 34,360
(1) Amounts for fiscal years 1996, 1995 and 1994 have been restated for the effect of a change in accounting method for inventories. See Note 3 to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K. (2) The unusual item in 1997 relates primarily to severance costs of several senior executive officers. -21- 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPANY OVERVIEW - ---------------- Set forth below is a discussion of the principal factors which affected the Company's results of operations during each of the three most recent fiscal periods, and an analysis of the Company's liquidity and capital resources. This discussion should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto included elsewhere in this report. As of September 30, 1996, the Company changed its method of determining the cost of certain inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. This change in accounting for inventories is discussed in more detail in Note 3 to the Consolidated Financial Statements contained in Item 8 of this report on Form 10-K. The change in the method of valuing inventories has been applied retroactively by restating financial statements for prior years. RESULTS OF OPERATIONS - --------------------- FISCAL YEAR ENDED SEPTEMBER 28, 1997 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 29, 1996 Overview Net sales for fiscal 1997 decreased approximately 2.6 percent to $275.7 million, compared with $283.0 million for fiscal 1996. The Company's gross profit in fiscal 1997 was $85.6 million, or approximately 31.1 percent of net sales, compared with $89.9 million, or approximately 31.8 percent of net sales in fiscal 1996. Major decreases in hot and iced teamaker sales somewhat offset by major increases in sales of coffeemakers, consumer scales, therapeutics and professional products resulted in reduced sales and gross profit overall. -22- 24 Sales to the Company's top five customers during fiscal 1997 accounted for approximately 54 percent of net sales, compared with approximately 52 percent of net sales in fiscal 1996. Due to the continuing consolidation of major retailers, the Company believes that its dependence on sales to its largest customers, all major retailers, will continue. Net Sales and Gross Profit CONSUMER PRODUCTS. In fiscal 1997, net sales of consumer products were $236.0 million compared with $247.3 million in 1996, a decrease of 4.6 percent. The decrease in net sales were primarily attributable to lower hot and iced teamaker sales, somewhat offset by increased sales of coffeemakers and consumer scales. The hot teamaker sales decline was attributable to reduced unit volumes as a result of lower customer demand, in spite of a high level of advertising support, and unfavorable pricing. The improved coffeemaker results were due to increased unit volumes from recently introduced new products and in the Company's premium line of coffeemakers, which also resulted in a favorable sales mix, partially offset by lower selling prices. Consumer scales experienced improved sales primarily due to increased unit volumes of both analog and digital strain gauge scales. Gross profit for consumer products decreased 7.0 percent in 1997 to $71.9 million from $77.3 million in 1996. The gross profit margin was 30.5 percent of net sales in 1997, compared with 31.3 percent in 1996. An unfavorable shift in sales mix away from higher margin teamakers and filters and continued overall competitive pricing negatively impacted gross profit margins in 1997 compared with 1996. The Company experienced reduced filter sales due to increased competition from private label manufacturers. In addition, significant advertising expenditures on water products did not result in the expected level of sales and profits due to higher levels of spending on advertising by competitors. During 1997, gross profit was favorably impacted by lower overall product costs, and improvements in product quality which resulted in lower defective product returns. Historically, gross profit margins on individual product lines have been greatest near the point of introduction, gradually decreasing as the product matures and becomes subject to pricing pressure. There continues to be intense pressure on retail prices and there can be no assurance as to the Company's ability to achieve price increases or maintain current price levels in the future. For these reasons, the Company continues its efforts to introduce new products and to reduce the cost of existing products as a means of protecting margins. PROFESSIONAL PRODUCTS. In fiscal 1997, net sales of professional products increased 11.4 percent to $39.7 million compared with $35.7 million in 1996. The Company experienced increased sales across all of its products lines with the most significant gains occurring in the office product and the international sales lines. Improved unit volumes and selling prices contributed to the increase in office product sales while international sales benefited from higher unit volumes. Gross profit was $13.8 million, or 34.6 percent of net sales in 1997, compared with $12.6 million, or 35.1 percent of net sales, in 1996. The lower gross profit margin as a percent of sales was attributable to increased sales of lower margin office products as well as decreased margins for products sold through the commercial and international distribution channels. -23- 25 Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") for fiscal 1997 totalled $62.5 million, or approximately 22.7 percent of net sales, compared with $59.6 million, or approximately 21.1 percent of net sales, for fiscal 1996. SG&A as a percent of net sales increased primarily as a result of $3.2 million of additional national advertising expenditures to support the marketing of teamaker and water filtration products, which did not result in the anticipated level of follow through sales, and increased promotional activities. Amortization of Intangible Assets The amortization of intangible assets of $3.9 million, or $0.43 per share, relates primarily to intangible assets associated with the acquisition by the Company of Mr. Coffee, inc. on August 17, 1994 ("the Acquisition"). Unusual Item The unusual item of $2.4 million, resulted primarily from severance costs associated with several senior executive officers. Interest Expense Net interest expense for fiscal 1997 was approximately $18.6 million, compared with $19.1 million in the prior year. The decrease in interest expense is attributable to lower average borrowings in 1997 compared with 1996. Income Taxes Expenses not deductible for tax purposes, primarily the amortization of intangible assets associated with the Acquisition, resulted in tax expense in 1997 despite the pretax loss experienced by the Company. Consequently, the effective tax rate was not meaningful for fiscal 1997, compared with an effective tax rate of 63.5 percent in 1996. The higher level of pretax income in 1996 along with the impact of the amortization of the intangible assets resulted in an effective tax rate significantly above the statutory tax rate in 1996. Net Income Based on the foregoing, the Company experienced a net loss of $2.2 million in fiscal 1997 compared with net income of $2.7 million in 1996. FISCAL YEAR ENDED SEPTEMBER 29, 1996 COMPARED WITH FISCAL YEAR ENDED OCTOBER 1, 1995 Overview Net sales for fiscal 1996 increased approximately 5.6 percent to $283.0 million, compared with $267.9 million for fiscal 1995. The Company's gross profit in fiscal 1996 was $89.9 million, or approximately 31.8 percent of net sales, compared with $83.4 million, or approximately 31.0 percent of net sales in fiscal 1995. The addition of new higher margin products to the sales mix, as well as improvements in operating efficiency during 1996 contributed to the overall gross profit improvement. Overall sales to the Company's top five -24- 26 customers during fiscal 1996 accounted for approximately 52 percent of net sales, compared with approximately 50 percent of net sales in fiscal 1995. Net Sales and Gross Profit CONSUMER PRODUCTS. Net sales of consumer products increased approximately 7.5 percent to $247.3 million in fiscal 1996, compared with $230.0 million in fiscal 1995. The increase in net sales of consumer products was due primarily to sales of the recently introduced automatic hot teamaker, Mrs. Tea(TM). Consumer product sales were also favorably impacted by higher sales of consumer scales attributable to increased distribution of electronic strain gauge scales at certain mass merchandisers. New distribution of filters also favorably impacted fiscal 1996 sales. These sales increases were partially offset by a decline in coffeemaker and iced teamaker sales reflecting an overall small appliance industry sales decline and lower retail activity resulting from severe winter weather conditions experienced in the second quarter of fiscal 1996. Therapeutic device sales declined in fiscal 1996 as the Company introduced four new therapeutic product categories in late fiscal 1996 to replace the less profitable Shiatsu double hand massager. Gross profit for consumer products increased from approximately 30.0 percent of net sales for fiscal 1995 to approximately 31.4 percent of net sales for fiscal 1996. The gross profit percentage reflects the favorable impact from sales of the recently introduced Mrs. Tea(TM) automatic hot teamaker, as well as lower costs for key raw material such as paper, certain imported appliances and packaging material. PROFESSIONAL PRODUCTS. Net sales of professional products declined approximately 5.7 percent to $35.7 million, primarily because fiscal 1995 sales had been favorably impacted by the U.S. Postal rate increase in January 1995, which generated incremental sales of postal scale dials, electronic rate chips and postal scales to accommodate the new rates. The professional products sales decline was partially offset in fiscal 1996 by improved sales of analog medical and consumer bath scales to foreign customers. Gross profit for professional products declined from approximately 36.7 percent of net sales for fiscal 1995 to approximately 35.1 percent of net sales for fiscal 1996. The gross profit for professional products was favorably impacted during fiscal 1995 by the U.S. Postal rate increase in January 1995 which was not repeated in 1996. Selling, General and Administrative Expenses Selling, general and administrative expenses for fiscal 1996 totaled $59.6 million, compared with $56.6 million for fiscal 1995. For both fiscal 1996 and 1995, SG&A approximated 21.1 percent of net sales. The overall increase in SG&A is attributable to higher national advertising expenditures to support the marketing of new products, such as the Mrs. Tea(TM) hot teamaker, and proportionately higher variable selling costs related to increased sales. Higher bad debt expense, as a result of bankruptcy and liquidation filings by certain customers, also contributed to the increase in SG&A. -25- 27 Amortization of Intangible Assets The amortization of intangible assets of $4.0 million, or $0.44 per share, relates primarily to intangible assets associated with the Acquisition in August 1994. Interest Expense Interest expense for fiscal 1996 was approximately $19.1 million, compared with $19.4 million for fiscal 1995. The decrease in interest expense is attributable to slightly lower overall interest rates during fiscal 1996, compared with fiscal 1995. Income Taxes Income tax expense of $4.7 million is based upon the income before income taxes adjusted principally for non-deductible amortization expense. The Company's effective tax rate for 1996 was approximately 63.5 percent, compared with approximately 73.2 percent for 1995. Expenses not deductible for tax purposes, primarily the amortization of intangible assets associated with the Acquisition, resulted in an effective tax rate significantly higher than the statutory tax rate in both years. The higher level of pretax income in 1996 relative to 1995 reduced the effect of these non-deductible expenses resulting in a lower effective tax rate in 1996. Net Income Based on the foregoing, the Company achieved net income of $2.7 million in fiscal 1996, compared with net income of $1.0 million in fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's primary sources of liquidity are internally generated cash and borrowings under a Credit Agreement among Signature Brands and a group of Banks represented by Banque Nationale de Paris ("BNP") as agent (the "Bank Credit Agreement") entered into in connection with the Acquisition. Cash flow activity for fiscal 1997 and 1996 is presented in the Consolidated Statements of Cash Flows. During fiscal 1997, the Company generated approximately $19.6 million in cash flow from its operating activities. Net loss plus non-cash charges generated approximately $9.1 million, while changes in working capital components generated approximately $10.5 million. The decrease in accounts receivable, which generated approximately $5.6 million, is primarily attributable to the lower level of sales in 1997 compared with 1996. In addition, the decrease in inventory, primarily attributable to improved management of inventory levels and the lower level of sales in 1997, generated approximately $3.4 million. The Company's business is somewhat seasonal, with a large portion of its sales and earnings generated in the first fiscal quarter of the year. During fiscal 1997 and 1996, the Company generated approximately 32 percent and 34 percent of its annual net sales during the fiscal quarters ended December 29, 1996 and December 31, 1995, respectively. -26- 28 The Company's aggregate capital expenditures during fiscal 1997 were approximately $5.7 million, and primarily reflect expenditures for new product tooling, information systems and production equipment. During fiscal 1998, the Company anticipates making capital expenditures of approximately $7.0 million primarily for new product tooling, information systems and production equipment. Management plans to fund these capital expenditures with available cash, cash flow from operations and, if necessary, borrowings under the revolving credit facility provided under the Bank Credit Agreement. Indebtedness incurred in connection with the Acquisition has significantly increased the Company's cash requirements and imposes various restrictions on its operations. The Acquisition and related transactions were financed with approximately $98 million in borrowings under the Bank Credit Agreement, approximately $70 million in proceeds from a unit offering of 13% senior subordinated notes due in 2002 (the "Notes") and warrants to purchase shares of Common Stock at a price of $6.25 per share, and approximately $17.2 million in net proceeds received from the exercise of certain transferable rights to purchase 3,543,433 shares of Common Stock issued to the stockholders of the Company. The Bank Credit Agreement includes a $75.0 million term loan facility, which was subject to amortization, as of September 28, 1997, on a quarterly basis in aggregate annual amounts of $8.75 million, $17.5 million, $15.0 million and $19.0 million during fiscal 1998 through fiscal 2001, respectively, and a $60.0 million revolving credit facility. Borrowings under the term loan and the revolving credit facility bear interest at a rate equal to BNP's Base Rate (as defined) plus 1.0 % per annum, or BNP's Eurodollar Rate (as defined and adjusted for reserves) plus 2.5 % per annum, in either case as selected by the Company. Signature Brands is required to make prepayments on the term loan and revolving credit facility with a percentage of Excess Cash Flow (as defined) and 100 % of the proceeds from certain asset sales, issuances of debt and equity securities and extraordinary items outside the ordinary course of business. There is no required term loan prepayment for fiscal 1998. Signature Brands may also make optional prepayments, in full or in part, on the Term Loan. In December 1997, the term loan facility was increased by $1.0 million and the amortization schedule was amended such that the annual aggregate payment amounts are $5.0 million, $8.75 million, $14.5 million and $33.0 million during fiscal 1998 through fiscal 2001, respectively. A portion of the annual payment for fiscal 2001 may be accelerated into fiscal 2000 if certain EBITDA levels are not achieved in fiscal 1999. In addition, the revolving credit facility was reduced to $55.0 million, however, because the advance rate on collateral was increased, the Company's availability under the revolving credit facility should not be materially impacted. The Bank Credit Agreement contains various customary affirmative and negative covenants. These include, without limitation, covenants that restrict, subject to certain exceptions, incurrence of additional indebtedness, mergers, consolidations or asset sales, changes in the nature of the business, granting of liens to secure any other indebtedness, and transactions with affiliates. In addition, the Bank Credit Agreement requires that the Company maintain certain specified financial ratios, including minimum interest and fixed charge coverage ratios, maximum leverage ratio, minimum net worth levels and ceilings on leverage and capital expenditures. In order to reflect the impact of the seasonality of the Company's business on its financial condition, relevant covenants in the Bank Credit Agreement are set on a rolling twelve month basis. At September 28, 1997, the Company was in compliance with such covenants. -27- 29 Borrowing availability under the revolving credit facility at September 28, 1997 was $13.6 million after considering outstanding letters of credit of $1.2 million, actual borrowings of $33.7 million, and sufficiency of collateral. Signature Brands' obligations under the Bank Credit Agreement are secured by substantially all of Signature Brands' assets and a pledge of all of its issued and outstanding common stock. Signature Brands' obligations under the Bank Credit Agreement are also guaranteed by the Company. The Notes are general obligations of Signature Brands and bear interest at the rate of 13% per annum. The interest on the Notes is payable semi-annually, in arrears, commencing on February 15, 1995. Principal of the Notes is payable on the maturity date, August 15, 2002. Signature Brands' payment obligations under the Notes are unconditionally guaranteed by the Company. The Notes and the Company's guaranty are subordinated to the prior payment of all of the Company's senior debt (which includes amounts outstanding under the Bank Credit Agreement). The Indenture governing the Notes contains customary provisions restricting mergers, consolidations or sales of assets, issuances of preferred stock or the incurrence of additional indebtedness, payment of dividends, creation of liens and transactions with affiliates. Provided that certain financial tests are met, the Indenture does not limit the amount of additional indebtedness that the Company and its subsidiaries may incur. The Notes are generally not redeemable at the option of the Company until August 15, 1999. Under certain limited circumstances, the Company may be required to use a portion of the proceeds from asset sales to make an offer to purchase a portion of the Notes, at a price of 101% of the principal amount thereof, together with accrued and unpaid interest. In addition, in the event of a change in control of the Company (generally defined to mean any transaction or series of transactions which results in persons other than the Thomas H. Lee Company, its affiliates and certain related entities acquiring beneficial ownership of more than 50 % of the total voting power of the Company on a fully diluted basis), each holder will have the right to require Signature Brands to repurchase its Notes at a price of 101% of the principal amount thereof, together with accrued and unpaid interest thereon. Except for the foregoing circumstances, Signature Brands is not required to make mandatory redemption or sinking fund payments with respect to the Notes. The Bank Credit Agreement currently prohibits the Company from purchasing any Notes prior to the expiration thereof and also provides that certain change in control events with respect to the Company would constitute a default thereunder. The Company is a holding company with no independent operations and has no material assets other than its ownership of all of the outstanding stock of Signature Brands. Therefore, the Company is dependent on the receipt of dividends and other distributions from Signature Brands and the proceeds from the sale of its capital stock (to the extent that such proceeds are not required to be used to prepay outstanding indebtedness) to fund any obligations that the Company incurs. The Bank Credit Agreement prohibits, and the Indenture restricts, the payment of dividends to the Company by Signature Brands. -28-- 30 Based upon current levels of operations, anticipated sales growth and plans for expansion, Management believes that the Company's cash flow from operations (including favorable cost savings estimated to be achieved in the future), combined with borrowings available under the Bank Credit Agreement, will be sufficient to enable the Company to meet all of its cash operating requirements over both the short term and the longer term, including scheduled interest and principal payments, capital expenditures and working capital needs. This expectation is predicated upon continued growth in revenues in the Company's core businesses of coffeemakers and consumer scales consistent with historical experience, achievement of operating cash flow margins consistent with historical experience, and the absence of significant increases in interest rates. INFLATION Increases in interest rates, the costs of materials and labor, and Federal, state and local tax rates can significantly affect the Company's operations. Management believes that the current practices of maintaining adequate operating margins through a combination of new product introductions, product differentiation, cost reduction, outsourcing, manufacturing and overhead expense control and careful management of working capital are its most effective tools for coping with inflation. NEW ACCOUNTING PRONOUNCEMENTS During 1997, the FASB issued SFAS No. 128 Earnings per Share, which changes the computation and presentation of earnings per share information. