-----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, WTJc1V6DOMyEdA/9eLQEgdesTEiu7w6ZjPY09puUwbk4F0Z5lJ19TVfTWaHSGXih AC1u0885EeCShox8PBgjLA== 0000950135-97-004267.txt : 19971030 0000950135-97-004267.hdr.sgml : 19971030 ACCESSION NUMBER: 0000950135-97-004267 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971029 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-K SEC ACT: SEC FILE NUMBER: 001-09630 FILM NUMBER: 97703166 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-K 1 CML GROUP, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 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 or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization)
524 MAIN STREET, ACTON, MASSACHUSETTS 01720 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (978) 264-4155 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, $.10 par value New York Stock Exchange Preference Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (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 voting Common Stock held by non-affiliates of the registrant was approximately $214,972,299 based on the closing price of the Common Stock as reported on the New York Stock Exchange on October 16, 1997. Number of shares of Common Stock outstanding as of October 16, 1997: 49,848,649 shares. 2 Documents Incorporated by Reference Part of Report into Documents which Incorporated ------------ -------------------- Portions of Proxy Statement for the Items 10, 11, 12 & 13 of Annual Meeting of Stockholders to be Part III held December 5, 1997 to be filed with the Securities and Exchange Commission on or about November 4, 1997 pursuant to Reg. 240.14a-6(b) under the Securities Exchange Act of 1934. 2 3 PART I Item 1. Business CML Group, Inc. (the "Company" or "CML") was incorporated under the laws of the State of Delaware in 1969. Unless the context otherwise requires, the term "Company" as used herein includes CML and its subsidiaries. CML is a specialty marketing company whose principal operations are NordicTrack and Smith & Hawken. NordicTrack, which was acquired in June 1986, designs, sources, manufactures and markets physical fitness and exercise equipment and other health-related products under the trade names NordicTrack(R) and Nordic Advantage(TM). Smith & Hawken, which was acquired in February 1993 and conducts its business under the trade name Smith & Hawken(R), sells gardening tools, work wear, outdoor furniture, plants and accessories. The Company decided to dispose of one of its subsidiaries in fiscal 1995 and two other subsidiaries in fiscal 1996. Britches of Georgetowne ("Britches"), which was sold in April 1996, operated a chain of retail stores that sold men's apparel under the trade names Britches of Georgetowne(R) and Britches Great Outdoors(TM). Substantially all of the assets of The Nature Company, which conducted its business under the trade name The Nature Company(TM), and Hear Music were sold in June 1996 and October 1996, respectively. See Notes 3 and 4 of Notes to Consolidated Financial Statements for additional information. The Company's sales channels consist of Company-owned specialty retail stores and kiosks; direct marketing, primarily through mail order catalogs and advertisements appearing in print, on television and on the internet; and wholesale, beginning in fiscal 1998. At July 31, 1997, the Company operated 148 retail stores and 51 mall kiosks and had proprietary mail order customer lists containing approximately 3 million names. For the fiscal year ended July 31, 1997, approximately 57.7% of the Company's total revenues were derived from retail stores and mall kiosks compared with approximately 68.2% in fiscal 1996 and 55.1% in fiscal 1995. In fiscal 1997, direct response and mail order sales accounted for approximately 42.3% of total revenues compared with 31.8% in fiscal 1996 and 44.9% in fiscal 1995. NordicTrack's cross-country skiers and its AbWorks(TM) product provided approximately 17.1% and 16.1% of the Company's total revenues, respectively, in fiscal 1997. Approximately 24.8% and 18.1% of the Company's consolidated net sales were derived from NordicTrack's cross-country skiers and non-motorized treadmills, respectively, in fiscal 1996. In fiscal 1995, NordicTrack's cross country-skiers comprised approximately 37.5% of the Company's total revenues and its non-motorized treadmills provided approximately 21.7% of the Company's total revenues. CML continues to operate in two industry segments: (i) NordicTrack and (ii) Smith & Hawken. Additional information on each of these industry segments is provided below and in Note 11 of Notes to Consolidated Financial Statements. NordicTrack NordicTrack designs, sources and manufactures, and markets high quality aerobic, anaerobic and spot-toning exercise equipment which it markets to consumers primarily through direct response advertising in print, on television and on the internet, and through its own mail order catalogs. NordicTrack also sells its products to its wholly-owned subsidiary, Nordic Advantage, which operates specialty retail stores and kiosks located primarily in the 3 4 United States and Canada, and, beginning in fiscal 1998, began marketing its products to other select retailers. NordicTrack's principal aerobic products consist of a new line of elliptical total-body exercise machines introduced in October 1997, marketed under the Ellipse(TM) and eMotion(TM) trade names, and sold at prices ranging from $400 to $900; several models of cross-country ski exercisers sold at prices ranging from $300 to $900; several motorized treadmills marketed under the PowerTread(TM) trade name and sold at prices ranging from $900 to $1,600; and two models of a non-motorized treadmill marketed under the WalkFit(TM) trade name and sold for $300 and $400. NordicTrack introduced its first cross-country ski exerciser in 1976 and the WalkFit(TM) treadmill in November 1993. NordicTrack's cross-country ski exercisers utilize a flywheel mechanism which replicates the non-jarring motion of cross-country skiing and provides a complete upper and lower body workout. Exercisers marketed under the Ellipse(TM) trade name use the Ellipta Glide(TM) design with a floating crank mechanism to provide a smooth, quiet elliptical motion. NordicTrack's principal anaerobic product is the UltraLift(TM) weight machine, introduced in October 1996 and priced at $1,000, which provides health club quality strength training at home. The UltraLift utilizes a four-bar linkage system that gives the user weight resistance without the inconvenience of weight stacks or weight plates. NordicTrack's principal spot-toning products are AbWorks(TM), an abdominal conditioner that was introduced in February 1996, and LegShaper(TM), an exercise machine for shaping and toning the hips, legs and buttocks that was introduced in January 1997. AbWorks(TM) sells for approximately $120 and LegShaper(TM) sells for approximately $150. During fiscal 1997, approximately 59.6% of NordicTrack's net sales were derived from Nordic Advantage's retail operations, and the remaining 40.4% came from its direct response and mail order operations. At the end of fiscal 1997, Nordic Advantage operated 123 stores compared with 126 stores at July 31, 1996 and 114 stores at July 31, 1995. Three retail stores were opened during fiscal 1997 compared with 12 and 26 stores opened during fiscal 1996 and 1995, respectively. During fiscal 1998, Nordic Advantage plans to open one new store and close several underperforming stores with leases that are set to expire. Nordic Advantage's stores vary in size from 550 to 4,500 square feet and average approximately 1,876 square feet. The stores generally are located in high traffic urban and suburban malls in affluent areas and in discount outlet malls. A portion of Nordic Advantage's retail sales comes from seasonal kiosks which generally are open for only a portion of the year. The stores and kiosks have allowed Nordic Advantage to reach that portion of the fitness market which does not traditionally purchase by direct response or mail order. NordicTrack began the wholesale distribution of its products in October 1997. The Company believes a wholesale presence will complement and enhance NordicTrack's specialty retailing and direct marketing franchises, reach a new, untapped customer base, and generate incremental revenues. 4 5 NordicTrack's international sales are not a significant percentage of revenues. NordicTrack's operations, including personnel, stores, purchasing, manufacturing, distribution, order fulfillment, accounting and management information systems, are separate and distinct from the Company's other industry segment. Smith & Hawken The Smith & Hawken segment currently is comprised of the Company's Smith & Hawken subsidiary, but included The Nature Company, Smith & Hawken and Hear Music prior to fiscal 1997. Substantially all of the assets of The Nature Company and Hear Music were sold in June 1996 and October 1996, respectively. Smith & Hawken is a leading marketer of gardening-related products. Its merchandise categories include furniture, plants, clothing, gardening tools and equipment, and garden-related accessories, including containers, housewares, gifts, and books. Smith & Hawken sells its products through its own Smith & Hawken stores and mail order catalogs. As of July 31, 1997, Smith & Hawken operated 25 retail stores ranging in size from 1,600 to 7,926 square feet and averaging approximately 4,534 square feet. Many of the stores have indoor and outdoor selling space. All of the stores are located in the United States and generally can be found on main streets or in high traffic urban and suburban malls located in affluent communities. Smith & Hawken's retail and mail order sales were 51.0% and 49.0%, respectively, of Smith & Hawken's total fiscal 1997 sales. Approximately 18.3 million catalogs were mailed by Smith & Hawken during fiscal 1997. Smith & Hawken plans to open four stores and mail approximately 19.1 million catalogs in fiscal 1998. Prior to the sale of The Nature Company in June 1996, the companies included in the Smith & Hawken segment shared real estate services, order processing services, fulfillment and distribution services and management information services and systems. Smith & Hawken has contracted with the buyer of The Nature Company's business to continue providing these services on a negotiated fee basis. Smith & Hawken's operations, including personnel, stores, purchasing, merchandising, distribution, order fulfillment, accounting and management information systems, are separate and distinct from the Company's other industry segment. Trade Names The Company believes that the names under which it conducts its business are of significant value because they are established, well-known and respected. 5 6 Shown below are the Company's principal trade names and trademarks and the estimated number of years in existence: Principal Trade Names Years in and Trademarks Existence NordicTrack(R) Over 20 Nordic Advantage, Inc. (TM) Over 6 Smith & Hawken(R) Over 12 The Company has entered into licensing agreements with third parties for the use of patents in connection with the manufacture of certain products, including Ellipse(TM), eMotion(TM), UltraLift(TM) and LegShaper(TM). Distribution The manufacture of NordicTrack's products occurs at its Glencoe, Minnesota production facility or is outsourced in the United States, Mexico or overseas. Inventory shipments are received at NordicTrack's Glencoe, Minnesota, and Sioux Falls, South Dakota, facilities from which direct response, retail and wholesale orders are fulfilled. NordicTrack also maintains relationships with third-party storage and transportation companies to warehouse and distribute certain products. Certain NordicTrack products are sold by NordicTrack to its wholly-owned subsidiary, Nordic Advantage, for resale through its retail stores and kiosks. NordicTrack also sells certain products on a wholesale basis to select third-party retailers. Prior to the sale of The Nature Company's business in fiscal 1996, Smith & Hawken's products were shipped by suppliers to a Florence, Kentucky distribution center leased by both Smith & Hawken and The Nature Company. The Company's interest in the Florence, Kentucky distribution center was sold with the assets of The Nature Company in June 1996. Smith & Hawken currently contracts with the buyer of The Nature Company's business to continue providing Smith & Hawken with warehousing, distribution and mail order fulfillment services. Inventory shipments are received at the Florence, Kentucky distribution center which distributes the merchandise to Smith & Hawken's retail stores and fills customers' mail orders. The agreement between Smith & Hawken and the buyer of The Nature Company's business is on a fee-for-service basis which may not be terminated before August 31, 1998. Suppliers The Company has various domestic and foreign suppliers, none of which accounts for more than 10% of its purchases. Generally, the Company is not dependent upon any single source for any raw materials or items of merchandise. Several of NordicTrack's products, however, are produced by single but separate manufacturers, from which a disruption of supply could adversely affect the Company's operating results. In general, NordicTrack and Smith & Hawken each contract with one or more printers and paper suppliers for its direct response and mail order catalogs. Manufacturing The Company's principal manufacturing activity consists of the production of NordicTrack physical fitness exercise equipment primarily at NordicTrack's Glencoe, Minnesota facility, which is approximately 284,000 square feet in size. The Glencoe facility produces the cross-country ski exercisers, non-motorized treadmills, AbWorks(TM), 6 7 and a new line of elliptical exercise products. Materials required for the Company's manufacturing operations generally are available from a wide variety of suppliers. 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, have greater financial resources and offer a greater selection of products. Its competitors include such companies as ICON Health & Fitness, Inc., Road Master Industries, Inc., Diversified Products Corp., Health Rider, Inc., Soloflex, Inc. and Consumer Direct, Inc. In recent years, NordicTrack's competitors have introduced several new and competitive products at competitive prices. Many of the competitors of Smith & Hawken are larger companies with greater financial resources, a greater selection of merchandise and nationwide distribution. Smith & Hawken's retail competitors include a large number and wide variety of specialty retail stores, discount stores, hardware stores, and department stores which carry similar product lines. Smith & Hawken's mail order catalogs compete with those of other companies selling garden-related merchandise, such as Gardener's Eden, David Kay, Calyx & Corolla and Gardener's Supply. Smith & Hawken competitors also include independent garden stores and plant nurseries in towns and cities throughout the United States. Competition in the direct response and mail order business has intensified in recent years due to increases in the number of competitors, the number of catalogs mailed and the number of competitors using direct response advertisements in both print and television media. Seasonality The Company's businesses are seasonal, with significant amounts of retail sales in the second and third fiscal quarters. The following table shows the approximate percentage of consolidated sales in each quarter of fiscal 1997: Percentage Fiscal Quarter Ended of Sales -------------------- -------- October 20% January 34% April 28% July 18% ---- Total 100% ==== Working Capital Requirements Inventory purchases represent the most significant use of working capital. The Company believes that its working capital requirements follow the seasonal patterns of other companies operating within its industry segments. Inventory represented approximately 67% and 53% of the Company's working capital assets, excluding cash and cash equivalents, and refundable and deferred income taxes, at July 31, 1997 and 1996, respectively. Inventory 7 8 purchases are based on future anticipated sales and typically reach their highest levels of the year in the fall in anticipation of the Christmas holiday and winter season. Backlog, Contracts and Research Backlog is not a significant factor in the Company's business. The Company does not have any material contracts which are subject to renegotiation. The Company's research and development activities primarily consist of the design and development of new products and the improvement of existing products at NordicTrack and Smith & Hawken. 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 $7,276,000. 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 $1,415,000 for the removal phase of the site cleanup, which has now been completed. The EPA had estimated that the removal costs would exceed $3,000,000, 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 $4,020,000. 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 $2,300,000. 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 share of waste shipped to that site at less than two-tenths 8 9 of one percent. The Company and more than 200 other potentially responsible parties have executed administrative orders pursuant to which they agreed to perform two non-time critical removal actions and to complete the remedial investigation and feasibility study commenced by the EPA. The Company has contributed $11,000 to the costs of the removal actions and remedial investigation and feasibility study and expects to contribute at least $11,000 more to those costs over time. Because complete cleanup cost estimates for the site are not yet available, an accurate assessment of the Company's likely range of liability cannot be made. Accordingly, the financial impact on the Company is not presently determinable. Employees During fiscal 1997, NordicTrack and Smith & Hawken employed, on average, approximately 3,100 people, including full-time, part-time and seasonal employees. The Company employs a large number of part-time employees from time to time because of the seasonality of the Company's sales. The Company considers its employee relations to be good. Foreign and Domestic Operations To date, international sales, licensing revenues and export sales have accounted for less than five percent of the Company's total annual sales. The Company's NordicTrack subsidiary operates a retail store in Germany and a retail store and several kiosks in the United Kingdom. Intercompany sales between the Company's operating units are not significant. Item 2. Properties Most of the Company's facilities, including its retail stores, are leased from third parties. However, its principal NordicTrack manufacturing, administrative and telemarketing facilities are owned by NordicTrack. The Company also owns its corporate offices in Acton, Massachusetts. Shown below is a summary of the square footage of the Company's principal facilities at July 31, 1997, by primary function:
Square Feet -------------------------------------------- Owned Leased Total ----- ------ ----- Distribution 85,500 146,302 231,802 Retail Selling 1,805 342,239 344,044 Manufacturing 206,500 9,000 215,500 Office and Administration 226,500 29,200 255,700 ------- ------- --------- Total 520,305 526,741 1,047,046 ======= ======= =========
9 10 Most of the retail store leases have initial terms ranging from five to ten years, with options to renew in certain cases. Retail store leases generally provide for minimum or base rents, additional expenses for common area maintenance charges and additional rent calculated as a percentage of sales in excess of specified levels. Rental expense under all leases for fiscal 1997 was approximately $25.6 million. For additional information regarding the Company's lease obligations, see Note 9 of Notes to Consolidated Financial Statements. Item 3. Legal Proceedings 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 named plaintiffs, Elissa Crespi and John Lucien Ware, Jr., allege in the Consolidated Complaint 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. They 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. NordicTrack filed a motion for transfer of venue to the United States District Court for the District of Minnesota, which was allowed in early 1997. On September 2, 1997, the named plaintiffs filed a motion to remand the case to New York State Court, which NordicTrack intends to oppose. The parties have conducted some discovery. While NordicTrack believes it has meritorious defenses to the Consolidated Complaint and intends to vigorously defend against the allegations, this lawsuit is still in an early stage and the Company is unable to determine the likelihood and possible impact on the Company's consolidated financial condition or results of operations of an unfavorable outcome. NordicTrack is the defendant in a lawsuit in the United States District Court for the District of Minnesota which commenced on August 12, 1996. In the action, the plaintiff, Precise Exercise Equipment ("Precise"), alleged that NordicTrack misappropriated trade secrets regarding Precise's abdominal exercise product and further breached a noncompetition agreement. While NordicTrack is vigorously defending against the allegations and believes it has meritorious defenses to Precise's claims on the contract, at this stage of the lawsuit the Company is unable to determine the likelihood and possible impact on the Company's consolidated financial condition or results of operations of unfavorable outcomes. In a complaint dated September 30, 1997, filed by Precor Incorporated ("Precor") in the United States District Court for the Western District of Washington at Seattle, Precor alleged that the manufacture, offering for sale and sale by NordicTrack of its exercisers marketed under the Ellipse(TM) trade mark infringe a United States patent which Precor has licensed from the inventor, Larry Miller (the "Miller Patent"). The technology used in NordicTrack's Ellipse(TM) exerciser is licensed by NordicTrack from a third party and the Company believes that NordicTrack's products do not infringe the Miller Patent. While NordicTrack believes it has meritorious defenses to the complaint 10 11 and intends to vigorously defend against the allegations, this lawsuit is in its earliest 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. 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 consolidated financial condition or results of operations. See Note 9 of Notes to Consolidated Financial Statements for information on environmental matters. 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. The IRS has indicated that it intends to mail an official assessment notice shortly proposing 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 of $43,000,000 made to the former owners of NordicTrack (acquired in June 1986) pursuant to their employment contracts; and (ii) incentive compensation payments made to the former owners of Britches of Georgetowne (acquired in August 1983 and sold in April 1996) pursuant to the terms of an earnout agreement and the valuation of certain assets acquired in connection with the acquisition of Britches of Georgetowne in the amount of $8,200,000. The net federal tax due relating to the proposed adjustments approximates $16,200,000, excluding interest. The incentive compensation payments to the former owners of NordicTrack were attributable to substantial increases in sales and profits at NordicTrack during the years under examination. 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 consolidated operating results for the period in which such issues are finally resolved and would also have a material adverse effect on the Company's consolidated financial condition. 11 12 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 31, 1997. Executive Officers of the Company The executive officers of the Company are as follows:
Name Age Position ---- --- -------- Charles M. Leighton 62 Chairman of the Board of Directors and Chief Executive Officer G. Robert Tod 58 President, Chief Operating Officer and Director Glenn E. Davis 43 Vice President, Finance, Chief Financial Officer and Treasurer Paul J. Bailey 40 Controller
Mr. Leighton, a founder of the Company, has been Chairman of the Board of Directors and Chief Executive Officer since the incorporation of the Company in 1969. Mr. Leighton is a director of New England Investment Companies and of Metropolitan Life Insurance Company. Mr. Tod, a founder of the Company, has been a member of the Board of Directors and President and Chief Operating Officer since the incorporation of the Company in 1969. Mr. Tod is a director of SCI Systems, Inc., EG&G, Inc. and USTrust. Mr. Davis has been a Vice President of the Company since November 1989 and served as Controller of the Company from May 1984 through June 1996. He was named Chief Financial Officer in March 1996 and Treasurer in June 1996. Mr. Bailey has been with the Company since January 1985 as Director of Financial Operations. He became Controller of the Company in June 1996. 12 13 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters The Company's common stock is traded on the New York Stock Exchange under the symbol "CML." The following table sets forth for the fiscal periods indicated the high and low sales prices per share of the common stock as reported on the New York Stock Exchange.
Fiscal 1997 Fiscal 1996 ----------------------- ----------------- Quarter High Low High Low ------- ---- --- ---- --- First $5.75 $3.13 $9.25 $5.38 Second 4.88 2.88 6.25 3.63 Third 3.25 1.88 5.00 2.88 Fourth 3.69 1.75 5.88 2.88
The Company declared one and three cash dividends aggregating $0.01 and $0.06 per share on its common stock during fiscal 1997 and 1996, respectively. The Company must meet certain financial covenants under its current revolving credit agreement in order to pay cash dividends. Although in the past the Company has occasionally paid dividends to its shareholders on a quarterly basis, the Company currently has a retained earnings deficit and has no present intention to pay dividends to its shareholders. The number of shareholders of record of the Company's common stock as of October 16, 1997 was 6,251. Item 6. Selected Financial Data (in thousands, except per share data)
Year Ended July 31, ------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Net sales $341,315 $544,905 $712,613 $655,791 $539,992 Income (loss) from continuing operations before extra- ordinary gain and cumulative effect of accounting change (40,214) (84,809) 15,906 50,563 56,072 Income (loss) per share from continuing operations before extra- ordinary gain and cumulative effect of accounting change (0.81) (1.72) 0.32 0.98 1.07 Cash dividends declared per share 0.01 0.06 0.09 0.08 0.06 Working capital 9,695 56,163 116,533 103,742 101,191 Total assets 146,336 213,351 340,081 384,663 340,171 Noncurrent liabilities 51,489 48,794 69,021 84,356 80,719 Stockholders' equity 45,728 85,797 188,552 219,237 184,250
13 14 The Company sold its Hear Music subsidiary in fiscal 1997 and sold its Britches of Georgetowne and The Nature Company subsidiaries in fiscal 1996. See Notes 3 and 4 of Notes to Consolidated Financial Statements. 14 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION The Company operates two subsidiaries, NordicTrack and Smith & Hawken, each of which is treated as a separate segment in the accompanying consolidated financial statements. Prior to the Company's decision to divest The Nature Company and Hear Music in the third quarter of fiscal 1996, both subsidiaries were included in the results of the Smith & Hawken segment. The Company recorded a charge associated with the decision to sell The Nature Company and Hear Music which is included in the fiscal 1996 results for the Smith & Hawken segment in the accompanying consolidated financial statements. In fiscal 1995, the Company decided to sell its Britches of Georgetowne ("Britches") subsidiary, which is accounted for as a discontinued operation in the accompanying consolidated financial statements. NordicTrack designs, sources, manufactures and markets physical fitness and exercise equipment and other health-related products through direct response advertising in print, on television and on the internet; through specialty stores and kiosks operated by its wholly-owned subsidiary, Nordic Advantage; and, beginning in fiscal 1998, to wholesale customers. Smith & Hawken markets fine gardening tools, work wear, furniture, plants and accessories through its catalogs and specialty retail stores. Industry segment information is presented in Note 11 of Notes to Consolidated Financial Statements. This Annual 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." See also Note 9 of the Notes to Consolidated Financial Statements for information on commitments and contingencies. RESULTS OF CONTINUING OPERATIONS - FISCAL 1997 AND 1996 CML Consolidated The Company had net sales of $341.3 million in fiscal 1997, a decrease of $203.6 million, or 37.4% below fiscal 1996. During fiscal 1997, the Company had a net loss from continuing operations of $40.2 million compared with a net loss from continuing operations of $84.8 million in fiscal 1996. During fiscal 1997, retail sales decreased $174.7 million to $197.1 million, or 47.0% below fiscal 1996's retail sales. The decrease in retail sales was primarily due to the decision during the third quarter of fiscal 1996 to divest The Nature Company and Hear Music, and lower sales at Nordic Advantage, offset in part by an increase in retail sales at Smith & Hawken. The decrease in Nordic Advantage retail sales was primarily due to lower sales of cross-country skiers, non-motorized treadmills and riders. During fiscal 1997, Smith & Hawken and Nordic Advantage opened one store and three stores, respectively. Direct response and mail order sales decreased $28.9 million in fiscal 1997, or 16.7% below the prior year, to $144.2 million. The decrease in direct response and mail order sales was primarily attributable to lower direct response sales at NordicTrack, resulting from 15 16 lower sales of cross-country skiers, non-motorized treadmills and riders, offset in part by an increase in mail order sales at Smith & Hawken. The Company expects future sales growth will result primarily from sales of new NordicTrack fitness equipment products, the addition of new Smith & Hawken stores, comparable store sales increases, increased catalog circulation, and penetration of the wholesale marketing channel by NordicTrack. The Company's international operations were not significant during fiscal 1997 and are not expected to be significant for the next several years. Cost of goods sold increased as a percentage of sales from 47.1% in fiscal 1996 to 48.1% in fiscal 1997. The increase in cost of goods sold as a percentage of sales was primarily attributable to increased sales promotions by NordicTrack in response to lower demand for cross-country skiers, non-motorized treadmills and riders, and a change in the mix of product sales toward lower-margin products. Selling, general and administrative expenses decreased as a percentage of sales from 70.8% in fiscal 1996 to 69.3% in fiscal 1997 primarily as a result of improved cost controls at NordicTrack and Smith & Hawken. The cost control improvements were accomplished despite higher fixed costs as a percentage of sales at Nordic Advantage stores that experienced a decrease in comparable store sales. The decrease in the loss from continuing operations in fiscal 1997 was due, in part, to improved operating results at Smith & Hawken, reduced operating losses at NordicTrack, and the elimination of losses resulting from the operation and sale of The Nature Company and Hear Music. In June 1996, the Company sold substantially all of the assets of The Nature Company for $39.9 million plus the assumption of certain liabilities. In October 1996, the Company completed the sale of substantially all of Hear Music's assets for $371,000 in cash plus the assumption of certain liabilities. Net interest expense was $1.8 million, or 0.5% of net sales, in fiscal 1997 compared with $3.1 million, or 0.6% of net sales, in fiscal 1996. Net interest expense decreased primarily due to lower bank borrowings and interest earned from the investment of excess cash balances in money market mutual funds. The Company's income tax benefit as a percentage of the pre-tax loss from continuing operations was 34.0% in fiscal 1997 compared with 35.4% in 1996. The tax rate of 34.0% for fiscal 1997 represents the benefit the Company expects to realize upon utilization of tax loss carryforwards. The tax rate for fiscal 1996 was 35.4%, which represented the benefit realized upon the carryback of tax losses from fiscal 1996 to prior fiscal years. See Notes 7 and 9 of the Notes to Consolidated Financial Statements for information related to income taxes and tax matters. NordicTrack Overall net sales decreased 27.3% from $368.1 million in fiscal 1996 to $267.7 million in fiscal 1997. Retail sales decreased $72.9 million, or 31.4%, to $159.5 million in fiscal 1997 compared with $232.4 million in fiscal 1996. The decrease in retail sales was primarily due to fewer kiosks open during fiscal 1997, the closing of six retail stores and a 24.9% decrease in comparable store sales. Direct response and mail order sales decreased $27.5 million, or 20.3%, to $108.2 million in fiscal 1997 from $135.7 million in fiscal 1996. The decrease in retail, direct response and mail order sales was primarily due to lower sales of cross-country skiers, non-motorized treadmills and riders. In fiscal 1997, NordicTrack accounted for approximately 78.4% of the Company's consolidated net sales and over 100.0% of the consolidated pre-tax operating loss before interest, corporate and other expenses. In fiscal 1996, approximately 67.6% of the Company's consolidated net sales and 60.4% of the 16 17 Company's consolidated pre-tax operating loss before interest, corporate and other expenses were attributable to NordicTrack. NordicTrack's gross margin decreased to 51.7% in fiscal 1997 from 55.4% in fiscal 1996, primarily due to increased sales promotions on cross-country skiers, non-motorized treadmills and riders in response to lower demand and a more competitive consumer environment, and a change in the sales mix toward lower-margin products with royalty arrangements. Selling, general and administrative expenses decreased as a percentage of sales from 74.9% in fiscal 1996 to 73.6% in fiscal 1997 primarily due to improved cost controls that were offset, in part, by higher fixed costs as a percentage of sales at retail store locations experiencing a decrease in comparable store sales. NordicTrack had an operating loss of $58.6 million in fiscal 1997 compared with an operating loss of $72.6 million in fiscal 1996. The decrease in the operating loss, which was accomplished in a declining sales environment, was primarily due to a reduction in selling, general and administrative expenses. NordicTrack plans to continue to develop and market new physical fitness exercise equipment and other related products. The UltraLift(TM) strength-training machine and the PowerTread(TM) line of motorized treadmills were introduced in fiscal 1997. A new line of aerobic exercise machines, marketed under the Ellipse(TM) and eMotion(TM) trade names, will be introduced in the fall of fiscal 1998. In fiscal 1998, NordicTrack also plans to market its products to wholesale customers and spend approximately $4.0 million on tooling for new products, computer hardware and software upgrades and enhancements, and equipment to improve manufacturing and distribution processes. The Smith & Hawken Segment The Smith & Hawken segment experienced a 58.4% decrease in net sales in fiscal 1997, with net sales declining from $176.8 million in fiscal 1996 to $73.6 million in fiscal 1997. The decrease was due to the divestitures of The Nature Company and Hear Music. Smith & Hawken's net sales increased $9.5 million, or 14.9%, to $73.6 million from $64.0 million in fiscal 1996. Retail sales of the Smith & Hawken segment decreased $101.8 million, or 73.1%, from $139.4 million in fiscal 1996 to $37.6 million in fiscal 1997 due to the sale of The Nature Company and Hear Music. Smith & Hawken's retail sales increased $6.2 million, or 19.7%, in fiscal 1997 to $37.6 million. Comparable store sales at Smith & Hawken increased 3.4% in fiscal 1997. Mail order sales of the Smith & Hawken segment decreased $1.4 million, or 3.6%, to $36.0 million in fiscal 1997 from $37.4 million in fiscal 1996. The decrease was due to the divestiture of The Nature Company. Smith & Hawken experienced a 10.3% increase in mail order sales in fiscal 1997 over fiscal 1996. The Smith & Hawken segment's gross margin increased to 52.7% in fiscal 1997 from 47.4% in fiscal 1996 and selling, general and administrative expenses decreased as a percentage of sales from 56.8% in fiscal 1996 to 50.0% in fiscal 1997. The increase in gross margin and decrease in selling, general and administrative expenses as a percentage of net sales were primarily due to the divestitures of The Nature Company and Hear Music businesses. Operating results of the Smith & Hawken segment improved from a loss of $47.7 million in fiscal 1996 to operating income of $2.0 million in fiscal 1997 primarily due to the divestitures of The Nature Company and Hear Music. The Company recorded a pre-tax loss of $30.8 million during the third quarter of fiscal 1996 as a result of the decision to sell The Nature Company and Hear Music. 17 18 Smith & Hawken expects to spend approximately $3.2 million in fiscal 1998 primarily on four new stores and computer hardware and software. RESULTS OF CONTINUING OPERATIONS - FISCAL 1996 AND 1995 CML Consolidated Net sales decreased $167.7 million to $544.9 million, or 23.5% below fiscal 1995. The Company had a loss from continuing operations of $84.8 million in fiscal 1996 compared with income from continuing operations of $15.9 million in fiscal 1995. Retail sales decreased $21.1 million in fiscal 1996 to $371.8 million, or 5.4% below fiscal 1995. The decrease was primarily attributable to the divestiture of The Nature Company in fiscal 1996 and a decrease in Nordic Advantage and the Smith & Hawken segment comparable store sales, partially offset by the addition of new Nordic Advantage and Smith & Hawken stores and a greater number of Nordic Advantage kiosks open during the year. During fiscal 1996, Nordic Advantage and Smith & Hawken opened 12 and 8 new stores, respectively. Direct response and mail order sales in fiscal 1996 decreased $146.6 million, or 45.9% below fiscal 1995, to $173.1 million. The decrease in direct response and mail order sales was primarily attributable to lower direct response sales at NordicTrack as a result of less effective advertising. Revenues of the Company's international operations were not material as a percentage of total revenues during fiscal 1996 or 1995. Cost of goods sold increased as a percentage of sales from 39.8% in fiscal 1995 to 47.1% in fiscal 1996. The increase in cost of goods sold as a percentage of sales was primarily due to increased sales promotions offered by NordicTrack and the Smith & Hawken segment in response to a more competitive consumer environment, higher materials, overhead and labor costs at NordicTrack, and an increase in the proportion of NordicTrack's sales derived from products with higher cost of goods sold. Selling, general and administrative expenses increased as a percentage of sales from 56.5% in fiscal 1995 to 70.8% in fiscal 1996. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to higher direct marketing expenses and reduced advertising efficiencies at NordicTrack, fixed costs at stores that experienced a decrease in sales, and higher operating expenses attributable to the increased number of kiosks. The loss from continuing operations in fiscal 1996 included a pre-tax charge of $30.8 million to write down The Nature Company's and Hear Music's net assets to estimated net realizable value and to accrue estimated lease termination and assignment costs and other transaction costs. In June 1996, the Company sold substantially all of the assets of The Nature Company for $39.9 million plus the assumption of certain liabilities. Net interest expense in fiscal 1996 was $3.1 million, or 0.6% of net sales, compared with net interest expense of $1.1 million, or 0.2% of net sales, in fiscal 1995. The increase in net interest expense was primarily due to higher bank borrowings during the year. The Company's income tax benefit as a percentage of the pre-tax loss from continuing operations was 35.4% in fiscal 1996 compared with an income tax provision as a percentage of pre-tax income from continuing operations of 37.4% in fiscal 1995. NordicTrack Net sales decreased 27.0% from $504.1 million in fiscal 1995 to $368.1 million in fiscal 1996. Retail sales increased $3.8 million, or 1.7%, to $232.4 million in fiscal 1996 compared with $228.6 million in fiscal 1995. Direct response and mail order sales decreased $139.8 million, or 50.7%, to $135.7 million in fiscal 1996 from $275.5 million in fiscal 1995. The increase in retail sales was primarily due to a greater number of kiosks open during fiscal 1996. During fiscal 1996, comparable store sales decreased 30.0%. In fiscal 1995, approximately 70.7% of the Company's consolidated sales and over 100.0% of the Company's 18 19 consolidated pre-tax operating income before interest, corporate and other expenses were attributable to NordicTrack. NordicTrack's gross margin decreased to 55.4% in fiscal 1996 from 64.9% in fiscal 1995 primarily due to increased sales promotions during the year in response to a more competitive consumer environment, higher materials, overhead and labor costs and a change in the sales mix to lower-margin products. Selling, general and administrative expenses increased as a percentage of sales from 55.7% in fiscal 1995 to 74.9% in fiscal 1996, primarily due to higher direct marketing expenses and reduced advertising efficiencies, fixed costs at stores that experienced a decrease in sales and higher operating expenses attributable to the increased number of kiosks. NordicTrack incurred an operating loss of $72.6 million in fiscal 1996 compared with $46.3 million of operating income in fiscal 1995. The decline in operating income was due to lower sales and higher cost of goods sold and selling, general and administrative expenses as a percentage of sales. The Smith & Hawken Segment Net sales of the Smith & Hawken segment decreased 15.2% from $208.5 million in fiscal 1995 to $176.8 million in fiscal 1996, primarily due to the divestiture of The Nature Company and the planned divestiture of Hear Music and a decrease in comparable store sales. Retail sales decreased $24.9 million, or 15.2%, to $139.4 million in fiscal 1996 compared with $164.3 million in fiscal 1995. Mail order sales decreased $6.8 million, or 15.4%, to $37.4 million in fiscal 1996 from $44.2 million in fiscal 1995, primarily due to the mailing of fewer catalogs by The Nature Company. Comparable store sales for the Smith & Hawken segment decreased 10.0% during fiscal 1996. The Smith & Hawken segment's gross margin decreased to 47.4% in fiscal 1996 from 48.9% in fiscal 1995 primarily due to higher markdowns during the year in response to a more competitive consumer environment. The Smith & Hawken segment's selling, general and administrative expenses increased as a percentage of sales from 55.2% in fiscal 1995 to 56.8% in fiscal 1996 primarily due to fixed costs at stores that experienced a decrease in sales. The Smith & Hawken segment incurred an operating loss of $47.7 million during fiscal 1996 as compared with an operating loss of $13.2 million in fiscal 1995. The increase in the operating loss was primarily attributable to a $30.8 million pre-tax charge resulting from the Company's decision to divest The Nature Company and Hear Music, lower gross margins and higher selling, general and administrative expenses as a percentage of sales. LIQUIDITY AND CAPITAL RESOURCES Cash Flows from Operating Activities The Company used internally generated funds, an income tax refund and proceeds from the sale of Britches, The Nature Company and Hear Music to finance its operations during fiscal 1997. In prior fiscal years, bank borrowings, in addition to internally generated funds and proceeds from the sale of assets, were used to finance the Company's operating needs. Operating activities used $13.3 million of cash in fiscal 1997 compared with a net use of $0.4 million in fiscal 1996 and net cash provided by operating activities of $30.6 million in fiscal 1995. Receipt of an income tax refund of approximately $53.9 million in September 1996 funded the operating loss for fiscal 1997 and partially financed the reduction in accounts payable and accrued expenses. Depreciation and amortization was $14.8 million in fiscal 1997, $28.7 million in fiscal 1996 and $30.7 million in fiscal 1995. The decrease in depreciation and amortization was primarily due to the divestitures of Britches, The Nature Company and Hear Music, the effects of which were partially offset by higher depreciation resulting from the Company's investment in tooling for new and existing products, new retail stores, and the refurbishment of existing stores. The Company's investment in working capital items increased $22.3 million in fiscal 1997, decreased $12.9 million in fiscal 1996 and increased $23.0 million in fiscal 1995. Cash Flows from Investing Activities 19 20 During fiscal 1997, net cash provided by investing activities was $0.1 million compared with $25.0 million in fiscal 1996 and net cash used in investing activities of $36.3 million in 1995. The higher level of cash provided by investing activities in fiscal 1996 relative to fiscal 1997 was primarily due to cash proceeds received from the sale of Britches and The Nature Company offset, in part, by a higher level of investment in new stores and manufacturing, distribution and data processing facilities. Capital expenditures were $5.9 million in fiscal 1997, of which NordicTrack spent approximately $4.5 million and Smith & Hawken spent approximately $1.4 million. During fiscal 1996 and 1995, capital expenditures were $21.6 million and $36.3 million, respectively. The fiscal 1997 capital expenditures were primarily for product tooling and store remodeling. Cash Flows from Financing Activities The Company used $0.2 million, $15.2 million and $14.9 million of cash for financing activities in fiscal 1997, 1996 and 1995, respectively. No loans were outstanding under the Company's revolving credit agreement at the end of fiscal 1997 and 1996, compared with $10.0 million of advances outstanding at July 31, 1995. The Company repurchased $1.3 million and $8.4 million of its common stock in fiscal 1996 and 1995, respectively. In addition, the Company spent $12.0 million in fiscal 1995 to repurchase a portion of its $57.5 million, 5-1/2% convertible subordinated debentures. Dividends paid by the Company on its common stock were $0.5 million, $4.2 million and $4.2 million during fiscal 1997, 1996 and 1995, respectively. Capital Resources On August 27, 1997, the Company amended and restated its senior secured revolving credit agreement which provides for borrowings and letters of credit of up to $40.0 million through April 15, 1999 based upon a percentage of eligible accounts receivable and inventories. The amended agreement also provides an overadvance facility of up to an additional $15.0 million during the fall of each year to meet the Company's seasonal borrowing needs. The agreement, which is secured by the Company's assets and the shares and guarantees of the Company's subsidiaries, requires the Company to comply with certain financial and operating covenants. The Company must meet certain financial covenants under the revolving credit agreement in order to pay cash dividends. The agreement also requires the Company to pay off the outstanding loan balance for a period of forty-five consecutive days each fiscal year and provides for a reduction in the commitment for net cash proceeds received from the sale of assets not in the ordinary course of business or from the issuance of subordinated debt or equity securities. At July 31, 1997, there were no loans outstanding under the revolving credit agreement. Total letters of credit outstanding at July 31, 1997 were $6.2 million. Unused borrowing and letter of credit capacity under the revolving credit agreement was $12.8 million at July 31, 1997. Total bank borrowings averaged $8,000 during fiscal 1997, $14.3 million during fiscal 1996 and $4.1 million during fiscal 1995. See Note 5 of Notes to Consolidated Financial Statements for additional information on long-term debt. The Company believes that internally generated funds, available bank lines of credit and proceeds from the sale of assets or securities or obtained through public or private financing transactions will be sufficient to meet its operating needs and anticipated capital expenditures for fiscal 1998. If the Company is unable to achieve its fiscal 1998 business plan, the Company may require significant additional funds to continue its ongoing operations, and if such funds are not available when needed, the Company may be required to curtail parts of its business and/or sell one of its two operating companies. 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 Annual Report and presented elsewhere by management from time to time. 20 21 Recent Operating Losses The Company incurred losses from continuing operations during fiscal 1997 and 1996, and there can be no assurance that the Company will not continue to incur 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 could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, 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 discussed in Notes 7 and 9 of Notes to Consolidated Financial Statements. Available Funds The Company's future financial performance will also depend on its ability to purchase goods and services on credit and to borrow funds under its revolving credit agreement. If the Company is unable to purchase goods and services on credit or the Company's lenders do not provide the Company with favorable credit arrangements, the Company may need to seek additional funds from other parties. 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 or securities or both, the Company may not be able to complete such sales 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. In addition, the Company's results of operations could be adversely affected if consumer spending is lower than anticipated during the holiday season. 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, have greater financial resources and offer a greater selection of products. During the past several years, NordicTrack's competitors have introduced several new and competitive products at competitive prices which have adversely affected NordicTrack's 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 and a new line of elliptical products will be introduced in the fall of fiscal 1998. 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 21 22 affected. There 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 has 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. 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. Cost Reduction Programs In fiscal 1997 and 1996, the Company was able to significantly reduce its operating costs as net sales decreased. There can be no assurance, however, that the Company will be able to further reduce operating costs if sales decline in the future. In addition, postage expenses associated with mailing catalogs and shipping charges associated with acquiring and distributing products and merchandise to customers are significant factors in the operation of the Company's businesses. Increases in postage or shipping costs, or disruptions in delivery and shipping services, could adversely affect the Company's operating results. Intellectual Property Rights The Company will continue to be 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. 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. The IRS has indicated that it intends to mail an official assessment notice shortly proposing 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 of $43,000,000 made to the former owners of NordicTrack (acquired in June 1986) pursuant to their employment contracts; and (ii) incentive compensation payments made to the former owners of Britches of Georgetowne (acquired in August 1983 and sold in April 1996) pursuant to the terms of an earnout agreement and the valuation of certain assets acquired in connection with the acquisition of Britches of Georgetowne in the amount of $8,200,000. The net federal tax due relating to the proposed adjustments approximates $16,200,000, excluding interest. The incentive compensation payments to the former owners of NordicTrack were attributable to substantial increases in sales and profits at NordicTrack during the years under examination. 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 22 23 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 consolidated operating results for the period in which such issues are finally resolved and would also have a material adverse effect on the Company's consolidated financial condition. 23 24 OTHER Inflation has not had a significant effect on the Company's operations. The Company is involved in various legal proceedings and claims and two former subsidiaries of the Company are involved in two separate environmental matters. See Note 9 of the Notes to Consolidated Financial Statements for additional information on commitments and contingencies. The Company plans to adopt Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in fiscal 1998. The Company does not expect implementation of SFAS No. 128 to have a material effect on reported earnings per share. The Company is evaluating the impact that implementation of SFAS Nos. 130 and 131 will have on the consolidated financial statements. Item 8. Financial Statements and Supplementary Data. See the Index to the Company's Consolidated Financial Statements and Financial Statement Schedule and the accompanying consolidated financial statements, notes and schedules which are filed as part of this Form 10-K following the signature page. 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 response to this item is contained in part under the caption "Executive Officers of the Company" in Part I hereof, and the remainder is incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on December 5, 1997 (the "1997 Proxy Statement") at "Election of Directors." Item 11. Executive Compensation. The response to this item is incorporated herein by reference to the Company's 1997 Proxy Statement at "Election of Directors," "Compensation Committee Report on Executive Compensation," "Compensation Committee Interlocks and Insider Participation," "Summary Compensation," "Stock Option Grants," "Year-End Option Table" and "Comparative Stock Performance." Item 12. Security Ownership of Certain Beneficial Owners and Management. The response to this item is incorporated herein by reference to the Company's 1997 Proxy Statement at "Security Ownership of Certain Beneficial Owners and Management." Item 13. Certain Relationships and Related Transactions. Not applicable. 24 25 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents filed as a part of this Form 10-K. 1. Consolidated Financial Statements. The Consolidated Financial Statements listed in the Index to Consolidated Financial Statements and Financial Statement Schedule are filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedule. The Financial Statement Schedule listed in the Index to Consolidated Financial Statements and Financial Statement Schedule is filed as part of this Annual Report on Form 10-K. 3. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. None. 25 26 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. CML GROUP, INC. By: /s/Charles M. Leighton ----------------------------------- Charles M. Leighton Chairman and Chief Executive Officer Date: October 29, 1997 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 and on the dates indicated.
