-----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, F94lBKEI7CFfKDrV8jk/Lq6cH3HfzjJdP8PVO7OhnRQx/3LInwNYmlhlqbE4gmf3 08Qe5cFl/hQZNKl3cY1efA== 0000950135-98-005905.txt : 19981118 0000950135-98-005905.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950135-98-005905 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CML GROUP INC CENTRAL INDEX KEY: 0000729576 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 042451745 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09630 FILM NUMBER: 98749566 BUSINESS ADDRESS: STREET 1: 524 MAIN ST CITY: ACTON STATE: MA ZIP: 01720 BUSINESS PHONE: 9782644155 MAIL ADDRESS: STREET 1: 524 MAIN STREET CITY: ACTON STATE: MA ZIP: 01720 10-K 1 CML GROUP, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 1998 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 001-09630 CML GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2451745 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 524 MAIN STREET, ACTON, MASSACHUSETTS 01720 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 264-4155 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) of the Act: NONE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting Common Stock held by non-affiliates of the registrant was approximately $23,330,287 based on the closing price of the Common Stock as reported on the New York Stock Exchange on October 21, 1998. Number of shares of Common Stock outstanding as of October 21, 1998: 62,214,099 shares. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 DOCUMENTS INCORPORATED BY REFERENCE
PART OF REPORT INTO DOCUMENTS WHICH INCORPORATED --------- ------------------- Portions of Proxy Statement for the Annual Items 10, 11, 12 & 13 of Part III Meeting of Stockholders to be held in December 1998 to be filed with the Securities and Exchange Commission in November 1998 pursuant to Reg. 240.14a-6(b) under the Securities Exchange Act of 1934.
3 PART I ITEM 1. BUSINESS. CML Group, Inc. (the "Company" or "CML") was incorporated under the laws of the State of Delaware in 1969. Unless the context otherwise requires, the term "Company" as used herein includes CML and its subsidiaries. CML is a specialty marketing company whose principal operations are NordicTrack, Inc. ("Nordic Track") and Smith Hawken, Ltd. ("Smith & Hawken"). NordicTrack, which was acquired in June 1986, designs, sources, and sells physical fitness and exercise equipment and other health-related products under the trade names NordicTrack(R) and Nordic Advantage(TM). Smith & Hawken, which was acquired in February 1993 and conducts its business under the trade name Smith & Hawken(R), sells gardening tools, work wear, outdoor furniture, plants and accessories. On November 5, 1998, NordicTrack and Nordic Advantage Inc. ("Nordic Advantage") filed petitions with the United States Bankruptcy Court for the Western Division of the District of Massachusetts seeking protection under Chapter 11 of the United States Bankruptcy Code. A plan of reorganization which may include a partial or complete liquidation of NordicTrack's operations is being prepared and will be submitted to the Court. The bankruptcy petitions filed by NordicTrack and Nordic Advantage on November 5, 1998 constitute defaults under the Company's revolving credit agreement. On November 5, 1998, however, lenders under the Company's revolving credit facility and the holders of the 15% secured convertible redeemable subordinated notes due 2003 agreed to forbear from exercising their rights under the guaranties issued by the Company and its subsidiaries until the earlier of January 31, 1999 or an event of default under the forbearance agreement. The forbearance agreement increases the total borrowing capacity of the Company's subsidiaries under the revolving credit facility to $72.0 million, including $1.5 million of debtor in possession financing for NordicTrack. The Company decided to dispose of one of its subsidiaries in fiscal 1995 and two other subsidiaries in fiscal 1996. Britches of Georgetowne ("Britches"), which was sold in April 1996, operated a chain of retail stores that sold men's apparel under the trade names Britches of Georgetowne(R) and Britches Great Outdoors(TM). Substantially all of the assets of The Nature Company, which conducted its business under the trade name The Nature Company(TM), and Hear Music were sold in June 1996 and October 1996, respectively. The Company's major sales channels consist of Company-operated specialty retail stores and kiosks, and direct marketing, primarily through mail order catalogs and on the Internet. At July 31, 1998, the Company operated 131 retail stores and 28 mall kiosks and had proprietary mail order customer lists containing approximately 1.7 million names. NordicTrack also markets exercise equipment through its wholesale sales channel and has derived significant sales in the past from advertisements in print and on television and from catalog mailings. In the second quarter of fiscal 1998, however, NordicTrack decided to discontinue direct response advertising and catalog mailings, thereby eliminating these channels as sources. In October 1998, Nordic Advantage also announced the closing of substantially all of its seasonal kiosks. For the fiscal year ended July 31, 1998, approximately 62.0% of the Company's total revenues were derived from retail stores and mall kiosks compared with approximately 57.7% in fiscal 1997 and 68.2% in fiscal 1996. In fiscal 1998, direct response and mail order sales accounted for approximately 33.6% of total revenues compared with 42.3% in fiscal 1997 and 31.8% in fiscal 1996. Wholesale sales were 4.4% of total revenues in fiscal 1998. In fiscal 1998, NordicTrack's Ellipse(TM) machines, motorized treadmills and UltraLift(TM) weight machines provided 21.0%, 13.0% and 7.1% of total revenues, respectively. NordicTrack's cross-country skiers accounted for 17.1% of total revenues in fiscal 1997, and its AbWorks(TM) product provided an additional 16.1% of revenues. In fiscal 1996, approximately 24.8% of the Company's consolidated net sales were derived from NordicTrack's cross-country skiers, and 18.1% came from the sale of non-motorized treadmills. CML continues to operate in two industry segments: (i) NordicTrack and (ii) Smith & Hawken. Additional information on each of these industry segments is provided below and in Note 12 of Notes to Consolidated Financial Statements. 1 4 NORDICTRACK (IN BANKRUPTCY PROCEEDINGS) NordicTrack experienced operating losses in fiscal 1998 and 1997 and, as a result of the continued losses, on November 5, 1998, NordicTrack and Nordic Advantage filed petitions with the United States Bankruptcy Court for the Western Division of the District of Massachusetts seeking protection under Chapter 11 of the United States Bankruptcy Code. A plan of reorganization which may include a partial or complete liquidation of NordicTrack's and Nordic Advantage's assets is being prepared and will be submitted to the Court. In October 1998, NordicTrack also announced the termination of up to 800 employees at its Chaska, Minnesota headquarters and Glencoe, Minnesota facility, and the closing of substantially all of its seasonal kiosks. The Company undertook a reorganization of NordicTrack during the second quarter of fiscal 1998, at which time the decision was made to exit manufacturing and eliminate the catalog and direct response sales channels. NordicTrack designs, sources and sells high quality aerobic and anaerobic exercise equipment and related accessories which it markets to consumers primarily through its wholly-owned subsidiary, Nordic Advantage. Nordic Advantage operates specialty retail stores and kiosks located primarily in the United States and Canada. NordicTrack began the wholesale marketing of its exercise equipment in fiscal 1998, although the wholesale channel is not expected to become a major source of revenues to NordicTrack. NordicTrack's principal aerobic products consist of its new line of total-body exercise machines marketed under the Ellipse(TM) and eMotion(TM) trade names and sold at prices ranging from $400 to $900; several models of cross-country ski exercisers sold at prices ranging from $430 to $600; and several motorized treadmills marketed under the PowerTread(TM) trade name and sold at prices ranging from $900 to $1,600. NordicTrack's cross-country ski exercisers utilize a flywheel mechanism that replicates the non-jarring motion of cross-country skiing and provides a complete upper and lower body workout. Exercisers marketed under the Ellipse(TM) trade name use the Ellipta Glide(TM) design with a floating crank mechanism to provide a smooth, fluid elliptical motion. NordicTrack's principal anaerobic products are its UltraLift(TM) line of weight machines which sell at prices ranging from $600 to $1,000. UltraLift(TM) weight machines provide health club quality strength training at home. UltraLift(TM) weight machines utilize a four-bar linkage system that gives the user weight resistance without the inconvenience of weight stacks or weight plates. During fiscal 1998, approximately 67.8% of NordicTrack's net sales were derived from Nordic Advantage's retail operations, 25.8% came from its direct response and mail order operations and the remaining 6.4% were from wholesale sales. Retail stores and kiosks have allowed Nordic Advantage to reach that portion of the fitness market which does not traditionally purchase by direct response or mail order. At the end of fiscal 1998, Nordic Advantage operated 102 stores, down from 123 stores at July 31, 1997 and 126 stores at July 31, 1996. Two retail stores were opened during fiscal 1998 compared with three stores during fiscal 1997 and 12 stores during fiscal 1996. Nordic Advantage's stores vary in size from 1,077 to 4,500 square feet and average approximately 1,900 square feet. The stores generally are located in high traffic urban and suburban malls in affluent areas and in discount outlet malls. A portion of Nordic Advantage's retail sales have come from seasonal kiosks which generally have been open for only a portion of the year. In October 1998, however, Nordic Advantage announced the closing of substantially all of its seasonal kiosks. NordicTrack's international sales are not a significant percentage of revenues. NordicTrack's operations, including personnel, stores, purchasing, distribution, order fulfillment, accounting and management information systems, are separate and distinct from the Company's other industry segment. 2 5 SMITH & HAWKEN The Smith & Hawken segment currently comprises the Company's Smith & Hawken subsidiary, but included The Nature Company, Smith & Hawken and Hear Music prior to fiscal 1997. Substantially all of the assets of The Nature Company and Hear Music were sold in June 1996 and October 1996, respectively. Smith & Hawken is a leading marketer of gardening-related products. Its merchandise categories include furniture, plants, clothing, gardening tools and equipment, and garden-related accessories, including containers, housewares, gifts, and books. Smith & Hawken sells its products through its own Smith & Hawken stores and mail order catalogs. As of July 31, 1998, Smith & Hawken operated 29 retail stores ranging in size from 1,600 to 7,926 square feet and averaging approximately 4,600 square feet. Many of the stores have indoor and outdoor selling space. All of the stores are located in the United States and generally can be found on main streets or in high traffic urban and suburban malls located in affluent communities. Smith & Hawken's retail sales accounted for 49.9% of its fiscal 1998 net sales; the remaining 50.1% of Smith & Hawken's net sales in fiscal 1998 were primarily mail order sales. Approximately 19.0 million catalogs were mailed by Smith & Hawken during fiscal 1998. In fiscal 1999, Smith & Hawken plans to open between 7 and 12 stores and mail approximately 20.3 million catalogs, depending on financing. Prior to the sale of The Nature Company in June 1996, the companies included in the Smith & Hawken segment shared real estate services, order processing services, fulfillment and distribution services, and management information services and systems. When The Nature Company business was sold, Smith & Hawken contracted with the buyer to continue providing these services on a negotiated fee basis. In August 1998, Smith & Hawken moved the management information functions in-house but continues to purchase order processing, fulfillment and distribution services from the buyer of The Nature Company's business. Smith & Hawken's operations, including personnel, stores, purchasing, merchandising, distribution, order fulfillment, accounting and management information systems, are separate and distinct from the Company's other industry segment. TRADE NAMES The Company believes that the names under which it conducts its business are of significant value because they are established, well-known and respected. Shown below are the Company's principal trade names and trademarks and their estimated number of years in existence:
PRINCIPAL TRADE NAMES YEARS IN AND TRADEMARKS EXISTENCE --------------------- --------- NordicTrack(R).............................................. Over 21 Nordic Advantage(TM)........................................ Over 7 Smith & Hawken(R)........................................... Over 13
The Company has entered into licensing agreements with third parties for the use of patents in connection with the manufacture of certain products, including Ellipse(TM), eMotion(TM) and UltraLift(TM). DISTRIBUTION The manufacture of NordicTrack's products is outsourced in the United States and overseas. Inventory shipments are received at NordicTrack's Glencoe, Minnesota facility from which retail orders are fulfilled. Prior to fiscal 1999, NordicTrack also received products at and distributed them from its Sioux Falls, South Dakota distribution center. NordicTrack intends to sell its Glencoe, Minnesota property and contract with third-party storage and transportation companies to warehouse and distribute products. Certain NordicTrack products are sold by NordicTrack to its wholly-owned subsidiary, Nordic Advantage, for resale through its retail stores and kiosks. In October 1998, however, Nordic Advantage announced the closing of substantially all of its seasonal kiosks. NordicTrack also sells certain products on a wholesale basis to select third-party 3 6 retailers, although the wholesale channel is not expected to become a major source of revenues to NordicTrack. Prior to the sale of The Nature Company's business to The Discovery Channel Store ("DCS") in fiscal 1996, Smith & Hawken's products were shipped by suppliers to a Florence, Kentucky distribution center leased by both Smith & Hawken and The Nature Company. The Company's interest in the Florence, Kentucky distribution center was sold with the assets of The Nature Company in June 1996. When the Company's interest in the Kentucky distribution center terminated, Smith & Hawken contracted with DCS to continue providing Smith & Hawken with certain services on a fee-for-service basis. This service contract terminated on August 31, 1998 and was replaced with a new fee-for-service contract that was signed on October 22, 1998. Under the new contract, DCS provides Smith & Hawken with warehousing, distribution and call center services, including the receipt and processing of customer orders and customer service. The new agreement requires written notice 180 days in advance to terminate it and may not be terminated before August 31, 1999 for receiving and distribution services or before August 31, 2000 for call center services. Shipping charges associated with acquiring products and merchandise and distributing them to customers are significant factors in the operation of the Company's businesses. Increases in shipping costs, or disruptions in delivery and shipping services, could adversely affect the Company's operating results. SUPPLIERS The Company has various domestic and foreign suppliers, none of which accounts for more than 10% of its purchases, except for ICON Health & Fitness, Inc. ("ICON Health & Fitness"). ICON Health & Fitness, which manufactures motorized treadmills to specification for NordicTrack, accounted for approximately 13% of the Company's total purchases in fiscal 1998. Generally, the Company is not dependent upon any single source for any raw materials or items of merchandise. Several of NordicTrack's products, however, are produced by single but separate manufacturers, from which a disruption of supply could adversely affect the Company's operating results. In general, Smith & Hawken contracts with one or more printers and paper suppliers for its mail order catalogs. MANUFACTURING The Company's principal manufacturing activity was conducted at NordicTrack's Glencoe, Minnesota facility, which is approximately 284,000 square feet in size. During the second quarter of fiscal 1998, the Company decided to cease manufacturing operations at NordicTrack and sell the Glencoe, Minnesota facility. The facility is currently listed for sale. Cross-country ski exercisers and the Ellipse(TM) line of exercise machines were produced at the Glencoe facility prior to the cessation of manufacturing activities. COMPETITION The markets in which the Company is engaged are highly competitive. NordicTrack competes with several companies which design, manufacture and distribute physical fitness and exercise equipment, have greater financial resources and offer a greater selection of products. Its competitors include such companies as ICON Health & Fitness, Inc., Precise Exercise Equipment, Precor Incorporated, Fitness Quest Inc., Road Master Industries, Inc., Diversified Products Corp., Health Rider, Inc., Soloflex, Inc. and Consumer Direct, Inc. In recent years, NordicTrack's competitors have introduced several new and competitive products at competitive prices. Many of the competitors of Smith & Hawken are larger companies with greater financial resources, a greater selection of merchandise and nationwide distribution. Smith & Hawken's retail competitors include a large number and wide variety of specialty retail stores, discount stores, hardware stores, and department stores which carry similar product lines. Smith & Hawken's mail order catalogs compete with those of other companies selling garden-related merchandise, such as Gardener's Eden, David Kay, Calyx & Corolla and Gardener's Supply. Smith & Hawken competitors also include independent garden stores and plant nurseries in towns and cities throughout the United States. 4 7 Competition in the mail order business has intensified in recent years due to increases in the number of competitors, the number of catalogs mailed and the increasing popularity of e-commerce on the Internet. SEASONALITY The Company's businesses are seasonal, with a higher percentage of retail sales in the second fiscal quarter. The following table shows the approximate percentage of consolidated sales in each quarter of fiscal 1998:
PERCENTAGE FISCAL QUARTER ENDED OF SALES - -------------------- ---------- October.............................................. 21% January.............................................. 40% April................................................ 22% July................................................. 17% --- Total...................................... 100% ===
WORKING CAPITAL REQUIREMENTS The Company has a working capital deficiency of $112.9 million at July 31, 1998 compared with working capital of $9.7 million at July 31, 1997. Inventory purchases represent the most significant use of working capital. The Company believes that its working capital requirements follow the seasonal patterns of other companies operating within its industry segments. Inventory represented approximately 69% and 67% of the Company's working capital assets, excluding cash and cash equivalents, and refundable and deferred income taxes, at July 31, 1998 and 1997, respectively. Inventory purchases are based on future anticipated sales and typically reach their highest levels of the year in the fall in anticipation of the Christmas holiday and winter seasons and early spring in anticipation of the primary gardening season. The bankruptcy petitions filed by NordicTrack and Nordic Advantage on November 5, 1998 constitute defaults under the Company's revolving credit agreement. On November 5, 1998, however, the lenders under the Company's revolving credit facility and the holders of the 15% secured convertible redeemable subordinated notes due 2003 agreed to forbear from exercising their rights under the guaranties issued by the Company and its subsidiaries until the earlier of January 31, 1999 or an event of default under the forbearance agreement. The forbearance agreement increases the total borrowing capacity of the Company's subsidiaries under the revolving credit facility to $72.0 million, including $1.5 million of debtor in possession financing for NordicTrack. BACKLOG, CONTRACTS AND RESEARCH Backlog is not a significant factor in the Company's business. The Company does not have any material contracts which are subject to renegotiation. The Company's research and development activities primarily consist of the design and development of new products and the improvement of existing products at NordicTrack and Smith & Hawken. ENVIRONMENTAL MATTERS On June 3, 1991, the Company received from the United States Environmental Protection Agency ("EPA") a Special Notice Letter containing a formal demand on the Company as a Potentially Responsible Party ("PRP") for reimbursement of the costs incurred and expected to be incurred in response to environmental problems at a so-called "Superfund" site in Conway, New Hampshire. The EPA originally estimated the costs of remedial action and future maintenance and monitoring programs at the site at about 5 8 $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 it originally estimated. The EPA 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. In May 1998, settlement discussions with the EPA resumed regarding responsibility for the environmental problems and the costs of cleanup. An agreement in principle has been reached pursuant to which the Company will be required to pay $600,000 to the EPA in return for a release from liability. The terms of the settlement document, including the release, are under negotiation. The Company's primary insurer has agreed to pay $575,000 of the settlement and the Company will pay $25,000. In June 1992, the EPA notified the Company that 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 impact on the Company's business, financial condition and results of operations is not presently determinable. EMPLOYEES During fiscal 1998, NordicTrack and Smith & Hawken employed approximately 2,400 people on average, including full-time, part-time and seasonal employees. On January 28, 1998, NordicTrack announced the immediate termination of 51 full-time employees and 65 seasonal telemarketing representatives located at its Chaska, Minnesota headquarters and Glencoe, Minnesota manufacturing and distribution facility. At that time, NordicTrack announced plans to phase out an additional 217 positions in May 1998 and an additional 70 positions in September 1998 at the Glencoe, Minnesota facility. NordicTrack also announced an operational restructuring on October 14, 1998, including the reduction of its Chaska, Minnesota and Glencoe, Minnesota work force by up to 300 employees, or approximately 25 percent, from approximately 1,200 full-time equivalent employees. On October 22, 1998, the Company announced further actions to restructure NordicTrack and additional work force reductions of up to 500 employees. The Company employs a large number of part-time employees from time to time because of the seasonality of the Company's sales. The Company considers its employee relations to be satisfactory. On November 2, 1998, NordicTrack, Inc., the NordicTrack Severance Pay Plan and CML Group, Inc. were named as defendants in a Class Action Complaint in United States District Court for the District of Minnesota. The named plaintiffs are five former NordicTrack employees. See Note 10 of Notes to Consolidated Financial Statements for additional information. 6 9 FOREIGN AND DOMESTIC OPERATIONS To date, international sales, licensing revenues and export sales have accounted for less than five percent of the Company's total annual sales. The Company's NordicTrack subsidiary operates a retail store and several kiosks in the United Kingdom. Intercompany sales between the Company's operating units are not significant. ITEM 2. PROPERTIES. Most of the Company's facilities, including its retail stores, are leased from third parties. However, its principal NordicTrack administrative and distribution facilities are owned by NordicTrack. The Company also owns its corporate offices in Acton, Massachusetts. Shown below is a summary of the square footage of Smith & Hawken's and NordicTrack's principal facilities at July 31, 1998, by primary function:
SQUARE FEET ----------------------------------------------------------- SMITH & HAWKEN NORDICTRACK --------------------------- ---------------------------- OWNED LEASED TOTAL OWNED LEASED TOTAL ----- ------- ------- ------ ------- ------- Distribution.............. -- 8,802 8,802 18,000 7,500 25,500 Retail Selling............ 1,805 132,176 133,981 -- 189,443 189,443 Office & Administration... -- 26,000 26,000 70,000 28,900 98,900 ----- ------- ------- ------ ------- ------- Total........... 1,805 166,978 168,783 88,000 225,843 313,843 ===== ======= ======= ====== ======= =======
The information excludes the Company's 8,900 square foot corporate offices which are listed for sale, and NordicTrack's Glencoe, Minnesota, St. Peter, Minnesota and Sioux Falls, South Dakota facilities. The Glencoe and St. Peter facilities are for sale and are approximately 284,000 and 15,000 square feet, respectively. The Sioux Falls facility, which is leased and available for subleasing, is approximately 130,000 square feet in size. Smith & Hawken has been notified by the landlord of its corporate offices of the landlord's intent to terminate the lease in the Spring of 2000. The current facility is approximately 26,000 square feet and is included in the data shown above. Smith & Hawken is seeking to negotiate a new lease for a larger space to accommodate future growth. Most of the retail store leases have initial terms ranging from five to ten years, with options to renew in certain cases. Retail store leases generally provide for minimum or base rents, additional expenses for common area maintenance charges and additional rent calculated as a percentage of sales in excess of specified levels. Rental expense under all leases for fiscal 1998 was approximately $21.6 million. For additional information regarding the Company's lease obligations, see Note 10 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. NORDICTRACK AND NORDIC ADVANTAGE BANKRUPTCY FILING On November 5, 1998, NordicTrack and Nordic Advantage filed petitions with the United States Bankruptcy Court for the Western Division of the District of Massachusetts seeking protection under Chapter 11 of the United States Bankruptcy Code. A plan of reorganization which may include a partial or complete liquidation of NordicTrack's operations is being prepared and will be submitted to the Court. LITIGATION NordicTrack is named as 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 and subsequently transferred to the United States District Court for the District of Minnesota on January 30, 1997. The named plaintiffs, Elissa Crespi and John Lucien Ware, Jr., allege in the Consolidated 7 10 Complaint that NordicTrack made false and misleading claims in its advertising concerning the weight loss of persons using its ski exercisers by misrepresenting and failing to disclose material findings of weight loss studies conducted by or on behalf of NordicTrack. The named 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 State of New York General Business Law. The named plaintiffs 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 September 2, 1997, the named plaintiffs filed a motion to remand the case to state court in New York, which NordicTrack opposed. On January 5, 1998, the parties reached an agreement-in-principle concerning the general terms and conditions of a class action settlement of the case which was memorialized in a Memorandum of Understanding filed with the Minnesota Court. On January 8, 1998, the United States District Court for the District of Minnesota remanded the case to the Supreme Court for the State of New York for consideration of whether the proposed settlement should be approved and a final judgment and order entered thereon. Since the filing of the Memorandum of Understanding, the parties have executed the comprehensive terms of a Stipulation of Settlement. Management believes the settlement will not have a material adverse impact on the Company's business, financial condition and results of operations. In addition, there can be no assurance that the New York Court will ultimately approve the class settlement. If the New York Court does approve the settlement, there can be no assurance that it will not be reversed or modified on appeal. NordicTrack is the defendant in a lawsuit in the United States District Court for the District of Minnesota which commenced on August 12, 1996. In this action, the plaintiff, Precise Exercise Equipment ("Precise"), alleges that NordicTrack misappropriated trade secrets regarding Precise's abdominal exercise product and further breached a non-competition agreement. The parties have entered into settlement discussions and are in the process of negotiating and drafting an acceptable written settlement agreement. Management believes the contemplated settlement will not have a material adverse impact on the Company's business, financial condition and results of operations. There can be no assurance, however, that the parties will be successful in negotiating a mutually acceptable written agreement or that the proposed settlement will ultimately receive court approval. In a complaint dated September 30, 1997, filed by Precor Incorporated ("Precor") in the United States District Court for the Western District of Washington in Seattle, Precor alleges that the manufacture, offering for sale and sale by NordicTrack of its exercisers marketed under the Ellipse(TM) trademark infringe a United States patent which Precor has licensed from the inventor, Larry Miller (the "Miller Patent"). The technology used in NordicTrack's Ellipse(TM) exercisers is licensed by NordicTrack from a third party, and the Company believes that NordicTrack's products do not infringe the Miller Patent. In February 1998, Precor amended the complaint to add infringement claims against a major wholesale customer of NordicTrack's and the licenser of NordicTrack's technology. In March 1998, Precor added as parties the two manufacturers of the Ellipse(TM) exercisers, one in Taiwan and one in Tennessee. The complaint is scheduled for trial in 1999. Precor has returned the Miller Patent to the United States Patent and Trademark Office for further examination. NordicTrack filed a separate reexamination request in April 1998 and requested a stay of the litigation pending completion of the reexaminations. The Court has denied the stay petition. Meanwhile, discovery has recently commenced. While NordicTrack believes it has meritorious defenses to the complaint and intends to vigorously defend against the allegations, this lawsuit is in an early stage, and the Company is unable to determine the likelihood and possible impact on the Company's business, financial condition and results of operations of an unfavorable outcome. On May 8, 1998, NordicTrack was named as a defendant in a complaint filed by Fitness Quest Inc. ("Fitness Quest") in the United States District Court for the Eastern Division of the Northern District of Ohio. Fitness Quest alleges the marketing by NordicTrack of a line of elliptical exercise products under the Ellipse(TM) trademark infringes the Eclipse Trainer(R) trademark used by Fitness Quest on its elliptical motion exercise machines and also alleges various violations of state and federal unfair competition laws. This complaint was settled on September 28, 1998. Management believes the contemplated settlement will not have a material adverse impact on the Company's business, financial condition and results of operations. 8 11 On May 21, 1998, NordicTrack was named as a defendant in a complaint filed by Michael L. Richey ("Richey"), an individual inventor and patentee of United States Patent No. 4,949,958 entitled "Weight Lifting Machine", in the United States District Court for the Southern District of Indiana at Indianapolis. Richey alleges that the NordicTrack UltraLift and Isolift exercise machines infringe his patent. He seeks an injunction under the patent to block sale by NordicTrack of those machines. No request for a preliminary injunction has yet been filed. Discovery has recently begun. While NordicTrack believes it has meritorious defenses to the complaint and intends to vigorously defend against the allegations, this lawsuit is in its earliest stages, and the Company is unable to determine the likelihood and possible impact on the Company's business, financial condition and results of operations of an unfavorable outcome. On November 2, 1998, NordicTrack, Inc., the NordicTrack Severance Pay Plan and CML Group, Inc. were named as defendants in a Class Action Complaint (the "Class Action Complaint") filed in United States District Court for the District of Minnesota by five former NordicTrack employees on behalf of themselves and other persons similarly situated. The named plaintiffs, Jay Miller, Carol Hamlin, Denisa Pulk, Colleen Entinger and Bernadine Venske allege in the Class Action Complaint that NordicTrack and CML Group violated the Worker Adjustment and Retraining Notification Act (the "WARN Act") by failing to provide sixty days written notice to employees advising them that NordicTrack facilities in Chaska, Minnesota and Glencoe, Minnesota were going to be shut down. The plaintiffs further allege that NordicTrack and CML Group violated the Employee Retirement Income Security Act ("ERISA") by breaching their fiduciary duty to pay terminated NordicTrack employees benefits pursuant to the NordicTrack Severance Pay Plan. The plaintiffs are seeking back pay and damages pursuant to the WARN Act and severance benefits under the NordicTrack Severance Pay Plan. While NordicTrack and CML Group believe they have meritorious defenses to the Class Action Complaint and intend to vigorously defend against the allegations, this lawsuit is in its earliest stages and the Company is unable to determine the likelihood and possible impact on the Company's financial condition or results of operations of an unfavorable outcome. The Company is involved in various other legal proceedings which have arisen in the ordinary course of business. Management believes the outcome of such other legal proceedings will not have a material adverse impact on the Company's consolidated financial condition or results of operations. See Note 10 of Notes to Consolidated Financial Statements for information on environmental matters. TAX MATTERS The Internal Revenue Service ("IRS") has been engaged in an examination of the Company's tax returns for the fiscal years 1987 through 1991. The IRS issued a "30-day letter" to the Company proposing certain adjustments which, if sustained, would result in a tax deficiency for the years under examination. The Company has filed an appeal with the IRS protesting the proposed adjustments. The adjustments proposed by the IRS primarily relate to: (i) the disallowance of deductions taken by the Company with respect to incentive compensation payments of $43.0 million made to the former owners of NordicTrack (acquired in June 1986) pursuant to their employment contracts; and (ii) incentive compensation payments made to the former owners of Britches of Georgetowne (acquired in August 1983 and sold in April 1996) pursuant to the terms of an earnout agreement and the valuation of certain assets acquired in connection with the acquisition of Britches of Georgetowne in the amount of $9.2 million. The net federal tax due relating to the proposed adjustments approximates $15.9 million. Interest on the proposed deficiencies approximates $22.2 million as of July 31, 1998. The incentive compensation payments to the former owners of NordicTrack were attributable to substantial increases in sales and profits at NordicTrack during the years under examination. The Company believes that the tax deductions taken were valid and in accordance with the Internal Revenue Code and intends to vigorously oppose the proposed adjustments. However, at this stage no assurance can be given of a favorable outcome on these matters. If the IRS proposed adjustments are sustained, any back taxes owed and associated interest would have a material adverse effect on the Company's consolidated operating results for the period in which such issues are finally resolved and would also have a material adverse effect on the Company's consolidated financial condition. 9 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 31, 1998. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- John A. C. Pound..................... 43 Chairman of the Board of Directors and Chief Executive Officer Michael G. Koppel.................... 42 Chief Operating Officer Glenn E. Davis....................... 44 Executive Vice President of Finance and Administration, Chief Financial Officer and Treasurer Paul J. Bailey....................... 41 Vice President and Controller
Mr. Pound became a director of the Company in December 1997. He was named Chairman of the Board of Directors in January 1998, Acting Chief Executive Officer in February 1998 and Chief Executive Officer of the Company in April 1998. Prior to joining the Company, he was a consultant on business strategy and corporate governance to investment organizations and corporations from January 1988 until January 1998, a lecturer at Harvard Law School from September 1994 until June 1997, and a member of the faculty at the Kennedy School of Government at Harvard University from September 1987 until June 1994. Mr. Koppel became Chief Operating Officer of the Company and Chief Financial Officer of NordicTrack in September 1998. Prior to joining the Company and NordicTrack, he was Vice President and Chief Financial Officer of Lids Corporation from March 1997 until August 1998, Vice President and Controller of the Filenes division of May Department Stores from March 1993 until February 1997, and Vice President and Controller of the G. Fox & Co. division of May Department Stores from January 1988 until February 1993. Mr. Davis was named Executive Vice President of Finance and Administration in February 1998. He has been a Vice President of the Company since November 1989 and served as Controller of the Company from May 1984 through June 1996. He was named Chief Financial Officer in March 1996 and Treasurer in June 1996. Mr. Bailey has been a Vice President of the Company since August 1998. He joined the Company in January 1985 as the Director of Financial Operations. In June 1996, he became Controller of the Company. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded on the New York Stock Exchange under the symbol "CML." The following table sets forth for the fiscal periods indicated the high and low sales prices per share of the common stock as reported on the New York Stock Exchange.
