-----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, MVNj0bbpDhorpYZJH4Ej1+vU/0DF1qp93hu5SGS8dQXuS46ICD8bO2GsG3ubhLlD v7rIjcG7iQ8gcXg1V5SAKQ== 0000950135-97-001239.txt : 19970319 0000950135-97-001239.hdr.sgml : 19970319 ACCESSION NUMBER: 0000950135-97-001239 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970318 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: 97558503 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. QUARTERLY REPORT ON FORM 10-Q 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 FEBRUARY 1, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ______________ Commission file number 0-12628 ------- CML GROUP, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Delaware 04-2451745 - ------------------------ ------------------------------------ (State of Incorporation) (IRS Employer Identification Number) 524 Main Street, Acton, Massachusetts 01720 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 264-4155 -------------- Not Applicable ---------------------------------------------------- (Former name, former address and former fiscal year if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Number of shares outstanding of each of the issuer's classes of common stock: 49,767,249 shares of common stock, $.10 par value, as of March 6, 1997. ================================================================================ 2 CML GROUP, INC. AND SUBSIDIARIES -------------------------------- Form 10-Q Index ----- Page ---- Part I: Financial Information Item 1: Financial Statements Consolidated Condensed Balance Sheets as of February 1, 1997 and July 31, 1996 3 - 4 Consolidated Condensed Statements of Operations for the three-month and six-month periods ended February 1, 1997 and January 27, 1996 5 Consolidated Condensed Statements of Cash Flows for the six-month periods ended February 1, 1997 and January 27, 1996 6 Notes to Consolidated Condensed Financial Statements 7 - 10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 15 Part II: Other Information Item 1: Legal Proceedings 16 Item 4: Submission of Matters to a Vote of Security Holders 16 Item 6: Exhibits and Reports on Form 8-K 16 Signatures 17 Exhibit Index 18 3 Part I: FINANCIAL INFORMATION Item 1. Financial Statements -------------------- CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Balance Sheets ------------------------------------- (In thousands) ASSETS
February 1, 1997 July 31, 1996 ---------------- ------------- Current assets: Cash and cash equivalents $ 38,434 $ 17,673 Accounts receivable 8,474 10,570 Refundable income taxes 128 53,874 Prepaid income taxes 6,043 6,102 Inventories: Raw materials 3,183 2,742 Work in process 1,819 1,875 Finished goods 38,489 25,817 -------- -------- Total inventories 43,491 30,434 Other current assets 17,650 16,270 -------- -------- Total current assets 114,220 134,923 -------- -------- Property, plant and equipment, at cost: Land and buildings 19,388 20,071 Machinery and equipment 44,362 43,739 Leasehold improvements 30,752 31,628 -------- -------- 94,502 95,438 Less accumulated depreciation 41,298 37,279 -------- -------- 53,204 58,159 -------- -------- Goodwill 8,664 8,782 Other assets 17,432 11,487 -------- -------- $193,520 $213,351 ======== ========
See Notes to Consolidated Condensed Financial Statements. 3 4 CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Balance Sheets ------------------------------------- (In thousands except share information)
LIABILITIES AND STOCKHOLDERS' EQUITY February 1, 1997 July 31, 1996 ---------------- ------------- Current liabilities: Current portion of long-term debt $ 47 $ 49 Accounts payable 19,730 23,582 Accrued compensation 5,406 6,385 Accrued advertising 7,683 8,260 Accrued insurance 5,357 5,706 Accrued lease termination costs 2,454 5,760 Other accrued expenses 37,201 29,018 -------- -------- Total current liabilities 77,878 78,760 -------- -------- Noncurrent liabilities: Long-term debt 269 276 Convertible subordinated debentures 41,593 41,593 Other noncurrent liabilities 6,904 6,925 -------- -------- Total noncurrent liabilities 48,766 48,794 -------- -------- Stockholders' equity: Common stock, par value $.10 per share Authorized - 120,000,000 shares Issued - 52,793,209 shares and 52,623,704 shares 5,279 5,262 Additional paid-in capital 81,189 81,082 Retained earnings 17,733 37,066 -------- -------- 104,201 123,410 Less treasury stock, at cost, 2,962,221 shares and 2,963,433 shares 37,325 37,613 -------- -------- 66,876 85,797 -------- -------- $193,520 $213,351 ======== ========
See Notes to Consolidated Condensed Financial Statements. 4 5 CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Statements of Operations ----------------------------------------------- (In thousands except per share data and shares outstanding) For the periods ended February 1, 1997 and January 27, 1996