Name Title Date -------------------- ------------------------ ------------- Chairman of the Board of ) Directors and Chief Executive ) /s/Charles M. Leighton Officer (Principal Executive ) - --------------------------------- Officer) ) Charles M. Leighton ) Vice President, Finance and ) /s/Glenn E. Davis Chief Financial Officer ) - --------------------------------- (Principal Financial Officer) ) Glenn E. Davis ) /s/Paul J. Bailey Controller ) - --------------------------------- (Principal Accounting Officer) ) Paul J. Bailey ) /s/G. Robert Tod President, Chief Operating ) October 29, 1997 - --------------------------------- Officer and Director ) G. Robert Tod ) /s/Howard H. Callaway Director ) - --------------------------------- Howard H. Callaway ) ) /s/Thomas H. Lenagh Director ) - --------------------------------- Thomas H. Lenagh ) ) /s/Roy W. Menninger, MD Director ) - --------------------------------- Roy W. Menninger, MD ) ) /s/Alison Taunton-Rigby Director ) - --------------------------------- Alison Taunton-Rigby ) ) /s/Lauren M. Tyler Director ) - --------------------------------- Lauren M. Tyler ) ) /s/Ralph F. Verni Director ) - --------------------------------- Ralph F. Verni )
26 27 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE OF CML GROUP, INC. Page No. -------- Consolidated Financial Statements: Independent Auditors' Report 28 Consolidated Statements of Operations - Years Ended July 31, 1997, 1996 and 1995 29 Consolidated Balance Sheets - July 31, 1997 and July 31, 1996 30 - 31 Consolidated Statements of Cash Flows - Years Ended July 31, 1997, 1996 and 1995 32 Consolidated Statements of Changes in Stockholders' Equity - Years Ended July 31, 1997, 1996 and 1995 33 Notes to Consolidated Financial Statements 34 - 46 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts 47 All other schedules are omitted because either they are not applicable or the required information is included in the consolidated financial statements or notes thereto. 27 28 INDEPENDENT AUDITORS' REPORT To the Stockholders and Directors of CML Group, Inc.: We have audited the accompanying consolidated balance sheets of CML Group, Inc. and its subsidiaries as of July 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended July 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the management of CML Group, Inc. Our responsibility is to express an opinion on the financial statements and the financial statement schedule 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, such consolidated financial statements present fairly, in all material respects, the financial position of CML Group, Inc. and its subsidiaries at July 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Boston, Massachusetts September 29, 1997 28 29 CML Group, Inc. and Subsidiaries Consolidated Statements of Operations
Year Ended July 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Net sales $341,315,000 $544,905,000 $712,613,000 - ----------------------------------------------------------------------------------------------------------------------------------- Less costs and expenses: Cost of goods sold 164,081,000 256,738,000 283,338,000 Selling, general and administrative expenses 236,368,000 385,539,000 402,732,000 Provision for loss on disposition of businesses held for sale (Note 4) -- 30,824,000 -- Interest expense, net 1,797,000 3,088,000 1,134,000 - ----------------------------------------------------------------------------------------------------------------------------------- 402,246,000 676,189,000 687,204,000 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and extraordinary gain (60,931,000) (131,284,000) 25,409,000 Provision (benefit) for income taxes (Notes 7 and 9) (20,717,000) (46,475,000) 9,503,000 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before extraordinary gain (40,214,000) (84,809,000) 15,906,000 - ----------------------------------------------------------------------------------------------------------------------------------- Loss from discontinued operations (Note 3): Loss from operations, net of income taxes -- -- (1,346,000) Provision for loss on disposal of discontinued operations, net of income tax benefit -- (15,615,000) (35,678,000) - ----------------------------------------------------------------------------------------------------------------------------------- -- (15,615,000) (37,024,000) - ----------------------------------------------------------------------------------------------------------------------------------- Loss before extraordinary gain (40,214,000) (100,424,000) (21,118,000) Extraordinary gain, net of income taxes of $1,313,000 (Note 6) -- -- 2,198,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net loss ($40,214,000) ($100,424,000) ($18,920,000) - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share (Note 1): Income (loss) from continuing operations before extraordinary gain Primary ($0.81) ($1.72) $0.32 Fully diluted ($0.81) ($1.72) $0.32 Loss before extraordinary gain Primary ($0.81) ($2.04) ($0.42) Fully diluted ($0.81) ($2.04) ($0.42) Net loss Primary ($0.81) ($2.04) ($0.38) Fully diluted ($0.81) ($2.04) ($0.38) - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares 49,976,895 49,643,316 50,381,718 - -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 29 30 CML Group, Inc. and Subsidiaries Consolidated Balance Sheets
July 31, - --------------------------------------------------------------------------------------------------------------------------- Assets 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 4,359,000 $ 17,673,000 Accounts receivable - trade, less allowance for doubtful accounts of $2,706,000 in 1997 and $3,488,000 in 1996 8,151,000 10,570,000 Refundable income taxes (Note 7) -- 53,874,000 Deferred income taxes (Notes 1, 7 and 9) 3,903,000 6,102,000 Inventories (Note 1): Raw materials 1,971,000 2,742,000 Work in process 836,000 1,875,000 Finished goods 31,115,000 25,817,000 - --------------------------------------------------------------------------------------------------------------------------- Total inventories 33,922,000 30,434,000 Other current assets (Note 1) 8,479,000 16,270,000 - --------------------------------------------------------------------------------------------------------------------------- Total current assets 58,814,000 134,923,000 - --------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment (Notes 1 and 9): Land and buildings 19,404,000 20,071,000 Machinery and equipment 45,257,000 43,739,000 Leasehold improvements 30,020,000 31,628,000 - --------------------------------------------------------------------------------------------------------------------------- 94,681,000 95,438,000 Less accumulated depreciation 46,223,000 37,279,000 - --------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 48,458,000 58,159,000 Goodwill (Note 1) 8,546,000 8,782,000 Deferred income taxes (Notes 1, 7 and 9) 24,412,000 5,295,000 Other assets 6,106,000 6,192,000 - --------------------------------------------------------------------------------------------------------------------------- $146,336,000 $213,351,000 ===========================================================================================================================
See Notes to Consolidated Financial Statements. 30 31 CML Group, Inc. and Subsidiaries Consolidated Balance Sheets
July 31, - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Current liabilities: Current portion of long-term debt (Note 5) $ 35,000 $ 49,000 Accounts payable 10,839,000 23,582,000 Accrued compensation 4,339,000 6,385,000 Accrued advertising 1,514,000 8,260,000 Accrued insurance 4,544,000 5,706,000 Accrued lease termination costs 2,587,000 5,760,000 Other accrued expenses 25,261,000 29,018,000 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 49,119,000 78,760,000 - --------------------------------------------------------------------------------------------------------------------------- Noncurrent liabilities: Long-term debt (Note 5) 245,000 276,000 Convertible subordinated debentures (Note 6) 41,593,000 41,593,000 Other noncurrent liabilities (Note 9) 9,651,000 6,925,000 - --------------------------------------------------------------------------------------------------------------------------- Total noncurrent liabilities 51,489,000 48,794,000 - --------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note 9) Stockholders' equity (Notes 1, 8 and 10): Common stock, par value $.10 per share Authorized - 120,000,000 shares Issued - 52,738,268 shares in 1997 and 52,623,704 shares in 1996 5,274,000 5,262,000 Additional paid-in capital 80,654,000 81,082,000 Retained earnings (deficit) (3,642,000) 37,066,000 - --------------------------------------------------------------------------------------------------------------------------- 82,286,000 123,410,000 Less treasury stock, at cost, 2,901,401 shares in 1997 and 2,963,433 shares in 1996 36,558,000 37,613,000 - --------------------------------------------------------------------------------------------------------------------------- 45,728,000 85,797,000 - --------------------------------------------------------------------------------------------------------------------------- $146,336,000 $213,351,000 ===========================================================================================================================
See Notes to Consolidated Financial Statements. 31 32 CML Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year Ended July 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss ($ 40,214,000) ($100,424,000) ($ 18,920,000) - ---------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Gain on acquisition of convertible subordinated debentures -- -- (3,511,000) Depreciation and amortization 14,830,000 28,738,000 30,723,000 Provision for loss on disposition of businesses held for sale -- 30,824,000 -- Provision for loss on disposal of discontinued operations -- 24,023,000 40,988,000 Royalty settlement -- 1,367,000 -- Loss on disposal of property, plant and equipment 1,800,000 2,465,000 4,475,000 Changes in assets and liabilities: Accounts receivable - trade 2,419,000 35,663,000 (10,865,000) Refundable income taxes 53,874,000 (53,874,000) -- Inventories (3,488,000) 3,864,000 (3,759,000) Other current assets 1,345,000 19,955,000 (5,391,000) Deferred income taxes (16,918,000) 2,135,000 (1,054,000) Accounts payable and accrued expenses (29,627,000) 6,470,000 (410,000) Accrued income taxes -- (1,833,000) (572,000) Other assets and noncurrent liabilities 2,706,000 179,000 (1,149,000) - ---------------------------------------------------------------------------------------------------------------------------------- Total adjustments 26,941,000 99,976,000 49,475,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (13,273,000) (448,000) 30,555,000 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisitions of property, plant and equipment (5,931,000) (21,555,000) (36,291,000) Net proceeds from sale of discontinued operations 1,658,000 11,618,000 -- Net proceeds from sale of business held for sale 4,368,000 34,870,000 -- Reduction in notes receivable 41,000 52,000 -- - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 136,000 24,985,000 (36,291,000) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase in long-term debt -- 289,000 10,000,000 Reduction in long-term debt (45,000) (10,249,000) (1,233,000) Dividends paid (494,000) (4,189,000) (4,236,000) Exercise of stock options and employee stock purchase rights 362,000 242,000 1,000,000 Acquisition of convertible subordinated debentures -- -- (11,991,000) Acquisition of treasury shares -- (1,295,000) (8,395,000) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (177,000) (15,202,000) (14,855,000) - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (13,314,000) 9,335,000 (20,591,000) Cash and cash equivalents at beginning of year 17,673,000 8,338,000 28,929,000 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 4,359,000 $ 17,673,000 $ 8,338,000 - ---------------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $2,579,000 $ 3,520,000 $ 3,302,000 - ---------------------------------------------------------------------------------------------------------------------------------- Income taxes $444,000 $ 1,317,000 $17,580,000 - ----------------------------------------------------------------------------------------------------------------------------------
The Company did not record any tax benefits resulting from the exercise of stock options in fiscal 1997 and recorded tax benefits of $59,000 and $91,000 during fiscal 1996 and 1995, respectively. See Notes to Consolidated Financial Statements. 32 33 CML Group, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity
Common Stock Retained Treasury Stock ----------------------- Additional Earnings ------------------- Shares Par Value Paid-in-Capital (Deficit) Shares Cost - ---------------------------------------------------------------------------------------------------------------------------------- Balance, August 1, 1994 51,851,180 $5,185,000 $78,736,000 $163,825,000 1,865,941 $28,509,000 Exercise of stock options 172,470 17,000 645,000 -- -- -- Employee stock purchase plan sales 53,024 5,000 333,000 -- -- -- Tax benefit from exercise of stock options -- -- 91,000 -- -- -- Acquisition of treasury shares -- -- -- -- 931,850 8,395,000 Cash dividends ($0.09 per share) -- -- -- (4,461,000) -- -- Net loss -- -- -- (18,920,000) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Balance, July 31, 1995 52,076,674 5,207,000 79,805,000 140,444,000 2,797,791 36,904,000 Exercise of stock options 102,360 10,000 311,000 -- 38,857 204,000 Employee stock purchase plan sales & benefit plan contributions 91,729 9,000 (425,000) -- (62,215) (790,000) Royalty settlement 352,941 36,000 1,332,000 -- -- -- Tax benefit from exercise of stock options -- -- 59,000 -- -- -- Acquisition of treasury shares -- -- -- -- 189,000 1,295,000 Cash dividends ($0.06 per share) -- -- -- (2,954,000) -- -- Net loss -- -- -- (100,424,000) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Balance, July 31, 1996 52,623,704 5,262,000 81,082,000 37,066,000 2,963,433 37,613,000 Exercise of stock options 138,960 14,000 366,000 -- 29,333 99,000 Employee stock purchase plan sales & benefit plan contributions (24,396) (2,000) (794,000) -- (91,365) (1,154,000) Cash dividends ($0.01 per share) -- -- -- (494,000) -- -- Net loss -- -- -- (40,214,000) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Balance, July 31, 1997 52,738,268 $5,274,000 $80,654,000 ($3,642,000) 2,901,401 $36,558,000 ==================================================================================================================================
See Notes to Consolidated Financial Statements. 33 34 CML Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies Basis of Consolidation The consolidated financial statements include the accounts of CML Group, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany transactions and balances are eliminated. Cash Equivalents The Company considers all highly liquid debt instruments with purchased remaining maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of money market mutual funds. Inventories Inventories are stated at the lower of cost or market with cost being determined by either the first-in, first-out or average cost methods. Direct Response and Catalog Costs Costs of direct response and catalogs are amortized in proportion to the sales they generate over periods not exceeding three months and six months, respectively. Direct response and catalog costs are included in other current assets. Direct response advertising expenses of the Company were $72,149,000, $113,213,000 and $133,456,000 in fiscal 1997, 1996 and 1995, respectively. Property, Plant and Equipment Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives which range from three to forty years or over the terms of the related leases, if such periods are shorter. Goodwill Goodwill is amortized on a straight-line basis over forty years. On an annual basis, the Company reviews the carrying value of goodwill against projections of undiscounted cash flows to evaluate the propriety of its carrying value and amortization period. Accumulated amortization was $966,000 at July 31, 1997 and $730,000 at July 31, 1996. The Company wrote off the goodwill and accumulated amortization relating to The Nature Company and Britches of Georgetowne ("Britches") in fiscal 1996 and 1995 in connection with their respective dispositions. Income Taxes Deferred income taxes reflect the tax effects of temporary differences between financial reporting and income tax reporting which result principally from the valuation of finished goods inventories, the treatment of prepaid and accrued expenses, net operating losses and depreciation methods. Earnings (Loss) Per Share Primary earnings (loss) per share are calculated using the weighted average number of common and common equivalent shares outstanding during the year. Fully diluted earnings (loss) per share assume that the convertible subordinated debentures were converted at the beginning of the year and net income (loss) was adjusted for the resultant reduction in interest costs, net of tax. New Accounting Standards The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," in February 1997 and SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in June 1997. The Company will adopt these statements in fiscal 1998 but does not expect them to have a material effect on reported earnings per share or the consolidated financial statements. 34 35 The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in fiscal 1997. Adoption of SFAS No. 121 did not have a material effect on the Company's consolidated financial statements. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to disclose, if material, the pro forma impact on fiscal 1997 and 1996 earnings and earnings per share from application of the fair value method of calculating employee stock-based compensation. The pro forma impact was not material. The Company continues to measure employee stock-based compensation in its consolidated financial statements according to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS No. 123. Use of Estimates 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. Reclassifications Certain fiscal 1996 and 1995 amounts have been reclassified to conform to the fiscal 1997 presentation. Note 2 - Management's Plan During fiscal 1997 and fiscal 1996, the Company incurred losses from continuing operations of $40.2 million and $84.8 million, respectively. The fiscal 1997 loss was primarily due to the operating loss at NordicTrack resulting from the significant decrease in sales of aerobic exercise products including cross-country skiers, non-motorized treadmills and riders, partially offset by lower operating costs. The loss reported for fiscal 1996 was primarily attributable to operating losses incurred by The Nature Company and Hear Music before those subsidiaries were sold, the write-down recorded in anticipation of the sale of The Nature Company and Hear Music and the operating loss incurred by NordicTrack due to a significant decrease in sales partially offset by lower operating costs. In addition, the Company is subject to certain contingent liabilities discussed in Note 9. The Company's fiscal 1998 financial performance primarily depends upon NordicTrack's ability to increase sales and control costs. In October 1997, NordicTrack introduced the Ellipse(TM), a new aerobic exercise product which utilizes a floating crank mechanism to provide a smooth, quiet elliptical motion. In addition, NordicTrack has announced plans to introduce two new anaerobic exercise products, a new spot-toning product and a re-designed line of motorized treadmills. It is anticipated that the new and re-designed products will result in higher sales at NordicTrack in fiscal 1998. In addition, a series of cost reduction programs were initiated in fiscal 1997 and 1996 which management believes will result in improved cost control in fiscal 1998 and beyond. The Company's future financial performance will also depend upon its ability to purchase goods and services on credit and to borrow funds under its revolving credit agreement. If necessary, the Company may elect to raise additional funds through the sale of assets or through public or private financing transactions or both. Ultimately, the Company's ability to meet its obligations as they come due depends upon the attainment of profitable operations, accessibility to credit to purchase goods and services, the successful introduction of new products and effective cost control programs. 35 36 Note 3 - Discontinued Operations On April 12, 1996, the Company sold the common stock of its Britches subsidiary for $13,400,000 in cash plus the assumption of certain liabilities. The Company recorded after tax provisions for loss on the disposal of Britches of $15,615,000 in fiscal 1996 and $35,678,000 in fiscal 1995. The respective income tax benefits recorded in conjunction with the provisions for loss on disposal were $8,408,000 and $5,310,000. Britches' net sales were $89,285,000 in fiscal 1996 and $127,034,000 in fiscal 1995. The loss from operations is shown net of an income tax benefit of $627,000 for fiscal 1995. Note 4 - Divestiture 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 fiscal 1996 is a pre-tax charge of $30,824,000 to write down the net assets of The Nature Company and Hear Music to estimated net realizable value and to accrue estimated lease termination and assignment costs and other transaction costs. The Nature Company and Hear Music had sales of $112,705,000 and $156,185,000 in fiscal 1996 and 1995, respectively, and pre-tax operating losses of $14,242,000 in fiscal 1996, excluding the $30,824,000 write-down recorded in anticipation of the sale of The Nature Company and Hear Music, and $14,161,000 in fiscal 1995. 36 37 On June 6, 1996, substantially all of the assets of The Nature Company were sold for $39,870,000 in cash (including $1,003,000 held in escrow at July 31, 1997) and the assumption of certain liabilities. On October 23, 1996, the Company sold substantially all of the assets of Hear Music for $371,000 in cash plus the assumption of certain liabilities. Note 5 - Long-Term Debt Long-term debt consisted of the following at July 31:
1997 1996 - ------------------------------------------------------------------------------------------------- Revolving credit loan $ -- $ -- Note payable 233,000 250,000 Obligations under capital leases (Note 9) 47,000 75,000 - ------------------------------------------------------------------------------------------------- 280,000 325,000 Less current portion 35,000 49,000 - ------------------------------------------------------------------------------------------------- Long-term debt $245,000 $276,000 =================================================================================================
Revolving Credit Agreement On April 17, 1996, the Company entered into a senior secured revolving credit agreement which was amended and restated on August 28, 1997. The amended agreement, which expires on April 15, 1999, provides for total borrowings and letters of credit of up to $40,000,000 based upon a percentage of eligible accounts receivable and inventories. The agreement also provides for an overadvance facility of up to $15,000,000 for a period of 90 consecutive days between September 1 and December 31 of each year. All loans outstanding under the agreement must be paid down for a period of 45 consecutive days between December 15 and July 31 of each year. The agreement is secured by the Company's assets and the shares and guarantees of the Company's subsidiaries and includes provisions which require the Company to meet specified levels of profitability and solvency. The Company also must meet certain financial covenants under the agreement in order to pay cash dividends. The agreement also provides for a reduction in the total commitment for net cash proceeds received from the sale of assets not in the ordinary course of business or the issuance of subordinated debt or equity securities. Advances outstanding under the agreement bear interest at 0.75% above the lender's "Base Rate", which approximates the lender's prime rate, or at 2.75% above the "Eurodollar Rate," except advances under the overadvance facility which bear interest at the Base Rate plus 2.00%. At July 31, 1997, the lender's Base Rate was 8.50%. The Company is required to pay a commitment fee of 0.50% of the unused commitment. The Company's borrowings under the agreement averaged $8,000 during fiscal 1997 with a maximum of $536,000 outstanding at any time. The average interest rate on advances outstanding during the year was 9.00%. At July 31, 1997, the Company had no loans outstanding under the agreement. Note Payable The note payable, which bears interest at 6.0%, is due in monthly installments of approximately $3,000 and matures on August 1, 2006. Product Financing Arrangements The Company has entered into two product financing arrangements, one in fiscal 1996 with limited recourse and the other in fiscal 1997 with full recourse. Under the arrangement with limited recourse, the Company assumes all risk of credit loss on bad debts between 4% and 8% of average receivables; at July 31, 1997 the receivable portfolio balance under this arrangement was $31,596,000. The Company is responsible for all bad debts under the financing arrangement with full recourse; the receivable portfolio balance under this arrangement was $2,937,000 at July 31, 1997. Both arrangements require the Company to pay the financing company, on a monthly basis, an amount equal to the difference between the average monthly high-grade commercial paper rate, which was 5.57% at July 31, 1997, and 5.75% on the average portfolio balance. The arrangement with limited recourse is a five year contract that may be terminated during the first three years upon six months notice. The arrangement with full recourse expires in November 1997. 37 38 Note 6 - Convertible Subordinated Debentures On January 20, 1993, the Company issued $57,500,000 of 5-1/2% convertible subordinated debentures due January 15, 2003. During fiscal 1995, the Company repurchased $15,907,000 principal amount of the debentures and recorded an extraordinary gain of $2,198,000, net of income taxes of $1,313,000. Interest on the debentures outstanding is payable semi-annually in arrears on January 15 and July 15 of each year. The debentures are convertible into shares of the Company's common stock at a conversion price of $25.917 per share, subject to adjustment under certain circumstances. The debentures are redeemable at the option of the Company, in whole or in part, at redemption prices which decrease from 101-1/2% for the 12 month period beginning January 15, 1997 to par as of January 15, 1998. The estimated fair value of the convertible subordinated debentures was approximately $30,155,000 at July 31, 1997 and at July 31, 1996, based upon quoted market prices. All other financial instruments are carried at amounts that approximate fair value. 38 39 Note 7 - Income Taxes The provision (benefit) for income taxes consists of the following:
Year Ended July 31, - ------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------- Current Federal $ 31,000 ($48,740,000) $9,311,000 State and foreign 106,000 143,000 1,856,000 - ------------------------------------------------------------------------------------------- 137,000 (48,597,000) 11,167,000 Deferred Federal (20,084,000) 778,000 (1,555,000) State and foreign (770,000) 1,344,000 (109,000) - ------------------------------------------------------------------------------------------- Total ($20,717,000) ($46,475,000) $9,503,000 =========================================================================================== Continuing operations ($20,717,000) ($46,475,000) $9,503,000 Discontinued operations -- (8,408,000) (5,937,000) Extraordinary gain (Note 6) -- -- 1,313,000 - ------------------------------------------------------------------------------------------- Total ($20,717,000) ($54,883,000) $4,879,000 ===========================================================================================
The sources of prepaid and deferred income taxes and the related tax effect are as follows:
July 31, - -------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------- Current Assets Inventories $ 2,343,000 $ 2,165,000 Depreciation and amortization -- 2,245,000 Compensation expenses 380,000 1,166,000 Occupancy expenses 335,000 2,152,000 Receivable reserves 853,000 2,174,000 Other 2,015,000 2,223,000 Less valuation allowance (1,134,000) (4,167,000) - -------------------------------------------------------------------------- 4,792,000 7,958,000 - -------------------------------------------------------------------------- Noncurrent Assets Depreciation and amortization 999,000 33,000 Net operating losses 27,221,000 2,041,000 Insurance expenses 1,554,000 1,911,000 Occupancy expenses 897,000 358,000 Alternative minimum tax credit 2,270,000 2,270,000 Other 20,000 3,704,000 Less valuation allowance (7,095,000) (3,616,000) - -------------------------------------------------------------------------- 25,866,000 6,701,000 - -------------------------------------------------------------------------- Total assets $30,658,000 $14,659,000 ========================================================================== Current Liabilities Catalog costs $ 494,000 $ 667,000 Advertising costs 234,000 955,000 Other 161,000 234,000 - -------------------------------------------------------------------------- 889,000 1,856,000 - -------------------------------------------------------------------------- Noncurrent Liabilities Goodwill 1,454,000 1,401,000 Other -- 5,000 - -------------------------------------------------------------------------- 1,454,000 1,406,000 - -------------------------------------------------------------------------- Total liabilities $ 2,343,000 $ 3,262,000 ========================================================================== Total net deferred taxes $28,315,000 $11,397,000 ==========================================================================
The valuation allowance increased by $446,000 during fiscal 1997 to $8,229,000 at July 31, 1997 primarily due to foreign related losses. The July 31, 1997 valuation allowance primarily relates to foreign net operating loss carryforwards that may not be realized and the alternative minimum tax credit. The valuation allowance at July 31, 1996 of $7,783,000 includes a net increase during fiscal 1996 of $4,261,000 primarily due to foreign losses and the alternative minimum tax credit. The July 31, 1996 valuation allowance primarily relates to foreign net 39 40 operating loss carryforwards that may not be realized and the alternative minimum tax credit. The valuation allowance at July 31, 1995 of $3,522,000 includes a net increase during fiscal 1995 of $518,000 primarily due to foreign losses. The July 31, 1995 valuation allowance primarily relates to future deductible amounts of a capital nature and net operating loss carryforwards that may not be realized. Net operating loss carryforwards begin expiring in 2000. A reconciliation of the statutory federal income tax rate to the effective tax rate for continuing operations is as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------- Statutory federal income tax rate (34.0%) (35.0%) 35.0% State and foreign income taxes net of federal tax effect 0.2 (0.5) 5.1 Amortization of goodwill -- -- 0.2 Benefit of foreign sales corporation (0.1) (0.2) (1.0) Research and development credits -- -- (0.8) Other (0.1) 0.3 (1.1) - ------------------------------------------------------------------------------------------- Effective tax rate (34.0%) (35.4%) 37.4% ===========================================================================================
Note 8 - Stock Options, Stock Purchase Plans and Employee Benefit Plan Stock Option Plans At July 31, 1997, there were 571,518 and 2,663,650 shares reserved for issuance pursuant to the Company's 1982 and 1991 Stock Option Plans, respectively. The terms of both Plans generally provide for options to be granted at fair market value as of the date of grant for a term of no longer than ten years. The options generally become exercisable over the first four years. At July 31, 1997, there were 54,000 and 250,000 shares reserved for issuance pursuant to the Company's 1993 and 1996 Director Option Plans, respectively. The terms of both Plans generally provide for options to be granted to non-employee directors at fair market value as of the date of grant for a term of ten years. The options vest in three equal annual installments beginning on the first anniversary of the date of grant. Combined activity under the Company's option plans is summarized as follows:
Outstanding Options Exercisable Options ------------------------------ --------------------------- Weighted Average Weighted Average Number Exercise Price Number Exercise Price Balance at August 1, 1994 2,006,093 $ 9.45 Granted 392,472 7.94 Exercised (172,470) 3.84 Terminated (187,900) 16.66 - ---------------------------------------------------------------------------------------------- Balance at July 31, 1995 2,038,195 $ 8.97 1,359,209 $7.39 Granted 553,728 5.03 Exercised (102,360) 3.14 Terminated (212,160) 13.72 - ---------------------------------------------------------------------------------------------- Balance at July 31, 1996 2,277,403 $ 7.83 1,422,192 $7.91 Granted 584,000 3.53 Exercised (138,960) 2.74 Terminated (385,475) 9.45 - ---------------------------------------------------------------------------------------------- Balance at July 31, 1997 2,336,968 $ 6.79 1,438,088 $8.01 ==============================================================================================
Outstanding options at July 31, 1997 with exercise prices under $10.00 consisted of 2,010,468 options with a weighted average exercise price of $5.03 and a weighted average remaining life of 4.7 years, of which 1,126,238 were exercisable. The remaining 326,500 outstanding options at July 31, 1997 had exercise prices between $10.00 and $30.00 with a weighted average exercise price of $17.62 and a weighted average remaining life of 5.7 years, of which 311,850 were exercisable at July 31, 1997. There were 791,228 outstanding options and 545,657 40 41 exercisable options at July 31, 1997 with exercise prices at or below the July 31, 1997 closing stock price of $3.56. Employee Stock Purchase Plans The Company's 1996 Employee Stock Purchase Plan authorizes the issuance of 975,000 shares in three annual offerings of 325,000 shares, plus the shares not purchased in prior offerings. Under the second offering, which ends June 14, 1998, 340 employees have elected to receive 391,985 shares. Under the first offering, which ended June 14, 1997, 37,819 shares were issued to employees at a price of $2.13 per share. The Company's 1993 Employee Stock Purchase Plan authorized the issuance of 900,000 shares in three annual offerings ending June 14, 1994, 1995 and 1996. The first, second and third offerings resulted in the issuance of 51,972, 53,024 and 29,514 shares to 595, 290 and 79 employees at a price of $11.90, $6.38 and $4.25 per share, respectively. Employee Benefit Plan The Company maintains a defined contribution benefit plan covering substantially all of its employees. The Company makes annual contributions to the plan based on a percentage of employee compensation as provided by the terms of the plan. Contributions by the Company to the plan charged to operations in fiscal 1997, 1996 and 1995 were $501,000, $1,010,000 and $2,113,000, respectively. Note 9 - Commitments and Contingencies Leases The Company leases certain manufacturing and distribution facilities, retail space and vehicles and equipment under agreements expiring over the next 15 years. Most of the leases for retail space provide for renewal options, contain normal escalation clauses and require the Company to pay real estate taxes and other expenses. Capital leases, which consist of vehicles included in machinery and equipment in the consolidated financial statements, are as follows:
July 31, - -------------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------- Machinery and equipment $73,000 $147,000 Less accumulated amortization 41,000 95,000 - -------------------------------------------------------------------------------------------- Machinery and equipment, net $32,000 $ 52,000 ============================================================================================
Future minimum lease payments under leases that have initial or remaining noncancelable lease terms in excess of one year at July 31, 1997 are as follows:
Capital Operating Leases Leases - ------------------------------------------------------------------------------------------- Year ending July 31: 1998 $20,000 $13,440,000 1999 34,000 11,829,000 2000 -- 9,836,000 2001 -- 8,009,000 2002 -- 6,512,000 Thereafter -- 16,190,000 - ------------------------------------------------------------------------------------------- Total minimum lease payments 54,000 65,816,000 Less portion representing interest 7,000 -- - ------------------------------------------------------------------------------------------- $47,000 $65,816,000 - -------------------------------------------------------------------------------------------
The total minimum payments required under operating leases do not include contingent rentals which may be paid under certain store leases on the basis of a percentage of sales in excess of stipulated amounts. The total amount of rentals charged to operations in fiscal 1997, 1996 and 1995 was $25,633,000, $53,616,000 and $47,415,000, respectively. Contingent rentals were approximately $500,000 in fiscal 1997, $3,317,000 in fiscal 1996 and $5,406,000 in fiscal 1995. Included in other noncurrent liabilities at July 31, 1997 and 1996 were store construction 41 42 credits of $1,387,000 and $1,535,000, respectively, and deferred rent liabilities of $366,000 and $282,000, respectively. 42 43 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 named plaintiffs, Elissa Crespi and John Lucien Ware, Jr., allege in the Consolidated Complaint 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. They 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. NordicTrack filed a motion for transfer of venue to the United States District Court for the District of Minnesota, which was allowed in early 1997. On September 2, 1997, the named plaintiffs filed a motion to remand the case to New York State Court, which NordicTrack intends to oppose. The parties have conducted some discovery. While NordicTrack believes it has meritorious defenses to the Consolidated Complaint and intends to vigorously defend against the allegations, this lawsuit is still in an early stage and the Company is unable to determine the likelihood and possible impact on the Company's consolidated financial condition or results of operations of an unfavorable outcome. NordicTrack is the defendant in a lawsuit in the United States District Court for the District of Minnesota which commenced on August 12, 1996. In the action, the plaintiff, Precise Exercise Equipment ("Precise"), alleged that NordicTrack misappropriated trade secrets regarding Precise's abdominal exercise product and further breached a noncompetition agreement. While NordicTrack is vigorously defending against the allegations and believes it has meritorious defenses to Precise's claims on the contract, at this stage of the lawsuit the Company is unable to determine the likelihood and possible impact on the Company's consolidated financial condition or results of operations of unfavorable outcomes. In a complaint dated September 30, 1997, filed by Precor Incorporated ("Precor") in the United States District Court for the Western District of Washington at Seattle, Precor alleged that the manufacture, offering for sale and sale by NordicTrack of its exercisers marketed under the Ellipse(TM) trade mark infringe a United States patent which Precor has licensed from the inventor, Larry Miller (the "Miller Patent"). The technology used in NordicTrack's Ellipse(TM) exerciser is licensed by NordicTrack from a third party and the Company believes that NordicTrack's products do not infringe the Miller Patent. While NordicTrack believes it has meritorious defenses to the complaint and intends to vigorously defend against the allegations, this lawsuit is in its earliest 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. 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 consolidated 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 $7,276,000. 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 43 44 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 $1,415,000 for the removal phase of the site cleanup, which has now been completed. The EPA had estimated that the removal costs would exceed $3,000,000, 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 $4,020,000. 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 $2,300,000. 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 consolidated 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 share of waste shipped to that site at less than two-tenths of one percent. The Company and more than 200 other potentially responsible parties have executed administrative orders pursuant to which they agreed to perform two non-time critical removal actions and to complete the remedial investigation and feasibility study commenced by the EPA. The Company has contributed $11,000 to the costs of the removal actions and the remedial investigation and feasibility study and expects to contribute at least $11,000 more to those costs over time. Because complete cleanup cost estimates for the site are not yet available, an accurate assessment of the Company's likely range 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. The IRS has indicated that it intends to mail an official assessment notice shortly proposing 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 of $43,000,000 made to the former owners of NordicTrack (acquired in June 1986) pursuant to their employment contracts; and (ii) incentive compensation payments made to the former owners of Britches of Georgetowne (acquired in August 1983 and sold in April 1996) pursuant to the terms of an earnout agreement and the valuation of certain assets acquired in connection with the acquisition of Britches of Georgetowne in the amount of $8,200,000. The net federal tax due relating to the proposed adjustments approximates $16,200,000, excluding interest. The incentive compensation payments to the former owners of NordicTrack were attributable to substantial increases in sales and profits at NordicTrack during the years under examination. 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 consolidated 44 45 operating results for the period in which such issues are finally resolved and would also have a material adverse effect on the Company's consolidated financial condition. As of July 31, 1997, the Company had net deferred tax assets of $28,315,000 (Note 7). 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. Letters of Credit At July 31, 1997, the Company was contingently liable for outstanding letters of credit in the amount of $6,174,000. Note 10 - Preferred Stock Rights and Preference Stock Preferred Stock Rights On June 22, 1988, the Company's Board of Directors declared a dividend of one-sixth of a preferred stock purchase right for each share of common stock outstanding at the close of business on July 22, 1988. Under certain circumstances, a right may be exercised to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at an exercise price of $92.00. The rights become exercisable only if an entity has acquired 20% or more of the Company's common stock, or announces an offer which would result in such entity acquiring 30% or more of the Company's common stock. After the rights become exercisable, if the Company is a party to certain merger or business combination transactions or transfers 50% or more of its assets or earnings power, or if the acquirer engages in certain self-dealing transactions, each right not owned by a 20% or more stockholder enables its holder to purchase for $92.00 that number of shares of common stock of the acquiring or surviving entity (or of the Company in certain instances) which equals the exercise price of the right divided by one-half of the current market price of the common stock of the acquiring or surviving entity (or of the Company), as applicable, at the date of the occurrence of the event. The rights expire July 22, 1998 and may be redeemed by the Company at $.02 per right in certain circumstances. Preference Stock The Company has 2,000,000 shares, $.10 par value, of preference stock authorized, none of which was issued and outstanding at July 31, 1997. 45 46 Note 11 - Industry Segments The Company operates in two industry segments, NordicTrack and Smith & Hawken. NordicTrack sells physical fitness exercise products. The Smith & Hawken segment currently includes only Smith & Hawken which sells gardening related products. Prior to April 28, 1996, the Smith & Hawken segment included The Nature Company and Hear Music, in addition to Smith & Hawken, and sold nature, music and gardening related items. Britches of Georgetowne is treated as a discontinued operation in the following industry segment information and in the accompanying consolidated financial statements.
