-----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, MNXrzKR/zIJdSx5PjQ6OXuSDVqr7Wa9N8h/pz4669TFl5JuhMEatOGwOuUJXEkJS lnGQjlWfo3nppxH5w4K9Zg== 0000950135-96-001367.txt : 19960314 0000950135-96-001367.hdr.sgml : 19960314 ACCESSION NUMBER: 0000950135-96-001367 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960127 FILED AS OF DATE: 19960312 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CML GROUP INC CENTRAL INDEX KEY: 0000729576 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 042451745 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09630 FILM NUMBER: 96534036 BUSINESS ADDRESS: STREET 1: 524 MAIN ST CITY: ACTON STATE: MA ZIP: 01720 BUSINESS PHONE: 5082644155 MAIL ADDRESS: STREET 1: 524 MAIN STREET CITY: ACTON STATE: MA ZIP: 01720 10-Q 1 CML GROUP, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 27, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------- ---------------- Commission file number 0-12628 ------- CML GROUP, INC. ---------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 04-2451745 ---------------------- ---------------------------------- (State of Incorporation) (IRS Employer Identification Number) 524 Main Street, Acton, Massachusetts 01720 - ---------------------------------------- -------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 264-4155 -------------- Not Applicable -------------------------------------------------------------- (Former name, former address and former fiscal year if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- Number of shares outstanding of each of the issuer's classes of common stock: 49,219,681 shares of common stock, $.10 par value, as of March 5, 1996. ================================================================================ 2 CML GROUP, INC. AND SUBSIDIARIES -------------------------------- Form 10-Q Index -----
Page ---- Part I: Financial Information Item 1: Financial Statements Consolidated Condensed Balance Sheets as of January 27, 1996 and July 31, 1995 3-4 Consolidated Condensed Statements of Operations for the three-month and six-month periods ended January 27, 1996 and January 28, 1995 5 Consolidated Condensed Statements of Cash Flows for the six-month periods ended January 27, 1996 and January 28, 1995 6 Notes to Consolidated Condensed Financial Statements 7-10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11-13 Part II: Other Information Item 1: Legal Proceedings 14-15 Item 4: Submission of Matters to a Vote of Securities Holders 15 Signatures 16 Exhibit Index 17
2 3 Part I: FINANCIAL INFORMATION Item 1. Financial Statements -------------------- CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Balance Sheets ------------------------------------- ASSETS
January 27, 1996 July 31, 1995 ---------------- ------------- Current assets: Cash and cash equivalents $ 17,375,000 $ 8,338,000 Accounts receivable 34,255,000 51,949,000 Refundable income taxes 13,410,000 -- Prepaid income taxes 21,340,000 8,710,000 Inventories: Raw materials 5,946,000 12,970,000 Work in process 3,097,000 3,096,000 Finished goods 50,429,000 49,378,000 ------------ ------------ Total inventories 59,472,000 65,444,000 Other current assets 17,911,000 30,286,000 Net assets of business held for sale 12,048,000 34,314,000 ------------ ------------ Total current assets 175,811,000 199,041,000 ------------ ------------ Property, plant and equipment, at cost: Land and buildings 20,006,000 19,865,000 Machinery and equipment 81,846,000 77,522,000 Leasehold improvements 85,636,000 80,710,000 ------------ ------------ 187,488,000 178,097,000 Less accumulated depreciation 74,176,000 65,057,000 ------------ ------------ 113,312,000 113,040,000 ------------ ------------ Goodwill 12,341,000 12,521,000 Other assets 14,063,000 15,479,000 ------------ ------------ $315,527,000 $340,081,000 ============ ============
See Notes to Consolidated Condensed Financial Statements. 3 4 CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Balance Sheets ------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY
January 27, 1996 July 31, 1995 ---------------- ------------- Current liabilities: Current portion of long-term debt $ 187,000 $ 203,000 Accounts payable 38,033,000 35,156,000 Accrued compensation 8,320,000 6,905,000 Accrued advertising 12,990,000 4,381,000 Accrued sales returns 6,377,000 4,572,000 Accrued income taxes 273,000 1,892,000 Accrued expenses related to discontinued operations 9,627,000 3,234,000 Other accrued expenses 40,652,000 26,165,000 ------------ ------------ Total current liabilities 116,459,000 82,508,000 ------------ ------------ Noncurrent liabilities: Long-term debt 43,000 10,082,000 Convertible subordinated debentures 41,593,000 41,593,000 Other noncurrent liabilities 17,613,000 17,346,000 ------------ ------------ Total noncurrent liabilities 59,249,000 69,021,000 ------------ ------------ Stockholders' equity: Common stock, par value $.10 per share Authorized - 120,000,000 shares Issued - 52,170,994 shares and 52,076,674 shares 5,217,000 5,207,000 Additional paid-in capital 80,093,000 79,805,000 Retained earnings 92,912,000 140,444,000 ------------ ------------ 178,222,000 225,456,000 Less treasury stock, at cost, 3,025,648 shares and 2,797,791 shares 38,403,000 36,904,000 ------------ ------------ 139,819,000 188,552,000 ------------ ------------ $315,527,000 $340,081,000 ============ ============
See Notes to Consolidated Condensed Financial Statements. 4 5 CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Statements of Operations ----------------------------------------------- For the periods ended January 27, 1996 and January 28, 1995
Three Months Six Months --------------------------- --------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Net sales $222,547,000 $278,992,000 $331,412,000 $408,190,000 ------------ ------------ ------------ ------------ Less costs and expenses: Cost of goods sold 107,492,000 106,263,000 156,087,000 156,572,000 Selling, general and administrative expenses 135,738,000 112,512,000 219,777,000 188,372,000 Interest expense 1,041,000 376,000 1,573,000 953,000 ------------ ------------ ------------ ------------ 244,271,000 219,151,000 377,437,000 345,897,000 ------------ ------------ ------------ ------------ Income (loss) from continuing operations before income taxes and extraordinary credit (21,724,000) 59,841,000 (46,025,000) 62,293,000 Provision (benefit) for income taxes (7,286,000) 22,938,000 (16,569,000) 23,858,000 ------------ ------------ ------------ ------------ Income (loss) from continuing operations before extraordinary credit (14,438,000) 36,903,000 (29,456,000) 38,435,000 ------------ ------------ ------------ ------------ Discontinued operations: Income from operations, net of income taxes -- 3,650,000 -- 2,999,000 Provision for loss on disposal, net of income tax benefit (15,615,000) -- (15,615,000) -- ------------ ------------ ------------ ------------ (15,615,000) 3,650,000 (15,615,000) 2,999,000 ------------ ------------ ------------ ------------ Income (loss) before extraordinary credit (30,053,000) 40,553,000 (45,071,000) 41,434,000 Extraordinary credit - early extinguishment of debt, net of income taxes -- 1,125,000 -- 1,125,000 ------------ ------------ ------------ ------------ Net income (loss) ($30,053,000) $ 41,678,000 ($45,071,000) $ 42,559,000 ============ ============ ============ ============ Earnings (loss) per share: Income (loss) from continuing operations before extraordinary credit: Primary ($0.29) $0.73 ($0.60) $0.76 ===== ===== ===== ===== Fully diluted ($0.29) $0.71 ($0.60) $0.75 ===== ===== ===== ===== Income (loss) before extraordinary credit: Primary ($0.61) $0.80 ($0.91) $0.82 ===== ===== ===== ===== Fully diluted ($0.61) $0.78 ($0.91) $0.80 ===== ===== ===== ===== Net income (loss): Primary ($0.61) $0.82 ($0.91) $0.84 ===== ===== ===== ===== Fully diluted ($0.61) $0.80 ($0.91) $0.82 ===== ===== ===== ===== Weighted average number of shares outstanding 49,559,508 50,680,233 49,665,626 50,743,006
See Notes to Consolidated Condensed Financial Statements. 5 6 CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Statements of Cash Flows -----------------------------------------------
For the Six Months Ended ------------------------------------ January 27, 1996 January 28, 1995 ---------------- ---------------- Cash flows from operating activities: Net income (loss) ($45,0711,000) $ 42,559,000 ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for loss on disposal of discontinued operation 24,023,000 --- Gain on early extinguishment of debt --- (1,814,000) Depreciation and amortization 15,931,000 14,496,000 Loss on disposal of property, plant and equipment 2,268,000 2,939,000 Changes in working capital items 39,734,000 600,000 (Increase) decrease in other assets 1,445,000 (2,476,000) Increase in other noncurrent liabilities 530,000 1,648,000 ------------ ------------ Total adjustments 83,931,000 15,393,000 ------------ ------------ Net cash provided by operating activities 38,860,000 57,952,000 ------------ ------------ Cash flows from investing activities: Additions to property, plant and equipment (16,137,000) (19,918,000) Reduction in notes receivable 31,000 40,000 ------------ ------------ Net cash used in investing activities (16,106,000) (19,878,000) ------------ ------------ Cash flows from financing activities: Decrease in long-term debt (10,055,000) (1,121,000) Acquisition of convertible debentures --- (5,778,000) Dividends paid (2,461,000) (2,001,000) Exercise of stock options 95,000 282,000 Acquisition of treasury stock (1,296,000) (2,179,000) ------------ ------------ Net cash used in financing activities (13,717,000) (10,797,000) ------------ ------------ Net increase in cash and cash equivalents during the period 9,037,000 27,277,000 Cash and cash equivalents at the beginning of the period 8,338,000 28,929,000 ------------ ------------ Cash and cash equivalents at the end of the period $ 17,375,000 $ 56,206,000 ============ ============
