-----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, V0+YWPzPkCK9L5/Lj3tV1rETJIs0QVXNoTeE3VD3/Bp3KOMMuLm+mlwQ4tRRL7k1 dXtqcWuwccrooW9NhYi29A== 0000950135-97-002723.txt : 19970618 0000950135-97-002723.hdr.sgml : 19970618 ACCESSION NUMBER: 0000950135-97-002723 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970503 FILED AS OF DATE: 19970617 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CML GROUP INC CENTRAL INDEX KEY: 0000729576 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 042451745 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09630 FILM NUMBER: 97625283 BUSINESS ADDRESS: STREET 1: 524 MAIN ST CITY: ACTON STATE: MA ZIP: 01720 BUSINESS PHONE: 5082644155 MAIL ADDRESS: STREET 1: 524 MAIN STREET CITY: ACTON STATE: MA ZIP: 01720 10-Q 1 CML GROUP, INC. 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 3, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ---------------------- ------------------- Commission file number 0-12628 ------- CML GROUP, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Delaware 04-2451745 -------- ---------- (State of Incorporation) (IRS Employer Identification Number) 524 Main Street, Acton, Massachusetts 01720 - ------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 264-4155 -------------- Not Applicable -------------- (Former name, former address and former fiscal year if changed since last report.) 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 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 --- --- Number of shares outstanding of each of the issuer's classes of common stock: 49,778,583 shares of common stock, $.10 par value, as of June 10, 1997. - -------------------------------------------------------------------------------- 2 CML GROUP, INC. AND SUBSIDIARIES -------------------------------- Form 10-Q Index -----
Page ---- Part I: Financial Information Item 1: Financial Statements Consolidated Condensed Balance Sheets as of May 3, 1997 and July 31, 1996 3 - 4 Consolidated Condensed Statements of Operations for the three-month and nine-month periods ended May 3, 1997 and April 27, 1996 5 Consolidated Condensed Statements of Cash Flows for the nine-month periods ended May 3, 1997 and April 27, 1996 6 Notes to Consolidated Condensed Financial Statements 7 - 10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 15 Part II: Other Information Item 1: Legal Proceedings 16 Item 6: Exhibits and Reports on Form 8-K 16 Signatures 16 Exhibit Index 17
2 3 Part I: FINANCIAL INFORMATION Item 1. Financial Statements -------------------- CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Balance Sheets ------------------------------------- (In thousands) ASSETS
May 3, 1997 July 31, 1996 ----------- ------------- Current assets: Cash and cash equivalents $ 22,422 $ 17,673 Accounts receivable 7,887 10,570 Refundable income taxes 81 53,874 Prepaid income taxes 6,043 6,102 Inventories: Raw materials 2,860 2,742 Work in process 978 1,875 Finished goods 33,906 25,817 -------- -------- Total inventories 37,744 30,434 Other current assets 11,816 16,270 -------- -------- Total current assets 85,993 134,923 -------- -------- Property, plant and equipment, at cost: Land and buildings 19,388 20,071 Machinery and equipment 45,042 43,739 Leasehold improvements 30,875 31,628 -------- -------- 95,305 95,438 Less accumulated depreciation 44,755 37,279 -------- -------- 50,550 58,159 -------- -------- Goodwill 8,605 8,782 Other assets 21,940 11,487 -------- -------- $167,088 $213,351 ======== ========
See Notes to Consolidated Condensed Financial Statements. 3 4 CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Balance Sheets ------------------------------------- (In thousands except share information) LIABILITIES AND STOCKHOLDERS' EQUITY
May 3, 1997 July 31, 1996 ----------- ------------- Current liabilities: Current portion of long-term debt $ 45 $ 49 Accounts payable 13,915 23,582 Accrued compensation 3,857 6,385 Accrued advertising 3,631 8,260 Accrued insurance 4,737 5,706 Accrued lease termination costs 1,345 5,760 Other accrued expenses 32,462 29,018 -------- -------- Total current liabilities 59,992 78,760 -------- -------- Noncurrent liabilities: Long-term debt 263 276 Convertible subordinated debentures 41,593 41,593 Other noncurrent liabilities 6,889 6,925 -------- -------- Total noncurrent liabilities 48,745 48,794 -------- -------- Stockholders' equity: Common stock, par value $.10 per share Authorized - 120,000,000 shares Issued - 52,824,646 shares and 52,623,704 shares 5,282 5,262 Additional paid-in capital 80,867 81,082 Retained earnings 9,131 37,066 -------- -------- 95,280 123,410 Less treasury stock, at cost, 2,930,784 shares and 2,963,433 shares 36,929 37,613 -------- -------- 58,351 85,797 -------- -------- $167,088 $213,351 ======== ========
See Notes to Consolidated Condensed Financial Statements. 4 5 CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Statements of Operations ----------------------------------------------- (In thousands except per share data and shares outstanding)