Year Ended July 31, - ------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------- Net Sales: NordicTrack $ 267,740,000 $ 368,151,000 $ 504,105,000 Smith & Hawken 73,575,000 176,754,000 208,508,000 - ------------------------------------------------------------------------------------------- $ 341,315,000 $ 544,905,000 $ 712,613,000 =========================================================================================== Operating Income (Loss): NordicTrack ($ 58,641,000) ($ 72,609,000) $ 46,284,000 Smith & Hawken (Note 4) 2,008,000 (47,691,000) (13,224,000) - ------------------------------------------------------------------------------------------- (56,633,000) (120,300,000) 33,060,000 Interest, Corporate and Other Expenses (4,298,000) (10,984,000) (7,651,000) - -------------------------------------------------------------------------------------------- ($ 60,931,000) ($131,284,000) $ 25,409,000 =========================================================================================== Identifiable Assets at July 31: NordicTrack $ 88,294,000 $ 138,431,000 $ 137,113,000 Smith & Hawken 43,744,000 45,898,000 131,653,000 Discontinued Operations -- -- 34,314,000 Corporate and Other 14,298,000 29,022,000 37,001,000 - ------------------------------------------------------------------------------------------- $ 146,336,000 $ 213,351,000 $ 340,081,000 =========================================================================================== Depreciation and Amortization: NordicTrack $ 11,277,000 $ 11,369,000 $ 9,949,000 Smith & Hawken 2,800,000 12,412,000 12,879,000 Discontinued Operations -- 4,454,000 7,316,000 Corporate and Other 753,000 503,000 579,000 - ------------------------------------------------------------------------------------------- $ 14,830,000 $ 28,738,000 $ 30,723,000 =========================================================================================== Capital Expenditures: NordicTrack $ 4,523,000 $ 7,551,000 $ 11,941,000 Smith & Hawken 1,403,000 12,459,000 16,178,000 Discontinued Operations -- 1,536,000 8,079,000 Corporate and Other 5,000 9,000 93,000 - ------------------------------------------------------------------------------------------- $ 5,931,000 $ 21,555,000 $ 36,291,000 ===========================================================================================
46 47 Schedule II CML GROUP, INC. and SUBSIDIARIES VALUATION and QUALIFYING ACCOUNTS
Balance at Charged Balance Beginning to Costs at End Description of Year and Expenses Deductions of Year ----------- ---------- ------------ ---------- ------- Allowance for Doubtful Accounts Receivable: Year Ended July 31, 1995 $1,402,000 $6,734,000 $5,995,000 $2,141,000 Year Ended July 31, 1996 2,141,000 4,652,000 3,305,000 3,488,000 Year Ended July 31, 1997 3,488,000 1,553,000 2,335,000 2,706,000 Allowance for Doubtful Notes Receivable: Year Ended July 31, 1995 $54,000 $ --- $45,000 $9,000 Year Ended July 31, 1996 9,000 --- --- 9,000 Year Ended July 31, 1997 9,000 --- 3,000 6,000 Accrual for Loss on Disposals: Year Ended July 31, 1995 $4,489,000 $40,988,000 $39,201,000 $6,276,000 Year Ended July 31, 1996 6,276,000 54,847,000 58,416,000 2,707,000 Year Ended July 31, 1997 2,707,000 --- 2,707,000 --- Income Tax Valuation Allowance: Year Ended July 31, 1995 $3,004,000 $ 518,000 $ --- $3,522,000 Year Ended July 31, 1996 3,522,000 4,261,000 --- 7,783,000 Year Ended July 31, 1997 7,783,000 446,000 --- 8,229,000
47 48 EXHIBIT INDEX
Page No. -------- 2(a) -- Stock Purchase Agreement dated as of April 11, 1996 among Britches of Georgetowne, Inc., the Company, Britches Acquisition Corp. and Damrak Company Limited is incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed April 29, 1996. -- 2(b) -- Asset Purchase and Sale Agreement dated as of June 6, 1996 by and among the Company, The Nature Company, The Nature Company International, Inc. and Nordic Advantage of Ontario, Discovery Communications, Inc. and The Discovery Channel Store, Inc. is incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed June 21, 1996. -- 3(a) -- Restated Certificate of Incorporation, as amended, of the Company is incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-8 filed December 11, 1992 (File No. 33-55660). -- 3(b) -- By-Laws, as amended, of the Company are incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-8 filed January 23, 1992 (File No. 33-45073). -- 4(a) -- Specimen certificate for shares of Common Stock of the Company is incorporated herein by reference to Exhibit 4 to the Company's Registration Statement on Form S-1 (File No. 2-86828). -- 4(b) -- Form of Rights Certificate is incorporated herein by reference to Exhibit B to Exhibit 1 to the Company's Form 8-A filed July 13, 1988. -- 4(c) -- Rights Agreement, dated as of June 28, 1988, between the Company and The First National Bank of Boston is incorporated herein by reference to Exhibit 1 to the Company's Form 8-A filed July 13, 1988, as amended by the Company's Form 8 filed August 5, 1988. -- 4(d) -- Specimen certificates for the Company's 5-1/2% Convertible Subordinated Debentures Due 2003 are incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed March 16, 1993. --
48 49 Page No. -------- 4(e) -- Terms of the Company's 5-1/2% Convertible Subordinated Debentures Due 2003 are incorporated herein by reference to Exhibit A to Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q filed March 16, 1993. -- *10(a) -- 1982 Stock Option Plan, as amended, and Forms of Option Agreements are incorporated herein by reference to Exhibit 10(y) to the Company's Registration Statement on Form S-1 (File No. 2-86828). -- *10(b) -- Amendment to Section 18 of the 1982 Stock Option Plan, dated October 7, 1987, is incorporated herein by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K filed October 28, 1988. -- *10(c) -- Amendment to Section 5(a) of the 1982 Stock Option Plan, dated December 5, 1991, is incorporated herein by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K filed October 21, 1992, as amended by the Company's Form 8 filed October 28, 1992. -- 10(d) -- Revolving Credit Agreement dated as of April 17, 1996 and amended and restated as of August 28, 1997 among the Company, NordicTrack, Inc., Nordic Advantage, Inc. and Smith & Hawken, Ltd., as Borrowers, and The First National Bank of Boston and the other Lending Institutions listed on Schedule 1 thereto, as Lenders. -- *10(e) -- Amended and Restated Employment and Consulting Agreement, dated as of September 14, 1989, among the Company, P.S.I. NordicTrack, Inc. and Edward A. Pauls is incorporated herein by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K filed October 30, 1989. -- *10(f) -- Amended and Restated Employment and Consulting Agreement, dated as of September 14, 1989, among the Company, P.S.I. NordicTrack, Inc. and Florence Pauls is incorporated herein by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K filed October 30, 1989. --
49 50 Page No. -------- *10(g) -- 1987 Employees' Severance Benefit Plan, dated October 7, 1987, is incorporated herein by reference to Exhibit 10(bb) to the Company's Annual Report on Form 10-K filed October 28, 1988. -- *10(h) -- 1991 Stock Option Plan and Forms of Option Agreements are incorporated herein by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K filed October 21, 1992, as amended by the Company's Form 8 filed October 28, 1992. -- *10(i) -- Form of Split Dollar Life Insurance Policy for the Benefit of Certain Executive Officers is incorporated herein by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K filed October 21, 1992, as amended by the Company's Form 8 filed October 28, 1992. -- *10(j) -- 1993 Director Option Plan is incorporated herein by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K filed October 29, 1993. -- *10(k) -- 1993 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K filed October 29, 1993. -- 10(l) -- Subscription Agreement, dated as of January 12, 1993, among the Company, Lehman Brothers International (Europe), Deutsche Bank A.G. London, Lombard Odier International Underwriters, S.A., Swiss Bank Corporation and S.G. Warburg Securities is incorporated herein by reference to Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q filed March 16, 1993. -- 10(m) -- Fiscal Agency Agreement, dated as of January 20, 1993, between the Company and Chemical Bank is incorporated herein by reference to Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q filed March 16, 1993. -- 10(n) -- 1996 Director Option Plan is incorporated herein by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q filed March 12, 1996. -- 10(o) -- 1996 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q filed March 12, 1996. -- *10(p) -- Form of Agreement Concerning Qualified Termination --
50 51 Page No. -------- 11 -- Statement Regarding Computation of Fully Diluted Earnings Per Share. 52 21 -- Subsidiaries of the Registrant. 53 23 -- Consent of Deloitte & Touche LLP. 54 27 -- Financial Data Schedule. 55
* Management contract or compensatory plan or arrangement filed herewith in response to Item 14(a)(3) of the instructions to Form 10-K. 51 EX-10.(D) 2 REVOLVING CREDIT AGREEMENT 1 EXHIBIT 10(d) REVOLVING CREDIT AGREEMENT Dated as of April 17, 1996 and amended and restated as of August 28, 1997 among CML GROUP, INC., NORDICTRACK, INC., NORDIC ADVANTAGE, INC. AND SMITH & HAWKEN, LTD. AS BORROWERS BANKBOSTON, N.A. (F/K/A THE FIRST NATIONAL BANK OF BOSTON) AND THE OTHER LENDING INSTITUTIONS LISTED ON SCHEDULE 1 HERETO AS LENDERS and BANKBOSTON, N.A. (F/K/A THE FIRST NATIONAL BANK OF BOSTON), AS ADMINISTRATIVE AGENT 2 TABLE OF CONTENTS 1. DEFINITIONS AND RULES OF INTERPRETATION. ..............................2 1.1. Definitions. .................................................2 1.2. Rules of Interpretation. .....................................24 2. THE REVOLVING CREDIT FACILITIES. ......................................25 2.1. Commitment to Lend. ..........................................25 2.1.1. Commitment to Lend NordicTrack Loans. ...............25 2.1.2. Intentionally Omitted. ..............................25 2.1.3. Commitment to Lend S&H Loans. .......................25 2.1.4. Intentionally Omitted. ..............................26 2.1.5. Overadvance Facility..................................26 2.2. Commitment Fee. ..............................................27 2.3. Reallocation and Reduction of Total Commitment. ..............27 2.3.1. Reallocation of Total Commitment. ...................27 2.3.2. Reduction of Sub-Commitment. ........................28 2.3.3. Mandatory Reduction of Total Commitment. ............28 2.4. The Notes. ...................................................29 2.4.1. The NordicTrack Notes. ..............................29 2.4.2. Intentionally Omitted. ..............................29 2.4.3. The S&H Notes. ......................................29 2.4.4. Intentionally Omitted. ..............................30 2.5. Interest on Loans. ...........................................30 2.6. Requests for Loans. ..........................................30 2.6.1. Loan Requests. ......................................30 2.6.2. Daily Borrowings. ...................................31 2.7. Conversion Options. ..........................................31 2.7.1. Conversion to Different Type of Loan. ...............31 2.7.2. Continuation of Type of Loan. .......................32 2.7.3. Eurodollar Rate Loans. ..............................32 2.8. Settlement; Failure to Make Funds Available. .................33 2.8.1. Settlement and Funding Procedures. ..................33 2.8.2. Advances by Administrative Agent. ...................33 2.8.3. Failure to Make Funds Available. ....................34 2.9. Change in Borrowing Bases. ...................................34 3. REPAYMENT OF THE LOANS. ...............................................35 3.1. Maturity. ....................................................35 3.2. Mandatory Repayments of Loans. ...............................35 3.2.1. NordicTrack Loans. ..................................35 3.2.2. Intentionally Omitted. ..............................35 3.2.3. S&H Loans. ..........................................35 3.2.4. Intentionally Omitted. ..............................36 3.2.5. Annual Clean-up. ....................................36 3.3. Depository Arrangements. .....................................36 3.3.1. The Borrowers' Depository Arrangements. .............36 3 -ii- 3.3.2. CML's Depository Arrangements. ......................38 3.3.3. The Other Guarantors' Depository Arrangements. ......39 3.3.4. Fees and Expenses; Application of Payment. ..........40 3.4. Optional Repayments of Loans. ................................41 4. LETTERS OF CREDIT. ....................................................41 4.1. Letter of Credit Commitments...................................41 4.1.1. Commitment to Issue Letters of Credit. ..............41 4.1.2. Letter of Credit Applications. ......................42 4.1.3. Terms of Letters of Credit. .........................42 4.1.4. Reimbursement Obligations of Lenders. ...............42 4.1.5. Participations of Lenders. ..........................43 4.2. Reimbursement Obligation of CML and the Borrowers. ...........43 4.3. Letter of Credit Payments. ...................................44 4.4. Obligations Absolute. ........................................44 4.5. Reliance by Issuer. ..........................................45 4.6. Letter of Credit Fee. ........................................45 5. CERTAIN GENERAL PROVISIONS. ...........................................46 5.1. Closing Fee. .................................................46 5.2. Administrative Agent's Fee. ..................................46 5.3. Funds for Payments. ..........................................46 5.3.1. Payments to Administrative Agent. ...................46 5.3.2. No Offset, etc. .....................................46 5.4. Computations. ................................................47 5.5. Inability to Determine Eurodollar Rate. ......................47 5.6. Illegality. ..................................................47 5.7. Additional Costs, etc. .......................................48 5.8. Capital Adequacy. ............................................49 5.9. Certificate. .................................................50 5.10. Indemnity. ..................................................50 5.11. Interest After Default. .....................................50 5.11.1. Overdue Amounts. ...................................50 5.11.2. Amounts Not Overdue. ...............................51 6. COLLATERAL SECURITY AND GUARANTIES. ...................................51 6.1. Security of Borrowers. .......................................51 6.2. Guaranty, Foreign Guaranties and Security of Guarantors. .....51 7. GUARANTY. .............................................................51 7.1. Guaranty of Payment and Performance. .........................51 7.2. Guarantors' Agreement to Pay Enforcement Costs, etc. .........52 7.3. Waivers by the Guarantors; Lenders' Freedom to Act. ..........52 7.4. Unenforceability of Obligations Against Borrowers. ...........53 7.5. Subrogation; Subordination. ..................................53 7.5.1. Postponement of Rights Against Borrowers. ...........53 7.5.2. Subordination. ......................................54 7.5.3. Provisions Supplemental. ............................54 7.6. Security; Setoff. ............................................54 4 -iii- 7.7. Further Assurances. ..........................................55 7.8. Termination. .................................................55 7.9. Successors and Assigns. ......................................55 8. REPRESENTATIONS AND WARRANTIES. .......................................56 8.1. Corporate Authority. .........................................56 8.1.1. Incorporation; Good Standing. .......................56 8.1.2. Authorization. ......................................56 8.1.3. Enforceability. .....................................56 8.2. Governmental Approvals. ......................................57 8.3. Title to Properties; Leases. .................................57 8.4. Financial Statements and Projections. ........................57 8.4.1. Financial Statements. ...............................57 8.4.2. Projections. ........................................58 8.5. No Material Changes, etc.; Solvency. .........................58 8.5.1. Changes. ............................................58 8.5.2. Solvency. ...........................................58 8.6. Franchises, Patents, Copyrights, etc. ........................58 8.7. Litigation. ..................................................59 8.8. No Materially Adverse Contracts, etc. ........................59 8.9. Compliance with Other Instruments, Laws, etc. ................59 8.10. Tax Status. .................................................59 8.11. No Event of Default. ........................................60 8.12. Holding Company and Investment Company Acts. ................60 8.13. Absence of Financing Statements, etc. .......................60 8.14. Perfection of Security Interest. ............................60 8.15. Certain Affiliate Transactions. .............................60 8.16. Employee Benefit Plans. .....................................60 8.16.1. In General. ........................................61 8.16.2. Terminability of Welfare Plans. ....................61 8.16.3. Guaranteed Pension Plans. ..........................61 8.16.4. Multiemployer Plans. ...............................61 8.17. Regulations U, X and G. .....................................61 8.18. Environmental Compliance. ...................................62 8.19. Subsidiaries, etc. ..........................................63 8.20. Bank Accounts. ..............................................64 8.21. Chief Executive Offices. ....................................64 8.22. Fiscal Year. ................................................64 8.23. Disclosure ..................................................64 8.24. Insurance. ..................................................64 9. AFFIRMATIVE COVENANTS OF CML AND THE BORROWERS. .......................64 9.1. Punctual Payment. ............................................65 9.2. Maintenance of Office. .......................................65 9.3. Records and Accounts. ........................................65 9.4. Financial Statements, Certificates and Information. ..........65 9.5. Notices. .....................................................67 5 -iv- 9.5.1. Defaults. ...........................................67 9.5.2. Environmental Events. ...............................68 9.5.3. Notification of Claim against Collateral. ...........68 9.5.4. Notice of Litigation and Judgments. .................68 9.5.5. Notice of Tax Refunds. ..............................69 9.6. Corporate Existence; Maintenance of Properties. ..............69 9.7. Insurance. ...................................................69 9.8. Taxes. .......................................................70 9.9. Inspection of Properties and Books, etc. .....................70 9.9.1. General. ............................................70 9.9.2. Inventory Reports and Appraisals. ...................70 9.9.3. Commercial Finance Examinations. ....................71 9.9.4. Appraisals. .........................................71 9.9.5. Environmental Assessments. ..........................71 9.9.6. Communications with Accountants. ....................72 9.10. Compliance with Laws, Contracts, Licenses, and Permits. .....72 9.11. Inventory Restrictions. .....................................73 9.12. Use of Proceeds. ............................................73 9.13. Additional Mortgaged Property. ..............................73 9.14. Agency Account Agreements. ..................................73 9.15. Investments in Borrowers. ...................................73 9.16. Ownership of Subsidiaries. ..................................74 9.17. Private Label Credit Card Program. ..........................74 9.18. Collateral Notes. ...........................................74 9.19. Further Assurances; Additional Locations. ...................74 9.19.1. Further Assurances. ................................75 9.19.2. Additional Locations. ..............................75 10. CERTAIN NEGATIVE COVENANTS OF CML AND THE BORROWERS. .................75 10.1. Restrictions on Indebtedness. ...............................75 10.2. Restrictions on Liens. ......................................76 10.3. Restrictions on Investments. ................................78 10.4. Distributions and Restricted Payments. ......................79 10.4.1. Intercompany Distributions and Restricted Payments. .79 10.4.2. CML Distributions. .................................80 10.5. Merger, Consolidation and Disposition of Assets. ............81 10.5.1. Mergers and Acquisitions. ..........................81 10.5.2. Disposition of Assets. .............................81 10.6. Sale and Leaseback. .........................................82 10.7. Compliance with Environmental Laws. .........................82 10.8. Subordinated Debt. ..........................................82 10.9. Employee Benefit Plans. .....................................83 10.10. Bank Accounts. .............................................83 10.11. Transactions with Affiliates. ..............................83 10.12. Restrictive or Inconsistent Agreements. ....................84 6 -v- 10.13. Business Activities. .......................................84 10.14. Private Label Credit Card Programs. ........................84 11. FINANCIAL COVENANTS OF CML AND THE BORROWERS. ........................84 11.1. Minimum Quarterly Consolidated EBITDA. ......................85 11.2. Minimum Consolidated EBITDA to Interest Ratio. ..............85 11.3. Capital Expenditures. .......................................85 11.4. Total Liabilities to Tangible Net Worth Ratio. ..............86 11.5. Minimum Quarterly EBITDA (NordicTrack). .....................86 12. CLOSING CONDITIONS. ..................................................87 12.1. Loan Documents. .............................................87 12.2. Certified Copies of Charter Documents. ......................87 12.3. Corporate Action. ...........................................87 12.4. Incumbency Certificate. .....................................87 12.5. Validity of Liens. ..........................................87 12.6. Perfection Certificates and UCC Search Results. .............88 12.7. Appraisals; Taxes. ..........................................88 12.8. Title Insurance. ............................................88 12.9. Certificates of Insurance. ..................................88 12.10. Agency Account Agreements. .................................88 12.11. Borrowing Base Report. .....................................89 12.12. Accounts Receivable Aging Report. ..........................89 12.13. Hazardous Waste Assessments. ...............................89 12.14. Solvency Certificate. ......................................89 12.15. Opinion of Counsel. ........................................89 12.16. Payment of Fees. ...........................................90 12.17. Payoff Letter. .............................................90 12.18. Disbursement Instructions. .................................90 12.19. Updated Collateral Examinations. ...........................90 12.20. Landlord Lien Waivers. .....................................90 12.21. Borrowing Availability. ....................................91 13. CONDITIONS TO ALL BORROWINGS. ........................................91 13.1. Representations True; No Event of Default. ..................91 13.2. No Legal Impediment. ........................................91 13.3. Governmental Regulation. ....................................91 13.4. Proceedings and Documents. ..................................91 13.5. Borrowing Base Report. ......................................92 13.6. Borrowing Availability. .....................................92 14. EVENTS OF DEFAULT; ACCELERATION; ETC. ................................92 14.1. Events of Default and Acceleration. .........................92 14.2. Termination of Commitments. .................................95 14.3. Remedies. ...................................................96 14.4. Distribution of Collateral Proceeds. ........................96 15. SETOFF. ..............................................................97 16. THE ADMINISTRATIVE AGENT. ............................................98 16.1. Authorization. ..............................................98 7 -vi- 16.2. Employees and Agents. .......................................99 16.3. No Liability. ...............................................99 16.4. No Representations. .........................................99 16.5. Payments. ...................................................100 16.5.1. Payments to Administrative Agent. ..................100 16.5.2. Distribution by Administrative Agent. ..............100 16.5.3. Delinquent Lenders. ................................100 16.6. Holders of Notes. ...........................................101 16.7. Indemnity. ..................................................101 16.8. Administrative Agent as Lender. .............................101 16.9. Resignation. ................................................102 16.10. Notification of Defaults and Events of Default. ............102 16.11. Duties in the Case of Enforcement. .........................102 17. EXPENSES. ............................................................103 18. INDEMNIFICATION. .....................................................104 19. SURVIVAL OF COVENANTS, ETC. ..........................................105 20. ASSIGNMENT AND PARTICIPATION. ........................................105 20.1. Conditions to Assignment by Lenders. ........................105 20.2. Certain Representations and Warranties; Limitations; Covenants. .........................................................106 20.3. Register. ...................................................107 20.4. New Notes. ..................................................107 20.5. Participations. .............................................108 20.6. Disclosure. .................................................108 20.7. Assignee or Participant Affiliated with the Borrowers. ......108 20.8. Miscellaneous Assignment Provisions. ........................109 20.9. Assignment by Borrowers or Guarantors .......................109 21. NOTICES, ETC. ........................................................109 22. GOVERNING LAW. .......................................................110 23. HEADINGS. ............................................................111 24. COUNTERPARTS. ........................................................111 25. ENTIRE AGREEMENT, ETC. ...............................................111 26. WAIVER OF JURY TRIAL. ................................................111 27. CONSENTS, AMENDMENTS, WAIVERS, ETC. ..................................112 28. SEVERABILITY. ........................................................113 8 SCHEDULES AND EXHIBITS Schedule 1 Lenders and Commitments Schedule 2 Permitted Inventory Locations Schedule 8.3 Title to Properties; Leases Schedule 8.5 Distributions since Balance Sheet Date Schedule 8.7 Litigation Schedule 8.10 Tax Status Schedule 8.18 Environmental Matters Schedule 8.19 Subsidiaries; Joint Ventures Schedule 8.20 Bank Accounts Schedule 8.21 Chief Executive Offices Schedule 8.24 Insurance Schedule 10.1 Existing Indebtedness Schedule 10.2 Existing Liens Schedule 10.3 Existing Investments Schedule 10.6 Sale and Leasebacks Transactions Exhibit A-1 Form of NordicTrack Note Exhibit A-2 Form of S&H Note Exhibit B Form of Loan Request Exhibit C Form of Borrowing Base Report Exhibit D Form of Compliance Certificate Exhibit E Form of Agency Account Agreement Exhibit F Form of Landlord Waiver Exhibit G Form of Assignment and Acceptance Exhibit H-1 Form of Overadvance Reallocation Request Exhibit H-2 Form of Commitment Reallocation Request Exhibit I Form of Supplement to Schedule 2 9 REVOLVING CREDIT AGREEMENT This REVOLVING CREDIT AGREEMENT is made as of April 17, 1996 and restated as of August 28, 1997, by and among (a) CML GROUP, INC., a Delaware corporation ("CML"), (b) NORDICTRACK, INC., a Minnesota corporation ("NT"), NORDIC ADVANTAGE, INC., a Minnesota corporation ("NA" and, on a consolidated basis with NT, "NordicTrack"), and SMITH & HAWKEN, LTD., a Delaware corporation ("S&H") and, together with NordicTrack, the "Borrowers"), (c) BANKBOSTON, N.A (f/k/a The First National Bank of Boston), a national banking association, and the other lending institutions that may become Lenders hereunder, and (d) BANKBOSTON, N.A. (f/k/a the First National Bank of Boston), as administrative, collateral and documentation agent for the Lenders. RECITALS CML, the Borrowers, certain of their Subsidiaries, BKB (the "Existing Lender"), the Co-Agents (as defined in the Existing Credit Agreement) and the Administrative Agent are party to a Revolving Credit Agreement, dated as of April 17, 1996 (as amended, the "Existing Credit Agreement") pursuant to which the Existing Lender made Loans and issued Letters of Credit to the Borrowers (the "Existing Credit Extensions"). The Borrowers and CML have requested the Lenders and the Administrative Agent to amend and restate the Existing Credit Agreement in its entirety to, among other things, (a) reflect the removal of certain Subsidiaries of CML as Borrowers under the Existing Credit Agreement; (b) reflect the assignment of BankAmerica Business Credit, Inc.'s interest as a Lender to BKB and remove the role of and all references to the Co-Agents; (c) add an Overadvance facility; (d) revise the interest rate provisions applicable to the Loans; (e) change the numerical amounts (but not the tests) for certain of the financial covenants set forth in ss.11 of the Existing Credit Agreement; and (f) make certain other changes to the terms and provisions of the Existing Credit Agreement. The Lenders and the Administrative Agent are willing, on the terms set forth in this Agreement and subject to the conditions and in reliance on the representations set forth herein, to amend and restate the Existing Credit Agreement so as to accomplish the foregoing. 10 -2- Accordingly, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby agree that, from and after the Restatement Effective Date, the Existing Credit Agreement (including all the SCHEDULES and EXHIBITS thereto) is amended and restated in its entirety to read as set forth above and as follows (and, in the case of the SCHEDULES and EXHIBITS, in the forms attached hereto). 1. DEFINITIONS AND RULES OF INTERPRETATION. 1.1. DEFINITIONS. The following terms shall have the meanings set forth in this ss.1 or elsewhere in the provisions of this Credit Agreement referred to below: ACCOUNTS RECEIVABLE. All rights of any of the Borrowers to payment for goods sold, leased or otherwise marketed in the ordinary course of business and all rights of any of the Borrowers to payment for services rendered in the ordinary course of business and all sums of money or other proceeds due thereon pursuant to transactions with account debtors, except for that portion of the sum of money or other proceeds due thereon that relate to sales, use or property taxes in conjunction with such transactions, recorded on books of account in accordance with generally accepted accounting principles. ADMINISTRATIVE AGENT. BankBoston, N.A. (f/k/a The First National Bank of Boston) acting as administrative, collateral and documentation agent for the Lenders. ADMINISTRATIVE AGENT'S HEAD OFFICE. The Administrative Agent's head office located at 100 Federal Street, Boston, Massachusetts 02110, or at such other location as the Administrative Agent may designate from time to time. ADMINISTRATIVE AGENT'S SPECIAL COUNSEL. Bingham, Dana & Gould LLP or such other counsel as may be approved by the Administrative Agent. AFFILIATE. With respect to any Person (a) any Person which directly, or indirectly, controls or is controlled by, or is under common control with, the Person specified, or (b) any other Person who is a Relative, director, officer or general partner of such Person or of any Person described in clause (a). For purposes of this definition, control of a Person shall include the power, whether direct or indirect, (x) to vote five percent (5%) or more of the equity securities having ordinary voting power for the election of directors or other managers of such Person or (y) to direct or cause the direction, of the management and policies of such Person whether by contract or otherwise. AGENCY ACCOUNT AGREEMENTS. The several Agency Account Agreements in the form of EXHIBIT E hereto (or a form otherwise approved by the Administrative Agent in its sole discretion) entered into by any of the Borrowers, any of the Guarantors, the Administrative Agent and the Agency Account Institutions or other depository institutions satisfactory to the Administrative Agent. AGENCY ACCOUNT INSTITUTIONS. NorWest Bank Minnesota, N.A., Fifth Third Bank and any other financial institutions which receive deposits directly or indirectly (as a result of interim concentration of depository accounts), from an aggregate eight or more retail stores of the Borrowers and their Subsidiaries. 11 -3- AGENCY ACCOUNTS. The depository accounts maintained by the Borrowers and the Guarantors with the Agency Account Institutions or other depository institutions satisfactory to the Administrative Agent, the funds from which are periodically transferred to the applicable Concentration Account pursuant to the Agency Account Agreements. AGGREGATE BORROWING BASE. The sum of the NordicTrack Borrowing Base and the S&H Borrowing Base. AMENDMENT AGREEMENT. The Amendment Agreement, dated as of the Restatement Effective Date, among the parties to the Existing Credit Agreement. ASSIGNMENT AND ACCEPTANCE. See ss.20.1. BALANCE SHEET DATE. July 31, 1996, the date of the most recent audited financial statements of CML and its Subsidiaries. BASE RATE. The higher of (i) the annual rate of interest announced from time to time by BKB at its head office in Boston, Massachusetts, as its "base rate" and (ii) one-half of one percent (1/2%) above the Federal Funds Effective Rate. For the purposes of this definition, "Federal Funds Effective Rate" shall mean for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three funds brokers of recognized standing selected by the Administrative Agent. BASE RATE LOANS. Loans bearing interest calculated by reference to the Base Rate. BKB. BankBoston, N.A. (f/k/a The First National Bank of Boston), a national banking association, in its individual capacity. BORROWERS. As defined in the preamble hereto. BORROWING BASE. Collectively, the NordicTrack Borrowing Base, the S&H Borrowing Base and the Overadvance Borrowing Base. BORROWING BASE REPORT. A Borrowing Base Report signed by the chief financial officer of CML and in substantially the form of EXHIBIT C hereto. BUSINESS DAY. Any day on which banking institutions in Boston, Massachusetts, are open for the transaction of banking business and, in the case of Eurodollar Rate Loans, also a day which is a Eurodollar Business Day. CAPITAL ASSETS. Fixed assets, both tangible (such as land, buildings, fixtures, machinery and equipment) and intangible (such as patents, copyrights, trademarks, franchises and good will); PROVIDED that Capital Assets shall not include any item customarily charged directly to expense or depreciated over a useful life of twelve (12) months or less in accordance with generally accepted accounting principles. 12 -4- CAPITAL EXPENDITURES. Amounts paid or indebtedness incurred by any Person or any of its Subsidiaries in connection with the purchase or lease by any such Person or any of its Subsidiaries of Capital Assets that would be required to be capitalized and shown on the balance sheet of such Person in accordance with generally accepted accounting principles. CAPITALIZED LEASES. Leases under which CML or any of its Subsidiaries is the lessee or obligor, the discounted future rental payment obligations under which are required to be capitalized on the balance sheet of the lessee or obligor in accordance with generally accepted accounting principles. CERCLA. See ss.8.18. CITIBANK. Citibank, N.A., in its capacity as agent for the lenders under the Citibank Facility. CITIBANK FACILITY. The revolving credit facility among CML, certain lenders party thereto and Citibank as agent for such lenders. CLOSING DATE. The first date on which the conditions set forth in ss.12 have been satisfied and any Loans are to be made or any Letter of Credit is to be issued hereunder. CML. As defined in the preamble hereto. CODE. The Internal Revenue Code of 1986. COLLATERAL. All of the property, rights and interests of CML and its Subsidiaries that are or are intended to be subject to the security interests and mortgages created by the Security Documents. COLLATERAL NOTES. Any promissory notes issued by one or more of the Borrowers in favor of BKB as agent under such notes, executed and delivered pursuant to ss.9.20, and assigned to the Administrative Agent, each of which such notes shall be secured by one of the Mortgages. COMMITMENT. With respect to each Lender, the amount set forth on SCHEDULE 1 hereto as the amount of such Lender's commitment to make Loans to, and to participate in the issuance, extension and renewal of Letters of Credit for the account of, the Borrowers, as the same may be reduced from time to time; or if such commitment is terminated pursuant to the provisions hereof, zero. COMMITMENT PERCENTAGE. With respect to each Lender, the percentage set forth on SCHEDULE 1 hereto as such Lender's percentage of the aggregate Commitments of all of the Lenders. COMMITMENT REALLOCATION DATE. The date on which any reallocation of the Sub-Commitments among the Borrowers is made or is to be made by CML in accordance with ss.2.3.1. COMMITMENT REALLOCATION REQUEST. See ss.2.3.1. 13 -5- COMPLIANCE CERTIFICATE. See ss.9.4(d). CONCENTRATION ACCOUNT. With respect to any Borrower or any Guarantor, such Borrower's or such Guarantor's, as the case may be, depository account with BKB under the control of the Administrative Agent for the benefit of the Lenders and the Administrative Agent. CONSOLIDATED OR CONSOLIDATED. With reference to any term defined herein, shall mean that term as applied to the accounts of a Person and its Subsidiaries, consolidated in accordance with generally accepted accounting principles. CONSOLIDATED ADJUSTED NET INCOME. With respect to any Person and its Subsidiaries, for any period, an amount equal to consolidated net income for such period, after deduction of all expenses, taxes and other proper charges, determined in accordance with generally accepted accounting principles and after eliminating therefrom all extraordinary nonrecurring items of income including, without limitation (a) income from unusual transactions, (b) income from the sale of Capital Assets and (c) income from the write-up in the book value of any assets of such Person or its Subsidiaries; PROVIDED, HOWEVER, for the purposes of determining Consolidated Adjusted Net Income, it shall include the estimated deferred tax benefits for prior and current period losses which CML has been including since the Original Closing Date regardless of whether or not generally accepted accounting principles would permit such inclusion in the computation of Consolidated Adjusted Net Income. CONSOLIDATED EBITDA. With respect to any Person and its Subsidiaries, for any period, Consolidated Adjusted Net Income plus, to the extent deducted in determining Consolidated Adjusted Net Income, the sum of interest, taxes, depreciation and amortization of such Person and its Subsidiaries for such period on a consolidated basis, all determined in accordance with generally accepted accounting principles. CONSOLIDATED TANGIBLE NET WORTH. With respect to any Person, the excess of Consolidated Total Assets over Consolidated Total Liabilities, and less the sum of: (a) the total book value of all assets of such Person and its Subsidiaries properly classified as intangible assets under generally accepted accounting principles, including such items as good will, the purchase price of acquired assets in excess of the fair market value thereof, trademarks, trade names, service marks, brand names, copyrights, patents and licenses, and rights with respect to the foregoing; PLUS (b) all amounts representing any write-up in the book value of any assets of such Person or its Subsidiaries resulting from a revaluation thereof subsequent to the Balance Sheet Date; PLUS (c) to the extent otherwise includable in the computation of Consolidated Tangible Net Worth, any subscriptions receivable relating to capital stock. CONSOLIDATED TOTAL ASSETS. All assets of a Person and its Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles; PROVIDED, HOWEVER, for the purposes of determining Consolidated Total Assets, it shall include the 14 -6- estimated deferred tax benefits for prior and current period losses which CML has been including since the Original Closing Date regardless of whether or not generally accepted accounting principles would permit such inclusion in the computation of Consolidated Total Assets. CONSOLIDATED TOTAL INTEREST EXPENSE. With respect to any Person for any period, the aggregate amount of interest required to be paid or accrued by such Person and its Subsidiaries during such period on all Indebtedness of such Person and its Subsidiaries outstanding during all or any part of such period, whether such interest was or is required to be reflected as an item of expense or capitalized, including payments consisting of interest in respect of Capitalized Leases and including commitment fees, agency fees, facility fees, balance deficiency fees and similar fees or expenses in connection with the borrowing of money, PROVIDED that Consolidated Total Interest Expense shall not include amortization of fees and expenses paid in connection with the transactions contemplated by the Credit Agreement. CONSOLIDATED TOTAL LIABILITIES. All liabilities of a Person and its Subsidiaries determined on a consolidated basis that in accordance with generally accepted accounting principles should be classified upon the obligor's balance sheet as liabilities. CONTROLLED DISBURSEMENT ACCOUNT. With respect to any Borrower or CML, such Borrower's or CML's, as the case may be, controlled disbursement account with BKB, listed on SCHEDULE 8.20 hereto. CONVERSION REQUEST. A notice given by any of the Borrowers to the Administrative Agent of such Borrower's election to convert or continue a Loan in accordance with ss.2.7. COPYRIGHT MORTGAGE. The Memorandum of Copyrights, dated as of the Original Closing Date, made by the Borrowers and the Guarantors in favor of the Administrative Agent and in form and substance satisfactory to the Lenders and the Administrative Agent. CREDIT AGREEMENT. This Revolving Credit Agreement, including the Schedules and Exhibits hereto. DEFAULT. See ss.14.1. DELINQUENT LENDER. See ss.16.5.3. DETERMINED VALUE. At the relevant time of reference thereto, (a) with respect to Eligible Real Estate, the appraised fair market value thereof determined by reference to the most recent appraisal thereof pursuant to ss.9.9.4 and (b) with respect to Eligible Machinery and Equipment, the appraised value of such machinery and equipment on an orderly liquidation basis determined by reference to the most recent appraisal conducted pursuant to ss.9.9.4, in each case after deduction of any claims entitled to priority under applicable law over the security interest or mortgage of the Administrative Agent. DISTRIBUTION. The declaration or payment of any dividend on or in respect of any shares of any class of capital stock of a Person, other than dividends payable solely in shares of common stock or similar non-preferred equity interests of such Person; the purchase, redemption, or other retirement of any shares of any class of capital stock or other equity 15 -7- interests of a Person, directly or indirectly through a Subsidiary of such Person or otherwise; the return of capital by a Person to its shareholders or equity holders as such; or any other distribution on or in respect of any shares of any class of capital stock or other equity interest of such Person. DOLLARS or $. Dollars in lawful currency of the United States of America. DOMESTIC LENDING OFFICE. Initially, the office of each Lender designated as such in SCHEDULE 1 hereto; thereafter, such other office of such Lender, if any, located within the United States that will be making or maintaining Base Rate Loans. DRAWDOWN DATE. The date on which any Loan is made or is to be made, and the date on which any Loan is converted or continued in accordance with ss.2.7. ELIGIBLE ACCOUNTS RECEIVABLE. The aggregate of the unpaid portions of Accounts Receivable (net of any credits, rebates, offsets, holdbacks or other adjustments or commissions payable to third parties that are adjustments to such Accounts Receivable) (i) that such Borrower reasonably and in good faith determines to be collectible; (ii) that are with account debtors that (A) are not Affiliates of CML or any of its Subsidiaries, (B) purchased the goods or services giving rise to the relevant Account Receivable in an arm's length transaction, (C) are not insolvent or the subject of any case or proceeding, whether voluntary or involuntary, under any bankruptcy, reorganization, arrangement, insolvency, adjustment of debt, dissolution, liquidation or similar law of any jurisdiction and (D) are, in the Administrative Agent's reasonable judgment, creditworthy; (iii) that are in payment of obligations that have been fully performed and are not subject to dispute or any other similar claims that would reduce the cash amount payable therefor; (iv) that are not subject to any pledge, restriction, security interest or other lien or encumbrance other than those created by the Loan Documents; (v) in which the Administrative Agent has a valid and perfected first priority security interest; (vi) that are not outstanding for more than (A) sixty (60) days past the date payment thereof is due or (B) ninety (90) days past the earlier to occur of (x) the date of the respective invoices therefor and (y) the date of shipment therefor in the case of goods or the end of the calendar month following the provision thereof in the case of services; (vii) that are not due from an account debtor located in Indiana, Minnesota or New Jersey unless such Borrower (A) has received a certificate of authority to do business and is in good standing in such state or (B) has filed a notice of business activities report with the appropriate office or agency of such state for the current year; (viii) that are not due from any single account debtor if more than twenty-five percent (25%) of the aggregate amount of all Accounts Receivable owing from such account debtor would otherwise not be Eligible Accounts Receivable (after applying co-op advertising credits, if any, to the balances more than sixty (60) days past the date payment thereof is due); (ix) that are payable in Dollars; (x) that are not payable from an office outside of the United States or Canada; (xi) that are not secured by a letter of credit unless the Administrative Agent has a prior, perfected security interest in such letter of credit; (xii) that are not "bill-and-hold", guaranteed sale, sale-or-return, sale on approval or consignment basis receivables; (xiii) that are not receivables arising under any Private Label Credit Card Program or any other credit card receivables; (xiv) that are not due from any single account debtor (other than American Express Company, Sears Roebuck and Company and Target Stores, a division of Dayton Hudson Corporation if and to the extent that, after inclusion of such Account Receivable in Eligible Accounts Receivable, the aggregate amount of Eligible Accounts Receivable owing from such account debtor would exceed twenty percent (20%) 16 -8- of the aggregate amount of all Eligible Accounts Receivable; (xv) in the case of NordicTrack, that are not due from NorWest Bank Minnesota, N.A.; and (xvi) in the case of S&H, that do not arise from the sale of mailing lists or are due from Felissimo Corporation. ELIGIBLE ASSIGNEE. Any of (i) a commercial bank or finance company organized under the laws of the United States, or any State thereof or the District of Columbia, and having total assets in excess of $1,000,000,000; (ii) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having a net worth of at least $100,000,000, calculated in accordance with generally accepted accounting principles; (iii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having total assets in excess of $1,000,000,000, PROVIDED that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (iv) the central bank of any country which is a member of the OECD; and (v) if, but only if, any Event of Default has occurred and is continuing, any other bank, insurance company, commercial finance company or other financial institution or other Person approved by the Administrative Agent, such approval not to be unreasonably withheld. ELIGIBLE INVENTORY. With respect to S&H, finished goods owned by such Borrower; PROVIDED that Eligible Inventory shall not include any inventory (i) held on consignment, or not otherwise owned by such Borrower, or of a type no longer sold by such Borrower; (ii) which has been returned by a customer or is damaged or subject to any legal encumbrance other than Permitted Liens; (iii) which is not in the possession of such Borrower unless (A) such inventory is subject to a documentary letter of credit issued by a lender approved by the Administrative Agent and the Administrative Agent has possession of and a first priority, perfected security interest in the documents of title relating to such inventory, (B) such inventory is in transit from one Permitted Inventory Location of such Borrower within the United States of America to another Permitted Inventory Location of such Borrower within the United States of America or (C) the aggregate gross book value of such inventory does not exceed $6,000,000 with respect to inventory located at such Borrower's distribution center and warehouse located at 8145 Holton Drive, Florence, Kentucky and operated by The Discovery Channel Store, Inc. pursuant to the Cooperation and Services Agreement between The Discovery Channel Store, Inc. and such Borrower, and $1,750,000 with respect to all other inventory locations and the Administrative Agent has received (x) a waiver in form and substance satisfactory to the Administrative Agent from the possessor of such inventory, (y) financing statements in form and substance satisfactory to the Administrative Agent executed and delivered by such Borrower as secured party/bailor and the possessor of such inventory as debtor/bailee, for filing in the appropriate jurisdictions PROVIDED, HOWEVER, that the Administrative Agent may in its sole discretion, waive the foregoing requirement with respect to financing statements, and (z) an assignment in form and substance satisfactory to the Administrative Agent by the secured party/bailor to the Administrative Agent of the aforementioned financing statements; (iv) in which the Administrative Agent does not have a valid and perfected first priority security interest; (v) which has been shipped to a customer of such Borrower regardless of whether such shipment is on a consignment basis; (vi) which is not located at a Permitted Inventory Location of such Borrower within the United States of America, unless (A) such inventory is subject to a documentary letter of credit issued by a lender approved by the Administrative Agent and the Administrative Agent has possession of and a first priority, 17 -9- perfected security interest in the documents of title relating to such inventory or (B) such inventory is in transit from one Permitted Inventory Location of such Borrower within the United States of America to another Permitted Inventory Location of such Borrower within the United States of America; (vii) which the Majority Lenders reasonably deem to be obsolete or not marketable; (viii) which is located in California unless the Administrative Agent has received a legal opinion in form and substance satisfactory to the Administrative Agent that the Loan Documents comply with the provisions of ss.9102(5)(b) of the Uniform Commercial Code as in effect in California, or (ix) which consists of live plantings. ELIGIBLE MACHINERY AND EQUIPMENT. Those items of machinery and equipment owned by NordicTrack at the relevant time of reference thereto with respect to which NordicTrack has full and unencumbered title (except for liens granted to the Administrative Agent pursuant to the Security Documents) and with respect to which the Administrative Agent has a valid and perfected first priority security interest. ELIGIBLE NORDICTRACK INVENTORY. With respect to NordicTrack, (a) finished goods owned by NordicTrack and (b) work-in-progress and raw materials owned by NordicTrack and having an aggregate gross book value of not more than $20,000,000 determined in accordance with generally accepted accounting principles; PROVIDED that Eligible NordicTrack Inventory shall not include any inventory (i) held on consignment, or not otherwise owned by NordicTrack, or of a type no longer sold by NordicTrack; (ii) which has been returned by a customer or is damaged or subject to any legal encumbrance other than Permitted Liens; (iii) which is not in the possession of NordicTrack unless (A) such inventory is subject to a documentary letter of credit issued by a lender approved by the Administrative Agent and the Administrative Agent has possession of and a first priority, perfected security interest in the documents of title relating to such inventory, (B) such inventory is in transit from one Permitted Inventory Location of NordicTrack within the United States of America to another Permitted Inventory Location of NT or NA, as applicable, within the United States of America or (C) the aggregate gross book value of such inventory does not exceed $4,250,000 and the Administrative Agent has received (x) a waiver in form and substance satisfactory to the Administrative Agent from the possessor of such inventory, (y) financing statements in form and substance satisfactory to the Administrative Agent executed and delivered by NT or NA, as applicable, as secured party/bailor and the possessor of such inventory as debtor/bailee, for filing in the appropriate jurisdictions PROVIDED, HOWEVER, that the Administrative Agent may, in its sole discretion, waive the foregoing requirement with respect to financing statements, and (z) an assignment in form and substance satisfactory to the Administrative Agent by the secured party/bailor to the Administrative Agent of the aforementioned financing statements; (iv) in which the Administrative Agent does not have a valid and perfected first priority security interest; (v) which has been shipped to a customer of NordicTrack regardless of whether such shipment is on a consignment basis; (vi) which is not located at a Permitted Inventory Location of NT or NA, as applicable, within the United States of America, unless (A) such inventory is subject to a documentary letter of credit issued by a lender approved by the Administrative Agent and the Administrative Agent has possession of and a first priority, perfected security interest in the documents of title relating to such inventory or (B) such inventory is in transit from one Permitted Inventory Location of NT or NA, as applicable, within the United States of America to another Permitted Inventory Location of NT or NA, as applicable, within the United States of America; (vii) which the Majority Lenders reasonably deem to be obsolete or not marketable or (viii) which is located in California unless the Administrative Agent has received a legal opinion in form and substance 18 -10- satisfactory to the Administrative Agent that the Loan Documents comply with the provisions of ss.9102(5)(b) of the Uniform Commercial Code as in effect in California. ELIGIBLE REAL ESTATE. With respect to NordicTrack, all real property with respect to which NordicTrack has full and unencumbered title (except for the liens granted to the Administrative Agent pursuant to the Security Documents) and with respect to which the Administrative Agent has a valid and perfected first priority lien. EMPLOYEE BENEFIT PLAN. Any employee benefit plan within the meaning of ss.3(3) of ERISA maintained or contributed to by CML, any of the Borrowers, or any ERISA Affiliate, other than a Multiemployer Plan. ENVIRONMENTAL LAWS. See ss.8.18(a). ERISA. The Employee Retirement Income Security Act of 1974. ERISA AFFILIATE. Any Person which is treated as a single employer with CML or any of the Borrowers under ss.414 of the Code. ERISA REPORTABLE EVENT. A reportable event with respect to a Guaranteed Pension Plan within the meaning of ss.4043 of ERISA and the regulations promulgated thereunder as to which the requirement of notice has not been waived. EUROCURRENCY RESERVE RATE. For any day with respect to a Eurodollar Rate Loan, the maximum rate (expressed as a decimal) at which any lender subject thereto would be required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System (or any successor or similar regulations relating to such reserve requirements) against "Eurocurrency Liabilities" (as that term is used in Regulation D), if such liabilities were outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on and as of the effective date of any change in the Eurocurrency Reserve Rate. EURODOLLAR BUSINESS DAY. Any day on which commercial banks are open for international business (including dealings in Dollar deposits) in London or such other eurodollar interbank market as may be selected by the Administrative Agent in its sole discretion acting in good faith. EURODOLLAR LENDING OFFICE. Initially, the office of each Lender designated as such in SCHEDULE 1 hereto; thereafter, such other office of such Lender, if any, that shall be making or maintaining Eurodollar Rate Loans. EURODOLLAR RATE. For any Interest Period with respect to a Eurodollar Rate Loan, the rate of interest equal to (i) the rate per annum (rounded upwards to the nearest 1/16 of one percent) at which the Reference Bank's Eurodollar Lending Office is offered Dollar deposits two Eurodollar Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations of such Eurodollar Lending Office are customarily conducted, for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of the Eurodollar Rate Loan of the Reference Bank to which such Interest 19 -11- Period applies, divided by (ii) a number equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable. EURODOLLAR RATE LOANS. Loans bearing interest calculated by reference to the Eurodollar Rate. EVENT OF DEFAULT. See ss.14.1. EXISTING CREDIT AGREEMENT. As defined in the Recitals. EXISTING LENDERS. As defined in the Recitals. FEE LETTER. The letter agreement dated as of March 8, 1996 and amended and restated as of the Original Closing Date among CML, the Borrowers, BKB and BankAmerica Business Credit, Inc. FISCAL AGENCY AGREEMENT. The Fiscal Agency Agreement dated as of January 20, 1993 between CML and Chemical Bank, as fiscal agent, in the form delivered to the Administrative Agent on or prior to the Closing Date. FOREIGN GUARANTIES. The several foreign subsidiary guaranties made by each of the Foreign Guarantors in favor of the Administrative Agent pursuant to which each Foreign Guarantor guaranties to the Administrative Agent for the benefit of the Lenders and the Administrative Agent the payment and performance of the Obligations. FOREIGN GUARANTORS. CML International (FSC), Ltd., The Nature Company Limited, NordicTrack (U.K.) Ltd., NordicTrack GmbH and Nordic Advantage of Ontario, Inc. FOREIGN PLEDGE AGREEMENT. Collectively, (a) the share pledge agreement dated as of April 24, 1996 among NT and the Lenders pledging the shares of NordicTrack GmbH, (b) the charge over securities dated as of April 29, 1996 between The Nature Company (now known as OTNC, Inc.) and the Administrative Agent pledging the securities of The Nature Company Limited and (c) the charge over securities dated as of April 29, 1996 between NT and the Administrative Agent, pledging the securities of NordicTrack (U.K.) Ltd., in each case in form and substance satisfactory to the Lenders and the Administrative Agent. GE CAPITAL CREDIT CARD PROGRAM. The credit card program made available to customers of NordicTrack in accordance with the GE Capital Credit Card Program Agreement. GE CAPITAL CREDIT CARD PROGRAM AGREEMENT. The Account Purchase and Consumer Credit Card Program Agreement, dated as of December 10, 1996, among General Electric Capital Corporation and NordicTrack. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. (i) When used in ss.11, whether directly or indirectly through reference to a capitalized term used therein, means (A) principles that are consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, in effect for the fiscal year ended on the Balance Sheet Date, and (B) to the extent consistent with such principles, the accounting practice of CML and the Borrowers reflected in their financial statements for the year ended on the 20 -12- Balance Sheet Date, and (ii) when used in general, other than as provided above, means principles that are (A) consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, as in effect from time to time, and (B) consistently applied with past financial statements of CML and the Borrowers adopting the same principles, provided that in each case referred to in this definition of "generally accepted accounting principles" a certified public accountant would, insofar as the use of such accounting principles is pertinent, be in a position to deliver an unqualified opinion (other than a qualification regarding changes in generally accepted accounting principles) as to financial statements in which such principles have been properly applied. GORDON BROTHERS REPORT. The Gordon Brothers Partners, Inc. Inventory Valuation and Review Report dated in May 1997 relating to the Borrowers' inventory, in the form delivered to the Administrative Agent on or prior to the Restatement Effective Date, or any subsequent appraisal thereof prepared in a manner consistent with such report and in form and substance satisfactory to the Administrative Agent. GUARANTEED PENSION PLAN. Any employee pension benefit plan within the meaning of ss.3(2) of ERISA maintained or contributed to by CML or any of the Borrowers or any ERISA Affiliate the benefits of which are guaranteed on termination in full or in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer Plan. GUARANTORS. CML, each Borrower and the direct and indirect Subsidiaries of CML listed on the signature pages hereto as Guarantors. GUARANTY. The Guaranty made by each of the Guarantors in favor of the Lenders and the Administrative Agent pursuant to ss.7 hereof, pursuant to which each Guarantor guaranties to the Lenders and the Administrative Agent the payment and performance of the Obligations. HAZARDOUS SUBSTANCES. See ss.8.18(b). INDEBTEDNESS. All obligations, contingent and otherwise, that in accordance with generally accepted accounting principles should be classified upon the obligor's balance sheet as liabilities, or to which reference should be made by footnotes thereto, including in any event and whether or not so classified: (i) all debt and similar monetary obligations, whether direct or indirect; (ii) all liabilities secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; and (iii) all guarantees, endorsements and other contingent obligations whether direct or indirect in respect of indebtedness of others, including any obligation to supply funds to or in any manner to invest in, directly or indirectly, the debtor, to purchase indebtedness, or to assure the owner of indebtedness against loss, through an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise, and the obligations to reimburse the issuer in respect of any letters of credit. INTERCOMPANY SUBORDINATION AGREEMENT. The Intercompany Subordination Agreement, dated as of the Original Closing Date, among CML, the Borrowers, and their Subsidiaries and in form and substance satisfactory to the Lenders and the Administrative Agent. 21 -13- INTEREST PAYMENT DATE. (i) As to any Base Rate Loan, the first day after the last day of the Interest Period with respect thereto; and (ii) as to any Eurodollar Rate Loan, the last day of each Interest Period with respect thereto. INTEREST PERIOD. With respect to each Loan, (i) initially, the period commencing on the Drawdown Date of such Loan and ending on the last day of one of the periods set forth below, as selected by the applicable Borrower in a Loan Request (A) for any Base Rate Loan, the last day of the calendar month; and (B) for any Eurodollar Rate Loan, 1, 2 or 3 months; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Loan and ending on the last day of one of the periods set forth above, as selected by the applicable Borrower in a Conversion Request; PROVIDED that all of the foregoing provisions relating to Interest Periods are subject to the following: (a) if any Interest Period with respect to a Eurodollar Rate Loan would otherwise end on a day that is not a Eurodollar Business Day, that Interest Period shall be extended to the next succeeding Eurodollar Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day; (b) if any Interest Period with respect to a Base Rate Loan would end on a day that is not a Business Day, that Interest Period shall end on the next succeeding Business Day; (c) if the applicable Borrower shall fail to give notice as provided in ss.2.7, such Borrower shall be deemed to have requested a conversion of the affected Eurodollar Rate Loan to a Base Rate Loan and the continuance of all Base Rate Loans as Base Rate Loans on the last day of the then current Interest Period with respect thereto; (d) any Interest Period relating to any Eurodollar Rate Loan that begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month; and (e) any Interest Period that would otherwise extend beyond the Maturity Date shall end on the Maturity Date. INVESTMENTS. All expenditures made and all liabilities incurred (contingently or otherwise) for the acquisition of stock or Indebtedness of, or for loans, advances, capital contributions or transfers of property to, or in respect of any guaranties (or other commitments as described under Indebtedness), or obligations of, any Person. In determining the aggregate amount of Investments outstanding at any particular time: (i) the amount of any Investment represented by a guaranty shall be taken at not less than the principal amount of the obligations guaranteed and still outstanding; (ii) there shall be included as an Investment all interest accrued with respect to Indebtedness constituting an Investment unless and until such interest is paid; (iii) there shall be deducted in respect of each such Investment any amount received as a return of capital (but only by repurchase, redemption, retirement, repayment, liquidating dividend or liquidating distribution); (iv) there shall not be deducted in respect of any Investment any amounts received as earnings 22 -14- on such Investment, whether as dividends, interest or otherwise, except that accrued interest included as provided in the foregoing clause (ii) may be deducted when paid; and (v) there shall not be deducted from the aggregate amount of Investments any decrease in the value thereof. ISSUING BANK. With respect to any Letter of Credit, BKB and any successor Issuing Bank. KIOSK. Any temporary seasonal lease (not in excess of twelve months in any event) by any Borrower of space provided that not more than $50,000 of Capital Expenditures may be expended by CML and its Subsidiaries in respect of any one kiosk. LANDLORD LIEN RESERVE. With respect to any Eligible Inventory or Eligible NordicTrack Inventory which is located at a premises subject to a Specified Lease, the Landlord Lien Reserve shall be the lesser of (a) the sum of (i) all rent past due for more than thirty (30) days under such Specified Lease at such time and (ii) all rent which may become due under such Specified Lease during the twelve month period commencing at the Original Closing Date, in each case, unless otherwise requested by the Administrative Agent, calculated on June 17, 1996 and at the end of each fiscal quarter thereafter by reference to the average monthly rent on such Specified Lease during the immediately preceding calendar year and (b) the net book value (determined on a first-in first-out basis at lower of cost or market) of such Eligible Inventory or Eligible NordicTrack Inventory. LANDLORD WAIVER. A waiver from the lessor or sublessor of property leased by any of the Borrowers as lessee in substantially the form of EXHIBIT F hereto or otherwise approved by the Administrative Agent in its sole discretion. LENDERS. BKB and any other Person who becomes a Lender pursuant to ss.20. LETTER OF CREDIT. See ss.4.1.1. LETTER OF CREDIT APPLICATION. See ss.4.1.1. LETTER OF CREDIT EXPOSURE. At any time, and with respect to any Borrower or CML, the sum of (a) the Maximum Drawing Amount with respect to all Letters of Credit issued at the request of such Borrower or, in the case of CML, any Borrower and (b) all Unpaid Reimbursement Obligations of such Borrower or, as the case may be, CML. LETTER OF CREDIT PARTICIPATION. See ss.4.1.4. LOAN DOCUMENTS. This Credit Agreement, the Notes, the Letter of Credit Applications, the Letters of Credit, the Fee Letter, the Intercompany Subordination Agreement, the Amendment Agreement and the Security Documents. LOAN REQUEST. See ss.2.6.1. LOANS. The NordicTrack Loans and the S&H Loans. MAJORITY LENDERS. As of any date, the Lenders (excluding any Delinquent Lenders) holding at least sixty-six and two-thirds percent (66 2/3%) of the outstanding principal 23 -15- amount of the Notes on such date; and if no such principal is outstanding, the Lenders (excluding any Delinquent Lenders) whose aggregate Commitments constitutes at least sixty-six and two-thirds percent (66 2/3%) of the Total Commitment. MATURITY DATE. April 15, 1999. MAXIMUM DRAWING AMOUNT. The maximum aggregate amount that the beneficiaries may at any time draw under outstanding Letters of Credit, as such aggregate amount may be reduced from time to time pursuant to the terms of the Letters of Credit. MAXIMUM OVERADVANCE AMOUNT. $15,000,000. MONOGRAM CREDIT CARD PROGRAM. The credit card program made available to customers of NordicTrack pursuant to the Monogram Credit Card Program Agreement. MONOGRAM CREDIT CARD PROGRAM AGREEMENT. The Consumer Credit Card Program Agreement dated as of November 29, 1995 among Monogram Credit Card Bank of Georgia and NordicTrack as amended prior to the Restatement Effective Date in the form delivered to the Administrative Agent on or prior to the Restatement Effective Date. MORTGAGED PROPERTY. Any Real Estate which is subject to any Mortgage. MORTGAGES. Collectively the Mortgage Deeds, Assignments of Leases and Security Agreements dated as of the Original Closing Date, from NordicTrack to BKB as agent under the Collateral Note and assigned to the Administrative Agent in accordance with the terms and provisions of (i) that certain Pledge Agreement dated as of the Original Closing Date by and among NT, BKB as agent and the Administrative Agent and (ii) that certain Assignment of Mortgage dated as of the Original Closing Date by and between BKB as agent and the Administrative Agent, with respect to the fee interest of NordicTrack in its owned real properties, in each case in form and substance satisfactory to the Administrative Agent and such other mortgages and deeds of trust from any of the Borrowers or Guarantors to the Administrative Agent pursuant to ss.9.13. MULTIEMPLOYER PLAN. Any multiemployer plan within the meaning of ss.3(37) of ERISA maintained or contributed to by CML, any of the Borrowers or any ERISA Affiliate. NA. As defined in the preamble hereto. NT. As defined in the preamble hereto. NET CASH PROCEEDS. With respect to any sale of any assets of any of CML, any of the Borrowers or any of their Subsidiaries, the gross consideration received by CML, such Borrower, or such Subsidiary (in cash) from such sale, net of commissions, direct sales costs, normal closing adjustments, income taxes attributable to such sale and professional fees and expenses incurred directly in connection therewith, to the extent the foregoing are actually paid in connection with such sale. NORDICTRACK. As defined in the preamble hereto. 24 -16- NORDICTRACK BORROWING BASE. At the time of reference thereto, an amount determined by the Administrative Agent by reference to the most recent Borrowing Base Report, which is equal to the sum of: (a) 80.00% of NordicTrack's Eligible Accounts Receivable for which invoices have been issued and are payable; PLUS (b) 55.00% of the net book value (determined on a first-in first-out basis at lower of cost or market) of Eligible NordicTrack Inventory; MINUS (c) the amount of any Landlord Lien Reserve with respect to NordicTrack; PROVIDED, HOWEVER, the Administrative Agent reserves its rights, upon prior written notice to the Borrowers, to add reserves and decrease the advance rates set forth herein, if, in the Administrative Agent's reasonable discretion, the results of commercial finance examinations, inventory appraisals or other credit or collateral considerations indicate a deterioration in NordicTrack's Eligible Accounts Receivable or Eligible NordicTrack Inventory from May 1997, such that additional reserves or a lower advance rate for NordicTrack's Eligible Accounts Receivable and/or Eligible NordicTrack Inventory is warranted. NORDICTRACK LOANS. Revolving credit loans made or to be made by the Lenders to NordicTrack pursuant to ss.2.1.1. NORDICTRACK NOTE RECORD. A record with respect to a NordicTrack Note. NORDICTRACK NOTES. See ss.2.4.1. NOTE RECORDS. Collectively, the NordicTrack Note Records and the S&H Note Records. NOTES. Collectively, the Collateral Notes, the NordicTrack Notes and the S&H Notes. OBLIGATIONS. All indebtedness, obligations and liabilities of any of CML, the Borrowers and their Subsidiaries to any of the Lenders and the Administrative Agent, individually or collectively, existing on the date of this Credit Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, arising or incurred under this Credit Agreement or any of the other Loan Documents or in respect of any of the Loans made or Reimbursement Obligations incurred or any of the Notes, Letter of Credit Applications, Letter of Credits or other instruments at any time evidencing any thereof. OPERATING ACCOUNT. With respect to any Borrower or CML, such Borrower's or CML's as the case may be, demand deposit account(s) with BKB, listed on SCHEDULE 8.20 hereto. ORIGINAL CLOSING DATE. April 17, 1996. 25 -17- OUTSTANDING. With respect to the Loans, the aggregate unpaid principal thereof as of any date of determination. OVERADVANCE. As of any date of determination, with respect to any Borrower, Loans, the unpaid principal thereof which exceeds an amount equal to such Borrower's Borrowing Base MINUS such Borrower's Letter of Credit Exposure. OVERADVANCE BORROWING BASE. At the relevant time of reference thereto, an amount determined by the Administrative Agent by reference to the most recent Borrowing Base Report, which is equal to the sum of: (a) 60.00% of the Determined Value of Eligible Real Estate; PLUS (b) 80.00% of the Determined Value of Eligible Machinery and Equipment; PLUS (c) 10.00% of the sum of (i) the net book value (determined on a first-in first-out basis at lower of cost or market) of S&H's Eligible Inventory and (ii) the net book value (determined on a first-in first-out basis at a lower of cost or market) of Eligible NordicTrack Inventory. OVERADVANCE REALLOCATION DATE. The date on which any reallocation of the Sub-Overadvance Amounts among the Borrowers is made or is to be made by CML in accordance with ss.2.1.5(b). OVERADVANCE REALLOCATION REQUEST. See ss.2.1.5(b). PATENT ASSIGNMENT. The Patent Collateral Assignment and Security Agreement, dated as of the Original Closing Date, made by the Borrowers and the Guarantors in favor of the Administrative Agent and in form and substance satisfactory to the Lenders and the Administrative Agent. PBGC. The Pension Benefit Guaranty Corporation created by ss.4002 of ERISA and any successor entity or entities having similar responsibilities. PERFECTION CERTIFICATES. The Perfection Certificates as defined in the Security Agreement. PERMITTED DISPOSITION. Any disposition of assets of any Person described in and permitted by ss.10.5.2. PERMITTED INVENTORY LOCATIONS. The retail stores, distribution centers and manufacturing facilities of the Borrowers located in the United States of America and listed on SCHEDULE 2 hereto, as such SCHEDULE 2 may be supplemented from time to time in accordance with the provisions of ss.9.4(j). PERMITTED LIENS. Liens, security interests and other encumbrances permitted by ss.10.2. PERMITTED OVERADVANCE AMOUNT. See ss.2.1.5(a). 26 -18- PERSON. Any individual, corporation, partnership, limited liability company, limited liability partnership, trust, unincorporated association, business, or other legal entity, and any government or any governmental agency or political subdivision thereof. PRIVATE LABEL CREDIT CARD PROGRAMS. The Monogram Credit Card Program, the GE Capital Credit Card Program and all other credit card programs provided to customers of NordicTrack by Persons other than CML, NordicTrack or their Subsidiaries or Affiliates, together with all associated documentation. REAL ESTATE. All real property now, or in the future, owned or leased (as lessee or sublessee) by CML, any of the Borrowers or any of their Subsidiaries. RECORD. The grid attached to a Note, or the continuation of such grid, or any other similar record, including computer records, maintained by any Lender with respect to any Loan referred to in such Note. REFERENCE BANK. BKB. REIMBURSEMENT OBLIGATION. Each of CML's and each Borrower's obligation to reimburse the Issuing Bank and the Lenders on account of any drawing under any Letter of Credit issued on behalf of (a) in the case of CML, any Borrower, and (b) in the case of any Borrower, such Borrower, all as provided in ss.4.2. RELATIVE. In relation to any Person, any spouse, parent, grandparent, child, grandchild, brother or sister of such Person, or the spouse of any of the foregoing. RESTATEMENT EFFECTIVE DATE. As defined in the Amendment Agreement. RESTRICTED PAYMENTS. In relation to CML, the Borrowers and their Subsidiaries, (a) any Distribution or (b) any payment or prepayment by any Borrower or its Subsidiaries to CML or to any other Affiliate of any of the Borrowers or CML other than payments to Affiliates (other than CML) for goods and services in the ordinary course of business on terms equivalent to those obtainable in arms length transactions. S&H. As defined in the preamble hereto. S&H BORROWING BASE. At the relevant time of reference thereto, an amount determined by the Administrative Agent by reference to the most recent Borrowing Base Report, which is equal to the sum of: (a) 80.00% of S&H's Eligible Accounts Receivable for which invoices have been issued and are payable; PLUS (b) 55.00% of the net book value (determined on a first-in first-out basis at lower of cost or market) of S&H's Eligible Inventory; MINUS (c) the amount of any Landlord Lien Reserve with respect to S&H; PROVIDED, HOWEVER, the Administrative Agent reserves its rights, upon prior written notice to the Borrowers, to add reserves and decrease the advance rates set forth herein, if, in the 27 -19- Administrative Agent's reasonable discretion, the results of commercial finance examinations, inventory appraisals or other credit or collateral considerations indicate a deterioration in S&H's Eligible Accounts Receivable or Eligible Inventory from ________________ __, 1997, such that additional reserves or a lower advance rate for S&H's Eligible Accounts Receivable and/or Eligible Inventory is warranted. S&H LOANS. Revolving credit loans made or to be made by the Lenders to S&H pursuant to ss.2.1.3. S&H NOTE RECORD. A Record with respect to an S&H Note. S&H NOTES. See ss.2.4.3. SECURITY AGREEMENT. The Security Agreement, dated as of the Original Closing Date, among the Borrowers, the Guarantors and the Administrative Agent and in form and substance satisfactory to the Lenders and the Administrative Agent. SECURITY DOCUMENTS. The Guaranty, the Foreign Guaranties, the Security Agreement, the Mortgages, the Patent Assignment, the Trademark Assignment, the Copyright Mortgage, the Agency Account Agreements, the Stock Pledge Agreement and the Foreign Pledge Agreements. SETTLEMENT. The making among the Lenders of, or receiving of payments among the Lenders, in immediately available funds, to the extent necessary to cause each Lender's actual share of the outstanding amount of Loans (after giving effect to any Loan Request) to be equal to each Lender's Commitment Percentage of the outstanding amount of such Loans (after giving effect to any Loan Request), in any case where, prior to such event or action, the actual share is not so equal. SETTLEMENT AMOUNT. See ss.2.8. SETTLEMENT DATE. (a) The Drawdown Date relating to any Loan Request, (b) Friday of each week, or if Friday is not a Business Day, the Business Day immediately following such Friday, (c) the Business Day immediately following the Administrative Agent becoming aware of the existence of an Event of Default, (d) any Business Day on which the amount of Loans outstanding from BKB PLUS BKB's Commitment Percentage of the aggregate Letter of Credit Exposures of the Borrowers is equal to or greater than BKB's Commitment Percentage of the Total Commitment, (e) the Business Day immediately following any Business Day on which the amount of Loans outstanding increases or decreases by more than $5,000,000 as compared to the previous Settlement Date, (f) any day on which any conversion of a Base Rate Loan to a Eurodollar Rate Loan occurs or (g) any Business Day on which (i) the amount of outstanding Loans decreases and (ii) the amount of the Administrative Agent's Loans outstanding equals zero Dollars ($0). SETTLING LENDER. See ss.2.8. SPECIFIED LEASE. A lease by any of the Borrowers as lessee of Real Estate at which Eligible Inventory or, in the case of NordicTrack, Eligible NordicTrack Inventory, is held and as to which at any time the Administrative Agent has not received evidence, in form and substance satisfactory to the Administrative Agent, that based upon then existing law (as 28 -20- determined by the Administrative Agent in the exercise of its reasonable discretion and on the advice of counsel), the landlord of such property would not have a lien on inventory superior to the security interest granted under the Security Documents, securing rent obligations more than thirty (30) days past due or securing future rent obligations accruing after the Closing Date; PROVIDED, HOWEVER, that no lease for which the applicable Borrower and the Administrative Agent have received a Landlord Waiver shall be a Specified Lease. STOCK PLEDGE AGREEMENT. The Stock Pledge Agreement, dated as of the Original Closing Date, among CML, certain of the Borrowers and the Administrative Agent, in form and substance satisfactory to the Lenders and the Administrative Agent. SUB-COMMITMENT. See ss.2.3.1. SUB-OVERADVANCE AMOUNT. See ss.2.1.6(b). SUBORDINATED DEBENTURES. The 5 1/2% Convertible Debentures due 2003 issued by CML pursuant to the Fiscal Agency Agreement. SUBSIDIARY. Any corporation, association, trust, or other business entity of which the designated parent shall at any time own directly or indirectly through a Subsidiary or Subsidiaries at least a majority (by number of votes) of the outstanding Voting Stock. TITLE INSURANCE COMPANY. Chicago Title Insurance Company. TITLE POLICY. In relation to each Mortgaged Property, an ALTA standard form title insurance policy issued by the Title Insurance Company (with such reinsurance or co-insurance as the Administrative Agent may require, any such reinsurance to be with direct access endorsements) in such amount as may be determined by the Administrative Agent insuring the priority of the Mortgage of such Mortgaged Property and that one of the Borrowers or one of the Guarantors holds marketable fee simple title to such Mortgaged Property, subject only to the encumbrances permitted by such Mortgage and which shall not contain exceptions for mechanics liens or persons in occupancy (except as may be permitted by such Mortgage), shall not insure over any matter except to the extent that any such affirmative insurance is acceptable to the Administrative Agent in its sole discretion, and shall contain such endorsements and affirmative insurance as the Administrative Agent in its discretion may require, including but not limited to (i) comprehensive endorsement, (ii) variable rate of interest endorsement, (iii) usury endorsement, (iv) revolving credit endorsement, (v) tie-in endorsement, (vi) doing business endorsement and (vii) ALTA form 3.1 zoning endorsement. TOTAL COMMITMENT. The sum of the Commitments of the Lenders, as in effect from time to time. TRADEMARK ASSIGNMENT. The Trademark Collateral Security and Pledge Agreement, dated as of the Original Closing Date, among the Borrowers, the Guarantors and the Administrative Agent, in form and substance satisfactory to the Lenders and the Administrative Agent and the Assignments of Trademarks and Service Marks executed in connection therewith. TYPE. As to any Loan, its nature as a Base Rate Loan or a Eurodollar Rate Loan. 29 -21- UNIFORM CUSTOMS. With respect to any Letter of Credit, the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 or any successor version thereto adopted by the Issuing Bank in the ordinary course of its business as a letter of credit issuer and in effect at the time of issuance of such Letter of Credit. UNPAID REIMBURSEMENT OBLIGATION. Any Reimbursement Obligation for which the applicable Borrower does not reimburse the Issuing Bank and the Lenders on the date specified in, and in accordance with, ss.4.2. VOTING STOCK. Stock or similar interests, of any class or classes (however designated), the holders of which are at the time entitled, as such holders, to vote for the election of a majority of the directors (or persons performing similar functions) of the corporation, association, trust or other business entity involved, whether or not the right so to vote exists by reason of the happening of a contingency. 1.2. RULES OF INTERPRETATION. (a) A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms and the terms of this Credit Agreement. (b) The singular includes the plural and the plural includes the singular. (c) A reference to any law includes any amendment or modification to such law. (d) A reference to any Person includes its permitted successors and permitted assigns. (e) Accounting terms not otherwise defined herein have the meanings assigned to them by generally accepted accounting principles applied on a consistent basis by the accounting entity to which they refer. (f) The words "include", "includes" and "including" are not limiting. (g) All terms not specifically defined herein or by generally accepted accounting principles, which terms are defined in the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts, have the meanings assigned to them therein, with the term "instrument" being that defined under Article 9 of the Uniform Commercial Code. (h) Reference to a particular "ss." refers to that section of this Credit Agreement unless otherwise indicated. (i) The words "herein", "hereof", "hereunder" and words of like import shall refer to this Credit Agreement as a whole and not to any particular section or subdivision of this Credit Agreement. 30 -22- 2. THE REVOLVING CREDIT FACILITIES. 2.1. COMMITMENT TO LEND. 2.1.1. COMMITMENT TO LEND NORDICTRACK LOANS. Subject to the terms and conditions set forth in this Credit Agreement, each of the Lenders severally agrees to lend to NordicTrack and NordicTrack may borrow, repay, and reborrow from time to time between the Restatement Effective Date and the Maturity Date upon notice by NordicTrack to the Administrative Agent given in accordance with ss.2.6, such sums as are requested by NordicTrack, PROVIDED that the sum of the outstanding amount of the NordicTrack Loans (after giving effect to all amounts requested) PLUS NordicTrack's Letter of Credit Exposure shall not at any time exceed the lesser of (a) NordicTrack's Sub-Commitment and (b) the NordicTrack Borrowing Base PLUS the lesser of (i) the Overadvance Borrowing Base less the aggregate outstanding amount of the Overadvances of the other Borrowers (after giving effect to all amounts requested) and (ii) NordicTrack's Sub-Overadvance Amount in effect at such time. The NordicTrack Loans shall be made PRO RATA in accordance with each Lender's Commitment Percentage. Each request for a NordicTrack Loan hereunder shall constitute a representation and warranty by NordicTrack that the conditions set forth in ss.12 and ss.13, in the case of the initial NordicTrack Loans to be made on the Restatement Effective Date, and ss.13, in the case of all other NordicTrack Loans, have been satisfied on the date of such request. 2.1.2. INTENTIONALLY OMITTED. 2.1.3. COMMITMENT TO LEND S&H LOANS. Subject to the terms and conditions set forth in this Credit Agreement, each of the Lenders severally agrees to lend to S&H and S&H may borrow, repay, and reborrow from time to time between the Restatement Effective Date and the Maturity Date upon notice by S&H to the Administrative Agent given in accordance with ss.2.6, such sums as are requested by S&H, PROVIDED that the sum of the outstanding amount of the S&H Loans (after giving effect to all amounts requested) PLUS S&H's Letter of Credit Exposure shall not at any time exceed the lesser of (a) S&H's Sub-Commitment and (b) the S&H Borrowing Base PLUS the lesser of (i) the Overadvance Borrowing Base less the aggregate outstanding amount of the Overadvances of the other Borrowers (after giving effect to all amounts requested) and (ii) S&H's Sub-Overadvance Amount in effect at such time. The S&H Loans shall be made PRO RATA in accordance with each Lender's Commitment Percentage. Each request for a S&H Loan hereunder shall constitute a representation and warranty by S&H that the conditions set forth in ss.12 and ss.13, in the case of the initial S&H Loans to be made on the Restatement Effective Date, and ss.13, in the case of all other S&H Loans, have been satisfied on the date of such request. 2.1.4. INTENTIONALLY OMITTED. 2.1.5. OVERADVANCE FACILITY. 2.1.5(a). PERMITTED OVERADVANCE AMOUNT. As of any date of determination, the sum of the Overadvances 31 -23- shall not exceed the lesser of (i) the Overadvance Borrowing Base and (ii) the Maximum Overadvance Amount (the "Permitted Overadvance Amount"). Overadvances shall be available on an annual basis for a period of ninety (90) consecutive days commencing not earlier than September 1 and ending not later than the next following December 31. CML shall notify the Administrative Agent in writing of the commencement of such ninety (90) day period at least five (5) Business Days prior to such commencement. Each Overadvance outstanding from time to time shall bear interest calculated by reference to the Base Rate pursuant to ss.2.5. 2.1.5(b). ALLOCATION OF MAXIMUM OVERADVANCE AMOUNT. On or prior to July 31 of each year, CML shall by written notice to the Administrative Agent allocate the Maximum Overadvance Amount for such year among the Borrowers (such amount allocated to each Borrower, a "Sub-Overadvance Amount"), PROVIDED that (a) the sum of the Borrowers' Sub-Overadvance Amounts shall not exceed the Maximum Overadvance Amount, (b) NordicTrack shall not have a Sub-Overadvance Amount at any time in excess of the Maximum Overadvance Amount, and (c) S&H shall not have a Sub-Overadvance Amount at any time in excess of $5,000,000. CML shall have the right, no more frequently than once in any calendar week (unless otherwise permitted by the Administrative Agent) to request that the Administrative Agent reallocate the unborrowed and unused portion of the Maximum Overadvance Amount. Concurrently with its delivery of the Borrowing Base Report for the previous week pursuant to ss.9.4(f), CML shall give the Administrative Agent written notice in the form of EXHIBIT H-1 hereto of each reallocation of the Sub-Overadvance Amounts requested under this ss.2.1.5(b) (an "Overadvance Reallocation Request"). Each such notice shall specify (i) each Borrower's Sub-Overadvance Amount as of the date of such notice, (ii) each Borrower's Sub-Overadvance Amount after giving effect to such notice, and (iii) the effective date of such reallocation, which date shall be no less than two (2) Business Days after the date of such notice. Promptly upon receipt of any such notice, the Administrative Agent shall notify each of the Lenders thereof. Upon giving effect to an Overadvance Reallocation Request, the sum of the Borrowers' Sub-Overadvance Amounts shall not exceed the Maximum Overadvance Amount. On the Overadvance Reallocation Date, the Sub-Overadvance Amount of each of the Borrowers shall be reallocated in accordance with the Overadvance Reallocation Request. The Administrative Agent shall keep a record of each Overadvance Reallocation Request and the Sub-Overadvance Amount of each Borrower as in effect on each date and such record shall be conclusive, in the absence of manifest error. 2.2. COMMITMENT FEE. Each Borrower agrees to pay to the Administrative Agent for the accounts of the Lenders in accordance with their respective Commitment Percentages a commitment fee calculated at the rate of one-half percent (0.50%) per annum on the average daily amount during each calendar quarter or portion thereof from the date hereof to the Maturity Date by which such Borrower's Sub-Commitment MINUS such Borrower's Letter of Credit Exposure exceeds the outstanding amount of such Borrower's Loans during such calendar quarter. The commitment fee shall be payable quarterly in arrears on the first day of each calendar quarter for the immediately preceding calendar quarter commencing on 32 -24- the first such date following the date hereof, with a final payment on the Maturity Date or any earlier date on which the Commitments shall terminate. 2.3. REALLOCATION AND REDUCTION OF TOTAL COMMITMENT. 2.3.1. REALLOCATION OF TOTAL COMMITMENT. On the Restatement Effective Date, CML shall by written notice to the Administrative Agent allocate the Total Commitment among the Borrowers (such amount allocated to any Borrower and set forth on SCHEDULE 1, a "Sub-Commitment"), PROVIDED that the sum of the Borrowers' Sub-Commitments shall not exceed the Total Commitment. CML shall have the right, no more frequently than once in any calendar month (unless otherwise permitted by the Administrative Agent) to request that the Lenders reallocate the unborrowed and unused portion of the Total Commitment. Concurrently with its delivery of the Borrowing Base Report for the previous month pursuant to ss.9.4(f), CML shall give to the Administrative Agent written notice in the form of EXHIBIT H-2 hereto of each reallocation requested under this ss.2.3.1 (a "Commitment Reallocation Request"). Each such notice shall specify (i) each Borrower's Sub-Commitment as of the date of such notice, (ii) each Borrower's Sub-Commitment after giving effect to such notice, and (iii) the effective date of such reallocation, which date shall be no less than two (2) Business Days after the date of such notice (the "Commitment Reallocation Date"). Upon giving effect to a Commitment Reallocation Request, the sum of the Borrowers' Sub-Commitments shall not exceed the Total Commitment in effect at that time. On the Commitment Reallocation Date, the Sub-Commitment of each of the Borrowers shall be reallocated in accordance with the Commitment Reallocation Request and SCHEDULE 1 shall be deemed revised to reflect the reallocation. The Administrative Agent shall keep a record of each Commitment Reallocation Request and the Sub-Commitment of each Borrower as in effect on each date and such record shall be conclusive, in the absence of manifest error. A reallocation of the Total Commitment under this ss.2.3.1 shall not be deemed to be a reduction of the Total Commitment. 2.3.2. REDUCTION OF SUB-COMMITMENT. Each of the Borrowers and CML shall have the right at any time and from time to time upon five (5) Business Days prior written notice to the Administrative Agent to reduce by $500,000 or an integral multiple thereof or terminate entirely its Sub-Commitment or, in the case of CML, any Borrower's Sub-Commitment, whereupon the Total Commitment shall be reduced by the amount specified in such notice or, as the case may be, terminated and the Commitments of the Lenders shall be reduced PRO RATA in accordance with their respective Commitment Percentages of the amount specified in such notice or, as the case may be, terminated. Promptly after receiving any notice of any Borrower or CML delivered pursuant to this ss.2.3.2, the Administrative Agent will notify the Lenders of the substance thereof. Upon the effective date of any such reduction or termination, the applicable Borrower shall pay to the Administrative Agent for the respective accounts of the Lenders the full amount of any commitment fee then accrued on the amount of the reduction. No reduction or termination of the Commitments may be reinstated. 2.3.3. MANDATORY REDUCTION OF TOTAL COMMITMENT. Without limiting the obligations of CML, the Borrowers and their Subsidiaries to comply with the provisions of ss.10.5.2 of the Credit Agreement, in the event of any disposition of 33 -25- assets by CML or any of its Subsidiaries (other than a Permitted Disposition), the Total Commitment shall be reduced on the date of receipt by CML or any of its Subsidiaries of any Net Cash Proceeds from such disposition by an amount equal to such Net Cash Proceeds. On or prior to the date of any such disposition, CML shall (a) allocate the reduction of the Total Commitment among the Sub-Commitments of the Borrowers as CML deems appropriate and (b) give to the Administrative Agent written notice setting forth the Total Commitment allocation after giving effect to any reduction pursuant to this ss.2.3.3. In the event CML fails, by the date of the receipt by CML or any of its Subsidiaries of any Net Cash Proceeds from such disposition, to reallocate the Sub-Commitments of the Borrowers to give effect to such reductions, the Administrative Agent shall reallocate the Sub-Commitments of the Borrowers in its sole discretion. 2.4. THE NOTES. 2.4.1. THE NORDICTRACK NOTES. The NordicTrack Loans shall be evidenced by promissory notes of NordicTrack in substantially the form of EXHIBIT A-1 hereto (each a "NordicTrack Note"), dated as of the Restatement Effective Date (or other such date on which a Lender may become a party hereto in accordance with ss.20 hereof) and completed with appropriate insertions. One NordicTrack Note shall be payable to the order of each Lender in a principal amount equal to such Lender's Commitment or, if less, the outstanding amount of all NordicTrack Loans made by such Lender, plus interest accrued thereon, as set forth below. NordicTrack irrevocably authorizes each Lender to make or cause to be made, at or about the time of the Drawdown Date of any NordicTrack Loan or at the time of receipt of any payment of principal on such Lender's NordicTrack Note, an appropriate notation on such Lender's NordicTrack Note Record reflecting the making of such NordicTrack Loan or (as the case may be) the receipt of such payment. The outstanding amount of the NordicTrack Loans set forth on such Lender's NordicTrack Note Record shall be PRIMA FACIE evidence of the principal amount thereof owing and unpaid to such Lender, but the failure to record, or any error in so recording, any such amount on such Lender's NordicTrack Note Record shall not limit or otherwise affect the obligations of NordicTrack hereunder or under any NordicTrack Note to make payments of principal of or interest on any NordicTrack Note when due. 2.4.2. INTENTIONALLY OMITTED. 2.4.3. THE S&H NOTES. The S&H Loans shall be evidenced by promissory notes of S&H in substantially the form of EXHIBIT A-3 hereto (each a "S&H Note"), dated as of the Restatement Effective Date (or other such date on which a Lender may become a party hereto in accordance with ss.20 hereof) and completed with appropriate insertions. One S&H Note shall be payable to the order of each Lender in a principal amount equal to such Lender's Commitment or, if less, the outstanding amount of all S&H Loans made by such Lender, plus interest accrued thereon, as set forth below. S&H irrevocably authorizes each Lender to make or cause to be made, at or about the time of the Drawdown Date of any S&H Loan or at the time of receipt of any payment of principal on such Lender's S&H Note, an appropriate notation on such Lender's S&H Note Record reflecting the making of such S&H Loan or (as the case may be) the receipt of such payment. The outstanding amount of the S&H Loans set forth on such Lender's S&H Note Record shall be PRIMA FACIE 34 -26- evidence of the principal amount thereof owing and unpaid to such Lender, but the failure to record, or any error in so recording, any such amount on such Lender's S&H's Note Record shall not limit or otherwise affect the obligations of S&H hereunder or under any S&H Note to make payments of principal of or interest on any S&H Note when due. 2.4.4. INTENTIONALLY OMITTED. 2.5. INTEREST ON LOANS. Except as otherwise provided in ss.5.11. (a) Each Base Rate Loan which does not constitute an Overadvance shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at the rate of three-quarters of one percent (0.75%) per annum above the Base Rate. (b) Each Eurodollar Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at the rate of two and three-quarters percent (2.75%) per annum above the Eurodollar Rate determined for such Interest Period. (c) Each Base Rate Loan which constitutes an Overadvance shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at the rate of two percent (2.00%) per annum above the Base Rate. (d) Each of the Borrowers promises to pay interest on each of its Loans in arrears on each Interest Payment Date with respect thereto. 2.6. REQUESTS FOR LOANS. 2.6.1. LOAN REQUESTS. Each of the Borrowers shall give to the Administrative Agent written notice in the form of EXHIBIT B hereto (or telephonic notice confirmed in a writing in the form of EXHIBIT B hereto) of each Loan requested by such Borrower hereunder (a "Loan Request") not later than (i) 1:00 p.m. (Boston time) on the proposed Drawdown Date of any Base Rate Loan and (ii) three (3) Eurodollar Business Days prior to the proposed Drawdown Date of any Eurodollar Rate Loan. Each such notice shall specify (A) the principal amount of the Loan requested, (B) the proposed Drawdown Date of such Loan, (C) the Interest Period for such Loan, (D) the Type of such Loan and (E) the Borrower requesting such Loan. Promptly upon receipt of any such notice, the Administrative Agent shall notify each of the Lenders thereof. Each Loan Request shall be irrevocable and binding on the requesting Borrower and shall obligate the requesting Borrower to accept the Loan requested from the Lenders on the proposed Drawdown Date. Each Loan Request shall be in a minimum aggregate amount of $100,000 or a larger integral multiple thereof. 2.6.2. DAILY BORROWINGS. Notwithstanding the notice and minimum amount requirements set forth in ss.2.6.1 but otherwise in accordance with the terms and conditions of this Credit Agreement, the Administrative Agent may, in its sole discretion and without conferring with the Lenders, make Loans to each Borrower (i) 35 -27- by entry of credits to such Borrower's Controlled Disbursement Account to cover checks or other charges which such Borrower has drawn or made against such account or (ii) in an amount as otherwise requested by such Borrower. Each Borrower hereby requests and authorizes the Administrative Agent to make from time to time such Loans by means of appropriate entries of such credits sufficient to cover checks and other charges then presented. Each Borrower acknowledges and agrees that the making of such Loans shall, in each case, be subject in all respects to the provisions of this Credit Agreement as if they were Loans covered by a Loan Request including, without limitation, the limitations set forth in ss.2.1 and the requirements that the applicable provisions of ss.ss.12 and 13 (in the case of Loans made on the Restatement Effective Date) and ss.13 (in all other cases) be satisfied. All actions taken by the Administrative Agent pursuant to the provisions of this ss.2.6.2 shall be conclusive and binding on the applicable Borrower absent the Administrative Agent's gross negligence or willful misconduct. Loans made pursuant to this ss.2.6.2 shall be Base Rate Loans until converted in accordance with the provisions of the Credit Agreement and, prior to a Settlement, such interest shall be solely for the account of the Administrative Agent. 2.7. CONVERSION OPTIONS. 2.7.1. CONVERSION TO DIFFERENT TYPE OF LOAN. Each Borrower may elect from time to time to convert any of its outstanding Loans (excluding the Loans outstanding from time to time which constitute Overadvances) to a Loan of another Type, PROVIDED that (i) with respect to any such conversion of a Loan to a Base Rate Loan, the applicable Borrower shall give the Administrative Agent at least three (3) Business Days prior written notice of such election; (ii) with respect to any such conversion of a Base Rate Loan to a Eurodollar Rate Loan, the applicable Borrower shall give the Administrative Agent at least three (3) Eurodollar Business Days prior written notice of such election; (iii) with respect to any such conversion of a Eurodollar Rate Loan into a Base Rate Loan, such conversion shall only be made on the last day of the Interest Period with respect thereto; (iv) no Loan may be converted into a Eurodollar Rate Loan when any Default or Event of Default has occurred and is continuing; and (v) no Borrower may have more than two (2) Eurodollar Rate Loans outstanding at any time. On the date on which such conversion is being made each Lender shall take such action as is necessary to transfer its Commitment Percentage of such Loans to its Domestic Lending Office or its Eurodollar Lending Office, as the case may be. All or any part of outstanding Loans of any Type may be converted into a Loan of another Type as provided herein, PROVIDED that any partial conversion shall be in an aggregate principal amount of $3,000,000 or a whole multiple of $1,000,000 in excess thereof. Each Conversion Request relating to the conversion of a Base Rate Loan to a Eurodollar Rate Loan shall be irrevocable by the Borrowers. 