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and, accordingly, will be adopted by the Company in the first quarter of the fiscal year beginning October 1997. Adoption of this statement will not materially impact the current computation and presentation of earnings per share. During 1997, the FASB also issued SFAS No. 129, Disclosure of Information about Capital Structure, with an effective date for periods ending after December 15, 1997 and, accordingly, will be effective for the financial statements of the Company for the fiscal year ending in September 1998. The disclosure requirements under SFAS No. 129 will not impact the Company. Also during 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which are effective for periods beginning after December 15, 1997. The disclosure requirements of these standards will, accordingly, be included in the financial statements of the Company for the fiscal year ending September 1999. YEAR 2000 BUSINESS MATTERS The Company does not expect year 2000 issues to have any material effect on its costs or to cause any significant disruptions to its operations. The Company is currently -29- 31 implementing new systems on a company-wide basis which are fully year 2000 compliant. These new systems are being installed to replace the Company's current systems, and are expected to be fully operational before year 2000 issues will impact the Company. The cost of these new systems will be capitalized and depreciated over their estimated useful lives for financial statement purposes. FORWARD LOOKING STATEMENTS The Company is making this statement in order to satisfy the "safe harbor" provisions contained in the Private Securities Litigation Reform Act of 1995. This Annual Report on Form 10-K includes forward-looking statements relating to the business of the Company. Forward-looking statements contained herein or in other statements made by the Company are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements. The Company believes that the following factors, among others, could affect its future performance and cause actual results of the Company to differ materially from those expressed in or implied by forward-looking statements made by or on behalf of the Company; (a) general economic, business and market conditions; (b) competition; (c) the success of advertising and promotional efforts; (d) the costs associated with new product development and the acceptance of new product offerings; (e) the existence or absence or adverse publicity; (f) changes in relationships with the Company's major customers or in the financial condition of those customers; (g) the maintenance of supply arrangements with key suppliers; (h) fluctuations in raw materials costs or in the availability of materials; and (i) the adequacy of the Company's financial resources and the availability and terms of any additional capital. -30- 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following pages contain the Financial Statements and Supplementary Data as specified for by Item 8 of Part II of Form 10-K. -31- 33 INDEPENDENT AUDITORS' REPORT --------------------------------- The Board of Directors Signature Brands USA, Inc. and Subsidiary: We have audited the consolidated financial statements of Signature Brands USA, Inc. and subsidiary (formerly Health o meter Products, Inc.) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Signature Brands USA, Inc. and subsidiary as of September 28, 1997 and September 29, 1996, and the results of their operations and their cash flows for the years ended September 28, 1997, September 29, 1996, and October 1, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP Cleveland, Ohio December 9, 1997, except as to paragraph 6 of Note 8, which is as of December 24, 1997 F-1 34 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Consolidated Balance Sheets September 28, 1997 and September 29, 1996 (amounts in thousands, except per share data)
Assets 1997 1996 ------ ---- ---- Current assets Cash $ 890 736 Trade accounts receivable, less allowance for doubtful accounts and discounts of $1,978 in 1997 and $2,592 in 1996 52,336 57,960 Inventories 39,607 43,037 Refundable income taxes 497 - Deferred income taxes 6,329 5,432 Other current assets 1,333 1,479 --------- --------- Total current assets 100,992 108,644 Property, plant and equipment, net 17,598 18,522 Other assets Excess of cost over fair value of net assets acquired, net 135,893 139,830 Deferred financing costs, net 3,723 4,579 Other 1,504 1,552 --------- --------- Total other assets 141,120 145,961 --------- --------- Total assets $ 259,710 273,127 ========= ========= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities Current portion of long-term debt $ 8,750 6,000 Accounts payable 21,004 22,851 Accrued liabilities 22,217 19,542 --------- --------- Total current liabilities 51,971 48,393 Long-term debt 154,112 170,531 Product liability 3,212 3,516 Other 3,818 2,043 --------- --------- Total liabilities 213,113 224,483 Stockholders' equity Common stock, par value $.01 per share; authorized 20,000 shares; issued and outstanding 9,082 shares at September 28, 1997 and 9,080 shares at September 29, 1996 91 91 Paid-in capital 51,937 51,772 Warrants 1,773 1,773 Accumulated deficit (7,204) (4,992) --------- --------- Total stockholders' equity 46,597 48,644 --------- --------- Total liabilities and stockholders' equity $ 259,710 273,127 ========= =========
See accompanying notes to consolidated financial statements. F-2 35 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended September 28, 1997, September 29, 1996, and October 1, 1995 (amounts in thousands, except per share data)
1997 1996 1995 ---- ---- ---- Net sales $ 275,708 282,977 267,887 Operating costs and expenses Cost of goods sold 190,083 193,117 184,454 Selling, general, and administrative expenses 62,578 59,635 56,642 Amortization of intangible assets 3,937 4,000 3,961 Unusual item 2,350 - - --------- --------- --------- Total operating costs and expenses 258,948 256,752 245,057 --------- --------- --------- Operating income 16,760 26,225 22,830 Interest expense 18,638 19,134 19,354 Other income (454) (357) (195) --------- --------- --------- Income (loss) before income taxes (1,424) 7,448 3,671 Income tax expense 788 4,727 2,687 --------- --------- --------- Net income (loss) $ (2,212) 2,721 984 ========= ========= ========= Net income (loss) per share $ (.24) .30 .11 ========= ========= ========= Weighted average shares outstanding 9,081 9,073 9,071 ========= ========= =========
See accompanying notes to consolidated financial statements. F-3 36 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended September 28, 1997, September 29, 1996, and October 1, 1995 (amounts in thousands)
Common Stock ---------------- Shares Paid-In Accumulated Issued Dollars Capital Warrants Deficit ------ ------- ------- -------- ------- Balance at October 2, 1994, as previously reported 9,071 $ 91 51,741 1,773 (8,300) Retroactive effect on prior years of change in accounting method - - - - (397) ------ ------ ------ ------ ------ Balance at October 2, 1994, as restated 9,071 91 51,741 1,773 (8,697) Net income - - - - 984 ------ ------ ------ ------ ------ Balance at October 1, 1995 9,071 91 51,741 1,773 (7,713) Net income - - - - 2,721 Issuance of common stock pursuant to exercise of stock options 9 - 31 - - ------ ------ ------ ------ ------ Balance at September 29, 1996 9,080 91 51,772 1,773 (4,992) Net loss - - - - (2,212) Issuance of common stock under option plans and awards 2 - 165 - - ------ ------ ------ ------ ------ Balance at September 28, 1997 9,082 $ 91 51,937 1,773 (7,204) ====== ====== ====== ====== ======
See accompanying notes to consolidated financial statements. F-4 37 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended September 28, 1997, September 29, 1996, and October 1, 1995 (amounts in thousands)
1997 1996 1995 ---- ---- ---- Cash flows from operating activities Net income (loss) $ (2,212) 2,721 984 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization of plant and equipment 6,554 6,011 5,108 Loss on asset write-offs and disposals 64 63 119 Amortization of intangible assets 3,937 4,000 3,961 Amortization of deferred financing costs 856 858 823 Deferred tax expense (benefit) (283) 349 2,547 Accretion of debt discount 223 223 223 Changes in Trade accounts receivable 5,624 (3,809) (12,479) Inventories 3,430 (1,674) 2,356 Refundable income taxes (497) - - Other assets 194 482 3,198 Accounts payable (1,847) (2,952) (7,306) Accrued liabilities 2,675 (286) 60 Noncurrent liabilities 857 (127) (492) -------- -------- -------- Net cash provided by (used in) operating activities 19,575 5,859 (898) -------- -------- -------- Cash flows from investing activities Capital expenditures (5,694) (4,439) (4,636) -------- -------- -------- Net cash used in investing activities (5,694) (4,439) (4,636) -------- -------- -------- Cash flows from financing activities Proceeds from revolving credit facilities 66,100 76,700 80,600 Repayments of revolving credit facilities (74,000) (74,500) (70,600) Repayment of long-term debt (5,992) (3,750) (5,000) Proceeds from stock issuances under option plans and awards 165 31 - Payment of financing fees - - (315) -------- -------- -------- Net cash provided by (used in) financing activities (13,727) (1,519) 4,685 -------- -------- -------- Increase (decrease) in cash 154 (99) (849) Cash at beginning of the period 736 835 1,684 -------- -------- -------- Cash at end of the period $ 890 736 835 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the period for Interest $ 15,872 18,092 18,820 Income taxes $ 1,891 3,490 280
See accompanying notes to consolidated financial statements. F-5 38 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 28, 1997 and September 29, 1996 (amounts in thousands, except share and per share data) (1) Summary of Significant Accounting Policies ------------------------------------------ (a) Description of Business ----------------------- Signature Brands USA, Inc. (the Company) is a holding company which, through its wholly owned subsidiary, Signature Brands, Inc. (Signature Brands), designs, manufactures, markets, and distributes a comprehensive line of consumer and professional products. The Company's consumer products, marketed under the Mr. Coffee(R) and Health o meter(R) brand names include automatic drip coffeemakers, iced and hot teamakers, coffee filters, water filtration products, accessories, and other kitchen countertop appliances as well as bath, kitchen, and gourmet scales and therapeutic devices. Professional products include the Pelouze(R) and Health o meter(R) brands of office, foodservice, and medical scales. (b) Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions are eliminated in consolidation. (c) Revenue Recognition ------------------- The Company recognizes revenue from product sales upon shipment to the customer. Costs or losses estimated to be incurred in connection with product returns and warranties are charged against revenues at the time of sale, based upon consideration of historical experience and information available from customers. (d) Inventories ----------- Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. (e) Property, Plant and Equipment ----------------------------- Property, plant and equipment are stated at cost. The Company calculates depreciation using the straight-line method over the estimated useful lives of the respective assets. (f) Excess of Cost over Fair Value of Net Assets Acquired ----------------------------------------------------- The Company's excess of cost over the fair value of net assets acquired primarily represents the value of its brand names, created by advertising and product performance over many years, and is being amortized on the straight-line basis over a 40-year period. The Company assesses the recoverability of this intangible asset by determining whether the brand name dominance in terms of market share and the national distribution secured can generate sufficient revenues, growth, and cash (Continued) F-6 39 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) flow to recover the intangible asset balance over its remaining life. Accumulated amortization amounted to $15,195 and $11,258 at September 28, 1997 and September 29, 1996, respectively. (g) Deferred Financing and Stock Issuance Costs ------------------------------------------- Financing costs related to the issuance of debt are capitalized and amortized over the term of the debt. Accumulated amortization of financing costs amounted to $2,606 and $1,750 at September 28, 1997 and September 29, 1996, respectively. Issuance costs related to the sale of common stock reduce paid-in capital. (h) Income Taxes ------------ The Company accounts for income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates in effect at the end of the period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the new tax rate is enacted. (i) Product Liability Costs ----------------------- Costs estimated to be incurred with respect to product liability claims are accrued based upon actuarially determined estimates derived from experience factors. The current portion represents product liability costs estimated to be paid within one year. (j) Net Income (Loss) per Common Share ---------------------------------- Net income per common share is calculated by dividing net income by the weighted average of outstanding common stock and common stock equivalents using the treasury stock method, except when the effect of common stock equivalents would be antidilutive or when dilution is less than 3 percent. Net loss per common share is based on the weighted average of outstanding common shares. (k) Use of Estimates ---------------- Generally accepted accounting principles require management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the period in preparing these financial statements. Actual results could differ from those estimates. (l) Stock-Based Compensation ------------------------ During 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which provides a basis for measurement and recognition of all stock-based employee compensation plans. The (Continued) F-7 40 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) disclosure requirements of this Statement are effective for fiscal years beginning after December 15, 1995. The Company chose to maintain its current accounting method for stock-based compensation and disclose the pro forma effects on net income and net income per share of the fair market value method, if material, as permitted by the Statement. (m) Advertising Costs ----------------- The Company expenses reimbursement of customers' advertising costs at the time the related revenues are recognized. Advertising expense was $23,450, $20,087 and $18,458 for the years ended September 28, 1997, September 29, 1996 and October 1, 1995, respectively. (2) Name Change ----------- On March 6, 1997, the stockholders of the Company approved an amendment to the Company's Certificate of Incorporation to change the name of the Company to "Signature Brands USA, Inc." In view of the Company's name change, on April 30, 1997, Health o meter, Inc., the Company's operating subsidiary, was merged with and into a wholly-owned subsidiary of the Company, Signature Brands, Inc., an Ohio corporation, formed by the Company solely for the purpose of changing the name of Health o meter, Inc. to "Signature Brands, Inc." (3) Accounting Change ----------------- As of September 30, 1996, the Company changed its method of determining the cost of certain inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Management believes that the change in accounting for inventories is preferable because it will more appropriately measure operating results and inventory value, better match revenues and expenses, and conform all inventories of the Company to the same accounting method. The change in the method of valuing inventories has been applied retroactively by restating financial statements for prior years. The effect of this restatement was to reduce retained earnings as of September 29, 1996 by $363. The following summarizes the effect of changing the accounting method for certain inventories:
1996 1995 ---- ---- Net income as previously reported $ 2,959 712 Effect of change in accounting method for inventories, net of income tax (238) 272 --------- --------- Net income as restated $ 2,721 984 ========= ========= Net income per share as previously reported $ .33 .08 Effect of change in accounting method for inventories, net of income tax (.03) .03 --------- --------- Net income per share as restated $ .30 .11 ========= =========