For the periods ended May 3, 1997 and April 27, 1996 Three Months Nine Months ------------ ----------- 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $ 96,061 $138,341 $278,400 $469,753 -------- -------- -------- -------- Less costs and expenses: Cost of goods sold 47,557 63,952 129,135 220,039 Selling, general and administrative expenses 61,102 98,882 189,646 318,659 Loss on disposition of assets -- 30,824 -- 30,824 Interest expense 436 520 1,192 2,093 -------- -------- -------- -------- 109,095 194,178 319,973 571,615 -------- -------- -------- -------- Loss from continuing operations before income tax benefit (13,034) (55,837) (41,573) (101,862) Income tax benefit (4,432) (19,592) (14,135) (36,161) -------- -------- -------- -------- Loss from continuing operations (8,602) (36,245) (27,438) (65,701) -------- -------- -------- -------- Provision for loss on disposal of discontinued operations, net of income tax benefit -- -- -- (15,615) -------- -------- -------- -------- Net loss $ (8,602) $(36,245) $(27,438) $(81,316) ======== ======== ======== ======== Loss per share: Loss from continuing operations: Primary $ (0.17) $ (0.74) $ (0.55) $ (1.33) ======== ======== ======== ======== Fully diluted $ (0.17) $ (0.74) $ (0.55) $ (1.33) ======== ======== ======== ======== Net loss: Primary $ (0.17) $ (0.74) $ (0.55) $ (1.65) ======== ======== ======== ======== Fully diluted $ (0.17) $ (0.74) $ (0.55) $ (1.65) ======== ======== ======== ======== Weighted average number of shares outstanding 49,987,949 49,470,085 50,080,122 49,600,446
See Notes to Consolidated Condensed Financial Statements. 5 6 CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Statements of Cash Flows ----------------------------------------------- (In thousands)
For the Nine Months Ended ------------------------- May 3, 1997 April 27, 1996 ----------- -------------- Cash flows from operating activities: Net loss $(27,438) $(81,316) -------- -------- Adjustments to reconcile net loss to net cash provided by operating activities: Provision for loss on disposition of assets -- 30,824 Provision for loss on disposal of discontinued operation -- 24,023 Depreciation and amortization 11,115 23,682 Loss on disposal of property, plant and equipment 1,169 3,831 Decrease in working capital items 29,482 12,497 (Increase) decrease in other assets (10,751) 2,341 Decrease in other noncurrent liabilities (36) (2,414) -------- -------- Total adjustments 30,979 94,784 -------- -------- Net cash provided by operating activities 3,541 13,468 -------- -------- Cash flows from investing activities: Additions to property, plant and equipment (3,924) (18,987) Net proceeds from the sale of discontinued operation 1,413 11,516 Net proceeds from the sale of businesses held for sale 3,913 -- Reductions in notes receivable 39 44 -------- -------- Net cash provided by (used in) investing activities 1,441 (7,427) -------- -------- Cash flows from financing activities: Decrease in long-term debt (17) (7,249) Dividends paid (497) (2,460) Exercise of stock options 281 101 Acquisition of treasury stock -- (1,296) -------- -------- Net cash used in financing activities (233) (10,904) -------- -------- Net increase (decrease) in cash and cash equivalents during the period 4,749 (4,863) Cash and cash equivalents at the beginning of the period 17,673 8,338 -------- -------- Cash and cash equivalents at the end of the period $ 22,422 $ 3,475 ======== ========
See Notes to Consolidated Condensed Financial Statements. 6 7 CML GROUP, INC. & SUBSIDIARIES Notes to Consolidated Condensed Financial Statements ---------------------------------------------------- (In thousands) Note 1 - ------ The accompanying consolidated condensed financial statements and notes should be read in conjunction with the financial statements contained in the Company's Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated condensed financial statements include all adjustments necessary for a fair presentation of the results of the interim periods presented and all such adjustments are of a normal recurring nature. The retail industry is seasonal in nature and the results of operations for the interim periods presented may not be indicative of the results for a full year. The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the consolidated financial statements and the reported amount of revenues and expenses during the period. Actual results could differ from those estimates. Certain 1996 amounts have been reclassified to conform to the 1997 presentation. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," is effective for the Company beginning in fiscal 1997. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages, but does not require, compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees. The Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," in March 1997 which the Company will adopt in fiscal 1998. SFAS No. 128 would have had an immaterial effect on reported earnings per share if it had been effective for the three- and nine-month periods ended May 3, 1997 and the three- and nine-month periods ended April 27, 1996. Note 2 - Divestitures of The Nature Company and Hear Music - ---------------------------------------------------------- The Company decided to divest its Nature Company and Hear Music subsidiaries during the third quarter of fiscal 1996. Included in the loss from continuing operations for the third quarter of fiscal 1996 is a pre-tax charge of $30,824 to write down The Nature Company and Hear Music's net assets to estimated net realizable value and to accrue estimated transaction costs. In June 1996, the Company sold substantially all of the assets of The Nature Company for a cash purchase price of $39,870 plus the assumption of certain liabilities. On October 23, 1996, the Company sold substantially all of the assets of Hear Music for $371 in cash plus the assumption of certain liabilities. 7 8 Note 3 - Long-term Debt - ----------------------- Consolidated long-term debt is summarized as follows:
May 3, 1997 July 31, 1996 ----------- ------------- Revolving credit loan $ -- $ -- Note payable 236 250 Obligations under capital leases 72 75 ---- ---- 308 325 Less current portion 45 49 ---- ---- Long-term debt $263 $276 ==== ====
Note 4 - Contingencies - ---------------------- Litigation ---------- NordicTrack is the defendant in a Consolidated Class Action Complaint ("Consolidated Complaint") filed on September 25, 1996 in the United States District Court for the Southern District of New York. The plaintiffs named in the Consolidated Complaint, Elissa Crespi and John Lucien Ware, Jr., allege that NordicTrack made false and misleading claims in its advertising concerning the weight loss of persons using its ski exercisers by misrepresenting and failing to disclose material findings of weight loss studies conducted by or on behalf of NordicTrack. The plaintiffs assert claims of common law fraud, fraudulent concealment, negligent misrepresentation and omission, breach of express and implied warranties, and violation of Section 349 of the New York General Business Law. They also seek to represent a class allegedly consisting of all persons in the United States who purchased a NordicTrack ski exerciser during the period from November 15, 1993 to April 10, 1996, excluding NordicTrack and its employees. On behalf of themselves and the alleged class, the plaintiffs seek unspecified actual and punitive damages with interest, rescission, attorneys' fees, costs, an order requiring NordicTrack to make corrective disclosures, and the imposition of a constructive trust. In February 1997, NordicTrack's motion was granted for transfer of venue to the United States District Court for the District of Minnesota. The parties have commenced discovery on the issue of class certification. While NordicTrack believes it has meritorious defenses to the Consolidated Complaint and intends to vigorously defend against the allegations, this lawsuit is in the early stages and the Company is unable to determine the likelihood and possible impact on the Company's financial condition or results of operations of an unfavorable outcome. In August 1996, NordicTrack filed a declaratory judgment action against Precise Exercise, Inc. ("Precise") in the United States District Court for the District of Minnesota seeking a declaratory judgment to invalidate an agreement between the parties. Thereafter, Precise filed an action against NordicTrack in State Court in New Jersey alleging NordicTrack breached its contract with Precise to market and distribute Precise's abdominal exercise product. On November 25, 1996, the New Jersey Court granted NordicTrack's motion to transfer that action to Minnesota. These actions were consolidated in the District of Minnesota. While NordicTrack is vigorously pursuing its claim for declaratory judgment and believes it has meritorious defenses to Precise's claims on the contract, these lawsuits are in the discovery stage and the Company is 8 9 unable to determine the likelihood and possible impact on the Company's financial condition or results of operations of unfavorable outcomes. The Company is involved in various other legal proceedings which have arisen in the ordinary course of business. Management believes the outcome of such other legal proceedings will not have a material adverse impact on the Company's financial condition or results of operations. Environmental Matters --------------------- On June 3, 1991, the Company received from the United States Environmental Protection Agency ("EPA") a Special Notice Letter containing a formal demand on the Company as a Potentially Responsible Party ("PRP") for reimbursement of the costs incurred and expected to be incurred in response to environmental problems at a so-called "Superfund" site in Conway, New Hampshire. The EPA originally estimated the costs of remedial action and future maintenance and monitoring programs at the site at about $7,276. The Superfund site includes a vacant parcel of land owned by a subsidiary of the Company as well as adjoining property owned by a third party. No manufacturing or other activities involving hazardous substances have ever been conducted by the Company or its affiliates on the Superfund site in Conway. The environmental problems affecting the land resulted