2.7.2. CONTINUATION OF TYPE OF LOAN. Any Loan of any Type may be continued as a Loan of the same Type upon the expiration of an Interest Period with respect thereto by compliance by the applicable Borrower with the notice provisions contained in ss.2.7.1; PROVIDED that no Eurodollar Rate Loan may be continued as such when any Default or Event of 36 -28- Default has occurred and is continuing, but shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto ending during the continuance of any Default or Event of Default of which officers of the Administrative Agent active upon the Borrowers' account have actual knowledge. In the event that the applicable Borrower fails to provide any such notice with respect to the continuation of any Eurodollar Rate Loan as such, then such Eurodollar Rate Loan shall be automatically converted to a Base Rate Loan on the last day of the first Interest Period relating thereto. The Administrative Agent shall notify the Lenders promptly when any such automatic conversion contemplated by this ss.2.7 is scheduled to occur. 2.7.3. EURODOLLAR RATE LOANS. Any conversion to or from Eurodollar Rate Loans shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of all Eurodollar Rate Loans having the same Interest Period shall not be less than $3,000,000 or a whole multiple of $1,000,000 in excess thereof. 2.8. SETTLEMENT; FAILURE TO MAKE FUNDS AVAILABLE. 2.8.1. SETTLEMENT AND FUNDING PROCEDURES. On each Settlement Date, the Administrative Agent shall, not later than 1:00 p.m. (Boston time), give telephonic or facsimile notice (i) to the Lenders and the Borrowers of (A) the respective outstanding amount of Base Rate Loans made by the Agent on behalf of the Lenders from the immediately preceding Settlement Date through the close of business on the prior day and (B) the amount of any Eurodollar Rate Loans to be made (following the giving of notice pursuant to 2.6.1(ii)) on such date pursuant to a Loan Request and (ii) to the Lenders of the amount (a "Settlement Amount") that each Lender (the "Settling Lender") shall pay to effect a Settlement of any Loan. A statement of the Administrative Agent submitted to the Lenders and the applicable Borrower or to the Lenders with respect to any amounts owing under this ss.2.8.1 shall be PRIMA FACIE evidence of the amount due and owing. The Settling Lender shall, not later than 3:00 p.m. (Boston time) on such Settlement Date, effect a wire transfer of immediately available funds to the Administrative Agent in the amount of the Settlement Amount. All funds advanced by any Lender as a Settling Lender pursuant to this ss.2.8.1 shall foR all purposes be treated as a Loan made by such Settling Lender to the applicable Borrower and all funds received by any Lender pursuant to this ss.2.8.1 shall for alL purposes be treated as repayment of amounts owed with respect to Loans made by such Lender. In the event that any bankruptcy, reorganization, liquidation, receivership or similar cases or proceedings in which any of the Borrowers is a debtor prevent a Settling Lender from making any Loan to effect a Settlement as contemplated hereby, such Settling Lender will make such disposition and arrangements with the other Lenders with respect to such Loans, either by way of purchase of participations, distribution, PRO TANTO assignment of claims, subrogation or otherwise as shall result in each Lender's share of the outstanding Loans being equal, as nearly as may be, to such Lender's Commitment Percentage of the outstanding amount of the Loans. 2.8.2. ADVANCES BY ADMINISTRATIVE AGENT. The Administrative Agent may, unless notified to the contrary by any Lender prior to a Settlement Date, assume that such Lender has made or will make available to the Administrative Agent on such Settlement Date the amount of such Lender's Settlement Amount, and the Administrative Agent may (but it shall not be required to), in reliance upon such assumption, make available to the applicable Borrower a corresponding amount. If 37 -29- any Lender makes available to the Administrative Agent such amount on a date after such Settlement Date, such Lender shall pay to the Administrative Agent on demand an amount equal to the product of (i) the average computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Administrative Agent for federal funds acquired by the Administrative Agent during each day included in such period, TIMES (ii) the amount of such Settlement Amount, TIMES (iii) a fraction, the numerator of which is the number of days that elapse from and including such Settlement Date to the date on which the amount of such Settlement Amount shall become immediately available to the Administrative Agent, and the denominator of which is 360. A statement of the Administrative Agent submitted to such Lender with respect to any amounts owing under this paragraph shall be PRIMA FACIE evidence of the amount due and owing to the Administrative Agent by such Lender. If such Lender's Settlement Amount is not made available to the Administrative Agent by such Lender within three (3) Business Days following such Settlement Date, the Administrative Agent shall be entitled to recover such amount from the applicable Borrower on demand, with interest thereon at the rate per annum applicable to the Loans as of such Settlement Date. 2.8.3. FAILURE TO MAKE FUNDS AVAILABLE. The failure or refusal of any Lender to make available to the Administrative Agent at the aforesaid time and place on any Settlement Date the amount of its Settlement Amount (i) shall not relieve any other Lender from its several obligations hereunder to make available to the Administrative Agent the amount of such other Lender's Settlement Amount and (ii) shall not impose upon such other Lender any liability with respect to such failure or refusal or otherwise increase the Commitment of such other Lender. 2.9. CHANGE IN BORROWING BASES. Each Borrowing Base shall be determined weekly (or at such other interval as may be specified pursuant to ss.9.4(f)) by thE Administrative Agent by reference to the Borrowing Base Report. The Administrative Agent shall give to the Lenders and the applicable Borrower(s) written notice of any change in such Borrower's Borrowing Base determined by the Administrative Agent resulting from the Administrative Agent's determination to add reserves or decrease the advance rates with respect to such Borrowing Base based on commercial finance examinations, inventory appraisals or other credit or collateral considerations, which notice shall be effective upon receipt by the applicable Borrower(s). Prior to such time as the applicable Borrower receives such notice, such Borrower's Borrowing Base shall be the amount in effect in the absence of such notice. For purposes of this Credit Agreement and the other Loan Documents, the Administrative Agent may assume, subject to adjustment based upon the provisions of this Credit Agreement, that each Borrower's Borrowing Base and the Overadvance Borrowing Base in effect on any given date is such Borrower's Borrowing Base or the Overadvance Borrowing Base, as the case may be, as indicated on the most recent Borrowing Base Report delivered on a timely basis to the Lenders and the Administrative Agent in accordance with the provisions of ss.9.4(f) hereof. 3. REPAYMENT OF THE LOANS. 3.1. MATURITY. Each Borrower promises to pay on the Maturity Date, and there shall become absolutely due and payable on the Maturity Date, all of its Loans outstanding on such date, together with any and all accrued and unpaid interest thereon. 38 -30- 3.2. MANDATORY REPAYMENTS OF LOANS. 3.2.1. NORDICTRACK LOANS. If at any time the sum of the outstanding amount of the NordicTrack Loans and NordicTrack's Letter of Credit Exposure exceeds the lesser of (i) NordicTrack's Sub-Commitment in effect at such time and (ii) the NordicTrack Borrowing Base PLUS the lesser of (x) the Overadvance Borrowing Base less the aggregate outstanding amount of the Overadvances of the other Borrowers and (y) NordicTrack's Sub-Overadvance Amount in effect at such time, then NordicTrack shall immediately pay the amount of such excess to the Administrative Agent for the respective accounts of the Lenders for application: FIRST, to any Unpaid Reimbursement Obligations in respect of Letters of Credit issued at the request of NordicTrack; second, to the NordicTrack Loans; and THIRD, to provide to the Administrative Agent cash collateral for Reimbursement Obligations in respect of Letters of Credit issued at the request of NordicTrack as contemplated by ss.4.2(b) and (c). Each payment of anY Unpaid Reimbursement Obligations or prepayment of NordicTrack Loans shall be allocated among the Lenders, in proportion, as nearly as practicable, to each Unpaid Reimbursement Obligation or (as the case may be) the respective unpaid principal amount of each Lender's NordicTrack Note, with adjustments to the extent practicable to equalize any prior payments or repayments not exactly in proportion. 3.2.2. INTENTIONALLY OMITTED. 3.2.3. S&H LOANS. If at any time the sum of the outstanding amount of the S&H Loans and S&H's Letter of Credit Exposure exceeds the lesser of (i) S&H's Sub-Commitment in effect at such time and (ii) the S&H Borrowing Base PLUS the lesser of (x) the Overadvance Borrowing Base less the aggregate outstanding amount of the Overadvances of the other Borrowers and (y) S&H's Sub-Overadvance Amount in effect at such time, then S&H shall immediately pay the amount of such excess to the Administrative Agent for the respective accounts of the Lenders for application: FIRST, to any Unpaid Reimbursement Obligations in respect of Letters of Credit issued at the request of S&H; SECOND, to the S&H Loans; and THIRD, to provide to the Administrative Agent cash collateral for Reimbursement Obligations in respect of Letters of Credit issued at the request of S&H as contemplated by ss.4.2(b) and (c). Each payment of anY Unpaid Reimbursement Obligations or prepayment of S&H Loans shall be allocated among the Lenders, in proportion, as nearly as practicable, to each Unpaid Reimbursement Obligation or (as the case may be) the respective unpaid principal amount of each Lender's S&H Note, with adjustments to the extent practicable to equalize any prior payments or repayments not exactly in proportion. 3.2.4. INTENTIONALLY OMITTED. 3.2.5. ANNUAL CLEAN-UP. During each fiscal year of the Borrowers, for a period of forty-five (45) consecutive days commencing not earlier than December 15 and ending not later than the next following July 31, the aggregate amount of all Loans outstanding shall be zero. At the beginning of each such forty-five (45) day period, the Borrowers shall repay all Loans outstanding and within fourteen (14) days following the commencement of such forty-five (45) day period, CML and the Borrowers shall deliver to the Administrative Agent and the Lenders a certificate 39 -31- signed by the chief financial officer of CML notifying the Administrative Agent and the Lenders of the commencement of such forty-five (45) day period. 3.3. DEPOSITORY ARRANGEMENTS. 3.3.1. THE BORROWERS' DEPOSITORY ARRANGEMENTS. Each of the Borrowers will (i) on or prior to the Original Closing Date, maintain a depository concentration account (such Borrower's "Concentration Account") with and under the control of the Administrative Agent, as contemplated by the terms of this Credit Agreement, (ii) direct each Agency Account Institution pursuant to the Agency Account Agreements (whereby such Agency Account Institution shall, among other things, waive any right of set off, other than for service charges and returns incurred in connection therewith), to cause all funds held by such Agency Account Institution in the Agency Accounts to be transferred daily (or such other period as the Administrative Agent requests) to, and only to, the Administrative Agent for deposit in such Borrower's Concentration Account and (iii) direct its account debtors and obligors on instruments or other obligors of such Borrower with respect to any of the Collateral to make all payments on or with respect to any of the Collateral due or to become due to such Borrower directly to such Borrower's Concentration Account or the Agency Accounts. If, notwithstanding the requirements of the foregoing sentence, any of the Borrowers receives any cash proceeds of any of the Collateral, whether in the form of money, checks or otherwise, such Borrower will hold such cash proceeds in trust for the benefit of the Administrative Agent and the Lenders and turn such cash proceeds promptly over to the Administrative Agent in the identical form received by deposit to any Agency Account or Concentration Account. The Administrative Agent shall, (i) with respect to all funds and cash proceeds in the form of money, checks and like items received in any Borrower's Concentration Account, on the same Business Day on which the Administrative Agent determines that good collected funds have been received, and prior to the final collection of good collected funds, on a provisional basis until such final collection, (ii) with respect to all funds and cash proceeds in the form of a wire transfer received in any Borrower's Concentration Account, on the same Business Day as the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received) and (iii) with respect to all funds and cash proceeds in the form of an automated clearing house transfer received in any Borrower's Concentration Account, on the next Business Day following the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), in each case, apply to the principal of the applicable Borrower's Base Rate Loans and then (after payment in full of all such Borrower's Base Rate Loans) to the principal of the applicable Borrower's Eurodollar Rate Loans all such funds and cash proceeds which were deposited to such Borrower's Concentration Account and, so long as no Default or Event of Default has occurred and is continuing, the Administrative Agent shall cause any excess to be credited to the applicable Borrower's Operating Account. From and after the occurrence and during the continuance of a Default or an Event of Default, the Administrative Agent may, from time to time in the Administrative Agent's discretion, retain any or all of such excess to pay any Obligations then due and payable in accordance with ss.14.4 and to provide cash collateral for any Obligations not then duE and payable, including an amount equal to 105% of the Maximum Drawing Amount to secure Reimbursement 40 -32- Obligations with respect to Letters of Credit issued at the request of the applicable Borrower, with the Administrative Agent causing any surplus, subject to the rights of any other persons entitled thereto, to be credited to the applicable Borrower's Operating Account. For purposes of the foregoing provisions of this ss.3.3.1, the Administrative Agent shall not be deemed to have received any sucH cash proceeds on any day unless received by the Administrative Agent before 4:00 p.m. (Boston time) on such day. Each of the Borrowers further acknowledges and agrees that any such provisional credit by the Administrative Agent shall be subject to reversal if final collection in good collected funds of the related item is not received by the Administrative Agent in accordance with the Administrative Agent's customary procedures and practices for collecting provisional items. 3.3.2. CML'S DEPOSITORY ARRANGEMENTS. CML will (i) on or prior to the Original Closing Date, maintain a depository concentration account (CML's "Concentration Account") with and under the control of the Administrative Agent, as contemplated by the terms of this Credit Agreement, (ii) direct each Agency Account Institution pursuant to the Agency Account Agreements (whereby such Agency Account Institution shall, among other things, waive any right of set off, other than for service charges and returns incurred in connection therewith), to cause all funds held by such Agency Account Institution in the Agency Accounts to be transferred daily (or such other period as the Administrative Agent requests) to, and only to, the Administrative Agent for deposit in such Borrower's Concentration Account, (iii) direct its account debtors and obligors on instruments or other obligors of CML with respect to any of the Collateral to make all payments on or with respect to any of the Collateral due or to become due to CML directly to CML's Concentration Account or the Agency Accounts and (iv) cause any and all tax refunds received by CML to be immediately deposited into CML's Concentration Account. If, notwithstanding the requirements of the foregoing sentence, CML receives any cash proceeds of any of the Collateral, whether in the form of money, checks or otherwise, CML will hold such cash proceeds in trust for the benefit of the Administrative Agent and the Lenders and turn such cash proceeds promptly over to the Administrative Agent in the identical form received by deposit to any Agency Account or Concentration Account. The Administrative Agent shall, (i) with respect to all funds and cash proceeds in the form of money, checks and like items received in CML's Concentration Account, on the same Business Day on which the Administrative Agent determines that good collected funds have been received, and prior to the final collection of good collected funds, on a provisional basis until such final collection, (ii) with respect to all funds and cash proceeds in the form of a wire transfer received in CML's Concentration Account, on the same Business Day as the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), and (iii) with respect to all funds and cash proceeds in the form of an automated clearing house transfer received in CML's Concentration Account, on the next Business Day following the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), in each case, apply first, to the principal of the Borrowers' Base Rate Loans and then (after payment in full of the Borrowers' Base Rate Loans) to the principal of the Borrowers' Eurodollar Rate Loans, in each case in such proportions as the Administrative Agent shall determine in its sole discretion all such funds and cash proceeds which were deposited to CML's Concentration Account and, so long as no 41 -33- Default or Event of Default has occurred and is continuing, the Administrative Agent shall cause any excess to be credited to CML's Operating Account. From and after the occurrence and during the continuance of a Default or an Event of Default, the Administrative Agent may, from time to time in the Administrative Agent's discretion, retain any or all of such excess to pay any Obligations then due and payable in accordance with ss.14.4 and to provide cash collateral for any Obligations not then duE and payable, including an amount equal to 105% of the Maximum Drawing Amount to secure Reimbursement Obligations of the Borrowers and CML, with the Administrative Agent causing any surplus, subject to the rights of any other persons entitled thereto, to be credited to CML's Operating Account. For purposes of the foregoing provisions of this ss.3.3.2, the Administrative Agent shall not be deemed to have received any sucH cash proceeds on any day unless received by the Administrative Agent before 4:00 p.m. (Boston time) on such day. CML further acknowledges and agrees that any such provisional credit by the Administrative Agent shall be subject to reversal if final collection in good collected funds of the related item is not received by the Administrative Agent in accordance with the Administrative Agent's customary procedures and practices for collecting provisional items. 3.3.3. THE OTHER GUARANTORS' DEPOSITORY ARRANGEMENTS. Each of the Guarantors not subject to ss.ss.3.3.1 or 3.3.2 will (i) direct each Agency AccoUnt Institution pursuant to the Agency Account Agreements (whereby such Agency Account Institution shall, among other things, waive any right of set off, other than for service charges and returns incurred in connection therewith), to cause all funds held by such Agency Account Institution in the Agency Accounts to be transferred daily (or such other period as the Administrative Agent requests) to, and only to, the Administrative Agent for deposit in the Concentration Account of the Borrower which is such Guarantor's direct or indirect parent, in accordance with this ss.3.3.3 and (ii) direct its account debtors and obligors on instruments or other obligors of such Guarantor with respect to any of the Collateral to make all payments on or with respect to any of the Collateral due or to become due to such Guarantor directly to the Concentration Account of such Guarantor's direct or indirect parent or the Agency Accounts of such Guarantor or such Guarantor's direct or indirect parent. If, notwithstanding the requirements of the foregoing sentence, any of the Guarantors receives any cash proceeds of any of the Collateral, whether in the form of money, checks or otherwise, such Guarantor will hold such cash proceeds in trust for the benefit of the Administrative Agent and the Lenders and turn such cash proceeds promptly over to the Administrative Agent in the identical form received by deposit to any Agency Account or Concentration Account. The Administrative Agent shall, (i) with respect to all funds and cash proceeds in the form of money checks and like items received in any Borrower's or CML's Concentration Account, on the same Business Day on which the Administrative Agent determines that good collected funds have been received, and prior to the final collection of good collected funds, on a provisional basis until such final collection, (ii) with respect to all funds and cash proceeds in the form of a wire transfer received in any Borrower's or CML's Concentration Account, on the same Business Day as the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), and (iii) with respect to all funds and cash proceeds in the form of an automated clearing house transfer received in any Borrower's or CML's Concentration Account, on the next Business Day following 42 -34- the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), in each case, apply, in accordance with the provisions of ss.3.3.1 or ss.3.3.2, as the case may be, all such funds and cash proceeds so long as no Default or Event of Default has occurred and is continuing, the Administrative Agent shall cause any excess to be credited in accordance with the provisions of ss.3.3.1 or ss.3.3.2, as the case may be. From and after the occurrence and during the continuance oF a Default or an Event of Default, the Administrative Agent may, from time to time in the Administrative Agent's discretion, retain any or all of such excess to pay any Obligations then due and payable in accordance with ss.14.4 and to provide casH collateral for any Obligations not then due and payable, including an amount equal to 105% of the Maximum Drawing Amount to secure Reimbursement Obligations of the Borrowers, with the Administrative Agent causing any surplus, subject to the rights of any other persons entitled thereto, to be credited in accordance with the provisions of ss.3.3.1 or ss.3.3.2, as the case may be. For purposes of the foregoing provisions of tHis ss.3.3.3, the Administrative Agent shall not be deemed to have received any such casH proceeds on any day unless received by the Administrative Agent before 4:00 p.m. (Boston time) on such day. Each of the Guarantors subject to this ss.3.3.3 furtheR acknowledges and agrees that any such provisional credit by the Administrative Agent shall be subject to reversal if final collection in good collected funds of the related item is not received by the Administrative Agent in accordance with the Administrative Agent's customary procedures and practices for collecting provisional items. 3.3.4. FEES AND EXPENSES; APPLICATION OF PAYMENT. Each of the Borrowers and the Guarantors agrees to pay to the Administrative Agent any and all reasonable fees, costs and expenses which the Administrative Agent incurs in connection with the opening and maintaining of the Concentration Accounts, the Controlled Disbursement Accounts and the depositing for collection by the Administrative Agent of any check or other item of payment. Absent gross negligence or willful misconduct by the Administrative Agent, each of the Borrowers and each of the Guarantors agrees to indemnify the Administrative Agent and to hold the Administrative Agent harmless from and against any loss, cost or expense sustained or incurred by the Administrative Agent on account of any claims of third parties arising in connection with the Administrative Agent's operation of the Concentration Account. Each partial prepayment of Loans under this ss.3.3 shall be allocated among the Lenders iN proportion, as nearly as practicable, to the respective unpaid principal amount of each Lender's applicable Note, with adjustments to the extent practicable to equalize any prior repayments not exactly in proportion. 3.4. OPTIONAL REPAYMENTS OF LOANS. Each Borrower shall have the right, at its election, to repay the outstanding amount of its Loans, as a whole or in part, at any time without penalty or premium, PROVIDED that any full or partial prepayment of the outstanding amount of any Eurodollar Rate Loans pursuant to this ss.3.4 may be made only on the last daY of the Interest Period relating thereto. The applicable Borrower shall give the Administrative Agent, no later than 1:00 p.m., Boston time, at least one (1) Business Day prior written notice of any proposed prepayment pursuant to this ss.3.4 of Base Rate Loans, and three (3) Eurodollar Business Days notice of any proposed prepayment pursuant to this ss.3.4 oF Eurodollar Rate Loans, in each case specifying the proposed date of prepayment of 43 -35- its Loans and the principal amount to be prepaid. Each such partial prepayment of the Loans shall be in an integral multiple of $500,000 and shall be applied, in the absence of instruction by the applicable Borrower, first to the principal of the applicable Borrower's Base Rate Loans and then to the principal of the applicable Borrower's Eurodollar Rate Loans. Each partial prepayment shall be allocated among the Lenders, in proportion, as nearly as practicable, to the respective unpaid principal amount of each Lender's applicable Note, with adjustments to the extent practicable to equalize any prior repayments not exactly in proportion. Any prepayment of the Loans made pursuant to ss.3.3 shall not be subject to the provisions of thiS ss.3.4. 4. LETTERS OF CREDIT. 4.1. LETTER OF CREDIT COMMITMENTS. 4.1.1. COMMITMENT TO ISSUE LETTERS OF CREDIT. Subject to the terms and conditions hereof and the execution and delivery by any of the Borrowers and CML of a letter of credit application on the Issuing Bank's customary form (a "Letter of Credit Application"), the Issuing Bank on behalf of the Lenders and in reliance upon the agreement of the Lenders set forth in ss.4.1.4 and upon the representations anD warranties of the applicable Borrower and CML contained herein, agrees, in its individual capacity, to issue, extend and renew for the account of such Borrower and CML one or more standby or documentary letters of credit (individually, a "Letter of Credit"), in such form as may be requested from time to time by the applicable Borrower and agreed to by the Issuing Bank; PROVIDED, HOWEVER, that, after giving effect to such request, (a) the sum of the aggregate Letter of Credit Exposure of the Borrowers shall not exceed $40,000,000 at any one time and (b) the sum of (i) each Borrower's Letter of Credit Exposure and (ii) the amount of all Loans of such Borrower outstanding shall not exceed the lesser of (A) such Borrower's Sub-Commitment and (B) such Borrower's Borrowing Base PLUS the lesser of (x) the Overadvance Borrowing Base and (y) such Borrower's Sub-Overadvance Amount less the aggregate Sub-Overadvance Amounts allocated to other Borrowers. 4.1.2. LETTER OF CREDIT APPLICATIONS. Each Letter of Credit Application shall be completed to the satisfaction of the Issuing Bank. In the event that any provision of any Letter of Credit Application shall be inconsistent with any provision of this Credit Agreement, then the provisions of this Credit Agreement shall, to the extent of any such inconsistency, govern. 4.1.3. TERMS OF LETTERS OF CREDIT. Each Letter of Credit issued, extended or renewed hereunder shall, among other things, (i) provide for the payment of sight drafts for honor thereunder when presented in accordance with the terms thereof and when accompanied by the documents described therein, (ii) subject to clause (iii) hereof, with respect to documentary Letters of Credit, have a term of not more than one hundred eighty (180) days from the date of issuance, extension or renewal thereof (unless the Issuing Bank, in its sole discretion, shall have agreed to a longer term of up to but not exceeding two hundred seventy (270) days) and with respect to standby Letters of Credit, have a term of not more than one (1) year from the date of issuance, extension or renewal thereof, and (iii) have an expiry date no later than the date which is fourteen (14) days (or, if the Letter of Credit is confirmed by a confirmer or otherwise provides for one or more nominated persons, forty-five (45) 44 -36- days) prior to the Maturity Date. Each Letter of Credit so issued, extended or renewed shall be subject to the Uniform Customs. 4.1.4. REIMBURSEMENT OBLIGATIONS OF LENDERS. Each Lender severally agrees that it shall be absolutely liable, without regard to the occurrence of any Default or Event of Default or any other condition precedent whatsoever, to the extent of such Lender's Commitment Percentage, to reimburse the Issuing Bank on demand for the amount of each draft paid by the Issuing Bank under each Letter of Credit to the extent that such amount is not reimbursed by the Borrowers or CML pursuant to ss.4.2 (such agreement for a Lender being called herein the "Letter of CrediT Participation" of such Lender). 4.1.5. PARTICIPATIONS OF LENDERS. Each such payment made by a Lender shall be treated as the purchase by such Lender of a participating interest in CML's and the Borrowers' Reimbursement Obligations under ss.4.2 in an amount equal to sucH payment. Each Lender shall share in accordance with its participating interest in any interest which accrues pursuant to ss.4.2. 4.2. REIMBURSEMENT OBLIGATION OF CML AND THE BORROWERS. In order to induce the Issuing Bank to issue, extend and renew each Letter of Credit and the Lenders to participate therein, each Borrower and CML hereby agrees to reimburse or pay to the Issuing Bank, for the account of the Issuing Bank or (as the case may be) the Lenders, with respect to each Letter of Credit issued, extended or renewed by the Issuing Bank hereunder at the request of such Borrower and CML, (a) except as otherwise expressly provided in ss.4.2(b) and (c), on each date thaT any draft presented under such Letter of Credit is honored by the Issuing Bank, or the Issuing Bank otherwise makes a payment with respect thereto, (i) the amount paid by the Issuing Bank under or with respect to such Letter of Credit, and (ii) the amount of any taxes, fees, charges or other costs and expenses whatsoever incurred by the Issuing Bank or any Lender in connection with any payment made by the Issuing Bank or any Lender under, or with respect to, such Letter of Credit, (b) upon the reduction (but not termination) of such Borrower's Sub-Commitment to an amount less than the Maximum Drawing Amount with respect to Letters of Credit issued at the request of such Borrower, an amount equal to such difference, which amount shall be held by the Issuing Bank for the benefit of the Lenders, the Issuing Bank and the Administrative Agent as cash collateral for all Reimbursement Obligations with respect to Letters of Credit issued at the request of such Borrower, and (c) upon the termination of the such Borrower's Sub-Commitment, or the acceleration of the Reimbursement Obligations with respect to Letters of Credit issued at the request of such Borrower in accordance with ss.14, an amount equal to the theN Maximum Drawing Amount with respect to Letters of Credit issued at the request of such Borrower, which amount shall be held by the Issuing Bank for the benefit of the Lenders, the Issuing Bank and the Administrative Agent as cash collateral for all Reimbursement Obligations with respect to Letters of Credit issued at the request of such Borrower. 45 -37- Each such payment shall be made to the Issuing Bank at the Issuing Bank's head office located at 100 Federal Street, Boston, Massachusetts in immediately available funds. Interest on any and all amounts remaining unpaid by the Borrowers under this ss.4.2 at any time froM the date such amounts become due and payable (whether as stated in this ss.4.2, bY acceleration or otherwise) until payment in full (whether before or after judgment) shall be payable to the Issuing Bank on demand at the rate specified in ss.5.11 for overdue principal oN the Loans. 4.3. LETTER OF CREDIT PAYMENTS. If any draft shall be presented or other demand for payment shall be made under any Letter of Credit, the Issuing Bank shall notify the applicable Borrower of the date and amount of the draft presented or demand for payment and of the date and time when it expects to pay such draft or honor such demand for payment. If the applicable Borrower or CML fails to reimburse the Issuing Bank as provided in ss.4.2 on oR before the date that such draft is paid or other payment is made by the Issuing Bank, the Issuing Bank may at any time thereafter notify the Lenders of the amount of any such Unpaid Reimbursement Obligation. No later than 3:00 p.m. (Boston time) on the Business Day next following the receipt of such notice, each Lender shall make available to the Issuing Bank, at its head office located at 100 Federal Street, Boston, Massachusetts, in immediately available funds, such Lender's Commitment Percentage of such Unpaid Reimbursement Obligation, together with an amount equal to the product of (i) the average, computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Issuing Bank for federal funds acquired by the Issuing Bank during each day included in such period, TIMES (ii) the amount equal to such Lender's Commitment Percentage of such Unpaid Reimbursement Obligation, TIMES (iii) a fraction, the numerator of which is the number of days that elapse from and including the date the Issuing Bank paid the draft presented for honor or otherwise made payment to the date on which such Lender's Commitment Percentage of such Unpaid Reimbursement obligation shall become immediately available to the Issuing Bank, and the denominator of which is 360. The responsibility of the Issuing Bank to CML, the Borrowers and the Lenders shall be only to determine that the documents (including each draft) delivered under each Letter of Credit in connection with such presentment shall be in conformity in all material respects with such Letter of Credit. 4.4. OBLIGATIONS ABSOLUTE. Each Borrower's and CML's obligations under this ss.4 shall be absolute and unconditional under any and all circumstances and irrespective of the occurrence of any Default or Event of Default or any condition precedent whatsoever or any setoff, counterclaim or defense to payment which any Borrower or CML may have or have had against the Issuing Bank, any Lender, any Agent or any beneficiary of a Letter of Credit. Each Borrower and CML further agrees with the Issuing Bank and the Lenders that the Issuing Bank and the Lenders shall not be responsible for, and each Borrower's and CML's Reimbursement Obligations under ss.4.2 shall not be affected by, among other things, thE validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among any Borrower, CML, the beneficiary of any Letter of Credit or any financing institution or other party to which any Letter of Credit may be transferred or any claims or defenses whatsoever of any Borrower against the beneficiary of any Letter of Credit or any such transferee. The Issuing Bank and the Lenders shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. Each Borrower and CML agrees that any action taken or omitted by the Issuing Bank or any 46 -38- Lender under or in connection with each Letter of Credit and the related drafts and documents, if done in good faith, shall be binding upon such Borrower and CML and shall not result in any liability on the part of the Issuing Bank or any Lender to such Borrower. 4.5. RELIANCE BY ISSUER. To the extent not inconsistent with ss.4.4, the Issuing Bank shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel, independent accountants and other experts selected by the Issuing Bank. The Issuing Bank shall be fully justified in failing or refusing to take any action under this Credit Agreement unless it shall first have received such advice or concurrence of the Majority Lenders as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Issuing Bank shall in all cases be fully protected in acting, or in refraining from acting, under this Credit Agreement in accordance with a request of the Majority Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and all future holders of the Notes or of a Letter of Credit Participation. 4.6. LETTER OF CREDIT FEE. Each Borrower shall, quarterly in arrears on the first day of each calendar quarter for the immediately preceding calendar quarter, pay a fee (in each case, a "Letter of Credit Fee") to the Issuing Bank (i) in respect of each standby Letter of Credit issued at the request of such Borrower equal to two and one-half percent (2.50%) per annum of the face amount of such standby Letter of Credit, and (ii) in respect of each documentary Letter of Credit issued at the request of such Borrower equal to one and three-eighths percent (1.375%) of the face amount of such documentary Letter of Credit. The Issuing Bank shall, in turn, remit to each Lender its PRO RATA portion of such Letter of Credit Fee. In addition, the applicable Borrower shall pay to the Issuing Bank, for its own account, on the date of issuance, or any extension or renewal of any Letter of Credit and at such other time or times as such charges are customarily made by the Issuing Bank, a fronting fee equal to one-eighth percent (0.125%) of the face amount of such Letter of Credit and the Issuing Bank's standard issuance, processing, negotiation, amendment and administrative fees, determined in accordance with customary fees and charges for similar facilities. 5. CERTAIN GENERAL PROVISIONS. 5.1. CLOSING FEE. The Borrowers jointly and severally agree to pay to the Administrative Agent on the Original Closing Date a closing fee in the amount set forth in the Fee Letter. 5.2. ADMINISTRATIVE AGENT'S FEE. The Borrowers jointly and severally shall pay to the Administrative Agent an Administrative Agent's fee as provided in the Fee Letter. 5.3. FUNDS FOR PAYMENTS. 5.3.1. PAYMENTS TO ADMINISTRATIVE AGENT. All payments of principal, interest, Reimbursement Obligations, commitment fees, Letter of Credit Fees and any other amounts due hereunder or under any of the other Loan Documents shall be 47 -39- made to the Administrative Agent, for the respective accounts of the Lenders and the Administrative Agent, at the Administrative Agent's Head Office or at such other location in the Boston, Massachusetts area that the Administrative Agent may from time to time designate, in each case in immediately available funds. 5.3.2. NO OFFSET, ETC. All payments by the Borrowers hereunder and under any of the other Loan Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless any Borrower is compelled by law to make such deduction or withholding. If any such obligation is imposed upon any Borrower with respect to any amount payable by it hereunder or under any of the other Loan Documents, such Borrower will pay to the Administrative Agent, for the account of the Lenders or (as the case may be) the Administrative Agent, on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Lenders or the Administrative Agent to receive the same net amount which the Lenders or the Administrative Agent would have received on such due date had no such obligation been imposed upon such Borrower. Such Borrower will deliver promptly to the Administrative Agent certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by such Borrower hereunder or under such other Loan Document. 5.4. COMPUTATIONS. All computations of interest on the Loans and of commitment fees, Letter of Credit Fees or other fees shall, unless otherwise expressly provided herein, be based on a 360-day year and paid for the actual number of days elapsed. Except as otherwise provided in the definition of the term "Interest Period" with respect to Eurodollar Rate Loans, whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day, and interest shall accrue during such extension. The outstanding amount of the Loans as reflected on the Note Records from time to time shall be considered correct and binding on the applicable Borrower unless within five (5) Business Days after receipt of any notice by the Administrative Agent or any of the Lenders of such outstanding amount, the Administrative Agent or such Lender shall notify such Borrower to the contrary. 5.5. INABILITY TO DETERMINE EURODOLLAR RATE. In the event, prior to the commencement of any Interest Period relating to any Eurodollar Rate Loan, the Administrative Agent shall determine or be notified by the Majority Lenders that adequate and reasonable methods do not exist for ascertaining the Eurodollar Rate that would otherwise determine the rate of interest to be applicable to any Eurodollar Rate Loan during any Interest Period, the Administrative Agent shall forthwith give notice of such determination (which shall be conclusive and binding on the Borrowers and the Lenders) to the Borrowers and the Lenders. In such event (i) any Loan Request or Conversion Request with respect to Eurodollar Rate Loans shall be automatically withdrawn and shall be deemed a request for Base Rate Loans, (ii) each Eurodollar Rate Loan will automatically, on the last day of the then current Interest Period relating thereto, become a Base Rate Loan, and (iii) the obligations of the Lenders to make Eurodollar Rate Loans shall be suspended until the 48 -40- Administrative Agent determine that the circumstances giving rise to such suspension no longer exist, whereupon the Administrative Agent shall so notify the Borrowers and the Lenders. 5.6. ILLEGALITY. Notwithstanding any other provisions herein, if any present or future law, regulation, treaty or directive or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Rate Loans, such Lender shall forthwith give notice of such circumstances to the Borrowers and the other Lenders and thereupon (i) the commitment of such Lender to make Eurodollar Rate Loans or convert Loans of another Type to Eurodollar Rate Loans shall forthwith be suspended and (ii) such Lender's Loans then outstanding as Eurodollar Rate Loans, if any, shall be converted automatically to Base Rate Loans on the last day of each Interest Period applicable to such Eurodollar Rate Loans or within such earlier period as may be required by law. Each Borrower hereby agrees promptly to pay the Administrative Agent for the account of such Lender, upon demand by such Lender, any additional amounts necessary to compensate such Lender for any costs incurred by such Lender in making any conversion in accordance with this ss.5.6, including any interest or fees payable by such Lender to lenders of funds obtained bY it in order to make or maintain its Eurodollar Rate Loans hereunder. 5.7. ADDITIONAL COSTS, ETC. If any present or future applicable law, which expression, as used herein, includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time hereafter made upon or otherwise issued to any Lender or the Administrative Agent by any central bank or other fiscal, monetary or other authority (whether or not having the force of law), shall: (a) subject any Lender or the Administrative Agent to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Credit Agreement, the other Loan Documents, any Letters of Credit, such Lender's Commitment or the Loans (other than taxes based upon or measured by the income or profits of such Lender or the Administrative Agent), or (b) materially change the basis of taxation (except for changes in taxes on income or profits) of payments to any Lender of the principal of or the interest on any Loans or any other amounts payable to any Lender or the Administrative Agent under this Credit Agreement or any of the other Loan Documents, or (c) impose or increase or render applicable (other than to the extent specifically provided for elsewhere in this Credit Agreement) any special deposit, reserve, assessment, liquidity, capital adequacy or other similar requirements (whether or not having the force of law) against assets held by, or deposits in or for the account of, or loans by, or letters of credit issued by, or commitments of an office of any Lender, or (d) impose on any Lender or the Administrative Agent any other conditions or requirements with respect to this Credit Agreement, the other Loan Documents, any Letters of Credit, the Loans, such Lender's Commitment, or any class of loans, letters of credit or commitments of which any of the Loans or such Lender's Commitment forms a part, and the result of any of the foregoing is 49 -41- (i) to increase the cost to any Lender of making, funding, issuing, renewing, extending or maintaining any of the Loans or such Lender's Commitment or any Letter of Credit, or (ii) to reduce the amount of principal, interest, Reimbursement Obligation or other amount payable to such Lender or the Administrative Agent hereunder on account of such Lender's Commitment, any Letter of Credit or any of the Loans, or (iii) to require such Lender or the Administrative Agent to make any payment or to forgo any interest or Reimbursement Obligation or other sum payable hereunder, the amount of which payment or forgone interest or Reimbursement Obligation or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by such Lender or the Administrative Agent from the Borrowers hereunder, then, and in each such case, the Borrowers will, upon demand made by such Lender or (as the case may be) the Administrative Agent at any time and from time to time and as often as the occasion therefor may arise, pay to such Lender or the Administrative Agent such additional amounts as will be sufficient to compensate such Lender or the Administrative Agent for such additional cost, reduction, payment or forgone interest or Reimbursement Obligation or other sum. 5.8. CAPITAL ADEQUACY. If after the date hereof any Lender or the Administrative Agent determines that (i) the adoption of or change in any law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) regarding capital requirements for banks or bank holding companies or any change in the interpretation or application thereof by a court or governmental authority with appropriate jurisdiction, or (ii) compliance by such Lender or the Administrative Agent or any corporation controlling such Lender or the Administrative Agent with any law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) of any such entity regarding capital adequacy, has the effect of reducing the return on such Lender's or the Administrative Agent's capital as a result of such Lender's obligations hereunder to a level below that which such Lender or the Administrative Agent could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or the Administrative Agent's then existing policies with respect to capital adequacy and assuming full utilization of such entity's capital) by any amount deemed by such Lender or (as the case may be) the Administrative Agent to be material, then such Lender or the Administrative Agent may notify the Borrowers of such fact. To the extent that the amount of such reduction in the return on capital is not reflected in the Base Rate, the Borrowers agree to pay such Lender or (as the case may be) the Administrative Agent for the amount of such reduction in the return on capital as and when such reduction is determined upon presentation by such Lender or (as the case may be) the Administrative Agent of a certificate in accordance with ss.5.9 hereof. Each Lender shall allocate such cost increases among its customers in good faith and on an equitable basis. 5.9. CERTIFICATE. A certificate setting forth any additional amounts payable pursuant to ss.ss.5.7 or 5.8 and a brief explanation of such amounts which are due, submitted by any Lender or the Administrative Agent to the Borrowers, shall be conclusive, absent manifest error, that such amounts are due and owing. 50 -42- 5.10. INDEMNITY. Each of the Borrowers agrees to indemnify each Lender and to hold each Lender harmless from and against any loss, cost or expense (including loss of anticipated profits) that such Lender may sustain or incur as a consequence of (i) default by such Borrower in payment of the principal amount of or any interest on any Eurodollar Rate Loans as and when due and payable, including any such loss or expense arising from interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain its Eurodollar Rate Loans, (ii) default by such Borrower in making a borrowing or conversion after such Borrower has given (or is deemed to have given) a Loan Request or a Conversion Request relating thereto in accordance with ss.2.6 or ss.2.7 or (iii) the making of any payment oF a Eurodollar Rate Loan or the making of any conversion of any such Loan to a Base Rate Loan on a day that is not the last day of the applicable Interest Period with respect thereto, including interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain any such Loans. 5.11. INTEREST AFTER DEFAULT. 5.11.1. OVERDUE AMOUNTS. Overdue principal and (to the extent permitted by applicable law) interest on the Loans and all other overdue amounts payable hereunder or under any of the other Loan Documents shall bear interest compounded monthly and payable on demand at a rate per annum equal to two percent (2%) above the rate of interest otherwise applicable thereto until such amount shall be paid in full (after as well as before judgment). 5.11.2. AMOUNTS NOT OVERDUE. During the continuance of an Event of Default the principal of the Loans not overdue shall, until such Event of Default has been cured or remedied or such Event of Default has been waived by the Majority Lenders pursuant to ss.27, bear interest at a rate per annum equal to the rate of interesT applicable to overdue principal pursuant to ss.5.11.1. 6. COLLATERAL SECURITY AND GUARANTIES. 6.1. SECURITY OF BORROWERS. The Obligations shall be secured by a perfected first priority security interest (subject only to Permitted Liens entitled to priority under applicable law) in all of the assets of the Borrowers, (with such exceptions as are acceptable to the Majority Lenders), including, without limitation, the stock of all Borrowers, Guarantors (other than CML) and Foreign Guarantors, and all intercompany obligations owing to the Borrowers, in each case wherever located and whether now owned or hereafter acquired, pursuant to the terms of the Security Documents to which any of such Borrower is a party. 6.2. GUARANTY, FOREIGN GUARANTIES AND SECURITY OF GUARANTORS. The Obligations shall also be guaranteed pursuant to the terms of the Guaranty and the Foreign Guaranties. The obligations of the Guarantors under the Guaranty shall be in turn secured by a perfected first priority security interest (subject only to Permitted Liens entitled to priority under applicable law) in all of the assets of each such Guarantor (with such exceptions as are acceptable to the Majority Lenders) and all intercompany obligations owing to the Guarantors, in each case wherever located and whether now owned or hereafter acquired, pursuant to the terms of the Security Documents to which such Guarantor is a party. 51 -43- 7. GUARANTY. 7.1. GUARANTY OF PAYMENT AND PERFORMANCE. Each of the Guarantors hereby jointly and severally guarantees to the Lenders, the Issuing Bank and the Administrative Agent the full and punctual payment when due (whether at stated maturity, by required pre-payment, by acceleration or otherwise), as well as the performance, of all of the Obligations including all such which would become due but for the operation of the automatic stay pursuant to ss.362(a) of the Federal Bankruptcy Code and the operation of ss.ss.502(b) and 506(b) of the Federal Bankruptcy Code. This Guaranty is an absolute, unconditional and continuing guaranty of the full and punctual payment and performance of all of the Obligations and not of their collectability only and is in no way conditioned upon any requirement that any Agent, the Issuing Bank or any Lender first attempt to collect any of the Obligations from the applicable Borrower or resort to any collateral security or other means of obtaining payment. Should any of the Borrowers default in the payment or performance of any of the Obligations, the obligations of the Guarantors hereunder with respect to such Obligations in default shall, upon demand by the Administrative Agent, become immediately due and payable to the Administrative Agent, for the benefit of the Lenders, the Issuing Bank and the Administrative Agent, without demand or notice of any nature, all of which are expressly waived by each of the Guarantors. Payments by the Guarantors hereunder may be required by the Administrative Agent on any number of occasions. All payments by any of the Guarantors hereunder shall be made to the Administrative Agent, in the manner and at the place of payment specified therefor in ss.5 hereof, for the account of the Lenders, the IssuinG Bank and the Administrative Agent. 7.2. GUARANTORS' AGREEMENT TO PAY ENFORCEMENT COSTS, ETC. Each of the Guarantors further jointly and severally agrees, as the principal obligor and not as a guarantor only, to pay to the Administrative Agent, on demand, all reasonable costs and expenses (including court costs and legal expenses, including the allocated cost of staff counsel) incurred or expended by any Agent, the Issuing Bank or any Lender in connection with the Obligations, this Guaranty and the enforcement thereof, together with interest on amounts recoverable under this ss.7 from the time when such amounts become due untiL payment, whether before or after judgment, at the rate of interest for overdue principal set forth in ss.5.11 hereof, PROVIDED that if such interest exceeds the maximum amount permitted tO be paid under applicable law, then such interest shall be reduced to such maximum permitted amount. 