(Continued) F-8 41 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) (4) Unusual Item ------------ The Company charged $2,350 to operations in the year ended September 28, 1997 primarily for costs associated with the severance of several senior executive officers. (5) Inventories ----------- The components of inventories are as follows:
1997 1996 ---- ---- Raw materials and purchased parts $11,233 13,446 Finished goods 28,374 29,591 ------- ------- $39,607 43,037 ======= =======
Work-in-process inventories are not significant and are included with raw materials. (6) Property, Plant and Equipment ----------------------------- Property, plant and equipment are as follows:
1997 1996 ---- ---- Land, buildings and building improvements $ 6,241 6,108 Machinery and equipment 9,477 7,862 Tools, dies and patterns 22,783 21,657 Furniture and fixtures 5,635 4,192 Leasehold improvements 578 413 Construction in progress 2,106 1,018 -------- -------- 46,820 41,250 Accumulated depreciation (29,222) (22,728) -------- -------- Property, plant and equipment, net $ 17,598 18,522 ======== ========
(7) Accrued Liabilities ------------------- The components of accrued liabilities are as follows:
1997 1996 ---- ---- Product returns under warranties $ 6,007 6,200 Advertising and promotional costs 5,807 4,866 Accrued compensation 2,585 1,945 Interest 3,094 1,364 Product liability 965 965 Other 3,759 4,202 -------- -------- Accrued liabilities $ 22,217 19,542 ======== ========
(Continued) F-9 42 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) (8) Long-Term Debt -------------- Debt is summarized as follows:
1997 1996 ---- ---- Revolving Credit Facility dated August 17, 1994, bearing interest at prime plus 1% or the London Interbank Offered Rate (LIBOR) plus 2.5% (weighted average interest rate was 8.45% at September 28, 1997); due August 15, 2001; secured by substantially all of Signature Brands' assets and a pledge of all its issued and outstanding common stock; Signature Brands' obligations under the Bank Credit Agreement are also guaranteed by the Company. $ 33,700 41,600 Term Loan dated August 17, 1994, bearing interest at prime plus 1% or LIBOR plus 2.5% (weighted average interest rate was 8.38% at September 28, 1997); due August 15, 2001; principal payable on a quarterly basis in aggregate 12-month amounts of $8,750, $17,500, $15,000, and $19,000 during fiscal 1998 through fiscal 2001; secured by substantially all of Signature Brands' assets and a pledge of all its issued and outstanding common stock; Signature Brands' obligations under the Bank Credit Agreement are also guaranteed by the Company. 60,258 66,250 Senior Subordinated Notes, net of unamortized discount of $1,096 and $1,319 at September 28, 1997 and September 29, 1996, respectively, bearing interest at 13%, payable semiannually; due August 15, 2002. 68,904 68,681 -------- -------- 162,862 176,531 Current portion of long-term debt (8,750) (6,000) --------- --------- Long-term debt $ 154,112 170,531 ========= =========
Bank Credit Agreement --------------------- Signature Brands' Bank Credit Agreement (the Agreement) includes a $60.0 million revolving credit facility (including an $18.0 million letter of credit subfacility) and a $75.0 million term loan facility. The revolving credit facility includes a charge of 0.5 percent on the unused line and 2.5 percent for letter of credit guarantees. Signature Brands is required to make prepayments on the term loan and revolving credit facility with a percentage of Excess Cash Flow, as defined, and 100 percent of the proceeds from certain asset sales, issuances of debt and equity securities, and extraordinary items outside the ordinary course of business. There is no required prepayment for fiscal 1998. Signature Brands may also make optional prepayments, in full or in part, on the term loan. (Continued) F-10 43 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) Borrowing availability under the revolving credit facility at September 28, 1997 was $13.6 million after giving effect to outstanding letters of credit of $1.2 million, actual borrowings of $33.7 million, and sufficiency of collateral. Signature Brands is subject to certain customary affirmative and negative covenants contained in the Agreement. These include, without limitation, covenants that restrict, subject to certain exceptions, incurrence of additional indebtedness; mergers, consolidations, or asset sales; changes in the nature of the business; granting of liens to secure any other indebtedness; and transactions with affiliates. In addition, the Agreement requires that the Company maintain certain specified financial ratios, including minimum interest and fixed charge coverage ratios, maximum leverage ratios, minimum net worth levels, and ceilings on leverage and capital expenditures. At September 28, 1997, the Company was in compliance with such covenants. In December 1997, the Agreement was amended to increase the term loan facility by $1.0 million and to modify the amortization schedule such that the annual aggregate payments are $5.0 million, $8.75 million, $14.5 million, and $33.0 million during fiscal 1998 through fiscal 2001, respectively. A portion of the annual payment for fiscal 2001 may be accelerated into fiscal 2000 if certain EBITDA levels are not achieved in fiscal 1999. In addition, the revolving credit facility was reduced to $55.0 million, however, because the advance rate on collateral was increased, the Company's availability thereunder should not be materially impacted. Senior Subordinated Notes ------------------------- The Senior Subordinated Notes (the Notes) are general obligations of Signature Brands. Signature Brands' payment obligations under the Notes are unconditionally guaranteed by the Company. The Notes and the Company's guaranty are subordinated to the prior payment of the Company's amounts outstanding under the Agreement. The Indenture governing the Notes contains customary provisions restricting mergers, consolidations, or sales of assets; issuances of preferred stock or the incurrence of additional indebtedness; payment of dividends; creation of liens; and transactions with affiliates. Provided that certain financial tests are met, the Indenture does not limit the amount of additional indebtedness that Signature Brands and its subsidiaries may incur. The Notes are generally not redeemable at the option of the Company until August 15, 1999. Under certain limited circumstances, the Company may be required to use a portion of the proceeds from asset sales to make an offer to purchase a portion of the Notes, at a price of 101 percent of the principal amount thereof, together with accrued and unpaid interest. In addition, in the event of a change in control of the Company, each holder will have the right to require Signature Brands to repurchase its Notes at a price of 101 percent of the principal amount thereof, together with accrued and unpaid interest thereon. Except for the foregoing circumstances, Signature Brands is not required to make mandatory redemption or sinking fund payments with respect to the Notes. The Agreement currently prohibits the Company from purchasing any Notes prior to the expiration thereof and also provides that certain change in control events with respect to the Company would constitute a default thereunder. (Continued) F-11 44 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) (9) Warrants -------- The Company, in conjunction with the issuance of the Notes, issued 70,000 warrants. Each warrant entitles the holder thereof to purchase 10.96 shares of common stock at $6.25 per share, subject to adjustment under certain circumstances. The warrants expire on August 15, 2002. (10) Income Taxes ------------ Income tax expense (benefit) for the years ended September 28, 1997, September 29, 1996, and October 1, 1995, respectively, consisted of:
1997 1996 1995 ---- ---- ---- Current Federal $ 856 4,052 100 State 215 326 40 Deferred (283) 349 2,547 ------- ------- ------- $ 788 4,727 2,687 ======= ======= =======
The principal items accounting for the difference in taxes on income computed at the U.S. statutory rate and as recorded for the years ended September 28, 1997, September 29, 1996, and October 1, 1995, respectively, are as follows:
1997 1996 1995 ---- ---- ---- Tax expense (benefit) at statutory rate of 35% $ (498) 2,607 1,285 State taxes, net of federal benefit 86 455 206 Goodwill amortization 1,241 1,302 1,255 Other (41) 363 (59) ------- ------- ------- $ 788 4,727 2,687 ======= ======= =======
(Continued) F-12 45 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 28, 1997 and September 29, 1996 are as follows:
1997 1996 ---- ---- Deferred tax assets Compensation and vacation $ 1,096 340 Warranties and sales reserves 2,259 2,897 Advertising 676 683 Product liability 1,646 1,746 Above market rate lease - 219 Bad debts 751 456 Other 455 741 ------- ------- Total gross deferred tax assets 6,883 7,082 Deferred tax liabilities Depreciation and amortization (1,493) (1,928) Other (232) (279) ------- ------- Total gross deferred tax liabilities (1,725) (2,207) ------- ------- Net deferred tax asset $ 5,158 4,875 ======= =======
The realization of the Company's net deferred tax asset is dependent on the generation of future taxable income. Management believes that it is more likely than not that the Company will generate sufficient future taxable income to fully utilize the established net asset. Accordingly, no valuation allowance for the net deferred tax asset has been provided. (11) Lease Commitments ----------------- The Company leases various buildings and equipment under leases expiring at various dates. At September 28, 1997, minimum rental commitments under noncancelable leases are as follows: Fiscal Year Ending ------------------ 1998 $ 2,031 1999 1,903 2000 1,800 2001 1,790 2002 1,750 Thereafter 18,400 ---------- $ 27,674 ========== Rental expense amounted to approximately $1,630, $1,438, and $1,447, for the years ended September 28, 1997, September 29, 1996, and October 1, 1995, respectively. (Continued) F-13 46 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) (12) Contingencies ------------- The Company is involved in various claims and items of litigation. Management believes that the ultimate outcome of such matters will not have a material adverse effect upon the operations or financial position of the Company. (13) Stock Incentive Plans --------------------- The Company has five stock-based compensation plans. Options granted under these plans have ten-year terms and generally have graded vesting schedules of either four or five years. Options scheduled over five years require achievement of company-wide performance goals in order for options to vest. The Company applies APB Opinion 25 (APB 25) in accounting for its stock incentive plans and, accordingly, recognizes compensation costs only to the extent that the market price of shares granted exceeds the exercise price at the grant date. During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), which permits the continued use of APB 25 and requires disclosure of the pro forma effects on net income and net income per share had the fair value method of accounting prescribed under SFAS 123 been used. Under SFAS 123, an option's fair value is estimated at the grant date using an option pricing model, the resulting fair value is then recognized as compensation cost over the vesting period of the related option. In the Company's case these pro forma disclosures are required to be applied only to options granted after October 1, 1995 (fiscal 1996). In estimating fair value, the Company has used the Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996, respectively; risk free interest rate of 6.21 percent and 6.10 percent, expected lives of 4.1 years and 4.7 years, and stock price volatility of 29.3 percent. The weighted average fair value of options granted during 1997 and 1996 was $1.18 and $1.70, respectively. The following chart depicts the pro forma affects on net income of applying the provisions of SFAS 123.
1997 1996 ---- ---- Net income (loss) As reported $ (2,212) 2,721 Pro forma (2,302) 2,673 Net income (loss) per share As reported $ (.24) .30 Pro forma (.25) .29
(Continued) F-14 47 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) The following is a summary with respect to options outstanding at September 28, 1997, September 29, 1996, and October 1, 1995, and the activity during those years:
1997 1996 1995 ---- ---- ---- Options unexercised at beginning of the year 919,853 813,853 502,353 Weighted average exercise price $ 4.15 $ 3.86 $ 3.96 Options granted during the year 669,000 211,000 377,000 Weighted average exercise price $ 3.99 $ 5.55 $ 4.44 Options exercised during the year (1,250) (9,125) - Weighted average exercise price $ 3.44 $ 3.46 - Options canceled during the year (186,375) (95,875) (65,500) Weighted average exercise price $ 5.24 $ 4.82 $ 4.44 Options unexercised at end of year 1,401,228 919,853 813,853 Weighted average exercise price $ 3.93 $ 4.15 $ 3.86 Options exercisable at end of year 567,728 443,478 398,353 Weighted average exercise price $ 3.52 $ 3.15 $ 3.08
At September 28, 1997, the range of exercise prices and weighted average remaining contractual life of outstanding options was $2.61 - $14.50 and 8.5 years. 1992 Incentive Stock Option Plan -------------------------------- In February 1992, the Company adopted a new incentive stock plan (1992 Plan). The 1992 Plan provides that incentive stock options and nonqualified stock options may be granted to such officers and key employees as the administrators of the 1992 Plan may select. The 1992 Plan is administered by a committee of the board of directors which selects the participants and determines (i) the type of options; (ii) the vesting schedule of options; (iii) the exercise price (which may not be less than fair market value on the date of grant); and (iv) the duration of the options (which cannot exceed 10 years). A total of 220,000 shares of common stock have been reserved for issuance under the 1992 Plan. No options may be granted under the 1992 Plan after December 31, 2001. 1994 Nonqualified Stock Option Grant ------------------------------------ In August 1994, the Company granted an executive officer of the Company 362,353 nonqualified stock options at an exercise price of $2.61 per share in exchange for canceled options of Mr. Coffee. The difference between the aggregate exercise price of such new options and the fair value of the Company's stock was equal to the option spread for the canceled Mr. Coffee options. The options are exercisable immediately, but may not be exercised more than one year after termination or death while in the employ of the Company or more than 10 years from date of grant. (Continued) F-15 48 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) 1995 Stock Option and Incentive Plan ------------------------------------ In April 1995, the Company adopted a new stock option and incentive plan (1995 Plan). The 1995 Plan provides authority for the grant of stock options and stock appreciation rights to directors, employees, and consultants by the Compensation Committee (Committee) of the board of directors. The total number of shares of common stock that may be subject to awards granted under the 1995 Plan is equal to 750,000 shares of common stock, subject to certain adjustments. The Committee selects the participants and determines (i) the type of option; (ii) the vesting schedule of options; (iii) the exercise price; and (iv) the duration of the options. No options may be granted under the 1995 Plan after April 27, 2005. 1997 Stock Option and Incentive Plan ------------------------------------ In March 1997, the Company adopted a new stock option and incentive plan (1997 Plan). The 1997 Plan provides the Compensation Committee (Committee) of the board of directors the authority to grant stock options and stock appreciation rights to directors, employees, and consultants. The Committee selects the participates and determines (i) the type of award; (ii) the vesting schedule of awards; (iii) the exercise price; and (iv) duration of the award. The total number of shares of common stock that may be subject to awards granted under the 1997 Plan is equal to 270,000 shares of common stock, subject to certain adjustments. No awards my be granted under the 1997 Plan after March 5, 2007. 1997 Nonqualified Stock Option Grant ------------------------------------ In August 1997, the Company granted an executive officer of the Company 500,000 nonqualified stock options at an exercise price of $3.50 per share. One-half of the options become exercisable on September 30 of each year following the date of grant, but may not be exercised more than ten years from the date of grant. (Continued) F-16 49 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) (14) Unaudited Quarterly Financial Data ----------------------------------
Quarter ------------------------------------------- First Second Third Fourth Year ended September 28, 1997 (1) Net sales $87,136 61,925 64,194 62,453 Gross profit 26,059 19,613 20,018 19,935 Interest expense 4,982 4,575 4,484 4,597 Net income (loss) 491 (267) 75 (2,511) Net income (loss) per share .05 (.03) .01 (.28) Weighted average shares outstanding (in thousands) 9,080 9,080 9,080 9,081 Year ended September 29, 1996 (2) Net sales $97,407 56,275 59,339 69,956 Gross profit 30,544 17,737 19,011 22,568 Interest expense 5,097 4,717 4,637 4,683 Net income (loss) 1,977 10 (218) 952 Net income (loss) per share .22 - (.02) .10 Weighted average shares outstanding (in thousands) 9,071 9,071 9,071 9,078
(1) The results for the fourth quarter include an unusual item of $2.4 million primarily for expenses associated with severance costs for several senior executive officers. (2) Amounts for the fourth quarter have been restated for the effect of the Company's change from the LIFO method of accounting for certain inventories to the FIFO method. Amounts for the first, second and third quarters were not restated as the impact was not material to those quarters. (15) Business and Credit Concentrations ---------------------------------- The Company distributes and sells its products through major retail outlets, including discounters/mass merchants, department stores, warehouse clubs, specialty stores, catalog showrooms, mail order catalog companies, and national hardware, drugstore, and retail grocery chains. Approximately 39 percent, 36 percent, and 33 percent of the Company's revenues were from two customers in the years ended September 28, 1997, September 29, 1996, and October 1, 1995, respectively. The largest of these two customers accounted for 27 percent, 23 percent, and 23 percent of the Company's revenues in those same years, respectively. (16) Related Party Transactions -------------------------- Signature Brands pays a management fee to a related party for certain administrative and professional services performed by the related party. Amounts paid to this related party for management fees, including reimbursed expenses, were $252, $263, and $305 for the years ended September 28, 1997, September 29, 1996, and October 1, 1995, respectively. (Continued) F-17 50 SIGNATURE BRANDS USA, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (amounts in thousands, except share and per share data) (17) Financial Instruments --------------------- Management has determined that at September 28, 1997 and September 29, 1996, the fair value of financial instruments included in the balance sheets approximated their carrying values. With respect to cash, receivables, payables, and accrued liabilities, this determination was based on the short maturity of the instruments. With respect to debt, the assessment was based on management's judgment as to currently available rates on debt with similar maturities. (18) Condensed Consolidated Financial Information -------------------------------------------- Condensed consolidated financial information for Signature Brands, Inc. at September 28, 1997 and September 29, 1996, and for the years ended September 28, 1997, September 29, 1996, and October 1, 1995 is as follows:
September 28 September 29 1997 1996 ------------ ------------ Current assets $ 100,992 108,644 Noncurrent assets 158,718 164,483 --------- --------- Total assets $ 259,710 273,127 ========= ========= Current liabilities $ 51,971 48,393 Noncurrent liabilities 161,142 176,090 Intercompany payables 47,823 47,658 --------- --------- Total liabilities 260,936 272,141 Stockholder's equity Common stock - $1.00 stated value; authorized 850 shares; issued and outstanding 100 shares in 1997 and $.01 par value; authorized and outstanding 1,000,000 shares in 1996 - 10 Paid-in capital 2,821 2,811 Accumulated deficit (4,047) (1,835) --------- --------- Total stockholder's equity (1,226) 986 --------- --------- Total liabilities and stockholder's equity $ 259,710 273,127 ========= =========
Year Ended --------------------------------------------- September 28 September 29 October 1 1997 1996 1995 ------------ ------------ ------------ Net sales $ 275,708 282,977 267,887 Gross profit 85,625 89,860 83,433 Net income (loss) (2,212) 2,721 984
F-18 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 as to the Directors of the Company is incorporated herein by reference to the information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 5, 1998, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. Information required by this Item 10 as to the executive officers of the Company is included as Item 4A of Part I of this Annual Report on Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K is incorporated by reference to the information set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on March 5, 1998. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated by reference to the information set forth under the caption "Compensation of Directors and Executive Officers" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 5, 1998, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated by reference to the information set forth under the caption "Stock Ownership of Principal Holders and Management" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 5, 1998, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. -32- 52 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is incorporated by reference to the information set forth under the caption "Certain Transactions" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 5, 1998, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements -------------------- The following Financial Statements of the Registrant are included in Part II, Item 8: Page ----- Independent Auditors' Report - KPMG Peat Marwick LLP . . . . . . F-1 Consolidated Balance Sheets September 28, 1997 and September 29, 1996 . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Statements of Operations Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 . . . . . . . . . . . F-3 Consolidated Statements of Stockholders' Equity Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 . . . . . . . . . . . F-4 Consolidated Statements of Cash Flows Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 . . . . . . . . . . . F-5 Notes to Consolidated Financial Statements . . . . . . . . . . . F-6 -33- 53 (a) (2) Financial Statement Schedules ----------------------------- The following Financial Statement Schedules of the Registrant and the report of the independent auditors, KPMG Peat Marwick LLP, are filed as part of Item 14(a)(2) of Part IV of Form 10-K. The report of KPMG Peat Marwick LLP thereon as of September 28, 1997 and September 29, 1996 and for the years ended September 28, 1997, September 29, 1996 and October 1, 1995, appears at page F-1 of this Form 10-K. Page ---- Schedule I - Condensed Financial Information of Registrant . . . . . . . . . . . . S-1 Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . S-3 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a) (3) Exhibits -------- Reference is made to the Exhibit Index set forth herein beginning at page E-1. (b) Report on Form 8-K ------------------ The Company filed a current report on Form 8-K dated August 12, 1997, to disclose under Item 5 thereof the appointment of Meeta Vyas as Vice Chairman of the Board of Directors and Chief Executive Officer of Signature Brands USA, Inc. to replace Peter C. McC. Howell. -34- 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized at Cleveland, Ohio this 24th day of December, 1997. SIGNATURE BRANDS USA, INC. SIGNATURE BRANDS, INC. By: /s/ Meeta Vyas ---------------------------------- Meeta Vyas Vice Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on December 24, 1997. /s/ Meeta Vyas /s/ Thomas R. Shepherd - --------------------------------------- ------------------------------------ Meeta Vyas Thomas R. Shepherd, Chairman of the Vice Chairman of the Board of Directors Board of Directors and Chief Executive Officer (Principal Executive Officer) /s/ Thomas H. Lee ------------------------------------ Thomas H. Lee, Director /s/ William P. Carmichael ------------------------------------ William P. Carmichael, Director /s/ Steven M. Billick /s/ David A. Jones - ------------------------------------- ------------------------------------ Steven M. Billick David A. Jones, Director Senior Vice President, Treasurer and Chief Financial Officer (Principal Accounting and Financial Officer) ------------------------------------ S. Donald McCullough, Director /s/ Robert W. Miller ------------------------------------ Robert W. Miller, Director /s/ Scott A. Schoen ------------------------------------ Scott A. Schoen, Director /s/ Frank E. Vaughn ------------------------------------ Frank E. Vaughn, Director -35- 55 Schedule I Signature Brands USA, Inc. and Subsidiary Condensed Financial Information of the Registrant Condensed Statements of Operations and Cash Flows Years ended September 28, 1997, September 29, 1996 and October 1, 1995 (dollars in thousands)
1997 1996 1995 ------- ------- ------- STATEMENTS OF OPERATIONS Equity in net income (loss) of subsidiary $(2,212) 2,721 984 ------- ------- ------- Net income (loss) $(2,212) 2,721 984 ======= ======= ======= STATEMENTS OF CASH FLOWS Cash flows from operating activities Net income (loss) $(2,212) 2,721 984 Adjustments to reconcile net income (loss) to net cash used in operating activities Intercompany receivables (165) (31) -- Equity in net (income) loss of subsidiary 2,212 (2,721) (984) ------- ------- ------- Net cash used in operating activities (165) (31) -- ------- ------- ------- Cash flow from financing activities Proceeds from stock issuances under option plans and awards 165 31 -- ------- ------- ------- Net cash provided by financing activities 165 31 -- ------- ------- ------- Increase (decrease) in cash -- -- -- Cash at the beginning of the period -- -- -- ------- ------- ------- Cash at the end of the period $ -- -- -- ======= ======= =======
S-1 56 Schedule I Signature Brands USA, Inc. and Subsidiary Condensed Financial Information of the Registrant Condensed Balance Sheets September 28, 1997 and September 29, 1996 (dollars in thousands, except share and per share amounts)
1997 1996 -------- -------- ASSETS Investment in subsidiary $ (1,226) 986 Intercompany receivable 47,823 47,658 -------- -------- Total assets $ 46,597 48,644 ======== ======== STOCKHOLDERS' EQUITY Common stock - par value $.01 per share; authorized 20,000 shares; issued and outstanding 9,082 shares at September 28, 1997 and 9,080 shares at September 29, 1996 $ 91 91 Paid-in capital 51,937 51,772 Warrants 1,773 1,773 Retained deficit (7,204) (4,992) -------- -------- Total stockholders' equity $ 46,597 48,644 ======== ========
S-2 57 Schedule II Signature Brands USA, Inc. and Subsidiary Valuation and Qualifying Accounts (dollars in thousands)
Balance at Balance at Beginning End of Period Additions Deductions of Period --------- --------- ---------- ------------ Allowance for Doubtful Accounts and Discounts - ------------- Year ended October 1, 1995 1,933 268 388 1,813 Year ended September 29, 1996 1,813 923 144 2,592 Year ended September 28, 1997 2,592 385 999 1,978
S-3 58 Exhibit Index Sequential Exhibit Number Description of Document Page - -------------- ----------------------- ---------- 3.1 Amended and Restated Certificate of Incorporation (K) of Signature Brands USA, Inc., as amended 3.2 Articles of Incorporation of Signature Brands, Inc. (L) 3.3 Amended and Restated By-laws of the Company, as amended (A) 3.4 Code of Regulations of Signature Brands, Inc. (L) 4.1 Indenture dated August 17, 1994 pursuant to which (C) Signature Brands' 13% Senior Subordinated Notes due 2002 have been issued 4.2 13% Senior Subordinated Note due 2002 (C) 4.3 Warrant Agreement dated August 17, 1994 (C) 4.4 First Supplemental Indenture Dated as of April 30, 1997 (L) Between Signature Brands, Inc. and Firstar Bank of Minnesota as Trustee 10.1 Second Amended 1992 Stock Incentive Plan of the Company* (B) 10.2 Employment Agreement among the Company, Health o meter (A) and Peter C. McC. Howell* 10.3 Form of Non-Qualified Stock Option Agreement between (A) the Company and Peter C. McC. Howell* 10.4 Amended and Restated Employment Agreement between (M) the Company and S. Donald McCullough dated July 1, 1996* (Portions of this exhibit have been omitted pursuant to a request for confidential treatment) 10.5 Employment Agreement between the Company and (H) Richard C. Adamany dated March 31, 1995* 10.6 Employment Agreement between the Company and (H) Timothy J. McGinnity dated March 31, 1995* 10.7 Employment Agreement between the Company and (I) John D. Lange dated March 20, 1995* E-1 59 10.8 Employment Agreement between the Company and (M) Steven M. Billick dated June 10, 1996* 10.9 Second Amended and Restated Stockholders Agreement (A) among the Company and certain of its stockholders 10.10 Credit Agreement dated August 17, 1994 among (C) Signature Brands', Banque National de Paris, New York Branch and the lenders named therein 10.11 Amended and Restated Management Agreement among (A) the THL Co., Health o meter and the Company 10.12 Letter Agreement between Health o meter and LLP Media, (D) Inc. dated January 31, 1992 10.13 Agreement for Purchase and Sale of Assets dated (E) November 11, 1992 among Pelouze, Health o meter and PSC Acquisition Co. 10.14 Agreement and Plan of Merger dated as of May 24, 1994 (B) among the Company, Health o meter, Java Acquisition Corporation and Mr. Coffee, inc. 10.15 1994-1999 Labor Agreement between Mr. Coffee and (F) Industrial and Allied Employees Local Union No. 73 10.16 1995 Stock Option and Incentive Plan of the Company* (G) 10.17 Lease Agreement dated October 15, 1996, between Duke (M) Realty Limited Partnership and the Company 10.18 Agreement between Health o meter, Inc. and Manufacturing, (M) Production and Service Workers Union, Local No. 24, AFL-CIO, November 14, 1994 through November 13, 1997 10.19 Employment Agreement between the Company and (J) C. Wayne Morris dated October 7, 1996* 10.20 1997 Stock Option and Incentive Plan of the Company* (K) 10.21 Employment Agreement between the Company and Torrey A. Glass dated January 29, 1997* 10.22 Employment Agreement between the Company and Meeta Vyas dated August 11, 1997* 10.23 Signature Brands USA, Inc. Chief Executive Officer Stock Option Plan* E-2 60 10.24 Form of Non-Qualified Stock Option Agreement between the Company and Meeta Vyas* 18.1 Letter on Change of Accounting Method 21.1 Subsidiaries of the Company 23.1 Consent of KPMG Peat Marwick LLP 27.1 Financial Data Schedule 27.2 Financial Data Schedule
- ---------------------- (A) Incorporated herein by reference to the appropriate exhibit to the Company's registration statement on Form S-1 (Reg. No. 33-80124). (B) Incorporated herein by reference to the appropriate exhibit to the Company's and Signature Brands' registration statement on Form S-1 (Reg. No. 33-80000). (C) Incorporated herein by reference to the appropriate exhibit to the Company's current report on Form 8-K dated August 17, 1994. (D) Incorporated herein by reference to the appropriate exhibit to the Company's registration statement on Form S-1 (Reg. No. 33-45202). (E) Incorporated herein by reference to the appropriate exhibit to the Company's current report on Form 8-K dated December 12, 1992. (F) Incorporated herein by reference to the appropriate exhibit to the Company's annual report on Form 10-K for the period ended October 2, 1994. (G) Incorporated herein by reference to the appropriate exhibit to the Company's Proxy Statement in connection with the Annual Meeting of Stockholders held on April 27, 1995. (H) Incorporated herein by reference to the appropriate exhibit to the Company's quarterly report on Form 10-Q for the period ended July 2, 1995. (I) Incorporated herein by reference to the appropriate exhibit to the Company's quarterly report on Form 10-Q for the period ended June 30, 1996. (J) Incorporated herein by reference to the appropriate exhibit to the Company's quarterly report on Form 10-Q for the period ended December 29, 1996. (K) Incorporated herein by reference to the appropriate exhibit to the Company's quarterly report on Form 10-Q for the period ended March 30, 1997. (L) Incorporated herein by reference to the appropriate exhibit to the Company's quarterly report on Form 10-Q for the period ended June 29, 1997. (M) Incorporated herein by reference to the appropriate exhibit to the Company's annual report on Form 10-K for the year ended September 29, 1996. * Management contract or compensatory plan or arrangement. E-3 EX-10.21 2 EXHIBIT 10.21 1 Exhibit 10.21 ------------- EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made and entered into as of the 29th day of January, 1997 by and between TORREY A. GLASS ("Employee") and SIGNATURE BRANDS, INC., (formerly known as Health o meter, Inc.), an Ohio corporation (the "Company"). W I T N E S S E T H WHEREAS, the Company desires to retain the services of the Employee as its Senior Vice President, Marketing and Sales, Consumer Products; and WHEREAS, the Company and the Employee deem it necessary and appropriate to enter into an agreement setting forth the terms and conditions of the Employee's employment with the Company. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Employee and the Company agree as follows: ARTICLE I EFFECTIVE TIME Section 1.00. EFFECTIVE TIME. This Agreement shall be effective as of January 29, 1997 (the "Effective Time"). ARTICLE II EMPLOYMENT Section 2.01. EMPLOYMENT. The Company hereby employs the Employee and the Employee hereby agrees to serve the Company on the terms and conditions set forth herein. Employee shall initially hold the offices of Senior Vice President Marketing and Sales, Consumer Products. Section 2.02. AT WILL STATUS. Employee specifically acknowledges and agrees that his employment with the Company is "at will," and may be terminated by him or the Company at any time with or without cause. 1 2 ARTICLE III DUTIES OF EMPLOYMENT Section 3.00. DUTIES. Subject to the authority of the Board, Employee shall have the status and powers as are customarily associated with, and shall perform such duties and functions as the Board shall from time to time determine and as are customarily assigned to, the Senior Vice President Marketing and Sales, Consumer Products of a corporation. Employee shall devote his full time and effort to the business and affairs of the Company. Employee further agrees to serve, if elected or appointed thereto, as a director of the Company's subsidiaries and affiliated entities (if any) and in one or more executive offices of any of the Company's subsidiaries and affiliated entities (if any); provided that the indemnity provisions of Section 11.01 of this agreement shall apply to Employee's service in any such capacity. ARTICLE IV COMPENSATION AND RELATED MATTERS Section 4.01. SALARY. As compensation for the employment services to be rendered by Employee hereunder, the Company shall pay to Employee a salary at an initial rate of One Hundred Sixty-five thousand ($165,000) Dollars per annum, payable at such intervals as may be consistent with the Company's payroll policies, subject to increase or decrease by the Compensation Committee of the Board in its sole discretion. Compensation of Employee by salary payments shall not be deemed exclusive and shall not prevent Employee from participating in any other compensation or benefit plan of the Company. The salary payments (including any increased salary payments) hereunder shall not in any way limit or reduce any other obligation of the Company hereunder, and no other compensation, benefit or payment hereunder shall in any way limit or reduce the obligation of the Company to pay Employee's salary hereunder. Section 4.02. EXPENSES. During the term of Employee's employment hereunder, Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Employee in performing the services hereunder, including, but not limited to, all expenses for travel and living expenses while away from home on business or at the request of and in the service of the Company, its subsidiaries or affiliated entities; provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. Employee shall also be provided an automobile allowance from the Company, in such amount as is determined appropriate by the Board of Directors of the Company from time to time. 2 3 Section 4.03 CONTINUED PARTICIPATION. Employee shall be entitled to participate in all of the Company's employee benefit plans in effect from time to time and made available by the Company to its executives and key management employees, including the Company's life and long-term disability insurance plans, medical and dental plans and 401 (k) Plan. Section 4.04. ANNUAL PERFORMANCE BONUS. In addition to the Employee's salary, the Employee will be entitled to participate during the period of his employment in any bonus plan established by the Board of Directors from time to time that contemplates participation by the executive officers of the Company. The amount of any annual bonus payable to Employee shall be determined under such plan. Section 4.05 STOCK OPTIONS. On January 29, 1997, Employee will receive the following: (a) TIME-BASED OPTIONS. Non-qualified stock options to purchase 20,000 shares of the Company's Common Stock under the Company's Stock Option and Incentive Plan. Such options shall be exercisable at the price of $5.375, and will vest in 25% increments on an annual basis, commencing on the first anniversary of the date of grant; and (b) PERFORMANCE-BASED OPTIONS. Non-qualified performance- based stock options to purchase 10,000 shares of the Company's Common Stock under the Company's Stock Option and Incentive Plan. Such options shall be exercisable at the price of $5.375, and will vest in 20% increments a year beginning in fiscal 1997, conditioned upon the Company's achievement of stated EBITDA objectives. The options set forth in this Paragraph will expire 10 years from the date of grant, or earlier in the event of termination of the Employee's employment, with the Company and will be subject to the other terms and conditions set forth in the forms of Option Agreement relating thereto attached as Exhibit A to this Agreement. The foregoing stock options shall be in addition to the 5,000 time-based and 5,000 performance-based stock options granted to Employee prior to the effective date of this Agreement. 