Three Months Six Months ------------ ---------- 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $115,381 $222,547 $182,339 $331,412 -------- -------- -------- -------- Less costs and expenses: Cost of goods sold 52,207 107,492 81,578 156,087 Selling, general and administrative expenses 69,921 135,738 128,544 219,777 Interest expense 295 1,041 756 1,573 ---------- ---------- ---------- ---------- 122,423 244,271 210,878 377,437 ---------- ---------- ---------- ---------- Loss from continuing operations before income taxes (7,042) (21,724) (28,539) (46,025) Income tax benefit (1,857) (7,286) (9,703) (16,569) ---------- ---------- ---------- ---------- Loss from continuing operations (5,185) (14,438) (18,836) (29,456) ---------- ---------- ---------- ---------- Provision for loss on disposal of discontinued operations, net of income tax benefit -- (15,615) -- (15,615) ---------- ---------- ---------- ---------- Net loss ($5,185) ($30,053) ($18,836) ($45,071) ========== ========== ========== ========== Loss per share: Loss from continuing operations ($0.10) ($0.29) ($0.38) ($0.60) ========== ========== ========== ========== Net loss ($0.10) ($0.61) ($0.38) ($0.91) ========== ========== ========== ========== Weighted average number of shares outstanding 50,079,654 49,559,508 50,122,305 49,665,626
See Notes to Consolidated Condensed Financial Statements. 5 6 CML GROUP, INC. & SUBSIDIARIES Consolidated Condensed Statements of Cash Flows ----------------------------------------------- (In thousands)
For the Six Months Ended ------------------------ February 1, 1997 January 27, 1996 ---------------- ---------------- Cash flows from operating activities: Net loss $(18,836) $(45,071) -------- -------- Adjustments to reconcile net loss to net cash provided by operating activities: Provision for loss on disposal of discontinued operation -- 24,023 Depreciation and amortization 7,059 15,931 Loss on disposal of property, plant and equipment 1,372 2,268 Decrease in working capital items 36,592 39,734 (Increase) decrease in other assets (6,155) 1,445 Increase (decrease) in other noncurrent liabilities (21) 530 -------- -------- Total adjustments 38,847 83,931 -------- -------- Net cash provided by operating activities 20,011 38,860 -------- -------- Cash flows from investing activities: Additions to property, plant and equipment (2,975) (16,137) Net proceeds from the sale of businesses held for sale 3,913 -- Reductions in notes receivable 37 31 -------- -------- Net cash provided by (used in) investing activities 975 (16,106) -------- -------- Cash flows from financing activities: Decrease in long-term debt (9) (10,055) Dividends paid (497) (2,461) Exercise of stock options 281 95 Acquisition of treasury stock -- (1,296) -------- -------- Net cash used in financing activities (225) (13,717) -------- -------- Net increase in cash and cash equivalents during the period 20,761 9,037 Cash and cash equivalents at the beginning of the period 17,673 8,338 -------- -------- Cash and cash equivalents at the end of the period $ 38,434 $ 17,375 ======== ========
See Notes to Consolidated Condensed Financial Statements. 6 7 CML GROUP, INC. & SUBSIDIARIES Notes to Consolidated Condensed Financial Statements ---------------------------------------------------- (In thousands) Note 1 - ------ The accompanying consolidated condensed financial statements and notes should be read in conjunction with the financial statements contained in the Company's Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated condensed financial statements include all adjustments necessary for a fair presentation of the results of the interim periods presented and all such adjustments are of a normal recurring nature. The retail industry is seasonal in nature and the results of operations for the interim periods presented may not be indicative of the results for a full year. The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the consolidated financial statements and the reported amount of revenues and expenses during the period. Actual results could differ from those estimates. Certain 1996 amounts have been reclassified to conform to the 1997 presentation. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," is effective for the Company beginning in fiscal 1997. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages, but does not require, compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees. Note 2 - Divestiture of Hear Music - ---------------------------------- The Company decided to divest its Hear Music subsidiary during the third quarter of fiscal 1996. On October 23, 1996, the Company sold substantially all of the assets of Hear Music for $371 in cash plus the assumption of certain liabilities. The Company's results of operations for the three- and six-month periods ended January 27, 1996 include Hear Music's sales of $2,552 and $3,931, respectively, and pretax operating losses of $801 and $1,733, respectively. Note 3 - Long-term Debt - ----------------------- Consolidated long-term debt is summarized as follows:
February 1, 1997 July 31, 1996 ---------------- ------------- Revolving credit loan $ -- $ -- Note payable 243 250 Obligations under capital leases 73 75 ---- ---- 316 325 Less current portion 47 49 ---- ---- Long-term debt $269 $276 ==== ====
7 8 Note 4 - Contingencies - ---------------------- Litigation ---------- NordicTrack is the defendant in a Consolidated Class Action Complaint ("Consolidated Complaint") filed on September 25, 1996 in the United States District Court for the Southern District of New York. The plaintiffs named in the Consolidated Complaint, Elissa Crespi and John Lucien Ware, Jr., allege that NordicTrack made false and misleading claims in its advertising concerning the weight loss of persons using its ski exercisers by misrepresenting and failing to disclose material findings of weight loss studies conducted by or on behalf of NordicTrack. The plaintiffs assert claims of common law fraud, fraudulent concealment, negligent misrepresentation and omission, breach of express and implied warranties, and violation of Section 349 of the New York General Business Law. They also seek to represent a class allegedly consisting of all persons in the United States who purchased a NordicTrack ski exerciser during the period from November 15, 1993 to April 10, 1996, excluding NordicTrack and its employees. On behalf of themselves and the alleged class, the plaintiffs seek unspecified actual and punitive damages with interest, rescission, attorneys' fees, costs, an order requiring NordicTrack to make corrective disclosures, and the imposition of a constructive trust. In February 1997, NordicTrack's motion was granted for transfer of venue to the United States District Court for the District of Minnesota. The parties have commenced discovery on the issue of class certification. While NordicTrack believes it has meritorious defenses to the Consolidated Complaint and intends to vigorously defend against the allegations, this lawsuit is in the 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. In August 1996, NordicTrack filed a declaratory judgment action against Precise Exercise, Inc. ("Precise") in the United States District Court for the District of Minnesota seeking a declaratory judgment to invalidate an agreement between the parties. Thereafter, Precise filed an action against NordicTrack in State Court in New Jersey alleging NordicTrack breached its contract with Precise to market and distribute Precise's abdominal exercise product. On November 25, 1996, the New Jersey Court granted NordicTrack's motion to transfer that action to Minnesota. It is likely these actions will be consolidated in the District of Minnesota. While NordicTrack is vigorously pursuing its claim for declaratory judgment and believes it has meritorious defenses to Precise's claims on the contract, these lawsuits are in the 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 unfavorable outcomes. The Company is involved in various other legal proceedings which have arisen in the ordinary course of business. Management believes the outcome of such other legal proceedings will not have a material adverse impact on the Company's financial condition or results of operations. 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 $7,276. The Superfund site includes a vacant parcel of land owned by a subsidiary of the Company as well as adjoining property owned by a third party. No manufacturing or other activities involving hazardous substances have ever been conducted by the Company or its affiliates on the Superfund site in Conway. The environmental problems affecting the land resulted from activities by the owners of the adjoining parcel. Representatives of the Company have engaged in discussions with the EPA regarding responsibility for the environmental problems and the costs of cleanup. The owners of the adjoining parcel are bankrupt. The EPA commenced cleanup activities at the site in July 1992. The EPA expended approximately $1,415 for the removal phase of the site cleanup, which has now been completed. The EPA had estimated that the removal costs would exceed $3,000, but only a small portion of the solid waste removed from the site was ultimately identified as hazardous waste. Therefore, the EPA's actual response costs for the removal phase were less than the EPA originally estimated. The EPA has implemented the groundwater phase of the cleanup, which the EPA originally estimated would cost approximately $4,020. The Company believes that the EPA's estimated cost for cleanup, including the proposed remedial actions, is excessive and involves unnecessary actions. In addition, a portion of the proposed remedial cost involves cleanup of the adjoining property that is not owned by the Company or any of its affiliates. Therefore, the Company believes it is not responsible for that portion of the cleanup costs. The Company has reserves and insurance coverage (from its primary insurer) for environmental liabilities at the site in the amount of approximately $2,300. The Company also believes that it is entitled to additional insurance from its excess insurance carriers. However, if excess liability coverage is not available to the Company and the ultimate liability substantially exceeds the primary insurance amount and reserves, the liability would have a material adverse effect upon the Company's operating results for the period in which the resolution of the claim occurs and could have a material adverse effect upon the Company's financial condition. In June 1992, the EPA notified the Company it may be liable for the release of hazardous substances by the Company's former Boston Whaler subsidiary at a hazardous waste treatment and storage facility in Southington, Connecticut. The EPA has calculated the Company's volumetric contribution at less than two-tenths of one percent. Because complete cleanup cost estimates for the site are not yet available, an accurate assessment of the Company's likely range of liability cannot be made. Accordingly, the financial impact on the Company is not presently determinable. 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. Although the Company has not received an official notice, based on 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 of Georgetowne. 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. As of February 1, 1997, the Company had net deferred tax assets of $17,357 which reflects the net tax effects of: (i) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes; and (ii) current year net operating losses and prior year alternative minimum tax credits which may be applied against future taxable income and taxes. SFAS No. 109, "Accounting for Income Taxes," provides for the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits are more likely than not. At this time, the Company believes that it is more likely than not that it will generate sufficient future taxable income, either through operations or the sale of assets, to realize the net deferred tax assets prior to expiration of any net operating losses. There can be no assurance, however, that the Company will generate any specific level of earnings. If the Company is unable to generate sufficient taxable income in the future through operating results or the sale of assets, increases in the tax valuation allowance will be required, resulting in a charge to earnings. 10 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations. ------------- Introduction - ------------ The Company operates in two industry segments: the NordicTrack Segment and the Smith & Hawken Segment. The Smith & Hawken Segment comprises only Smith & Hawken in fiscal 1997. Prior to fiscal 1997, the Smith & Hawken Segment comprised Smith & Hawken, The Nature Company and Hear Music. This Quarterly Report contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. There are a number of factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Factors that May Affect Future Results". Financial Condition - ------------------- Stockholders' equity decreased by $18.9 million to $66.9 million from July 31, 1996 to February 1, 1997 primarily due to a net loss of $18.8 million during the first six months of fiscal 1997. The Company's working capital at February 1, 1997 was $36.3 million compared to $56.2 million at July 31, 1996. The decrease in working capital was primarily attributable to a decrease in refundable income taxes partially offset by an increase in inventories and cash used for operations during the first half of fiscal 1997. During the first six months of fiscal 1997, the Company invested approximately $3.0 million in property, plant and equipment and received an aggregate of $3.9 million from the sale of Hear Music and The Nature Company, which amount was previously held in an escrow account. The Company had approximately $38.4 million of cash and cash equivalents as of February 1, 1997 and it had no loans outstanding under its $40 million senior revolving credit agreement with two banks. During fiscal 1997, the Company has been in violation of certain of the covenants under its credit agreement, and there can be no assurance that the Company's lenders will permit the Company to borrow funds on favorable terms in the future. If the Company's