7.3. WAIVERS BY THE GUARANTORS; LENDERS' FREEDOM TO ACT. Each of the Guarantors agrees that the Obligations will be paid and performed strictly in accordance with their respective terms, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Agent, the Issuing Bank or any Lender with respect thereto. Each of the Guarantors waives promptness, diligence, presentment, demand, protest, notice of acceptance, notice of any Obligations incurred and all other notices of any kind, all defenses which may be available by virtue of any valuation, stay, moratorium law or other similar law now or hereafter in effect, any right to require the marshalling of assets of the applicable Borrower or any other entity or other Person primarily or secondarily liable with respect to any of the Obligations, and all suretyship defenses generally. Without limiting the generality of the foregoing, each of the Guarantors agrees to the provisions of any instrument evidencing, securing or otherwise executed in connection with any Obligation and agrees that the obligations of such Guarantor hereunder shall not be released or discharged, in whole or in part, or otherwise 52 -44- affected by (i) the failure of any Agent, the Issuing Bank or any Lender to assert any claim or demand or to enforce any right or remedy against the applicable Borrower or any other entity or other person primarily or secondarily liable with respect to any of the Obligations; (ii) any extensions, compromise, refinancing, consolidation or renewals of any Obligation; (iii) any change in the time, place or manner of payment of any of the Obligations or any rescissions, waivers, compromise, refinancing, consolidation or other amendments or modifications of any of the terms or provisions of this Credit Agreement, the other Loan Documents or any other agreement evidencing, securing or otherwise executed in connection with any of the Obligation, (iv) the addition, substitution or release of any entity or other person primarily or secondarily liable for any Obligation; (v) the adequacy of any rights which any Agent, the Issuing Bank or any Lender may have against any collateral security or other means of obtaining repayment of any of the Obligations; (vi) the impairment of any collateral securing any of the Obligations, including without limitation the failure to perfect or preserve any rights which any Agent, the Issuing Bank or any Lender might have in such collateral security or the substitution, exchange, surrender, release, loss or destruction of any such collateral security; or (vii) any other act or omission which might in any manner or to any extent vary the risk of such Guarantor or otherwise operate as a release or discharge of such Guarantor, all of which may be done without notice to such Guarantor. To the fullest extent permitted by law, each of the Guarantors hereby expressly waives any and all rights or defenses arising by reason of (A) any "one action" or "anti-deficiency" law which would otherwise prevent any Agent, the Issuing Bank or any Lender from bringing any action, including any claim for a deficiency, or exercising any other right or remedy (including any right of set-off), against such Guarantor before or after such Agent's, the Issuing Bank's or such Lender's commencement or completion of any foreclosure action, whether judicially, by exercise of power of sale or otherwise, or (B) any other law which in any other way would otherwise require any election of remedies by any Agent, the Issuing Bank or any Lender. 7.4. UNENFORCEABILITY OF OBLIGATIONS AGAINST BORROWERS. If for any reason any of the Borrowers has no legal existence or is under no legal obligation to discharge any of the Obligations, or if any of the Obligations have become irrecoverable from such Borrower by reason of such Borrower's insolvency, bankruptcy or reorganization or by other operation of law or for any other reason, this Guaranty shall nevertheless be binding on each of the Guarantors to the same extent as if each such Guarantor at all times had been the principal obligor on all such Obligations. In the event that acceleration of the time for payment of any of the Obligations is stayed upon the insolvency, bankruptcy or reorganization of such Borrower, or for any other reason, all such amounts otherwise subject to acceleration under the terms of this Credit Agreement, the other Loan Documents or any other agreement evidencing, securing or otherwise executed in connection with any Obligation shall be immediately due and payable by each of the Guarantors. 7.5. SUBROGATION; SUBORDINATION. 7.5.1. POSTPONEMENT OF RIGHTS AGAINST BORROWERS. Until the final payment and performance in full in cash of all of the Obligations: none of the Guarantors shall exercise any rights against any Borrower arising as a result of payment by each such Guarantor hereunder, by way of subrogation, reimbursement, restitution, contribution or otherwise, and will not prove any claim in competition with any Agent, the Issuing Bank or any Lender in respect of any payment hereunder in any bankruptcy, insolvency or reorganization case or proceedings of any nature; 53 -45- none of the Guarantors will claim any setoff, recoupment or counterclaim against any Borrower in respect of any liability of any such Guarantor to such Borrower; and each of the Guarantors waives any benefit of and any right to participate in any collateral security which may be held by any Agent, the Issuing Bank or any Lender. 7.5.2. SUBORDINATION. The payment of any amounts due with respect to any indebtedness of the Borrowers for money borrowed or credit received now or hereafter owed to any of the Guarantors is hereby subordinated to the prior payment in full in cash of all of the Obligations. Each of the Guarantors agrees that, after the occurrence of any default in the payment or performance of any of the Obligations, such Guarantor will not demand, sue for or otherwise attempt to collect any such indebtedness of any Borrower to such Guarantor until all of the Obligations shall have been paid in full. If, notwithstanding the foregoing sentence, any of the Guarantors shall collect, enforce or receive any amounts in respect of such indebtedness while any Obligations are still outstanding, such amounts shall be collected, enforced and received by such Guarantor as trustee for the Lenders, the Issuing Bank and the Administrative Agent and be paid over to the Administrative Agent, for the benefit of the Lenders, the Issuing Bank and the Administrative Agent, on account of the Obligations without affecting in any manner the liability of the Guarantors under the other provisions of this Guaranty. 7.5.3. PROVISIONS SUPPLEMENTAL. The provisions of this ss.7.5 shall be supplemental to and not in derogation of any rights and remedies of the Lenders, the Issuing Bank and the Administrative Agent under any separate subordination agreement which the Administrative Agent may at any time and from time to time enter into with any of the Guarantors for the benefit of the Lenders, the Issuing Bank and the Administrative Agent. 7.6. SECURITY; SETOFF. Each of the Guarantors grants to each of the Admininstrative Agent, the Issuing Bank and the Lenders, as security for the full and punctual payment and performance of all of the Guarantors' obligations hereunder, a continuing lien on and security interest in all securities or other property belonging to each such Guarantor now or hereafter held by such Agent, the Issuing Bank or such Lender and in all deposits (general or special, time or demand, provisional or final) and other sums credited by or due from such Agent, the Issuing Bank or such Lender to such Guarantor or subject to withdrawal by such Guarantor. Regardless of the adequacy of any collateral security or other means of obtaining payment of any of the Obligations, each of the Administrative Agent, the Issuing Bank and the Lenders is hereby authorized at any time and from time to time, without notice to any of the Guarantors (any such notice being expressly waived by each of the Guarantors) and to the fullest extent permitted by law, to set off and apply such deposits and other sums against the obligations of such Guarantor under this Guaranty, whether or not such Agent, the Issuing Bank or such Lender shall have made any demand under this Guaranty and although such obligations may be contingent or unmatured. 7.7. FURTHER ASSURANCES. Each of the Guarantors agrees that it will from time to time, at the request of the Administrative Agent, do all such things and execute all such documents as the Administrative Agent may consider necessary or desirable to give full effect to this Guaranty and to perfect and preserve the rights and powers of the Lenders, the Issuing Bank and the Administrative Agent hereunder. Each of the Guarantors acknowledges and confirms that such Guarantor itself has established its own adequate 54 -46- means of obtaining from the Borrowers on a continuing basis all information desired by such Guarantor concerning the financial condition of the Borrowers and that such Guarantor will look to the Borrowers and not to any Agent, the Issuing Bank or any Lender in order for such Guarantor to keep adequately informed of changes in any of the Borrowers' financial condition. 7.8. TERMINATION. Notwithstanding any termination of this Guaranty, this Guaranty shall continue to be effective or be reinstated, if at any time any payment made or value received with respect to any Obligation is rescinded or must otherwise be returned by any Agent, the Issuing Bank or any Lender upon the insolvency, bankruptcy or reorganization of any Borrower, or otherwise, all as though such payment had not been made or value received. 7.9. SUCCESSORS AND ASSIGNS. This Guaranty shall be binding upon each of the Guarantors, its successors and assigns, and shall inure to the benefit of the Administrative Agent, the Issuing Bank and the Lenders and their respective successors, transferees and assigns. Without limiting the generality of the foregoing sentence, each Lender may, in accordance with the provisions of ss.20, assign or otherwise transfer this Credit Agreement, thE other Loan Documents or any other agreement or note held by it evidencing, securing or otherwise executed in connection with the Obligations, or sell participations in any interest therein, to any other entity or other person, and such other entity or other person shall thereupon become vested, to the extent set forth in the agreement evidencing such assignment, transfer or participation, with all the rights in respect thereof granted to such Lender herein. None of the Guarantors may assign any of its obligations hereunder. 8. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers and, to the extent the representation relates to CML, CML represents and warrants to the Lenders and the Administrative Agent as follows: 8.1. CORPORATE AUTHORITY. 8.1.1. INCORPORATION; GOOD STANDING. Each of CML, the Borrowers and each of their Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (ii) has all requisite corporate power to own its property and conduct its business as now conducted and as presently contemplated, and (iii) is in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction where such qualification is necessary except where a failure to be so qualified would not have a materially adverse effect on the business, assets or financial condition of CML, such Borrower or such Subsidiary. 8.1.2. AUTHORIZATION. The execution, delivery and performance of this Credit Agreement and the other Loan Documents to which CML, any of the Borrowers or any of their Subsidiaries is or is to become a party and the transactions contemplated hereby and thereby (i) are within the corporate authority of such Person, (ii) have been duly authorized by all necessary corporate proceedings, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which CML, any of the Borrowers or any of their Subsidiaries is subject or any judgment, order, writ, injunction, license or permit 55 -47- applicable to CML, any of Borrower or any of their Subsidiaries and (iv) do not conflict with any provision of the corporate charter or bylaws of, or any agreement or other instrument binding upon, CML, any of the Borrowers or any of their Subsidiaries. 8.1.3. ENFORCEABILITY. The execution and delivery of this Credit Agreement and the other Loan Documents to which CML, any of the Borrowers or any of their Subsidiaries is or is to become a party will result in valid and legally binding obligations of such Person enforceable against it in accordance with the respective terms and provisions hereof and thereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. 8.2. GOVERNMENTAL APPROVALS. The execution, delivery and performance by CML, any of the Borrowers and any of their Subsidiaries of this Credit Agreement and the other Loan Documents to which CML, any of the Borrowers or any of their Subsidiaries is or is to become a party and the transactions contemplated hereby and thereby do not require the approval or consent of, or filing with, any governmental agency or authority other than those already obtained. 8.3. TITLE TO PROPERTIES; LEASES. Except as indicated on SCHEDULE 8.3 hereto, CML, the Borrowers and their Subsidiaries own all of the assets reflected in the consolidated balance sheet of CML, the Borrowers and their Subsidiaries as at the Balance Sheet Date or acquired since that date (except property and assets sold or otherwise disposed of in the ordinary course of business since that date), subject to no rights of others, including any mortgages, leases, conditional sales agreements, title retention agreements, liens or other encumbrances except Permitted Liens. 8.4. FINANCIAL STATEMENTS AND PROJECTIONS. 8.4.1. FINANCIAL STATEMENTS. There has been furnished to each of the Lenders (a) the consolidated balance sheet of CML, the Borrowers and their Subsidiaries as at the Balance Sheet Date, and the consolidated statements of income and cash flows of CML, the Borrowers and their Subsidiaries for the fiscal year then ended, certified by Deloitte and Touche LLP and (b) the consolidated balance sheet of CML, the Borrowers and their Subsidiaries as at May 3, 1997 and the consolidated statements of income and cash flows of CML, the Borrowers and their Subsidiaries for the fiscal quarters then ended. All such balance sheets, statements of income and statements of cash flows have been prepared in accordance with generally accepted accounting principles and fairly present the consolidated financial condition of CML, the Borrowers and their Subsidiaries as at the close of business on the dates thereof and the results of operations for the fiscal year or quarter, as the case may be, then ended. There are no contingent liabilities of CML, any of the Borrowers or any of their Subsidiaries as of May 3, 1997 involving material amounts, known to the officers of CML or any the Borrowers, which were not disclosed in the balance sheet as of May 3, 1997 or the notes related thereto. 56 -48- 8.4.2. PROJECTIONS. The projections of the annual operating budgets of CML, the Borrowers and their Subsidiaries on a consolidated basis, balance sheets and cash flow statements for the 1997 to 1998 fiscal years, copies of which have been delivered to each Lender, disclose all assumptions made with respect to general economic, financial and market conditions used in formulating such projections. To the knowledge of CML, any of Borrowers or any of their Subsidiaries, no facts exist that (individually or in the aggregate) would result in any material change in any of such projections. The projections are based upon reasonable estimates and assumptions, have been prepared on the basis of the assumptions stated therein and reflect the reasonable estimates of CML, the Borrowers and its Subsidiaries of the results of operations and other information projected therein. 8.5. NO MATERIAL CHANGES, ETC.; SOLVENCY. 8.5.1. CHANGES. Since May 3, 1997 there has occurred no materially adverse change in the financial condition, business or operations of CML, the Borrowers and their Subsidiaries. Since the Balance Sheet Date and except as set forth on SCHEDULE 8.5, CML has not made any Distribution. 8.5.2. SOLVENCY. CML, each of the Borrowers and each of their Subsidiaries, taken as a whole (after giving effect to the transactions contemplated by this Credit Agreement and the other Loan Documents), is Solvent. As used herein, "Solvent" shall mean such Person, (i) has assets having a fair value in excess of its liabilities, (ii) has assets having a fair value in excess of the amount required to pay its liabilities on existing debts as such debts become absolute and matured, and (iii) has, and expects to continue to have, access to adequate capital for the conduct of its business and the ability to pay its debts from time to time incurred in connection with the operation of its business as such debts mature. 8.6. FRANCHISES, PATENTS, COPYRIGHTS, ETC. Each of CML, the Borrowers and their Subsidiaries possesses all franchises, patents, copyrights, trademarks, trade names, licenses and permits, and rights in respect of the foregoing, adequate for the conduct of its business substantially as now conducted without known conflict with any rights of others. 8.7. LITIGATION. Except as set forth in SCHEDULE 8.7 hereto, there are no actions, suits, proceedings or investigations of any kind pending or threatened against CML, any of the Borrowers or any of their Subsidiaries before any court, tribunal or administrative agency or board that, if adversely determined, might, either in any case or in the aggregate, materially adversely affect the properties, assets, financial condition or business of CML, the Borrowers and their Subsidiaries or materially impair the right of CML, the Borrowers and their Subsidiaries, considered as a whole, to carry on business substantially as now conducted by them, or result in any substantial liability not adequately covered by insurance, or for which adequate reserves are not maintained on the consolidated balance sheet of CML, the Borrowers and their Subsidiaries, or which question the validity of this Credit Agreement or any of the other Loan Documents, or any action taken or to be taken pursuant hereto or thereto. 8.8. NO MATERIALLY ADVERSE CONTRACTS, ETC. None of CML, any of the Borrowers nor any of their Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation that has or is expected in the future to have a 57 -49- materially adverse effect on the business, assets or financial condition of CML, any of the Borrowers or any of their Subsidiaries. None of CML, any of the Borrowers nor any of their Subsidiaries is a party to any contract or agreement that has or is expected, in the judgment of CML's officers, to have any materially adverse effect on the business of CML, any of the Borrowers or any of their Subsidiaries. 8.9. COMPLIANCE WITH OTHER INSTRUMENTS, LAWS, ETC. None of CML, any of the Borrowers nor any of their Subsidiaries is in violation of any provision of its charter documents, bylaws, or any agreement or instrument to which it may be subject or by which it or any of its properties may be bound or any decree, order, judgment, statute, license, rule or regulation, in any of the foregoing cases in a manner that could result in the imposition of substantial penalties or materially and adversely affect the financial condition, properties or business of CML, any of the Borrowers or any of their Subsidiaries. 8.10. TAX STATUS. Each of CML, the Borrowers and their Subsidiaries (i) have made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which any of them is subject, (ii) have paid all taxes and other governmental assessments and charges shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and by appropriate proceedings and (iii) have set aside on their books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. Except as set forth on SCHEDULE 8.10, there are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and none of the officers of CML or any of the Borrowers knows of any basis for any such claim. 8.11. NO EVENT OF DEFAULT. No Default or Event of Default has occurred and is continuing. 8.12. HOLDING COMPANY AND INVESTMENT COMPANY ACTS. None of CML, any of the Borrowers nor any of their Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an affiliate" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935; nor is it an "investment company", or an "affiliated company" or a "principal underwriter" of an "investment company", as such terms are defined in the Investment Company Act of 1940. 8.13. ABSENCE OF FINANCING STATEMENTS, ETC. Except with respect to Permitted Liens, there is no financing statement, security agreement, chattel mortgage, real estate mortgage or other document filed or recorded with any filing records, registry or other public office, that purports to cover, affect or give notice of any present or possible future lien on, or security interest in, any assets or property of CML, any of the Borrowers or any of their Subsidiaries or any rights relating thereto. 8.14. PERFECTION OF SECURITY INTEREST. All filings, assignments, pledges and deposits of documents or instruments have been made and all other actions have been taken that are necessary or advisable, under applicable law, to establish and perfect the Administrative Agent's security interest in the Collateral (with such exceptions as are acceptable to the Majority Lenders). The Collateral and the Administrative Agent's rights with respect to the Collateral are not subject to any setoff, claims, withholdings or other defenses. CML, one of the Borrowers or one of their Subsidiaries, as specified in the 58 -50- Security Documents, is the owner of the Collateral free from any lien, security interest, encumbrance and any other claim or demand, except for Permitted Liens. 8.15. CERTAIN AFFILIATE TRANSACTIONS. None of CML, any of the Borrowers nor any of their Subsidiaries is a party to any transaction in violation of ss.10.11. None of CML, any oF Borrowers nor any of their Subsidiaries is a party to any tax sharing agreement. 8.16. EMPLOYEE BENEFIT PLANS. 8.16.1. IN GENERAL. Each Employee Benefit Plan has been maintained and operated in compliance in all material respects with the provisions of ERISA and, to the extent applicable, the Code, including but not limited to the provisions thereunder respecting prohibited transactions. The Borrowers have heretofore delivered to the Administrative Agent the most recently completed annual report, Form 5500, with all required attachments, and actuarial statement required to be submitted under ss.103(d) of ERISA, with respect to each Guaranteed Pension Plan. 8.16.2. TERMINABILITY OF WELFARE PLANS. Under each Employee Benefit Plan which is an employee welfare benefit plan within the meaning of ss.3(1) or ss.3(2)(B) of ERISA, no benefits are due unless the event giving rise to the benefit entitlement occurs prior to plan termination (except as required by Title I, Subtitle B, Part 6 of ERISA). Any of CML, the Borrowers or an ERISA Affiliate, as appropriate, may terminate each such Plan at any time (or at any time subsequent to the expiration of any applicable bargaining agreement) in the discretion of CML, such Borrower or such ERISA Affiliate without liability to any Person other than for benefits accrued prior to such termination. 8.16.3. GUARANTEED PENSION PLANS. None of CML, any of the Borrowers nor any ERISA Affiliate maintains or operates a Guaranteed Pension Plan. 8.16.4. MULTIEMPLOYER PLANS. None of CML, any of the Borrowers nor any ERISA Affiliate maintains or operates a Multiemployer Plan. 8.17. REGULATIONS U, X AND G. The proceeds of the Loans shall be used solely for working capital and general corporate purposes of the Borrowers. Each of the Borrowers will obtain Letters of Credit solely for working capital purposes. No portion of any Loan is to be used, and no portion of any Letter of Credit is to be obtained, for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations U, X and G of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. 8.18. ENVIRONMENTAL COMPLIANCE. The Borrowers have taken all necessary steps to investigate the past and present condition and usage of the Real Estate and the operations conducted thereon and have determined that: (a) none of CML, any Borrower, any of their Subsidiaries nor any of their operations is in violation, or alleged violation, of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and 59 -51- Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment (hereinafter "Environmental Laws"), which violation could have a material adverse effect on the environment or the business, assets or financial condition of CML, any of the Borrowers or any of their Subsidiaries; (b) except as set forth on SCHEDULE 8.18 attached hereto, none of CML, any of the Borrowers nor any of their Subsidiaries has received notice from any third party including, without limitation, any federal, state or local governmental authority, (i) that any one of them has been identified by the United States Environmental Protection Agency ("EPA") as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii) that any hazardous waste, as defined by 42 U.S.C. ss.6903(5), any hazardouS substances as defined by 42 U.S.C. ss.9601(14), any pollutant or contaminant as defineD by 42 U.S.C. ss.9601(33) and any toxic substances, oil or hazardous materials or otheR chemicals or substances regulated by any Environmental Laws ("Hazardous Substances") which any one of them has generated, transported or disposed of has been found at any site at which a federal, state or local agency or other third party has conducted or has ordered that CML, any Borrower or any of their Subsidiaries conduct a remedial investigation, removal or other response action pursuant to any Environmental Law; or (iii) that it is or shall be a named party to any claim, action, cause of action, complaint, or legal or administrative proceeding (in each case, contingent or otherwise) arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances; (c) except as set forth on SCHEDULE 8.18 attached hereto: (i) no portion of the Real Estate has been used for the handling, processing, storage or disposal of Hazardous Substances except in accordance with applicable Environmental Laws; and no underground tank or other underground storage receptacle for Hazardous Substances is located on any portion of the Real Estate; (ii) in the course of any activities conducted by CML, the Borrowers, their Subsidiaries or operators of their properties, no Hazardous Substances have been generated or are being used on the Real Estate except in accordance with applicable Environmental Laws; (iii) there have been no releases (i.e. any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping) or threatened releases of Hazardous Substances on, upon, into or from the properties of CML, the Borrowers or their Subsidiaries, which releases would have a material adverse effect on the value of any of the Real Estate or adjacent properties or the environment; (iv) to the best of CML's and the Borrowers' knowledge, there have been no releases on, upon, from or into any real property in the vicinity of any of the Real Estate which, through soil or groundwater contamination, may have come to be located on, and which would have a material adverse effect on the value of, the Real Estate; and (v) in addition, to the best of CML's and the Borrowers' knowledge, any Hazardous Substances that have been generated on any of the Real Estate have been transported offsite only by carriers having an identification number issued by the EPA, treated or disposed of only by treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which 60 -52 transporters and facilities have been and are, to the best of CML's and each Borrowers' knowledge, operating in compliance with such permits and applicable Environmental Laws; and (d) except as set forth on SCHEDULE 8.18 attached hereto, none of CML, the Borrowers and their Subsidiaries, any Mortgaged Property or any of the other Real Estate is subject to any applicable environmental law requiring the performance of Hazardous Substances site assessments, or the removal or remediation of Hazardous Substances, or the giving of notice to any governmental agency or the recording or delivery to other Persons of an environmental disclosure document or statement by virtue of the transactions set forth herein and contemplated hereby, or as a condition to the recording of any Mortgage or to the effectiveness of any other transactions contemplated hereby. 8.19. SUBSIDIARIES, ETC. Set forth on SCHEDULE 8.19 hereto is a complete and accurate list of all Subsidiaries of CML, each Borrower and each of their Subsidiaries, showing as of the Restatement Effective Date (as to each such Subsidiary) the jurisdiction of its incorporation, the number of shares of each class of capital stock authorized and the number outstanding on the Restatement Effective Date and the percentage of the outstanding shares of each such class owned (directly or indirectly) by CML, such Borrower or such Subsidiary at the Restatement Effective Date and the number of shares covered by all outstanding options, warrants, rights of conversion or purchase and similar rights at the date hereof. All of the outstanding capital stock of all such Subsidiaries has been validly issued, is fully paid and non-assessable and is owned by CML or one or more of its Subsidiaries free and clear of all liens except those created by the Security Documents. Except as set forth on SCHEDULE 8.19 hereto, none of CML, any of the Borrowers nor any of their Subsidiaries is engaged in any joint venture or partnership with any other Person. None of the Guarantors (other than the Borrowers and CML) or the Foreign Guarantors has assets having an aggregate net book value in excess of $1,000,000. 8.20. BANK ACCOUNTS. SCHEDULE 8.20 sets forth the account numbers, location and a description of all bank accounts of CML, each of the Borrowers and each of their Subsidiaries. 8.21. CHIEF EXECUTIVE OFFICES. Set forth on SCHEDULE 8.21 hereto is a complete and accurate list of the chief executive office of each of CML, each Borrower and each of their Subsidiaries, at which location such Person keeps its books and records. 8.22. FISCAL YEAR. Each of CML, each Borrower and each of their Subsidiaries has a fiscal year which is the twelve (12) months ending on July 31 of each year. 8.23. DISCLOSURE No representation or warranty made by CML or any of the Borrowers in this Credit Agreement or in any agreement, instrument, document, certificate, statement or letter furnished to any Agent or any Lender by or on behalf of CML and the Borrowers in connection with any of the transactions contemplated by any of the Loan Documents contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which they are made. 61 -53- 8.24. INSURANCE. CML, the Borrowers and each of their Subsidiaries maintains with financially sound and reputable insurers insurance with respect to its properties and businesses against such casualties and contingencies as are in accordance with sound business practices, with the details of such coverage being more fully described on SCHEDULE 8.24 hereto. 9. AFFIRMATIVE COVENANTS OF CML AND THE BORROWERS. Each of CML and each of the Borrowers covenants and agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or any Lender has any obligation to make any Loans or the Issuing Bank has any obligation to issue, extend or renew any Letters of Credit: 9.1. PUNCTUAL PAYMENT. Each Borrower will duly and punctually pay or cause to be paid the principal and interest on its Loans, all Reimbursement Obligations in respect of letters of credit issued at the request of such Borrower, the Letter of Credit Fees relating to such Letters of Credit, its commitment fees, the Administrative Agent's fee and all other amounts provided for in this Credit Agreement and the other Loan Documents to which CML, any of the Borrowers or any of their Subsidiaries is a party, all in accordance with the terms of this Credit Agreement and such other Loan Documents. 9.2. MAINTENANCE OF OFFICE. Each of CML and each of the Borrowers will maintain its chief executive office at the location set forth on SCHEDULE 8.21 hereto, or at such other place in the United States of America as CML or such Borrower shall designate upon prior written notice to the Administrative Agent, where notices, presentations and demands to or upon such Person in respect of the Loan Documents to which such Person is a party may be given or made. 9.3. RECORDS AND ACCOUNTS. Each of CML and each of the Borrowers will (i) keep, and cause each of its Subsidiaries to keep, true and accurate records and books of account in which full, true and correct entries will be made in accordance with generally accepted accounting principles and (ii) maintain adequate accounts and reserves for all taxes (including income taxes), depreciation, depletion, obsolescence and amortization of its properties and the properties of its Subsidiaries, contingencies, and other reserves. 9.4. FINANCIAL STATEMENTS, CERTIFICATES AND INFORMATION. CML and the Borrowers will deliver to each of the Lenders: (a) as soon as practicable, but in any event not later than ninety (90) days after the end of each fiscal year of CML, the consolidated balance sheet of CML and its Subsidiaries and the consolidating balance sheets of CML and its Subsidiaries, each as at the end of such year, and the related consolidated statement of income and consolidated statement of cash flow and consolidating statements of income and consolidating statements of cash flow for such year, each setting forth in comparative form the figures for the previous fiscal year and all such consolidated and consolidating statements to be in reasonable detail, prepared in accordance with generally accepted accounting principles, and all such consolidated statements to be certified without qualification by Deloitte and Touche LLP or by other independent certified public accountants satisfactory to the Administrative Agent, together with a written statement from such accountants to the effect that they have read a copy of 62 -54- this Credit Agreement, and that, in making the examination necessary to said certification, they have obtained no knowledge of any Default or Event of Default, or, if such accountants shall have obtained knowledge of any then existing Default or Event of Default they shall disclose in such statement any such Default or Event of Default; PROVIDED that such accountants shall not be liable to the Lenders for failure to obtain knowledge of any Default or Event of Default; (b) as soon as practicable, but in any event not later than forty-five (45) days after the end of each of the first three fiscal quarters in each fiscal year of CML, copies of the unaudited consolidated balance sheet of CML and its Subsidiaries and the unaudited consolidating balance sheets of CML and its Subsidiaries, each as at the end of such quarter, and the related consolidated statement of income and consolidated statement of cash flow and consolidating statements of income and consolidating statements of cash flow for the portion of CML's fiscal year then elapsed, all in reasonable detail and prepared in accordance with generally accepted accounting principles, together with a certification by the principal financial or accounting officer of CML that the information contained in such financial statements fairly presents the financial position of CML and its Subsidiaries on the date thereof (subject to year-end adjustments); (c) as soon as practicable, but in any event within thirty (30) days after the end of the first eleven months in each fiscal year of CML, copies of the unaudited monthly consolidated balance sheet of CML and its Subsidiaries and the unaudited consolidating balance sheets of CML and its Subsidiaries, each as at the end of such month and the related consolidated statement of income, consolidated statement of cash flow, consolidating statements of income and consolidating statements of cash flow for such month, each prepared in accordance with generally accepted accounting principles, together with a certification by the principal financial or accounting officer of CML that the information contained in such financial statements fairly presents the financial condition of CML and its Subsidiaries on the date thereof (subject to quarter and year-end adjustments); (d) simultaneously with the delivery of the financial statements referred to in subsections (a) and (b) above, a statement certified by the principal financial or accounting officer of CML in substantially the form of EXHIBIT E hereto (a "COMPLIANCE CERTIFICATE") and setting forth in reasonable detail computations evidencing compliance with the covenants contained in ss.11 and (if applicable) reconciliations to reflecT changes in generally accepted accounting principles since the Balance Sheet Date; (e) contemporaneously with the filing or mailing thereof, copies of all material of a financial nature filed with the Securities and Exchange Commission or sent to the stockholders of CML; (f) (i) within three (3) Business Days after the end of each calendar week or at such earlier time as the Administrative Agent may reasonably request, a Borrowing Base Report setting forth the Borrowing Bases as at the end of such calendar week or other date so requested by the Administrative Agent and (ii) within fifteen (15) days after the end of each calendar month, a Borrowing Base Report setting forth the Borrowing Bases as at the end of such calendar month, containing 63 -55- such adjustments to the applicable weekly Borrowing Base Reports as may be appropriate; (g) within fifteen (15) days after the end of each calendar month, an Accounts Receivable aging report with respect to the Borrowers; (h) from time to time as the Administrative Agent may request detailed management prepared reports summarizing the Borrowers' inventory, including information on the aging and obsolence of such inventory; (i) as soon as practicable, but in any event not later than thirty (30) days prior to the beginning of each fiscal year, management-prepared financial forecasts of CML and its Subsidiaries with respect to such fiscal year; (j) prior to the opening by any Borrower of any new retail store, distribution center or manufacturing facility at which Eligible Inventory or Eligible NordicTrack Inventory, as the case may be, is to be located, a supplement to SCHEDULE 2 hereto in the form of EXHIBIT I hereto, listing any additions or deletions to the list of retail stores, distribution centers and manufacturing facilities of the Borrowers located in the United States, which supplement, together with SCHEDULE 2 hereto and any prior supplements, shall be deemed to constitute SCHEDULE 2 for all purposes of this Credit Agreement; and (k) from time to time such other financial data and information (including accountants' management letters) as any Agent or any Lender may reasonably request. 9.5. NOTICES. 9.5.1. DEFAULTS. The Borrowers and CML will promptly notify the Administrative Agent and each of the Lenders in writing of the occurrence of any Default or Event of Default. If any Person shall give any notice or take any other action in respect of a claimed default (whether or not constituting an Event of Default) under (a) this Credit Agreement or (b) any other note, evidence of indebtedness, indenture or other obligation to which or with respect to which CML, any Borrower or any of their Subsidiaries is a party or obligor, whether as principal, guarantor, surety or otherwise and the aggregate amount of such obligations referred to in this clause (b) in default is in excess of $1,000,000, the Borrowers and CML shall forthwith give written notice thereof to the Administrative Agent and each of the Lenders, describing the notice or action and the nature of the claimed default. 9.5.2. ENVIRONMENTAL EVENTS. The Borrowers and CML will promptly give notice to the Administrative Agent and each of the Lenders (i) of any violation of any Environmental Law that CML, any of the Borrowers or any of their Subsidiaries reports in writing or is reportable by such Person in writing (or for which any written report supplemental to any oral report is made) to any federal, state or local environmental agency and (ii) upon becoming aware thereof, of any inquiry, proceeding, investigation, or other action, including a notice from any agency of potential environmental liability, of any federal, state or local environmental agency or board, that has the potential to materially affect the assets, liabilities, financial 64 -56- conditions or operations of CML, any of the Borrowers or any of their Subsidiaries, or the Administrative Agent's mortgages, deeds of trust or security interests pursuant to the Security Documents. 9.5.3. NOTIFICATION OF CLAIM AGAINST COLLATERAL. The Borrowers and CML will, immediately upon becoming aware thereof, notify the Administrative Agent and each of the Lenders in writing of any setoff, claims (including, with respect to the Real Estate, environmental claims), withholdings or other defenses to which any of the Collateral, or the Administrative Agent's rights with respect to the Collateral, are subject. 9.5.4. NOTICE OF LITIGATION AND JUDGMENTS. CML and each of the Borrowers will, and will cause each of their Subsidiaries to, give notice to the Administrative Agent and each of the Lenders in writing within fifteen (15) days of becoming aware of any litigation or proceedings threatened in writing or any pending litigation and proceedings affecting CML, any of the Borrowers or any of their Subsidiaries or to which CML, any of the Borrower or any of their Subsidiaries is or becomes a party involving an uninsured claim against CML, any of the Borrowers or any of their Subsidiaries that could reasonably be expected to have a materially adverse effect on CML, any of the Borrowers or any of their Subsidiaries and stating the nature and status of such litigation or proceedings. Each of CML and each of the Borrowers will, and will cause each of its Subsidiaries to, give notice to the Administrative Agent and each of the Lenders, in writing, in form and detail satisfactory to the Administrative Agent, within ten (10) days of any judgment not covered by insurance, final or otherwise, against CML, any of the Borrowers or any of their Subsidiaries in an amount in excess of $1,000,000. 9.5.5. NOTICE OF TAX REFUNDS. CML and each of the Borrowers will give notice promptly to the Administrative Agent of such Person's receipt of any federal or state tax refund in excess of $1,000,000 and will, within fifteen (15) days of the end of each fiscal quarter, give notice to the Administrative Agent of the aggregate amount of federal and state tax refunds received by such Person during such fiscal quarter. 9.6. CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. CML and the Borrowers will do or cause to be done all things necessary to preserve and keep in full force and effect their corporate existence, rights and franchises and those of their Subsidiaries and will not, and will not cause or permit any of their Subsidiaries to, convert to a limited liability company or a limited liability partnership. They (i) will cause all of their properties and those of their Subsidiaries used or useful in the conduct of their business or the business of their Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment, (ii) will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of CML or the Borrowers, may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times, and (iii) will, and will cause each of their Subsidiaries to, continue to engage primarily in the businesses now conducted by them and in related businesses; PROVIDED that nothing in this ss.9.6 shall prevenT CML or the Borrowers from discontinuing the operation and maintenance of any of their properties or any of those of their Subsidiaries if such discontinuance is, in the judgment of CML or the Borrowers as the case may be, desirable in the conduct of its or 65 -57- their business and that do not in the aggregate materially adversely affect the business of CML, the Borrowers and their Subsidiaries on a consolidated basis. 9.7. INSURANCE. Each of CML and each Borrower will, and will cause each of their Subsidiaries to, maintain with financially sound and reputable insurers having an A.M. Best rating of not less than A- (or an equivalent rating reasonably satisfactory to the Administrative Agent) (except that NordicTrack's workers' compensation insurance may be self-insured) insurance with respect to its properties and business against such casualties and contingencies as shall be in accordance with the general practices of businesses engaged in similar activities in similar geographic areas and in amounts, containing such terms, in such forms and for such periods as described on SCHEDULE 8.24 hereto and as may be reasonable and prudent and in accordance with the terms of the Security Agreement. Each of CML and each Borrower will, and will cause each of their Subsidiaries to, maintain insurance on the Mortgaged Properties in accordance with the terms of the Mortgages. 9.8. TAXES. Each of CML and each Borrower will, and will cause each of their Subsidiaries to, duly pay and discharge, or cause to be paid and discharged, before the same shall become overdue, all taxes, assessments and other governmental charges imposed upon it and its real properties, sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies that if unpaid might by law become a lien or charge upon any of its property; PROVIDED that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if CML, such Borrower or such Subsidiary shall have set aside on its books adequate reserves with respect thereto; and PROVIDED FURTHER that CML, each Borrower and each Subsidiary of such Persons will pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien that may have attached as security therefor. 9.9. INSPECTION OF PROPERTIES AND BOOKS, ETC. 9.9.1. GENERAL. Each of CML and each Borrower shall permit the Lenders, through the Administrative Agent or any of the Lenders' other designated representatives, to visit and inspect any of the properties of CML, any of the Borrowers or any of their Subsidiaries, to examine the books of account of CML, the Borrowers and their Subsidiaries (and to make copies thereof and extracts therefrom), and to discuss the affairs, finances and accounts of the Borrowers and their Subsidiaries with, and to be advised as to the same by, its and their officers, all at such reasonable times and intervals as the Administrative Agent or any Lender may reasonably request. 9.9.2. INVENTORY REPORTS AND APPRAISALS. No more frequently than twice each calendar year, or more frequently as determined by the Administrative Agent if an Event of Default shall have occurred and be continuing, upon the request of the Administrative Agent, the Borrowers will obtain and deliver to the Administrative Agent a report of an independent collateral auditor or appraiser satisfactory to the Administrative Agent (which may be affiliated with one of the Lenders) with respect to the inventory components included in the Borrowing Bases, which report (i) shall indicate whether or not the information set forth in the Borrowing Base Report most recently delivered is accurate and complete in all material respects based upon a review by such auditors of the inventory (including verification as to the value, 66 -58- location and respective types) and (ii) shall, in any event, be not less extensive in scope than the Gordon Brothers Report delivered to the Administrative Agent prior to the Restatement Effective Date. All such collateral value reports shall be conducted and made at the expense of the applicable Borrower. 9.9.3. COMMERCIAL FINANCE EXAMINATIONS. No more frequently than thrice each calendar year, or more frequently as determined by the Administrative Agent if an Event of Default shall have occurred and be continuing, upon the Administrative Agent's request, CML and the Borrowers shall permit the Administrative Agent's commercial finance examiners to conduct commercial finance examinations of CML's, the Borrowers' and their Subsidiaries' property, all at such reasonable times and intervals as the Administrative Agent may reasonably request. All such commercial finance examinations shall be conducted and made at the expense of the Borrowers. 9.9.4. APPRAISALS. No more frequently than once each calendar year, or more frequently as determined by the Administrative Agent if an Event of Default shall have occurred and be continuing, upon the request of the Administrative Agent, the Borrowers will obtain and deliver to the Administrative Agent appraisal reports in form and substance and from appraisers satisfactory to the Administrative Agent, stating the then current fair market, orderly liquidation and forced liquidation values of all or any portion of the equipment or real estate owned by CML, any of the Borrowers or any of their Subsidiaries. From time to time if an Event of Default shall have occurred and be continuing, upon the request of the Administrative Agent, the Borrowers will obtain and deliver to the Administrative Agent appraisal reports in form and substance and from appraisers satisfactory to the Administrative Agent stating the then current business value of each of CML, each Borrower and their Subsidiaries. No later than June 30th of each year, the Borrowers will obtain and deliver to the Administrative Agent appraisal reports in form and substance and from appraisers satisfactory to the Administrative Agent, stating the then current fair market value of (i) NordicTrack's Mortgaged Property and (ii) NordicTrack's machinery and equipment. All such appraisals referred to in this ss.9.9.4 shall be conducted and made at the expense of thE Borrowers. 9.9.5. ENVIRONMENTAL ASSESSMENTS. Whether or not an Event of Default shall have occurred, upon prior notice to CML and the Borrowers, the Administrative Agent may, from time to time, in its discretion for the purpose of assessing and ensuring the value of any Mortgaged Property, obtain one or more environmental assessments or audits of such Mortgaged Property prepared by a hydrogeologist, an independent engineer or other qualified consultant or expert approved by the Administrative Agent to evaluate or confirm (i) whether any Hazardous Materials are present in the soil or water at such Mortgaged Property and (ii) whether the use and operation of such Mortgaged Property complies with all Environmental Laws. Environmental assessments may include without limitation detailed visual inspections of such Mortgaged Property including any and all storage areas, storage tanks, drains, dry wells and leaching areas, and the taking of soil samples, surface water samples and ground water samples, as well as such other investigations or analyses as the Administrative Agent deem appropriate. All such environmental assessments shall be conducted and made at the expense of the Borrowers. Prior to requiring that such inspections be performed, the 67 -59- Administrative Agent shall discuss with CML and the Borrowers the views of CML and the Borrowers as to whether the results of such inspections would be confidential and would be required to be reported to governmental authorities and the consequences of potential findings from such inspections. 9.9.6. COMMUNICATIONS WITH ACCOUNTANTS. Each of CML and each Borrower authorizes the Administrative Agent and, if accompanied by the Administrative Agent, the Lenders to communicate directly with CML's and the Borrowers' independent certified public accountants and authorizes such accountants to disclose to the Administrative Agent and the Lenders any and all financial statements and other supporting financial documents and schedules including copies of any management letter with respect to the business, financial condition and other affairs of CML, any of the Borrowers or any of their Subsidiaries. At the request of the Administrative Agent, CML and the Borrowers shall deliver a letter addressed to such accountants instructing them to comply with the provisions of this ss.9.9.6. 9.10. COMPLIANCE WITH LAWS, CONTRACTS, LICENSES, AND PERMITS. Each of CML and each Borrower will, and will cause each of their Subsidiaries to, comply with (i) the applicable laws and regulations wherever its business is conducted, including all Environmental Laws, (ii) the provisions of its charter documents and by-laws, (iii) all agreements and instruments by which it or any of its properties may be bound and (iv) all applicable decrees, orders, and judgments. If any authorization, consent, approval, permit or license from any officer, agency or instrumentality of any government shall become necessary or required in order that CML, any of the Borrowers or any of their Subsidiaries may fulfill any of its obligations hereunder or any of the other Loan Documents to which CML, such Borrower or such Subsidiary is a party, CML or such Borrower will, or (as the case may be) will cause such Subsidiary to, immediately take or cause to be taken all reasonable steps within the power of CML or such Borrower or such Subsidiary to obtain such authorization, consent, approval, permit or license and furnish the Administrative Agent and the Lenders with evidence thereof. 