from activities by the owners of the adjoining parcel. Representatives of the Company have engaged in discussions with the EPA regarding responsibility for the environmental problems and the costs of cleanup. The owners of the adjoining parcel are bankrupt. The EPA commenced cleanup activities at the site in July 1992. The EPA expended approximately $1,415 for the removal phase of the site cleanup, which has now been completed. The EPA had estimated that the removal costs would exceed $3,000, but only a small portion of the solid waste removed from the site was ultimately identified as hazardous waste. Therefore, the EPA's actual response costs for the removal phase were less than the EPA originally estimated. The EPA has implemented the groundwater phase of the cleanup, which the EPA originally estimated would cost approximately $4,020. The Company believes that the EPA's estimated cost for cleanup, including the proposed remedial actions, is excessive and involves unnecessary actions. In addition, a portion of the proposed remedial cost involves cleanup of the adjoining property that is not owned by the Company or any of its affiliates. Therefore, the Company believes it is not responsible for that portion of the cleanup costs. The Company has reserves and insurance coverage (from its primary insurer) for environmental liabilities at the site in the amount of approximately $2,300. The Company also believes that it is entitled to additional insurance from its excess insurance carriers. However, if excess liability coverage is not available to the Company and the ultimate liability substantially exceeds the primary insurance amount and reserves, the liability would have a material adverse effect upon the Company's operating results for the period in which the resolution of the claim occurs and could have a material adverse effect upon the Company's financial condition. In June 1992, the EPA notified the Company it may be liable for the release of hazardous substances by the Company's former Boston Whaler subsidiary at a hazardous waste treatment and storage facility in Southington, Connecticut. The EPA has calculated the Company's volumetric contribution at less than two-tenths of one percent. Because complete cleanup cost estimates for the site are not yet available, an accurate assessment of the Company's likely range 9 10 of liability cannot be made. Accordingly, the financial impact on the Company is not presently determinable. Tax Matters ----------- The Internal Revenue Service ("IRS") has been engaged in an examination of the Company's tax returns for the fiscal years 1987 through 1991. Although the Company has not received an official assessment notice, the IRS has tentatively proposed certain adjustments which, if sustained by the IRS, would result in a tax deficiency for the years under examination. The adjustments proposed by the IRS primarily relate to: (i) the disallowance of deductions taken by the Company with respect to incentive compensation payments made to the former owners of NordicTrack (acquired in June 1986) in the amount of $43,000; and (ii) incentive compensation payments made to the former owners of Britches of Georgetowne (acquired in August 1983 and sold in April 1996) and the valuation of certain assets acquired in connection with the acquisition of Britches of Georgetowne in the amount of $8,200. The Company believes that the tax deductions taken were valid and in accordance with the Internal Revenue Code and intends to vigorously oppose the proposed adjustments. However, at this stage no assurance can be given of a favorable outcome on these matters. If the IRS proposed adjustments are sustained, any back taxes owed and associated interest would have a material adverse effect on the Company's operating results for the period in which such issues are finally resolved and would also have a material adverse effect on the Company's financial condition. As of May 3, 1997, the Company had net deferred tax assets of $21,919 which reflects the net tax effects of: (i) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes; and (ii) current year net operating losses and prior year alternative minimum tax credits which may be applied against future taxable income and taxes. SFAS No. 109, "Accounting for Income Taxes," provides for the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits are more likely than not. The Company believes that it is more likely than not that it will generate sufficient future taxable income, either through operations or the sale of assets, to realize the net deferred tax assets prior to expiration of any net operating losses. There can be no assurance, however, that the Company will generate any specific level of earnings. If the Company is unable to generate sufficient taxable income in the future through operating results or the sale of assets, increases in the tax valuation allowance will be required, resulting in a charge to earnings. 