See Notes to Consolidated Condensed Financial Statements. 6 7 CML GROUP, INC. & SUBSIDIARIES Notes to Consolidated Condensed Financial Statements ---------------------------------------------------- Note 1 - ------ The accompanying consolidated condensed financial statements and notes should be read in conjunction with the financial statements contained in the Company's Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated condensed financial statements include all adjustments necessary for a fair presentation of the results of the interim periods presented and, except for the adjustments relating to the decision to sell Britches of Georgetowne (see Note 2), all such adjustments are of a normal recurring nature. The retail industry is seasonal in nature and the results of operations for the interim periods presented may not be indicative of the results for a full year. Certain 1995 amounts have been reclassified to conform to the 1996 presentation. Note 2 - Discontinued Operation - ------------------------------- In March 1996, the Company signed a letter of intent for the sale of its Britches of Georgetowne subsidiary for a cash purchase price of $13.5 million, plus the assumption of liabilities, subject to certain adjustments. In connection with the planned sale of Britches, the Company recorded an additional provision for loss on disposal, in the second quarter of fiscal 1996, of $15,615,000, net of an income tax benefit of $8,408,000. The pretax provision for loss on disposal includes a further write-down of Britches' net assets to estimated net realizable value and the accrual of estimated operating losses through the expected sale date. The estimated net realizable value of Britches' net assets has been included in current assets on the accompanying consolidated condensed balance sheet at January 27, 1996. The sale is subject to negotiation and execution of a definitive purchase agreement. Note 3 - Long-term Debt - ----------------------- Consolidated long-term debt is summarized as follows:
January 27, 1996 July 31, 1995 ---------------- ------------- Revolving credit loan $ --- $10,000,000 Note payable 119,000 199,000 Obligations under capital leases 111,000 86,000 -------- ----------- 230,000 10,285,000 Less current portion 187,000 203,000 -------- ----------- Long-term debt $ 43,000 $10,082,000 ======== ===========
7 8 The Company is in violation of certain covenants under its existing $55 million revolving credit facility and is restricted from borrowing under such facility. The Company's lenders, however, continue to issue letters of credit on behalf of the Company and the Company had letters of credit outstanding in an aggregate amount of $20,484,000 as of January 27, 1996. The Company has signed a commitment letter with two banks for a new three-year $100 million revolving credit facility to be secured by the assets of the Company and its subsidiaries. The new facility, which is subject to completion of due diligence and execution of a definitive agreement, will include requirements relating to the achievement of certain earnings levels by NordicTrack and The Nature Company. In addition, the agreement will restrict dividends and advances between the Company and its subsidiaries. Advances outstanding under the agreement will bear interest at the prime rate plus 3/4 of 1%. Note 4 - Contingencies - ---------------------- Litigation ---------- In May 1994, ICON Health & Fitness, Inc. ("ICON") commenced a civil suit against NordicTrack in the United States District Court for the District of Utah alleging infringement of three patents arising out of NordicTrack's design of its WalkFit treadmill and certain other similar products. Discovery has been completed. In November 1995, the Court granted NordicTrack's Motion for Summary Judgment relating to one of ICON's three patent infringement claims. ICON's other two claims have been scheduled for trial during the summer of 1996. While the Company believes it has meritorious defenses, no assurance can be given of a favorable outcome in the ICON lawsuit. An unfavorable outcome could have a material adverse effect on the Company's operating results for the period in which such decision occurs and could also have a material adverse effect on the Company's financial condition. In January 1995, an individual, William Wilkinson, filed a demand for arbitration and statement of claim alleging that NordicTrack breached the terms of a licensing and product development agreement by failing to compensate him with royalties for certain design features of its WalkFit treadmill and certain similar products. Included in the Company's loss from continuing operations for the quarter ended January 27, 1996 is a $4.0 million pre-tax charge for settlement of this claim in January 1996. On October 25, 1994, four stockholders, owning an aggregate of 2,400 shares of CML Group, Inc. Common Stock, filed a class action lawsuit in U.S. District Court for the District of Massachusetts against the Company and its Chairman, Charles M. Leighton, and President, G. Robert Tod. The complaint alleged that the Company failed to properly disclose the extent of its NordicTrack advertising expenditures and the impact of those expenditures on its future operating results, thereby violating federal securities laws. On December 19, 1994, the defendants filed a motion to dismiss the complaint, and on April 7, 1995, the plaintiffs responded by filing an amended complaint which added an allegation that Messrs. Leighton and Tod violated the securities laws by selling CML stock in the Spring of 1994. The Company believes the amended complaint is without merit and intends to vigorously contest the lawsuit. In April 1995, the defendants filed a motion to dismiss this lawsuit. A hearing on this motion was held on December 14, 1995. In February 1996, NordicTrack agreed to a proposed consent agreement with the Federal Trade Commission ("FTC") to settle allegations that it made false and unsubstantiated weight loss and weight maintenance claims in advertising its cross-country ski exercise machines. The FTC alleged that NordicTrack based these claims on studies with various methodological flaws. The proposed consent agreement would prohibit NordicTrack from misrepresenting the existence or results of any study or survey relating to weight loss and making certain claims with respect to its exercise equipment without reliable supporting evidence. The proposed consent agreement will be published in the Federal Register and will be subject to public comment for 60 days, after which the FTC will decide whether to make it final. No civil penalties are expected to be imposed by the FTC as a result of the proposed consent agreement. On or about February 23, 1996, an alleged purchaser of a NordicTrack cross-country ski exercise machine filed a Class Action Complaint, entitled Elissa Crespi, on behalf of Herself and All Other Similarly Situated v. NordicTrack, Inc., against NordicTrack in the Supreme Court of the State of New York, County of New York (the "Crespi Complaint"). On or about February 26, 1996, another alleged purchaser of a cross-country ski exercise machine filed a Class Action Complaint in the same court, entitled Wendy Penel, on behalf of Herself and All Others Similarly Situated, v. NordicTrack, Inc. (the "Penel Complaint"). The Crespi Complaint alleges that NordicTrack made false and misleading claims concerning the weight-loss of persons using its ski-exerciser and thereby defrauded its customers, breached warranties and violated Section 349 of the New York General Business Law. The Penel Complaint alleges that NordicTrack misrepresented the results of a weight-loss study and made unsubstantiated claims regarding weight loss and/or weight maintenance benefits from the use of NordicTrack's cross-country ski exercise machines. The Penel Complaint asserts claims of negligent misrepresentation, breach of an express warranty, and common law fraud. Each plaintiff seeks to represent a class consisting of all persons in the United States who purchased NordicTrack ski exercisers. The plaintiff in the Crespi Complaint seeks for herself and the alleged class unspecified actual and punitive damages, rescission, attorneys' fees, costs and an order requiring NordicTrack to make corrective disclosures. The plaintiff in the Penel Complaint seeks restitution of all amounts paid by her and the alleged class members for NordicTrack cross-country ski exercise machines, together with interest, attorneys' fees, costs, and any additional and consequential damages for injuries suffered by the plaintiff and alleged class members. NordicTrack believes it has meritorious defenses to these complaints and intends to vigorously contest these lawsuits. These lawsuits are in the earliest stages and the Company is unable to determine the likelihood and possible impact on the Company of unfavorable outcomes. The Company is involved in various other legal proceedings which have arisen in the ordinary course of business. Management believes the outcome of such proceedings will not have a material adverse impact on the Company's financial condition or results of operations. 8 9 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 $7.3 million. 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 $1.4 million for the removal phase of the site cleanup, which has now been completed. The EPA had estimated that the removal costs would exceed $3.0 million, 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 $4.0 million. 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 $2.3 million. 