FISCAL 1998 FISCAL 1997 -------------- -------------- QUARTER HIGH LOW HIGH LOW - ------- ----- ----- ----- ----- First............................................... $5.13 $2.81 $5.75 $3.13 Second.............................................. 4.13 1.50 4.88 2.88 Third............................................... 2.38 1.06 3.25 1.88 Fourth.............................................. 3.75 0.63 3.69 1.75
The Company did not declare any cash dividends on its common stock during fiscal 1998 and declared one cash dividend aggregating $0.01 per share on its common stock during fiscal 1997. The Company is 10 13 prohibited from paying cash dividends under the terms of its financing agreements. Although in the past the Company has occasionally paid dividends to its shareholders on a quarterly basis, the Company currently has a retained earnings deficit and has no present intention to pay dividends to its shareholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 6 of Notes to Consolidated Financial Statements. The number of shareholders of record of the Company's common stock as of October 21, 1998 was 6,162. On July 27, 1998, the Company sold a secured convertible redeemable subordinated note in the principal amount of $20 million (the "Note") to the State of Wisconsin Investment Board (the "Purchaser"). The Note is due July 27, 2003 and is convertible at the option of the Purchaser, at any time prior to 5:00 P.M. on July 27, 2003, at an initial rate of one share for each $4.00 of principal amount surrendered, subject to adjustment ("Conversion Price"). The Note is also convertible upon election by the Company: (i) at a conversion rate based upon trading prices of the common stock prior to conversion, if the Company receives gross proceeds of $30 million or more from the sale of its equity securities and (ii) at the Conversion Price, if trading prices of common stock exceed the Conversion Price for a specified period. The Note bears interest at the rate of 15% per annum, is prepayable at any time by the Company and may be redeemed in full at the election of the Purchaser after September 1, 2000. The Company's obligations under the Note are secured by a junior lien in substantially all of the assets of the Company and its subsidiaries. The Company also granted the Purchaser a right of first refusal in connection with future issuances of equity by the Company. For this issuance, the Company has relied upon an exemption from registration under Section 4(2) of the Securities Act of 1933 as an issuance not involving a public offering. No principal underwriter was involved in the above issuance. See Note 7 of Notes to Consolidated Financial Statements. Pursuant to a July 27, 1998 Stock Purchase Agreement by and among the Company, B III Capital Partners, L.P. ("B III Capital") and Mellon Bank, N.A. ("Mellon"), solely in its capacity as Trustee for General Motors Employees Domestic Group Pension Trust as directed by DDJ Capital Management, LLC, Mellon and B III Capital purchased 1,905,600 and 9,909,118 shares of common stock, respectively, for a purchase price of $.10 per share. For this issuance, the Company has relied upon an exemption from registration under Section 4(2) of the Securities Act of 1933 as an issuance not involving a public offering. No principal underwriter was involved in the above issuance. ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED JULY 31, --------------------------------------------------------- 1998 1997 1996 1995 1994 --------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.......................... $ 274,360 $341,315 $544,905 $712,613 $655,791 Income (loss) from continuing operations before extraordinary gain............................. (127,378) (40,214) (84,809) 15,906 50,563 Income (loss) per share from continuing operations before extraordinary gain............... (2.54) (0.81) (1.72) 0.32 0.98 Cash dividends declared per share............................ -- 0.01 0.06 0.09 0.08 Working capital (deficiency)....... (112,915) 9,695 56,163 116,533 103,742 Total assets....................... 94,332 146,336 213,351 340,081 384,663 Noncurrent liabilities............. 10,427 51,489 48,794 69,021 84,356 Stockholders' equity (deficiency)..................... (66,658) 45,728 85,797 188,552 219,237
The Company sold its Hear Music subsidiary in fiscal 1997, its Britches of Georgetowne and The Nature Company subsidiaries in fiscal 1996, and undertook the reorganization of NordicTrack in fiscal 1998. See Notes 3, 4 and 5 of Notes to Consolidated Financial Statements. 11 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION The Company operates two subsidiaries, NordicTrack and Smith & Hawken, each of which is treated as a separate segment in the accompanying consolidated financial statements. On November 5, 1998, NordicTrack and Nordic Advantage filed petitions with the United States Bankruptcy Court for the Western Division of the District of Massachusetts seeking protection under Chapter 11 of the United States Bankruptcy Code. A plan of reorganization which may include a partial or complete liquidation of NordicTrack's and Nordic Advantage's assets is being prepared and will be submitted to the Court. NordicTrack's assets, liabilities and results of operations are included in the accompanying Consolidated Financial Statements. Prior to the Company's decision to divest The Nature Company and Hear Music in the third quarter of fiscal 1996, both subsidiaries were included in the results of the Smith & Hawken segment. In connection with its decision to sell The Nature Company and Hear Music, the Company recorded a charge against earnings which is included in the fiscal 1996 results for the Smith & Hawken segment in the accompanying consolidated financial statements. In fiscal 1995, the Company decided to sell its Britches of Georgetowne ("Britches") subsidiary, which is accounted for as a discontinued operation in the accompanying consolidated financial statements. NordicTrack designs, sources and markets physical fitness and exercise equipment and other health-related products through specialty stores and kiosks operated by its wholly-owned subsidiary, Nordic Advantage; through direct response advertising on the Internet; and to wholesale customers. Smith & Hawken markets fine gardening tools, clothing, furniture, plants and accessories through its catalogs and specialty retail stores. Industry segment information is presented in Note 12 of Notes to Consolidated Financial Statements. This Annual Report contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. There are a number of factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Factors that May Affect Future Results." See also Note 10 of the Notes to Consolidated Financial Statements for information on commitments and contingencies. RESULTS OF CONTINUING OPERATIONS -- FISCAL 1998 AND 1997 CML Consolidated The Company had net sales of $274.4 million in fiscal 1998, a decrease of $66.9 million, or 19.6%, from fiscal 1997. During fiscal 1998, the Company had a net loss from continuing operations of $127.4 million compared with a net loss from continuing operations of $40.2 million in fiscal 1997. During fiscal 1998, retail sales decreased $26.9 million to $170.2 million, or 13.7% below fiscal 1997's retail sales. The decrease in retail sales was primarily due to lower retail sales at Nordic Advantage, offset in part by an increase in retail sales at Smith & Hawken. During fiscal 1998, Smith & Hawken and Nordic Advantage opened four stores and two stores, respectively. Direct response and mail order sales decreased $52.0 million in fiscal 1998, or 36.1% below the prior year, to $92.2 million. The decrease in direct response and mail order sales was primarily attributable to lower direct response and mail order sales at NordicTrack offset in part by an increase in mail order sales at Smith & Hawken. During the third quarter of fiscal 1998, NordicTrack exited the direct response and mail order businesses. See Note 3 of Notes to Consolidated Financial Statements. In November 1997, NordicTrack began distributing its products through other retailers and during fiscal 1998 recorded $12.0 million of sales to wholesale customers. The Company does not expect wholesale sales to become a significant source of revenues for NordicTrack. 12 15 The Company expects future sales growth, if any, will result primarily from the addition of new Smith & Hawken stores. The Company's international operations were not significant during fiscal 1998 and are not expected to be significant for the next several years. Cost of goods sold increased as a percentage of sales from 48.1% in fiscal 1997 to 59.0% in fiscal 1998. The increase in cost of goods sold as a percentage of sales was primarily attributable to lower margins on the Company's NordicTrack products. Selling, general and administrative expenses decreased as a percentage of sales from 69.1% in fiscal 1997 to 67.7% in fiscal 1998 primarily as a result of a decrease in selling, general and administrative expenses as a percentage of sales at Smith & Hawken offset in part by an increase in selling, general and administrative expenses as a percentage of sales at NordicTrack. During the second quarter of fiscal 1998, NordicTrack announced that it would focus on its retail sales channel and that it planned to exit the direct response and catalog businesses. NordicTrack also announced that it would cease manufacturing and distribution activities at its Glencoe, Minnesota facility. As a result of those decisions, NordicTrack recorded asset impairment and restructuring charges of $2.9 million and $8.9 million, respectively, during fiscal 1998 to reposition its operations. Through July 31, 1998, $6.4 million was charged against the reserve including $1.0 million for items which required the expenditure of cash. The restructuring reserve balance at July 31, 1998 was $2.1 million. Through July 31, 1998, NordicTrack had eliminated 65 telemarketing positions, 98 manufacturing positions and 51 other full-time positions in connection with the strategic repositioning of its operations. In October 1998, NordicTrack announced the elimination of up to 800 additional full-time equivalent positions throughout the company. Net interest expense was $11.1 million, or 4.0% of net sales, in fiscal 1998 compared with $1.8 million, or 0.5% of net sales, in fiscal 1997. Net interest expense increased primarily due to higher borrowings under the Company's revolving credit agreement, higher interest rates on those borrowings and transactions costs relating to the renegotiation during the year of the Company's revolving credit agreement. During fiscal 1998, the Company recorded an income tax provision of $31.4 million as a result of valuation reserves recorded against net deferred tax assets. During fiscal 1997, the Company recorded an income tax benefit of $20.7 million or 34.0% of the pre-tax loss from continuing operations. See Notes 8 and 10 of the Notes to Consolidated Financial Statements for information related to income taxes and tax matters. The increase in the loss from continuing operations in fiscal 1998 was primarily due to higher operating losses at NordicTrack and higher interest expense, partially offset by improved operating results at Smith & Hawken. NordicTrack (In Bankruptcy Proceedings) On November 5, 1998, NordicTrack and Nordic Advantage filed petitions with the United States Bankruptcy Court for the Western Division of the District of Massachusetts seeking protection under Chapter 11 of the United States Bankruptcy Code. A plan of reorganization which may include a partial or complete liquidation of NordicTrack's and Nordic Advantage's assets is being prepared and will be submitted to the Court. Overall net sales decreased 30.4% from $267.7 million in fiscal 1997 to $186.4 million in fiscal 1998. Retail sales decreased $33.2 million, or 20.8%, to $126.3 million in fiscal 1998 compared with $159.5 million in fiscal 1997. During fiscal 1998, NordicTrack opened two retail stores and closed 23 retail stores. Comparable store sales decreased 19.0% during fiscal 1998. Direct response and mail order sales decreased $60.1 million, or 55.5%, to $48.1 million in fiscal 1998 from $108.2 million in fiscal 1997. The decrease in retail, direct response and mail order sales was primarily due to lower sales of cross-country skiers, non-motorized treadmills, riders and abdominal and thigh exercisers, partially offset by higher sales of motorized treadmills and sales of the new line of elliptical exercise products. During the third quarter of fiscal 1998, NordicTrack exited the direct response and mail order businesses. NordicTrack accounted for approximately 67.9% and 78.4% of the Company's consolidated net 13 16 sales in fiscal 1998 and fiscal 1997, respectively. NordicTrack accounted for over 100.0% of the consolidated pre-tax operating loss before interest, corporate and other expenses in each fiscal year. NordicTrack's gross margin decreased to 35.8% in fiscal 1998 from 51.7% in fiscal 1997, primarily due to: (i) reduced margins on cross-country skiers, non-motorized treadmills and abdominal products which experienced lower sales and higher discounting; (ii) the change in sales mix toward motorized treadmills which have lower margins; (iii) sales promotions and after-sale product costs of the elliptical exercise machines; (iv) the liquidation of inventories of discontinued product lines; (v) inefficiencies which arose from capacity underutilization at the Glencoe, Minnesota manufacturing plant; (vi) the write-down of inventories resulting from the decision to exit direct response and catalog operations; and (vii) discounts to wholesale customers. The effects of these changes were partially offset by lower cost of goods sold as a percentage of net sales from sales of NordicTrack's UltraLift(TM) line of strength training machines. Selling, general and administrative expenses increased as a percentage of sales from 73.6% in fiscal 1997 to 75.4% in fiscal 1998 primarily due to the decrease in sales, including comparable store sales, over which fixed costs are spread, and higher customer shipping costs, partially offset by a decrease in advertising expense primarily due to the elimination of the direct response and mail order operations. NordicTrack had an operating loss of $85.6 million in fiscal 1998 compared with an operating loss of $58.6 million in fiscal 1997. The increase in the operating loss was primarily attributable to lower sales, lower gross margins and higher asset impairment and restructuring charges, offset in part by lower advertising and other selling, general and administrative expenses. Smith & Hawken Smith & Hawken experienced a 19.6% increase in net sales in fiscal 1998, with net sales increasing from $73.6 million in fiscal 1997 to $88.0 million in fiscal 1998. Retail sales at Smith & Hawken increased $6.3 million, or 16.8%, from $37.6 million in fiscal 1997 to $43.9 million in fiscal 1998 primarily due to the opening of four new retail stores and an 8.3% increase in comparable store sales during fiscal 1998. Mail order sales of the Smith & Hawken segment increased $8.1 million, or 22.5%, to $44.1 million in fiscal 1998 from $36.0 million in fiscal 1997. The increase was primarily due to an increase in the number of catalog pages circulated and an increase in average order size. Smith & Hawken's gross margin decreased to 52.1% in fiscal 1998 from 52.7% in fiscal 1997. The decrease in gross margin was primarily due to higher markdowns taken to clear holiday catalog merchandise and to counteract lower than expected retail sales due to poor weather in February and March. Selling, general and administrative expenses decreased as a percentage of sales from 50.0% in fiscal 1997 to 48.8% in fiscal 1998. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to improved cost controls within the retail sales channel and the leveraging of fixed costs over higher sales. During fiscal 1998, Smith & Hawken's operating income increased by $0.8 million, or 40.0%, from $2.0 million in fiscal 1997 to $2.8 million in fiscal 1998. Smith & Hawken expects to spend approximately $8.0 million, net of landlord allowances, in fiscal 1999 primarily on new stores, store remodels and computer hardware and software, depending on financing. RESULTS OF CONTINUING OPERATIONS -- FISCAL 1997 AND 1996 CML Consolidated The Company had net sales of $341.3 million in fiscal 1997, a decrease of $203.6 million, or 37.4%, from fiscal 1996. During fiscal 1997, the Company had a net loss from continuing operations of $40.2 million compared with a net loss from continuing operations of $84.8 million in fiscal 1996. During fiscal 1997, retail sales decreased $174.7 million to $197.1 million, or 47.0% below fiscal 1996's retail sales. The decrease was primarily due to the decision during the third quarter of fiscal 1996 to divest The Nature Company and Hear Music, and lower sales at Nordic Advantage, offset in part by an increase in retail sales at Smith & Hawken. The decrease in Nordic Advantage's retail sales was primarily due to lower sales of 14 17 cross-country skiers, non-motorized treadmills and riders. During fiscal 1997, Smith & Hawken and Nordic Advantage opened one store and three stores, respectively. Direct response and mail order sales decreased $28.9 million in fiscal 1997, or 16.7% below the prior year, to $144.2 million. The decrease in direct response and mail order sales was primarily attributable to lower direct response sales at NordicTrack, resulting from lower sales of cross-country skiers, non-motorized treadmills and riders, offset in part by an increase in mail order sales at Smith & Hawken. The Company's international operations were not significant during fiscal 1997 and fiscal 1996. Cost of goods sold as a percentage of sales increased from 47.1% in fiscal 1996 to 48.1% in fiscal 1997. The increase in cost of goods sold as a percentage of sales was primarily attributable to increased sales promotions by NordicTrack in response to lower demand for cross-country skiers, non-motorized treadmills and riders and a change in the mix of product sales toward lower-margin products. Selling, general and administrative expenses decreased as a percentage of sales from 70.8% in fiscal 1996 to 69.3% in fiscal 1997, primarily due to improved cost controls at NordicTrack and Smith & Hawken. The cost control improvements were accomplished despite higher fixed costs as a percentage of sales at Nordic Advantage stores that experienced a decrease in comparable store sales. The decrease in the loss from continuing operations in fiscal 1997 was due, in part, to improved operating results at Smith & Hawken, reduced operating losses at NordicTrack, and the elimination of losses resulting from the operation and sale of The Nature Company and Hear Music. In June 1996, the Company sold substantially all of the assets of The Nature Company for $39.9 million plus the assumption of certain liabilities. In October 1996, the Company completed the sale of substantially all of Hear Music's assets for $371,000 in cash plus the assumption of certain liabilities. Net interest expense was $1.8 million, or 0.5% of net sales, in fiscal 1997 compared with $3.1 million, or 0.6% of net sales, in fiscal 1996. Net interest expense decreased primarily due to lower bank borrowings and interest earned from the investment of excess cash balances in money market mutual funds. The Company's income tax benefit as a percentage of the pre-tax loss from continuing operations was 34.0% in fiscal 1997 compared with 35.4% in 1996. NordicTrack Overall net sales decreased 27.3% from $368.1 million in fiscal 1996 to $267.7 million in fiscal 1997. Retail sales decreased $72.9 million, or 31.4%, to $159.5 million in fiscal 1997 compared with $232.4 million in fiscal 1996. The decrease in retail sales was primarily due to the reduction in the number of kiosks during fiscal 1997, the closing of six retail stores and a 24.9% decrease in comparable store sales. Direct response and mail order sales decreased $27.5 million, or 20.3%, to $108.2 million in fiscal 1997 from $135.7 million in fiscal 1996. The decrease in retail, direct response and mail order sales was primarily due to lower sales of cross-country skiers, non-motorized treadmills and riders. In fiscal 1996, approximately 67.6% of the Company's consolidated net sales and 60.4% of the Company's consolidated pre-tax operating loss before interest, corporate and other expenses were attributable to NordicTrack. NordicTrack's gross margin decreased to 51.7% in fiscal 1997 from 55.4% in fiscal 1996, primarily due to increased sales promotions on cross-country skiers, non-motorized treadmills and riders in response to lower demand and a more competitive consumer environment, and a change in the sales mix toward lower-margin products with royalty arrangements. Selling, general and administrative expenses decreased as a percentage of sales from 74.9% in fiscal 1996 to 73.6% in fiscal 1997, primarily due to improved cost controls that were offset, in part, by higher fixed costs as a percentage of sales at retail store locations experiencing a decrease in comparable store sales. NordicTrack had an operating loss of $58.6 million in fiscal 1997 compared with an operating loss of $72.6 million in fiscal 1996. The decrease in the operating loss, which was accomplished in a declining sales environment, was primarily due to a reduction in selling, general and administrative expenses. 15 18 Smith & Hawken The Smith & Hawken segment experienced a 58.4% decrease in net sales in fiscal 1997, with net sales declining from $176.8 million in fiscal 1996 to $73.6 million in fiscal 1997. The decrease was due to the divestitures of The Nature Company and Hear Music. Smith & Hawken's net sales increased $9.5 million, or 14.9%, to $73.6 million from $64.0 million in fiscal 1996. Retail sales of the Smith & Hawken segment decreased $101.8 million, or 73.1%, from $139.4 million in fiscal 1996 to $37.6 million in fiscal 1997 due to the sale of The Nature Company and Hear Music. Smith & Hawken's retail sales increased $6.2 million, or 19.7%, in fiscal 1997 to $37.6 million. Comparable store sales at Smith & Hawken increased 3.4% in fiscal 1997. Mail order sales of the Smith & Hawken segment decreased $1.4 million, or 3.6%, to $36.0 million in fiscal 1997 from $37.4 million in fiscal 1996. The decrease was due to the divestiture of The Nature Company. Smith & Hawken experienced a 10.3% increase in mail order sales in fiscal 1997 compared with fiscal 1996. The Smith & Hawken segment's gross margin increased to 52.7% in fiscal 1997 from 47.4% in fiscal 1996 and selling, general and administrative expenses decreased as a percentage of net sales from 56.8% in fiscal 1996 to 50.0% in fiscal 1997. The increase in gross margin and decrease in selling, general and administrative expenses as a percentage of net sales were primarily due to the divestitures of The Nature Company and Hear Music businesses. Operating results of the Smith & Hawken segment improved from a loss of $47.7 million in fiscal 1996 to operating income of $2.0 million in fiscal 1997 primarily due to the divestitures of The Nature Company and Hear Music. The Company recorded a pre-tax loss of $30.8 million during the third quarter of fiscal 1996 as a result of the decision to sell The Nature Company and Hear Music. LIQUIDITY AND CAPITAL RESOURCES Indebtedness and High Degree of Leverage The Company is highly leveraged. As of July 31, 1998, the Company had $32.0 million of advances and $3.5 million of letters of credit outstanding under its new $65.0 million revolving credit facility managed by DDJ Capital Management, LLC and BankBoston, N.A., maturing on August 1, 1999. In addition, the Company had outstanding $20.0 million of 15.0% secured convertible redeemable subordinated notes due 2003 that were issued to the State of Wisconsin Investment Board (the "Notes") and $41.6 million of 5.5% convertible subordinated debentures due 2003 (the "Convertible Subordinated Debentures"). The Company's high degree of leverage may have important consequences for the Company. These include the following: (1) It may be difficult or impossible for the Company and its subsidiaries to obtain additional financing for working capital, capital expenditures or other purposes, if necessary. (2) The Company will use a substantial portion of its cash flow and that of its subsidiaries to pay interest expense. This will reduce the funds which would otherwise be available for operations and future business opportunities. (3) The governing documents for the Notes, the Convertible Subordinated Debentures and the revolving credit facility all contain covenants that, among other things, limit the ability of the Company to take various actions that might otherwise be beneficial to the Company. See "Certain Factors That May Affect Future Results -- Certain Restrictions." (4) The Company may be more highly leveraged than its competitors, which may place it at a competitive disadvantage. (5) The Company's high degree of leverage will make it more vulnerable to a downturn in its business or the economy generally. (6) The Company's high degree of leverage may render advisable the divestiture of all or some of its subsidiaries. There can be no assurance that the Company will be able to reduce its financial leverage significantly or that the Company will achieve an appropriate balance between acceptable growth and future reductions in financial leverage. 