10 11 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations. ---------------------- Introduction - ------------ The Company operates in two industry segments: the NordicTrack Segment and the Smith & Hawken Segment. The Smith & Hawken Segment includes only Smith & Hawken in fiscal 1997. Prior to fiscal 1997, the Smith & Hawken Segment was comprised of Smith & Hawken, The Nature Company and Hear Music. This Quarterly Report contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. There are a number of factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Factors that May Affect Future Results". Financial Condition - ------------------- Stockholders' equity decreased by $27.4 million to $58.4 million from July 31, 1996 to May 3, 1997 primarily due to the net loss for the first nine months of fiscal 1997. The Company's working capital, excluding cash, at May 3, 1997 was $3.6 million compared to $38.5 million at July 31, 1996. The decrease in working capital was primarily attributable to a decrease in refundable income taxes, partially offset by a decrease in accounts payable and an increase in inventories. During the first nine months of fiscal 1997, the Company invested approximately $3.9 million in property, plant and equipment. The Company had approximately $22.4 million of cash and cash equivalents as of May 3, 1997 and had no loans outstanding under its $40 million senior revolving credit agreement with two banks. During fiscal 1997, the Company has been in violation of certain of the covenants under its credit agreement, and there can be no assurance that the Company's lenders will permit the Company to borrow funds on favorable terms in the future. If the Company's lenders do not provide the Company with favorable credit arrangements, the Company may need to seek additional funds from other persons. There can be no assurance, however, that the Company would be able to obtain any such third-party funding or obtain such funding on terms as favorable as those offered by its lenders. Also, in the event the Company elects to raise additional funds through the sale of assets, the Company may not be able to complete such sale in a timely manner or on terms favorable to the Company. Results of Operations - --------------------- During the third quarter of fiscal 1997, net sales decreased 30.6% to $96.1 million from $138.3 million in the third quarter of fiscal 1996 primarily due to the divestitures of The Nature Company and Hear Music and lower NordicTrack sales which were partially offset by higher sales at Smith & Hawken. The loss from continuing operations for the third quarter of fiscal 1997 was $8.6 million compared to a loss from continuing operations of $36.2 million for the same period in fiscal 1996. The reduction in the loss from continuing operations was primarily due to improved operating results at Smith & Hawken and the divestitures of The Nature Company and Hear Music. The loss from continuing operations for the third quarter of fiscal 1996 includes a $30.8 million pre-tax charge to write down The Nature Company and Hear 11 12 Music's net assets to estimated net realizable value and to accrue estimated transaction costs associated with their planned divestitures. The net assets of The Nature Company were sold in June 1996. Hear Music's net assets were sold in October 1996. For the first nine months of fiscal 1997, net sales of the Company decreased 40.7% to $278.4 million from $469.8 million in the first nine months of fiscal 1996. The sales decrease was primarily attributable to the divestitures of The Nature Company and Hear Music and lower sales at NordicTrack which were offset, in part, by higher sales at Smith & Hawken. During the first nine months of fiscal 1997, the loss from continuing operations was $27.4 million compared with a loss of $65.7 million for the comparable period of fiscal 1996. The reduction in the loss from continuing operations was primarily attributable to the divestitures of The Nature Company and Hear Music, expense reductions at NordicTrack and improved operating results at Smith & Hawken. The net loss reported by the Company for the first nine months of fiscal 1996 included a $15.6 million loss from discontinued operations, net of an income tax benefit of $8.4 million, related to the sale of Britches of Georgetowne. Britches of Georgetowne was sold in April 1996. Retail sales for the third quarter of fiscal 1997 decreased 40.1% to $55.8 million from $93.2 million in the third quarter of fiscal 1996. Retail sales for the first nine months of fiscal 1997 decreased 50.9% to $161.6 million from $329.3 million in the first nine months of fiscal 1996. The decrease in retail sales was primarily due to the divestitures of The Nature Company and Hear Music and lower retail sales at NordicTrack which were partially offset by higher retail sales at Smith & Hawken. Direct response and mail order sales decreased $4.9 million, or 10.9%, in the third quarter of fiscal 1997 and $23.6 million, or 16.8%, during the first nine months of fiscal 1997, compared with the similar periods of fiscal 1996. The decline in direct response and mail order sales was primarily due to lower direct response sales at NordicTrack and the divestiture of The Nature Company which were offset, in