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, but would not have a material adverse effect upon the Company's financial condition. In June 1992, the EPA notified the Company it may be liable for the release of hazardous substances by the Company's former Boston Whaler subsidiary at a hazardous waste treatment and storage facility in Southington, Connecticut. The EPA has calculated the Company's volumetric contribution at less than two tenths of one percent. The EPA has not completed its Remedial Investigation/Feasibility Study and, therefore, an estimate of cleanup costs is not available. 9 10 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 Company has been advised by the IRS that the examination will be completed in the near future. Although the Company has not received an official notice, based on recent discussions with IRS personnel, the Company expects that the IRS will propose certain adjustments which, if sustained by the IRS, would result in a tax deficiency for the years under examination. The adjustments expected to be proposed by the IRS primarily relate to: (i) the disallowance of deductions taken by the Company with respect to incentive compensation payments made to the former owners of NordicTrack (acquired in June 1986) and to the former owners of Britches of Georgetowne (acquired in August 1983); and (ii) the valuation of certain assets acquired in connection with the acquisition of Britches. The Company believes that the tax deductions taken were valid and in accordance with the Internal Revenue Code. 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 could have a material adverse effect on the Company's operating results for the period in which such issues are finally resolved and could also have a material adverse effect on the Company's financial condition. Note 5 - Dividends - ------------------ On December 1, 1995, the Board of Directors declared a cash dividend of $0.025 per share, payable March 21, 1996 to shareholders of record as of March 6, 1996. 10 11 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations. --------------------- Financial Condition - ------------------- Stockholders' equity at January 27, 1996 decreased $48.8 million to $139.8 million from $188.6 million at July 31, 1995 due primarily to a net loss of $45.1 million, which includes a $15.6 million loss from discontinued operations, net of an income tax benefit resulting from the planned sale of Britches of Georgetowne. In March 1996, the Company signed a letter of intent for the sale of substantially all of the assets of Britches of Georgetowne at a purchase price of $13.5 million in cash plus the assumption of liabilities subject to certain adjustments. The sale is subject to the negotiation and execution of a definitive purchase agreement. The Company's working capital decreased to $59.4 million at January 27, 1996 from $116.5 million at July 31, 1995. The decrease in working capital is primarily attributable to decreases in accounts receivable, inventories, other current assets and net assets of business held for sale and increases in accrued advertising, accrued expenses related to discontinued operations and other accrued expenses partially offset by increases in refundable and prepaid income taxes. During the first six months of fiscal 1996, the Company spent approximately $16.1 million on additions to property, plant and equipment and repaid $10.1 million of long-term debt. Although the Company had no outstanding bank borrowings at January 27, 1996, the Company is in violation of certain covenants under its existing $55 million revolving credit facility and is restricted from making future borrowings under such facility. The Company's lenders, however, continue to issue letters of credit on behalf of the Company and the Company had letters of credit outstanding in an aggregate amount of $20,484,000 as of January 27, 1996. The Company has signed a commitment letter with two banks for a new three-year $100 million revolving credit facility which will be secured by the assets of the Company. The closing of the new facility is subject to completion of due diligence and final documentation. Results of Operations - --------------------- The Company's continuing operations consist of two segments, NordicTrack and the Nature Company Segment ("NC Segment"). The NC Segment includes The Nature Company, Smith & Hawken and Hear Music. During the second quarter of fiscal 1996, net sales of the Company's continuing operations decreased by $56.4 million to $222.5 million, or 20.2%, over the second quarter of fiscal 1995. The Company incurred a loss of $14.4 million from continuing operations in the second quarter of fiscal 1996 compared with income of $36.9 million from continuing operations during the same period of fiscal 1995. The decrease in income from continuing operations is primarily due to a decrease in sales and an increase in selling, general and administrative expenses. For the first six months of fiscal 1996, sales from continuing operations decreased by $76.8 million to $331.4 million, or 18.8%, compared with the first six months of fiscal 1995. In addition, income from continuing operations during the first six months of fiscal 1996 declined by $67.9 million over the same period in fiscal 1995, resulting in a net loss of $29.5 million in fiscal 1996. The decline in income from continuing operations is primarily attributable to lower sales and higher selling, general and administrative expenses. Total retail store sales from continuing operations increased by $6.0 million to $166.8 million, or 3.7%, over the second quarter of fiscal 1995 primarily due to the addition of new Smith & Hawken stores and Nordic Advantage stores and kiosks. During the second quarter of fiscal 1996, comparable store sales decreased by 18.8%. Direct response and mail order sales in the second quarter of fiscal 1996 decreased by $62.4 million to $55.7 million, or 52.8%, over the second quarter of fiscal 1995 primarily due to lower direct response sales at NordicTrack. 11 12 Retail sales from continuing operations during the first six months of fiscal 1996 increased by 6.0%, to $236.2 million, over the same period in fiscal 1995 primarily due to the addition of new Smith & Hawken stores and Nordic Advantage stores and kiosks. Comparable store sales declined 19.3% in the first six months of fiscal 1996. Direct response and mail order sales were $95.2 million during the first six months of fiscal 1996, a decline of $90.1 million, or 48.6%, over the comparable period in fiscal 1995. Cost of goods sold increased as a percentage of sales from 38.1% in the second quarter of fiscal 1995 to 48.3% in the second quarter of fiscal 1996. For the first six months of the year, cost of goods sold increased from 38.4% in fiscal 1995 to 47.1% in fiscal 1996. Cost of goods sold increased as a percentage of sales primarily due to increased sales promotions offered by NordicTrack and the NC Segment in response to a more competitive consumer environment, higher materials prices, higher overhead rate and labor costs at NordicTrack and an increase in the proportion of NordicTrack's sales which are accounted for by products with higher costs of goods sold. Selling, general and administrative expenses increased as a percentage of sales from 40.3% in the second quarter of fiscal 1995 to 61.0% in the second quarter of fiscal 1996, and from 46.1% in the first six months of fiscal 1995 to 66.3% in the first six months of fiscal 1996. The increase in selling, general and administrative expenses as a percentage of sales is due to less efficient advertising at NordicTrack, fixed costs at stores which experienced a decrease in comparable store sales and higher operating expenses attributable to the increased number of kiosks. Interest expense was $0.4 million, or 0.1% of sales, in the second quarter of fiscal 1995 compared to $1.0 million, or 0.5% of sales, in the second quarter of fiscal 1996. For the first six months of the year, interest was $1.0 million, or 0.2% of sales, in fiscal 1995 and $1.6 million, or 0.5% of sales, in fiscal 1996. During the second quarter of fiscal 1996, the Company recorded an income tax benefit of 33.5% from continuing operations compared with a provision for income taxes on continuing operations of 38.3% during the second quarter of fiscal 1995. In the first six months of fiscal 1996, the Company recorded an income tax benefit of 36.0% for continuing operations compared with an income tax provision of 38.3% of income from continuing operations during the first six months of fiscal 1995. During the second quarter of fiscal 1996, NordicTrack's total sales decreased by $47.0 million to $141.5 million, or 24.9%, over the second quarter of fiscal 1995. NordicTrack sales declined by $65.4 million to $214.4 million in the first six months of fiscal 1996 compared with the same period in fiscal 1995. Approximately 70.0% and 64.7% of NordicTrack's total sales in the second quarter and first six months of fiscal 1996, respectively, were accounted for by sales at its Nordic Advantage subsidiary which operates retail stores and mall kiosks. Nordic Advantage's retail sales increased from $88.2 million in the second quarter of fiscal 1995 to $99.0 million in the second quarter of fiscal 1996, and from $120.9 million in the first half of fiscal 1995 to $138.6 million in the first half of fiscal 1996. The retail sales increases are primarily due to the opening of new mall kiosks. At the end of the second fiscal quarter of 1996, Nordic Advantage operated 265 mall kiosks, up from 114 at the end of the second quarter of fiscal 1995. Nordic Advantage also had 130 stores open at the end of the second quarter of fiscal 1996 compared with 108 stores at the end of the second quarter of fiscal 1995. Nordic Advantage's comparable store sales decreased 23.3% during the second quarter of fiscal 1996 and 25.3% during the first six months of fiscal 12 13 1996 compared with the same periods of fiscal 1995. In the second quarter, direct response sales decreased $57.8 million to $42.5 million, or 57.6%, and they decreased $83.1 million to $75.8 million, or 52.3%, in the first six months of fiscal 1996. The NC Segment experienced a 10.5% decline in sales during the second quarter of fiscal 1996. Total sales in the fiscal 1996 second quarter were $81.0 million. Total sales for the NC Segment during the first half of fiscal 1996 declined by $11.4 million to $117.0 million, or by 8.9%, over the same period in fiscal 1995. Retail sales, which comprise 83.6% of this segment's sales for the second quarter of fiscal 1996, declined $4.8 million to $67.7 million, or 6.6%, compared with retail sales for the second quarter of fiscal 1995. The decline in retail sales during the quarter is primarily attributable to the decline in comparable store sales. Comparable store sales for the NC Segment declined by 14.5% in the second quarter of fiscal 1996. Retail sales for this segment, which were 83.4% of total sales for the first half of fiscal 1996, decreased by $4.4 million, or 4.3%, to $97.6 million compared with $101.9 million during the first six months of fiscal 1995. Comparable store sales for the NC Segment decreased by 13.5% in the first six months of fiscal 1996. The NC Segment operated 156 stores at the end of the second quarter of fiscal 1996. 