16 19 Cash Flows from Operating Activities The Company used internally generated funds, proceeds from the sale of assets and borrowings under its revolving credit agreement to finance its operations during fiscal 1998. In addition, in prior fiscal years the Company used proceeds from the sale of one or more of its subsidiaries to finance its operating needs. Operating activities used $53.9 million of cash in fiscal 1998, compared with a net cash use of $13.3 million in fiscal 1997 and a net cash use of $448,000 in fiscal 1996. Depreciation and amortization was $17.0 million in fiscal 1998, $14.8 million in fiscal 1997 and $28.7 million in fiscal 1996. The increase in depreciation and amortization was primarily due to higher amortization of costs related to the renegotiation of the Company's revolving credit agreement, partially offset by lower depreciation resulting from the writedown to estimated net realizable value of certain NordicTrack assets. The Company's investment in working capital items decreased $16.4 million in fiscal 1998, increased $22.3 million in fiscal 1997 and decreased $12.9 million in fiscal 1996. Cash Flows from Investing Activities During fiscal 1998, net cash used in investing activities was $1.1 million compared with net cash provided by investing activities of $136,000 in fiscal 1997 and $25.0 million in fiscal 1996. Cash provided by investing activities in fiscal 1998 decreased relative to fiscal 1997 primarily due to a higher level of investment in new stores at Smith & Hawken and lower cash proceeds generated from discontinued and divested businesses, partially offset by higher cash proceeds from the sale of assets. Capital expenditures were $6.7 million in fiscal 1998, of which NordicTrack spent approximately $1.7 million and Smith & Hawken spent approximately $4.9 million. During fiscal 1997 and 1996, capital expenditures were $5.9 million and $21.6 million, respectively. The fiscal 1998 capital expenditures were primarily for new stores, product tooling, store remodeling and computer equipment. Cash Flows from Financing Activities The Company generated $52.4 million of cash from financing activities in fiscal 1998 and used $177,000 and $15.2 million of cash for financing activities in fiscal 1997 and fiscal 1996, respectively. At July 31, 1998, loans outstanding under the Company's revolving credit agreement totaled $32.0 million. No loans were outstanding under the revolving credit agreement at the end of fiscal 1997 and 1996. In July 1998, the Company received cash proceeds of $20.0 million from the issuance of Notes to a stockholder of the Company (see Note 7 of Notes to Consolidated Financial Statements). The Company repurchased $1.3 million of its common stock in fiscal 1996. Dividends of $494,000 and $4.2 million were paid on the Company's common stock during fiscal 1997 and 1996, respectively. Capital Resources In July 1998, the Company amended and restated its senior secured revolving credit agreement which provides for borrowings and letters of credit of up to $65.0 million through August 1, 1999. A portion of the borrowings and letters of credit permitted under the amended and restated revolving credit agreement is based upon a percentage of eligible accounts receivable and inventories. The amended and restated agreement also provides for an overadvance facility which varies from month to month of up to an additional $49.9 million. The agreement, which is secured by the Company's assets and the shares and guarantees of the Company's subsidiaries, requires the Company to comply with certain financial and operating covenants. The Company is prohibited from paying cash dividends and capital expenditures are limited under the agreement. The agreement also requires the Company to reduce the total commitment to $35.0 million by April 1, 1999. If the Company is unsuccessful in reducing the total commitment to the specified level, the Company must issue notes to the lenders in the principal amount equal to interest which would have accrued at the rate of 1.5% per month, compounded monthly, on the outstanding principal amount of the loans from January 1, 1999 through the date on which the total commitment is reduced to the specified level. The agreement also provides for a reduction in the commitment for net cash proceeds received from the sale of assets not in the ordinary course of business or from the issuance of subordinated debt or equity securities. At July 31, 1998, loans outstanding under the revolving credit agreement totaled $32.0 million and letters of credit outstanding at July 31, 1998 17 20 totaled $3.5 million. Unused borrowing and letter of credit capacity under the revolving credit agreement was $1.0 million at July 31, 1998. Total bank borrowings averaged $25.4 million during fiscal 1998, $8.0 million during fiscal 1997 and $14.3 million during fiscal 1996. The bankruptcy petitions filed by NordicTrack and Nordic Advantage on November 5, 1998 constitute defaults under the Company's revolving credit agreement. On November 5, 1998, however, the lenders under the Company's revolving credit facility and the holders of the 15% secured convertible redeemable subordinated notes due 2003 agreed to forbear from exercising their rights under the guaranties issued by the Company and its subsidiaries until the earlier of January 31, 1999 or an event of default under the forbearance agreement. The forbearance agreement increases the total borrowing capacity of the Company's subsidiaries under the revolving credit facility to $72.0 million, including $1.5 million of debtor in possession financing for NordicTrack. See Notes 1, 6 and 7 of Notes to Consolidated Financial Statements. If the Company is unable to achieve its fiscal 1999 business plan, the Company may require significant additional funds to continue its ongoing operations, and if such funds are not available when needed, the Company may be required to curtail parts of its business, sell one of its two operating companies or seek protection under the insolvency laws. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time. Recent Operating Losses; Chapter 11 Filing by NordicTrack The Company incurred substantial operating losses during fiscal 1998, 1997 and 1996, and may continue to incur losses in the future. The potential for continued losses has had an adverse effect on the Company's liquidity and has caused concern among the Company's customers, suppliers and employees about the Company's future viability. On November 5, 1998, NordicTrack and Nordic Advantage filed petitions with the United States Bankruptcy Court for Western Division of the District of Massachusetts seeking protection under Chapter 11 of the United States Bankruptcy Code. A plan of reorganization is being prepared and will be submitted to the Court. This plan may include a partial or complete liquidation of NordicTrack's operations. Certain Restrictions The governing documents for the revolving credit facility impose certain operating and financial restrictions on the Company. For example, the revolving credit facility limits or restricts, among other things, the Company's ability to: (1) declare dividends, redeem or repurchase capital stock or make distributions and restricted payments; (2) issue equity; (3) engage in mergers, consolidations, acquisitions and asset sales; (4) alter its lines of business or accounting methods or make capital expenditures in excess of stated amounts; (5) prepay, redeem or purchase debt; (6) make loans and investments; (7) incur indebtedness and contingent obligations; (8) incur liens and engage in sale/leaseback transactions; 18 21 (9) amend or otherwise alter debt and other material agreements; and (10) engage in transactions with affiliates. The Note Purchase Agreement dated July 27, 1998 between the Company and the State of Wisconsin Investment Board (the "Note Purchase Agreement") contains many similar restrictions. Events beyond the Company's control, such as prevailing economic and financial conditions, may affect its ability to comply with such covenants. A breach of any of these covenants could result in a default under the revolving credit facility and the convertible subordinated debentures and notes. Upon the occurrence of an event of default, the lenders could elect to declare all outstanding borrowings to be immediately due and payable. If the Company were to fail to repay any such amounts, the lenders could proceed against the collateral securing such indebtedness. If the lenders were to accelerate the payment of such indebtedness, there can be no assurance that the assets of the Company would be sufficient to repay in full such indebtedness and the other indebtedness of the Company and its subsidiaries. In addition, because the revolving credit facility and the Note Purchase Agreement limit the ability of the Company to engage in certain transactions except under certain circumstances, the Company may be prohibited from entering into transactions that could be beneficial to the Company. Available Funds The Company's future financial performance will also depend on its ability to purchase goods and services on credit and to borrow funds under its revolving credit agreement. If the Company is unable to purchase goods and services on credit or the Company's lenders do not provide the Company with credit arrangements on acceptable terms, the Company may need to seek additional funds from other parties. There can be no assurance, however, that the Company would be able to obtain any such third-party funding or obtain such funding on terms as favorable as those offered by its lenders. Also, in the event the Company elects to raise additional funds through the sale of assets or securities or both, the Company may not be able to complete such sales in a timely manner or on terms favorable to the Company. Consumer Spending The success of the Company is influenced by a number of economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates and taxation rates. Adverse changes in these economic conditions may restrict consumer spending, thereby negatively affecting the Company's results of operations. In addition, the Company's results of operations could be adversely affected if consumer spending is lower than anticipated during the holiday season. Competition The markets in which the Company is engaged are highly competitive. NordicTrack competes with several companies which design, manufacture and distribute physical fitness and exercise equipment, have greater financial resources and offer a greater selection of products. During the past several years, NordicTrack's competitors have introduced several new and competitive products at competitive prices which have adversely affected NordicTrack's revenues and profits. The future success of NordicTrack depends in part upon its ability to introduce new and competitive products successfully, on a timely basis and at competitive prices. The failure of NordicTrack to successfully compete with its competitors could materially adversely affect the financial condition of the Company. Many of the competitors of Smith & Hawken are larger companies with greater financial resources, a greater selection of merchandise and nationwide distribution, including a large number and wide variety of specialty retail stores, discount stores and department stores. Smith & Hawken also competes with mail order catalogs that sell gardening-related merchandise and independent garden stores and plant nurseries in towns and cities throughout the United States. The failure of Smith & Hawken to successfully compete with these companies could adversely affect the Company's operating results. 19 22 New Products Several new and enhanced products were introduced by the Company in fiscal 1998 and 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 has replaced a number of key executives. There can be no assurance, however, that the new personnel will be able to successfully increase revenues or reduce costs in the future. Seasonality The Company's businesses are seasonal, with a higher percentage of retail sales in the second fiscal quarter. The Company expects this seasonality to continue in the future. Because of this seasonality, the Company's revenues and earnings have fluctuated and will continue to fluctuate from quarter to quarter. Advertising and Marketing Programs The Company's success in the markets in which it competes depends in part upon the effectiveness of advertising and marketing programs of the Company and the Company's ability to successfully manage its advertising in-house. The inability of the Company to periodically design and successfully execute new and effective advertising and marketing programs could adversely affect the Company's operating results. Cost Reduction Programs In fiscal 1998 and 1997, the Company was able to reduce its operating costs as net sales decreased. There can be no assurance, however, that the Company will be able to further reduce operating costs if sales decline in the future. In addition, postage expenses associated with mailing catalogs and shipping charges associated with acquiring and distributing products and merchandise to customers are significant factors in the operation of the Company's businesses. Increases in postage or shipping costs, or disruptions in delivery and shipping services, could adversely affect the Company's operating results. Intellectual Property Rights The Company will continue to be subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights. There can be no assurance that third parties will not assert infringement claims in the future with respect to the Company's current or future products or that any such claims will not require the Company to enter into royalty arrangements or result in costly litigation. While the Company believes that it currently has all licenses necessary to conduct its business, no assurance can be given that additional licenses will not be required in the future. Furthermore, no assurance can be given that, if any additional licenses are required, such licenses could be obtained on commercially reasonable terms. Tax Matters The Internal Revenue Service ("IRS") has conducted an examination of the Company's tax returns for the fiscal years 1987 through 1991 and has issued a "30-day letter" to the Company proposing certain adjustments which, if sustained, would result in a significant tax deficiency for the years under examination. The Company has filed an appeal with the IRS protesting the proposed adjustments. The Company believes that the tax deductions taken were valid and in accordance with the Internal Revenue Code and intends to vigorously oppose the proposed adjustments. However, at this stage no assurance can be given of a favorable outcome on these matters. If the IRS proposed adjustments are sustained, any back taxes owed and associated 20 23 interest would have a material adverse effect on the Company's consolidated operating results for the period in which such issues are finally resolved and would also have a material adverse effect on the Company's consolidated financial condition. See Note 10 of Notes to Consolidated Financial Statements for additional information on this and other contingent liabilities. Year 2000 Software Issues NordicTrack, Smith & Hawken and the corporate office of the Company each have separate and distinct computer systems and applications. The Company and its subsidiaries have reviewed the implications of year 2000 compliance and have taken steps designed to ensure that their computer systems and applications will manage dates beyond 1999. The Company believes that it has allocated adequate resources for this purpose and that planned software upgrades, which are in the normal course of business, will address the Company's internal year 2000 needs. However, there can be no assurance that the systems of other parties upon which the Company's businesses also rely will be converted on a timely basis. The Company's business, financial condition and results of operations could be materially adversely affected by the failure of its systems and applications or those operated by other parties to properly operate or manage dates beyond 1999. NordicTrack estimates that its year 2000 compliance effort is approximately 50% complete and due to NordicTrack's recent Chapter 11 bankruptcy filings may not be 100% complete by December 31, 1999. NordicTrack's most critical year 2000 systems include its AS400 applications, including accounting, order processing, inventory, distribution, payroll and host merchandising systems; store point-of-sale system; certain older personal computers and personal computer applications; vendor EDI documents and applications; telephone systems; and security systems. The majority of NordicTrack's year 2000 exposure will be resolved as a byproduct of the implementation of a new internal software package needed to improve business processes and productivity. NordicTrack's and Nordic Advantage's Chapter 11 bankruptcy petitions filed on November 5, 1998 and the layoffs announced in October 1998, may impact NordicTrack's ability to continue implementing its new software package as originally planned. Failure to implement the new software package could have a material impact on the operations of NordicTrack and its timely ability to address year 2000 problems. NordicTrack has surveyed its outside vendors for year 2000 compliance and has received assurance of timely compliance by some but not all major vendors. NordicTrack will continue to monitor its major vendors' ability to address year 2000 issues and will seek assurances that they will be year 2000 compliant. NordicTrack does not currently have a contingency plan in place in the event a particular system is not year 2000 compliant. Contingency plans will be adopted if it becomes clear that NordicTrack is not going to achieve its scheduled compliance objectives. Critical hardware and software configurations supporting Smith & Hawken's business include its AS400 applications, including accounting, inventory and merchandising software; internal personal computer network hardware, software and applications; store polling and point-of-sale systems; telephone system hardware and software; and the systems of major outside vendors, including The Discovery Channel Store, which is the buyer of The Nature Company's business, and which continues to provide order processing, fulfillment and distribution services to Smith & Hawken. Smith & Hawken has completed the replacement of its telephone switch, voicemail system, network server hardware and software, and desktop computer hardware and software in order to make them year 2000 compliant. Projects in process which will address the year 2000 issue include the upgrade of accounting, inventory and merchandising software (expected completion date of May 1999); e-mail software conversion (expected completion date of May 1999); and replacement of in-store systems hardware and software (expected completion date of May 1999). Contingency plans will be developed as part of the calendar 1999 planning process and modified based on the effectiveness of the new system implementations at meeting Smith & Hawken's year 2000 compliance goals. In addition, Smith & Hawken will survey its major third-party vendors to evaluate their year 2000 compliance status. On or prior to December 31, 1999, the Company plans to transfer all functions performed at the corporate office to one or more of its operating subsidiaries, thereby resolving any corporate-office year 2000 issues. 21 24 OTHER Inflation has not had a significant effect on the Company's operations. The Company is involved in various legal proceedings and claims and two former subsidiaries of the Company are involved in two separate environmental matters. See Note 10 of the Notes to Consolidated Financial Statements for additional information on commitments and contingencies. The Company plans to adopt Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in fiscal 1999. The Company is evaluating the impact that implementation of SFAS Nos. 130 and 131 will have on the consolidated financial statements. The adoption of Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," did not affect the Company's financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the potential change in a financial instrument's value caused by fluctuations in interest and currency exchange rates and equity and commodity prices. The Company's operating activities expose it to many risks that are continually monitored, evaluated and managed. Proper management of these risks helps reduce the likelihood of earnings volatility. At July 31, 1998, the Company was not a party to any derivative arrangement and the Company does not engage in trading, market-making or other speculative activities in the derivatives markets. The Company's foreign currency exposure is not material and the Company does not engage in regular hedging activities to minimize the impact of foreign currency fluctuations. As discussed in Note 6 of Notes to Consolidated Financial Statements, loans outstanding under the company's revolving credit agreements bear interest at 4.0% above the lenders' base rate which may vary over time. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the Index to the Company's Consolidated Financial Statements and Financial Statement Schedule and the accompanying consolidated financial statements, notes and schedules which are filed as part of this Form 10-K following the signature page. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The response to this item is contained in part under the caption "Executive Officers of the Company" in Part I hereof, and the remainder is incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders to be held in December 1998 (the "1998 Proxy Statement") at "Election of Directors." ITEM 11. EXECUTIVE COMPENSATION. The response to this item is incorporated herein by reference to the Company's 1998 Proxy Statement at "Election of Directors," "Compensation Committee Interlocks and Insider Participation," "Summary Compensation," "Stock Option Grants," "Year-End Option Table" and "Employment Agreements and Severance Arrangements." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The response to this item is incorporated herein by reference to the Company's 1998 Proxy Statement at "Security Ownership of Certain Beneficial Owners and Management." 22 25 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The response to this item is incorporated herein by reference to the Company's 1998 Proxy Statement at "Certain Transactions" and "Employment Agreements and Severance Arrangements." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as a part of this Form 10-K. 1. Consolidated Financial Statements. The Consolidated Financial Statements listed in the Index to Consolidated Financial Statements and Financial Statement Schedule are filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedule. The Financial Statement Schedule listed in the Index to Consolidated Financial Statements and Financial Statement Schedule is filed as part of this Annual Report on Form 10-K. 3. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. On July 28, 1998, the Company filed a Current Report on Form 8-K announcing under Item 5 (Other Events) the sale to the State of Wisconsin Investment Board of a redeemable subordinated note for a purchase price of $20 million and establishment of a senior revolving credit facility maturing August 1, 1999 of up to $65 million, with funds managed by DDJ Capital Management LLC (the "Funds") and BankBoston, N.A. ("BankBoston"). In consideration of the senior revolving credit facility, the Company issued to the Funds and BankBoston equity in the Company representing 19% of the Company's outstanding common stock, calculated on a fully diluted basis. 23 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CML GROUP, INC. By: /s/ JOHN A.C. POUND ----------------------------------- John A.C. Pound Chairman and Chief Executive Officer Date: November 13, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- Chairman of the Board of /s/ JOHN A.C. POUND Directors and Chief Executive - --------------------------------------------- Officer (Principal Executive John A.C. Pound Officer) /s/ GLENN E. DAVIS Executive Vice President of - --------------------------------------------- Finance and Administration, and Glenn E. Davis Chief Financial Officer (Principal Financial Officer) /s/ PAUL J. BAILEY Vice President and Controller - --------------------------------------------- (Principal Accounting Officer) Paul J. Bailey /s/ WARREN J. ISABELLE Director - --------------------------------------------- Warren J. Isabelle /s/ THOMAS H. LENAGH Director - --------------------------------------------- Thomas H. Lenagh /s/ KATHLEEN TIERNEY Director - --------------------------------------------- Kathleen Tierney /s/ MARTIN E. WELCH, III Director - --------------------------------------------- Martin E. Welch, III
November 13, 1998 25 27 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE OF CML GROUP, INC.