part, by higher mail order sales at Smith & Hawken. Cost of goods sold increased as a percentage of sales from 46.2% in the third quarter of fiscal 1996 to 49.5% in the third quarter of fiscal 1997 primarily due to NordicTrack's higher cost of goods sold as a percentage of sales. For the first nine months of the year, cost of goods sold as a percentage of sales decreased from 46.8% in fiscal 1996 to 46.4% in fiscal 1997 primarily due to the sale of The Nature Company and Hear Music, offset in part by higher cost of goods sold as a percentage of sales at NordicTrack and Smith & Hawken. NordicTrack's cost of goods sold as a percentage of sales increased primarily due to the sale of a higher proportion of outsourced products and products with royalty obligations, discounting on the NordicRider(TM) machine and higher material costs for cross-country skiers. Smith & Hawken's cost of goods sold as a percentage of sales increased during the first nine months of fiscal 1997 primarily due to higher planned markdowns which were offset, in part, by higher initial markup on products. Selling, general and administrative expenses decreased as a percentage of sales from 71.5% in the third quarter of fiscal 1996 to 63.6% in the same period of fiscal 1997. The third quarter improvement in selling, general and administrative expenses as a percentage of sales was primarily due to expense reductions relative to sales at NordicTrack and Smith & Hawken plus the divestitures of The Nature Company and Hear Music. For the first nine months of the year, selling, general and administrative expenses increased as a percentage of sales from 67.8% in fiscal 1996 to 68.1% in fiscal 1997 primarily due to fixed costs at NordicTrack's stores which experienced a decrease in comparable store sales and to the sale of The Nature Company and Hear Music. Interest expense was $0.5 million, or 0.4% of sales, in the third quarter of fiscal 1996 compared with $0.4 million, or 0.5% of sales, in the third quarter of fiscal 1997. For the first nine months of the year, interest expense of $2.1 million in fiscal 1996 and $1.2 million in fiscal 1997 represented 0.4% of sales. 12 13 The Company's income tax benefit as a percentage of the pre-tax loss from continuing operations was 34.0% during the third quarter and first nine months of fiscal 1997 which compares with 35.1% and 35.5% for the third quarter and first nine months of fiscal 1996, respectively. During the third quarter of fiscal 1997, NordicTrack's total sales decreased 22.6% to $79.2 million from $102.3 million in the third quarter of fiscal 1996. NordicTrack's sales during the first nine months of the year declined 28.2% to $227.6 million in fiscal 1997 from $316.7 million in fiscal 1996. The sales decline was primarily due to lower sales of cross-country skiers, non-motorized treadmills and NordicRider(TM) which were offset, in part, by sales of AbWorks(TM), UltraLift(TM), motorized treadmills and LegShaper Plus(TM). Approximately 59.5% and 59.7% of NordicTrack's total sales in the third quarter and first nine months of fiscal 1997, respectively, were accounted for by sales at its Nordic Advantage subsidiary which operates retail stores and mall kiosks. Nordic Advantage's sales decreased from $63.2 million in the third quarter of fiscal 1996 to $47.1 million in the similar quarter of fiscal 1997. For the first nine months of the year, Nordic Advantage's sales decreased from $201.8 million in fiscal 1996 to $135.8 million in fiscal 1997. The decrease in retail sales was primarily due to decreases in comparable store sales of 14.2% during the third quarter and 25.9% during the first nine months of fiscal 1997 and to the operation of fewer mall kiosks. At the end of the third quarter of fiscal 1997, Nordic Advantage operated 126 retail stores and 87 mall kiosks compared with 128 retail stores and 214 mall kiosks at the end of the third quarter of fiscal 1996. Direct response sales decreased $7.0 million to $32.1 million in the third quarter of fiscal 1997 and $23.1 million to $91.8 million in the first nine months of fiscal 1997 compared with the similar periods of fiscal 1996. The Smith & Hawken Segment's sales decreased $19.2 million, or 53.3%, to $16.8 million during the third quarter of fiscal 1997 and $102.2 million, or 66.8%, to $50.8 million in the first nine months of fiscal 1997 compared with the similar periods of fiscal 1996. The sales decline was primarily due to the sale of The Nature Company and Hear Music which was partially offset by sales increases at Smith & Hawken. Retail sales of the Smith & Hawken Segment decreased $21.2 million, or 70.9%, to $8.7 million during the third quarter of fiscal 1997. During the first nine months of fiscal 1997 retail sales decreased $101.7 million, or 79.7%, to $25.8 million compared with the similar period of fiscal 1996. The decline in retail sales was primarily due to the sale of The Nature Company and Hear Music which was partially offset by increases in Smith & Hawken's retail sales of 25.3% and 32.4% during the third quarter and first nine months of fiscal 1997, respectively. Smith & Hawken's comparable store sales increased by 13.4% and 9.9% for the third quarter and first nine months of fiscal 1997, respectively. The Smith & Hawken Segment operated 25 Smith & Hawken stores at the end of the third quarter of fiscal 1997. In the third quarter of fiscal 1997, the Smith & Hawken Segment's mail order sales increased $2.0 million to $8.1 million primarily due to higher mail order sales at Smith & Hawken. For the first nine months of fiscal 1997, the Smith & Hawken Segment's mail order sales declined $0.5 million to $25.0 million primarily due to the sale of The Nature Company which was offset, in part, by higher mail order sales at Smith & Hawken. Certain Factors That May Affect Future Results - ---------------------------------------------- The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Quarterly Report and presented elsewhere by management from time to time. Recent Operating Results The Company has had net losses for each of fiscal 1995, fiscal 1996 and the first three quarters of fiscal 1997, and there can be no assurance that the Company will not continue to have 13 14 net losses in the future. Continued net losses would affect the Company's cash position and could require the Company to reduce certain expenditures, including without limitation expenditures for advertising and inventory, which would have a material adverse effect on the Company's business, financial condition and results of operations. If the Company continues to have net losses in the future, the Company may be unable to realize the benefit of the net deferred tax asset referred to in Note 4 of Notes to Consolidated Condensed Financial Statements. Available Funds During fiscal 1997, the Company has been in violation of certain of the covenants under its credit agreement, and there can be no assurance that the Company's lenders will permit the Company to borrow funds on favorable terms in the future. If the Company's lenders do not provide the Company with favorable credit arrangements, the Company may need to seek additional funds from other persons. There can be no assurance, however, that the Company would be able to obtain any such third-party funding or obtain such funding on terms as favorable as those offered by its lenders. Also, in the event the Company elects to raise additional funds through the sale of assets, the Company may not be able to complete such sale in a timely manner or on terms favorable to the Company. Consumer Spending The success of the Company is influenced by a number of economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates and taxation rates. Adverse changes in these economic conditions may restrict consumer spending, thereby negatively affecting the Company's results of operations. Competition The markets in which the Company is engaged are highly competitive. NordicTrack competes with several companies which design, manufacture and distribute physical fitness and exercise equipment. During the past several years, NordicTrack's competitors have introduced several new and competitive products at competitive prices which have adversely affected NordicTrack's recent revenues and profits. The future success of NordicTrack depends in part upon its ability to introduce new and competitive products successfully, on a timely basis and at competitive prices. The failure of NordicTrack to successfully compete with its competitors could materially adversely affect the financial condition of the Company. Many of the competitors of Smith & Hawken are larger companies with greater financial resources, a greater selection of merchandise and nationwide distribution, including a large number and wide variety of specialty retail stores, discount stores and department stores. Smith & Hawken also competes with mail order catalogs that sell gardening-related merchandise and independent garden stores and plant nurseries in towns and cities throughout the United States. The failure of Smith & Hawken to successfully compete with these companies could adversely affect the Company's operating results. New Products Several new and enhanced products were introduced by the Company in fiscal 1996 and fiscal 1997. The Company's future financial performance will depend on the continued market acceptance of the Company's existing products and the successful development, introduction and customer acceptance of new and enhanced products. If these products do not receive favorable market acceptance, the Company's future operating results would be adversely affected. There 14 15 can be no assurance that the Company will be successful in developing new products and marketing its existing or new products. New Management Team The Company replaced a number of key executives at NordicTrack. There can be no assurance, however, that the new personnel will be able to successfully increase revenues or reduce costs at NordicTrack in the future. Seasonality The Company's businesses are seasonal, with significant amounts of retail sales in the second and third fiscal quarters. The Company expects this seasonality to continue in the future. Because of this