lenders do not provide the Company with favorable credit arrangements, the Company may need to seek additional funds from other persons. There can be no assurance, however, that the Company would be able to obtain any such third-party funding or obtain such funding on terms as favorable as those offered by its lenders. Also, in the event the Company elects to raise additional funds through the sale of assets, the Company may not be able to complete such sale in a timely manner or on terms favorable to the Company. Results of Operations - --------------------- During the second quarter of fiscal 1997, net sales decreased 48.2% to $115.4 million from $222.5 million in the second quarter of fiscal 1996 primarily due to the divestitures of The Nature Company and Hear Music and lower NordicTrack sales which were partially offset by higher sales at Smith & Hawken. The Company incurred a loss from continuing operations of $5.2 million in the second quarter of fiscal 1997 which compares with a loss from continuing operations of $14.4 million in the second quarter of fiscal 1996. The reduction in the loss from continuing operations was primarily due to the reduction of expenses at NordicTrack, improved operating results at Smith & Hawken and the divestiture of Hear Music. During the second quarter of fiscal 1996, the Company recorded an additional $15.6 million loss from discontinued operations, net of an income tax benefit, for the planned sale of its Britches of Georgetowne subsidiary. Britches of Georgetowne was sold in April 1996. 11 12 For the first six months of fiscal 1997, net sales of the Company decreased 45.0% to $182.3 million from $331.4 million in the first six months of fiscal 1996 primarily due to the divestitures of The Nature Company and Hear Music and lower NordicTrack sales which were partially offset by higher sales at Smith & Hawken. The loss from continuing operations was reduced by $10.6 million to $18.8 million in the first six months of fiscal 1997 compared with the loss from continuing operations of $29.5 million in the comparable period of fiscal 1996. The reduction in the loss from continuing operations was primarily attributable to the divestitures of The Nature Company and Hear Music, the reduction of expenses at NordicTrack and improved operating results at Smith & Hawken. Retail sales for the second quarter of fiscal 1997 decreased 58.5% to $69.1 million from $166.8 million in the second quarter of fiscal 1996 and retail sales for the first six months of fiscal 1997 decreased 55.2% to $105.8 million from $236.2 million in the first half of fiscal 1996 primarily due to the divestitures of The Nature Company and Hear Music and lower retail sales at NordicTrack which were offset, in part, by higher retail sales at Smith & Hawken. Direct response and mail order sales declined by $9.6 million to $46.2 million in the second quarter of fiscal 1997 and declined by $18.7 million to $76.5 million during the first six months of fiscal 1997, compared with the similar periods in fiscal 1996, primarily due to lower direct response sales at NordicTrack and the divestiture of The Nature Company which were partially offset by increased mail order sales at Smith & Hawken. Cost of goods sold decreased as a percentage of sales from 48.3% in the second quarter of fiscal 1996 to 45.2% in the second quarter of fiscal 1997. For the first six months of the year, cost of goods sold as a percentage of sales decreased from 47.1% in fiscal 1996 to 44.7% in fiscal 1997. The decrease in cost of goods sold as a percentage of sales was primarily due to the sale of The Nature Company and Hear Music. Selling, general and administrative expenses decreased as a percentage of sales from 61.0% in the second quarter of fiscal 1996 to 60.6% in the same period of fiscal 1997. The second quarter improvement was primarily due to expense reductions relative to sales at both NordicTrack and Smith & Hawken. For the first six months of the year, selling, general and administrative expenses increased as a percentage of sales from 66.3% in fiscal 1996 to 70.5% in fiscal 1997. The increase was primarily due to less efficient advertising at NordicTrack, primarily in the first quarter of fiscal 1997, and to higher fixed costs relative to sales at Nordic Advantage stores due to a decrease in comparable store sales. Interest expense was $1.0 million, or 0.5% of sales, in the second quarter of fiscal 1996 compared to $0.3 million, or 0.3% of sales, in the second quarter of fiscal 1997. For the first six months of the year, interest expense was $1.6 million, or 0.5% of sales, in fiscal 1996 and $0.8 million, or 0.4% of sales, in fiscal 1997. During the second quarter of fiscal 1996, the Company recorded taxes from continuing operations using an estimated effective tax rate of 33.5% compared with an estimated effective tax rate of 26.4% during the second quarter of fiscal 1997. In the first six months of fiscal 1996, the Company recorded taxes from continuing operations using an estimated effective tax rate of 36.0% compared with an estimated effective tax rate of 34.0% during the first six months of fiscal 1997. 