PAGE NO. -------- Independent Auditors' Report................................ 26 Consolidated Financial Statements: Consolidated Statements of Operations -- Years Ended July 31, 1998, 1997 and 1996................................ 27 Consolidated Balance Sheets -- July 31, 1998 and July 31, 1997................................................... 28-29 Consolidated Statements of Cash Flows -- Years Ended July 31, 1998, 1997 and 1996................................ 30 Consolidated Statements of Changes in Stockholders' Equity (Deficiency) -- Years Ended July 31, 1998, 1997 and 1996................................................... 31 Notes to Consolidated Financial Statements................ 32-47 Financial Statement Schedule: Schedule II -- Valuation and Qualifying Accounts.......... 48
All other schedules are omitted because either they are not applicable or the required information is included in the consolidated financial statements or notes thereto. 26 28 INDEPENDENT AUDITORS' REPORT To the Stockholders and Directors of CML Group, Inc.: We have audited the accompanying consolidated balance sheets of CML Group, Inc. and its subsidiaries as of July 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity (deficiency), and cash flows for each of the years in the three-year period ended July 31, 1998. Our audits also included the financial statement schedule listed in Item 14.(a)2. These financial statements and financial statement schedule are the responsibility of CML Group, Inc. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CML Group, Inc. and its subsidiaries at July 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements for the year ended July 31, 1998 have been prepared assuming that CML Group, Inc. will continue as a going concern. As discussed in Note 1 to the financial statements, CML Group, Inc.'s recurring losses from operations, stockholders' deficiency and non-compliance with its financing agreements raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As further discussed in Note 1, on November 5, 1998 the Company filed a petition with the United States Bankruptcy Court seeking protection for the Company's NordicTrack subsidiary under Chapter 11 of the United States Bankruptcy Code. The financial statements do not include any adjustments that might result from this event. /s/ Deloitte & Touche LLP Boston, Massachusetts September 28, 1998 (except for Note 1, the second paragraph of Note 7 and the tenth paragraph of Note 10 as to which the dates are November 5, October 14 and November 12, 1998, respectively) 27 29 CML GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31, -------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Net sales........................................... $ 274,360 $ 341,315 $ 544,905 ----------- ----------- ----------- Less costs and expenses: Cost of goods sold................................ 161,875 164,081 256,738 Selling, general and administrative expenses...... 185,606 235,765 385,539 Impairment charges................................ 2,877 603 -- Restructuring charges............................. 8,890 -- -- Provision for loss on disposition of businesses held for sale.................................. -- -- 30,824 Interest expense, net............................. 11,074 1,797 3,088 ----------- ----------- ----------- 370,322 402,246 676,189 ----------- ----------- ----------- Loss from continuing operations before income taxes............................................. (95,962) (60,931) (131,284) Provision (benefit) for income taxes................ 31,416 (20,717) (46,475) ----------- ----------- ----------- Loss from continuing operations..................... (127,378) (40,214) (84,809) ----------- ----------- ----------- Loss from discontinued operations: Loss from operations, net of income taxes......... -- -- -- Provision for loss on disposal of discontinued operations, net of income tax benefit.......... -- -- (15,615) ----------- ----------- ----------- -- -- (15,615) ----------- ----------- ----------- Net loss............................................ $ (127,378) $ (40,214) $ (100,424) =========== =========== =========== Loss per share, basic and diluted (Note 1): Loss from continuing operations................... $ (2.54) $ (0.81) $ (1.72) Net loss.......................................... $ (2.54) $ (0.81) $ (2.04) Weighted average number of shares................... 50,207,014 49,837,026 49,339,007 ----------- ----------- -----------
See Notes to Consolidated Financial Statements. 28 30 CML GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JULY 31, --------------------- 1998 1997 -------- --------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $ 1,851 $ 4,359 Accounts receivable -- trade, less allowance for doubtful accounts of $2,115 in 1998 and $2,706 in 1997.......... 7,290 8,151 Refundable income taxes................................... 108 -- Deferred income taxes..................................... -- 3,903 Inventories: Raw materials.......................................... 2,151 1,971 Work in process........................................ 178 836 Finished goods......................................... 22,424 31,115 ------- -------- Total inventories........................................... 24,753 33,922 Other current assets........................................ 3,646 8,479 ------- -------- Total current assets........................................ 37,648 58,814 ------- -------- Property, plant and equipment: Land and buildings........................................ 12,663 19,404 Machinery and equipment................................... 33,983 45,257 Leasehold improvements.................................... 28,773 30,020 ------- -------- 75,419 94,681 Less accumulated depreciation............................. (43,474) (46,223) ------- -------- Property, plant and equipment, net.......................... 31,945 48,458 Goodwill.................................................... 8,309 8,546 Deferred income taxes....................................... -- 24,412 Other assets................................................ 16,430 6,106 ------- -------- $94,332 $146,336 ======= ========
See Notes to Consolidated Financial Statements. 28 31 CML GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JULY 31, --------------------- 1998 1997 --------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current portion of long-term debt......................... $ 237 $ 35 Revolving line of credit.................................. 31,982 -- Convertible subordinated debentures and notes............. 61,593 -- Accounts payable.......................................... 16,247 10,839 Accrued compensation...................................... 5,641 4,339 Accrued advertising....................................... 991 1,514 Accrued insurance......................................... 3,857 4,544 Accrued lease termination costs........................... 2,375 2,587 Other accrued expenses.................................... 27,640 25,261 --------- -------- Total current liabilities................................... 150,563 49,119 --------- -------- Noncurrent liabilities: Long-term debt............................................ -- 245 Convertible subordinated debentures....................... -- 41,593 Other noncurrent liabilities.............................. 10,427 9,651 --------- -------- Total noncurrent liabilities................................ 10,427 51,489 Commitments and contingencies (Note 10)..................... Stockholders' equity (deficiency): Common stock, par value $.10 per share Authorized -- 120,000,000 shares Issued -- 64,927,274 shares in 1998 and 52,738,268 shares in 1997........... 6,493 5,274 Additional paid-in capital................................ 93,370 80,654 Retained deficit.......................................... (131,020) (3,642) --------- -------- (31,157) 82,286 Less treasury stock, at cost, 2,817,471 shares in 1998 and 2,901,401 shares in 1997.................................. (35,501) (36,558) --------- -------- (66,658) 45,728 --------- -------- $ 94,332 $146,336 ========= ========
See Notes to Consolidated Financial Statements. 30 32 CML GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31, ---------------------------------- 1998 1997 1996 --------- -------- --------- (IN THOUSANDS) Cash flows from operating activities: Net loss............................................... $(127,378) $(40,214) $(100,424) --------- -------- --------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Impairment charges.................................. 2,877 603 -- Restructuring charges............................... 8,890 -- -- Depreciation and amortization....................... 17,023 14,830 28,738 Provision for loss on disposition of businesses held for sale.......................................... -- -- 30,824 Provision for loss on disposal of discontinued operations........................................ -- -- 24,023 Royalty settlement.................................. -- -- 1,367 Loss on disposal of property, plant and equipment... 47 1,197 2,465 Changes in assets and liabilities: Accounts receivable -- trade...................... (190) 2,419 35,663 Refundable income taxes........................... (108) 53,874 (53,874) Inventories....................................... 7,568 (3,488) 3,864 Other current assets.............................. 13,099 1,345 19,955 Deferred income taxes............................. 28,315 (16,918) 2,135 Accounts payable and accrued expenses............. 5,917 (29,627) 6,470 Accrued income taxes.............................. -- -- (1,833) Other assets and noncurrent liabilities........... (9,914) 2,706 179 --------- -------- --------- Total adjustments........................................ 73,524 26,941 99,976 --------- -------- --------- Net cash used in operating activities.................... (53,854) (13,273) (448) --------- -------- --------- Cash flows from investing activities: Acquisitions of property, plant and equipment.......... (6,666) (5,931) (21,555) Net proceeds from sale of discontinued operations...... -- 1,658 11,618 Net proceeds from sale of business held for sale....... 768 4,368 34,870 Net proceeds from the sale of assets................... 4,782 -- -- Reduction in notes receivable.......................... 42 41 52 --------- -------- --------- Net cash provided by (used in) investing activities...... (1,074) 136 24,985 --------- -------- --------- Cash flows from financing activities: Increase in long-term debt............................. 31,982 -- 289 Reduction in long-term debt............................ (43) (45) (10,249) Proceeds from the sale of convertible debentures and notes............................................... 20,000 -- -- Dividends paid......................................... -- (494) (4,189) Exercise of stock options and employee stock purchase rights.............................................. 481 362 242 Acquisition of treasury shares......................... -- -- (1,295) --------- -------- --------- Net cash provided by (used in) financing activities...... 52,420 (177) (15,202) --------- -------- --------- Net increase (decrease) in cash and cash equivalents..... (2,508) (13,314) 9,335 Cash and cash equivalents at beginning of year........... 4,359 17,673 8,338 --------- -------- --------- Cash and cash equivalents at end of year................. $ 1,851 $ 4,359 $ 17,673 --------- -------- --------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest............................................... $ 6,637 $ 2,579 $ 3,520 --------- -------- --------- Income taxes........................................... $ 115 $ 444 $ 1,317 --------- -------- ---------
The Company did not record any tax benefits resulting from the exercise of stock options in fiscal 1998 or 1997 and recorded tax benefits of $59 during fiscal 1996. See Notes to Consolidated Financial Statements. 31 33 CML GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
COMMON STOCK TREASURY STOCK ---------------------- ADDITIONAL RETAINED ------------------- SHARES PAR VALUE PAID-IN-CAPITAL EARNINGS (DEFICIT) SHARES COST ---------- --------- --------------- ------------------ --------- ------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) BALANCE, JULY 31, 1995.... 52,076,674 $5,207 $79,805 $ 140,444 2,797,791 $36,904 Exercise of stock options................. 102,360 10 311 -- 38,857 204 Employee stock purchase plan sales & benefit plan contributions...... 91,729 9 (425) -- (62,215) (790) Royalty settlement........ 352,941 36 1,332 -- -- -- Tax benefit from exercise of stock options........ -- -- 59 -- -- -- Acquisition of treasury shares.................. -- -- -- -- 189,000 1,295 Cash dividends ($0.06 per share).................. -- -- -- (2,954) -- -- Net loss.................. -- -- -- (100,424) -- -- ---------- ------ ------- --------- --------- ------- BALANCE, JULY 31, 1996.... 52,623,704 5,262 81,082 37,066 2,963,433 37,613 Exercise of stock options................. 138,960 14 366 -- 29,333 99 Employee stock purchase plan sales & benefit plan contributions...... (24,396) (2) (794) -- (91,365) (1,154) Cash dividends ($0.01 per share).................. -- -- -- (494) -- -- Net loss.................. -- -- -- (40,214) -- -- ---------- ------ ------- --------- --------- ------- BALANCE, JULY 31, 1997.... 52,738,268 5,274 80,654 (3,642) 2,901,401 36,558 Exercise of stock options................. 183,614 18 462 -- -- -- Employee stock purchase plan sales & benefit plan contributions...... 114,054 11 (689) -- (83,930) (1,057) Issuance of deferred compensation plan shares.................. 76,620 8 68 -- -- -- Shares issued to senior secured lenders......... 11,814,718 1,182 9,895 -- -- -- Warrants issued to senior secured lenders......... -- -- 2,980 -- -- -- Net loss.................. -- -- -- (127,378) -- -- ---------- ------ ------- --------- --------- ------- BALANCE, JULY 31, 1998.... 64,927,274 $6,493 $93,370 $(131,020) 2,817,471 $35,501 ========== ====== ======= ========= ========= =======
See Notes to Consolidated Financial Statements. 32 34 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1 -- BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of CML Group, Inc. and its wholly-owned subsidiaries (the "Company") and have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, during the years ended July 31, 1998, 1997 and 1996, the Company's losses from continuing operations before income taxes aggregated $95,962, $60,931 and $131,284, respectively, and, as of July 31, 1998, the Company's current liabilities exceeded its current assets by $112,915 and its total liabilities exceeded its total assets by $66,658. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. As described in Notes 6 and 7 of Notes to Consolidated Financial Statements, the Company is not in compliance with its financing agreements. On November 5, 1998, however, the lenders under the Company's revolving credit facility and the holders of the 15% secured convertible redeemable subordinated notes due 2003 agreed to forebear from exercising their rights under the guaranties issued by the Company and its subsidiaries until the earlier of January 31, 1999 or an event of default under the forbearance agreement. The Company has classified amounts due under its financing agreements as current liabilities in the accompanying balance sheet as July 31, 1998. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. On November 5, 1998, the Company's NordicTrack and Nordic Advantage subsidiaries filed petitions with the United States Bankruptcy Court for the Western Division of the District of Massachusetts seeking protection under Chapter 11 of the United States Bankruptcy Code. A plan of reorganization which may include a partial or complete liquidation of NordicTrack's and Nordic Advantage's assets is being prepared and will be submitted to the Court. In addition, management intends to pursue a recapitalization plan which, if successful, would result in a reduction in the amount of indebtedness outstanding under the Company's revolving credit agreement to $35,000 or less by April 1, 1999, to comply with the existing revolving credit agreement. The Plan would also raise capital to fund expansion at Smith & Hawken. If the Company is unable to execute its recapitalization plan, it could be forced to sell Smith & Hawken or seek protection under the insolvency laws. Summarized unaudited financial information with respect to NordicTrack as of July 31, 1998 and 1997 and statement of operations information for each of the fiscal years in the three year period ended July 31, 1998 is presented below:
JULY 31, ------------------- BALANCE SHEET INFORMATION: 1998 1997 - -------------------------- -------- ------- Current assets.......................................... $ 20,170 $37,400 Noncurrent assets....................................... 16,747 50,894 -------- ------- Total assets....................................... $ 36,917 $88,294 ======== ======= Current liabilities..................................... $ 62,358(1) $31,543 Noncurrent liabilities.................................. -- 220 Stockholders' equity (deficiency)....................... (25,441) 56,531 -------- ------- Total liabilities and stockholder's equity......... $ 36,917 $88,294 ======== =======
- --------------- (1) Includes $24,735 of debt under the Company's revolving credit agreement which is guaranteed by the Company and subsidiaries. 32 35 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED JULY 31, -------------------------------- STATEMENT OF OPERATIONS INFORMATION: 1998 1997 1996 - ------------------------------------ -------- -------- -------- Sales.................................... $186,319 $267,740 $368,151 -------- -------- -------- Less costs and expenses: Cost of goods sold.................... 119,679 129,269 163,849 Selling, general and administrative expenses............................ 140,522 197,112 276,911 Impairment and restructuring charges............................. 11,767 -- -- Interest (income) expense, net........ 2,533 (1,273) 135 -------- -------- -------- 274,501 325,108 440,895 -------- -------- -------- Loss from continuing operations before income taxes.......................... $(88,182) $(57,368) $(72,744) ======== ======== ========
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation All significant intercompany transactions and balances are eliminated. Cash Equivalents The Company considers all highly liquid debt instruments with purchased remaining maturities of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost or market with cost being determined by either the first-in, first-out or average cost methods. Direct Response Advertising and Catalog Costs Catalog costs are capitalized and amortized in proportion to the sales they generate over periods not exceeding three months and six months, respectively. Unamortized catalog costs are included in other current assets. Direct response advertising expenses of the Company were $33,402, $72,149 and $113,213 in fiscal 1998, 1997 and 1996, respectively. Property, Plant and Equipment Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives which range from three to forty years or over the terms of the related leases, if such periods are shorter. Goodwill Goodwill associated with the purchase of the Company's Smith & Hawken subsidiary is being amortized on a straight-line basis over forty years. On an annual basis, the Company reviews the carrying value of goodwill against projections of undiscounted cash flows to evaluate the propriety of its carrying value and amortization period. Accumulated amortization was $1,203 at July 31, 1998 and $966 at July 31, 1997. The Company wrote off the goodwill and accumulated amortization relating to The Nature Company in fiscal 1996 in connection with its disposition. 33 36 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes Deferred income taxes reflect the tax effects of temporary differences between financial reporting and income tax reporting which result principally from the valuation of finished goods inventories, the treatment of prepaid and accrued expenses, net operating losses and depreciation methods. Loan Origination Costs Loan origination costs associated with the Company's revolving credit facility are amortized over the life of the revolving credit facility. Capitalized costs associated with the July 27, 1998 amendment to the revolving credit facility total $13,819 as of July 31, 1998. These costs will be amortized through interest expense over the 12 month period ended July 31, 1999. Capitalized costs at July 31, 1998 include $11,077 for the issuance of 11,814,718 shares of common stock to the lenders, a commitment fee of $2,275 and $467 for various other closing costs. Per Share Data Earnings per share data is presented in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which was implemented by the Company in the second quarter of fiscal 1998. The Company calculated loss per share for each fiscal year by dividing the net loss by the weighted average number of common shares outstanding. The net losses and the number of shares included in the calculations of basic and diluted net losses per share are the same during each fiscal year. Certain securities that could potentially dilute basic earnings per share in the future were not included in the computations of diluted net losses per share because to do so would have been antidilutive for the periods presented. These securities include the Company's convertible subordinated debentures, convertible subordinated notes, warrants, and stock options; 2,435,505 shares associated with these securities would have been included in the weighted average share calculation for the year ended July 31, 1998 had their inclusion not been antidilutive. Impairment of Long-Lived Assets The Company evaluates impairment of long-lived assets in compliance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As such, the carrying values of impaired assets are compared with their discounted expected future cash flows to determine the extent of any impairment charge. For purposes of SFAS No. 121, assets are grouped at the retail store level which is the lowest level for which there is identifiable and independent cash flow information. The Company recorded impairment charges of $2,877 in fiscal 1998 and $603 in fiscal 1997. Employee Stock-Based Compensation The Company measures employee stock-based compensation in its consolidated financial statements according to the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation expense is recognized under APB Opinion No. 25 when employee stock-based awards are granted at prices different from the market price of the stock on the date of grant. The Company discloses the pro forma impact on earnings and earnings per share from application of the fair value method of calculating employee stock-based compensation in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." New Accounting Standards The Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in June 1997. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 is also effective 35 37 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for fiscal years beginning after December 15, 1997 but is not applicable to interim financial statements in the initial year of application. Use of Estimates The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the consolidated financial statements and the reported amount of revenues and expenses during the period. Actual results could differ from those estimates. Reclassifications Certain fiscal 1997 and 1996 amounts have been reclassified to conform to the fiscal 1998 presentation. NOTE 3 -- NORDICTRACK IMPAIRMENT AND RESTRUCTURING CHARGES During the second quarter of fiscal 1998, NordicTrack announced plans to strategically reposition its operations by outsourcing its manufacturing and distribution activities and closing its Glencoe, Minnesota production facility; exiting or outsourcing its direct response and catalog businesses; and closing underperforming stores. As a result of these strategic initiatives, NordicTrack recorded non-recurring restructuring charges of $8,890 during the second and fourth quarters of fiscal 1998 for severance, plant shutdown and other costs. As of July 31, 1998, $6,750 of the reserve had been utilized leaving a balance of $2,140 to cover future costs. Of the costs charged against the reserve in the third and fourth quarters of fiscal 1998, $1,042 required the expenditure of cash, primarily for severance. During the second quarter of fiscal 1998, NordicTrack also recorded $2,877 of asset impairment charges in compliance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Impaired assets included tooling used to manufacture cross-country skiers and non-motorized treadmills in Glencoe, Minnesota and retail store fixed assets. Tooling costs were written off in their entirety. Store fixed asset write-downs were measured based on a comparison of the assets' net book value to the net present value of the stores' estimated future net cash flows. In addition, in the second quarter of fiscal 1998, NordicTrack wrote down inventory by $1,086, which was included in cost of goods sold, and accrued $2,023 for lease termination and other costs related to the reorganization plan. In October 1998, NordicTrack also announced the closing of substantially all of its seasonal kiosks and additional layoffs of up to 800 employees at its Chaska, Minnesota and Glencoe, Minnesota facilities. NOTE 4 -- DISCONTINUED OPERATIONS During fiscal 1995, the Company decided to sell its wholly-owned subsidiary, Britches of Georgetowne ("Britches"), and accounted for Britches as a discontinued operation. On April 12, 1996, the Company sold the common stock of Britches for $13,400 in cash plus the assumption of certain liabilities. The Company recorded a provision for loss on the disposal of Britches of $15,615, net of an income tax benefit of $8,408 in fiscal 1996. Britches' net sales were $89,285 in fiscal 1996. NOTE 5 -- DIVESTITURE OF THE NATURE COMPANY AND HEAR MUSIC The Company decided to divest its Nature Company and Hear Music subsidiaries during the third quarter of fiscal 1996. Included in the loss from continuing operations for fiscal 1996 is a pre-tax charge of $30,824 to write down the net assets of The Nature Company and Hear Music to estimated net realizable value and to accrue estimated lease termination and assignment costs and other transaction costs. The Nature Company and Hear Music had sales of $112,705 and pre-tax operating losses of $14,242 in fiscal 1996, 35 38 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) excluding the $30,824 write-down recorded in anticipation of the sale of The Nature Company and Hear Music. On June 6, 1996, substantially all of the assets of The Nature Company were sold for $39,870 in cash and the assumption of certain liabilities. The Company sold substantially all of the assets of Hear Music on October 23, 1996 for $371 in cash plus the assumption of certain liabilities. NOTE 6 -- REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT Long-term debt consisted of the following at July 31:
1998 1997 -------- ---- Revolving credit loan..................................... $ 31,982 $ -- Note payable.............................................. 212 233 Obligations under capital leases (Note 9)................. 25 47 -------- ---- 32,219 280 Less current portion...................................... (32,219) (35) -------- ---- Long-term debt............................................ $ -- $245 ======== ====
Revolving Credit Agreement On July 27, 1998, the Company's senior secured revolving credit agreement was amended to, among other things, increase the total borrowing capacity of the Company's subsidiaries for loan advances and letters of credit from $50,000 to $65,000 and increase the maximum overadvance amount from $35,000 to $49,896. The amended agreement, which expires on August 1, 1999, allocates the total commitment between NordicTrack and Smith & Hawken. Loan advances under the agreement bear interest at 4.0% above the lenders' "base rate" which approximates the prime rate. At July 31, 1998, the lenders' prime rate was 8.5%. The agreement provides for a reduction in the total commitment for net cash proceeds received from the sale of assets not in the ordinary course of business or the issuance of subordinated debt or equity securities. To the extent the Company is not successful in reducing the total commitment to $35,000, or less, by April 1, 1999, the Company must issue notes to the lenders in the principal amount equal to interest which would have accrued at the rate of 1.5% per month, compounded monthly, on the outstanding principal amount of the loans from January 1, 1999 through the date on which the total commitment is reduced to not more than $35,000. Thereafter and until the total commitment is reduced to $35,000, all loans bear interest at the base rate plus 4.0%, payable monthly in arrears in cash, plus 1.5% per month, payable monthly in arrears by issuance of notes in the principal amount of such accrued unpaid interest. Overdue principal and interest on loans and all other overdue amounts bear interest compounded monthly and payable on demand at a rate per annum equal to 2.0% above the otherwise applicable interest rate. An unused line fee of 0.5% per annum of the unused commitment is payable quarterly in arrears. The Company may not pay cash dividends and its capital expenditures are limited under the agreement. In connection with an interim financing agreement obtained during April 1998, the Company issued warrants to one of the lenders to purchase 1,621,741 shares of the Company's common stock at a nominal exercise price. Prior to July 31, 1998, approximately 1,045,400 warrants expired. In connection with the July 27, 1998 amendment, the Company issued 11,814,718 shares of common stock, with a market value of $11,077 on July 27, 1998, to the other two lenders. The market value of the common stock, together with a commitment fee of $2,275 and other closing costs, are capitalized into other assets and will be amortized over the 12 month period ending July 31, 1999. Advances under the Company's revolving line of credit are classified as current liabilities in the consolidated financial statements. An event of default under the revolving credit agreement, if not waived by the senior secured lenders, constitutes a default under the terms of the convertible subordinated debentures and notes described in Note 7 of Notes to Consolidated Financial Statements. 36 39 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The bankruptcy petitions filed by NordicTrack and Nordic Advantage on November 5, 1998 (see Note 1 of Notes to Consolidated Financial Statements) constitute defaults under the Company's revolving credit agreement. On November 5, 1998, however, the lenders under the Company's revolving credit facility and the holders of the 15% secured convertible redeemable subordinated notes due 2003 agreed to forbear from exercising their rights under the guaranties issued by the Company and its subsidiaries until the earlier of January 31, 1999 or an event of default under the forbearance agreement. The forbearance agreement increases the total borrowing capacity of the Company's subsidiaries under the revolving credit facility to $72,000 including $1,500 of debtor in possession financing for NordicTrack. In addition, the forbearance agreement included a commitment fee of $1,380 payable in cash to the senior secured lenders. A commitment fee of $400 also is due to the State of Wisconsin Investment Board, which is the holder of $20,000 of secured convertible subordinated notes (see Note 7 of Notes to Consolidated Financial Statements). Loan advances outstanding under the Company's revolving credit agreement averaged $25,398 in fiscal 1998 with a maximum of $48,518 outstanding at any time. The average interest rate on advances outstanding during the year was 10.6% and the average effective rate, after giving effect to loan origination costs and commitment fees, was 29.7%. At July 31, 1998, the Company had advances of $31,982 and letters of credit of $3,549 outstanding under the agreement. Note Payable The note payable, which bears interest at 6.0%, is due in monthly installments of approximately $3 and matures on August 1, 2006. As a result of the Company's non-compliance with covenants in its revolving credit agreement, all amounts payable under the note may be accelerated. Accordingly, the note payable is classified as a current liability in the consolidated financial statements. Product Financing Arrangements The Company has entered into two product financing arrangements, one in fiscal 1996 with limited recourse and the other in fiscal 1997 with full recourse. Under the arrangement with limited recourse, the Company assumes all risk of credit loss on bad debts between 4% and 8% of average receivables; at July 31, 1998 the receivable portfolio balance under this arrangement was $17,962. The Company is responsible for all bad debts under the financing arrangement with full recourse; the receivable portfolio balance under this arrangement was $1,267 at July 31, 1998. Both arrangements require the Company to pay the financing company, on a monthly basis, an amount equal to the difference between the average monthly high-grade commercial paper rate, which was 5.52% at July 31, 1998, and 5.75% on the average portfolio balance. The arrangement with limited recourse is a five year contract that may be terminated during the first three years upon six months notice. The arrangement with full recourse expired in November 1997. NOTE 7 -- CONVERTIBLE SUBORDINATED DEBENTURES AND NOTES (CLASSIFIED AS CURRENT LIABILITIES) On January 20, 1993, the Company issued $57,500 of 5 1/2% convertible subordinated debentures due January 15, 2003. As of July 31, 1998, debentures with a par value of $41,593 were outstanding. Interest on 37 40 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the outstanding debentures is payable semiannually in arrears on January 15 and July 15 of each year. The debentures are convertible into shares of the Company's common stock at a conversion price of $25.917 per share, subject to adjustment under certain circumstances. The debentures are redeemable at the option of the Company, in whole or in part, at par. The estimated fair value of the convertible subordinated debentures based upon quoted market prices was approximately $22,980 and $30,155 at July 31, 1998 and 1997, respectively. The convertible subordinated debentures are subject to redemption at the option of the holders if the Company's common stock is neither listed for trading on a United States national securities exchange nor approved for trading on an established automated over-the-counter trading market in the United States. The Company's common stock continues to be listed on the New York Stock Exchange, although the Company does not currently meet the listing requirements of the exchange. The New York Stock Exchange is reviewing the continued listing status of the Company. On July 27, 1998, the Company issued a $20,000 secured convertible subordinated note to the State of Wisconsin Investment Board which, on October 14, 1998, was replaced with two notes totaling $20,000 payable to the State of Wisconsin Investment Board. The notes mature on July 27, 2003 and bear interest at 15% payable semiannually in arrears on June 30 and December 31. The notes are convertible into shares of the Company's common stock at the rate of one share of common stock for each $4.00 of principal amount surrendered for conversion, subject to adjustment under certain circumstances. The notes are redeemable at par at the option of the Company, in whole or in part, or at the option of the holder after September 1, 2000. The estimated fair value of the secured convertible subordinated notes was approximately $20,000 at July 31, 1998. The Company's non-compliance with covenants contained in its revolving credit agreement discussed in Note 6 of Notes to Consolidated Financial Statements, constitutes defaults on the notes. The State of Wisconsin Investment Board, however, agreed to forbear from exercising its rights and remedies under the notes until January 31, 1999, in exchange for a commitment fee of $400 which will be added to the principal amount of the notes. Under the terms of the forbearance agreement, the State of Wisconsin Investment Board also agreed to defer the due date of the first interest payment on the notes from December 31, 1998 until January 31, 1999. NOTE 8 -- INCOME TAXES The provision (benefit) for income taxes consists of the following:
YEAR ENDED JULY 31, ------------------------------- 1998 1997 1996 ------- -------- -------- Current Federal........................................... $ -- $ 31 $(48,740) State and foreign................................. 78 106 143 ------- -------- -------- 78 137 (48,597) Deferred Federal........................................... 31,757 (20,084) 778 State and foreign................................. (419) (770) 1,344 ------- -------- -------- Total............................................... $31,416 $(20,717) $(46,475) ======= ======== ======== Continuing operations............................... $31,416 $(20,717) $(46,475) Discontinued operations (Note 3).................... -- -- (8,408) ------- -------- -------- Total............................................... $31,416 $(20,717) $(54,883) ======= ======== ========
38 41 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The sources of prepaid and deferred income taxes and the related tax effect are as follows:
JULY 31, ------------------- 1998 1997 -------- ------- Current Assets Inventories............................................... $ 2,711 $ 2,343 Depreciation and amortization............................. 399 -- Compensation expenses..................................... 882 380 Occupancy expenses........................................ 191 335 Receivable reserves....................................... 573 853 Other..................................................... 3,026 2,015 Less valuation allowance.................................. (7,200) (1,134) -------- ------- 582 4,792 -------- ------- Noncurrent Assets Depreciation and amortization............................. 1,610 999 Net operating losses...................................... 54,394 27,221 Insurance expenses........................................ 1,322 1,554 Occupancy expenses........................................ 632 897 Alternative minimum tax credit............................ 2,270 2,270 Other..................................................... 3,163 20 Less valuation allowance.................................. (61,885) (7,095) -------- ------- 1,506 25,866 -------- ------- Total assets................................................ $ 2,088 $30,658 ======== ======= Current Liabilities Catalog costs............................................. $ 414 $ 494 Advertising costs......................................... -- 234 Other..................................................... 168 161 -------- ------- 582 889 -------- ------- Noncurrent Liabilities Goodwill.................................................. 1,506 1,454 -------- ------- 1,506 1,454 -------- ------- Total liabilities........................................... $ 2,088 $ 2,343 ======== ======= Total net deferred taxes.................................... $ -- $28,315 ======== =======
See Note 10 "Tax Matters" for additional tax information. The valuation allowance increased by $60,856 during fiscal 1998 to $69,085 at July 31, 1998 primarily due to net operating losses and a change in estimate with respect to the future realization of the Company's deferred tax assets. The July 31, 1998 valuation allowance primarily relates to net operating loss carryforwards that may not be realized. The valuation allowance increased by $446 during fiscal 1997 to $8,229 at July 31, 1997 primarily due to foreign related losses. The July 31, 1997 valuation allowance primarily relates to foreign net operating loss carryforwards that may not be realized and the alternative minimum tax credit. Net operating loss carryforwards begin expiring in 2000. 39 42 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the statutory federal income tax rate to the effective tax rate for continuing operations is as follows:
1998 1997 1996 ----- ----- ----- Statutory federal income tax rate........................... (34.0)% (34.0)% (35.0)% State and foreign income taxes net of federal tax effect.... 0.1 0.2 (0.5) Increase in valuation allowance, net........................ 66.6 -- -- Benefit of foreign sales corporation........................ -- (0.1) (0.2) Other....................................................... -- (0.1) 0.3 ----- ----- ----- Effective tax rate.......................................... 32.7% (34.0)% (35.4)% ===== ===== =====
NOTE 9 -- EMPLOYEE BENEFIT PLANS Stock Option Plans At July 31, 1998, there were 340,458 and 2,629,436 shares reserved for issuance pursuant to the Company's 1982 and 1991 Stock Option Plans, respectively. The terms of both Plans generally provide for options to be granted at fair market value as of the date of grant for a term of no longer than ten years. The options generally become exercisable over the first four years. However, options that fully vest over their first two years representing 760,000 shares of common stock were granted in fiscal 1998. At July 31, 1998, there were 54,000 and 250,000 shares reserved for issuance pursuant to the Company's 1993 and 1996 Director Option Plans, respectively. The terms of both Plans generally provide for options to be granted to non-employee directors at fair market value as of the date of grant for a term of ten years. The options vest in three equal annual installments beginning on the first anniversary of the date of grant. Combined activity under the Company's option plans is summarized as follows:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ----------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE ---------- ---------------- --------- ---------------- BALANCE AT AUGUST 1, 1995......... 2,038,195 $ 8.97 1,359,209 $7.39 Granted......................... 553,728 5.03 Exercised....................... (102,360) 3.14 Terminated...................... (212,160) 13.72 ---------- ------ --------- ----- BALANCE AT JULY 31, 1996.......... 2,277,403 $ 7.83 1,422,192 $7.91 Granted......................... 584,000 3.53 Exercised....................... (138,960) 2.74 Terminated...................... (385,475) 9.45 ---------- ------ --------- ----- BALANCE AT JULY 31, 1997.......... 2,336,968 $ 6.79 1,438,088 $8.01 Granted......................... 1,280,929 2.30 Exercised....................... (183,614) 2.62 Terminated...................... (1,034,322) 6.89 ---------- ------ --------- ----- BALANCE AT JULY 31, 1998.......... 2,399,961 $ 4.67 1,408,867 $5.88 ========== ====== ========= =====
40 43 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of outstanding options as of July 31, 1998 follows:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS -------------------------------------------------- ---------------------------- REMAINING RANGE OF EXERCISE NUMBER OF WEIGHTED AVERAGE CONTRACTUAL LIFE NUMBER OF WEIGHTED AVERAGE PRICES SHARES EXERCISE PRICE IN YEARS SHARES EXERCISE PRICE - ----------------- --------- ---------------- ------------------- --------- ---------------- $1.44 - $5.00........ 1,744,812 $ 2.48 7.81 836,683 $ 2.32 $5.01 - $10.00....... 477,499 7.57 6.00 394,534 7.77 $10.01 & higher...... 177,650 18.41 4.58 177,650 18.41 --------- ------ ---- --------- ------ 2,399,961 $ 4.67 7.21 1,408,867 $ 5.88 ========= ====== ==== ========= ======
Employee Stock Purchase Plans The Company's 1996 Employee Stock Purchase Plan authorizes the issuance of 975,000 shares in three annual offerings of 325,000 shares, plus the shares not purchased in prior offerings. Under the third offering, which ends June 14, 1999, 202 employees have elected to receive 296,327 shares. The first offering which ended June 14, 1997, and the second offering which ended June 14, 1998, resulted in the issuance of 37,819 and 83,410 shares to 43 and 56 employees at prices of $2.13 and $1.54 per share, respectively. Employee Benefit Plan The Company maintains a defined contribution benefit plan covering substantially all of its employees. The Company makes annual contributions to the plan, either in cash or the Company's common stock, based on a percentage of employee compensation as provided by the terms of the plan. Contributions by the Company to the plan charged to operations in fiscal 1998, 1997 and 1996 were $563, $501 and $1,010, respectively. Deferred Compensation Plan The Company's Incentive Deferred Compensation Plan provides for the grant of incentive compensation awards in the form of shares of common stock to senior executive employees of the Company and its subsidiaries. These shares will be issued to the participants and distributed to them no later than one year after their retirement, disability or death, or their sixty-fifth birthday, whichever occurs first. No awards have been made under the plan in the last ten fiscal years. During fiscal 1998, the Company issued 76,620 shares of common stock to plan participants leaving a balance of 28,140 shares in the plan as of July 31, 1998. SFAS No. 123 Pro Forma Disclosures Compensation cost based on the fair value method of valuing stock-based awards would have resulted in the following pro forma losses and losses per share, in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation:" 41 44 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED JULY 31, ---------------------------------- 1998 1997 1996 --------- -------- --------- NET LOSS FROM CONTINUING OPERATIONS: As reported.................................... $(127,378) $(40,214) $ (84,809) Pro forma...................................... (128,480) (40,704) (85,093) NET LOSS: As reported.................................... $(127,378) $(40,214) $(100,424) Pro forma...................................... (128,480) (40,704) (100,708) BASIC & DILUTED NET LOSS PER SHARE FROM CONTINUING OPERATIONS: As reported.................................... $ (2.54) $ (0.81) $ (1.72) Pro forma...................................... (2.56) (0.82) (1.72) BASIC & DILUTED NET LOSS PER SHARE: As reported.................................... $ (2.54) $ (0.81) $ (2.04) Pro forma...................................... (2.56) (0.82) (2.04)
Fair values were calculated using the Black-Scholes option pricing model. Key assumptions used in the model were:
1998 1997 1996 --------------- -------------- -------------- Dividend yield...................... 0.00% 0.00% 0.00% Volatility.......................... 94.83 - 115.17% 61.73 - 76.89% 38.96 - 72.47% Risk-free interest rate............. 5.42 - 6.33% 5.72 - 6.88% 5.82 - 6.81% Expected life in years.............. 9.26 7.12 9.16 Weighted average grant date fair value............................. $2.01 $1.49 $2.80
NOTE 10 -- COMMITMENTS AND CONTINGENCIES Leases The Company leases certain office, distribution and retail space, as well as vehicles and equipment, under agreements expiring over the next 15 years. Most of the leases for retail space provide for renewal options, contain normal escalation clauses and require the Company to pay real estate taxes and other expenses. Capital leases, which consist of vehicles included in machinery and equipment in the consolidated financial statements, are as follows:
JULY 31, ------------ 1998 1997 ---- ---- Machinery and equipment..................................... $ 40 $ 73 Less accumulated amortization............................... (37) (41) ---- ---- Machinery and equipment, net................................ $ 3 $ 32 ==== ====
42 45 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments under leases that have initial or remaining noncancelable lease terms in excess of one year at July 31, 1998 are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- Year ending July 31: 1999...................................................... $25 $12,375 2000...................................................... -- 11,548 2001...................................................... -- 9,708 2002...................................................... -- 7,786 2003...................................................... -- 6,725 Thereafter................................................ -- 18,341 --- ------- Total minimum lease payments.............................. 25 66,483 Less portion representing interest........................ -- -- --- ------- $25 $66,483 === =======
The total minimum payments required under operating leases do not include contingent rentals which may be paid under certain store leases on the basis of a percentage of sales in excess of stipulated amounts. Total rentals charged to operations in fiscal 1998, 1997 and 1996 were $21,601, $25,633 and $53,616, respectively. Contingent rentals were approximately $350 in fiscal 1998, $500 in fiscal 1997 and $3,317 in fiscal 1996. Store construction credits of $2,153 and $1,387 and deferred rent liabilities of $521 and $366 were included in other noncurrent liabilities at July 31, 1998 and July 31, 1997, respectively. Litigation NordicTrack is named as 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 and subsequently transferred to the United States District Court for the District of Minnesota on January 30, 1997. The named plaintiffs, Elissa Crespi and John Lucien Ware, Jr., allege in the Consolidated Complaint that NordicTrack made false and misleading claims in its advertising concerning the weight loss of persons using its ski exercisers by misrepresenting and failing to disclose material findings of weight loss studies conducted by or on behalf of NordicTrack. The named 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 State of New York General Business Law. The named plaintiffs 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 September 2, 1997, the named plaintiffs filed a motion to remand the case to state court in New York, which NordicTrack opposed. On January 5, 1998, the parties reached an agreement-in-principle concerning the general terms and conditions of a class action settlement of the case which was memorialized in a Memorandum of Understanding filed with the Minnesota Court. On January 8, 1998, the United States District Court for the District of Minnesota remanded the case to the Supreme Court for the State of New York for consideration of whether the proposed settlement should be approved and a final judgment and order entered thereon. Since the filing of the Memorandum of Understanding, the parties have executed the comprehensive terms of a Stipulation of Settlement. Management believes the settlement will not have a material adverse impact on the Company's business, financial condition and results of operations. In addition, there can be no assurance that the New York Court will ultimately approve the class settlement. If the New York Court does approve the settlement, there can be no assurance that it will not be reversed or modified on appeal. 43 46 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NordicTrack is the defendant in a lawsuit in the United States District Court for the District of Minnesota which commenced on August 12, 1996. In this action, the plaintiff, Precise Exercise Equipment ("Precise"), alleges that NordicTrack misappropriated trade secrets regarding Precise's abdominal exercise product and further breached a non-competition agreement. The parties have entered into settlement discussions and are in the process of negotiating and drafting an acceptable written settlement agreement. Management believes the contemplated settlement will not have a material adverse impact on the Company's business, financial condition and results of operations. There can be no assurance, however, that the parties will be successful in negotiating a mutually acceptable written agreement or that the proposed settlement will ultimately receive court approval. In a complaint dated September 30, 1997, filed by Precor Incorporated ("Precor") in the United States District Court for the Western District of Washington in Seattle, Precor alleges that the manufacture, offering for sale and sale by NordicTrack of its exercisers marketed under the Ellipse(TM) trademark infringe a United States patent which Precor has licensed from the inventor, Larry Miller (the "Miller Patent"). The technology used in NordicTrack's Ellipse(TM) exercisers is licensed by NordicTrack from a third party, and the Company believes that NordicTrack's products do not infringe the Miller Patent. In February 1998, Precor amended the complaint to add infringement claims against a major wholesale customer of NordicTrack's and the licenser of NordicTrack's technology. In March 1998, Precor added as parties the two manufacturers of the Ellipse(TM) exercisers, one in Taiwan and one in Tennessee. The complaint is scheduled for trial in 1999. Precor has returned the Miller Patent to the United States Patent and Trademark Office for further examination. NordicTrack filed a separate reexamination request in April 1998 and requested a stay of the litigation pending completion of the reexaminations. The Court has denied the stay petition. Meanwhile, discovery has recently commenced. While NordicTrack believes it has meritorious defenses to the complaint and intends to vigorously defend against the allegations, this lawsuit is in an early stage and the Company is unable to determine the likelihood and possible impact on the Company's business, financial condition and results of operations of an unfavorable outcome. On May 8, 1998, NordicTrack was named as a defendant in a complaint filed by Fitness Quest Inc. ("Fitness Quest") in the United States District Court for the Eastern Division of the Northern District of Ohio. Fitness Quest alleges the marketing by NordicTrack of a line of elliptical exercise products under the Ellipse(TM) trademark infringes the Eclipse Trainer(R) trademark used by Fitness Quest on its elliptical motion exercise machines and also alleges various violations of state and federal unfair competition laws. This complaint was settled on September 28, 1998. Management believes the contemplated settlement will not have a material adverse impact on the Company's business, financial condition and results of operations. On May 21, 1998, NordicTrack was named as a defendant in a complaint filed by Michael L. Richey ("Richey"), an individual inventor and patentee of United States Patent No. 4,949,958 entitled "Weight Lifting Machine", in the United States District Court for the Southern District of Indiana at Indianapolis. Richey alleges that the NordicTrack UltraLift and Isolift exercise machines infringe his patent. He seeks an injunction under the patent to block sale by NordicTrack of those machines. No request for a preliminary injunction has yet been filed. Discovery has recently begun. While NordicTrack believes it has meritorious defenses to the complaint and intends to vigorously defend against the allegations, this lawsuit is in its earliest stages and the Company is unable to determine the likelihood and possible impact on the Company's business, financial condition and results of operations of an unfavorable outcome. On November 2, 1998, NordicTrack, Inc., the NordicTrack Severance Pay Plan and CML Group, Inc. were named as defendants in a Class Action Complaint (the "Class Action Complaint") filed in United States District Court for the District of Minnesota by five former NordicTrack employees on behalf of themselves and other persons similarly situated. The named plaintiffs, Jay Miller, Carol Hamlin, Denisa Pulk, Colleen Entinger and Bernadine Venske allege in the Class Action Complaint that NordicTrack and CML Group violated the Worker Adjustment and Retraining Notification Act (the "WARN Act") by failing to 44 47 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) provide sixty days written notice to employees advising them that NordicTrack facilities in Chaska, Minnesota and Glencoe, Minnesota were going to be shutdown. The plaintiffs further allege that NordicTrack and CML Group violated the Employee Retirement Income Security Act ("ERISA") by breaching their fiduciary duty to pay terminated NordicTrack employees benefits pursuant to the NordicTrack Severance Pay Plan. The plaintiffs are seeking back pay and damages pursuant to the WARN Act and severance benefits under the NordicTrack Severance Pay Plan. While NordicTrack and CML Group believe they have meritorious defenses to the Class Action Complaint and intend to vigorously defend against the allegations, this lawsuit is in its earliest stages and the Company is unable to determine the likelihood and possible impact on the Company's financial condition or results of operations of an unfavorable outcome. The Company is involved in various other legal proceedings which have arisen in the ordinary course of business. Management believes the outcome of such other legal proceedings will not have a material adverse impact on the Company's consolidated financial condition or results of operations. Environmental Matters On June 3, 1991, the Company received from the United States Environmental Protection Agency ("EPA") a Special Notice Letter containing a formal demand on the Company as a Potentially Responsible Party ("PRP") for reimbursement of the costs incurred and expected to be incurred in response to environmental problems at a so-called "Superfund" site in Conway, New Hampshire. The EPA originally estimated the costs of remedial action and future maintenance and monitoring programs at the site at about $7,276. 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 it originally estimated. The EPA 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. In May 1998, settlement discussions with the EPA resumed regarding responsibility for the environmental problems and the costs of cleanup. An agreement in principle has been reached pursuant to which the Company will be required to pay $600 to the EPA in return for a release from liability. The terms of the settlement document, including the release, are under negotiation. The Company's primary insurer has agreed to pay $575 of the settlement and the Company will pay $25. In June 1992, the EPA notified the Company that 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 impact on the Company's business, financial condition and results of operations is not presently determinable. 45 48 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Tax Matters The Internal Revenue Service ("IRS") has been engaged in an examination of the Company's tax returns for the fiscal years 1987 through 1991. The IRS issued a "30-day letter" to the Company proposing certain adjustments which, if sustained, would result in a tax deficiency for the years under examination. The Company has filed an appeal with the IRS protesting the proposed adjustments. The adjustments proposed by the IRS primarily relate to: (i) the disallowance of deductions taken by the Company with respect to incentive compensation payments of $43,000 made to the former owners of NordicTrack (acquired in June 1986) pursuant to their employment contracts; and (ii) incentive compensation payments made to the former owners of Britches of Georgetowne (acquired in August 1983 and sold in April 1996) pursuant to the terms of an earnout agreement and the valuation of certain assets acquired in connection with the acquisition of Britches of Georgetowne in the amount of $9,200 . The net federal tax due relating to the proposed adjustments approximates $15,900. Interest on the proposed deficiencies approximates $22,200 as of July 31, 1998. The Company believes that its positions with respect to these issues taken were valid and in accordance with the Internal Revenue Code and intends to vigorously oppose the proposed adjustments. However, at this stage no assurance can be given of a favorable outcome on these matters. If the IRS proposed adjustments are sustained, any back taxes owed and associated interest would have a material adverse effect on the Company's consolidated operating results for the period in which such issues are finally resolved and would also have a material adverse effect on the Company's consolidated financial condition. Letters of Credit At July 31, 1998, the Company was contingently liable for outstanding letters of credit in the amount of $3,549. NOTE 11 -- PREFERENCE STOCK Preference Stock The Company has 2,000,000 shares, $.10 par value, of preference stock authorized, none of which was issued and outstanding at July 31, 1998. NOTE 12 -- INDUSTRY SEGMENTS The Company operates in two industry segments, NordicTrack and Smith & Hawken. NordicTrack sells physical fitness exercise products. The Smith & Hawken segment currently includes only Smith & Hawken which sells gardening related products. Prior to April 28, 1996, the Smith & Hawken segment included The Nature Company and Hear Music, in addition to Smith & Hawken, and sold nature, music and gardening related items. Britches of Georgetowne is treated as a discontinued operation in the following industry segment information and in the accompanying consolidated financial statements. 46 49 CML GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED JULY 31, --------------------------------- 1998 1997 1996 -------- -------- --------- Net Sales: NordicTrack............................................. $186,319 $267,740 $ 368,151 Smith & Hawken.......................................... 88,041 73,575 176,754 -------- -------- --------- $274,360 $341,315 $ 544,905 ======== ======== ========= Operating Income (Loss): NordicTrack............................................. $(85,649) $(58,641) $ (72,609) Smith & Hawken (Note 5)................................. 2,801 2,008 (47,691) -------- -------- --------- (82,848) (56,633) (120,300) Interest, Corporate and Other Expenses.................... (13,114) (4,298) (10,984) -------- -------- --------- $(95,962) $(60,931) $(131,284) ======== ======== ========= Identifiable Assets at July 31: NordicTrack............................................. $ 36,917 $ 88,294 $ 138,431 Smith & Hawken.......................................... 45,075 43,744 45,898 Corporate and Other..................................... 12,340 14,298 29,022 -------- -------- --------- $ 94,332 $146,336 $ 213,351 ======== ======== ========= Depreciation and Amortization: NordicTrack............................................. $ 8,886 $ 11,277 $ 11,369 Smith & Hawken.......................................... 3,095 2,800 12,412 Discontinued Operations................................. -- -- 4,454 Corporate and Other..................................... 5,042 753 503 -------- -------- --------- $ 17,023 $ 14,830 $ 28,738 ======== ======== ========= Capital Expenditures: NordicTrack............................................. $ 1,714 $ 4,523 $ 7,551 Smith & Hawken.......................................... 4,941 1,403 12,459 Discontinued Operations................................. -- -- 1,536 Corporate and Other..................................... 11 5 9 -------- -------- --------- $ 6,666 $ 5,931 $ 21,555 ======== ======== =========
47 50 SCHEDULE II CML GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED BALANCE BEGINNING TO COSTS AT END DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS OF YEAR - ----------- --------- ------------ ---------- ------- (IN THOUSANDS) Allowance for Doubtful Accounts Receivable: Year Ended July 31, 1996..................... $2,141 $ 4,652 $ 3,305 $ 3,488 Year Ended July 31, 1997..................... 3,488 1,553 2,335 2,706 Year Ended July 31, 1998..................... 2,706 1,026 1,617 2,115 Allowance for Doubtful Notes Receivable: Year Ended July 31, 1996..................... $ 9 $ -- $ -- $ 9 Year Ended July 31, 1997..................... 9 -- 3 6 Year Ended July 31, 1998..................... 6 -- 6 -- Accrual for Loss on Disposals: Year Ended July 31, 1996..................... $6,276 $54,847 $58,416 $ 2,707 Year Ended July 31, 1997..................... 2,707 -- 2,707 -- Year Ended July 31, 1998..................... -- -- -- -- Income Tax Valuation Allowance: Year Ended July 31, 1996..................... $3,522 $ 4,261 $ -- $ 7,783 Year Ended July 31, 1997..................... 7,783 446 -- 8,229 Year Ended July 31, 1998..................... 8,229 60,856 -- 69,085
48 51 EXHIBIT INDEX 2(a) -- Stock Purchase Agreement dated as of April 11, 1996 among Britches of Georgetowne, Inc., the Company, Britches Acquisition Corp. and Damrak Company Limited is incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed April 29, 1996. 2(b) -- Asset Purchase and Sale Agreement dated as of June 6, 1996 by and among the Company, The Nature Company, The Nature Company International, Inc. and Nordic Advantage of Ontario, Discovery Communications, Inc. and The Discovery Channel Store, Inc. is incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed June 21, 1996. 3(a) -- Restated Certificate of Incorporation, as amended, of the Company is incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-8 filed December 11, 1992 (File No. 33-55660) 3(b) -- By-Laws, as amended, of the Company are incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-8 filed January 23, 1992 (File No. 33-45073) 4(a) -- Specimen certificate for shares of Common Stock of the Company is incorporated herein by reference to Exhibit 4 to the Company's Registration Statement on Form S-1 (File No. 2-86828) 4(b) -- Specimen certificates for the Company's 5 1/2% Convertible Subordinated Debentures Due 2003 are incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed March 16, 1993. 4(c) -- Terms of the Company's 5 1/2% Convertible Subordinated Debentures Due 2003 are incorporated herein by reference to Exhibit A to Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q filed March 16, 1993. 4(d) -- Secured Redeemable Subordinated Note Due 2003 dated as of July 27, 1998 between the Company and the State of Wisconsin Investment Board *10(a) -- 1982 Stock Option Plan, as amended, and Forms of Option Agreements are incorporated herein by reference to Exhibit 10(y) to the Company's Registration Statement on Form S-1 (File No. 2-86828) *10(b) -- Amendment to Section 18 of the 1982 Stock Option Plan, dated October 7, 1987, is incorporated herein by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K filed October 28, 1988. *10(c) -- Amendment to Section 5(a) of the 1982 Stock Option Plan, dated December 5, 1991, is incorporated herein by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K filed October 21, 1992, as amended by the Company's Form 8 filed October 28, 1992. 10(d) -- Revolving Credit Agreement dated as of April 17, 1996 and amended and restated as of July 27, 1998 among the Company, NordicTrack, Inc., Nordic Advantage, Inc. and Smith & Hawken, Ltd., as Borrowers, and BankBoston, N.A. and the other Lending Institutions listed on Schedule 1 thereto, as Lenders. *10(e) -- 1987 Employees' Severance Benefit Plan, dated October 7, 1987, is incorporated herein by reference to Exhibit 10(bb) to the Company's Annual Report on Form 10-K filed October 28, 1988. *10(f) -- 1991 Stock Option Plan and Forms of Option Agreements are incorporated herein by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K filed October 21, 1992, as amended by the Company's Form 8 filed October 28, 1992. *10(g) -- Form of Split Dollar Life Insurance Policy for the Benefit of Certain Executive Officers is incorporated herein by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K filed October 21, 1992, as amended by the Company's Form 8 filed October 28, 1992. *10(h) -- 1993 Director Option Plan is incorporated herein by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K filed October 29, 1993.
49 52 *10(i) -- 1993 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K filed October 29, 1993. 10(j) -- Subscription Agreement, dated as of January 12, 1993, among the Company, Lehman Brothers International (Europe), Deutsche Bank A.G. London, Lombard Odier International Underwriters, S.A., Swiss Bank Corporation and S.G. Warburg Securities is incorporated herein by reference to Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q filed March 16, 1993. 10(k) -- Fiscal Agency Agreement, dated as of January 20, 1993, between the Company and Chemical Bank is incorporated herein by reference to Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q filed March 16, 1993. *10(l) -- 1996 Director Option Plan is incorporated herein by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q filed March 12, 1996. *10(m) -- 1996 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q filed March 12, 1996. *10(n) -- Form of Agreement Concerning Qualified Termination is incorporated herein by reference to Exhibit 10(p) to the Company's Annual Report on Form 10-K filed October 29, 1997. *10(o) -- Severance agreement dated as of March 17, 1998 between the Company and Charles M. Leighton. *10(p) -- Employment Agreement dated as of June 18, 1998 among the Company, Smith & Hawken, Ltd. and Kathleen Tierney. 10(q) -- NordicTrack Note dated as of July 27, 1998 among NordicTrack, Inc., Nordic Advantage, Inc. and B III Capital partners, L.P. 10(r) -- S&H Note dated as of July 27, 1998 between Smith & Hawken, Ltd. and BankBoston, N.A. 10(s) -- Stock Purchase Agreement dated as of July 27, 1998 among the Company, B III Capital Partners, L.P. and Mellon Bank, N.A. solely in its capacity as Trustee for General Motors Employees Domestic Group Pension Trust as directed by DDJ Capital Management, LLC, and not in its individual capacity. 10(t) -- Registration Rights Agreement dated as of July 27, 1998 among the Company, B III Capital Partners, L.P. and Mellon Bank, N.A. solely in its capacity as Trustee for General Motors Employees Domestic Group Pension Trust as directed by DDJ Capital Management, LLC, and not in its individual capacity. 10(u) -- Amendment No. 1 to Common Stock Purchase Warrant No. 3 dated as of July 27, 1998 between FSC Corp. and the Company. 10(v) -- Common Stock Purchase Warrant No. 1 dated as of March 11, 1998 between Rothschild Recovery Fund, L.P. and the Company. 10(w) -- Note Purchase Agreement dated as of July 27, 1998 between the Company and the State of Wisconsin Investment Board. *10(x) -- Severance agreement dated as of August 10, 1998 between the Company and G. Robert Tod. *10(y) -- First Amendment to Kathleen Tierney Employment Agreement dated as of August 14, 1998 among the Company, Smith & Hawken, Ltd. and Kathleen Tierney. *10(z) -- Employment Agreement among the Company, Smith & Hawken, Ltd. and David McCreight. 21 -- Subsidiaries of the Registrant. 23 -- Consent of Deloitte & Touche LLP. 27 -- Financial Data Schedule.