9.11. INVENTORY RESTRICTIONS. Each of the Borrowers shall cause all Eligible Inventory and, in the case of NordicTrack, all Eligible NordicTrack Inventory, to be located at all times solely at Permitted Inventory Locations, and to be sold or otherwise disposed of in the ordinary course of such Borrower's business, consistent with past practices or as required pursuant to the terms of this Credit Agreement. 9.12. USE OF PROCEEDS. Each Borrower will use the proceeds of its Loans and will obtain Letters of Credit solely for the purposes set forth in ss.8.17. 9.13. ADDITIONAL MORTGAGED PROPERTY. If, after the Closing Date, CML, any of the Borrowers or any of their Subsidiaries acquires real estate used as a manufacturing or warehouse facility, CML or such Borrower shall, or shall cause such Subsidiary to, forthwith deliver to the Administrative Agent a fully executed mortgage or deed of trust over such real estate, in form and substance satisfactory to the Administrative Agent, together with title insurance policies, surveys, evidences of insurances with the Administrative Agent named as loss payee and additional insured, legal opinions and other documents and certificates with respect to such real estate as was required for Real Estate of NordicTrack as of the Original Closing Date. CML and each Borrower further agrees that, following the taking of such actions with respect to such real estate, the Administrative 68 -60- Agent shall have for the benefit of the Lenders and the Administrative Agent a valid and enforceable first priority mortgage or deed of trust over such real estate, free and clear of all title defects and encumbrances except for Permitted Liens. 9.14. AGENCY ACCOUNT AGREEMENTS. The Borrowers have delivered to the Administrative Agent Agency Account Agreements in form and substance satisfactory to the Administrative Agent from each of the Agency Account Institutions. Each of CML and the Borrowers will, and will cause each of their Subsidiaries to, use its best efforts to obtain Agency Account Agreements from each other depository institution with which any of the Borrowers or any of the Guarantors has an account. 9.15. INVESTMENTS IN BORROWERS. Within five (5) Business Days of receipt by CML of any tax refund from any governmental authority or any other funds received by CML from a third party, CML will invest all such refunds and other funds in the Borrowers as subordinated loans or as contributions to capital. 9.16. OWNERSHIP OF SUBSIDIARIES. CML will maintain legal and beneficial ownership of one hundred percent (100%) of the equity interests of each of the Guarantors (other than CML and NA). NT will maintain legal and beneficial ownership of one hundred percent (100%) of the equity interests of NA. 9.17. PRIVATE LABEL CREDIT CARD PROGRAM. Except as otherwise provided in this ss.9.17, NordicTrack will maintain in effect at all times at least one Private Label Credit CarD Program which (a) is as limited in recourse to CML, NordicTrack and their Subsidiaries as the Monogram Credit Card Program, (b) is on terms not less advantageous to NordicTrack than the terms of the Monogram Credit Card Program and (c) has a Credit Review Point (as such term is defined in the Monogram Credit Card Program Agreement) of not less than $120,000,000. In the event that any Private Label Credit Card Program is terminated for any reason, NordicTrack shall select and enter into a letter of intent (or similar expression of understanding) with the new provider of such program within sixty (60) days after the date of such termination and shall replace and implement such new program within 150 days from the date of such termination with another Private Label Credit Card Program which complies with the provisions of this ss.9.17. 9.18. COLLATERAL NOTES. In addition to the NordicTrack Notes and the S&H Notes, the Borrowers agree that with respect to any or all of the Mortgaged Properties, they will execute and deliver or cause to be executed and delivered such Collateral Notes as the Administrative Agent may request, it being understood, however, that (a) the aggregate of all payments or recoveries on such Collateral Notes shall not exceed the amount of the Obligations (exclusive of the Collateral Notes), and (b) any payments or recoveries on such Collateral Notes shall be credited to the unpaid amount of the Obligations and in such order of application as may be required by ss.3.3 and ss.14.4 hereof. In the event that the appraiSed value of any Mortgaged Property, a lien on which secures any of the Collateral Notes, exceeds the amount of the Obligations secured by the applicable Collateral Note, the applicable Borrower will execute and deliver such amended Collateral Notes, amendments to Mortgages and other documents, and will obtain such endorsements to the Title Policy covering such Mortgaged Property, so as to reflect such altered appraised value. 9.19. FURTHER ASSURANCES; ADDITIONAL LOCATIONS. 69 -61- 9.19.1. FURTHER ASSURANCES. CML and each Borrower will, and will cause each of their Subsidiaries to, cooperate with the Lenders and the Administrative Agent and execute such further instruments and documents as the Lenders or the Administrative Agent shall reasonably request to carry out to their satisfaction the transactions contemplated by this Credit Agreement and the other Loan Documents. 9.19.2. ADDITIONAL LOCATIONS. Prior to the opening by any Borrower of any new retail store, distribution center or manufacturing facility at which Eligible Inventory or Eligible NordicTrack Inventory, as the case may be, is to be located, such Borrower shall take all actions necessary or advisable, under applicable law, to establish and perfect the Administrative Agent's security interest in the Collateral located or to be located at such retail store, distribution center or manufacturing facility (with such exceptions as are acceptable to the Majority Lenders). 10. CERTAIN NEGATIVE COVENANTS OF CML AND THE BORROWERS. Each of CML and each of the Borrowers covenants and agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or any Lender has any obligation to make any Loans or the Issuing Bank has any obligations to issue, extend or renew any Letters of Credit: 10.1. RESTRICTIONS ON INDEBTEDNESS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, create, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any Indebtedness other than: (a) Indebtedness to the Lenders and the Administrative Agent arising under any of the Loan Documents; (b) current liabilities of CML, such Borrower or such Subsidiary incurred in the ordinary course of business not incurred through (i) the borrowing of money, or (ii) the obtaining of credit except for credit on an open account basis customarily extended and in fact extended in connection with normal purchases of goods and services; (c) Indebtedness in respect of taxes, assessments, governmental charges or levies and claims for labor, materials and supplies to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of ss.9.8; (d) Indebtedness in respect of judgments or awards that have been in force for less than the applicable period for taking an appeal so long as execution is not levied thereunder or in respect of which CML, such Borrower or such Subsidiary shall at the time in good faith be prosecuting an appeal or proceedings for review and in respect of which a stay of execution shall have been obtained pending such appeal or review; (e) endorsements for collection, deposit or negotiation and warranties of products or services, in each case incurred in the ordinary course of business; 70 -62- (f) Subordinated Debt not exceeding $41,593,000 in aggregate principal amount at any time outstanding; (g) obligations under Capitalized Leases and purchase money Indebtedness incurred in connection with the acquisition of any real or personal property by CML, such Borrower or such Subsidiary, PROVIDED that the aggregate outstanding principal amount of all such Indebtedness of CML, the Borrowers and their Subsidiaries permitted under this paragraph (g) shall not exceed $7,500,000 at any one time; (h) Indebtedness not otherwise permitted by this ss.10.1 existing on the datE hereof and listed and described on SCHEDULE 10.1 hereto; (i) Indebtedness of a Guarantor which is a Subsidiary of any Borrower to such Borrower in respect of loans permitted by ss.10.3(e); (j) Indebtedness of any Borrower to CML in respect of Investments by CML in such Borrower permitted under ss.10.3(i); (k) Indebtedness of NordicTrack under the Monogram Credit Card Program and the GE Capital Credit Card Program; and (l) Indebtedness consisting of guaranties by CML or any of its Subsidiaries of obligations of any direct or indirect Subsidiaries of such Person in respect of operating leases of such Subsidiary; and (m) Indebtedness of CML to any Borrower in respect of Investments by such Borrower in CML permitted under ss.10.3(j). 10.2. RESTRICTIONS ON LIENS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, (i) create or incur or suffer to be created or incurred or to exist any lien, encumbrance, mortgage, pledge, charge, restriction or other security interest of any kind upon any of its property or assets of any character whether now owned or hereafter acquired, or upon the income or profits therefrom; (ii) transfer any of such property or assets or the income or profits therefrom for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors; (iii) acquire, or agree or have an option to acquire, any property or assets upon conditional sale or other title retention or purchase money security agreement, device or arrangement; (iv) suffer to exist for a period of more than thirty (30) days after the same shall have been incurred any Indebtedness or claim or demand against it that if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever over its general creditors; or (v) sell, assign, pledge or otherwise transfer any accounts, contract rights, general intangibles, chattel paper or instruments, with or without recourse; PROVIDED that CML, any of the Borrowers and any of their Subsidiaries may create or incur or suffer to be created or incurred or to exist: (a) liens in favor of such Borrower on all or part of the assets of Subsidiaries of such Borrower securing Indebtedness owing by Subsidiaries of such Borrower to such Borrower; 71 -63- (b) liens to secure taxes, assessments and other government charges in respect of obligations not overdue or liens on properties other than Mortgaged Properties to secure claims for labor, material or supplies in respect of obligations not overdue; (c) deposits or pledges made in connection with, or to secure payment of, workmen's compensation, unemployment insurance, old age pensions or other social security obligations; (d) liens on properties other than Mortgaged Properties in respect of judgments or awards, the Indebtedness with respect to which is permitted by ss.10.1(d); (e) liens of carriers, warehousemen, mechanics and materialmen, and other like liens on properties other than Mortgaged Properties, in existence less than 120 days from the date of creation thereof in respect of obligations not overdue; (f) encumbrances on Real Estate other than the Mortgaged Property consisting of easements, rights of way, zoning restrictions, restrictions on the use of real property and defects and irregularities in the title thereto, landlord's or lessor's liens under leases to which CML, any of the Borrowers or any of their Subsidiaries is a party, and other minor liens or encumbrances none of which in the opinion of CML or such Borrower interferes materially with the use of the property affected in the ordinary conduct of the business of CML, such Borrower or their Subsidiaries, as the case may be, which defects do not individually or in the aggregate have a materially adverse effect on the business of CML or such Borrower, as the case may be individually or of CML, the Borrowers and their Subsidiaries on a consolidated basis; (g) liens existing on the date hereof and listed on SCHEDULE 10.2 hereto; (h) liens to secure Capitalized Lease obligations of the type and amount permitted by ss.10.1(g), so long as such liens cover only the property subject to sucH Capitalized Leases, and purchase money security interests in or purchase money mortgages on real or personal property other than Mortgaged Properties acquired after the date hereof to secure purchase money Indebtedness of the type and amount permitted by ss.10.1(g), incurred in connection with the acquisition of such property, which security interests or mortgages cover only the real or personal property so acquired; (i) liens and encumbrances on each Mortgaged Property as and to the extent permitted by the Mortgage applicable thereto; (j) liens in favor of the Administrative Agent for the benefit of the Lenders and the Administrative Agent under the Loan Documents; and (k) liens on assets of NordicTrack granted in accordance with the Monogram Credit Card Program and the GE Capital Credit Card Program. 72 -64- 10.3. RESTRICTIONS ON INVESTMENTS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, make or permit to exist or to remain outstanding any Investment except Investments in: (a) marketable direct or guaranteed obligations of the United States of America that mature within one (1) year from the date of purchase by CML or such Borrower; (b) demand deposits, certificates of deposit, bankers acceptances and time deposits of United States banks having total assets in excess of $1,000,000,000 and money market accounts of brokerage firms acceptable to the Administrative Agent; (c) securities commonly known as "commercial paper" issued by a corporation organized and existing under the laws of the United States of America or any state thereof that at the time of purchase have been rated and the ratings for which are not less than "P 1" if rated by Moody's Investors Services, Inc., and not less than "A 1" if rated by Standard and Poor's Ratings Group, a division of McGraw-Hill, Inc.; (d) Investments existing on the date hereof and listed on SCHEDULE 10.3 hereto; (e) Investments by any Borrower in any Subsidiary of that Borrower that is a Guarantor in the form of loans made in cash; (f) Investments consisting of the Guaranty; (g) Investments consisting of promissory notes received as proceeds of asset dispositions permitted by ss.10.5.2; (h) Investments consisting of loans and advances to employees for moving, entertainment, travel and other similar expenses in the ordinary course of business not to exceed $2,000,000 in the aggregate at any time outstanding; (i) Investments by CML in any of the Borrowers in the form of contributions to capital, subordinated loans or a repayment of a loan previously made to such Borrower so long as such entities remain Borrowers hereunder; (j) Investments consisting of guaranties by CML or any of its Subsidiaries of obligations of any direct or indirect Subsidiaries of such Person in respect of operating leases of such Subsidiary; and (k) Investments by any Borrower in CML in the form of distributions, subordinated loans or a repayment of a loan previously made to CML by such Borrower, provided such Investment would be permitted under ss.10.4 hereof. PROVIDED, HOWEVER, that, with the exception of loans and advances referred to in ss.10.3(h), sucH Investments will be considered Investments permitted by this ss.10.3 only if all actions havE been taken to the satisfaction of the Administrative Agent to provide to the Administrative Agent, for the benefit of the Lenders and the Administrative Agent, a first 73 -65- priority perfected security interest in all of such Investments free of all encumbrances other than Permitted Liens. 10.4. DISTRIBUTIONS AND RESTRICTED PAYMENTS. 10.4.1. INTERCOMPANY DISTRIBUTIONS AND RESTRICTED PAYMENTS. The Borrowers will not make any Restricted Payments, PROVIDED HOWEVER, that: (a) the Borrowers, may make Restricted Payments to CML in an aggregate amount per fiscal year not to exceed (i) $10,000,000, PLUS (ii) amounts required to pay income and other taxes and governmental levies owed or payable by CML, PLUS (iii) amounts required and permitted to be paid by CML in respect of interest on its Subordinated Debentures, PLUS (iv) the maximum amount of dividends permitted to be paid by CML during such fiscal year pursuant to ss.10.4.2; PROVIDED that all such Restricted Payments made by thE Borrowers to CML pursuant to this ss.10.4.1(a) shall be used by CML for thE purposes described in such clauses (ii), (iii) and (iv) and to pay any expenses required to be paid by CML in the ordinary course of business in each case not later than five (5) Business Days after the date on which the relevant Restricted Payment is made; (b) the Borrowers may make Restricted Payments to CML in an aggregate amount per fiscal year not to exceed $12,000,000 PROVIDED all such Restricted Payments are used by CML to pay expenses incurred directly by or for the direct benefit of any of the Borrowers or their Subsidiaries in each case not later than five (5) Business Days after the date on which the relevant Restricted Payment is made; (c) each Borrower may make Restricted Payments to CML in an aggregate amount per Borrower not to exceed, on a cumulative basis in any fiscal year, (i) $12,500,000 with respect to NordicTrack and (ii) $2,500,000 with respect to S&H, PROVIDED that (A) no Default or Event of Default shall have occurred and be continuing or would result from the making of such Restricted Payment and (B) CML, concurrently with its receipt of such Restricted Payment, invests the proceeds of such Restricted Payment in another Borrower to satisfy the working capital requirements of such Borrower. 10.4.2. CML DISTRIBUTIONS. CML will not make any Distributions other than: (a) Distributions in the form of dividends paid in cash not to exceed an aggregate amount of $1,300,000 for any fiscal quarter, PROVIDED that: (i) no Default or Event of Default has occurred and is continuing or would result from the making of such Distribution; (ii) the Borrowers have aggregate borrowing availability under this Credit Agreement (after giving effect to such Distribution) in excess of $5,000,000; 74 -66- (iii) Consolidated EBITDA of CML and its Subsidiaries for the most recent fiscal quarter ending during the month set forth in the table below is not less than the amount set forth opposite such month: Minimum ------- Quarter Ending Consolidated EBITDA -------------- ------------------- July 1997 $ 2,530,000 October 1997 $ 1,932,000 January 1998 $53,645,000 April 1998 $ 310,000 July 1998 $ 3,818,000 (iv) at any time after the fiscal quarter ending in July 1998, Consolidated EBITDA of CML and its Subsidiaries for the most recent period of four consecutive fiscal quarters is not less than $30,000,000; and (v) prior to the declaration or making of any proposed Distribution under this paragraph (a), CML shall have delivered to the Administrative Agent a certificate of the principal financial or accounting officer of CML containing calculations, on a PRO FORMA basis after giving effect to the proposed Distribution and the proposed borrowing, if applicable, illustrating compliance by CML with the foregoing clauses (i) through (iv). (b) purchases or redemptions by CML of the stock of CML resulting solely from any holder of any stock option issued by CML paying (i) all or a portion of the exercise price of such stock option or (ii) any taxes due from such holder as a result of the exercise of such stock option by such holder's relinquishment of rights under such stock option. 10.5. MERGER, CONSOLIDATION AND DISPOSITION OF ASSETS. 10.5.1. MERGERS AND ACQUISITIONS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, become a party to any merger or consolidation, or agree to or effect any asset acquisition or stock acquisition (other than the acquisition of assets in the ordinary course of business consistent with past practices) except the merger or consolidation of one or more of the Subsidiaries of any Borrower with and into such Borrower (with such Borrower being the surviving entity), or the merger or consolidation of two or more Subsidiaries of any Borrower, provided, that if any of such Subsidiaries is also a Guarantor, such Guarantor is the surviving entity of such merger or consolidation. 10.5.2. DISPOSITION OF ASSETS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, become a party to or agree to or effect any disposition of assets, other than (a) the disposition of assets in the ordinary course of business, consistent with past practices, (b) the dispositions of assets permitted under ss.10.6, (c) the termination or assignment of store leases of anY Borrower or its Subsidiaries; PROVIDED that all Net Cash Proceeds from any such termination or assignment referred to in this clause (c) shall be applied, concurrently with receipt of such proceeds by CML or any of its Subsidiaries, to prepay the Loans of the applicable Borrower, or, in the case of CML, any of the Borrowers, and 75 -67- (d) the sale of accounts receivable of NordicTrack to General Electric Capital Corporation in accordance with the GE Capital Credit Card Program Agreement. 10.6. SALE AND LEASEBACK. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, enter into any arrangement, directly or indirectly, whereby CML, any of the Borrowers or any of their Subsidiaries shall sell or transfer any property owned by it in order then or thereafter to lease such property or lease other property that CML, any of the Borrowers or any of their Subsidiaries intends to use for substantially the same purpose as the property being sold or transferred except as described in SCHEDULE 10.6. 10.7. COMPLIANCE WITH ENVIRONMENTAL LAWS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, (i) use any of the Real Estate or any portion thereof for the handling, processing, storage or disposal of Hazardous Substances in violation of Environmental Laws, (ii) cause or permit to be located on any of the Real Estate any underground tank or other underground storage receptacle for Hazardous Substances in violation of Environmental Laws, (iii) generate any Hazardous Substances on any of the Real Estate in violation of Environmental Laws, (iv) conduct any activity at any Real Estate or use any Real Estate in any manner so as to cause a release (i.e. releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping) or threatened release of Hazardous Substances on, upon or into the Real Estate or (v) otherwise conduct any activity at any Real Estate or use any Real Estate in any manner that would violate any Environmental Law or bring such Real Estate in violation of any Environmental Law. 10.8. SUBORDINATED DEBT. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, amend, supplement or otherwise modify the terms of any of the Subordinated Debentures or Fiscal Agency Agreement or prepay, redeem or repurchase any of the Subordinated Debentures. 10.9. EMPLOYEE BENEFIT PLANS. None of CML, any Borrower nor any ERISA Affiliate will (a) engage in any "prohibited transaction" within the meaning of ss.406 of ERISA or ss.4975 of the Code which could result in a material liability for CML, any of thE Borrowers or any of their Subsidiaries; or (b) operated or maintain any Guaranteed Pension Plan or Multiemployer Plan. 10.10. BANK ACCOUNTS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, (i) establish any bank accounts other than those listed on SCHEDULE 8.20 (as such may be amended from time to time to include those depository institutions which have executed and delivered to the Administrative Agent Agency Account Agreements) unless such new account is subject to an Agency Account Agreement, (ii) violate directly or indirectly any Agency Account Agreement in favor of the Administrative Agent for the benefit of the Lenders and the Administrative Agent with respect to such account or (iii) deposit into any of the payroll accounts listed on SCHEDULE 8.20 any amounts in excess of amounts necessary to pay current payroll obligations from such accounts. 76 -68- 10.11. TRANSACTIONS WITH AFFILIATES. Neither CML nor any of the Borrowers will, nor will they permit any of their Subsidiaries to, enter into, or cause, suffer or permit to exist any transaction or agreement with any Affiliate except: (a) employment agreements entered into in the ordinary course of business by CML, any of the Borrowers or any of their Subsidiaries and loans and advances to employees of CML, any of the Borrowers or any of their Subsidiaries in the ordinary course of business for travel expenses, drawing accounts or other similar business related expenses; (b) any transaction or agreement having terms not less favorable to CML, the Borrowers and their Subsidiaries than would be the case if such transaction or agreement had been entered into with a Person that is not an Affiliate, PROVIDED that the aggregate potential value payable or receivable by CML, the Borrowers and their Subsidiaries in connection with all such transactions during any fiscal year of CML (excluding transactions or agreements exclusively among or between CML, the Borrowers and their Subsidiaries) shall not exceed $500,000; and (c) tax sharing agreements in form and substance satisfactory to the Administrative Agent among CML and any of its Subsidiaries. 10.12. RESTRICTIVE OR INCONSISTENT AGREEMENTS. Neither CML nor any of the Borrowers will, nor will they permit any of their Subsidiaries to, enter into any agreement: (a) other than the Loan Documents, the Fiscal Agency Agreement and the Subordinated Debentures (as in effect on the Closing Date or as thereafter amended in compliance with this Credit Agreement) which, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or otherwise imposes any materially adverse or burdensome condition upon, the declaration or payment of dividends or distributions, the incurrence of Indebtedness, the granting of liens, the making of loans or advances to any of CML, any Borrower or any of their Subsidiaries or the amendment or modification of any of the Loan Documents; or (b) containing any provision that would be violated or breached by any Loan or by the performance by CML, any Borrower or any of their Subsidiaries of their obligations hereunder or under any of the Loan Documents. 10.13. BUSINESS ACTIVITIES. CML will not engage in any business activity except its ownership of its Subsidiaries, including the Borrowers, activities reasonably related thereto, its performance from time to time of its obligations under this Credit Agreement, the other Loan Documents, the Subordinated Debentures and the Fiscal Agency Agreement and each other agreement, instrument or document contemplated hereby, whether or not executed on or before the Closing Date. 10.14. PRIVATE LABEL CREDIT CARD PROGRAMS. Neither CML nor NordicTrack will amend, supplement or otherwise modify any terms or provisions of any Private Label Credit Card Program without the prior written consent of the Administrative Agent. Without limitation of the foregoing, neither CML nor NordicTrack will (a) increase the Credit Review Point (as such term is defined in the Monogram Credit Card Program Agreement) above $123,000,000 without the prior written consent of the Administrative Agent or (b) increase the Credit Review Point (as such term is defined in the GE Capital Credit Card 77 -69- Program Agreement) above $20,000,000 without the prior written consent of the Administrative Agent. CML and NordicTrack will promptly notify the Administrative Agent of the termination of the GE Capital Credit Card Program and of the termination of the Intercreditor Agreement dated as of December 10, 1996 among General Electric Capital Corporation, the Lenders and the Administrative Agent. 11. FINANCIAL COVENANTS OF CML AND THE BORROWERS. Each of CML and each of the Borrowers covenants and agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or any Lender has any obligation to make any Loans or the Issuing Bank has any obligation to issue, extend or renew any Letters of Credit: 11.1. MINIMUM QUARTERLY CONSOLIDATED EBITDA. CML and the Borrowers will not permit, for each fiscal quarter ending during the month set forth in the table below, Consolidated EBITDA of CML and its Subsidiaries for such fiscal quarter to be less than the amount set forth opposite such month: Minimum Consolidated -------------------- Quarter Ending EBITDA -------------- ------ July 1997 ($15,585,000) October 1997 ($20,461,000) January 1998 $10,863,000 April 1998 $ 5,681,000 July 1998 $ 1,342,000 October 1998 ($14,084,000) January 1999 $15,199,000 11.2. MINIMUM CONSOLIDATED EBITDA TO INTEREST RATIO. CML and the Borrowers will not permit the ratio of Consolidated EBITDA to Consolidated Total Interest Expense of CML and its Subsidiaries for any period of four consecutive fiscal quarters ending during the month set forth in the table below to be less than the amount set forth opposite such month: Period Ending Ratio ------------- ----- July 1998 1.12:100 October 1998 2.03:1.00 January 1999 3.08:1.00 11.3. CAPITAL EXPENDITURES. Neither CML nor any of the Borrowers will make, nor will they permit any of their Subsidiaries to make, Capital Expenditures that exceed 78 -70- $5,000,000 in the aggregate for any fiscal quarter ending after July 1996, and $10,000,000 in the aggregate for any fiscal year ending after July 1996; PROVIDED, HOWEVER that if during any fiscal year the amount of Capital Expenditures permitted for that fiscal year is not so utilized, such unutilized amount may be utilized in the next succeeding fiscal year (after first utilizing the amount of capital expenditures permitted in such fiscal year) but not in any subsequent fiscal year. CML and its Subsidiaries will not make or commit to make Capital Expenditures with respect to new stores (other than kiosks) in any year unless the Consolidated EBITDA of CML and its Subsidiaries calculated on a rolling four quarter basis based upon the most recent consolidated financial statements of CML and its Subsidiaries delivered to the Lenders pursuant to ss.9.4 is equal to or exceeds $35,000,000 in which event (a) Capital Expenditures of CML and its Subsidiaries shall not exceed $20,000,000 in the aggregate for such year and (b) Capital Expenditures of CML and its Subsidiaries with respect to new stores (other than kiosks) shall not exceed $10,000,000 in the aggregate for such year. 11.4. TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. CML and the Borrowers will not permit the ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth of CML and its Subsidiaries to exceed at any time during any fiscal quarter ending during the month set forth in the table below the amount set forth opposite such month: Quarter Ending Ratio -------------- ----- July 1997 3.15:1.00 October 1997 6.86:1.00 January 1998 5.39:1.00 April 1998 4.13:1.00 July 1998 4.03:1.00 October 1998 7.87:1.00 January 1999 4.88:1.00 11.5. MINIMUM QUARTERLY EBITDA (NORDICTRACK). For any fiscal quarter ending during the month set forth in the table below, CML and the Borrowers will not permit, NordicTrack's EBITDA for such fiscal quarter to be less than the amount set forth opposite such month: Quarter Ending Minimum EBITDA -------------- -------------- July 1997 ($18,325,000) October 1997 ($17,006,000) January 1998 $11,040,000 April 1998 $ 6,770,000 July 1998 ($ 1,000,000) October 1998 ($10,883,000) January 1999 $14,930,000 79 -71- 12. CLOSING CONDITIONS. The obligations of the Lenders to make the initial Loans and of the Issuing Bank to issue any initial Letters of Credit shall be subject to the satisfaction of the following conditions precedent on or prior to the Original Closing Date. 12.1. LOAN DOCUMENTS. Each of the Loan Documents shall have been duly executed and delivered by the respective parties thereto, shall be in full force and effect and shall be in form and substance satisfactory to each of the Lenders. Each Lender shall have received a fully executed copy of each such document. 12.2. CERTIFIED COPIES OF CHARTER DOCUMENTS. Each of the Lenders shall have received from CML, each of the Borrowers and each of their Subsidiaries a copy, certified by a duly authorized officer of such Person to be true and complete on the Original Closing Date, of each of (i) its charter or other incorporation documents as in effect on such date of certification, and (ii) its by-laws as in effect on such date. 12.3. CORPORATE ACTION. All corporate action necessary for the valid execution, delivery and performance by CML, each of the Borrowers and each of their Subsidiaries of this Credit Agreement and the other Loan Documents to which it is or is to become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Lenders shall have been provided to each of the Lenders. 12.4. INCUMBENCY CERTIFICATE. Each of the Lenders shall have received from CML, each of the Borrowers and each of their Subsidiaries an incumbency certificate, dated as of the Original Closing Date, signed by a duly authorized officer of CML, such Borrower or such Subsidiary, and giving the name and bearing a specimen signature of each individual who shall be authorized: (i) to sign, in the name and on behalf of each of CML, such Borrower or such Subsidiary, each of the Loan Documents to which CML, such Borrower or such Subsidiary is or is to become a party; (ii) in the case of such Borrower, to make Loan Requests and Conversion Requests and to apply for Letters of Credit; and (iii) to give notices and to take other action on its behalf under the Loan Documents. 12.5. VALIDITY OF LIENS. The Security Documents shall be effective to create in favor of the Administrative Agent a legal, valid and enforceable first (except for Permitted Liens entitled to priority under applicable law) security interest in and lien upon the Collateral (with such exceptions as are acceptable to the Majority Lenders). All filings, recordings, deliveries of instruments and other actions necessary or desirable in the opinion of the Administrative Agent to protect and preserve such security interests shall have been duly effected (with such exceptions as are acceptable to the Majority Lenders). The Administrative Agent shall have received evidence thereof in form and substance satisfactory to the Administrative Agent. 12.6. PERFECTION CERTIFICATES AND UCC SEARCH RESULTS. The Administrative Agent shall have received from each of CML, each of the Borrowers and their Subsidiaries a completed and fully executed Perfection Certificate and the results of UCC, patent, trademark and copyright searches with respect to the Collateral, indicating no liens other than Permitted Liens and otherwise in form and substance satisfactory to the Administrative Agent. 80 -72- 12.7. APPRAISALS; TAXES. The Administrative Agent shall have received (i) appraisals of NordicTrack's Mortgaged Property performed by appraisers mutually agreed upon by the Administrative Agent and the Borrowers and such appraisals shall be in form and substance satisfactory to the Administrative Agent; and (ii) evidence of payment of real estate taxes and municipal charges on all Real Estate not delinquent on or before the Original Closing Date. 12.8. TITLE INSURANCE. The Administrative Agent shall have received a Title Policy covering each Mortgaged Property (or commitments to issue such policies, with all conditions to issuance of the Title Policy deleted by an authorized agent of the Title Insurance Company) together with proof of payment of all fees and premiums for such policies, from the Title Insurance Company and in amounts satisfactory to the Administrative Agent, insuring the interest of each of the Administrative Agent and each of the Lenders as mortgagee under the Mortgages. 12.9. CERTIFICATES OF INSURANCE. The Administrative Agent shall have received (i) a certificate of insurance from an independent insurance broker dated as of the Original Closing Date, identifying insurers, types of insurance, insurance limits, and policy terms, and otherwise describing the insurance obtained in accordance with the provisions of the Security Agreement and (ii) certified copies of all policies evidencing such insurance (or certificates therefore signed by the insurer or an agent authorized to bind the insurer) and the Administrative Agent shall be satisfied with the adequacy of all such insurance. 12.10. AGENCY ACCOUNT AGREEMENTS. The Administrative Agent shall have received an Agency Account Agreement, from each depository institution at which CML, any of the Borrowers or any of the Guarantors maintains depository accounts which the Administrative Agent in its sole discretion has identified as a key concentration account concerning the Administrative Agent's interest for the benefit of the Lenders and the Administrative Agent in such accounts. 12.11. BORROWING BASE REPORT. The Administrative Agent shall have received from the Borrowers the initial Borrowing Base Report dated as of the Original Closing Date. 12.12. ACCOUNTS RECEIVABLE AGING REPORT. The Administrative Agent shall have received from NordicTrack and S&H the most recent Accounts Receivable aging report of NordicTrack and S&H dated as of a date which shall be no more than fifteen (15) days prior to the Original Closing Date and, as applicable shall have notified the Administrative Agent in writing on the Original Closing Date of any material deviation from the Accounts Receivable values reflected in such Accounts Receivable aging report and shall have provided the Administrative Agent with such supplementary documentation as the Administrative Agent may reasonably request. 12.13. HAZARDOUS WASTE ASSESSMENTS. The Administrative Agent shall have received hazardous waste site assessments from environmental engineers and in form and substance satisfactory to the Administrative Agent, covering (a) all currently owned real estate and (b), as requested by the Administrative Agent, all other real property in respect of which CML, any of the Borrowers or any of their Subsidiaries may have material liability, whether contingent or otherwise, for dumping or disposal of Hazardous Substances. 81 -73- 12.14. SOLVENCY CERTIFICATE. Each of the Lenders shall have received an officer's certificate of CML dated as of the Original Closing Date as to the solvency of CML and its Subsidiaries following the consummation of the transactions contemplated herein and in form and substance satisfactory to the Lenders. 12.15. OPINION OF COUNSEL. Each of the Lenders and the Administrative Agent shall have received a favorable legal opinion addressed to the Lenders and the Administrative Agent, in form and substance satisfactory to the Lenders and the Administrative Agent, from: (a) Hale and Dorr, counsel to CML, the Borrowers and the Guarantors; and (b) local counsel to CML, the Borrowers and their Subsidiaries in the United Kingdom, Germany, Canada, the U.S. Virgin Islands and the states of California and Minnesota, as applicable. Each of CML, the Borrowers and their Subsidiaries have instructed each such counsel to deliver its opinion to the Lenders and the Administrative Agent. 12.16. PAYMENT OF FEES. The Borrowers shall have paid to the Administrative Agent the Closing Fee and Administrative Agent's fee pursuant to ss.ss.5.1 and 5.2. 12.17. PAYOFF LETTER. The Administrative Agent shall have received a payoff letter from Citibank and the other lenders under the Citibank Facility, indicating the amount of the loan obligations of CML to Citibank to be discharged on the Original Closing Date and an acknowledgment by Citibank that upon receipt of such funds it will forthwith execute and deliver to the Administrative Agent for filing all termination statements and take such other actions as may be necessary to discharge all mortgages, deeds of trust and security interests granted by CML, any of the Borrowers or any of their Subsidiaries in favor of Citibank and the other lenders under the Citibank Facility. 12.18. DISBURSEMENT INSTRUCTIONS. The Administrative Agent shall have received disbursement instructions from the Borrowers, indicating that a portion of the proceeds of the Loans, in an amount equal to the aggregate loan obligations of CML under the Citibank Facility, are paid to Citibank. 12.19. UPDATED COLLATERAL EXAMINATIONS. The Administrative Agent shall have reviewed and been satisfied with the update of the commercial finance examinations performed by the Administrative Agent's field examiners, including satisfactory review of the Borrowers' books and records in connection with the calculation of the Borrowing Base and the Administrative Agent's satisfaction with the components and the Borrowers' method of calculating the Borrowing Base. 12.20. LANDLORD LIEN WAIVERS. The Administrative Agent shall have received landlord waivers with respect to material leased locations of the Borrowers located in Kentucky, Minnesota, South Dakota and Virginia in form and substance satisfactory to the Administrative Agent. 12.21. BORROWING AVAILABILITY. The Administrative Agent shall have received evidence satisfactory to the Administrative Agent that after giving effect to all transactions 82 -74- to occur on the Original Closing Date and after deducting the amount of accounts payable of the Borrowers' more than thirty (30) days past due, the Borrowers shall have aggregate borrowing availability under the Credit Agreement on the Original Closing Date of not less than $9,000,000. 13. CONDITIONS TO ALL BORROWINGS. The obligations of the Lenders to make any Loan, and of the Issuing Bank to issue, extend or renew any Letter of Credit, in each case whether on or after the Original Closing Date, shall also be subject to the satisfaction of the following conditions precedent: 13.1. REPRESENTATIONS TRUE; NO EVENT OF DEFAULT. Each of the representations and warranties of any of CML, the Borrowers and their Subsidiaries contained in this Credit Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with this Credit Agreement shall be true as of the date as of which they were made and shall also be true at and as of the time of the making of such Loan or the issuance, extension or renewal of such Letter of Credit, with the same effect as if made at and as of that time (except to the extent of changes resulting from transactions contemplated or permitted by this Credit Agreement and the other Loan Documents and to the extent that such representations and warranties relate expressly to an earlier date) and no Default or Event of Default shall have occurred and be continuing. 13.2. NO LEGAL IMPEDIMENT. No change shall have occurred in any law or regulations thereunder or interpretations thereof that in the reasonable opinion of any Lender would make it illegal for such Lender to make such Loan or to participate in the issuance, extension or renewal of such Letter of Credit or in the reasonable opinion of the Issuing Bank would make it illegal for the Issuing Bank to issue, extend or renew such Letter of Credit. 13.3. GOVERNMENTAL REGULATION. Each Lender shall have received such statements in substance and form reasonably satisfactory to such Lender as such Lender shall require for the purpose of compliance with any applicable regulations of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System. 13.4. PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the transactions contemplated by this Credit Agreement, the other Loan Documents and all other documents incident thereto shall be satisfactory in substance and in form to the Lenders and to the Administrative Agent and the Administrative Agent's Special Counsel, and the Lenders, the Administrative Agent and such counsel shall have received all information and such counterpart originals or certified or other copies of such documents as the Administrative Agent may reasonably request. 13.5. BORROWING BASE REPORT. The Administrative Agent shall have received the most recent Borrowing Base Report required to be delivered to the Administrative Agent in accordance with ss.9.4(f). 13.6. BORROWING AVAILABILITY. After giving effect to all amounts requested, the sum of the outstanding amount of all Loans PLUS the Borrowers' aggregate Letter of Credit Exposures shall not exceed the lesser of (a) the Total Commitment and (b) the Aggregate Borrowing Base PLUS the Permitted Overadvance Amount. 83 -75- 14. EVENTS OF DEFAULT; ACCELERATION; ETC. 14.1. EVENTS OF DEFAULT AND ACCELERATION. If any of the following events ("Events of Default" or, if the giving of notice or the lapse of time or both is required, then, prior to such notice or lapse of time, "Defaults") shall occur: (a) any of the Borrowers shall fail to pay any principal of the Loans or any Reimbursement Obligation when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (b) CML, any of the Borrowers or any of their Subsidiaries shall fail to pay any interest on the Loans, the commitment fee, any Letter of Credit Fee, the Administrative Agent's fee, or other sums due hereunder or under any of the other Loan Documents, when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (c) CML or any of the Borrowers shall fail to comply with any of its covenants contained in ss.ss.9.1, 9.4, 9.5, 9.7, 9.9, 9.12, 9.14 through 9.19, 10 or 11 or any of The covenants contained in any of the Mortgages; (d) CML, any of the Borrowers or any of their Subsidiaries shall fail to perform any term, covenant or agreement contained herein or in any of the other Loan Documents (other than those specified elsewhere in this ss.14.1) for fifteen (15) dayS after written notice of such failure has been given to the Borrowers by the Administrative Agent; (e) any representation or warranty of CML, any of the Borrowers or any of their Subsidiaries in this Credit Agreement or any of the other Loan Documents or in any other document or instrument delivered pursuant to or in connection with this Credit Agreement shall prove to have been false in any material respect upon the date when made or deemed to have been made or repeated; (f) CML, any of the Borrowers or any of their Subsidiaries shall fail to pay at maturity, or within any applicable period of grace, any obligation for borrowed money or credit received or in respect of any Capitalized Leases and the aggregate amount of such obligations and Capitalized Leases is in excess of $2,000,000, or fail to observe or perform any term, covenant or agreement contained in any agreement by which it is bound, evidencing or securing borrowed money or credit received or in respect of any Capitalized Leases and the aggregate amount of such obligations and Capitalized Leases is in excess of $2,000,000 for such period of time as would permit (assuming the giving of appropriate notice if required) the holder or holders thereof or of any obligations issued thereunder to accelerate the maturity thereof; (g) CML, any of the Borrowers or any of their Subsidiaries shall make an assignment for the benefit of creditors, or admit in writing its inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of CML, any of the Borrowers or any of their Subsidiaries or of any substantial part of 84 -76- the assets of CML, any of the Borrowers or any of their Subsidiaries or shall commence any case or other proceeding relating to CML, any of the Borrowers or any of their Subsidiaries under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against CML, any of the Borrowers or any of their Subsidiaries and CML, any of the Borrowers or any of their Subsidiaries shall indicate its approval thereof, consent thereto or acquiescence therein or such petition or application shall not have been dismissed within sixty (60) days following the filing thereof; (h) a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating CML, any of the Borrowers or any of their Subsidiaries bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of CML, any of the Borrowers or any of their Subsidiaries in an involuntary case under federal bankruptcy laws as now or hereafter constituted; (i) there shall remain in force, undischarged, unsatisfied and unstayed, for more than thirty days, whether or not consecutive, any final judgment against CML, any of the Borrowers or any of their Subsidiaries that, with other outstanding final judgments, undischarged, against CML, any of the Borrowers or any of their Subsidiaries exceeds in the aggregate $2,000,000; (j) the holders of all or any part of the Subordinated Debt shall accelerate the maturity of all or any part of the Subordinated Debt or the Subordinated Debt shall be prepaid, redeemed or repurchased in whole or in part; (k) if any of the Loan Documents shall be cancelled, terminated, revoked or rescinded or the Administrative Agent's security interests, mortgages or liens in a substantial portion of the Collateral shall cease to be perfected, or shall cease to have the priority contemplated by the Security Documents, in each case otherwise than in accordance with the terms thereof or with the express prior written agreement, consent or approval of the Lenders, or any action at law, suit or in equity or other legal proceeding to cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of CML, any of the Borrowers or any of their Subsidiaries party thereto or any of their respective stockholders, or any court or any other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable in accordance with the terms thereof; (l) CML, any of the Borrowers or any of their Subsidiaries shall be enjoined, restrained or in any way prevented by the order of any court or any administrative or regulatory agency from conducting any material part of its business and such order shall continue in effect for more than thirty (30) days; (m) there shall occur any material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, 85 -77- embargo, condemnation, act of God or public enemy, or other casualty, which in any such case causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of CML, any of the Borrowers or any of their Subsidiaries if such event or circumstance is not covered by business interruption insurance and would have a material adverse effect on the business or financial condition of CML, such Borrower or such Subsidiary; (n) there shall occur the loss, suspension or revocation of, or failure to renew, any license or permit now held or hereafter acquired by CML, any of the Borrowers or any of their Subsidiaries if such loss, suspension, revocation or failure to renew would have a material adverse effect on the business or financial condition of CML, such Borrower or such Subsidiary; (o) CML, any of the Borrowers or any of their Subsidiaries shall be indicted for a state or federal crime, or any civil or criminal action otherwise shall have been brought against CML, any of the Borrowers or any of their Subsidiaries, a punishment for which in any such case could include the forfeiture of any assets of such Person included in any of the Borrowing Bases or any assets of such Person not included in the Borrowing Bases but having a fair market value in excess of $2,000,000; (p) (i) CML shall at any time, legally or beneficially own less than one hundred percent (100%) of the shares of capital stock of the Borrowers (other than NA), as adjusted pursuant to any stock split, stock dividend or recapitalization or reclassification of the capital of such Borrower or (ii) NT shall at any time, legally or beneficially own less than one hundred percent (100%) of the common stock of NA, as adjusted pursuant to any stock split, stock dividend or recapitalization or reclassification of the capital of NA; (q) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of common stock of CML; or, during any period of twelve consecutive calendar months, a majority of the seats (other than vacant seats) on the board of directors of CML shall at any time be occupied by Persons other than (i) directors on the Original Closing Date or (ii) directors initially nominated or appointed by action of a majority of CML's directors; then, and in any such event, so long as the same may be continuing, the Administrative Agent may, and upon the request of the Majority Lenders shall, by notice in writing to the Borrowers declare all amounts owing with respect to this Credit Agreement, the Notes and the other Loan Documents and all Reimbursement Obligations to be, and they shall thereupon forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers; PROVIDED that in the event of any Event of Default specified in ss.ss.14.1(g), 14.1(h) or 14.1(j), all sUch amounts shall become immediately due and payable automatically and without any requirement of notice from the Administrative Agent or any Lender. 86 -78- 14.2. TERMINATION OF COMMITMENTS. If any one or more of the Events of Default specified in ss.14.1(g), ss.14.1(h) or ss.14.1(j) shall occur, any unused portion of the cRedit hereunder shall forthwith terminate and each of the Lenders shall be relieved of all further obligations to make Loans to the Borrowers and the Issuing Bank shall be relieved of all further obligations to issue, extend or renew Letters of Credit. If any other Event of Default shall have occurred and be continuing, or if on any Drawdown Date or other date for issuing, extending or renewing any Letter of Credit the conditions precedent to the making of the Loans to be made on such Drawdown Date or (as the case may be) to issuing, extending or renewing such Letter of Credit on such other date are not satisfied, the Administrative Agent may and, upon the request of the Majority Lenders, shall, by notice to the Borrowers, terminate the unused portion of the credit hereunder, and upon such notice being given such unused portion of the credit hereunder shall terminate immediately and each of the Lenders shall be relieved of all further obligations to make Loans and the Issuing Bank shall be relieved of all further obligations to issue, extend or renew Letters of Credit. No termination of the credit hereunder shall relieve CML, any of the Borrowers or any of their Subsidiaries of any of the Obligations. 