seasonality, the Company's revenues and earnings have fluctuated and will continue to fluctuate from quarter to quarter. Advertising and Marketing Programs The Company's success in the markets in which it competes depends in part upon the effectiveness of advertising and marketing programs of the Company and the Company's ability to successfully manage its advertising in-house. In fiscal 1996, NordicTrack implemented a new advertising program which in large part was ineffective. The inability of the Company to periodically design and successfully execute new and effective advertising and marketing programs could adversely affect the Company's operating results. Costs of Postage and Shipping Postage expenses associated with mailing catalogs and shipping charges associated with distributing merchandise to customers are significant factors in the operation of the Company's businesses. Increases in postage or shipping costs could adversely affect the Company's operating results. Intellectual Property Rights The Company is subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights. There can be no assurance that third parties will not assert infringement claims in the future with respect to the Company's current or future products or that any such claims will not require the Company to enter into royalty arrangements or result in costly litigation. While the Company believes that it currently has all licenses necessary to conduct its business, no assurance can be given that additional licenses will not be required in the future. Furthermore, no assurance can be given that, if any additional licenses are required, such licenses could be obtained on commercially reasonable terms. 15 16 PART II: OTHER INFORMATION Item 1: Legal Proceedings. Environmental Matters See Note 4 of Notes to Consolidated Condensed Financial Statements in Item 1 of Part I hereof, which is hereby incorporated by reference for information concerning environmental matters. Litigation See Note 4 of Notes to Consolidated Condensed Financial Statements in Item 1 of Part I hereof, which is hereby incorporated by reference for information concerning litigation. Tax Matters See Note 4 of Notes to Consolidated Condensed Financial Statements in Item 1 of Part I hereof, which is hereby incorporated by reference for information concerning tax matters. Items 2-5: None. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits - See Exhibit Index. (b) Reports on Form 8-K: None. Signatures - ---------- Pursuant to the requirements 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. CML GROUP, INC. --------------- (Registrant) Date: June 17, 1997 /s/Paul J. Bailey ------------- ----------------- Paul J. Bailey Controller Principal Accounting Officer 16 17 EXHIBIT INDEX Page No. -------- 11 -- Statement Regarding Computation of Earnings (Loss) Per Share 18 27 -- Financial Data Schedule 19 17 EX-11 2 COMPUTATION OF EARNINGS (LOSS) PER SHARE 1 Exhibit 11 CML GROUP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE For the periods ended May 3, 1997 and April 27, 1996
Third Quarter Nine Months ------------- ----------- 1997 1996 1997 1996 ---- ---- ---- ---- Primary loss per share: Weighted average number of shares outstanding: Common 49,863,299 49,171,210 49,793,540 49,175,007 Shares deemed outstanding from: Assumed issuance of deferred compensation awards 105,000 105,000 105,000 105,000 Assumed exercise of stock options 19,650 193,875 181,582 320,439 ----------- ------------ ------------ ------------ Total 49,987,949 49,470,085 50,080,122 49,600,446 =========== ============ ============ ============ Net loss $(8,602,000) $(36,245,000) $(27,438,000) $(81,316,000) =========== ============ ============ ============ Primary loss per share $ (0.17) $ (0.74) $ (0.55) $ (1.65) =========== ============ ============ ============ Weighted average number of shares outstanding, as above 49,987,949 49,470,085 50,080,122 49,600,446 Shares deemed outstanding from the assumed conversion of convertible subordinated debentures 1,604,877 1,604,877 1,604,877 1,604,877 Additional shares deemed outstanding from the assumed exercise of stock options -- -- 16,423 -- ----------- ------------ ------------ ------------ Total 51,592,826 51,074,962 51,701,422 51,205,323 =========== ============ ============ ============ Additional income from the elimination of the interest cost of the convertible subordinated debentures, net of income tax effect $ 400,000 $ 393,000 $ 1,199,000 $ 1,174,000 Fully diluted loss per share $ (0.17) $ (0.74) $ (0.55) $ (1.65) =========== ============ ============ ============
18 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CML GROUP, INC. FOR THE NINE MONTHS ENDED MAY 3, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 9-MOS JUL-31-1997 AUG-01-1996 MAY-03-1997 22,422,000 0 11,381,000 3,494,000 37,744,000 85,993,000 95,305,000 44,755,000 167,088,000 59,992,000 41,593,000 0 0 5,282,000 53,069,000 167,088,000 278,400,000 278,400,000 129,135,000 129,135,000 0 1,209,000 1,192,000 (41,573,000) (14,135,000) (27,438,000) 0 0 0 (27,438,000) (0.55) (0.55)
-----END PRIVACY-ENHANCED MESSAGE-----