- --------------- * Management contract or compensatory plan or arrangement filed herewith in response to Item 14(a)(3) of the instructions to Form 10-K. 50 EX-10.(D) 2 REVOLVING CREDIT AGREEMENT 1 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT Dated as of April 17, 1996 and amended and restated as of July 27, 1998 among CML GROUP, INC., NORDICTRACK, INC., NORDIC ADVANTAGE, INC. AND SMITH & HAWKEN, LTD. AS BORROWERS BANKBOSTON, N.A. (F/K/A THE FIRST NATIONAL BANK OF BOSTON) AND THE OTHER LENDING INSTITUTIONS LISTED ON SCHEDULE 1 HERETO AS LENDERS and BANKBOSTON, N.A. (F/K/A THE FIRST NATIONAL BANK OF BOSTON), AS ADMINISTRATIVE AGENT 2 TABLE OF CONTENTS 1. DEFINITIONS AND RULES OF INTERPRETATION..................................... 1.1. DEFINITIONS......................................................... 1.2. RULES OF INTERPRETATION............................................. 2. THE REVOLVING CREDIT FACILITIES............................................. 2.1. COMMITMENT TO LEND.................................................. 2.1.1. COMMITMENT TO LEND NORDICTRACK LOANS...................... 2.1.2. INTENTIONALLY OMITTED..................................... 2.1.3. COMMITMENT TO LEND S&H LOANS.............................. 2.1.4. INTENTIONALLY OMITTED..................................... 2.1.5. OVERADVANCE FACILITY...................................... 2.2. UNUSED LINE FEE..................................................... 2.3. REALLOCATION AND REDUCTION OF TOTAL COMMITMENT...................... 2.3.1. REALLOCATION OF TOTAL COMMITMENT.......................... 2.3.2. REDUCTION OF SUB-COMMITMENT............................... 2.3.3. MANDATORY REDUCTION OF TOTAL COMMITMENT................... 2.4. THE NOTES........................................................... 2.4.1. THE NORDICTRACK NOTES..................................... 2.4.2. INTENTIONALLY OMITTED..................................... 2.4.3. THE S&H NOTES............................................. 2.4.4. INTENTIONALLY OMITTED..................................... 2.5. INTEREST ON LOANS................................................... 2.6. REQUESTS FOR LOANS.................................................. 2.6.1. LOAN REQUESTS............................................. 2.6.2. DAILY BORROWINGS.......................................... 2.7. INTENTIONALLY OMITTED............................................... 2.7.1. INTENTIONALLY OMITTED..................................... 2.7.2. INTENTIONALLY OMITTED..................................... 2.7.3. INTENTIONALLY OMITTED..................................... 2.8. SETTLEMENT; FAILURE TO MAKE FUNDS AVAILABLE......................... 2.8.1. SETTLEMENT AND FUNDING PROCEDURES......................... 2.8.2. ADVANCES BY ADMINISTRATIVE AGENT.......................... 2.8.3. FAILURE TO MAKE FUNDS AVAILABLE........................... 2.9. CHANGE IN BORROWING BASES........................................... 3. REPAYMENT OF THE LOANS...................................................... 3.1. MATURITY............................................................ 3.2. MANDATORY REPAYMENTS OF LOANS....................................... 3.2.1. NORDICTRACK LOANS......................................... 3.2.2. INTENTIONALLY OMITTED..................................... 3.2.3. S&H LOANS................................................. 3.2.4. REPAYMENTS FROM NET CASH PROCEEDS......................... 3.3. DEPOSITORY ARRANGEMENTS............................................. 3.3.1. THE BORROWERS' DEPOSITORY ARRANGEMENTS.................... 3.3.2. CML'S DEPOSITORY ARRANGEMENTS............................. 3.3.3. THE OTHER GUARANTORS' DEPOSITORY ARRANGEMENTS............. 3.3.4. FEES AND EXPENSES; APPLICATION OF PAYMENT................. 3.4. OPTIONAL REPAYMENTS OF LOANS........................................ 3 4. LETTERS OF CREDIT........................................................... 4.1. LETTER OF CREDIT COMMITMENTS....................................... 4.1.1. COMMITMENT TO ISSUE LETTERS OF CREDIT.................... 4.1.2. LETTER OF CREDIT APPLICATIONS............................ 4.1.3. TERMS OF LETTERS OF CREDIT............................... 4.1.4. REIMBURSEMENT OBLIGATIONS OF LENDERS..................... 4.1.5. PARTICIPATIONS OF LENDERS................................ 4.2. REIMBURSEMENT OBLIGATION OF CML AND THE BORROWERS.................. 4.3. LETTER OF CREDIT PAYMENTS.......................................... 4.4. OBLIGATIONS ABSOLUTE............................................... 4.5. RELIANCE BY ISSUER................................................. 5. CERTAIN GENERAL PROVISIONS.................................................. 5.1. CLOSING FEE........................................................ 5.2. ADMINISTRATIVE AGENT'S FEE......................................... 5.3. FUNDS FOR PAYMENTS................................................. 5.3.1. PAYMENTS TO ADMINISTRATIVE AGENT......................... 5.3.2. NO OFFSET, ETC........................................... 5.4. COMPUTATIONS....................................................... 5.5. INTENTIONALLY OMITTED.............................................. 5.6. INTENTIONALLY OMITTED.............................................. 5.7. ADDITIONAL COSTS, ETC.............................................. 5.8. CAPITAL ADEQUACY................................................... 5.9. CERTIFICATE........................................................ 5.10. INTENTIONALLY OMITTED.............................................. 5.11. INTEREST AFTER DEFAULT............................................. 5.11.1. OVERDUE AMOUNTS......................................... 5.11.2. AMOUNTS NOT OVERDUE..................................... 6. COLLATERAL SECURITY AND GUARANTIES.......................................... 6.1. SECURITY OF BORROWERS.............................................. 6.2. GUARANTY, FOREIGN GUARANTIES AND SECURITY OF GUARANTORS............ 7. GUARANTY.................................................................... 7.1. GUARANTY OF PAYMENT AND PERFORMANCE................................ 7.2. GUARANTORS' AGREEMENT TO PAY ENFORCEMENT COSTS, ETC................ 7.3. WAIVERS BY THE GUARANTORS; LENDERS' FREEDOM TO ACT................. 7.4. UNENFORCEABILITY OF OBLIGATIONS AGAINST BORROWERS.................. 7.5. SUBROGATION; SUBORDINATION......................................... 7.5.1. POSTPONEMENT OF RIGHTS AGAINST BORROWERS................. 7.5.2. SUBORDINATION............................................ 7.5.3. PROVISIONS SUPPLEMENTAL.................................. 7.6. SECURITY; SETOFF................................................... 7.7. FURTHER ASSURANCES................................................. 7.8. TERMINATION........................................................ 7.9. SUCCESSORS AND ASSIGNS............................................. 4 8. REPRESENTATIONS AND WARRANTIES.............................................. 8.1. CORPORATE AUTHORITY................................................ 8.1.1. INCORPORATION; GOOD STANDING............................. 8.1.2. AUTHORIZATION............................................ 8.1.3. ENFORCEABILITY........................................... 8.2. GOVERNMENTAL APPROVALS............................................. 8.3. TITLE TO PROPERTIES; LEASES........................................ 8.4. FINANCIAL STATEMENTS AND PROJECTIONS............................... 8.4.1. FINANCIAL STATEMENTS..................................... 8.4.2. PROJECTIONS.............................................. 8.5. NO MATERIAL CHANGES, ETC.; SOLVENCY................................ 8.5.2. SOLVENCY................................................ 8.6. FRANCHISES, PATENTS, COPYRIGHTS, ETC............................... 8.7. LITIGATION......................................................... 8.8. NO MATERIALLY ADVERSE CONTRACTS, ETC............................... 8.9. COMPLIANCE WITH OTHER INSTRUMENTS, LAWS, ETC....................... 8.10. TAX STATUS......................................................... 8.11. NO EVENT OF DEFAULT................................................ 8.12. HOLDING COMPANY AND INVESTMENT COMPANY ACTS........................ 8.13. ABSENCE OF FINANCING STATEMENTS, ETC............................... 8.14. PERFECTION OF SECURITY INTEREST.................................... 8.15. CERTAIN AFFILIATE TRANSACTIONS..................................... 8.16. EMPLOYEE BENEFIT PLANS............................................. 8.16.1. IN GENERAL.............................................. 8.16.2. TERMINABILITY OF WELFARE PLANS.......................... 8.16.3. GUARANTEED PENSION PLANS................................ 8.16.4. MULTIEMPLOYER PLANS..................................... 8.17. REGULATIONS U, X AND G............................................. 8.18. ENVIRONMENTAL COMPLIANCE........................................... 8.19. SUBSIDIARIES, ETC.................................................. 8.20. BANK ACCOUNTS...................................................... 8.21. CHIEF EXECUTIVE OFFICES............................................ 8.22. FISCAL YEAR........................................................ 8.23. DISCLOSURE......................................................... 8.24. INSURANCE.......................................................... 8.25. EQUITY DOCUMENTS, WISCONSIN DOCUMENTS.............................. 5 9. AFFIRMATIVE COVENANTS OF CML AND THE BORROWERS.............................. 9.1. PUNCTUAL PAYMENT................................................... 9.2. MAINTENANCE OF OFFICE.............................................. 9.3. RECORDS AND ACCOUNTS............................................... 9.4. FINANCIAL STATEMENTS, CERTIFICATES AND INFORMATION................. 9.5. NOTICES............................................................ 9.5.1. DEFAULTS................................................. 9.5.2. ENVIRONMENTAL EVENTS..................................... 9.5.3. NOTIFICATION OF CLAIM AGAINST COLLATERAL................. 9.5.4. NOTICE OF LITIGATION AND JUDGMENTS....................... 9.5.5. NOTICE OF TAX REFUNDS.................................... 9.6. CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES..................... 9.7. INSURANCE.......................................................... 9.8. TAXES.............................................................. 9.9. INSPECTION OF PROPERTIES AND BOOKS, ETC............................ 9.9.1. GENERAL.................................................. 9.9.5. ENVIRONMENTAL ASSESSMENTS................................ 9.9.6. COMMUNICATIONS WITH ACCOUNTANTS.......................... 9.10. COMPLIANCE WITH LAWS, CONTRACTS, LICENSES, AND PERMITS............. 9.11. INVENTORY RESTRICTIONS............................................. 9.12. USE OF PROCEEDS.................................................... 9.13. ADDITIONAL MORTGAGED PROPERTY...................................... 9.14. AGENCY ACCOUNT AGREEMENTS.......................................... 9.15. INVESTMENTS IN BORROWERS........................................... 9.16. OWNERSHIP OF SUBSIDIARIES.......................................... 9.17. COLLATERAL NOTES................................................... 9.18. FURTHER ASSURANCES; ADDITIONAL LOCATIONS........................... 9.18.1. FURTHER ASSURANCES...................................... 9.18.2. ADDITIONAL LOCATIONS.................................... 9.19. FURTHER ASSURANCES AS TO TRUST..................................... 9.20. SALE OF S&H........................................................ 10. CERTAIN NEGATIVE COVENANTS OF CML AND THE BORROWERS......................... 10.1 RESTRICTIONS ON INDEBTEDNESS....................................... 10.2 RESTRICTIONS ON LIENS.............................................. 10.3 RESTRICTIONS ON INVESTMENTS........................................ 10.4 DISTRIBUTIONS AND RESTRICTED PAYMENTS.............................. 10.4.1. INTERCOMPANY DISTRIBUTIONS AND RESTRICTED PAYMENTS...... 10.4.2. CML DISTRIBUTIONS....................................... 10.5. MERGER, CONSOLIDATION AND DISPOSITION OF ASSETS.................... 10.5.1. MERGERS AND ACQUISITIONS................................ 10.5.2. DISPOSITION OF ASSETS................................... 10.6. SALE AND LEASEBACK................................................. 10.7. COMPLIANCE WITH ENVIRONMENTAL LAWS................................. 10.8. SUBORDINATED DEBT.................................................. 10.9. EMPLOYEE BENEFIT PLANS............................................. 10.10. BANK ACCOUNTS...................................................... 10.11. TRANSACTIONS WITH AFFILIATES....................................... 10.12. RESTRICTIVE OR INCONSISTENT AGREEMENTS............................. 10.13. BUSINESS ACTIVITIES................................................ 10.14. PRIVATE LABEL CREDIT CARD PROGRAMS................................. 10.15. ISSUANCE OF CAPITAL STOCK.......................................... 10.16. WISCONSIN DOCUMENTS................................................ 6 11. FINANCIAL COVENANTS OF CML AND THE BORROWERS............................... 11.1. CAPITAL EXPENDITURES.............................................. 11.2. MAXIMUM MONTHLY BORROWER EXPOSURE................................. 12. CLOSING CONDITIONS......................................................... 12.1. LOAN DOCUMENTS.................................................... 12.2. CERTIFIED COPIES OF CHARTER DOCUMENTS............................. 12.3. CORPORATE ACTION.................................................. 12.4. INCUMBENCY CERTIFICATE............................................ 12.5. VALIDITY OF LIENS................................................. 12.6. PERFECTION CERTIFICATES AND UCC SEARCH RESULTS.................... 12.7. APPRAISALS; TAXES................................................. 12.8. TITLE INSURANCE................................................... 12.9. CERTIFICATES OF INSURANCE......................................... 12.10. AGENCY ACCOUNT AGREEMENTS......................................... 12.11. BORROWING BASE REPORT............................................. 12.12. ACCOUNTS RECEIVABLE AGING REPORT.................................. 12.13. HAZARDOUS WASTE ASSESSMENTS....................................... 12.14. SOLVENCY CERTIFICATE.............................................. 12.15. OPINION OF COUNSEL................................................ 12.16. PAYMENT OF FEES................................................... 12.17. PAYOFF LETTER..................................................... 12.18. DISBURSEMENT INSTRUCTIONS......................................... 12.19. UPDATED COLLATERAL EXAMINATIONS................................... 12.20. LANDLORD LIEN WAIVERS............................................. 12.21. BORROWING AVAILABILITY............................................ 13. CONDITIONS TO ALL BORROWINGS............................................... 13.1. REPRESENTATIONS TRUE; NO EVENT OF DEFAULT......................... 13.2. NO LEGAL IMPEDIMENT............................................... 13.3. GOVERNMENTAL REGULATION........................................... 13.4. PROCEEDINGS AND DOCUMENTS......................................... 13.5. BORROWING BASE REPORT............................................. 14. EVENTS OF DEFAULT; ACCELERATION; ETC....................................... 14.1. EVENTS OF DEFAULT AND ACCELERATION................................ 14.2. TERMINATION OF COMMITMENTS........................................ 14.3. REMEDIES.......................................................... 14.4. DISTRIBUTION OF COLLATERAL PROCEEDS............................... 15. SETOFF..................................................................... 16. THE ADMINISTRATIVE AGENT................................................... 16.1. AUTHORIZATION..................................................... 16.2. EMPLOYEES AND AGENTS.............................................. 16.3. NO LIABILITY...................................................... 16.4. NO REPRESENTATIONS................................................ 16.5. PAYMENTS.......................................................... 16.5.1. PAYMENTS TO ADMINISTRATIVE AGENT....................... 16.5.2. DISTRIBUTION BY ADMINISTRATIVE AGENT................... 16.5.3. DELINQUENT LENDERS..................................... 16.6. HOLDERS OF NOTES.................................................. 16.7. INDEMNITY......................................................... 16.8. ADMINISTRATIVE AGENT AS LENDER.................................... 16.9. RESIGNATION....................................................... 16.10. NOTIFICATION OF DEFAULTS AND EVENTS OF DEFAULT.................... 16.11. DUTIES IN THE CASE OF ENFORCEMENT................................. 7 17. EXPENSES................................................................... 18. INDEMNIFICATION............................................................ 19. SURVIVAL OF COVENANTS, ETC................................................. 20. ASSIGNMENT AND PARTICIPATION............................................... 20.1. CONDITIONS TO ASSIGNMENT BY LENDERS............................... 20.2. CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS.... 20.3. REGISTER.......................................................... 20.4. NEW NOTES......................................................... 20.5. PARTICIPATIONS.................................................... 20.6. DISCLOSURE........................................................ 20.7. ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE BORROWERS............. 20.8. MISCELLANEOUS ASSIGNMENT PROVISIONS............................... 20.9. ASSIGNMENT BY BORROWERS OR GUARANTORS............................. 21. NOTICES, ETC............................................................... 22. GOVERNING LAW.............................................................. 23. HEADINGS................................................................... 24. COUNTERPARTS............................................................... 25. ENTIRE AGREEMENT, ETC...................................................... 26. WAIVER OF JURY TRIAL....................................................... 27. CONSENTS, AMENDMENTS, WAIVERS, ETC......................................... 28. SEVERABILITY............................................................... 8 SCHEDULES AND EXHIBITS Schedule 1 Lenders and Commitments Schedule 2 Permitted Inventory Locations Schedule 2.1.5 Sub-Overadvance Amounts Schedule 8.3 Title to Properties; Leases Schedule 8.5 Distributions since Balance Sheet Date Schedule 8.7 Litigation Schedule 8.10 Tax Status Schedule 8.18 Environmental Matters Schedule 8.19 Subsidiaries; Joint Ventures Schedule 8.20 Bank Accounts Schedule 8.21 Chief Executive Offices Schedule 8.24 Insurance Schedule 10.1 Existing Indebtedness Schedule 10.2 Existing Liens Schedule 10.3 Existing Investments Schedule 10.5.2 Assets to be Sold Schedule 10.6 Sales and Leasebacks Schedule 11.2 Maximum Monthly Borrower Exposure Exhibit A-1 Form of NordicTrack Note Exhibit A-2 Form of S&H Note Exhibit B Form of Loan Request Exhibit C Form of Borrowing Base Report Exhibit D Form of Compliance Certificate Exhibit E Form of Agency Account Agreement Exhibit F Form of Landlord Waiver Exhibit G Form of Assignment and Acceptance Exhibit H-2 Form of Commitment Reallocation Request Exhibit I Form of Supplement to Schedule 2 Annex A Monthly Budget 9 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT This AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is made as of April 17, 1996 and restated as of July 27, 1998, by and among (a) CML GROUP, INC., a Delaware corporation ("CML"), (b) NORDICTRACK, INC., a Minnesota corporation ("NT"), NORDIC ADVANTAGE, INC., a Minnesota corporation ("NA" and, on a consolidated basis with NT, "NORDICTRACK"), and SMITH & HAWKEN, LTD., a Delaware corporation ("S&H" and, together with NordicTrack, the "BORROWERS"), (c) BANKBOSTON, N.A (f/k/a The First National Bank of Boston), a national banking association ("BKB"), B III CAPITAL PARTNERS, L.P., a Delaware limited partnership ("BIII"), MELLON BANK, N.A. solely in its capacity as trustee for GENERAL MOTORS EMPLOYEES DOMESTIC GROUP PENSION TRUST, a trust ("GM"), and the other lending institutions that may become Lenders hereunder, and (d) BKB as administrative, collateral and documentation agent for the Lenders (the "ADMINISTRATIVE AGENT"). RECITALS CML, the Borrowers, certain of their Subsidiaries, BKB and BIII (collectively, the "EXISTING LENDERS"), and the Administrative Agent are party to a Revolving Credit Agreement, dated as of April 17, 1996, and amended and restated as of August 28, 1997, and as further amended as of March 11, 1998, as of March 30, 1998 and as of April 1, 1998, as supplemented as of June 15, 1998, and as amended as of July 10, 1998, as of July 13, 1998, and as of July 15, 1998 (as amended, restated and supplemented, the "EXISTING CREDIT AGREEMENT") pursuant to which the Existing Lenders made Loans and issued Letters of Credit to the Borrowers (the "EXISTING CREDIT EXTENSIONS"). The Borrowers and CML have requested the Lenders and the Administrative Agent to amend and restate the Existing Credit Agreement in its entirety to, among other things, (a) increase the Total Commitment; (b) increase the Maximum Overadvance Amount; (c) revise the interest rate provisions applicable to the Loans; (d) revise certain of the financial covenants set forth in ss.11 of the Existing Credit Agreement; and (e) make certain other changes to the terms and provisions of the Existing Credit Agreement. The Existing Lenders and the Administrative Agent are willing, on the terms set forth in this Agreement and subject to the conditions and in reliance on the representations set forth herein, to amend and restate the Existing Credit Agreement so as to accomplish the foregoing. Accordingly, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby agree that, from and after the Restatement Effective Date, the Existing Credit Agreement (including all the SCHEDULES, EXHIBITS and ANNEXES thereto) is amended and restated in its entirety to read as set forth above and as follows (and, in the case of the SCHEDULES, EXHIBITS and ANNEXES, in the forms attached hereto). All Loans made and Letters of Credit issued under the Existing Credit Agreement shall continue as Loans and Letters of Credit under this Credit Agreement and shall be governed by this Credit Agreement and secured by all the Collateral. 10 DEFINITIONS AND RULES OF INTERPRETATION. 1. DEFINITIONS. The following terms shall have the meanings set forth in this ss.1 or elsewhere in the provisions of this Credit Agreement referred to below: ACCOUNTS PAYABLE. At any time with respect to any Person, the aggregate accounts payable of such Person and its Subsidiaries determined in accordance with generally accepted accounting principles. ACCOUNTS RECEIVABLE. All rights of any of the Borrowers to payment for goods sold, leased or otherwise marketed in the ordinary course of business and all rights of any of the Borrowers to payment for services rendered in the ordinary course of business and all sums of money or other proceeds due thereon pursuant to transactions with account debtors, except for that portion of the sum of money or other proceeds due thereon that relate to sales, use or property taxes in conjunction with such transactions, recorded on books of account in accordance with generally accepted accounting principles. ACCRUED EXPENSES. At any time with respect to any Person, the aggregate accrued expenses of such Person and its Subsidiaries determined in accordance with generally accepted accounting principles. ADMINISTRATIVE AGENT. As defined in the preamble hereto. ADMINISTRATIVE AGENT'S HEAD OFFICE. The Administrative Agent's head office located at 100 Federal Street, Boston, Massachusetts 02110, or at such other location as the Administrative Agent may designate from time to time. ADMINISTRATIVE AGENT'S SPECIAL COUNSEL. Bingham Dana LLP or such other counsel as may be approved by the Administrative Agent. AFFILIATE. With respect to any Person (a) any Person which directly, or indirectly, controls or is controlled by, or is under common control with, the Person specified, or (b) any other Person who is a Relative, director, officer or general partner of such Person or of any Person described in clause (a). For purposes of this definition, control of a Person shall include the power, whether direct or indirect, (x) to vote five percent (5%) or more of the equity securities having ordinary voting power for the election of directors or other managers of such Person or (y) to direct or cause the direction, of the management and policies of such Person whether by contract or otherwise. AEI CORP. See ss.10.1(n). AGENCY ACCOUNT AGREEMENTS. The several Agency Account Agreements in the form of EXHIBIT E hereto (or a form otherwise approved by the Administrative Agent in its sole discretion) entered into by any of the Borrowers, any of the Guarantors, the Administrative Agent and the Agency Account Institutions or other depository institutions satisfactory to the Administrative Agent. AGENCY ACCOUNT INSTITUTIONS. NorWest Bank Minnesota, N.A., Fifth Third Bank and any other financial institutions which receive deposits directly or indirectly (as a result of interim concentration of depository accounts), from an aggregate eight or more retail stores of the Borrowers and their Subsidiaries. AGENCY ACCOUNTS. The depository accounts maintained by the Borrowers and the Guarantors with the Agency Account Institutions or other depository institutions satisfactory to the Administrative Agent, the funds from which are periodically transferred to the applicable Concentration Account pursuant to the Agency Account Agreements. AGGREGATE BORROWING BASE. The sum of the NordicTrack Borrowing Base and the S&H Borrowing Base. 11 AMENDMENT AGREEMENT. The Amendment Agreement, dated as of July 27, 1998, among the parties to the Existing Credit Agreement. AMENDMENT NO. 1 TO COMMON STOCK PURCHASE WARRANT. Amendment No. 1 to Common Stock Purchase Warrant, dated as of the Restatement Effective Date, between CML and BKB. AMENDMENT NO. 1 TO CREDIT AGREEMENT. Amendment No. 1 to Credit Agreement and Limited Waiver, dated as of March 11, 1998, among CML, the Borrowers, the Lenders, the Issuing Bank and the Administrative Agent. APPROVED BUDGETED EXPENSES. Expenses incurred by CML in the ordinary course of business for itself or for the benefit of any of the Borrowers or their Subsidiaries, in each case which were previously included in the applicable CML Budget or, in the case of expenses incurred for the benefit of any of the Borrowers or their Subsidiaries, in the Monthly Budget, prepared in each case by CML and submitted to and approved by the Majority Lenders. ASSIGNMENT AND ACCEPTANCE. See ss.20.1. BALANCE SHEET DATE. July 31, 1997, the date of the most recent audited financial statements of CML and its Subsidiaries, as of the Restatement Effective Date. BASE RATE. The higher of (i) the annual rate of interest announced from time to time by BKB at its head office in Boston, Massachusetts, as its "base rate" and (ii) one-half of one percent (0.50%) above the Federal Funds Effective Rate. For the purposes of this definition, "FEDERAL FUNDS EFFECTIVE RATE" shall mean for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three funds brokers of recognized standing selected by the Administrative Agent. BKB. As defined in the preamble hereto. BORROWER EXPOSURE. At any time with respect to any Borrower, the sum of (a) the outstanding amount of Loans made to such Borrower PLUS (b) the aggregate Letter of Credit Exposure of such Borrower. BORROWERS. As defined in the preamble hereto. BORROWING BASE. The NordicTrack Borrowing Base and the S&H Borrowing Base. BORROWING BASE REPORT. A Borrowing Base Report signed by the chief financial officer of CML in substantially the form of EXHIBIT C hereto. BIII. As defined in the preamble hereto. BUSINESS DAY. Any day on which banking institutions in Boston, Massachusetts, are open for the transaction of banking business. CAPITAL ASSETS. Fixed assets, both tangible (such as land, buildings, fixtures, machinery and equipment) and intangible (such as patents, copyrights, trademarks, franchises and good will); PROVIDED that Capital Assets shall not include any item customarily charged directly to expense or depreciated over a useful life of twelve (12) months or less in accordance with generally accepted accounting principles. 