12 13 During the second quarter of fiscal 1997, NordicTrack's total sales decreased 33.6% to $93.9 million from $141.5 million in the second quarter of fiscal 1996. NordicTrack's sales declined 30.8% to $148.3 million in the first six months of fiscal 1997 from $214.4 million in the same period of fiscal 1996. Approximately 62.7% and 59.8% of NordicTrack's total sales in the second quarter and first six months of fiscal 1997, respectively, were accounted for by sales at its Nordic Advantage subsidiary which operates retail stores and mall kiosks. Nordic Advantage's sales decreased from $99.0 million in the second quarter of fiscal 1996 to $58.9 million in the similar quarter of fiscal 1997, and from $138.6 million in the first half of fiscal 1996 to $88.7 million in the first half of fiscal 1997. The decrease in retail sales was primarily due to 35.2% and 30.9% declines, respectively, in comparable store sales for the second quarter and first six months of fiscal 1997 and to a decrease in the number of mall kiosks operated by Nordic Advantage during each of these periods compared with fiscal 1996. At the end of the second quarter of fiscal 1997, Nordic Advantage operated 129 retail stores and 148 mall kiosks compared with 130 retail stores and 265 mall kiosks at the end of the second quarter of fiscal 1996. In the second quarter of fiscal 1997, direct response sales decreased by $7.4 million to $35.0 million and during the first six months of fiscal 1997, direct response sales decreased by $16.1 million to $59.6 million, compared with the similar periods of fiscal 1996. The Smith & Hawken Segment's sales decreased by $59.6 million, or 73.5%, to $21.5 million during the second quarter of fiscal 1997 and by $83.0 million, or 70.9%, to $34.0 million in the first six months of fiscal 1997 compared with the similar periods of fiscal 1996. The declines were primarily due to the sale of The Nature Company and Hear Music which were partially offset by sales increases at Smith & Hawken. Total retail sales for the second quarter of fiscal 1997 decreased by $57.5 million, or 84.9%, to $10.3 million and during the first six months of fiscal 1997 they decreased by $80.4 million, or 82.4%, to $17.1 million compared with the similar periods of fiscal 1996. The declines in retail sales were primarily due to the sale of The Nature Company and Hear Music which were partially offset by Smith & Hawken's retail sales increases of 23.2% and 36.3% during the second quarter and first half of fiscal 1997, respectively. Smith & Hawken's comparable store sales increased by 2.2% and 7.6% for the second quarter and first six months of fiscal 1997, respectively. The Smith & Hawken Segment operated 24 Smith & Hawken stores at the end of the second quarter of fiscal 1997. In the second quarter of fiscal 1997, the Smith & Hawken Segment's mail order sales declined by $2.1 million to $11.2 million primarily due to the sale of The Nature Company which was partially offset by an increase in Smith & Hawken's mail order sales. For the first six months of fiscal 1997, the Smith & Hawken Segment's mail order sales declined by $2.6 million to $16.9 million primarily due to the sale of The Nature Company but partially offset by higher mail order sales at Smith & Hawken. Certain Factors That May Affect Future Results - ---------------------------------------------- The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Quarterly Report and presented elsewhere by management from time to time. 13 14 Recent Operating Results The Company has had net losses for each of fiscal 1995, fiscal 1996 and the first two quarters of fiscal 1997, and there can be no assurance that the Company will not continue to have net losses in the future. Continued net losses would affect the Company's cash position and could require the Company to reduce certain expenditures, including without limitation expenditures for advertising and inventory, which would have a material adverse effect on the Company's business, financial condition and results of operations. If the Company continues to have net losses in the future, the Company may be unable to realize the benefit of the net deferred tax asset referred to in Note 4 of Notes to Consolidated Condensed Financial Statements. Available Funds During fiscal 1997, the Company has been in violation of certain of the covenants under its credit agreement, and there can be no assurance