13 14 PART II: OTHER INFORMATION Item 1: Legal Proceedings. Environmental Matters --------------------- Note 4 of Notes to Consolidated Condensed Financial Statements in Item 1 of Part I hereof is hereby incorporated by reference for information concerning environmental matters. Litigation ---------- In May 1994, ICON Health & Fitness, Inc. ("ICON") commenced a civil suit against NordicTrack in the United States District Court for the District of Utah alleging infringement of three patents arising out of NordicTrack's design of its WalkFit treadmill and certain other similar products. Discovery has been completed. In November 1995, the Court granted NordicTrack's Motion for Summary Judgment relating to one of ICON's three patent infringement claims. ICON's other two claims have been scheduled for trial during the summer of 1996. While the Company believes it has meritorious defenses, no assurance can be given of a favorable outcome in the ICON lawsuit. An unfavorable outcome could have a material adverse effect on the Company's operating results for the period in which such decision occurs and could also have a material adverse effect on the Company's financial condition. In January 1995, an individual, William Wilkinson, filed a demand for arbitration and statement of claim alleging that NordicTrack breached the terms of a licensing and product development agreement by failing to compensate him with royalties for certain design features of its WalkFit treadmill and certain similar products. Included in the Company's loss from continuing operations for the quarter ended January 27, 1996 is a $4.0 million pre-tax charge for settlement of this claim in January 1996. On October 25, 1994, four stockholders, owning an aggregate of 2,400 shares of CML Group, Inc. Common Stock, filed a class action lawsuit in U.S. District Court for the District of Massachusetts against the Company and its Chairman, Charles M. Leighton, and President, G. Robert Tod. The complaint alleged that the Company failed to properly disclose the extent of its NordicTrack advertising expenditures and the impact of those expenditures on its future operating results, thereby violating federal securities laws. On December 19, 1994, the defendants filed a motion to dismiss the complaint, and on April 7, 1995, the plaintiffs responded by filing an amended complaint which added an allegation that Messrs. Leighton and Tod violated the securities laws by selling CML stock in the Spring of 1994. The Company believes the amended complaint is without merit and intends to vigorously contest the lawsuit. In April 1995, the defendants filed a motion to dismiss this lawsuit. A hearing on this motion was held on December 14, 1995. In February 1996, NordicTrack agreed to a proposed consent agreement with the Federal Trade Commission ("FTC") to settle allegations that it made false and unsubstantiated weight loss and weight maintenance claims in advertising its cross-country ski exercise machines. The FTC alleged that NordicTrack based these claims on studies with various methodological flaws. The proposed consent agreement would prohibit NordicTrack from misrepresenting the existence or results of any study or survey relating to weight loss and making certain claims with respect to its exercise equipment without reliable supporting evidence. The proposed consent agreement will be published in the Federal Register and will be subject to public comment for 60 days, after which the FTC will decide whether to make it final. No civil penalties are expected to be imposed by the FTC as a result of the proposed consent agreement. On or about February 23, 1996, an alleged purchaser of a NordicTrack cross-country ski exercise machine filed a Class Action Complaint, entitled Elissa Crespi, on behalf of Herself and All Other Similarly Situated v. NordicTrack, Inc., against NordicTrack in the Supreme Court of the State of New York, County of New York (the "Crespi Complaint"). On or about February 26, 1996, another alleged purchaser of a cross-country ski exercise machine filed a Class Action Complaint in the same court, entitled Wendy Penel, on behalf of Herself and All Others Similarly Situated, v. NordicTrack, Inc. (the "Penel Complaint"). The Crespi Complaint alleges that NordicTrack made false and misleading claims concerning the weight-loss of persons using its ski-exerciser and thereby defrauded its customers, breached warranties and violated Section 349 of the New York General Business Law. The Penel Complaint alleges that NordicTrack misrepresented the results of a weight-loss study and made unsubstantiated claims regarding weight loss and/or weight maintenance benefits from the use of NordicTrack's cross-country ski exercise machines. The Penel Complaint asserts claims of negligent misrepresentation, breach of an express warranty, and common law fraud. Each plaintiff seeks to represent a class consisting of all persons in the United States who purchased NordicTrack ski exercisers. The plaintiff in the Crespi Complaint seeks for herself and the alleged class unspecified actual and punitive damages, rescission, attorneys' fees, costs and an order requiring NordicTrack to make corrective disclosures. The plaintiff in the Penel Complaint seeks restitution of all amounts paid by her and the alleged class members for NordicTrack cross-country ski exercise machines, together with interest, attorneys' fees, costs, and any additional and consequential damages for injuries suffered by the plaintiff and alleged class members. NordicTrack believes it has meritorious defenses to these complaints and intends to vigorously contest these lawsuits. These lawsuits are in the earliest stages and the Company is unable to determine the likelihood and possible impact on the Company of unfavorable outcomes. 14 15 The Company is involved in various other legal proceedings which have arisen in the ordinary course of business. Management believes the outcome of such proceedings will not have a material adverse impact on the Company's financial condition or results of operations. 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 Company has been advised by the IRS that the examination will be completed in the near future. Although the Company has not received an official notice, based on recent discussions with IRS personnel, the Company expects that the IRS will propose certain adjustments which, if sustained by the IRS, would result in a tax deficiency for the years under examination. The adjustments expected to be proposed by the IRS primarily relate to: (i) the disallowance of deductions taken by the Company with respect to incentive compensation payments made to the former owners of NordicTrack (acquired in June 1986) and to the former owners of Britches of Georgetowne (acquired in August 1983); and (ii) the valuation of certain assets acquired in connection with the acquisition of Britches. The Company believes that the tax deductions taken were valid and in accordance with the Internal Revenue Code. 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 could have a material adverse effect on the Company's operating results for the period in which such issues are finally resolved and could also have a material adverse effect on the Company's financial condition. Items 2-3: None. Item 4: Submission of Matters to a Vote of Security Holders: The Company held its Annual Meeting of Stockholders on December 1, 1995. At this meeting the stockholders of the Company elected G. Robert Tod as a Class B Director (by votes of 38,683,208 shares of Common Stock in favor and 2,420,203 shares of Common Stock withheld), Dr. Roy W. Menninger as a Class B Director (by votes of 38,692,552 shares of Common Stock in favor and 2,410,859 shares of Common Stock withheld) and Lauren M. Tyler as a Class B Director (by votes of 38,639,796 shares of Common Stock in favor and 2,463,615 shares of Common Stock withheld). Each of the newly elected Class B Directors is to serve for a term of three years. The other directors of the Company whose terms of office as directors continued after the meeting are Howard H. Callaway, Charles M. Leighton, Thomas H. Lenagh, Alison Taunton-Rigby and Ralph F. Verni. At the Annual Meeting, stockholders holding 33,855,456 shares of Common Stock voted to approve the Company's 1996 Employee Stock Purchase Plan. Stockholders holding 5,679,053 shares of Common Stock voted against the 1996 Employee Stock Purchase Plan and stockholders holding 1,568,902 shares of Common Stock abstained. At the Annual Meeting, stockholders holding 34,459,696 shares of Common Stock voted to approve the Company's 1996 Director Option Plan. Stockholders holding 4,934,623 shares of Common Stock voted against the 1996 Director Option Plan and stockholders holding 1,709,092 shares of Common Stock abstained. At the Annual Meeting, stockholders holding 40,731,629 shares of Common Stock voted to ratify the appointment of Deloitte & Touche LLP as the Company's independent auditors for the 1996 fiscal year. Stockholders holding 233,365 shares of Common Stock voted against such ratification and stockholders holding 138,417 shares of Common Stock abstained. No "broker non-votes" were recorded at the Annual Meeting of Stockholders. 15 16 Item 5: Other Information: None. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits - See Exhibit Index. (b) Reports on Form 8-K: None. Signatures - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CML GROUP, INC. --------------------------- (Registrant) Date: March 12, 1996 /s/Glenn E. Davis -------------- --------------------------- Glenn E. Davis Vice President, Finance Principal Financial Officer 16 17 EXHIBIT INDEX