12 CAPITAL EXPENDITURES. Amounts paid or indebtedness incurred by any Person or any of its Subsidiaries in connection with the purchase or lease by any such Person or any of its Subsidiaries of Capital Assets that would be required to be capitalized and shown on the balance sheet of such Person in accordance with generally accepted accounting principles. CAPITALIZED LEASES. Leases under which CML or any of its Subsidiaries is the lessee or obligor, the discounted future rental payment obligations under which are required to be capitalized on the balance sheet of the lessee or obligor in accordance with generally accepted accounting principles. CAPITAL STOCK. Any shares, interests, participations, rights or other equivalents (howsoever designated) of capital stock of a corporation (including common or preferred stock) or any equivalent ownership interests in a Person other than a corporation. CERCLA. See ss.8.18. CHANGE IN CONTROL. Any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of thirty percent (30%) or more of the outstanding shares of common stock of CML; or, during any period of twelve (12) consecutive calendar months, a majority of the seats (other than vacant seats) on the board of directors of CML shall at any time be occupied by Persons other than (i) directors on the Original Closing Date or (ii) directors initially nominated or appointed by action of a majority of CML's directors. CITIBANK. Citibank, N.A., in its capacity as agent for the lenders under the Citibank Facility. CITIBANK FACILITY. The revolving credit facility among CML, certain lenders party thereto and Citibank as agent for such lenders. CLOSING DATE. The first date on which the conditions set forth in ss.12 have been satisfied and any Loans are to be made or any Letter of Credit is to be issued hereunder. CML. As defined in the preamble hereto. CML BUDGETS. Each of the monthly operating budget of CML for each of the months of July 1998 through July 1999 delivered to the Administrative Agent and the Lenders prior to the Restatement Effective Date. CODE. The Internal Revenue Code of 1986. COLLATERAL. All of the property, rights and interests of CML and its Subsidiaries that are or are intended to be subject to the security interests and mortgages created by the Security Documents. COLLATERAL AGENCY AGREEMENT. The Collateral Agency and Intercreditor Agreement, dated as of the date hereof, between BKB, Wisconsin, CML, the Borrowers, the Guarantors and the Foreign Guarantors, in form and substance satisfactory to the Lenders and the Administrative Agent. COLLATERAL AGENT. BKB, as collateral agent under the Collateral Agency Agreement. COLLATERAL NOTES. Any promissory notes issued by one or more of the Borrowers in favor of BKB as agent under such notes, executed and delivered pursuant to ss.9.17, and assigned to the Administrative Agent, each of which such notes shall be secured by one of the Mortgages. 13 COMMITMENT. With respect to each Lender, the amount set forth on SCHEDULE 1 hereto as the amount of such Lender's commitment to make Loans to, and to participate in the issuance, extension and renewal of Letters of Credit for the account of, the Borrowers, as the same may be reduced from time to time; or if such commitment is terminated pursuant to the provisions hereof, zero. COMMITMENT PERCENTAGE. With respect to each Lender, the percentage set forth on SCHEDULE 1 hereto as such Lender's percentage of the aggregate Commitments of all of the Lenders. COMMITMENT REALLOCATION DATE. The date on which any reallocation of the Sub-Commitments among the Borrowers is made or is to be made by CML in accordance with ss.2.3.1. COMMITMENT REALLOCATION REQUEST. See ss.2.3.1. COMPLIANCE CERTIFICATE. See ss.9.4(d). CONCENTRATION ACCOUNT. With respect to any Borrower or any Guarantor, such Borrower's or such Guarantor's, as the case may be, depository account with BKB under the control of the Administrative Agent for the benefit of the Lenders and the Administrative Agent. CONSOLIDATED OR CONSOLIDATED. With reference to any term defined herein, shall mean that term as applied to the accounts of a Person and its Subsidiaries, consolidated in accordance with generally accepted accounting principles. CONSOLIDATED ADJUSTED NET INCOME. With respect to any Person and its Subsidiaries, for any period, an amount equal to consolidated net income for such period, after deduction of all expenses, taxes and other proper charges, determined in accordance with generally accepted accounting principles and after eliminating therefrom all extraordinary nonrecurring items of income including, without limitation (a) income from unusual transactions, (b) income from the sale of Capital Assets and (c) income from the write-up in the book value of any assets of such Person or its Subsidiaries; PROVIDED, HOWEVER, for the purposes of determining Consolidated Adjusted Net Income, it shall include the estimated deferred tax benefits for prior and current period losses which CML has been including since the Original Closing Date regardless of whether or not generally accepted accounting principles would permit such inclusion in the computation of Consolidated Adjusted Net Income. CONSOLIDATED EBITDA. With respect to any Person and its Subsidiaries, for any period, Consolidated Adjusted Net Income plus, to the extent deducted in determining Consolidated Adjusted Net Income, the sum of interest, taxes, depreciation and amortization of such Person and its Subsidiaries for such period on a consolidated basis, all determined in accordance with generally accepted accounting principles. CONSOLIDATED TANGIBLE NET WORTH. With respect to any Person, the excess of Consolidated Total Assets over Consolidated Total Liabilities, and less the sum of: (a) the total book value of all assets of such Person and its Subsidiaries properly classified as intangible assets under generally accepted accounting principles, including such items as good will, the purchase price of acquired assets in excess of the fair market value thereof, trademarks, trade names, service marks, brand names, copyrights, patents and licenses, and rights with respect to the foregoing; PLUS (b) all amounts representing any write-up in the book value of any assets of such Person or its Subsidiaries resulting from a revaluation thereof subsequent to the Balance Sheet Date; PLUS 14 (c) to the extent otherwise includable in the computation of Consolidated Tangible Net Worth, any subscriptions receivable relating to Capital Stock. CONSOLIDATED TOTAL ASSETS. All assets of a Person and its Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles; PROVIDED, HOWEVER, for the purposes of determining Consolidated Total Assets, it shall include the estimated deferred tax benefits for prior and current period losses which CML has been including since the Original Closing Date regardless of whether or not generally accepted accounting principles would permit such inclusion in the computation of Consolidated Total Assets. CONSOLIDATED TOTAL INTEREST EXPENSE. With respect to any Person for any period, the aggregate amount of interest required to be paid or accrued by such Person and its Subsidiaries during such period on all Indebtedness of such Person and its Subsidiaries outstanding during all or any part of such period, whether such interest was or is required to be reflected as an item of expense or capitalized, including payments consisting of interest in respect of Capitalized Leases and including commitment fees, agency fees, facility fees, balance deficiency fees and similar fees or expenses in connection with the borrowing of money, PROVIDED that Consolidated Total Interest Expense shall not include amortization of fees and expenses paid in connection with the transactions contemplated by the Credit Agreement. CONSOLIDATED TOTAL LIABILITIES. All liabilities of a Person and its Subsidiaries determined on a consolidated basis that in accordance with generally accepted accounting principles should be classified upon the obligor's balance sheet as liabilities. CONTROLLED DISBURSEMENT ACCOUNT. With respect to any Borrower or CML, such Borrower's or CML's, as the case may be, controlled disbursement account with BKB, listed on SCHEDULE 8.20 hereto. COPYRIGHT MORTGAGE. The Memorandum of Copyrights, dated as of the Original Closing Date, made by the Borrowers and the Guarantors in favor of the Administrative Agent, as amended by the First Amendment to Copyright Mortgage and the Second Amendment to Copyright Mortgage, and in form and substance satisfactory to the Lenders and the Administrative Agent. CREDIT AGREEMENT. This Amended and Restated Revolving Credit Agreement, including the Schedules, Exhibits and Annexes hereto. DEFAULT. See ss.14.1. DELINQUENT LENDER. See ss.16.5.3. DISTRIBUTION. The declaration or payment of any dividend on or in respect of any shares of any class of Capital Stock of a Person, other than dividends payable solely in shares of common stock or similar non-preferred equity interests of such Person; the purchase, redemption, or other retirement of any shares of any class of Capital Stock or other equity interests of a Person, directly or indirectly through a Subsidiary of such Person or otherwise; the return of capital by a Person to its shareholders or equity holders as such; or any other distribution on or in respect of any shares of any class of Capital Stock or other equity interest of such Person. DOLLARS or $. Dollars in lawful currency of the United States of America. DOMESTIC LENDING OFFICE. Initially, the office of each Lender designated as such in SCHEDULE 1 hereto; thereafter, such other office of such Lender, if any, located within the United States that will be making or maintaining Loans. DRAWDOWN DATE. The date on which any Loan is made or is to be made. 15 ELIGIBLE ACCOUNTS RECEIVABLE. The aggregate of the unpaid portions of Accounts Receivable (net of any credits, rebates, offsets, holdbacks or other adjustments or commissions payable to third parties that are adjustments to such Accounts Receivable) (i) that such Borrower reasonably and in good faith determines to be collectible; (ii) that are with account debtors that (A) are not Affiliates of CML or any of its Subsidiaries, (B) purchased the goods or services giving rise to the relevant Account Receivable in an arm's length transaction, (C) are not insolvent or the subject of any case or proceeding, whether voluntary or involuntary, under any bankruptcy, reorganization, arrangement, insolvency, adjustment of debt, dissolution, liquidation or similar law of any jurisdiction and (D) are, in the Administrative Agent's reasonable judgment, creditworthy; (iii) that are in payment of obligations that have been fully performed and are not subject to dispute or any other similar claims that would reduce the cash amount payable therefor; (iv) that are not subject to any pledge, restriction, security interest or other lien or encumbrance other than those created by the Loan Documents; (v) in which the Administrative Agent has a valid and perfected first priority security interest; (vi) that are not outstanding for more than (A) sixty (60) days past the date payment thereof is due or (B) ninety (90) days past the earlier to occur of (x) the date of the respective invoices therefor and (y) the date of shipment therefor in the case of goods or the end of the calendar month following the provision thereof in the case of services; (vii) that are not due from an account debtor located in Indiana, Minnesota or New Jersey unless such Borrower (A) has received a certificate of authority to do business and is in good standing in such state or (B) has filed a notice of business activities report with the appropriate office or agency of such state for the current year; (viii) that are not due from any single account debtor if more than twenty-five percent (25%) of the aggregate amount of all Accounts Receivable owing from such account debtor would otherwise not be Eligible Accounts Receivable (after applying co-op advertising credits, if any, to the balances more than sixty (60) days past the date payment thereof is due); (ix) that are payable in Dollars; (x) that are not payable from an office outside of the United States or Canada; (xi) that are not secured by a letter of credit unless the Administrative Agent has a prior, perfected security interest in such letter of credit; (xii) that are not "bill-and-hold", guaranteed sale, sale-or-return, sale on approval or consignment basis receivables; (xiii) that are not receivables arising under any Private Label Credit Card Program or any other credit card receivables; (xiv) that are not due from any single account debtor (other than American Express Company, Sears Roebuck and Company and Target Stores, a division of Dayton Hudson Corporation if and to the extent that, after inclusion of such Account Receivable in Eligible Accounts Receivable, the aggregate amount of Eligible Accounts Receivable owing from such account debtor would exceed twenty percent (20%) of the aggregate amount of all Eligible Accounts Receivable; (xv) in the case of NordicTrack, that are not due from NorWest Bank Minnesota, N.A.; and (xvi) in the case of S&H, that do not arise from the sale of mailing lists or are due from Felissimo Corporation. ELIGIBLE ASSIGNEE. Any of (i) a commercial bank or finance company organized under the laws of the United States, or any State thereof or the District of Columbia, and having total assets in excess of $1,000,000,000; (ii) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having a net worth of at least $100,000,000, calculated in accordance with generally accepted accounting principles; (iii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having total assets in excess of $1,000,000,000, PROVIDED that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (iv) the central bank of any country which is a member of the OECD; and (v) any other bank, insurance company, commercial finance company or other financial institution or other Person approved by the Administrative Agent, such approval not to be unreasonably withheld and to be based only on the creditworthiness of the potential assignee and the Administrative Agent's satisfaction that such potential assignee's obligations hereunder will be enforceable. ELIGIBLE INVENTORY. With respect to S&H, finished goods owned by such Borrower; PROVIDED that Eligible Inventory shall not include any inventory (i) held on consignment, or not otherwise owned by such Borrower, or of a type no longer sold by such Borrower; (ii) which has been returned by a customer or is 16 damaged or subject to any legal encumbrance other than Permitted Liens; (iii) which is not in the possession of such Borrower unless (A) such inventory is subject to a documentary letter of credit issued by a lender approved by the Administrative Agent and the Administrative Agent has possession of and a first priority, perfected security interest in the documents of title relating to such inventory, (B) such inventory is in transit from one Permitted Inventory Location of such Borrower within the United States of America to another Permitted Inventory Location of such Borrower within the United States of America or (C) the aggregate gross book value of such inventory does not exceed $6,000,000 with respect to inventory located at such Borrower's distribution center and warehouse located at 8145 Holton Drive, Florence, Kentucky and operated by The Discovery Channel Store, Inc. pursuant to the Cooperation and Services Agreement between The Discovery Channel Store, Inc. and such Borrower, and $1,750,000 with respect to all other inventory locations and the Administrative Agent has received (x) a waiver in form and substance satisfactory to the Administrative Agent from the possessor of such inventory, (y) financing statements in form and substance satisfactory to the Administrative Agent executed and delivered by such Borrower as secured party/bailor and the possessor of such inventory as debtor/bailee, for filing in the appropriate jurisdictions PROVIDED, HOWEVER, that the Administrative Agent may, with the consent of the Majority Lenders, waive the foregoing requirement with respect to financing statements, and (z) an assignment in form and substance satisfactory to the Administrative Agent by the secured party/bailor to the Administrative Agent of the aforementioned financing statements; (iv) in which the Administrative Agent does not have a valid and perfected first priority security interest; (v) which has been shipped to a customer of such Borrower regardless of whether such shipment is on a consignment basis; (vi) which is not located at a Permitted Inventory Location of such Borrower within the United States of America, unless (A) such inventory is subject to a documentary letter of credit issued by a lender approved by the Administrative Agent and the Administrative Agent has possession of and a first priority, perfected security interest in the documents of title relating to such inventory or (B) such inventory is in transit from one Permitted Inventory Location of such Borrower within the United States of America to another Permitted Inventory Location of such Borrower within the United States of America; (vii) which the Majority Lenders reasonably deem to be obsolete or not marketable; (viii) which is located in California unless the Administrative Agent has received a legal opinion in form and substance satisfactory to the Administrative Agent that the Loan Documents comply with the provisions of ss.9102(5)(b) of the Uniform Commercial Code as in effect in California, or (ix) which consists of live plantings. ELIGIBLE NORDICTRACK INVENTORY. With respect to NordicTrack, finished goods owned by NordicTrack; PROVIDED that Eligible NordicTrack Inventory shall not include any inventory (i) consisting of work-in-progress or raw materials; (ii) held on consignment, or not otherwise owned by NordicTrack, or of a type no longer sold by NordicTrack; (iii) which has been returned by a customer or is damaged or subject to any legal encumbrance other than Permitted Liens; (iv) which is not in the possession of NordicTrack unless (A) such inventory is subject to a documentary letter of credit issued by a lender approved by the Administrative Agent and the Administrative Agent has possession of and a first priority, perfected security interest in the documents of title relating to such inventory, (B) such inventory is in transit from one Permitted Inventory Location of NordicTrack within the United States of America to another Permitted Inventory Location of NT or NA, as applicable, within the United States of America or (C) the aggregate gross book value of such inventory does not exceed $4,250,000 and the Administrative Agent has received (x) a waiver in form and substance satisfactory to the Administrative Agent from the possessor of such inventory, (y) financing statements in form and substance satisfactory to the Administrative Agent executed and delivered by NT or NA, as applicable, as secured party/bailor and the possessor of such inventory as debtor/bailee, for filing in the appropriate jurisdictions PROVIDED, HOWEVER, that the Administrative Agent may, with the consent of the Majority Lenders, waive the foregoing requirement with respect to financing statements, and (z) an assignment in form and substance satisfactory to the Administrative Agent by the secured party/bailor to the Administrative Agent of the aforementioned financing statements; (v) in which the Administrative Agent does not have a valid and perfected first priority security interest; (vi) which has been shipped to a customer of NordicTrack regardless of whether such shipment is on a consignment basis; (vii) which is not located at a Permitted Inventory Location of NT or NA, as applicable, within the United States of America, unless (A) such inventory is subject to a 17 documentary letter of credit issued by a lender approved by the Administrative Agent and the Administrative Agent has possession of and a first priority, perfected security interest in the documents of title relating to such inventory or (B) such inventory is in transit from one Permitted Inventory Location of NT or NA, as applicable, within the United States of America to another Permitted Inventory Location of NT or NA, as applicable, within the United States of America; (viii) which the Majority Lenders reasonably deem to be obsolete or not marketable or (ix) which is located in California unless the Administrative Agent has received a legal opinion in form and substance satisfactory to the Administrative Agent that the Loan Documents comply with the provisions of ss.9102(5)(b) of the Uniform Commercial Code as in effect in California. EMPLOYEE BENEFIT PLAN. Any employee benefit plan within the meaning of ss.3(3) of ERISA maintained or contributed to by CML, any of the Borrowers, or any ERISA Affiliate, other than a Multiemployer Plan. ENVIRONMENTAL LAWS. See ss.8.18(a). EQUITY DOCUMENTS. Collectively, (a) the Stock Purchase Agreement, (b) the Registration Rights Agreement, (c) the Amendment No. 1 to Common Stock Purchase Warrant, (d) the Warrant Purchase Agreement, and (e) the Warrants. ERISA. The Employee Retirement Income Security Act of 1974. ERISA AFFILIATE. Any Person which is treated as a single employer with CML or any of the Borrowers under ss.414 of the Code. ERISA REPORTABLE EVENT. A reportable event with respect to a Guaranteed Pension Plan within the meaning of ss.4043 of ERISA and the regulations promulgated thereunder as to which the requirement of notice has not been waived. EVENT OF DEFAULT. See ss.14.1. EXISTING CREDIT AGREEMENT. As defined in the Recitals. EXISTING LENDERS. As defined in the Recitals. EXISTING LETTERS OF CREDIT. See ss.4.7. FEE LETTER. The letter agreement, dated as of the Restatement Effective Date, among CML, the Borrowers, the Administrative Agent, BKB and BIII. FIRST AMENDMENT TO COPYRIGHT MORTGAGE. Amendment No. 1 to the Memorandum of Grant of Security Interest in Copyrights, dated as of February 27, 1998, among CML, the Borrowers, the Guarantors and the Administrative Agent and in form and substance satisfactory to the Lenders and the Administrative Agent. FIRST AMENDMENT TO SECURITY DOCUMENTS AGREEMENT. First Amendment to Security Documents Agreement, dated as of the Restatement Effective Date, among CML, the Borrowers, the Guarantors and the Administrative Agent and in form and substance satisfactory to the Lenders and the Administrative Agent. FISCAL AGENCY AGREEMENT. The Fiscal Agency Agreement dated as of January 20, 1993 between CML and Chemical Bank (now known as The Chase Manhattan Bank), as fiscal agent. 18 FOREIGN GUARANTIES. The several foreign subsidiary guaranties, as amended by the First Amendment to Security Documents, made by each of the Foreign Guarantors in favor of the Administrative Agent pursuant to which each Foreign Guarantor guaranties to the Administrative Agent for the benefit of the Lenders and the Administrative Agent the payment and performance of the Obligations. FOREIGN GUARANTORS. CML International (FSC), Ltd., The Nature Company Limited, NordicTrack (U.K.) Ltd., NordicTrack GmbH and Nordic Advantage of Ontario, Inc. FOREIGN PLEDGE AGREEMENT. Collectively, (a) the share pledge agreement dated as of April 24, 1996 among NT and the Lenders pledging the shares of NordicTrack GmbH, (b) the charge over securities dated as of April 29, 1996 between The Nature Company (now known as OTNC, Inc.) and the Administrative Agent pledging the securities of The Nature Company Limited and (c) the charge over securities dated as of April 29, 1996 between NT and the Administrative Agent, pledging the securities of NordicTrack (U.K.) Ltd., in each case as amended by the First Amendment to Security Documents, and in form and substance satisfactory to the Lenders and the Administrative Agent. GE CAPITAL CREDIT CARD PROGRAM. The credit card program made available to customers of NordicTrack in accordance with the GE Capital Credit Card Program Agreement. GE CAPITAL CREDIT CARD PROGRAM AGREEMENT. The Account Purchase and Consumer Credit Card Program Agreement, dated as of December 10, 1996, among General Electric Capital Corporation and NordicTrack. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. (i) When used in ss.11, whether directly or indirectly through reference to a capitalized term used therein, means (A) principles that are consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, in effect for the fiscal year ended on the Balance Sheet Date, and (B) to the extent consistent with such principles, the accounting practice of CML and the Borrowers reflected in their financial statements for the year ended on the Balance Sheet Date, and (ii) when used in general, other than as provided above, means principles that are (A) consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, as in effect from time to time, and (B) consistently applied with past financial statements of CML and the Borrowers adopting the same principles, provided that in each case referred to in this definition of "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" a certified public accountant would, insofar as the use of such accounting principles is pertinent, be in a position to deliver an unqualified opinion (other than a qualification regarding changes in generally accepted accounting principles) as to financial statements in which such principles have been properly applied. GM. As defined in the preamble hereto. GORDON BROTHERS REPORT. The Gordon Brothers Partners, Inc. Inventory Valuation and Review Report dated in May 1997 relating to the Borrowers' inventory, or any subsequent appraisal thereof prepared in a manner consistent with such report and in form and substance satisfactory to the Administrative Agent. GUARANTEED PENSION PLAN. Any employee pension benefit plan within the meaning of ss.3(2) of ERISA maintained or contributed to by CML or any of the Borrowers or any ERISA Affiliate the benefits of which are guaranteed on termination in full or in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer Plan. GUARANTORS. CML, each Borrower and the direct and indirect Subsidiaries of CML listed on the signature pages hereto as Guarantors. 