that the Company's lenders will permit the Company to borrow funds on favorable terms in the future. If the Company's lenders do not provide the Company with favorable credit arrangements, the Company may need to seek additional funds from other persons. There can be no assurance, however, that the Company would be able to obtain any such third-party funding or obtain such funding on terms as favorable as those offered by its lenders. Also, in the event the Company elects to raise additional funds through the sale of assets, the Company may not be able to complete such sale in a timely manner or on terms favorable to the Company. Consumer Spending The success of the Company is influenced by a number of economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates and taxation rates. Adverse changes in these economic conditions may restrict consumer spending, thereby negatively affecting the Company's results of operations. Competition The markets in which the Company is engaged are highly competitive. NordicTrack competes with several companies which design, manufacture and distribute physical fitness and exercise equipment. During the past several years, NordicTrack's competitors have introduced several new and competitive products at competitive prices which have adversely affected NordicTrack's recent revenues and profits. The future success of NordicTrack depends in part upon its ability to introduce new and competitive products successfully, on a timely basis and at competitive prices. The failure of NordicTrack to successfully compete with its competitors could materially adversely affect the financial condition of the Company. Many of the competitors of Smith & Hawken are larger companies with greater financial resources, a greater selection of merchandise and nationwide distribution, including a large number and wide variety of specialty retail stores, discount stores and department stores. Smith & Hawken also competes with mail order catalogs that sell gardening-related merchandise and independent garden stores and plant nurseries in towns and cities throughout the United States. The failure of Smith & Hawken to successfully compete with these companies could adversely affect the Company's operating results. 14 15 New Products Several new and enhanced products were introduced by the Company in fiscal 1996 and fiscal 1997. The Company's future financial performance will depend on the continued market acceptance of the Company's existing products and the successful development, introduction and customer acceptance of new and enhanced products. If these products do not receive favorable market acceptance, the Company's future operating results would be adversely affected. There can be no assurance that the Company will be successful in developing new products and marketing its existing or new products. New Management Team The Company replaced a number of key executives at NordicTrack. There can be no assurance, however, that the new personnel will be able to successfully increase revenues or reduce costs at NordicTrack in the future. Seasonality The Company's businesses are seasonal, with significant amounts of retail sales in the second and third fiscal quarters. The Company expects this seasonality to continue in the future. Because of this seasonality, the Company's revenues and earnings have fluctuated and will continue to fluctuate from quarter to quarter. Advertising and Marketing Programs The Company's success in the markets in which it competes depends in part upon the effectiveness of advertising and marketing programs of the Company and the Company's ability to successfully manage its advertising in-house. In fiscal 1996, NordicTrack implemented a new advertising program which in large part was ineffective. The inability of the Company to periodically design and successfully execute new and effective advertising and marketing programs could adversely affect the Company's operating results. Costs of Postage and Shipping Postage expenses associated with mailing catalogs and shipping charges associated with distributing merchandise to customers are significant factors in the operation of the Company's businesses. Increases in postage or shipping costs could adversely affect the Company's operating results. Intellectual Property Rights The Company is subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights. There can be no assurance that third parties will not assert infringement claims in the future with respect to the Company's current or future products or that any such claims will not require the Company to enter into royalty arrangements or result in costly litigation. While the Company believes that it currently has all licenses necessary to conduct its business, no assurance can be given that additional licenses will not be required in the future. Furthermore, no assurance can be given that, if any additional licenses are required, such licenses could be obtained on commercially reasonable terms. 