Page No. -------- 10(a) -- 1996 Director Option Plan 18-23 10(b) -- 1996 Employee Stock Purchase Plan 24-31 11 -- Statement Regarding Computation of Earnings (Loss) Per Share 32 27 -- Financial Data Schedule 33
17 EX-10.A 2 1996 DIRECTOR OPTION PLAN 1 Exhibit 10(a) CML GROUP, INC. 1996 DIRECTOR OPTION PLAN Adopted by the Board of Directors on October 3, 1995 ---------------------------------------------------- 1. PURPOSE The purpose of this 1996 Director Option Plan (the "Plan") of CML Group, Inc. (the "Company") is to encourage ownership in the Company by outside directors of the Company whose continued services are considered essential to the Company's future progress and to provide them with a further incentive to remain as directors of the Company. 2. ADMINISTRATION The Board of Directors shall supervise and administer the Plan. Grants of stock options under the Plan and the amount and nature of the awards to be granted shall be automatic and non-discretionary in accordance with Section 5. However, all questions of interpretation of the Plan or of any options issued under it shall be determined by the Board of Directors and such determination shall be final and binding upon all persons having an interest in the Plan. 3. PARTICIPATION IN THE PLAN Directors of the Company who are not employees of the Company or any subsidiary of the Company shall be eligible to participate in the Plan. 4. STOCK SUBJECT TO THE PLAN (a) The maximum number of shares which may be issued under the Plan shall be two hundred fifty thousand (250,000) shares of the Company's Common Stock, par value $.10 per share ("Common Stock"), subject to adjustment as provided in Section 9 of the Plan. (b) If any outstanding option under the Plan for any reason expires or is terminated without having been exercised in full, the shares allocable to the unexercised portion of such option shall again become available for grant pursuant to the Plan. (c) All options granted under the Plan shall be non-statutory options not entitled to special tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended to date and as may be amended from time to time (the "Code"). 5. TERMS, CONDITIONS AND FORM OF OPTIONS Each option granted under the Plan shall be evidenced by a written agreement in such form as the Board of Directors shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: 18 2 (a) OPTION GRANT DATES. Options shall be granted automatically to all eligible directors on the date that the Plan is approved by the stockholders of the Company at the Company's 1995 Annual Meeting of Stockholders (scheduled to be held December 1, 1995). Thereafter, options shall be granted automatically to persons who subsequently become eligible directors on the close of business on the date of his or her initial election or appointment to the Board of Directors; provided that any option granted prior to the approval of the Plan by stockholders of the Company at the Company's 1995 Annual Meeting of Stockholders is conditioned upon such approval of the Plan by stockholders of the Company. (b) SHARES SUBJECT TO OPTION. Subject to the provisions of Section 5(e), each option granted under the Plan shall be exercisable for the number of shares of Common Stock determined by dividing $180,000 by the fair market value of the Common Stock on the date of grant. (c) FAIR MARKET VALUE AND OPTION EXERCISE PRICE. The fair market value of the Common Stock described in Section 5(b) and the option exercise price per share for each option granted under the Plan shall equal (i) the closing price per share of the Common Stock on the New York Stock Exchange (or, if the Common Stock is traded on another nationally recognized securities exchange or trading system on the date of grant, the closing price per share of the Common Stock on such exchange or trading system) on the date of grant (or, if no such price is reported on such date, such price as reported on the nearest preceding day); or (ii) the fair market value of the stock on the date of grant, as determined by the Board of Directors, if the Common Stock is not traded on a nationally recognized securities exchange or trading system. (d) OPTIONS NON-TRANSFERABLE. Each option granted under the Plan by its terms shall not be transferable by the optionee otherwise than by will, or by the laws of descent and distribution, or pursuant to a qualified domestic relations order (as defined in Section 414(p) of the Code), and shall be exercised during the lifetime of the optionee only by him. No option or interest therein may be transferred, assigned, pledged or hypothecated by the optionee during his lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. (e) EXERCISE PERIOD. Except as otherwise provided in this Plan, no option may be exercised prior to the first anniversary of the date of grant of such option. Each option may be exercised on a cumulative basis as to one-third of the shares subject to the option on the first, second and third anniversary of the date of grant of such option; PROVIDED that, subject to the provisions of Section 5(f), no option may be exercised more than 90 days after the optionee ceases to serve as a director of the Company. No option shall be exercisable after the expiration of ten (10) years from the date of grant or prior to approval of the Plan by the stockholders of the Company. (f) EXERCISE PERIOD UPON DEATH OR DISABILITY. Notwithstanding the provisions of Section 5(e), any option granted under the Plan: (i) may be exercised in full by an optionee who becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while serving as a director of the Company; or (ii) may be exercised 19 3 (x) in full upon the death of an optionee while serving as a director of the Company, or (y) to the extent then exercisable upon the death of an optionee within 90 days of ceasing to serve as a director of the Company, by the person to whom it is transferred by will, by the laws of descent and distribution, or by written notice filed pursuant to Section 5(i); in each such case within the period of one year after the date the optionee ceases to be such a director by reason of such death or disability; provided, that no option shall be exercisable after the expiration of ten (10) years from the date of grant or prior to the approval of the Plan by the stockholders of the Company. (g) EXERCISE PROCEDURE. Options may be exercised only by written notice to the Company at its principal office accompanied by payment of the full consideration for the shares as to which they are exercised. (h) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide for the payment of the exercise price (i) by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options or, (ii) to the extent provided in the applicable option agreement, by delivery to the Company of shares of Common Stock of the Company already owned by the optionee having a fair market value equal in amount to the exercise price of the options being exercised, or (iii) by any combination of such methods of payment. The fair market value of any shares of the Company's Common Stock or other non-cash consideration which may be delivered upon exercise of an option shall be determined by the Board of Directors. (i) EXERCISE BY REPRESENTATIVE FOLLOWING DEATH OF DIRECTOR. A director, by written notice to the Company, may designate one or more persons (and from time to time change such designation) including his legal representative, who, by reason of his death, shall acquire the right to exercise all or a portion of the option. If the person or persons so designated wish to exercise any portion of the option, they must do so within the term of the option as provided herein. Any exercise by a representative shall be subject to the provisions of the Plan. 6. ASSIGNMENTS The rights and benefits under the Plan may not be assigned except for the designation of a beneficiary as provided in Section 5. 7. TIME FOR GRANTING OPTIONS All options for shares subject to the Plan shall be granted, if at all, not later than December 31, 2000. 8. LIMITATION OF RIGHTS 20 4 (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the granting of an option nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a director for any period of time. (b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. An optionee shall have no rights as a stockholder with respect to the shares covered by his options until the date of the issuance to him of a stock certificate therefor, and no adjustment will be made for dividends or other rights for which the record date is prior to the date such certificate is issued. 