3 4 ARTICLE V SEVERANCE ARRANGEMENTS Section 5.01 DEFINITIONS. (a) For purposes of this Article, "termination for cause" shall mean any termination of the Employee's employment resulting from: (i) Employee's engaging in fraud, misappropriation of funds, embezzlement or like conduct committed against the Company; (ii) Employee's conviction of a felony; or (iii) Employee's material violation of any provision of this Agreement which has not been cured within thirty (30) days after written notice setting forth such material violation and also setting forth the actions that Employee shall be required to take to cure such material violation has been given by the Company to Employee. (b) The Company may terminate Employee's employment hereunder at any time without cause. Notwithstanding any other provisions of this Agreement to the contrary and for purposes of this Article, any termination of Employee's employment resulting from: (i) Employee's death or (ii) Employee's inability to perform the essential functions of his job with or without reasonable accommodation, shall be deemed to be a termination by the Company without cause. Section 5.02 RESIGNATION; TERMINATION FOR CAUSE. If Employee resigns from his positions with the Company or his employment shall be terminated by the Company for cause, the Company shall pay Employee his full salary through the date of resignation or termination at the rate then in effect and the Company shall have no further obligations to Employee under this Agreement. Section 5.03 TERMINATION WITHOUT CAUSE. If the Company terminates Employee's employment hereunder without cause, then: (a) the Company shall pay Employee his full salary through the date of termination, at the annual rate then in effect; (b) in lieu of any further salary payments to Employee for periods subsequent to the date of termination, the Company shall continue to pay to Employee his salary at the annual rate in effect immediately prior to such termination until the earlier to occur of (i) the date that Employee obtains a position with another employer providing for the payment of an annual base salary at a rate substantially equivalent to that provided herein or (ii) the expiration of the twelve (12) month period following such termination (the "Salary Continuation Period"), in equal periodic installments consistent with the Company's payroll policies; and 4 5 (c) payment of the foregoing by the Company shall constitute complete satisfaction and remedy with respect to termination of Employee's employment by the Company without cause. Section 5.04 CONTINUED BENEFITS. Unless Employee is terminated by the Company for cause, or Employee shall resign from his positions with the Company, the Company shall maintain in full force and effect, for the continued benefit of Employee during the Salary Continuation Period, coverage under all medical and dental insurance plans and programs in which Employee participated prior to termination at the same cost to Employee as that applicable to other employees participating in such plans during such period; PROVIDED, that Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event Employee's participation in any such plan or program is barred, the Company shall arrange to provide Employee with benefits substantially similar to those which Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. ARTICLE VI BINDING AGREEMENT Section 6.00 BINDING AGREEMENT. This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, designee or, if there is no such designee, to Employee's estate. This Agreement and all rights of the Company hereunder shall inure to the benefit of and be enforceable by the Company's successors and assigns. ARTICLE VII REPRESENTATIONS AND AGREEMENTS OF EMPLOYEE Section 7.01 ABILITY TO PERFORM. Employee represents and warrants that he is free to enter into this Agreement and to perform the duties required hereunder, and that there are no employment contracts or understandings, restrictive covenants or other restrictions, whether written or oral, preventing the performance of his duties hereunder. Section 7.02 COOPERATION. Employee agrees to submit to a medical examination and to cooperate and supply such other information and documents as may be required by any insurance company in connection with the Company's obtaining life insurance on the life of Employee, and any other type of insurance or fringe benefit as the Company shall determine from time to time to obtain. 5 6 ARTICLE VIII RESTRICTIVE COVENANTS Section 8.01 NON-COMPETITION. Employee agrees that during the Non-Competitive Period (as defined below), Employee shall not, directly or indirectly, as owner, partner, joint venturer, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, licensor or in any capacity whatsoever, engage in, become financially interested in, be employed by, render any consultation or business advice with respect to, or have any connection with, any business engaged in manufacturing, assembly, marketing or sales of coffeemakers, teamakers, filters, scales, massagers or any other product then being manufactured, assembled, marketed or sold by the Company, or then being developed by the Company with the expectation of sale by the Company within 90 days, in any geographic area where, at the time of termination of his employment hereunder, the business of the Company was being conducted in any material respect; provided, however, that Employee may own any securities of any corporation which is engaged in such business and is publicly owned and traded but in an amount not to exceed at any one time five percent (5%) of any class of stock or securities of such corporation. The term "Non-Competitive Period" shall mean the period commencing on the date of his termination or resignation and ending on the date which is (i) twelve (12) months later, in the event of termination by the Company without cause, or (ii) eighteen (18) months later, in the event of termination by Employee of his employment hereunder, or termination by the Company for cause. Section 8.02 NO HIRING. During the Non-Competitive Period, Employee will not knowingly (i) hire or attempt to hire any employee of the Company or of any of the Company's subsidiaries or affiliated entities (if any); (ii) assist in such hiring by any other person; or (iii) encourage any such employee to terminate his employment with the Company or any of such subsidiaries or affiliated entities. Section 8.03 SEVERABILITY. If any portion of the restrictions set forth in this Article VIII should, for any reason whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforceability of the remainder of such restrictions shall not thereby be adversely affected. Section 8.04 REASONABLENESS. Employee agrees that the territorial and time limitations set forth in this Article VIII are reasonable and properly required for the adequate protection of the business of the Company. In the event any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, Employee agrees to the reduction of the territorial or time limitation to the area or period which such court shall have deemed reasonable. 6 7 ARTICLE IX NON-DISCLOSURE OF CONFIDENTIAL INFORMATION Section 9.01 NON-DISCLOSURE. Employee shall not, during the term of this Agreement and at any time thereafter, directly or indirectly, disclose or permit to be known outside of the scope of his duties to the Company, to any person, firm or corporation, any confidential information acquired by him during the course of, or as an incident to, his employment relating to the Company. It shall not be outside the scope of Employee's duties to the Company to disclose confidential information to the Company's directors, officers, employees, advisors, attorneys, accountants, lenders, financial institutions or investors. Such confidential information shall be limited to proprietary technology, market data, formulae, customer and supplier lists, non-public financial and operating information and data, and any other documents embodying such confidential information to the extent that such data and information relate specifically to the Company. Such restrictions apply only to the reproduction or use of the specific written documents of the Company relating to the above-described categories and not to any knowledge (including but not limited to knowledge gained from such confidential information) based on Employee's experience during his employment with the Company or otherwise. Section 9.02 RETURN OF DOCUMENTS. Upon termination of Employee's employment with the Company, all documents, records, reports, writings and other similar documents containing confidential information, including copies thereof, then in Employee's possession or control shall be returned and left with the Company. ARTICLE X EQUITABLE RELIEF Section 10.00 RIGHT TO INJUNCTION. Employee recognizes that the services to be rendered by him hereunder are of a special, unique, unusual, extraordinary and intellectual character, involving skill of the highest order and giving them peculiar value, the loss of which cannot be adequately compensated for in damages. In the event of a breach of this Agreement by Employee, the Company shall be entitled to injunctive relief or any other legal or equitable remedies. Employee agrees that the Company may recover by appropriate action the amount of the actual damages caused the Company by any failure, refusal or neglect of Employee to perform his agreements, representations and warranties herein contained. The remedies provided in this Agreement shall be deemed cumulative and the exercise of one shall not preclude the exercise of any other remedy, at law or in equity, for the same event or any other event. 7 8 ARTICLE XI MISCELLANEOUS Section 11.01 INDEMNIFICATION; INSURANCE. The Company will indemnify Employee to the maximum extent permitted by law (including advancing expenses where appropriate) with respect to actions taken by him as an officer or director of the Company, any of its subsidiaries, or any affiliated entity of the Company or any of its subsidiaries. The Company's obligation to provide indemnification shall survive termination of employment. The Company will also maintain in effect during Employee's employment hereunder directors and officer liability insurance, to the extent the same can be obtained on commercially reasonable terms. If permitted by the terms of the policy providing such insurance, Employee will remain insured under such policy until the first to occur of (i) termination of such policy (other than termination by the Company), or (ii) the fifth anniversary of termination of Employee's employment with the Company. Section 11.02 ARBITRATION. Should any dispute arise between the parties concerning the performance of this Agreement, the parties agree to mediation and, if not resolved through such mediation within thirty (30) days, final and binding arbitration in Cleveland, Ohio in accordance with the rules of the American Arbitration Association, subject to Article X in the case of alleged breach of Articles VIII or IX. The decision rendered in any arbitration proceedings shall be in writing and shall set forth the basis therefor. The parties shall abide by the award rendered in the arbitration proceedings, and such award may be entered as a final, non-appealable judgment, and may be enforced and executed upon, in any court having jurisdiction over the party against whom enforcement of such award is sought. Each of the parties agrees (in connection with any action brought to enforce the arbitration provisions of this paragraph) not to assert in any such action, any claim that it is not subject to the personal jurisdiction of such court, that the action is brought in an inconvenient forum, that the venue of the action is improper or that such mediation or arbitration may not be enforced by such courts. Each party agrees that service of process may be made upon it by any method authorized by the laws of the state in which arbitration is to be conducted in accordance with this Section 11.02. Section 11.03 NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in the Agreement shall be in writing, shall be deemed to have been duly given when delivered or unless otherwise specified mailed by U.S. registered mail, return receipt requested, postage prepaid, addressed as follows: If to Employee: Torrey A. Glass 13705 Shaker Blvd., #8 Cleveland, Ohio 44120 If to the Company: Signature Brands, Inc. 7005 Cochran Road 8 9 Glenwillow, Ohio 44139-4312 With a copy to: Calfee, Halter & Griswold 1400 McDonald Investment Center 800 Superior Avenue Cleveland, Ohio 44114 Attn: Thomas F. McKee, Esq. or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. Section 11.04 AMENDMENT OR ALTERATION. No amendment or alteration of the terms of this Agreement shall be valid unless made in writing and signed by both of the parties hereto. Section 11.05 GOVERNING LAW. This Agreement shall be governed by the laws of the State of Ohio, without giving effect to the conflicts of laws provisions thereof. Section 11.06 SEVERABILITY. The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. Section 11.07 WAIVER OR BREACH. No waiver of or failure to enforce any provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision of this Agreement, nor shall such waiver or failure to enforce constitute a continuing waiver. Section 11.08 ASSIGNMENT. This Agreement may not be transferred or assigned by either party without the prior written consent of the other party. Section 11.09 FURTHER ASSURANCES. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. Section 11.10 HEADINGS. The section headings appearing in this Agreement are for purposes of each reference and shall not be considered a part of this Agreement or in any way modify, amend or affect its provisions. 9 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SIGNATURE BRANDS, INC. BY: /s/ S. Donald McCullough ---------------------------------- Name: S. Donald McCullough Title: President /s/ Torrey A. Glass ------------------------------------ Torrey A. Glass 10 EX-10.22 3 EXHIBIT 10.22 1 EXHIBIT 10.22 EXECUTION COPY EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is entered into as of the 11th day of August, 1997, by and between Signature Brands USA, Inc., a Delaware corporation, with a principal business address at 7005 Cochran Road, Glenwillow, Ohio 44139 (the "Company"), and Meeta Vyas, an individual residing at 246 Milbank Avenue, Greenwich, Connecticut 06830 (the "Executive"). This Agreement is binding immediately and will be honored in its entirety in the event of a Change of Control as specified in Section 4(e). WHEREAS, the Company desires the benefit of the experience, supervision and services of the Executive and desires to employ the Executive upon the terms and conditions hereinafter set forth; and WHEREAS, the Executive is willing and able to accept such employment on such terms and conditions. NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive hereby agree as follows: l. EMPLOYMENT DUTIES AND ACCEPTANCE. The Company hereby employs the Executive, and the Executive agrees to serve and accept employment, as the Vice-Chairman and Chief Executive Officer of the Company, reporting directly to the Board of Directors of the Company (the "Board"). In addition, the Executive will replace the outgoing Chief Executive Officer as a member of the Board. In connection therewith, as Chief Executive Officer, the Executive will oversee and direct the operations, strategic direction and leadership of the Company, with complete responsibility for operating and financial results, and will perform such other duties consistent with the responsibilities of Chief Executive Officer, all subject to the direction and control of the Board. The Executive and the Company shall, within one year from the date hereof, discuss the elevation of the Executive from Vice-Chairman to Chairman of the Board, which elevation would be subject to mutual agreement between the Executive and the Company and approval by the Board. In addition, after consultation with the Executive, the Company will consider making changes to the composition of the Board as suggested by the Executive. During the term of the Executive's employment with the Company hereunder (the "Term"), the Executive shall devote all of her working time to such employment and appointment, shall devote her best efforts to advance the interests of the Company and shall not engage in any other business activities, as an employee, director, consultant or in any other capacity, whether or not she receives any compensation therefor, without the prior written consent of the Board. 2. TERM OF EMPLOYMENT. The Executive's employment and appointment hereunder shall commence on September 2, 1997 and shall continue, unless earlier terminated in 2 accordance with Section 4 hereof, until September 30, 1999 (the "Term"). The Company and the Executive agree that the Term of employment may be extended for a third year if such an extension is agreed to by the Company and the Executive prior to September 30, 1999. 3. COMPENSATION. In consideration of the performance by the Executive of her duties hereunder, the Company shall pay or provide to the Executive the following compensation which the Executive agrees to accept in full satisfaction for her services provided pursuant hereto (necessary withholding taxes, FICA contributions and the like shall be deducted from such compensation): (a) BASE SALARY. A base salary, payable in accordance with the Company's payroll practices, at the rate of Five Hundred Thousand Dollars ($500,000) per annum during the Term ("Base Salary"). The Board of Directors of the Company will review from time to time the Base Salary payable to the Executive hereunder and may, in its discretion, increase but not decrease, the Executive's rate of compensation. Any such increased Base Salary shall be and become the "Base Salary" for purposes of this Agreement. (b) BONUS. A bonus (the "Bonus"), payable annually in arrears not later than 120 days after the end of the Company's fiscal year, which is based, as set forth on SCHEDULE A hereto, on the Company achieving certain annual performance goals established by the Board from time to time; provided, that in no event, shall the Bonus be less than 50% of the Executive's Base Salary. (c) INSURANCE COVERAGES AND PENSION PLANS. Such medical, dental, life insurance and pension benefits as are generally made available by the Company to its executive officers ("Management") from time to time shall be made available to the Executive. (d) STOCK OPTIONS. The Company shall grant to the Executive an option (the "Option") to purchase 500,000 shares of the Company's Common Stock, $.01 par value per share (the "Common Stock"), at a per share exercise price equal to the closing price of the Company's Common Stock on August ll, 1997, which Option shall vest 50% as of September 30, 1998 and 50% as of September 30, 1999. The Option shall be granted pursuant to a stock option agreement which will be similar in form and content to the Company's standard stock option agreement, except as otherwise specifically set forth herein. The stock option agreement shall provide that upon the occurrence of any Change of Control (as defined in Section 4(e)) prior to September 30, 1999, the Option shall be fully accelerated and vested. The Company hereby agrees to take whatever steps are required to authorize a new stock option plan, or an amendment to the current stock option plan, or to take such other action as is necessary in order to permit the Company to grant the Option to the Executive as soon as possible. If additional action by the Company is required in order to permit the Option to be granted to the Executive and a Change of Control occurs prior to the taking of such action, the Company agrees to use its best efforts to authorize the grant of the Option or to take such alternative action as to give the Executive value exactly equivalent to that represented by the Option had it been granted prior to the Change of Control. 