15 16 PART II: OTHER INFORMATION Item 1: Legal Proceedings. Environmental Matters --------------------- See Note 4 of Notes to Consolidated Condensed Financial Statements in Item 1 of Part I hereof, which is hereby incorporated by reference for information concerning environmental matters. Litigation ---------- See Note 4 of Notes to Consolidated Condensed Financial Statements in Item 1 of Part I hereof, which is hereby incorporated by reference for information concerning litigation. Tax Matters ----------- See Note 4 of Notes to Consolidated Condensed Financial Statements in Item 1 of Part I hereof, which is hereby incorporated by reference for information concerning tax matters. Items 2-3: None. Item 4: Submission of Matters to a Vote of Security Holders: The Company held its Annual Meeting of Stockholders on December 6, 1996. At this meeting the stockholders of the Company elected Howard H. Callaway as a Class C Director (by votes of 44,867,732 shares of Common Stock in favor and 859,594 shares of Common Stock withheld) and Alison Taunton-Rigby as a Class C Director (by votes of 44,923,216 shares of Common Stock in favor and 804,110 shares of Common Stock withheld). Each of the newly elected Class C 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 Charles M. Leighton, Thomas H. Lenagh, Dr. Roy W. Menninger, G. Robert Tod, Lauren M. Tyler and Ralph F. Verni. At the Annual Meeting, stockholders holding 45,100,408 shares of Common Stock voted to ratify the appointment of Deloitte & Touche LLP as the Company's independent auditors for the 1997 fiscal year. Stockholders holding 478,748 shares of Common Stock voted against such ratification and stockholders holding 148,171 shares of Common Stock abstained. No "broker non-votes" were recorded at the Annual Meeting of Stockholders. 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. 16 17 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 18, 1997 /s/Paul J. Bailey -------------- ----------------- Paul J. Bailey Controller Principal Accounting Officer 17 18 EXHIBIT INDEX Page No. -------- 11 -- Statement Regarding Computation of Earnings (Loss) Per Share 19 27 -- Financial Data Schedule 20 18 EX-11 2 COMPUTATION OF EARNINGS/LOSS PER SHARE 1 Exhibit 11 CML GROUP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE For the periods ended February 1, 1997 and January 27, 1996
Second Quarter Six Months -------------- ---------- 1997 1996 1997 1996 ---- ---- ---- ---- Primary loss per share: Weighted average number of shares outstanding: Common 49,810,109 49,129,197 49,758,660 49,176,906 Shares deemed outstanding from: Assumed issuance of deferred compensation awards 105,000 105,000 105,000 105,000 Assumed exercise of stock options 164,545 325,311 258,645 383,720 ----------- ------------ ------------ ------------ Total 50,079,654 49,559,508 50,122,305 49,665,626 =========== ============ ============ ============ Net loss $(5,185,000) $(30,053,000) $(18,836,000) $(45,071,000) =========== ============ ============ ============ Primary loss per share $ (0.10) $ (0.61) $ (0.38) $ (0.91) =========== ============ ============ ============ Weighted average number of shares outstanding, as above 50,079,654 49,559,508 50,122,305 49,665,626 Shares deemed outstanding from the assumed conversion of convertible subordinated debentures 1,604,877 1,604,877 1,604,877 1,604,877 Additional shares deemed outstanding from the assumed exercise of stock options -- -- 24,635 -- ----------- ------------ ------------ ------------ Total 51,684,531 51,164,385 51,751,817 51,270,503 =========== ============ ============ ============ Additional income from the elimination of the interest cost of the convertible subordinated debentures, net of income tax effect $ 446,000 $ 398,000 $ 800,000 $ 779,000 =========== ============ ============ ============ Fully diluted loss per share $ (0.10) $ (0.61) $ (0.38) $ (0.91) =========== ============ ============ ============
19 EX-27 3 FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from the consolidated financial statements of CML Group, Inc. for the six months ended February 1, 1997 and is qualified in its entirety by reference to such financial statements. 1 U.S. DOLLARS 6-MOS JUL-31-1997 AUG-01-1996 FEB-01-1997 1 38,434,000 0 11,362,000 2,888,000 43,491,000 114,220,000 94,502,000 41,298,000 193,520,000 77,878,000 41,593,000 0 0 5,279,000 61,597,000 193,520,000 182,339,000 182,339,000 81,578,000 81,578,000 0 622,000 756,000 (28,539,000) (9,703,000) (18,836,000) 0 0 0 (18,836,000) (0.38) (0.38)
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