9. CHANGES IN COMMON STOCK (a) If (x) the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities of the Company, or (y) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Common Stock or other securities, through or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment shall be made in (i) the maximum number and kind of shares reserved for issuance under the Plan, and (ii) the number and kind of shares or other securities subject to then outstanding options under the Plan and (iii) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. No fractional shares will be issued under the Plan on account of any such adjustments. (b) In the event that the Company is merged or consolidated into or with another corporation (in which consolidation or merger the stockholders of the Company receive distributions of cash or securities of another issuer as a result thereof), or in the event that all or substantially all of the assets of the Company is acquired by any other person or entity, or in the event of a reorganization or liquidation of the Company, the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company, shall, subject to the provisions of Section 10, as to outstanding options, take one or more of the following actions: (i) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), (ii) upon written notice to the optionees, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice, or (iii) if, under the terms of a merger transaction, holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the merger (the "Merger Price"), make or provide for a cash payment to the optionees equal to the difference between (A) the Merger Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Merger Price) and (B) the aggregate exercise price of all such outstanding options in exchange for the termination of such options. 10. CHANGE IN CONTROL Notwithstanding any other provision to the contrary in this Plan, in the event of a Change in Control (as defined below), all options outstanding as of the date such Change in Control 21 5 occurs shall become exercisable in full, whether or not exercisable in accordance with their terms. A "Change in Control" shall occur or be deemed to have occurred only if any of the following events occur: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) individuals who, as of October 1, 1995, constitute the Board of Directors of the Company (as of the date thereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to October 1, 1995 whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Securities Exchange Act of 1934) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 30% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 11. AMENDMENT OF THE PLAN The Board of Directors may suspend or discontinue the Plan or review or amend it in any respect whatsoever; provided, however, that without approval of the stockholders of the Company no revision or amendment shall change the number of shares subject to the Plan (except as provided in Section 9), change the designation of the class of directors eligible to receive options, or materially increase the benefits accruing to participants under the Plan. The Plan may not be amended more than once in any six-month period. 12. WITHHOLDING The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. 13. EFFECTIVE DATE AND DURATION OF THE PLAN 22 6 (a) EFFECTIVE DATE. The Plan shall become effective when adopted by the Board of Directors, but no option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months after the date of the Board's adoption of the Plan, all options granted under the Plan shall terminate and no further options shall be granted under the Plan. Amendments to the Plan not requiring shareholder approval shall become effective when adopted by the Board of Directors; amendments requiring shareholder approval (as provided in Section 11) shall become effective when adopted by the Board of Directors, but no option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular optionee) unless and until such amendment shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months of the Board's adoption of such amendment, any options granted on or after the date of such amendment shall terminate to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular optionee. Subject to this limitation, options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan. (b) TERMINATION. Unless sooner terminated in accordance with Section 9, the Plan shall terminate upon the earlier of (i) the close of business on December 31, 2000, or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise or cancellation of options granted under the Plan. If the date of termination is determined under (i) above, then options outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options. 14. NOTICE Any written notice to the Company required by any of the provisions of the Plan shall be addressed to the Treasurer of the Company and shall become effective when it is received. 15. COMPLIANCE WITH RULE 16B-3 Transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successor promulgated pursuant to Section 16 of the Securities Exchange Act of 1934. To the extent any provision of the Plan or action or adjustment by the Board of Directors in administering the Plan fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board of Directors. 16. GOVERNING LAW The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware. 23 EX-10.B 3 1996 EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 10(b) CML GROUP, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN Adopted by the Board of Directors on October 3, 1995 ---------------------------------------------------- 1. Purposes. -------- The 1996 Employee Stock Purchase Plan of CML Group, Inc. (the "Plan") is intended to provide a method whereby employees of CML Group, Inc. and its subsidiary corporations (hereinafter collectively referred to, unless the context otherwise requires, as the "Company"), will have an opportunity to acquire a proprietary interest in the Company through the purchase of shares of the Common Stock, $.10 par value per share, of the Company (the "Common Stock"). It is the intention of the Company to have the Plan qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of Section 423 of the Code. 2. Definitions. ----------- (a) "base pay" means regular straight-time earnings, excluding payments for overtime, incentive compensation, bonuses and other special payments. (b) "employee" means any person who is customarily employed for more than 20 hours per week and more than five months in a calendar year by the Company or by a subsidiary corporation. (c) "Offering Commencement Date" means the applicable date on which an Offering under the Plan commences pursuant to Section 4. (d) "Offering Termination Date" means the applicable date on which an Offering under the Plan terminates pursuant to Section 4. (e) "subsidiary" means any present or future corporation which (i) is a "subsidiary corporation" as that term is defined in Section 424 of the Code and (ii) is designated as a participant in the Plan by the Board of Directors or Committee described in Section 13. 3. Eligibility. ----------- (a) Any employee who shall have been employed by the Company or any subsidiary at least 90 days prior to the applicable Offering Commencement Date shall be eligible to participate in the Plan. (b) Any provision of the Plan to the contrary notwithstanding, no employee shall be granted an option to participate in the Plan: 24 2 (i) if, immediately after the grant, such employee would own stock, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary corporation (for purposes of this Section the rules of Section 424(d) of the Code shall apply in determining stock ownership of any employee); or (ii) which permits his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries to accrue at a rate which exceeds $25,000 of the fair market value of the stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Dates. -------------- The Plan will be implemented by three annual offerings (referred to herein collectively as "Offerings" and individually as an "Offering") of a maximum of 325,000 shares each (subject to adjustment as provided in Sections 12(a) and 17) of the Common Stock, as follows: (a) Offering I shall commence on June 15, 1996, and terminate on June 14, 1997. (b) Offering II shall commence on June 15, 1997, and terminate on June 14, 1998. (c) Offering III shall commence on June 15, 1998, and terminate on June 14, 1999. Participation in any one or more of the Offerings under the Plan shall neither limit, nor require, participation in any other Offering. 5. Participation. ------------- All eligible employees will become participants in an Offering on the applicable Offering Commencement Date. Payroll deductions for a participant shall commence on the applicable Offering Commencement Date of the Offering and shall end on the Offering Termination Date of such Offering, unless sooner terminated pursuant to Section 10. 6. Payroll Deductions. ------------------ (a) Participants may elect to have amounts withheld from their base pay by completing an authorization for a payroll deduction ("Authorization") on the form provided by the Company and filing it with the office of the Treasurer of the Company. At the time a participant files his or her Authorization for a payroll deduction, the participant shall elect to have deductions made from his or her pay on each payday during the time he or she is a participant in an Offering at the rate of 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his or her annualized base pay. (b) All payroll deductions made for a participant shall be credited to his or her account maintained by the Company under the Plan. A participant may not make any separate cash payment into such account. 25 3 (c) Except as provided in Section 8(b) or 10, a participant may not make any changes to his or her participation during an Offering and, specifically, a participant may not during an Offering alter the amount of his or her payroll deductions for such Offering. 