2 3 (e) VACATION. The Executive shall be entitled to four (4) weeks of vacation each year. (f) EXPENSES. The Executive shall be entitled to reimbursement of all reasonable and documented expenses actually incurred or paid by the Executive in the performance of the Executive's duties under this Agreement, upon presentation of expense statements, vouchers or other supporting information in accordance with Company policy. In addition, the Company will reimburse the Executive for reasonable and documented house-hunting and moving expenses associated with moving to the Cleveland, Ohio area. (g) AUTOMOBILE. The Company, at its expense, shall provide the Executive with a luxury automobile suitable for the Chief Executive Officer of the Company. The Company shall pay all expenses in connection with such automobile, including without limitation, insurance, gasoline, repairs and maintenance. (h) INDEMNIFICATION. The Executive shall be entitled to indemnification from the Company to the extent provided in its charter and by-laws and shall be covered by the terms of the Company's policy of insurance for directors and officers in effect from time to time (the "D&O Insurance"). Copies of the Company's charter, by-laws and D&O Insurance will be made available to the Executive upon request. (I) STOCK PURCHASE OPTION. The Company hereby grants to the Executive, or to those members of the Executive's immediate family designated by the Executive and approved by the Company, the right and option to purchase up to 91,727 shares of the Company's Common Stock at a per share price equal to 50% of the closing price of the Company's Common Stock on August 11, 1997, which option shall only be exercisable from September 2, 1997 until the close of business on November 1, 1997. The sale of such stock will be made pursuant to the terms of a stock subscription agreement reasonably acceptable to the Company and the Executive which will contain certain provisions restricting transfer of such stock prior to the end of the Term. 4. TERMINATION. (a) TERMINATION BY THE COMPANY FOR CAUSE. The Company shall have the right at any time to terminate the Executive's employment hereunder without prior notice upon the occurrence of any of the following (any such termination being referred to as a termination for "Cause"): (i) the Executive has been convicted of, or pleads NOLO CONTENDERE with respect to, any felony, or of any lesser crime or offense having as its predicate element fraud, dishonesty or misappropriation of the property of the Company; (ii) the habitual drug addiction or intoxication of the Executive which negatively impacts her job performance; 3 4 (iii) the willful failure or refusal of the Executive to perform her duties as set forth herein or the willful failure or refusal to follow the direction of the Board; provided such failure or refusal continues after 10 days of the receipt of notice in writing from the Board of such failure or refusal; or (iv) the Executive breaches any of the terms of this Agreement or any other agreement between the Executive and the Company which breach is not cured within 10 days subsequent to notice from the Company to the Executive of such breach. (b) TERMINATION BY COMPANY FOR DEATH OR DISABILITY. The Company shall have the right at any time, subject to the provisions of Section 5(b), to terminate the Executive's employment hereunder without prior notice upon the Executive's inability to perform her duties hereunder by reason of any mental, physical or other disability for a period of at least three consecutive months (for purposes hereof, "disability" has the same meaning as is defined for such term in the Company's disability policy). The Company's obligations hereunder shall, subject to the provisions of Section 5(b), also terminate upon the death of the Executive. (c) TERMINATION BY COMPANY WITHOUT CAUSE. The Company shall have the right at any time, subject to the provisions of Section 5(c), to terminate the Executive's employment for any other reason without Cause upon thirty (30) days prior written notice to the Executive. (d) VOLUNTARY TERMINATION BY EXECUTIVE. The Executive shall be entitled to terminate her employment and appointment hereunder upon thirty (30) days prior written notice to the Company. Except as set forth under Section 4(e) below, any such termination shall be treated as a termination by the Company for Cause under Section 5(a). (e) TERMINATION BY EXECUTIVE UPON CHANGE OF CONTROL. (i) If a Change of Control (as defined below) shall occur on or prior to December 31, 1997, the Executive may elect to terminate her employment hereunder as of the closing of such Change of Control, by giving the Company five (5) days' written notice, which notice shall specify that it is being given pursuant to this Section 4(e). Any voluntary termination by the Executive pursuant to this Section 4(e) shall be treated as a Termination upon Change in Control under Section 5(d). (ii) For purposes hereof, the term "Change of Control" shall mean (A) the sale of all or substantially all of the assets of the Company, (B) the sale, in a single transaction or series of related transactions, of all of the shares of the Company's Common Stock owned by Thomas H. Lee Company and its affiliates (collectively, the "Lee Group") as of August 11, 1997 (including any shares issued as a dividend on or otherwise in respect of such stock), (C) the 4 5 consummation of a merger, consolidation or similar transaction involving the Company in which the holders of the Company's capital stock immediately prior to the transaction do not retain at least a majority of the voting power of the corporation surviving the merger or its parent corporation, (D) the percentage of the Company's outstanding Common Stock owned by the Lee Group at any time becomes less than 50% of the percentage of the Company's outstanding Common Stock owned by the Lee Group as of August 11, 1997 or (E) the complete liquidation or dissolution of the Company. (f) NOTICE OF TERMINATION. Any termination by the Company or the Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 9. For purposes of this Agreement, a "Notice of Termination" means a written notice given prior to the termination which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than thirty (30) days after the giving of such notice). The failure by the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause shall not waive the Company's rights hereunder or preclude the Company from asserting such fact or circumstance in enforcing its rights hereunder. 5. EFFECT OF TERMINATION OF EMPLOYMENT. (a) FOR CAUSE. If the Executive's employment is terminated for Cause, the Executive's salary and other benefits specified in Section 3 shall cease at the time of such termination, and the Executive shall not be entitled to any compensation specified in Section 3 which has not been paid prior to such termination; provided, however, that the Executive shall be entitled to continue to participate in the Company's medical benefit plans to the extent required by law. (b) DEATH OR DISABILITY. If the Executive's employment is terminated by the death or disability of the Executive (pursuant to Section 4(b)), the Executive's compensation provided in Section 3 shall be paid to the Executive or, in the event of the death of the Executive, the Executive's estate, as follows: (i) the Executive's Base Salary specified in Section 3(a) shall continue to be paid in monthly installments until the first to occur of (i) twelve (12) months following such termination and (ii) such time as the Executive breaches the provisions of Sections 6 or 7 of this Agreement; and (ii) the Executive's additional benefits specified in Section 3(c) shall continue to be available to the Executive until the first to occur of (i) twelve (12) months following such termination and (ii) such time as the Executive breaches the provisions of Sections 6 or 7 of this Agreement. 5 6 (c) WITHOUT CAUSE. If the Executive's employment is terminated by the Company without Cause (pursuant to Section 4(c)), the Executive's compensation provided in Section 3 shall be paid as follows: (i) the Executive shall be entitled to receive, in equal monthly installments pursuant to the Company's standard payroll practices, the Base Salary specified in Section 3(a) until the later of (i) twelve (12) months following such termination and (ii) September 30, 1999; (ii) the Executive shall be entitled to receive a bonus equal to 50% of the amounts to be paid pursuant to Section 5(c)(i) above, which amounts shall be paid in equal monthly installments pursuant to the Company's standard payroll practices; and (iii) the Executive's additional benefits specified in Section 3(c) shall continue to be available to the Executive until the later of (i) twelve (12) months following such termination and (ii) September 30, 1999. Nothing in this Section 5(c) is intended to affect in any manner the acceleration of the Executive's Option in the event of a Change of Control as provided in Section 3(d). (d) TERMINATION UPON CHANGE OF CONTROL. If the Executive elects to terminate her employment hereunder as a result of a Change of Control as provided in Section 4(e), the Executive shall be guaranteed the following: (i) all payments provided for in the event of a Termination Without Cause under Section 5(c) above; and (ii) the full acceleration and vesting of the Option specified in Section 3(d). 6. AGREEMENT NOT TO COMPETE. The Executive agrees that during the Non-Competition Period (defined below) she will not in any capacity, either separately, jointly, or in association with others, as an officer, director, consultant, agent, employee, owner, partner or stockholder, engage or have a financial interest in any business which is involved in the business of manufacturing, assembling, marketing or sales of coffeemakers, teamakers, filters, scales, massagers or any other business which competes with the Company's current or currently planned products as of the date of the employee's termination of employment with the Company (excepting only the ownership of not more than 5 % of the outstanding securities of any class listed on an exchange or regularly traded in the over-the-counter market). The "Non-Competition Period" shall mean the longer of (a) the remaining Term or (b) one (1) year. The Executive further agrees that during the Non-Competition Period she will not in any capacity, either separately, jointly or in association with others, solicit or otherwise contact any of the Company's customers or prospects, as shown by the Company's records, that were customers or 6 7 prospects of the Company at any time during the Non-Competition Period if such solicitation or contact is for the general purpose of selling products or services that satisfy the same general needs as any products or services that the Company had available for sale to its customers or prospects during the Non-Competition Period. If a court determines that the foregoing restrictions are too broad or otherwise unreasonable under applicable law, including with respect to time or space, the court is hereby requested and authorized by the parties hereto to revise the foregoing restrictions to include the maximum restrictions allowed under the applicable law. The Executive expressly agrees that breach of the foregoing would result in irreparable injuries to the Company, that the remedy at law for any such breach will be inadequate and that upon breach of this provision, the Company, in addition to all other available remedies, shall be entitled as a matter of right to injunctive relief in any court of competent jurisdiction without the necessity of proving the actual damage to the Company. For purposes of this Section 6 and Section 7, the "Company" refers to the Company and any incorporated or unincorporated affiliates of the Company. 7. SECRET PROCESSES AND CONFIDENTIAL INFORMATION. (a) For the Term and thereafter, (i) the Executive will not divulge, directly or indirectly, other than in the regular and proper course of business of the Company, any confidential knowledge or information with respect to the operation or finances of the Company or with respect to confidential or secret processes, techniques, machinery, customers, plans and products manufactured or sold by the Company and (ii) the Executive will not use, directly or indirectly, any confidential information for the benefit of anyone other than the Company; provided, however, that the Executive has no obligation, express or implied, to refrain from using or disclosing to others any such knowledge or information which is or hereafter shall become available to the public other than through disclosure by the Executive. (b) The Executive will promptly disclose to the Company and to no other person, firm or entity all inventions, discoveries, improvements, trade secrets, formulas, techniques, processes, know-how and similar matters, whether or not patentable and whether or not reduced to practice, which are conceived or learned by the Executive during the period of the Executive's employment with the Company, either alone or with others, which relate to or result from the actual or anticipated business or research of the Company or which result, to any extent, from the Executive's use of the Company's premises or property (collectively called the "Inventions"). The Executive acknowledges and agrees that all the Inventions shall be the sole property of the Company, and the Executive hereby assigns to the Company all of the Executive's rights and interests in and to all of the Inventions, it being acknowledged and agreed by the Executive that all the Inventions are works made for hire. The Company shall be the sole owner of all domestic and foreign rights and interests in the Inventions. The Executive agrees to assist the Company at its expense to obtain and from time to time enforce patents and copyrights on the Inventions. (c) Upon the request of, and, in any event, upon termination of the Executive's employment with the Company, the Executive shall promptly deliver to the Company all documents, data, records, notes, drawings, manuals and all other tangible 7 8 information in whatever form which pertains to the Company, and the Executive will not retain any such information or any reproduction or excerpt thereof. 8. NOTICES. All notices or other communications hereunder shall be in writing and shall be deemed to have been duly given (a) when delivered personally, (b) upon confirmation of receipt when such notice or other communication is sent by facsimile or telex, (c) one day after delivery to an overnight delivery courier, or (d) on the fifth day following the date of deposit in the United States mail if sent first class, postage prepaid, by registered or certified mail. The addresses for such notices shall be as follows: (a) For notices and communications to the Company: Signature Brands, Inc. 7005 Cochran Road Glenwillow, Ohio 44139 Facsimile: (440) 542-4055 Attention: Chairman of the Board with a copy to: Thomas H. Lee Company 75 State Street Boston, MA 02109 Facsimile: (617) 227-3514 Attention: Scott A. Schoen and a copy to: Calfee, Halter & Griswold, LLP 1400 McDonald Investment Center 800 Superior Avenue Cleveland, OH 44114 Facsimile: (216) 241-0816 Attention: Thomas F. McKee, Esq. (b) For notices and communications to the Executive: Ms. Meeta Vyas 246 Milbank Avenue Greenwich, CT 06830 Facsimile: (203) 661-2493 Any party hereto may, by notice to the other, change its address for receipt of notices hereunder. 8 9 9. GENERAL. 9.1 EXECUTIVE'S ABILITY TO PERFORM. The Executive hereby represents and warrants that she is not subject to any agreement, restriction, lien or encumbrance of any type limiting in any way her ability to perform her obligations hereunder. The Executive shall not disclose to the Company, use in the Company's business, or cause the Company to use, any information or material which is confidential to any third party unless the Company has a written agreement with such third party allowing the Company to receive and use such information or materials. The Executive will not incorporate into her work any material which is subject to proprietary rights of any third party, unless the Company has the right to incorporate such material. The Executive has no obligations, by reason of prior employment relationships or otherwise, which might in any way affect her ability to give her best efforts to the business of the Company or to carry out the provisions of this Agreement. 9.2 GOVERNING LAW. This Agreement shall be governed by, and enforced in accordance with, the laws of the State of Ohio applicable to agreements made and to be performed entirely within such state. 9.3 AMENDMENT; WAIVER. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument executed by all of the parties hereto or, in the case of a waiver, by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 9.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Executive, without regard to the duration of her employment by the Company or reasons for the cessation of such employment, and inure to the benefit of his administrators, executors, heirs and assigns, although the obligations of the Executive are personal and may be performed only by her. This Agreement shall also be binding upon and inure to the benefit of the Company and its subsidiaries, successors and assigns, including, in connection with a Change of Control or otherwise, any corporation with which or into which the Company or its successors may be merged or which may succeed to their assets or business. 9.5 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be considered to have the force and effect of an original. 9.6 ENTIRE AGREEMENT. This Agreement, the stock option agreement referred to in Section 3(d) hereof and the stock subscription agreement referred to in Section 3(i) hereof constitute the entire understanding of the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, discussions, writings and agreements between them 9 10 including, without limitation, that certain letter dated August 1, 1997 sent by Scott A. Schoen to the Executive. [Remainder of page intentionally left blank] 10 11 IN WITNESS WHEREOF, the parties have executed this Agreement as an instrument under seal as of the date first above written. SIGNATURE BRANDS USA, INC. By /s/ Thomas R. Shepherd ------------------------------- Name: Thomas R. Shepherd Title: Chairman EXECUTIVE: /s/ Meeta Vyas ------------------------------- Meeta Vyas, individually 12 SCHEDULE A Executive Bonus Schedule ------------------------ The Bonus provided for in Section 3(b) shall be based on the percentage of budgeted EBITDA achieved by the Company during each fiscal year. The budgeted EBITDA figure shall be the amount approved by the Board in the Company's annual operating budget. Such EBITDA amount shall be as reasonably adjusted by the Board to take into account any acquisitions or dispositions.