14.3. REMEDIES. In case any one or more of the Events of Default shall have occurred and be continuing, and whether or not the Lenders shall have accelerated the maturity of the Loans pursuant to ss.14.1, each Lender, if owed any amount with respect to thE Loans or the Reimbursement Obligations, may, with the consent of the Majority Lenders but not otherwise, proceed to protect and enforce its rights by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Credit Agreement and the other Loan Documents or any instrument pursuant to which the Obligations to such Lender are evidenced, including as permitted by applicable law the obtaining of the EX PARTE appointment of a receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of such Lender. No remedy herein conferred upon any Lender or the Administrative Agent or the holder of any Note or purchaser of any Letter of Credit Participation is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. 14.4. DISTRIBUTION OF COLLATERAL PROCEEDS. In the event that following the occurrence or during the continuance of any Default or Event of Default, the Administrative Agent or any Lender, as the case may be, receives any monies in connection with the enforcement of any the Security Documents, or otherwise with respect to the realization upon any of the Collateral, such monies shall be distributed for application as follows: (a) First, to the payment of, or (as the case may be) the reimbursement of the Administrative Agent for or in respect of the Administrative Agent's fee payable pursuant to ss.5.2 and all reasonable costs, expenses, disbursements and losses whicH shall have been incurred or sustained by the Administrative Agent in connection with the collection of such monies by the Administrative Agent, for the exercise, protection or enforcement by the Administrative Agent of all or any of the rights, remedies, powers and privileges of the Administrative Agent under this Credit Agreement or any of the other Loan Documents or in respect of the Collateral or in support of any provision of adequate indemnity to the Administrative Agent against 87 -79- any taxes or liens which by law shall have, or may have, priority over the rights of the Administrative Agent to such monies; (b) Second, to all other Obligations in such order or preference as the Majority Lenders may determine; PROVIDED, HOWEVER, that distributions in respect of Obligations owing to the Lenders with respect to each type of Obligation such as interest, principal, fees and expenses, shall be made among the Lenders PRO RATA; and PROVIDED, FURTHER, that the Administrative Agent may in its discretion make proper allowance to take into account any Obligations not then due and payable; (c) Third, upon payment and satisfaction in full or other provisions for payment in full satisfactory to the Lenders and the Administrative Agent of all of the Obligations, to the payment of any obligations required to be paid pursuant to ss.9-504(1)(c) of the Uniform Commercial Code of the Commonwealth of Massachusetts; and (d) Fourth, the excess, if any, shall be returned to the Borrowers or to such other Persons as are entitled thereto. 15. SETOFF. Regardless of the adequacy of any collateral, during the continuance of any Event of Default, any deposits or other sums credited by or due from any of the Lenders to any of the Borrowers and any securities or other property of any of the Borrowers in the possession of such Lender may be applied to or set off by such Lender against the payment of Obligations and any and all other liabilities, direct, or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of such Borrower to such Lender. Each of the Lenders agrees with each other Lender that (i) if an amount to be set off is to be applied to Indebtedness of such Borrower to such Lender, other than Indebtedness evidenced by the Notes held by such Lender or constituting Reimbursement Obligations owed to such Lender, such amount shall be applied ratably to such other Indebtedness and to the Indebtedness evidenced by all such Notes held by such Lender or constituting Reimbursement Obligations owed to such Lender, and (ii) if such Lender shall receive from such Borrower, whether by voluntary payment, exercise of the right of setoff, counterclaim, cross action, enforcement of the claim evidenced by the Notes held by, or constituting Reimbursement Obligations owed to, such Lender by proceedings against such Borrower at law or in equity or by proof thereof in bankruptcy, reorganization, liquidation, receivership or similar proceedings, or otherwise, and shall retain and apply to the payment of the Note or Notes held by, or Reimbursement Obligations owed to, such Lender any amount in excess of its ratable portion of the payments received by all of the Lenders with respect to the Notes held by, and Reimbursement Obligations owed to, all of the Lenders, such Lender will make such disposition and arrangements with the other Lenders with respect to such excess, either by way of distribution, PRO TANTO assignment of claims, subrogation or otherwise as shall result in each Lender receiving in respect of the Notes held by it or Reimbursement Obligations owed it, its proportionate payment as contemplated by this Credit Agreement; PROVIDED that if all or any part of such excess payment is thereafter recovered from such Lender, such disposition and arrangements shall be rescinded and the amount restored to the extent of such recovery, but without interest. 88 -80- 16. THE ADMINISTRATIVE AGENT. 16.1. AUTHORIZATION. (a) The Administrative Agent is authorized to take such action on behalf of each of the Lenders and to exercise all such powers as are hereunder and under any of the other Loan Documents and any related documents delegated to the Administrative Agent, together with such powers as are reasonably incident thereto, PROVIDED that no duties or responsibilities not expressly assumed herein or therein shall be implied to have been assumed by the Administrative Agent. (b) The relationship between the Administrative Agent and each of the Lenders is that of an independent contractor. The use of the term "Administrative Agent" is for convenience only and is used to describe, as a form of convention, the independent contractual relationship between the Administrative Agent and each of the Lenders. Nothing contained in this Credit Agreement nor the other Loan Documents shall be construed to create an agency, trust or other fiduciary relationship between the Administrative Agent and any of the Lenders. (c) As an independent contractor empowered by the Lenders to exercise certain rights and perform certain duties and responsibilities hereunder and under the other Loan Documents, the Administrative Agent is nevertheless a "representative" of the Lenders, as that term is defined in Article 1 of the Uniform Commercial Code, for purposes of actions for the benefit of the Lenders and the Administrative Agent with respect to all collateral security and guaranties contemplated by the Loan Documents. Such actions include the designation of the Administrative Agent as "secured party", "mortgagee" or the like on all financing statements and other documents and instruments, whether recorded or otherwise, relating to the attachment, perfection, priority or enforcement of any security interests, mortgages or deeds of trust in collateral security intended to secure the payment or performance of any of the Obligations, all for the benefit of the Lenders and the Administrative Agent. 16.2. EMPLOYEES AND AGENTS. The Administrative Agent may exercise its powers and execute its duties by or through employees or agents and shall be entitled to take, and to rely on, advice of counsel concerning all matters pertaining to its rights and duties under this Credit Agreement and the other Loan Documents. The Administrative Agent may utilize the services of such Persons as the Administrative Agent in its sole discretion may reasonably determine, and all reasonable fees and expenses of any such Persons shall be paid by the Borrower. 16.3. NO LIABILITY. Neither the Administrative Agent nor any of its shareholders, directors, officers or employees nor any other Person assisting them in their duties nor any agent or employee thereof, shall be liable for any waiver, consent or approval given or any action taken, or omitted to be taken, in good faith by it or them hereunder or under any of the other Loan Documents, or in connection herewith or therewith, or be responsible for the consequences of any oversight or error of judgment whatsoever, except that the Administrative Agent or such other Person, as the case may be, may be liable for losses due to its willful misconduct or gross negligence. 89 -81- 16.4. NO REPRESENTATIONS. The Administrative Agent shall not be responsible for the execution or validity or enforceability of this Credit Agreement, the Notes, the Letters of Credit, any of the other Loan Documents or any instrument at any time constituting, or intended to constitute, collateral security for the Notes, or for the value of any such collateral security or for the validity, enforceability or collectability of any such amounts owing with respect to the Notes, or for any recitals or statements, warranties or representations made herein or in any of the other Loan Documents or in any certificate or instrument hereafter furnished to it by or on behalf of CML, any of the Borrowers or any of their Subsidiaries, or be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements herein or in any instrument at any time constituting, or intended to constitute, collateral security for the Notes or to inspect any of the properties, books or records of CML, any of the Borrowers or any of their Subsidiaries. The Administrative Agent shall not be bound to ascertain whether any notice, consent, waiver or request delivered to it by any of the Borrowers or any holder of any of the Notes shall have been duly authorized or is true, accurate and complete. The Administrative Agent has not made nor does it now make any representations or warranties, express or implied, nor does it assume any liability to the Lenders, with respect to the credit worthiness or financial conditions of CML, any of the Borrowers or any of their Subsidiaries. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based upon such information and documents as it has deemed appropriate, made its own credit analysis and decision to enter into this Credit Agreement. 16.5. PAYMENTS. 16.5.1. PAYMENTS TO ADMINISTRATIVE AGENT. A payment by any of the Borrowers to the Administrative Agent hereunder or any of the other Loan Documents for the account of any Lender shall constitute a payment to such Lender. The Administrative Agent agrees promptly to distribute to each Lender such Lender's PRO RATA share of payments received by the Administrative Agent for the account of the Lenders except as otherwise expressly provided herein or in any of the other Loan Documents. 16.5.2. DISTRIBUTION BY ADMINISTRATIVE AGENT. If in the opinion of the Administrative Agent the distribution of any amount received by it in such capacity hereunder, under the Notes or under any of the other Loan Documents might involve it in liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction. If a court of competent jurisdiction shall adjudge that any amount received and distributed by the Administrative Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Administrative Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. 16.5.3. DELINQUENT LENDERS. Notwithstanding anything to the contrary contained in this Credit Agreement or any of the other Loan Documents, any Lender that fails (i) to make available to the Administrative Agent its PRO RATA share of any Loan or to purchase any Letter of Credit Participation or (ii) to comply with the provisions of ss.15 with respect to making dispositions and arrangements with the 90 -82- otheR Lenders, where such Lender's share of any payment received, whether by setoff or otherwise, is in excess of its PRO RATA share of such payments due and payable to all of the Lenders, in each case as, when and to the full extent required by the provisions of this Credit Agreement, shall be deemed delinquent (a "Delinquent Lender") and shall be deemed a Delinquent Lender until such time as such delinquency is satisfied. A Delinquent Lender shall be deemed to have assigned any and all payments due to it from the Borrowers, whether on account of outstanding Loans, Unpaid Reimbursement Obligations, interest, fees or otherwise, to the remaining nondelinquent Lenders for application to, and reduction of, their respective PRO RATA shares of all outstanding Loans and Unpaid Reimbursement Obligations. The Delinquent Lender hereby authorizes the Administrative Agent to distribute such payments to the nondelinquent Lenders in proportion to their respective PRO RATA shares of all outstanding Loans and Unpaid Reimbursement Obligations. A Delinquent Lender shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans and Unpaid Reimbursement Obligations of the nondelinquent Lenders, the Lenders' respective PRO RATA shares of all outstanding Loans and Unpaid Reimbursement Obligations have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. Until such time as its delinquency is satisfied, a Delinquent Lender shall have no right to vote with respect to any matters under or in respect of the Credit Agreement and shall not be entitled to receive its portion of any commitment fee paid in accordance with ss.2.2 of this Credit Agreement. 16.6. HOLDERS OF NOTES. The Administrative Agent may deem and treat the payee of any Note or the purchaser of any Letter of Credit Participation as the absolute owner or purchaser thereof for all purposes hereof until it shall have been furnished in writing with a different name by such payee or by a subsequent holder, assignee or transferee. 16.7. INDEMNITY. The Lenders ratably agree hereby to indemnify and hold harmless the Administrative Agent from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses (including any expenses for which the Administrative Agent has not been reimbursed by the Borrowers as required by ss.17), and liabilities of every nature and character arising out of or related to this CrediT Agreement, the Notes, or any of the other Loan Documents or the transactions contemplated or evidenced hereby or thereby, or the Administrative Agent's actions taken hereunder or thereunder, except to the extent that any of the same shall be directly caused by the Administrative Agent's willful misconduct or gross negligence. 16.8. ADMINISTRATIVE AGENT AS LENDER. In its individual capacity, BKB shall have the same obligations and the same rights, powers and privileges in respect to its Commitment and the Loans made by it, and as the holder of any of the Notes and as the purchaser of any Letter of Credit Participations, as it would have were it not also the Administrative Agent. 16.9. RESIGNATION. The Administrative Agent may resign at any time by giving sixty (60) days prior written notice thereof to the Lenders and the Borrowers. Upon any such resignation, the Majority Lenders shall have the right to appoint a successor Administrative Agent in such capacity. Unless a Default or Event of Default shall have occurred and be continuing, such successor Administrative Agent shall be reasonably 91 -83- acceptable to the Borrowers. If no successor Administrative Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent's giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a financial institution having a rating of not less than A or its equivalent by Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. Upon the acceptance of any appointment as an Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation, the provisions of this Credit Agreement and the other Loan Documents shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. 16.10. NOTIFICATION OF DEFAULTS AND EVENTS OF DEFAULT. Each Lender hereby agrees that, upon learning of the existence of a Default or an Event of Default, it shall promptly notify the Administrative Agent thereof. The Administrative Agent hereby agrees that upon receipt of any notice under this ss.16.10 it shall promptly notify the other Lenders oF the existence of such Default or Event of Default. 16.11. DUTIES IN THE CASE OF ENFORCEMENT. In case one of more Events of Default have occurred and shall be continuing, and whether or not acceleration of the Obligations shall have occurred, the Administrative Agent shall, if (i) so requested by the Majority Lenders and (ii) the Lenders have provided to the Administrative Agent such additional indemnities and assurances against expenses and liabilities as the Administrative Agent may reasonably request, proceed to enforce the provisions of the Security Documents authorizing the sale or other disposition of all or any part of the Collateral and exercise all or any such other legal and equitable and other rights or remedies as it may have in respect of such Collateral. The Majority Lenders may direct the Administrative Agent in writing as to the method and the extent of any such sale or other disposition, the Lenders hereby agreeing to indemnify and hold the Administrative Agent, harmless from all liabilities incurred in respect of all actions taken or omitted in accordance with such directions, PROVIDED that the Administrative Agent need not comply with any such direction to the extent that the Administrative Agent reasonably believes the Administrative Agent's compliance with such direction to be unlawful or commercially unreasonable in any applicable jurisdiction. 17. EXPENSES. Each of the Borrowers jointly and severally agrees to pay (i) the reasonable costs of producing and reproducing this Credit Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (ii) any taxes (including any interest and penalties in respect thereto) payable by the Administrative Agent or any of the Lenders (other than taxes based upon the Administrative Agent's or any Lender's net income) on or with respect to the transactions contemplated by this Credit Agreement (the Borrowers hereby agreeing to indemnify the Administrative Agent and each Lender with respect thereto); (iii) the reasonable fees, expenses and disbursements of the Administrative Agent's Special Counsel or any local counsel to the Administrative Agent incurred in connection with the preparation, administration, interpretation or syndication of the Loan Documents and other instruments mentioned herein, each closing hereunder, and amendments, 92 -84- modifications, approvals, consents or waivers hereto or hereunder (including in each case the allocated cost of staff counsel) and the syndication and the termination hereof, and each Lenders' counsel in the case of waivers or modifications of the Loan Documents; (iv) the reasonable fees, expenses and disbursements of the Administrative Agent incurred by the Administrative Agent in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, including all title insurance premiums and surveyor, engineering and appraisal charges and the fees, expenses and disbursements of the Administrative Agent and the Lenders for waivers and modifications of the Loan Documents; (v) any reasonable fees, costs, expenses and bank charges, including bank charges for returned checks, incurred by the Administrative Agent in establishing, maintaining or handling agency accounts, lock box accounts and other accounts for the collection of any of the Collateral; (vi) all reasonable out-of-pocket expenses (including without limitation reasonable attorneys' fees and costs, which attorneys may be employees of any Lender or the Administrative Agent, and reasonable consulting, accounting, appraisal, investment banking and similar professional fees and charges) incurred by any Lender or the Administrative Agent in connection with (A) the enforcement of or preservation of rights under any of the Loan Documents against CML, any of the Borrowers or any of their Subsidiaries or the administration thereof after the occurrence of a Default or Event of Default and (B) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to any Lender's or the Administrative Agent's relationship with CML, any of the Borrowers or any of their Subsidiaries; (vii) all reasonable fees, expenses and disbursements of any Lender or Administrative Agent incurred in connection with UCC searches, UCC filings, intellectual property searches, intellectual property filings, or mortgage recordings and (viii) all reasonable costs of conducting commercial finance examinations and appraisals of the Borrowers' properties, including the applicable daily time charges of the Administrative Agent's commercial finance examiners, agents, consultants and representatives engaged in such examinations and appraisals as in effect from time to time and reasonable out-of-pocket travel and other related expenses. The covenants of this ss.17 shall survive payment or satisfaction of all other Obligations. 18. INDEMNIFICATION. Each of the Borrowers jointly and severally agrees to indemnify and hold harmless the Administrative Agent and the Lenders from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Credit Agreement or any of the other Loan Documents or the transactions contemplated hereby including, without limitation, (i) any actual or proposed use by CML, any of the Borrowers or any of their Subsidiaries of the proceeds of any of the Loans or Letters of Credit, (ii) the reversal or withdrawal of any provisional credits granted by the Administrative Agent upon the transfer of funds from bank agency or lock box accounts or in connection with the provisional honoring of checks or other items, (iii) any actual or alleged infringement of any patent, copyright, trademark, service mark or similar right of CML, any of the Borrowers or any of their Subsidiaries comprised in the Collateral, (iv) CML, any of the Borrowers or any of their Subsidiaries entering into or performing this Credit Agreement or any of the other Loan Documents or (v) with respect to CML, the Borrowers and their Subsidiaries and their respective properties and assets, the violation of any Environmental Law, the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threatened release of any Hazardous Substances or any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to, 93 -85- claims with respect to wrongful death, personal injury or damage to property), in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding. In litigation, or the preparation therefor, the Lenders and the Administrative Agent shall be entitled to select their own counsel and, in addition to the foregoing indemnity, the Borrowers agree to pay promptly the reasonable fees and expenses of such counsel. If, and to the extent that the obligations of the Borrowers under this ss.18 are unenforceable for any reason, the Borrowers hereby agree tO make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law. The covenants contained in this ss.18 shall survive paymenT or satisfaction in full of all other Obligations. 19. SURVIVAL OF COVENANTS, ETC. All covenants, agreements, representations and warranties made herein, in the Notes, in any of the other Loan Documents or in any documents or other papers delivered by or on behalf of CML, any of the Borrowers or any of their Subsidiaries pursuant hereto shall be deemed to have been relied upon by the Lenders and the Administrative Agent, notwithstanding any investigation heretofore or hereafter made by any of them, and shall survive the making by the Lenders of any of the Loans and the issuance, extension or renewal of any Letters of Credit, as herein contemplated, and shall continue in full force and effect so long as any Letter of Credit or any amount due under this Credit Agreement or the Notes or any of the other Loan Documents remains outstanding or any Lender has any obligation to make any Loans or the Issuing Bank has any obligation to issue, extend or renew any Letter of Credit, and for such further time as may be otherwise expressly specified in this Credit Agreement. All statements contained in any certificate or other paper delivered to any Lender or the Administrative Agent at any time by or on behalf of CML, any of the Borrowers or any of their Subsidiaries pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by CML, such Borrower or such Subsidiary hereunder. 20. ASSIGNMENT AND PARTICIPATION. 20.1. CONDITIONS TO ASSIGNMENT BY LENDERS. Except as provided herein, each Lender may assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Credit Agreement (including all or a portion of its Commitment Percentage and Commitment and the same portion of the Loans at the time owing to it, the Notes held by it and its participating interest in the risk relating to any Letters of Credit); PROVIDED that (i) each of the Administrative Agent and, unless a Default or Event of Default shall have occurred and be continuing, the Borrowers shall have given its prior written consent to such assignment, which consent, in the case of the Borrowers, will not be unreasonably withheld or delayed, (ii) each such assignment shall be a constant PRO RATA percentage, and not a varying percentage, of all the assigning Lender's rights and obligations under this Credit Agreement, (iii) each assignment shall be in an amount that is a whole multiple of $5,000,000 or, if less, the entire remaining Commitment of such Lender and (iv) the parties to such assignment shall execute and deliver to the Administrative Agent, for recording in the Register (as hereinafter defined), an Assignment and Acceptance, substantially in the form of EXHIBIT G hereto (an "Assignment and Acceptance"), together with any Notes subject to such assignment. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, 94 -86- which effective date shall be at least five (5) Business Days after the execution thereof, (i) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder, and (ii) the assigning Lender shall, to the extent provided in such assignment and upon payment to the Administrative Agent of the registration fee referred to in ss.20.3, be released from itS obligations under this Credit Agreement. 20.2. CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS. By executing and delivering an Assignment and Acceptance, the parties to the assignment thereunder confirm to and agree with each other and the other parties hereto as follows: (a) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, the assigning Lender makes no representation or warranty, express or implied, and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or the attachment, perfection or priority of any security interest or mortgage; (b) the assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of CML, the Borrowers and their Subsidiaries or any other Person primarily or secondarily liable in respect of any of the Obligations, or the performance or observance by CML, the Borrowers and their Subsidiaries or any other Person primarily or secondarily liable in respect of any of the Obligations of any of their obligations under this Credit Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (c) such assignee confirms that it has received a copy of this Credit Agreement, together with copies of the most recent financial statements referred to in ss.8.4 anD ss.9.4 and such other documents and information as it has deemed appropriate to makE its own credit analysis and decision to enter into such Assignment and Acceptance; (d) such assignee will, independently and without reliance upon the assigning Lender, the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Credit Agreement; e) such assignee represents and warrants that it is an Eligible Assignee; (f) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Credit Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; 95 -87- (g) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Credit Agreement are required to be performed by it as a Lender; (h) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; and (i) such assignee acknowledges that it has made arrangements with the assigning Lender satisfactory to such assignee with respect to its PRO RATA share of Letter of Credit Fees in respect of outstanding Letters of Credit. 20.3. REGISTER. The Administrative Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register or similar list (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment Percentage of, and principal amount of the Loans owing to and Letter of Credit Participations purchased by, the Lenders from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Credit Agreement. The Register shall be available for inspection by the Borrowers and the Lenders at any reasonable time and from time to time upon reasonable prior notice. Upon each such recordation, the assigning Lender agrees to pay to the Administrative Agent a registration fee in the sum of $3,500. 20.4. NEW NOTES. Upon its receipt of an Assignment and Acceptance executed by the parties to such assignment, together with each Note subject to such assignment, the Administrative Agent shall (i) record the information contained therein in the Register, and (ii) give prompt notice thereof to the Borrowers and the Lenders (other than the assigning Lender). Within five (5) Business Days after receipt of such notice, each Borrower, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for each surrendered Note, a new Note with respect to such Borrower to the order of such Eligible Assignee in an amount equal to the amount assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and, if the assigning Lender has retained some portion of its obligations hereunder, a new Note to the order of the assigning Lender in an amount equal to the amount retained by it hereunder. Such new Notes shall provide that they are replacements for the surrendered Notes, shall be in an aggregate principal amount equal to the aggregate principal amount of the surrendered Notes, shall be dated the effective date of such in Assignment and Acceptance and shall otherwise be substantially the form of the assigned Notes. Within five (5) days of issuance of any new Notes pursuant to this ss.20.4, thE Borrowers shall deliver an opinion of counsel, addressed to the Lenders and the Administrative Agent, relating to the due authorization, execution and delivery of such new Notes and the legality, validity and binding effect thereof, in form and substance satisfactory to the Lenders. The surrendered Notes shall be cancelled and returned to the Borrowers. 20.5. PARTICIPATIONS. Each Lender may sell participations to one or more banks or other entities in all or a portion of such Lender's rights and obligations under this Credit Agreement and the other Loan Documents; PROVIDED that (i) each such participation shall be in an amount of not less than $5,000,000, (ii) any such sale or participation shall not affect the rights and duties of the selling Lender hereunder to the Borrowers and (iii) the only rights granted to the participant pursuant to such participation arrangements with respect to 96 -88- waivers, amendments or modifications of the Loan Documents shall be the rights to approve waivers, amendments or modifications that would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the Commitment of such Lender as it relates to such participant, reduce the amount of any commitment fees or Letter of Credit Fees to which such participant is entitled or extend any regularly scheduled payment date for principal or interest. 20.6. DISCLOSURE. CML and each of the Borrowers agrees that in addition to disclosures made in accordance with standard and customary banking practices any Lender may disclose information obtained by such Lender pursuant to this Credit Agreement to assignees or participants and potential assignees or participants hereunder; PROVIDED that such assignees or participants or potential assignees or participants shall agree (i) to treat in confidence such information unless such information otherwise becomes public knowledge, (ii) not to disclose such information to a third party, except as required by law or legal process and (iii) not to make use of such information for purposes of transactions unrelated to such contemplated assignment or participation. 20.7. ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE BORROWERS. If any assignee Lender is an Affiliate of CML or any Borrower, then any such assignee Lender shall have no right to vote as a Lender hereunder or under any of the other Loan Documents for purposes of granting consents or waivers or for purposes of agreeing to amendments or other modifications to any of the Loan Documents or for purposes of making requests to the Administrative Agent pursuant to ss.14.1 or ss.14.2, and the determination of the Majority Lenders shall for All purposes of this Credit Agreement and the other Loan Documents be made without regard to such assignee Lender's interest in any of the Loans. If any Lender sells a participating interest in any of the Loans or Reimbursement Obligations to a participant, and such participant is CML, a Borrower or an Affiliate of a Borrower or CML, then such transferor Lender shall promptly notify the Administrative Agent of the sale of such participation. A transferor Lender shall have no right to vote as a Lender hereunder or under any of the other Loan Documents for purposes of granting consents or waivers or for purposes of agreeing to amendments or modifications to any of the Loan Documents or for purposes of making requests to the Administrative Agent pursuant to ss.14.1 or ss.14.2 to the extent that sUch participation is beneficially owned by CML, a Borrower or any Affiliate of a Borrower, and the determination of the Majority Lenders shall for all purposes of this Agreement and the other Loan Documents be made without regard to the interest of such transferor Lender in the Loans to the extent of such participation. 20.8. MISCELLANEOUS ASSIGNMENT PROVISIONS. Any assigning Lender shall retain its rights to be indemnified pursuant to ss.17 with respect to any claims or actions arising prioR to the date of such assignment. If any assignee Lender is not incorporated under the laws of the United States of America or any state thereof, it shall, prior to the date on which any interest or fees are payable hereunder or under any of the other Loan Documents for its account, deliver to the Borrowers and the Administrative Agent certification as to its exemption from deduction or withholding of any United States federal income taxes. If the Reference Bank transfers all of its interest, rights and obligations under this Credit Agreement, the Administrative Agent shall, in consultation with the Borrowers and with the consent of the Borrowers and the Majority Lenders, appoint another Lender to act as the Reference Bank hereunder. Anything contained in this ss.20 to the contrary notwithstanding, any Lender may at any time pledge all or any portion of its interest and rights under this Credit Agreement (including all or any portion of its Notes) to any of the twelve Federal 97 -89- Reserve Banks organized under ss.4 of the Federal Reserve Act, 12 U.S.C. ss.341. No such pleDge or the enforcement thereof shall release the pledgor Lender from its obligations hereunder or under any of the other Loan Documents. 20.9. ASSIGNMENT BY BORROWERS OR GUARANTORS None of CML, any of the Borrowers nor any of the Guarantors shall assign or transfer any of its rights or obligations under any of the Loan Documents without the prior written consent of each of the Lenders. 21. NOTICES, ETC. Except as otherwise expressly provided in this Credit Agreement, all notices and other communications made or required to be given pursuant to this Credit Agreement or the Notes or any Letter of Credit Applications shall be in writing and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by telegraph, telecopy, facsimile or telex and confirmed by delivery via courier or postal service, addressed as follows: (a) if to CML, at 524 Main Street, Acton, Massachusetts 01720, Attention: Chief Financial Officer, or at such other address for notice as CML shall last have furnished in writing to the Person giving the notice; (b) if to any of the Borrowers, at c/o CML Group, Inc., 524 Main Street, Acton, Massachusetts 01720, Attention: Chief Financial Officer, or at such other address for notice as such Borrower shall last have furnished in writing to the Person giving the notice with a copy to the Chief Financial Officer of such Borrower at the address set forth for such Borrower on SCHEDULE 8.21 hereto; (c) if to any of the Guarantors or Foreign Guarantors, at c/o CML Group, Inc., 524 Main Street, Acton, Massachusetts 01720, Attention: Chief Financial Officer, or at such other address for notice as such Guarantor shall last have furnished in writing to the Person giving the notice with a copy to the Chief Financial Officer of such Guarantor or Foreign Guarantor at the address set forth for such Guarantor or Foreign Guarantor on SCHEDULE 8.21 hereto; (d) if to the Administrative Agent, at 100 Federal Street, Boston, Massachusetts 02110, USA, Attention: Mark J. Forti, Vice President, or such other address for notice as the Administrative Agent shall last have furnished in writing to the Person giving the notice; and (e) if to any Lender, at such Lender's address set forth on SCHEDULE 1 hereto, or such other address for notice as such Lender shall have last furnished in writing to the Person giving the notice. Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier or facsimile to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer or the sending of such facsimile and (ii) if sent by registered or certified first-class mail, postage prepaid, on the third Business Day following the mailing thereof. 98 -90- 22. GOVERNING LAW. THIS CREDIT AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). CML, EACH OF THE BORROWERS AND EACH OF THE GUARANTORS AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON CML, THE BORROWERS AND THE GUARANTORS BY MAIL AT THE ADDRESS SPECIFIED IN SS.21. CML, EACH OF THE BORROWERS AND EACH OF THE GUARANTORS HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT. 23. HEADINGS. The captions in this Credit Agreement are for convenience of reference only and shall not define or limit the provisions hereof. 24. COUNTERPARTS. This Credit Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Credit Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. 25. ENTIRE AGREEMENT, ETC. The Loan Documents express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Credit Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in ss.27. 26. WAIVER OF JURY TRIAL. CML, each Borrower and each Guarantor hereby waives its right to a jury trial with respect to any action or claim arising out of any dispute in connection with this Credit Agreement, the Notes or any of the other Loan Documents, any rights or obligations hereunder or thereunder or the performance of which rights and obligations. Except as prohibited by law, CML, each Borrower and each Guarantor hereby waives any right it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. CML, each Borrower and each Guarantor (i) certifies that no 99 -91- representative, agent or attorney of any Lender or the Administrative Agent has represented, expressly or otherwise, that such Lender or the Administrative Agent, would not, in the event of litigation, seek to enforce the foregoing waivers and (ii) acknowledges that the Administrative Agent and the Lenders have been induced to enter into this Credit Agreement, the other Loan Documents to which it is a party by, among other things, the waivers and certifications contained herein. 27. CONSENTS, AMENDMENTS, WAIVERS, ETC. The provisions of this Credit Agreement and the other Loan Documents may from time to time be amended, modified or waived, and any Collateral may be released, if such amendment, modification, waiver or release is consented to in writing by the Majority Lenders and, in the case of any amendment or modification, CML or its Subsidiaries party to the relevant Loan Document. Notwithstanding the foregoing, no such amendment, modification, waiver or release: (a) which would modify any requirement hereunder that any particular action be taken by all the Lenders shall be effective unless consented to by each Lender; (b) which would modify this ss.27 or change the definition of "Majority Lenders" shalL be effective unless consented to by each Lender; (c) which would release any Collateral from the lien of the Security Documents shall be effective unless consented to by each Lender, unless (i) such release is in connection with the sale of such Collateral and such sale is permitted by this Credit Agreement, all Net Cash Proceeds of such sale are used to prepay the Loans and, except with respect to Permitted Dispositions, the Total Commitment is reduced, concurrently with such prepayment, by the amount of such prepayment, (ii) such release is of Collateral consisting of cash or cash equivalents and substantially all such cash or cash equivalents is used to pay or prepay Obligations in accordance with the Credit Agreement, (iii) such release is "cash collateral", as defined in Section 363(a) of the federal Bankruptcy Code, in any case where CML, a Borrower or a Guarantor is a debtor, and the release is made under a cash collateral stipulation with the debtor approved by the Majority Lenders and the Administrative Agent, (iv) such release is of foreign Collateral and such release is effected with the approval of the Administrative Agent pursuant to the last sentence of this ss.27, or (v) such release is of other Collateral and the aggregate value of all Collateral releases permitted under this clause (v) from and after the Closing Date shall not exceed $1,000,000; (d) which would increase the Commitment or Commitment Percentage of any Lender, reduce any commitment fee, Letter of Credit Fee or other fees payable to any Lender, extend the Maturity Date, increase the advance rates of any Borrowing Base, or reduce the principal amount of or rate of interest on any Loan of any Lender shall be effective unless consented to by such Lender; or 100 -92- (e) which would adversely affect the interests, rights or obligations of the Administrative Agent, in its capacity as the Administrative Agent, or would amend the provisions of ss.ss.2.1 or 2.8 relating to the transfer of funds betwEen the Administrative Agent and the Lenders (including the types of funds or the method of such transfer), shall be effective unless consented to by the Administrative Agent. The Guarantors (other than CML and the Borrowers) shall not be deemed a party to this Credit Agreement for any purpose except for purposes of ss.3.3, ss.7 and ss.ss.21 through 28. The consent of any Guarantor (other than CML and the Borrowers) shall not be required for any amendment, modification or waiver of any provision of this Credit Agreement, unless such amendment, modification or waiver relates to ss.3.3, ss.7, and ss.ss.21 through 28 and adVersely affects such Guarantor. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Administrative Agent or any Lender in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon CML or any of the Borrowers shall entitle CML or any of the Borrowers to other or further notice or demand in similar or other circumstances. If CML has demonstrated to the reasonable satisfaction of the Administrative Agent that the pledge of the stock of any foreign Subsidiary of CML (to the extent greater than 65% of the outstanding stock of such foreign Subsidiary) or the Foreign Guaranty given by any such foreign Subsidiary will result in material tax obligations for CML and its Subsidiaries, which tax obligations would not arise if such pledge or guaranty were released by the Administrative Agent and/or the Lenders, the Administrative Agent and/or the Lenders, as appropriate, upon ten (10) days' prior written request of CML delivered to the Administrative Agent and the Lenders shall release such pledge (to the extent applicable to greater than 65% of the outstanding stock of the relevant foreign Subsidiary) or guaranty; PROVIDED that (i) no such release shall be required if any Event of Default is continuing and (ii) no such release shall be required in any event prior to July 15, 1997. 28. SEVERABILITY. The provisions of this Credit Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Credit Agreement in any jurisdiction. 101 -93- IN WITNESS WHEREOF, the undersigned have duly executed this Credit Agreement as a sealed instrument as of the date first set forth above. CML GROUP, INC. By: ------------------------------------ Glenn E. Davis, Vice President - Finance NORDICTRACK, INC. NORDIC ADVANTAGE, INC. SMITH & HAWKEN, LTD. By: ------------------------------------ Glenn E. Davis, Vice President BANKBOSTON N.A. (f/k/a The First National Bank of Boston), individually and as Administrative Agent By: ------------------------------------ Title: 102 -94- For purposes of ss.3.3, ss.7, and ss.ss.21 through 28 hereof: OCR, INC. OBW, INC. WFH GROUP, INC. OTNC, INC. BFPI, INC. By: ------------------------------------ Glenn E. Davis, Vice President EX-10.(P) 3 FORM OF AGRREMENT CONCERNING QUALIFIED TERMINATION 1 EXHIBIT 10(p) AGREEMENT CONCERNING QUALIFIED TERMINATION This Agreement made this __ day of __________, 1997 between CML Group, Inc. (the "Company") and __________________________________________ (the "Employee"). WHEREAS, the Employee is a member of the corporate staff located at the Company's executive offices in Acton, Massachusetts and/or a key member of the Company's management team; WHEREAS, the Company recognizes that the possibility of acquisition of the Company's business by a third party, disposition by the Company of one or more of its principal business assets or segments, or formation of a strategic alliance or similar business arrangement (each, hereinafter referred to as "Major Company Event") may result in the departure or distraction of the Employee to the detriment of the Company and its shareholders; and WHEREAS, the Company wishes to assure the Employee of a continuing compensation benefit should his/her employment be terminated following a Major Company Event; NOW THEREFORE, in consideration of these premises and other good and valuable considerations, the parties agree as follows: 1. In the event the Company elects to terminate the Employee's employment prior to or following the occurrence of a Major Company Event because, as determined by the Board of Directors or the Compensation Committee of the Board of Directors, the Employee's services are no longer required (hereinafter, a "Qualified Termination"), the Company shall pay to the Employee from and after the date of such termination an amount ("Termination Payment") equal to the product of (a) the Employee's then monthly base salary and (b) the number of years (any fraction of a year to be included as a full year) that the Employee has been a full-time employee of the Company or any of its subsidiaries, PROVIDED, HOWEVER, that in no event may the number determined pursuant to clause (b) exceed twenty-four (24). 2. The Termination Payment shall be paid to the Employee by the Company in substantially equal monthly installments on the first day of each month, commencing on the first day of the month immediately following the Employee's Qualified Termination or, if the Board of Directors otherwise decides, in a lump sum cash payment within 30 days following the Employee's Qualified Termination. In addition to the Termination Payment, the Company, at no cost to the Employee, shall provide the Employee with health insurance (including medical and dental coverage), life insurance, long-term disability ("Termination Benefits") substantially identical in amount and coverage to similar benefits provided to the Employee immediately prior 2 to the Employee's Qualified Termination. The Termination Benefits shall be provided for the greater of (i) the number of months equal to the result obtained by dividing (x) the Termination Payment by (y) the Employee's monthly base salary and (ii) six (6) months. Any health care continuation benefits which the Company is required to provide pursuant to Part 6 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974 as amended shall begin upon the cessation of the Termination Benefits. 3. In the event that the Employee has an employment contract or any other agreement with the Company which entitles him/her to any severance payments upon the termination of employment, the amount of any payments under paragraph 1 shall be reduced (but not below zero) by the payments to be made under such other agreement. 4. Anything to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Employee shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 5. Nothing in this Agreement shall be construed as limiting the Company's right to terminate the Employee's employment, and the payments required pursuant to this Agreement shall only apply if such termination is a Qualified Termination. 6. Any notices hereunder shall be in writing and shall be deemed given five days after mailing in the continental United States by registered or certified mail, or upon personal receipt after delivery, telex, telecopy or telegram, to the party entitled thereto at the address stated below or to such changed address as the addressee may have given by a similar notice: To the Company: CML Group, Inc. 524 Main Street Acton, MA 01720 To the Executive: At his/her home address, as last shown on the records of the Company 7. In the event that any provision of this Agreement shall be determined to be invalid or unenforceable in any jurisdiction, it shall continue to be enforceable in all other jurisdictions and in any event the remaining provisions shall remain in full force and effect to the fullest extent permitted by law. -2- 3 8. This Agreement shall be binding upon and inure to the benefit of the parties and their successors. If the Employee dies while any amounts are still owing under this Agreement, such amounts shall be paid to the Employee's estate or to such person as the Employee shall have designated in writing to the Company. This Agreement shall not otherwise be assignable by the Employee. 9. This Agreement may not be amended unless agreed to in writing by the Employee and the Company. No waiver by either party of any breach of this Agreement shall be deemed a waiver of a subsequent breach. 10. The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of The Commonwealth of Massachusetts. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CML GROUP, INC. By __________________________________ _____________________________________ Employee -3- EX-11 4 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 ---------- CML GROUP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE
YEAR ENDED JULY 31, ----------------------------------------------- 1997 1996 1995 ------------ ------------- ------------ Primary loss per share: Weighted average number of shares outstanding: Common 49,732,025 49,234,007 49,659,991 Shares deemed outstanding from: Assumed issuance of deferred compensation awards 105,000 105,000 105,000 Assumed exercise of stock options 139,870 304,309 616,727 ------------ ------------- ------------ Total 49,976,895 49,643,316 50,381,718 ============ ============= ============ Net loss $(40,214,000) $(100,424,000) $(18,920,000) ------------ ------------- ------------ Primary loss per share $ (0.81) $ (2.04) $ (0.38) ============ ============= ============ Fully diluted loss per share: Weighted average number of shares outstanding, as above 49,976,895 49,643,316 50,381,718 Shares deemed outstanding from the assumed conversion of convertible subordinated debentures 1,604,877 1,604,877 1,919,411 Additional shares deemed outstanding from the assumed exercise of stock options 50,577 27,529 10,651 ------------ ------------- ------------ Total 51,632,349 51,275,722 52,311,780 ============ ============= ============ Additional income from the elimination of the interest cost of the convertible subordinated debentures, net of income tax effect $ 1,597,957 $ 1,565,397 $ 1,821,709 Fully diluted loss per share $ (0.81) $ (2.04) $ (0.38) ============ ============= ============
47 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 ---------- CML GROUP, INC. SUBSIDIARIES OF CML GROUP, INC.* Jurisdiction Name of Subsidiary of Incorporation - ------------------ ---------------- OBW, Inc. Massachusetts OCR, Inc. Delaware OTNC, Inc. California NordicTrack, Inc.+ Minnesota NordicTrack GmbH+ Germany NordicTrack (U.K.) Limited+ United Kingdom Nordic Advantage, Inc. Minnesota Nordic Advantage of Ontario, Inc. Canada WFH Group, Inc. Delaware BFPI, Inc. Massachusetts CML International (FSC), Ltd. U.S. Virgin Islands Smith & Hawken, Ltd.++ Delaware - ------------ * Direct and indirect wholly-owned subsidiaries + Does business as NordicTrack ++ Does business as Smith & Hawken 49 EX-23 6 CONSENT OF DELOITTE & TOUCH LLP 1 EXHIBIT 23 ---------- INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 2-89564, No. 33-34998, No. 33-48864, No. 33-45073, No. 33-58952, No. 33-65385 and No. 33-65387 and No. 33-55660 of CML Group, Inc. and its subsidiaries each on Form S-8, and Registration Statements No. 33-40936, No. 33-40224, No. 33-58054 and 333-01629 of CML Group, Inc. and its subsidiaries each on Form S-3, of our report dated September 29, 1997 appearing in this Annual Report on Form 10-K of CML Group, Inc. and its subsidiaries for the year ended July 31, 1997. DELOITTE & TOUCHE LLP Boston, Massachusetts October 29, 1997 49 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CML GROUP, INC. FOR THE TWELVE MONTHS ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 YEAR JUL-31-1997 AUG-01-1996 JUL-31-1997 4,359,000 0 10,857,000 2,706,000 33,922,000 58,814,000 94,681,000 46,223,000 146,336,000 49,119,000 41,593,000 0 0 5,274,000 40,454,000 146,336,000 341,315,000 341,315,000 164,081,000 164,081,000 0 1,553,000 1,797,000 (60,931,000) (20,717,000) (40,214,000) 0 0 0 (40,214,000) (0.81) (0.81)
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