7. Granting of Option. ------------------ (a) For each of the Offerings, a participating employee shall be deemed to have been granted an option (the "Option"), on the applicable Offering Commencement Date, to purchase a maximum number of shares of the Common Stock equal to an amount determined as follows: 85% of the market value of a share of the Common Stock on the applicable Offering Commencement Date shall be divided into an amount equal to (x) that percentage of the employee's base pay which he or she has elected to have withheld (but not in any case in excess of 10%) multiplied (y) by the employee's annualized base pay. The market value of the Common Stock shall be determined as provided in subsection (b) below. An employee's annualized base pay shall be determined as follows: (i) in the case of a full-time employee normally paid on an hourly rate, by multiplying his or her normal hourly rate by 2080, (ii) in the case of a part-time employee normally paid on an hourly rate, by multiplying his or her normal hourly rate by the product of 52 times the number of hours in his or her normal work week, (iii) in the case of an employee normally paid at a bi-weekly rate, by multiplying his or her normal bi-weekly rate by 26, (iv) in the case of a part-time employee normally paid at a weekly rate, by multiplying his or her normal weekly rate by 52; and (v) in the case of an employee normally paid at a monthly rate, by multiplying his or her normal monthly rate by 12. (b) The purchase price of a share of Common Stock purchased with payroll deductions made during each Offering (the "Option Exercise Price") shall be the lower of: (i) 85% of the composite closing price of the Common Stock on the New York Stock Exchange (or, if the Common Stock is then traded on the Nasdaq National Market, 85% of the closing price of the Common Stock on such system), as published in THE WALL STREET JOURNAL, on the Offering Commencement Date applicable to such Offering (or on the next regular business day on which shares of the Common Stock shall be traded in the event that no shares of the Common Stock shall have been traded on the Offering Commencement Date); or (ii) 85% of the composite closing price of the Common Stock on the New York Stock Exchange (or, if the Common Stock is then traded on the Nasdaq National Market, 85% of the closing price of the Common Stock on such system), as published in THE WALL STREET JOURNAL, on the Offering Termination Date applicable to such Offering (or on the next regular business day on which shares of the Common Stock shall be traded in the event that no shares of the Common Stock shall have been traded on the Offering Termination Date). 8. Exercise of Option. ------------------ With respect to each Offering during the term of the Plan: (a) Unless a participant gives written notice of withdrawal to the Company as provided in Sections 8(b) and 10, his or her Option will be deemed to have been exercised 26 4 automatically on the Offering Termination Date applicable to such Offering, for the purchase of the number of full shares of Common Stock which the accumulated payroll deductions in his or her account maintained by the Company under the Plan at that time will purchase at the applicable Option Exercise Price (but not in excess of the number of shares for which options have been granted to the employee pursuant to Section 7(a)), and any excess in his or her account at that time will be returned to him or her. (b) By written notice to the Treasurer of the Company at any time prior to the Offering Termination Date applicable to any such Offering, a participant may elect to withdraw all, but not less than all, of the accumulated payroll deductions in his or her account at such time, with simple interest computed at the rate of six percent (6%) per annum. (c) Fractional shares will not be issued under the Plan and any accumulated payroll deductions which would have been used to purchase fractional shares or which are in excess of the limitations of Section 7(a) shall be returned to an employee promptly following the termination of an Offering. 9. Delivery. -------- As promptly as practicable after the Offering Termination Date of each Offering, the Company will deliver to each participant, as appropriate, the certificate or certificates representing the shares of Common Stock purchased upon the exercise of such participant's Option. 10. Withdrawal. ---------- (a) As indicated in Section 8(b), a participant may withdraw payroll deductions credited to his or her account with the Company under any Offering at any time prior to the applicable Offering Termination Date by giving written notice of withdrawal to the Treasurer of the Company. All of the participant's payroll deductions credited to his or her account will be paid to the participant promptly after receipt of such notice of withdrawal and no further payroll deductions will be made from his or her pay during such Offering. The Company may, at its option, treat any attempt by an employee to borrow on the security of accumulated payroll deductions as an election, under Section 8(b), to withdraw such deductions. (b) A participant's withdrawal from any Offering will not have any effect upon his or her eligibility to participate in any succeeding Offering or in any similar plan which may hereafter be adopted by the Company, provided, however, that any officer subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended, who withdraws from any Offering may not participate in the Plan again for at least six months. (c) Upon termination of the participant's employment for any reason, including retirement but excluding death or disability, while in the employ of the Company, the payroll deductions credited to his or her account will be returned to the participant, with simple interest at the rate of six percent (6%) per annum. (d) Upon termination of the participant's employment because of disability or death, the participant or his or her beneficiary (as defined in Section 14) shall have the right to elect, by 27 5 written notice given to the Treasurer of the Company prior to the expiration of the period of 30 days commencing with the date of the disability or death of the participant, either (i) to withdraw all of the payroll deductions credited to the participant's account under the Plan, with simple interest at the rate of six percent (6%) per annum; or (ii) to exercise the participant's Option on the Offering Termination Date next following the date of the participant's disability or death for the purchase of the number of full shares of Common Stock which the accumulated payroll deductions in the participant's account at the date of the participant's disability or death will purchase at the applicable Option Exercise Price, and any excess in such account will be returned to the participant or said beneficiary. If no such written notice of election is received by the Treasurer of the Company, the participant or beneficiary shall automatically be deemed to have elected to withdraw the payroll deductions credited to the participant's account at the date of the participant's disability or death and the same will be paid promptly to the participant or said beneficiary with simple interest at the rate of six percent (6%) per annum. 11. Interest. -------- No interest will be paid or allowed on any money paid into the Plan or credited to the account of any participant employee except upon withdrawal as provided under Sections 8(b) and 10 or upon the return of payroll deductions as provided under Section 12(a). 12. Stock. ----- (a) The maximum number of shares of Common Stock which shall be made available for sale under the Plan during any Offering under the Plan shall be 325,000 shares (subject to adjustment upon changes in capitalization of the Company as provided in Section 17), plus any shares available but not issued in any prior Offering under the Plan. If the total number of shares for which Options are exercised on any Offering Termination Date in accordance with Section 8 exceeds 325,000 (plus any shares available but not issued in any prior Offering), the Company shall make a pro rata allocation of the shares available for delivery and distribution in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable, and the balance of payroll deductions credited to the account of each participant under the Plan shall be returned to him or her as promptly as possible, with simple interest on such balance at the rate of six percent (6%) per annum. If less than 325,000 shares are purchased during an Offering, the amount not purchased may be carried over to and made available during any subsequent Offering. (b) The participant will have no interest in Common Stock covered by his or her Option until such Option has been exercised. (c) Common Stock to be delivered to a participant under the Plan will be registered in the name of the participant, or, if the participant so directs, by written notice to the Company prior to the Offering Termination Date applicable thereto, in the names of the participant and one such other person as may be designated by the participant, as joint tenants with rights of survivorship, to the extent permitted by applicable law. 28 6 (d) The Board of Directors of the Company may, in its discretion, require as conditions to the exercise of any Option that the shares of Common Stock reserved for issuance upon the exercise of the Option shall have been duly authorized for listing on the New York Stock Exchange and that either (i) a Registration Statement under the Securities Act of 1933, as amended, with respect to said shares shall be effective; or (ii) the participant shall have represented in form and substance satisfactory to the Company that it is the participant's intention to purchase such shares for investment. 