Percentage of Bonus Available as Plan EBITDA Achieved Percentage of Base Salary -------------------- ------------------------- 100 % 100 % 99 95 98 90 97 85 96 80 95 75 94 70 93 65 92 60 91 55 90 or less 50
12 EX-10.23 4 EXHIBIT 10.23 1 Exhibit 10.23 SIGNATURE BRANDS USA, INC. CHIEF EXECUTIVE OFFICER STOCK OPTION PLAN SECTION 1. PURPOSE The Signature Brands USA, Inc. Chief Executive Officer Stock Option Plan, is designed to foster the long-term growth and performance of the Company by: (a) enhancing the Company's ability to attract and retain a Chief Executive Officer; (b) motivating such Chief Executive Officer to serve and promote the long-term interests of the Company and its stockholders through stock ownership and performance-based incentives; and (c) providing the Company with flexibility to provide stock-based incentives to an individual whose services are anticipated to promote the Company's long-term business objectives. To achieve this purpose, the Plan provides authority for the grant of Stock Options. SECTION 2. DEFINITIONS (a) "Acquisition Consideration" shall mean the kind and amount of shares of the surviving or new corporation, cash, securities, evidence of indebtedness, other property or a combination thereof receivable in respect of one share of Common Stock upon consummation of the transaction in question. (b) "Affiliate" shall have the meaning ascribed to that term in Rule 12b-2 promulgated under the Exchange Act. (c) "Award" shall mean the grant of Stock Options under this Plan. (d) "Award Agreement" shall mean any agreement between the Company and an Optionee that sets forth terms, conditions, and restrictions applicable to an Award. (e) "Board of Directors" shall mean the Board of Directors of the Company. (f) "Change of Control" shall mean (i) the sale of all or substantially all of the assets of the Company, (ii) the sale, in a single transaction or series of related transactions, of all of the shares of Common Stock owned by the Lee Group on August 11, 1995 (including any shares issued as a dividend on or otherwise in respect of such stock), (iii) the consummation of a merger, consolidation or similar transaction involving the Company in which the holders of the Company's capital stock immediately prior to the transaction do not retain at least a majority of the voting power of the corporation surviving the merger or its parent corporation, (iv) the percentage of the Company's outstanding Common Stock owned by the Lee Group at any time becomes less than 50% of the percentage of the Company's outstanding Common Stock owned by the Lee Group as of August 11, 1997, or (v) the complete liquidation or dissolution of the Company. 2 (g) "Chief Executive Officer" shall mean the Chief Executive Officer of the Company. (h) "Code" shall mean the Internal Revenue Code of 1986, or any law that supersedes or replaces it, as amended from time to time. (i) "Committee" shall mean the Compensation Committee of the Board of Directors, or any other committee of the Board of Directors that the Board of Directors authorizes to administer this Plan. The Committee will be constituted in a manner that satisfies the "non-employee director" standard set forth in Rule 16b-3. (j) "Common Stock" shall mean shares of Common Stock, $.01 par value, of Signature Brands USA, Inc., including authorized and unissued shares and treasury shares. (k) "Company" shall mean Signature Brands USA, Inc., a Delaware corporation, and its direct and indirect subsidiaries. (l) "Director" shall mean a director of Signature Brands USA, Inc. (m) "Exchange Act" shall mean the Securities Exchange Act of 1934, and any law that supersedes or replaces it, as amended from time to time. (n) "Fair Market Value" of Common Stock shall mean the value of the Common Stock determined by the Committee, or pursuant to rules established by the Committee, on a basis consistent with regulations under the Code. (o) "Lee Group" shall mean the Thomas H. Lee Company and its affiliates. (p) "Notice of Award" shall mean any notice by the Committee to an Optionee that advises the Optionee of the grant of an Award or sets forth terms, conditions, and restrictions applicable to an Award. (q) "Optionee" shall mean any person to whom an Award has been granted under this Plan. (r) "Plan" shall mean the Signature Brands USA, Inc. Chief Executive Officer Stock Option Plan, as the same shall be amended from time to time. (s) "Person" shall mean an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a governmental authority. (t) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange Act, or any rule that supersedes or replaces it, as amended from time to time. (u) "Stock Option" shall mean an Award granted pursuant to Section 6(a) hereof. -2- 3 (v) "Stock Option Agreement" shall mean an agreement between the Company and an Optionee evidencing the terms of a Stock Option. (w) "Third Party" shall mean any Person, group or entity other than the Lee Group. SECTION 3. ELIGIBILITY Only the Chief Executive Officer of the Company, or the designee for such position, shall be eligible for the grant of Awards. The selection of any such person to receive Awards will be within the discretion of the Committee. More than one Award may be granted to the same person. An individual may be selected to receive and granted an Award hereunder on or after being hired by the Company, even if before he or she actually commences employment by the Company. Notwithstanding the foregoing, (i) no member of the Committee shall be eligible to receive Awards under the Plan during the period of his or her service thereon and (ii) any individual that renounces in writing any right that he or she may have to receive Awards under the Plan shall not be eligible to receive any Awards hereunder. SECTION 4. SHARES OF COMMON STOCK AVAILABLE FOR AWARDS; ADJUSTMENT (a) Number of Shares of Common Stock. The aggregate number of shares of Common Stock that may be subject to Awards granted under this Plan during the term of this Plan in the aggregate will be equal to 500,000 shares of Common Stock, subject to any adjustments made in accordance with the terms of this Section 4. (b) No Fractional Shares. No fractional shares of Common Stock will be issued, and the Committee will determine the manner in which the value of fractional shares of Common Stock will be treated. (c) Adjustment. In the event of any change in the Common Stock by reason of a merger, consolidation, reorganization, recapitalization, or similar transaction, including any transaction described under Section 424(a) of the Code, or in the event of a stock dividend, stock split, or distribution to stockholders (other than normal cash dividends), the Committee will have authority to adjust the number and class of shares of Common Stock subject to outstanding Awards, the exercise price applicable to outstanding Awards, and the Fair Market Value of the shares of Common Stock and other value determinations applicable to outstanding Awards, including such adjustments as may be allowed or required under Section 424(a) of the Code. Such adjustments shall be in the discretion of the Committee, but subject to the provisions of any Stock Option Agreements hereunder. SECTION 5. ADMINISTRATION (a) Committee. This Plan will be administered by the Committee. The Committee will, subject to the terms of this Plan, have the authority to: (i) determine the -3- 4 number of Awards to be granted to the Chief Executive Officer; (ii) grant Awards to the Chief Executive Officer; (iii) determine the terms, conditions, vesting periods, and restrictions applicable to Awards, including timing and price; (iv) adopt, alter, and repeal administrative rules and practices governing this Plan, subject to the provisions of any Stock Option Agreement hereunder; (v) interpret the terms and provisions of this Plan and any Awards granted under this Plan, including, where applicable, determining the method of valuing any Award and certifying as to the satisfaction of such Awards, subject to the provisions of any Stock Option Agreement hereunder; (vi) prescribe the forms of any Notices of Award, Award Agreements, or other instruments relating to Awards; and (vii) otherwise supervise the administration of this Plan. (b) Delegation. The Committee may delegate any of its authority to any other Person or Persons that it deems appropriate, provided the delegation does not cause this Plan or any Awards granted under this Plan to fail to qualify for the exemption provided by Rule 16b-3. (c) Decisions Final. All decisions by the Committee, and by any other Person or Persons to whom the Committee has delegated authority, to the extent permitted by law, will be final and binding on all Persons. SECTION 6. AWARDS (a) Grant of Awards. The Committee will determine the Awards to be granted to the Chief Executive Officer and will set forth in the related Stock Option Agreement the terms, conditions, vesting periods, and restrictions applicable to each Award. Awards may be granted singly or in combination or tandem with other Awards. Awards may also be granted in replacement of, or in substitution for, other awards granted by the Company whether or not granted under the Plan. Without limiting the foregoing, if the Optionee pays all or part of the exercise price or taxes associated with an Award by the transfer of shares of Common Stock or the surrender of all or part of an Award (including the Award being exercised), the Committee may, in its discretion, grant a new Award to replace the shares of Common Stock that were transferred or the Award that was surrendered. (b) Stock Options. An Optionee who is granted a Stock Option shall have the right to purchase a specified number of shares of Common Stock, during a specified period, and at a specified exercise price, all as determined by the Committee. A Stock Option shall be a Stock Option that does not qualify as an Incentive Stock Option. The exercise price of a Stock Option may be equal to or more than the Fair Market Value of the shares of Common Stock on the date the Stock Option is granted. (c) Limits on Awards. The maximum aggregate number of shares of Common Stock for which Stock Options may be granted to any particular Optionee during any fiscal year of the Company during the term of this Plan is 500,000, subject to adjustment in accordance with Section 4(c). -4- 5 (d) Termination of Awards. Any Award granted under this Plan shall expire, and the Optionee to whom such Award was granted shall have no further rights with respect thereto, on the tenth (10th) anniversary of the date of grant of such Award, unless otherwise provided in the Notice of Award or Stock Option Agreement with respect to such Award. SECTION 7. DEFERRAL OF PAYMENT With the approval of the Committee, at the request of the Optionee, the delivery of the shares of Common Stock, cash or any combination thereof subject to an Award may be deferred, either in the form of installments or a single future delivery. The Committee may also permit the Optionee to defer the receipt of some or all of an Award, as well as other compensation, in accordance with procedures established by the Committee to assure that the recognition of taxable income is deferred under the Code. Deferred amounts may, to the extent permitted by the Committee, be credited as cash, at the request of the Optionee. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments. SECTION 8. PAYMENT OF EXERCISE PRICE The exercise price of a Stock Option may be paid in cash, by the transfer of shares of Common Stock, by the surrender of all or part of an Award (including the Award being exercised), or by a combination of these methods, as and to the extent requested by the Optionee and permitted by the Committee. The Committee may prescribe any other method of paying the exercise price that it determines to be consistent with applicable law and the purpose of this Plan with the mutual agreement of the Chief Executive Officer. SECTION 9. TAXES ASSOCIATED WITH AWARDS Prior to the payment of an Award or upon the exercise or release thereof, the Company may withhold, or require an Optionee to remit to the Company, an amount sufficient to pay any federal, state, and local taxes associated with the Award. The Committee may, in its discretion and subject to such rules as the Committee may adopt, permit an Optionee to pay any or all taxes associated with the Award in cash, by the transfer of shares of Common Stock, by the surrender of all or part of an Award (including the Award being exercised), or by a combination of these methods. SECTION 10. EFFECT OF TERMINATION OF EMPLOYMENT If the employment of an Optionee terminates for any reason, all unexercised, deferred, and unpaid Awards may be exercisable or paid only in accordance with rules established by the Committee or as specified in the particular Award Agreement or Notice of Award. Such rules may provide, as the Committee deems appropriate, for the expiration, continuation, or acceleration of the vesting of all or part of the Awards. -5- 6 SECTION 11. TERMINATION OF AWARDS UNDER CERTAIN CONDITIONS Subject to the provisions of any Stock Option Agreement hereunder, the Committee may cancel any unexpired, unpaid or deferred Awards at any time if the Optionee, without the prior written consent of the Company, engages in any of the following activities: (i) Renders services for an organization, or engages in a business, that is, in the judgment of the Committee, in competition with the Company; or (ii) Discloses to anyone outside of the Company, or uses for any purpose other than the Company's business any confidential information or material relating to the Company whether acquired by the Optionee during or after employment with the Company, in a fashion or with a result that the Committee, in its judgment, deems is or may be injurious to the best interests of the Company. SECTION 12. CHANGE OF CONTROL In the event of a Change of Control of the Company, the Committee shall have the right in its sole discretion, but subject to any contrary provision of any Stock Option Agreement hereunder to: (i) accelerate the exercisability of any Stock Options, notwithstanding any limitations set forth in the Plan; (ii) cancel all outstanding Stock Options in exchange for the Acquisition Consideration that the Optionee would have received had the Stock Option been exercised prior to such transaction, less the applicable exercise price therefor, even if such net consideration is zero; (iii) cause the Optionee to have the right thereafter and during the term of the Stock Option, to receive upon exercise thereof the Acquisition Consideration receivable upon the consummation of such transaction by a holder of the number of shares of Common Stock which might have been obtained upon exercise of all or any portion thereof; or (iv) take such other action as it deems appropriate to preserve the value of the Award to the Optionee. Alternatively, but also subject to the contrary provision of any Stock Option Agreement hereunder, the Company shall also have the right to negotiate with any purchaser of the Company's assets or stock, as the case may be, to take any of the actions set forth in the preceding sentence as such purchaser may determine to be appropriate or desirable. SECTION 13. AMENDMENT, SUSPENSION, OR TERMINATION OF THIS PLAN; AMENDMENT OF OUTSTANDING AWARDS (a) Amendment, Suspension, or Termination of this Plan. The Board of Directors may amend, suspend, or terminate this Plan at any time; provided, however, that in no event shall the rights of the Optionee under any Stock Option Agreement be impaired without the Optionee's written consent, and provided that, in no event, without the approval of the Company's shareholders, shall any action of the Committee or the Board of Directors result in: -6- 7 (i) increasing, except as provided in Section 4(c) hereof, the maximum number of shares of Common Stock that may be subject to Awards granted under the Plan; or (ii) making any change which would eliminate the exemption provided by Rule 16b-3 for this Plan and for Awards granted under this Plan. (b) Amendment of Outstanding Awards. The Committee may, in its discretion, amend the terms of any Award, prospectively or retroactively, but no such amendment may impair the rights of the Optionee under any Stock Option Agreement without the Optionee's written consent. The Committee may, in whole or in part, waive any restrictions or conditions applicable to, or accelerate the vesting of, any Award. SECTION 14. NONASSIGNABILITY Unless otherwise provided in a Stock Option Agreement, (i) no Award granted under the Plan may be transferred or assigned by the Optionee to whom it is granted other than by will, pursuant to the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code, and (ii) an Award granted under this Plan may be exercised, during the Optionee's lifetime, only by the Optionee or by the Optionee's guardian or legal representative. SECTION 15. TERMS OF AWARDS AND RELATED AGREEMENTS NEED NOT BE IDENTICAL The form and substance of Awards, Stock Option Agreements and Notices of Awards, whether granted at the same or different times, need not be identical. Subject only to the terms of the Plan, the Committee shall have the authority to prescribe the terms of any Awards and the provisions of any Stock Option Agreements, Notices of Award or other instruments entered into with respect to the same; it being expressly understood that the Committee shall have the authority to include in any such Stock Option Agreements, Notices of Award or other instruments relating to Awards, such representations, warranties, covenants and agreements on behalf of the Company or the Optionee as it deems necessary or appropriate, including, without limitation, covenants relating to non-competition, non-solicitation and non-disclosure of confidential information. SECTION 16. GOVERNING LAW The interpretation, validity, and enforcement of this Plan will, to the extent not otherwise governed by the Code or the securities laws of the United States, be governed by the laws of the State of Delaware. SECTION 17. NO RIGHTS AS EMPLOYEES/STOCKHOLDERS Nothing in the Plan or in any Stock Option Agreement or Notice of Award shall automatically confer upon any Optionee any right to continue in the employ of the Company or an Affiliate, or to serve as a member of the Board or to be entitled to receive -7- 8 any remuneration or benefits not set forth in the Plan or such Award Agreement or Notice of Award, or to interfere with or limit either the right of the Company or an Affiliate to terminate the employment of such Optionee at any time or the right of the stockholders of the Company to remove him or her as a member of the Board with or without cause. Nothing contained in the Plan or in any Award Agreement or Notice of Award shall be construed as entitling any Optionee to any rights of a stockholder as a result of the grant of an Award until such time as shares of Common Stock are actually issued to such Optionee pursuant to the exercise of a Stock Option. SECTION 18. EFFECTIVE AND TERMINATION DATES (a) Effective Date. This Plan was approved by the Board of Directors on August 11, 1997 and became effective on that date. The Plan shall be deemed to be effective August 11, 1997 and is adopted in its entirety and irrevocably on that date. (b) Termination Date. This Plan will continue in effect until midnight on August 10, 2007; provided, however, that Awards granted on or before that date may extend beyond that date and restrictions and other terms and conditions imposed on Common Stock or any other Award granted on or before that date may extend beyond such date. -8- EX-10.24 5 EXHIBIT 10.24 1 Exhibit 10.24 SIGNATURE BRANDS USA, INC. CHIEF EXECUTIVE OFFICER STOCK OPTION PLAN NONQUALIFIED STOCK OPTION AGREEMENT ----------------------------------- THIS AGREEMENT is entered into as of the 11th day of August, 1997, by and between Signature Brands USA, Inc., a Delaware corporation (the "Company"), and Meeta Vyas (the "Optionee"). WITNESSETH: WHEREAS, the Board of Directors of the Company has appointed a Compensation Committee (the "Committee") to serve as the Committee to administer the Signature Brands USA, Inc. Chief Executive Officer Stock Option Plan (the "Plan"); and WHEREAS, the Committee has determined that the Optionee has been retained as the Chief Executive Officer of the Company with primary responsibility for the success and future growth of the Company; and WHEREAS, the Committee has determined that, subject to and in consideration of the Optionee's agreement to be bound by the provisions of this Agreement (including without limitation the provisions of Section 8 hereof), the Optionee should be granted a stock option under the Plan upon the terms and conditions set forth in this Agreement, and for the number of shares of Common Stock, $.01 par value, of the Company (the "Common Stock") set forth hereinbelow. NOW, THEREFORE, the Company and the Optionee hereby agree as follows: SECTION 1. DEFINITIONS. The following