13. Administration. -------------- The Plan shall be administered by the Compensation Committee appointed by the Board of Directors of the Company or, if no such committee is established, by the Board of Directors of the Company (the committee so designated by the Board of Directors or, if no such committee is established, the Board of Directors, shall hereinafter be referred to as the "Committee"). The officer of the Company charged with day-to-day administration of the Plan shall, for matters involving the Plan, be an ex-officio member of the Committee. The interpretation and construction of any provision of the Plan and the adoption of rules and regulations for administering the Plan shall be made by the Committee, subject, however, at all times to the final approval of the Board of Directors of the Company. Determinations made by the Committee and approved by the Board of Directors of the Company with respect to any matter or provision contained in the Plan shall be final, conclusive and binding upon the Company and upon all participants, their heirs or legal representatives. Any rule or regulation adopted by the Committee shall remain in full force and effect unless and until altered, amended or repealed by the Committee or the Board of Directors of the Company. The Company shall indemnify Committee members, to the fullest extent permitted by applicable statute, for any expenses incurred in defending a civil or criminal action or proceeding, arising out of such member's actions with respect to administration of the Plan, in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by the person indemnified to repay such payment if such member shall be adjudicated not to have acted in good faith in the reasonable belief that such member's action was in the best interest of the Company. 14. Designation of Beneficiary. -------------------------- A participant may file a written designation of a beneficiary who is to receive any shares of Common Stock and/or cash in the event of the death of the participant prior to the delivery of such shares or cash to the participant. Such designation of beneficiary may be changed by the participant at any time by written notice to the Treasurer of the Company. Within 30 days after the participant's death, the beneficiary may, as provided in Section 10(d), elect to exercise the participant's Option when it becomes exercisable on the Offering Termination Date of the then current Offering. Upon the death of a participant and upon receipt by the Company of proof of the identity and existence at the participant's death of a beneficiary validly designated by the participant under the Plan, and notice of election of the beneficiary to exercise the participant's Option, the Company shall deliver such stock and/or cash to such beneficiary. In the event of 29 7 the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company) the Company, in its discretion, may deliver such cash to the spouse or to any one or more dependents of the participant as the Company may determine. No beneficiary shall prior to the death of the participant by whom he or she has been designated acquire any interest in the stock or cash credited to the participant's account maintained by the Company under the Plan. 15. Transferability. --------------- Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an Option or to receive stock under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way by the participant otherwise than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 8(b). 16. Use of Funds. ------------ All payroll deductions received or held by the Company under this Plan may be used by the Company for any corporate purpose and the Company shall not be obligated to segregate such payroll deductions. 17. Effect of Changes of Common Stock. --------------------------------- In the event of any changes of outstanding shares of the Common Stock by reason of stock dividends, subdivisions, combinations and exchanges of shares, recapitalizations, mergers in which the Company is the surviving corporation, consolidations, and the like, the aggregate number and class of shares available under this Plan and the Option Exercise Price per share shall be appropriately adjusted by the Board of Directors of the Company, whose determination shall be conclusive. Any such adjustments may provide for the elimination of any fractional shares which would otherwise become subject to any Options. 18. Amendment or Termination. ------------------------ The Board of Directors of the Company may at any time terminate or amend the Plan. Except as hereinafter provided, no such termination may affect Options previously granted, and no such amendment may make any change in Options previously granted which would adversely affect the rights of any participant. In addition, no amendment may be made to the Plan without approval of the stockholders of the Company within twelve months of such amendment if such amendment would (a) materially increase the benefits accruing to participants under the Plan, (b) materially increase the number of shares which may be issued under the Plan or (c) materially modify the requirements as to eligibility for participation under the Plan. 19. Notices. ------- 30 8 All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received by the Treasurer of the Company. 20. Merger or Consolidation. ----------------------- If the Company shall at any time merge into or consolidate with another corporation and the Company is the surviving entity, the holder of each Option then outstanding will thereafter be entitled to receive at the next Offering Termination Date upon the exercise of such Option (unless previously withdrawn pursuant to Section 10) for each share as to which such Option shall be exercised the securities or property which a holder of one share of the Common Stock was entitled to upon and at the time of such merger or consolidation, and the Board of Directors of the Company shall take such steps in connection with such merger or consolidation as the Board of Directors shall deem necessary to assure that the provisions of Section 17 shall thereafter be applicable, as nearly as reasonably practicable, to such securities or property. In the event of a merger or consolidation in which the Company is not the surviving entity, or of a sale of assets in which the Company is not the surviving entity, the Plan shall terminate, and all payroll deductions credited to participants' accounts shall be returned to them, with simple interest at the rate of six percent (6%) per annum; PROVIDED, however, that the Board of Directors may, in the event of such merger, consolidation or sale, accelerate the Offering Termination Date of the Offering then in effect and permit participants to purchase shares under the Plan at such accelerated Offering Termination Date. 21. Approval of Stockholders. ------------------------ The Plan has been adopted by the Board of Directors of the Company, but is subject to the approval of the stockholders of the Company at the annual meeting of stockholders scheduled to be held on December 1, 1995. 22. Registration and Qualification of the Plan Under Applicable Securities ---------------------------------------------------------------------- Laws. ---- Notwithstanding anything to the contrary herein, no Option shall be granted under the Plan until such time as the Company has qualified or registered the shares which are subject to the Options under all applicable state and federal securities laws to the extent required by such laws. 31 EX-11 4 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 CML GROUP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE For the periods ended January 27, 1996 and January 28, 1995
Second Quarter Six Months --------------------------- --------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Primary earnings (loss) per share:, Weighted average number of shares outstanding: Common 49,129,197 49,870,036 49,176,906 49,928,177 Shares deemed outstanding from the assumed exercise of stock options and from deferred compensation awards 430,311 810,197 488,720 814,829 ----------- ----------- ----------- ----------- Total 49,559,508 50,680,233 49,665,626 50,743,006 =========== =========== =========== =========== Net income (loss) ($30,053,000) $41,678,000 ($45,071,000) $42,559,000 =========== =========== =========== =========== Primary earnings (loss) per share ($0.61) $0.82 ($0.91) $0.84 =========== =========== =========== =========== Fully diluted earnings (loss) per share: Weighted average number of shares outstanding, as above 49,559,508 50,680,233 49,665,626 50,743,006 Shares deemed outstanding from the assumed conversion of convertible subordinated debentures 1,604,877 2,110,453 1,604,877 2,164,551 Additional shares deemed outstanding from the assumed exercise of stock options -- 7,926 -- 3,963 ----------- ----------- ----------- ------------ Total 51,164,385 52,798,612 51,270,503 52,911,520 =========== =========== =========== ============ Additional income from the elimination of the interest cost of the convertible subord- inated debentures, net of income tax effect $398,000 $510,000 $779,000 $1,031,000 Fully diluted earnings (loss) per share ($0.61) $0.80 ($0.91) $0.82 =========== =========== =========== ============
32 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CML GROUP, INC. FOR THE SIX MONTHS ENDED JANUARY 27, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS 6-MOS JUL-31-1996 AUG-01-1995 JAN-27-1996 1 17,375,000 0 34,255,000 4,086,000 59,472,000 175,811,000 187,488,000 74,176,000 315,527,000 116,459,000 41,593,000 5,217,000 0 0 134,602,000 315,527,000 331,412,000 331,412,000 156,087,000 156,087,000 0 3,957,000 1,573,000 (46,025,000) (16,569,000) (29,456,000) (15,615,000) 0 0 (47,071,000) (0.91) (0.91)
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