terms shall have the meanings set forth below whenever used in this instrument: (a) "Acquisition Consideration" shall mean the kind and amount of shares of the surviving or new corporation, cash, securities, evidence of indebtedness, other property or a combination thereof receivable in respect of one share of Common Stock upon consummation of the transaction in question. (b) "Agreement" shall mean this instrument. (c) "Board of Directors" shall mean the Board of Directors of the Company. (d) "Cause" shall mean the occurrence of any of the following, which occurrence will justify termination of the Optionee's employment by the Company for "Cause": (i) the Optionee has been convicted of, or pleads nolo contendere with respect to, any felony, or of any lesser crime or offense having as its predicate 2 element fraud, dishonesty or misappropriation of the property of the Company; (ii) the habitual drug addiction or intoxication of the Optionee which negatively impacts her job performance; (iii) the willful failure or refusal of the Optionee to perform her duties as set forth herein or the willful failure or refusal to follow the direction of the Board; provided such failure or refusal continues after 10 days of the receipt of notice in writing from the Board of such failure or refusal; or (iv) the Optionee breaches any of the terms of this Agreement or any other agreement between the Optionee and the Company which breach is not cured within 10 days subsequent to notice from the Company to the Optionee of such breach. (e) "Change of Control" shall mean (i) the sale of all or substantially all of the assets of the Company, (ii) the sale, in a single transaction or series of related transactions, of all of the shares of Common Stock owned by the Lee Group on August 11, 1997 (including any shares issued as a dividend on or otherwise in respect of such stock), (iii) the consummation of a merger, consolidation or similar transaction involving the Company in which the holders of the Company's capital stock immediately prior to the transaction do not retain at least a majority of the voting power of the corporation surviving the merger or its parent corporation, (iv) the percentage of the Company's outstanding Common Stock owned by the Lee Group at any time becomes less than 50% of the percentage of the Company's outstanding Common Stock owned by the Lee Group as of August 11, 1997, or (v) the complete liquidation or dissolution of the Company. (f) "Code" shall mean the Internal Revenue Code of 1986, or any law that supersedes or replaces it, as amended from time to time. (g) "Committee" shall mean the Compensation Committee of the Board of Directors, or any other committee of the Board of Directors that the Board of Directors authorizes to administer this Plan. The Committee will be constituted in a manner that satisfies the "non-employee director" standard set forth in Rule 16b-3. (h) "Common Stock" shall mean shares of Common Stock, $.01 par value, of Signature Brands USA, Inc., including authorized an unissued shares and treasury shares. (i) "Company" shall mean Signature Brands USA, Inc., a Delaware corporation, and its directors and indirect subsidiaries. (j) "Director" shall mean a director of Signature Brands USA, Inc. (k) "Effective Date" shall mean the date as of which this Agreement is executed. 2 3 (l) "Employee" shall mean any person who is an employee of either the Company or any Subsidiary. (m) "Employment Agreement" shall mean that certain employment agreement between the Optionee and the Company, dated August 11, 1997, as the same may be amended from time to time. (n) "Lee Group" shall mean the Thomas H. Lee Company and its affiliates. (o) "Incentive Stock Option" shall mean any Option which qualifies as an Incentive Stock Option under terms of Section 422 of the Code. (p) "Option" shall mean the right and option of the Optionee to purchase Common Stock pursuant to the terms of this Agreement. (q) "Option Price" shall mean the price at which Common Stock may be acquired upon the exercise of any Option. (r) "Optionee" shall mean the person to whom an Option has been granted pursuant to this Agreement. (s) "Personal Representative" shall mean, following the Optionee's death, the person who shall have acquired, by Will or by the laws of descent and distribution, the right to exercise any Option. (t) "Plan" shall mean the Signature Brands USA, Inc. Chief Executive Officer Stock Option Plan, as adopted and as it may later be amended. (u) "Subsidiary" shall mean any corporation at least 50% of the common stock of which is owned directly or indirectly by the Company. (v) "Third Party" shall mean any person, group or entity other than the Lee Group. SECTION 2. GRANT OF OPTION. Effective as of the date of this Agreement, and subject to all of the terms and provisions of this Agreement, the Company grants to the Optionee, upon the terms and conditions set forth hereinafter, the right and option to purchase all or any lesser number (but not a fractional share) of an aggregate of five hundred thousand (500,000) shares of Common Stock at an Option Price per share equal to $3.50 (the closing price for the Company's Common Stock as reported in The Wall Street Journal under the heading "NASDAQ National Market" for the effective date of this Agreement). All of such shares of Common Stock are subject to a nonqualified stock option, and none of such shares of Common Stock are subject to an Incentive Stock Option. SECTION 3. TERM OF OPTION. Except as otherwise provided herein, the term of the Option shall be for a period of ten (10) years from the date hereof, and the Option shall expire at the close of regular business hours at the Company's principal office (presently at 7005 Cochran Road, 3 4 Glenwillow, Ohio 44139) on the last day of the term of the Option (August 10, 2007) or, if earlier, on the applicable expiration date provided for in Section 5, 6 and 7 hereof. SECTION 4. EXERCISABILITY. The Optionee shall be entitled to exercise the Option with respect to the number of shares of Common Stock indicated below on or after the dates indicated opposite such number below:
Cumulative Number of Shares of Common Stock Date Beginning As To Which Option On Which Option May Be Exercised May Be Exercised ---------------- ---------------- 250,000 September 30, 1998 500,000 September 30, 1999
To the extent that the Option has become exercisable with respect to a number of shares of Common Stock, as provided above, the Option may thereafter be exercised by the Optionee either as to all or any part of such whole shares of Common Stock at any time or from time to time prior to the expiration of the Option pursuant to Section 3 hereof without regard to the provisions of Sections 5, 6 or 7 hereof. Notwithstanding the foregoing provisions of this Section 3, if there is a Change of Control in accordance with Section 4(e) of the Employment Agreement, all Options shall vest immediately, even if the Optionee continues employment with the new entity until the end of the employment contract period. Also, if the Optionee shall terminate her employment with the Company upon a Change of Control in accordance with Section 4(e) of the Employment Agreement, the Option shall remain fully exercisable upon such termination of employment. SECTION 5. TERMINATION OF OPTIONEE'S EMPLOYMENT. If the Optionee ceases to be an Employee for any reason other than by virtue of the Optionee's death or Cause, the Option shall remain in full force and effect and may be exercised by the Optionee (but only to the extent the Option is, at the time of the cessation of the Optionee's employment, then exercisable under Section 4 hereof); provided, however, that the Option shall terminate upon the last day of the term of the Option. SECTION 6. OPTIONEE'S DEATH. If, while the Optionee is an Employee, the Optionee dies, the Option shall continue in full force and effect and may be exercised by the Optionee's Personal Representative; provided, however, that the Option shall terminate upon the last day of the term of the Option. SECTION 7. TERMINATION OF OPTIONEE'S EMPLOYMENT FOR CAUSE; BREACH OF EMPLOYMENT AGREEMENT. If the Optionee's employment (i) is terminated for Cause, or (ii) if she breaches the Employment Agreement at any time, all unvested Options shall immediately terminate effective on the date of termination of the Optionee's employment, or the date she breaches the Non-Competition Agreement if such breach is within the duration of the non-competition period. Vested Option shall terminate upon the last day of the term of the Option. 4 5 SECTION 8. NON-COMPETITION. Without limiting the generality of Optionee's duty to comply with the terms of the Employment Agreement, the Optionee shall comply with the Agreement not to Compete set forth in Section 6 of the Employment Agreement. SECTION 9. ADJUSTMENTS. (a) If the Company shall at any time change the number of shares of issued Common Stock without new consideration to the Company (such as by stock dividends or stock splits), the total number of shares then remaining subject to purchase hereunder shall be changed in proportion to such change in issued shares and the option price per share shall be adjusted so that the total consideration payable to the Company upon purchase of all shares not theretofore purchased shall not be changed. (b) In the case of a Change of Control of the Company, the Company shall have the right, with the explicit written consent of the Optionee, to either (i) accelerate the exercisability of any unvested Stock Options subject to this Agreement notwithstanding any limitations set forth in this Agreement or in the Plan, or (ii) cause the Optionee to have the right thereafter and during the term of the Stock Option, to receive upon exercise thereof the Acquisition Consideration receivable upon the consummation of such transaction by a holder of the number of shares of Common Stock which might have been obtained upon exercise of all or any portion thereof; or (iii) take such other action appropriate to preserve the value of the Award to the Optionee with the agreement of the Optionee. SECTION 10. EXERCISE OF OPTION. The Option may be exercised by delivering to the Secretary of the Company at its principal office (presently at 7005 Cochran Road, Glenwillow, Ohio 44139) a completed Notice of Exercise of Option (obtainable from the Secretary of the Company) setting forth the number of shares of Common Stock with respect to which the Option is being exercised. Such Notice shall be accompanied by payment in full for the Common Stock. Such payment shall be made by certified or cashier's check payable to the order of the Company and/or certificates of Common Stock equal in value (based upon their Fair Market Value (as defined in the Plan) on the date of surrender) to such purchase price; provided, however, that payment of the exercise price by delivery of Common Stock of the Company then owned by the Optionee may only be made if such payment does not result in a charge to earnings for financial accounting purposes as determined by the Company. SECTION 11. ISSUANCE OF SHARE CERTIFICATES. Subject to the last sentence of this Section 11, upon receipt by the Company prior to expiration of the Option of a duly completed Notice of Exercise of Option to exercise the Option accompanied by full payment for the Common Stock being purchased pursuant to such Notice (and, with respect to any Option exercised pursuant to Section 12 hereof by someone other than the Optionee, accompanied in addition by proof satisfactory to the Committee of the right of such person to exercise the Option), the Company shall cause to be made or otherwise delivered to the Optionee, within thirty (30) days of such receipt, a certificate for the number of shares of Common Stock so purchased. The Optionee shall not have any of the rights of a shareholder with respect to the shares of Common Stock which are subject to the Option unless and until a certificate representing such Common Stock is issued to the Optionee. 5 6 The Company shall not be required to issue any certificates for Common Stock upon the exercise of the Option prior to (i) obtaining any approval from any governmental agency which the Committee shall, in its sole discretion, determine to be necessary or advisable, and/or (ii) the admission of such Common Stock to listing on any national securities exchange or the inclusion of such Common Stock on any interdealer quotation system on which the Common Stock may be listed or included, as the case may be, and/or (iii) completion of any registration or other qualification of the Common Stock under any state or federal law or ruling or regulations of any governmental body which the Committee shall, in its sole discretion, determine to be necessary or advisable, or the determination by the Committee, in its sole discretion, that any registration or other qualification of the Common Stock is not necessary or advisable. SECTION 12. SUCCESSORS IN INTEREST AND NONASSIGNABILITY. This Agreement shall be binding upon and inure to the benefit of any successor of the Company and the heirs, estate, and Personal Representative of the Optionee or a transferee of the Optionee. The Option shall not be transferable other than by Will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code, or by a written transfer document filed with the Company and transferring the Option or portion thereof to one or more members of the Optionee's immediate family. The Option may be exercised during the lifetime of the Optionee only by the Optionee, or such transferee to the extent of the transfer. A deceased Optionee's Personal Representative shall act in the place and stead of the deceased Optionee with respect to exercising an Option or taking any other action pursuant to this Agreement. SECTION 13. PROVISIONS OF AGREEMENT CONTROL. To the extent possible, this Agreement shall be interpreted in a manner consistent with the terms, conditions, and provisions of the Plan and to such rules, regulations, and interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. A copy of the Plan is attached hereto as Exhibit "A" and is incorporated herein by reference. In the event and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions, and provisions of the Plan, this Agreement shall control, and the Plan shall be deemed to be modified accordingly. SECTION 14. NO LIABILITY UPON DISTRIBUTION OF SHARES. The liability of the Company under this Agreement and any distribution of Common Stock made hereunder is limited to the obligations set forth herein with respect to such distribution and no term or provision of this Agreement shall be construed to impose any liability on the Company or the Committee in favor of any person with respect to any loss, cost or expense which the person may incur in connection with or arising out of any transaction in connection with this Agreement. SECTION 15. WITHHOLDING. The Optionee agrees that the Company may make appropriate provision for tax withholding with respect to the transactions contemplated by this Agreement. SECTION 16. TENURE. The Optionee's right to continue to serve the Company as an officer, director, employee or otherwise shall not be enlarged or otherwise affected by the award of these Options. 6 7 SECTION 17. CAPTIONS. The captions and section numbers appearing in this Agreement are inserted only as a matter of convenience. They do not define, limit, construe or describe the scope or intent of the provisions of this Agreement. SECTION 18. NUMBER. The use of the singular or plural herein shall not be restrictive as to number and shall be interpreted in all cases as the context shall require. SECTION 19. GENDER. The use of the feminine, masculine or neuter pronoun shall not be restrictive as to gender and shall be interpreted in all cases as the context may require. SECTION 20. INVESTMENT REPRESENTATION. Optionee hereby represents and warrants that any Common Stock which he may acquire by virtue of the exercise of the Option shall be acquired for investment purposes only and not with a view to distribution or resale; provided, however, that this restriction shall become inoperative in the event the Common Stock which are subject to the Option shall be registered under the Securities Act of 1933, as amended, or in the event there is presented to the Company evidence satisfactory to the Company to the effect that the offer or sale of the Common Stock which were acquired upon exercise of the Option may lawfully be made without registration under the Federal Securities Act of 1933, as amended. SECTION 21. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware and any applicable federal law. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer, and the Optionee has hereunto set his hand, all as of the day and year first above written. SIGNATURE BRANDS USA, INC. ("Company") By: /s/ Thomas R. Shepherd -------------------------------- Thomas R. Shepherd Chairman of the Board MEETA VYAS ("Optionee") /s/ Meeta Vyas ----------------------------------- Meeta Vyas 7 EX-18.1 6 EXHIBIT 18.1 1 Exhibit 18.1 December 24, 1997 Signature Brands USA, Inc. Glenwillow, Ohio Ladies and Gentlemen: We have audited the consolidated balance sheets of Signature Brands USA, Inc. (formerly known as Health o meter Products, Inc.) as of September 28, 1997 and September 29, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year periods ended September 28, 1997, September 29, 1996, and October 1, 1995 and have reported thereon under date of December 9, 1997, except as to paragraph 6 of Note 8 which is as of December 24, 1997. The aforementioned consolidated financial statements and our audit report thereon are included in the Company's annual report on Form 10-K for the year ended September 28, 1997. As stated in Note 3 to those financial statements, the Company changed its method of accounting for inventory from the LIFO method to the FIFO method and states that the newly adopted accounting principle is preferable in the circumstances because it will more appropriately measure operating results and inventory value, better match revenues and expenses, and conform all inventories to the same accounting method. In accordance with your request, we have reviewed and discussed with Company officials the circumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based. With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of the Company's compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter. Based on our review and discussion, with reliance on management's business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company's circumstances. Very truly yours, /s/ KPMG PEAT MARWICK LLP Cleveland, Ohio EX-21.1 7 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES 1. Signature Brands, Inc., an Ohio corporation, a wholly owned subsidiary of Signature Brands USA, Inc. 2. Java Kava International, Ltd., a U.S. Virgin Island corporation, a wholly owned subsidiary of Signature Brands, Inc. EX-23.1 8 EXHIBIT 23.1 1 Exhibit 23.1 The Board of Directors Signature Brands USA, Inc. We consent to incorporation by reference in the Registration Statements (Nos. 333-04019 and 333-37459) on Form S-8 of Signature Brands USA, Inc. (formerly Health o meter Products, Inc.) of our report dated December 9, 1997, except as to paragraph 6 of Note 8 which is as of December 24, 1997, relating to the consolidated balance sheets of Signature Brands USA, Inc. and subsidiary as of September 28, 1997 and September 29, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years ended September 28, 1997, September 29, 1996 and October 1, 1995, and all related schedules, which report appears in the September 28, 1997 annual report on Form 10-K of Signature Brands USA, Inc. /s/ KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Cleveland, Ohio December 24, 1997 EX-27.1 9 EXHIBIT 27.1
5 0000883327 SIGNATURE BRANDS, USA, INC. 1,000 YEAR SEP-28-1997 SEP-30-1996 SEP-28-1997 890 0 54,314 1,978 39,607 100,992 46,820 29,222 259,710 51,971 154,112 0 0 91 46,506 259,710 275,708 275,708 190,083 256,598 2,350 385,000 18,638 (1,424) 788 (2,212) 0 0 0 (2,212) (.24) (.24)
EX-27.2 10 EXHIBIT 27.2
5 0000925252 SIGNATURE BRANDS, INC. 1,000 YEAR SEP-28-1997 SEP-30-1996 SEP-28-1997 890 0 54,314 1,978 39,607 100,992 46,820 29,222 259,710 51,971 154,112 0 0 0 (1,226) 259,710 275,708 275,708 190,083 256,598 2,350 385,000 18,638 (1,424) 788 (2,212) 0 0 0 (2,212) 0 0
EX-27.3 11 EXHIBIT 27.3
5 0000883327 SIGNATURE BRANDS USA, INC. 1,000 YEAR SEP-29-1996 OCT-2-1995 SEP-29-1996 736 0 60,552 2,592 43,037 108,644 41,250 22,728 273,127 48,393 170,531 0 0 91 48,553 273,127 282,977 282,977 193,117 256,752 0 923,000 19,134 7,448 4,727 2,721 0 0 0 2,721 .30 .30
EX-27.4 12 EXHIBIT 27.4
5 0000925252 SIGNATURE BRANDS, INC. 1,000 YEAR SEP-29-1996 OCT-2-1995 SEP-29-1996 736 0 60,552 2,592 43,037 108,644 41,250 22,728 273,127 48,393 170,531 0 0 10 976 273,127 282,977 282,977 193,117 256,752 0 923,000 19,134 7,448 4,727 2,721 0 0 0 2,721 0 0
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