19 GUARANTY. The Guaranty made by each of the Guarantors in favor of the Lenders and the Administrative Agent pursuant to ss.7 hereof, pursuant to which each Guarantor guaranties to the Lenders and the Administrative Agent the payment and performance of the Obligations. HAZARDOUS SUBSTANCES. See ss.8.18(b). INDEBTEDNESS. All obligations, contingent and otherwise, that in accordance with generally accepted accounting principles should be classified upon the obligor's balance sheet as liabilities, or to which reference should be made by footnotes thereto, including in any event and whether or not so classified: (i) all debt and similar monetary obligations, whether direct or indirect; (ii) all liabilities secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; and (iii) all guarantees, endorsements and other contingent obligations whether direct or indirect in respect of indebtedness of others, including any obligation to supply funds to or in any manner to invest in, directly or indirectly, the debtor, to purchase indebtedness, or to assure the owner of indebtedness against loss, through an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise, and the obligations to reimburse the issuer in respect of any letters of credit. INITIAL LENDERS. BIII, BKB and GM. INTERCOMPANY SUBORDINATION AGREEMENT. The Intercompany Subordination Agreement, dated as of the Original Closing Date, among CML, the Borrowers, and their Subsidiaries and in form and substance satisfactory to the Lenders and the Administrative Agent. INTERCREDITOR AGREEMENT. The Intercreditor Agreement, dated as of the Restatement Effective Date, between CML, the Borrowers, the Guarantors, the Foreign Guarantors, Wisconsin and the Administrative Agent and in form and substance satisfactory to the Lenders and the Administrative Agent. INTEREST PAYMENT DATE. As to any Loan, the first day after the last day of the Interest Period with respect thereto, beginning with the first such day after the Restatement Effective Date. INTEREST PERIOD. With respect to each Loan, (i) initially, the period commencing on the Drawdown Date of such Loan and ending on the last day of the calendar month, and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Loan and ending on the last day of the calendar month, PROVIDED that all of the foregoing provisions relating to Interest Periods are subject to the following: (a) if any Interest Period with respect to a Loan would end on a day that is not a Business Day, that Interest Period shall end on the next succeeding Business Day; (b) any Interest Period that would otherwise extend beyond the Maturity Date shall end on the Maturity Date. INVESTMENTS. All expenditures made and all liabilities incurred (contingently or otherwise) for the acquisition of stock or Indebtedness of, or for loans, advances, capital contributions or transfers of property to, or in respect of any guaranties (or other commitments as described under Indebtedness), or obligations of, any Person. In determining the aggregate amount of Investments outstanding at any particular time: (i) the amount of any Investment represented by a guaranty shall be taken at not less than the principal amount of the obligations guaranteed and still outstanding; (ii) there shall be included as an Investment all interest accrued with respect to Indebtedness constituting an Investment unless and until such interest is paid; (iii) there shall be deducted in respect of each such Investment any amount received as a return of capital (but only by repurchase, redemption, retirement, repayment, liquidating dividend or liquidating distribution); 20 (iv) there shall not be deducted in respect of any Investment any amounts received as earnings on such Investment, whether as dividends, interest or otherwise, except that accrued interest included as provided in the foregoing clause (ii) may be deducted when paid; and (v) there shall not be deducted from the aggregate amount of Investments any decrease in the value thereof. ISSUING BANK. With respect to any Letter of Credit, BKB and any successor Issuing Bank. KEY MAN LIFE INSURANCE POLICIES. Collectively, (i) the life insurance policy issued on the life of Charles M. Leighton for the benefit of CML in the face amount of $400,000 by The New England Mutual Life Insurance Company, Life Policy number 8698540, (ii) the life insurance policy issued on the life of Charles M. Leighton for the benefit of CML in the face amount of $800,000 by The New England Mutual Life Insurance Company, Life Policy number 8672183, (iii) the life insurance policy issued on the life of G. Robert Tod for the benefit of CML in the face amount of $408,000 by The New England Mutual Life Insurance Company, Life Policy number 8698541, and (iv) the life insurance policy issued on the life of G. Robert Tod for the benefit of CML in the face amount of $800,000 by The New England Mutual Life Insurance Company, Life Policy number 8672184. KIOSK. Any temporary seasonal lease (not in excess of twelve (12) months in any event) by any Borrower of space provided that not more than $50,000 of Capital Expenditures may be expended by CML and its Subsidiaries in respect of any one kiosk. LANDLORD LIEN RESERVE. With respect to any Eligible Inventory or Eligible NordicTrack Inventory which is located at a premises subject to a Specified Lease, the Landlord Lien Reserve shall be the lesser of (a) the sum of (i) all rent past due for more than thirty (30) days under such Specified Lease at such time and (ii) all rent which may become due under such Specified Lease during the twelve (12) month period commencing at the Original Closing Date, in each case, unless otherwise requested by the Administrative Agent, calculated on June 17, 1996 and at the end of each fiscal quarter thereafter by reference to the average monthly rent on such Specified Lease during the immediately preceding calendar year and (b) the net book value (determined on a first-in first-out basis at lower of cost or market) of such Eligible Inventory or Eligible NordicTrack Inventory. LANDLORD WAIVER. A waiver from the lessor or sublessor of property leased by any of the Borrowers as lessee in substantially the form of EXHIBIT F hereto or otherwise approved by the Administrative Agent in its sole discretion. LENDERS. BIII, GM and BKB, and any other Person who becomes a Lender pursuant to ss.20. LENDER REPRESENTATIVE. See ss.9.9.7. LETTER OF CREDIT. See ss.4.1.1. LETTER OF CREDIT APPLICATION. See ss.4.1.1. LETTER OF CREDIT EXPOSURE. At any time, and with respect to any Borrower or CML, the sum of (a) the Maximum Drawing Amount with respect to all Letters of Credit issued at the request of such Borrower or, in the case of CML, any Borrower and (b) all Unpaid Reimbursement Obligations of such Borrower or, as the case may be, CML. LETTER OF CREDIT PARTICIPATION. See ss.4.1.4. LIFE INSURANCE COLLATERAL ASSIGNMENTS. The collateral assignments of the Key Man Life Insurance Polices executed and delivered by CML to the Administrative Agent. 21 LOAN DOCUMENTS. This Credit Agreement, the Notes, the Letter of Credit Applications, the Letters of Credit, the Fee Letter, the Intercompany Subordination Agreement, the Amendment Agreement, the Intercreditor Agreement, the Collateral Agency Agreement and the Security Documents. LOAN REQUEST. See ss.2.6.1. LOANS. The NordicTrack Loans and the S&H Loans. MAJORITY LENDERS. As of any date, the Lenders (excluding any Delinquent Lenders) holding at least fifty-one percent (51%) of the outstanding principal amount of the Notes on such date; and if no such principal is outstanding, the Lenders (excluding any Delinquent Lenders) whose aggregate Commitments constitutes at least fifty-one percent (51%) of the Total Commitment. MATURITY DATE. August 1, 1999. MAXIMUM DRAWING AMOUNT. The maximum aggregate amount that the beneficiaries may at any time draw under outstanding Letters of Credit, as such aggregate amount may be reduced from time to time pursuant to the terms of the Letters of Credit. MAXIMUM OVERADVANCE AMOUNT. $49,896,000. MONOGRAM CREDIT CARD PROGRAM. The credit card program made available to customers of NordicTrack pursuant to the Monogram Credit Card Program Agreement. MONOGRAM CREDIT CARD PROGRAM AGREEMENT. The Consumer Credit Card Program Agreement dated as of November 29, 1995 among Monogram Credit Card Bank of Georgia and NordicTrack as amended prior to the Restatement Effective Date in the form delivered to the Administrative Agent on or prior to the Restatement Effective Date. MONTHLY BUDGET. The monthly operating budget of CML and its Subsidiaries for the period from July 1, 1998 through July 31, 1999 delivered to the Administrative Agent and the Lenders on or prior to the Restatement Effective Date and attached as ANNEX A hereto, such Monthly Budget including a report of each Borrower's projected monthly outstandings (including Loans and Letter of Credit Exposure), Overadvances, Borrowing Base availability, Accounts Payable and Accrued Expenses. MORTGAGED PROPERTY. Any Real Estate which is subject to any Mortgage. MORTGAGES. Collectively (a) the Mortgage Deeds, Assignments of Leases and Security Agreements dated as of the Original Closing Date, from NordicTrack to BKB as agent under the Collateral Note and assigned to the Administrative Agent in accordance with the terms and provisions of (i) that certain Pledge Agreement dated as of the Original Closing Date by and among NT, BKB as agent and the Administrative Agent and (ii) that certain Assignment of Mortgage dated as of the Original Closing Date by and between BKB as agent and the Administrative Agent, with respect to the fee interest of NordicTrack in its owned real properties, in each case in form and substance satisfactory to the Administrative Agent and (b) such other mortgages and deeds of trust from any of the Borrowers or Guarantors to the Administrative Agent, or amendments or restatements thereof, which have been executed and delivered to the Administrative Agent or which are required to be executed or delivered to the Administrative Agent pursuant to ss.9.13 or ss.9.18 or Amendment No. 1 to Credit Agreement. MULTIEMPLOYER PLAN. Any multiemployer plan within the meaning of ss.3(37) of ERISA maintained or contributed to by CML, any of the Borrowers or any ERISA Affiliate. NA. As defined in the preamble hereto. 22 NT. As defined in the preamble hereto. NT SPIN-OFF. See ss.10.4.2. NET CASH PROCEEDS. With respect to any (a) sale of any assets (including Capital Stock of any Subsidiary of CML) of any of CML, any of the Borrowers or any of their Subsidiaries, or (b) issuance by CML of any Capital Stock, the gross consideration received by CML, such Borrower, or such Subsidiary (in cash) from such sale or issuance, net of commissions, underwriting costs, direct sales costs, normal closing adjustments, income taxes attributable to such sale and professional fees and expenses incurred directly in connection therewith, to the extent the foregoing are actually paid in connection with such sale or issuance. NORDICTRACK. As defined in the preamble hereto. NORDICTRACK BORROWING BASE. At the time of reference thereto, an amount determined by the Administrative Agent by reference to the most recent Borrowing Base Report, which is equal to the sum of: (a) 80.00% of NordicTrack's Eligible Accounts Receivable for which invoices have been issued and are payable; PLUS (b) 55.00% of the net book value (determined on a first-in first-out basis at lower of cost or market) of Eligible NordicTrack Inventory; MINUS (c) the amount of any Landlord Lien Reserve with respect to NordicTrack; PROVIDED, HOWEVER, the Administrative reserves its rights, upon prior written notice to the Borrowers, and with the consent of the Majority Lenders, to add reserves and decrease the advance rates set forth herein, if, in the Administrative Agent's judgment, the results of commercial finance examinations, inventory appraisals or other credit or collateral considerations indicate a deterioration in NordicTrack's Eligible Accounts Receivable or Eligible NordicTrack Inventory, such that additional reserves or a lower advance rate for NordicTrack's Eligible Accounts Receivable and/or Eligible NordicTrack Inventory is warranted. NORDICTRACK LOANS. Revolving credit loans made or to be made by the Lenders to NordicTrack pursuant to ss.2.1.1. NORDICTRACK NOTE RECORD. A record with respect to a NordicTrack Note. NORDICTRACK NOTES. See ss.2.4.1. NOTE RECORDS. Collectively, the NordicTrack Note Records and the S&H Note Records. NOTES. Collectively, the Collateral Notes, the NordicTrack Notes and the S&H Notes. OBLIGATIONS. All indebtedness, obligations and liabilities of any of CML, the Borrowers and their Subsidiaries to any of the Lenders and the Administrative Agent, individually or collectively, existing on the date of this Credit Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, arising or incurred under this Credit Agreement or any of the other Loan Documents or in respect of any of the Loans made or Reimbursement Obligations incurred or any of the Notes, Letter of Credit Applications, Letter of Credits or other instruments at any time evidencing any thereof. 23 OPERATING ACCOUNT. With respect to any Borrower or CML, such Borrower's or CML's as the case may be, demand deposit account(s) with BKB, listed on SCHEDULE 8.20 hereto. ORIGINAL CLOSING DATE. April 17, 1996. OUTSTANDING. With respect to the Loans, the aggregate unpaid principal thereof as of any date of determination. OVERADVANCE. As of any date of determination, with respect to any Borrower, Loans, the unpaid principal thereof which exceeds an amount equal to such Borrower's Borrowing Base MINUS such Borrower's Letter of Credit Exposure. PATENT ASSIGNMENT. The Patent Collateral Assignment and Security Agreement, dated as of the Original Closing Date, and restated as of the Restatement Effective Date, made by the Borrowers and the Guarantors in favor of the Administrative Agent and in form and substance satisfactory to the Lenders and the Administrative Agent. PBGC. The Pension Benefit Guaranty Corporation created by ss.4002 of ERISA and any successor entity or entities having similar responsibilities. PERFECTION CERTIFICATES. The Perfection Certificates as defined in the Security Agreement. PERMITTED CAPITAL STOCK. Capital Stock of the Borrower with respect to which CML has no obligation to make any Distributions prior to the payment in full in cash of all the Obligations. PERMITTED DISPOSITION. Any disposition of assets of any Person described in and permitted by ss.10.5.2. PERMITTED EMPLOYEE ISSUANCE. Any issuance by CML of its common stock to employees, officers or directors of CML or any of the Borrowers pursuant to stock option plans and employee stock purchase plans of CML or any of the Borrowers in compliance with ss.10.15. PERMITTED INVENTORY LOCATIONS. The retail stores, distribution centers and manufacturing facilities of the Borrowers located in the United States of America and listed on SCHEDULE 2 hereto, as such SCHEDULE 2 may be supplemented from time to time in accordance with the provisions of ss.9.4(j). PERMITTED LIENS. Liens, security interests and other encumbrances permitted by ss.10.2. PERSON. Any individual, corporation, partnership, limited liability company, limited liability partnership, trust, unincorporated association, business, or other legal entity, and any government or any governmental agency or political subdivision thereof. PIK DATE. See ss.2.5. PIK EVENT DATE. The failure of the Borrowers, by April 1, 1999, to (a) permanently reduce the Total Commitment to not more than $35,000,000, and (b) prepay all outstanding Loans such that, as of April 1, 1999, the outstanding Loans and Letter of Credit Exposure of CML and the Borrowers does not exceed $35,000,000 in the aggregate. PIK NOTES. Promissory notes issued in payment of interest on the Loans pursuant to ss.2.5, in form and substance satisfactory to the Administrative Agent. 24 PRIVATE LABEL CREDIT CARD PROGRAMS. The Monogram Credit Card Program, the GE Capital Credit Card Program and all other credit card programs provided to customers of NordicTrack by Persons other than CML, NordicTrack or their Subsidiaries or Affiliates, together with all associated documentation. REAL ESTATE. All real property now, or in the future, owned or leased (as lessee or sublessee) by CML, any of the Borrowers or any of their Subsidiaries. RECORD. The grid attached to a Note, or the continuation of such grid, or any other similar record, including computer records, maintained by any Lender with respect to any Loan referred to in such Note. REFERENCE BANK. BKB. REGISTRATION RIGHTS AGREEMENT. The Registration Rights Agreement, dated as of the Restatement Effective Date, between CML, BIII and GM, in form and substance satisfactory to the Lenders, whereby CML shall agree to effect the registration, under the Securities Act of 1933, of the common stock of CML issued to BIII and GM. REIMBURSEMENT OBLIGATION. Each of CML's and each Borrower's obligation to reimburse the Issuing Bank and the Lenders on account of any drawing under any Letter of Credit issued on behalf of (a) in the case of CML, any Borrower, and (b) in the case of any Borrower, such Borrower, all as provided in ss.4.2. RELATIVE. In relation to any Person, any spouse, parent, grandparent, child, grandchild, brother or sister of such Person, or the spouse of any of the foregoing. RESTATEMENT EFFECTIVE DATE. As defined in the Amendment Agreement. RESTRICTED PAYMENTS. In relation to CML, the Borrowers and their Subsidiaries, (a) any Distribution or (b) any payment or prepayment by any Borrower or its Subsidiaries to CML or to any other Affiliate of any of the Borrowers or CML other than payments to Affiliates (other than CML) for goods and services in the ordinary course of business on terms equivalent to those obtainable in arms length transactions. S&H. As defined in the preamble hereto. S&H BORROWING BASE. At the relevant time of reference thereto, an amount determined by the Administrative Agent by reference to the most recent Borrowing Base Report, which is equal to the sum of: (a) 80.00% of S&H's Eligible Accounts Receivable for which invoices have been issued and are payable; PLUS (b) 55.00% of the net book value (determined on a first-in first-out basis at lower of cost or market) of S&H's Eligible Inventory; MINUS (c) the amount of any Landlord Lien Reserve with respect to S&H; PROVIDED, HOWEVER, the Administrative Agent reserves its rights, upon prior written notice to the Borrowers, and with the consent of the Majority Lenders, to add reserves and decrease the advance rates set forth herein, if, in the Administrative Agent's judgment, the results of commercial finance examinations, inventory appraisals or other credit or collateral considerations indicate a deterioration in S&H's Eligible Accounts Receivable or Eligible Inventory, such that additional reserves or a lower advance rate for S&H's Eligible Accounts Receivable and/or Eligible Inventory is warranted. 25 S&H LOANS. Revolving credit loans made or to be made by the Lenders to S&H pursuant to ss.2.1.3. S&H NOTE RECORD. A Record with respect to an S&H Note. S&H NOTES. See ss.2.4.3. SECOND AMENDMENT TO COPYRIGHT MORTGAGE. The Amendment No. 2 to the Memorandum of Grant of Security Interest in Copyrights, dated as of the Restatement Effective Date, among CML, the Borrowers, the Guarantors and the Administrative Agent and in form and substance satisfactory to the Lenders and the Administrative Agent. SECURITY AGREEMENT. The Security Agreement, dated as of the Original Closing Date, and restated as of the Restatement Effective Date, among the Borrowers, the Guarantors and the Administrative Agent. SECURITY DOCUMENTS. The Guaranty, the Foreign Guaranties, the Security Agreement, the Mortgages, the Life Insurance Collateral Assignments, the Patent Assignment, the Trademark Assignment, the Copyright Mortgage, the First Amendment to Copyright Mortgage, the Second Amendment to Copyright Mortgage, the Agency Account Agreements, the Stock Pledge Agreement, the Foreign Pledge Agreements, the Collateral Agency Agreement, and the First Amendment to Security Documents Agreement. SETTLEMENT. Among the Lenders, the making or receiving of payments in immediately available funds to the extent necessary to cause each Lender's actual share of the outstanding amount of Loans (after giving effect to any Loan Request) to be equal to each Lender's Commitment Percentage of the outstanding amount of such Loans, in any case where, prior to such event or action, the actual share is not so equal. SETTLEMENT AMOUNT. See ss.2.8. SETTLEMENT DATE. (a) The Drawdown Date relating to any Loan Request, (b) Friday of each week, or if Friday is not a Business Day, the Business Day immediately following such Friday, (c) the Business Day immediately following the day the Agent becomes aware of the existence of an Event of Default, (d) the Business Day immediately following any Business Day on which the amount of Loans outstanding from BKB is equal to or greater than BKB's Commitment, (e) the Business Day immediately following any Business Day on which the amount of Loans outstanding increases or decreases by more than $1,000 as compared to the previous Settlement Date, or (f) any Business Day on which (i) the amount of outstanding Loans decreases and (ii) the amount of BKB's Loans outstanding equals zero Dollars ($0). SETTLING LENDER. See ss.2.8. SPECIFIED LEASE. A lease by any of the Borrowers as lessee of Real Estate at which Eligible Inventory or, in the case of NordicTrack, Eligible NordicTrack Inventory, is held and as to which at any time the Administrative Agent has not received evidence, in form and substance satisfactory to the Administrative Agent, that based upon then existing law (as determined by the Administrative Agent in the exercise of its reasonable discretion and on the advice of counsel), the landlord of such property would not have a lien on inventory superior to the security interest granted under the Security Documents, securing rent obligations more than thirty (30) days past due or securing future rent obligations accruing after the Original Closing Date; PROVIDED, HOWEVER, that no lease for which the applicable Borrower and the Administrative Agent have received a Landlord Waiver shall be a Specified Lease. 26 STOCK PLEDGE AGREEMENT. The Stock Pledge Agreement, dated as of the Original Closing Date, and restated as of the Restatement Effective Date, among CML, certain of the Borrowers and the Administrative Agent, as amended and in effect from time to time, in form and substance satisfactory to the Lenders and the Administrative Agent. STOCK PURCHASE AGREEMENT. The Stock Purchase Agreement, dated as of the Restatement Effective Date, among CML, BIII and GM, in form and substance satisfactory to the Lenders. SUB-COMMITMENT. See ss.2.3.1. SUB-OVERADVANCE AMOUNT. See ss.2.1.5(b). SUBORDINATED DEBENTURES. The 5 1/2% Convertible Debentures due 2003 issued by CML pursuant to the Fiscal Agency Agreement. SUBSIDIARY. Any corporation, association, trust, or other business entity of which the designated parent shall at any time own directly or indirectly through a Subsidiary or Subsidiaries at least a majority (by number of votes) of the outstanding Voting Stock. TITLE INSURANCE COMPANY. Chicago Title Insurance Company. TITLE POLICY. In relation to each Mortgaged Property, an ALTA standard form title insurance policy issued by the Title Insurance Company (with such reinsurance or co-insurance as the Administrative Agent may require, any such reinsurance to be with direct access endorsements) in such amount as may be determined by the Administrative Agent insuring the priority of the Mortgage of such Mortgaged Property and that one of the Borrowers or one of the Guarantors holds marketable fee simple title to such Mortgaged Property, subject only to the encumbrances permitted by such Mortgage and which shall not contain exceptions for mechanics liens or persons in occupancy (except as may be permitted by such Mortgage), shall not insure over any matter except to the extent that any such affirmative insurance is acceptable to the Administrative Agent in its sole discretion, and shall contain such endorsements and affirmative insurance as the Administrative Agent in its discretion may require, including but not limited to (i) comprehensive endorsement, (ii) variable rate of interest endorsement, (iii) usury endorsement, (iv) revolving credit endorsement, (v) tie-in endorsement, (vi) doing business endorsement and (vii) ALTA form 3.1 zoning endorsement. TOTAL COMMITMENT. The sum of the Commitments of the Lenders, as in effect from time to time. TRADEMARK ASSIGNMENT. The Trademark Collateral Security and Pledge Agreement, dated as of the Original Closing Date, and restated as of the Restatement Effective Date, made by the Borrowers and the Guarantors in favor of the Administrative Agent and in form and substance satisfactory to the Lenders and the Administrative Agent. TRUST. The Trust, as such term is defined in the Trust Agreement. TRUST AGREEMENT. The Trust Agreement dated as of June 28, 1989, between CML and Indian Head National Bank, pursuant to which CML has established a "rabbi trust" for the benefit of certain executive employees of CML. 27 TRUST ASSETS. Any assets or properties from time to time heretofore or hereafter transferred to the Trust pursuant to the terms of the Trust Agreement and constituting assets held in trust for the benefit of certain executive employees of CML. UNIFORM CUSTOMS. With respect to any Letter of Credit, the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 or any successor version thereto adopted by the Issuing Bank in the ordinary course of its business as a letter of credit issuer and in effect at the time of issuance of such Letter of Credit. UNPAID REIMBURSEMENT OBLIGATION. Any Reimbursement Obligation for which the applicable Borrower does not reimburse the Issuing Bank and the Lenders on the date specified in, and in accordance with, ss.4.2. UNUSED LINE FEE. See ss.2.2. VOTING STOCK. Stock or similar interests, of any class or classes (however designated), the holders of which are at the time entitled, as such holders, to vote for the election of a majority of the directors (or persons performing similar functions) of the corporation, association, trust or other business entity involved, whether or not the right so to vote exists by reason of the happening of a contingency. WARRANT PURCHASE AGREEMENT. The Warrant Purchase Agreement, dated as of March 11, 1998, among CML, BKB and Rothschild Recovery Fund, L.P. WARRANTS. The Common Stock Purchase Warrants of CML issued to BKB pursuant to the terms of the Warrant Purchase Agreement, and as amended by the Amendment No. 1 to Common Stock Purchase Warrant, in form and substance satisfactory to BKB. WISCONSIN. The State of Wisconsin Investment Board. WISCONSIN DOCUMENTS. The Wisconsin Note Purchase Agreement, the Wisconsin Subordinated Note, the Wisconsin Guaranties, the Intercreditor Agreement and each other document, instrument or other agreement related thereto. WISCONSIN GUARANTIES. The several subordinated subsidiary guaranties, made by each of the Subsidiaries of CML in favor of Wisconsin pursuant to which each Subsidiary guaranties to Wisconsin the payment and performance of CML's obligations under the Wisconsin Documents. WISCONSIN NOTE PURCHASE AGREEMENT. The Note Purchase Agreement, dated as of the date hereof, between Wisconsin and CML, pursuant to which the Wisconsin Subordinated Note is issued, in form and substance satisfactory to the Lenders. WISCONSIN SUBORDINATED NOTE. The Secured Convertible Subordinated Note in the principal amount of $20,000,000, dated as of the date hereof, issued by CML to Wisconsin pursuant to the Wisconsin Note Purchase Agreement, in form and substance satisfactory to the Lenders. 28 1. RULES OF INTERPRETATION. (a) A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms and the terms of this Credit Agreement. (b) The singular includes the plural and the plural includes the singular. (c) A reference to any law includes any amendment or modification to such law. (d) A reference to any Person includes its permitted successors and permitted assigns. (e) Accounting terms not otherwise defined herein have the meanings assigned to them by generally accepted accounting principles applied on a consistent basis by the accounting entity to which they refer. (f) The words "include", "includes" and "including" are not limiting. (g) All terms not specifically defined herein or by generally accepted accounting principles, which terms are defined in the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts, have the meanings assigned to them therein, with the term "instrument" being that defined under Article 9 of the Uniform Commercial Code. (h) Reference to a particular "ss." refers to that section of this Credit Agreement unless otherwise indicated. (i) The words "herein", "hereof", "hereunder" and words of like import shall refer to this Credit Agreement as a whole and not to any particular section or subdivision of this Credit Agreement. (j) BKB acts as Collateral Agent for the Secured Parties (as defined in the Collateral Agency Agreement) pursuant to the Collateral Agency Agreement with respect to the Collateral granted to the Collateral Agent pursuant to (i) the Security Agreement, (ii) the Mortgages, (iii) the Patent Assignment, (iv) the Trademark Assignment, (v) the Copyright Mortgage, and (vi) the Stock Pledge Agreement. Accordingly, references in this Credit Agreement to BKB as Administrative Agent with respect to such Collateral and such Security Documents shall be deemed references to BKB as Collateral Agent. BKB acts as Administrative Agent for the Lenders and the Administrative Agent pursuant to this Credit Agreement with respect to (i) the Guaranty, (ii) the Foreign Guaranties, (iii) the Life Insurance Collateral Assignments, and (iv) the Foreign Pledge Agreements. All references in this Credit Agreement and in such Security Documents to BKB as Administrative Agent shall be to BKB in such capacity and not in its capacity as Collateral Agent. References in ss.8.14 and in ss.10.2(j) to the Administrative Agent shall be deemed references to BKB in its capacity as Administrative Agent and as Collateral Agent. 29 1. THE REVOLVING CREDIT FACILITIES. 2. COMMITMENT TO LEND. Subject to the terms and conditions set forth in this Credit Agreement (including without limitation, the provisions of ss.11.4), each of the Lenders severally agrees, in reliance upon the representations and warranties of NordicTrack contained herein, to lend to NordicTrack and NordicTrack may borrow, repay, and reborrow from time to time between the Restatement Effective Date and the Maturity Date upon notice by NordicTrack to the Administrative Agent given in accordance with ss.2.6, such sums as are requested by NordicTrack, PROVIDED that the sum of the outstanding amount of the NordicTrack Loans (after giving effect to all amounts requested) PLUS NordicTrack's Letter of Credit Exposure shall not at any time exceed the lesser of (a) NordicTrack's Sub-Commitment and (b) the NordicTrack Borrowing Base PLUS NordicTrack's Sub-Overadvance Amount in effect at such time. The NordicTrack Loans shall be made PRO RATA in accordance with each Lender's Commitment Percentage. Each request for a NordicTrack Loan hereunder shall constitute a representation and warranty by NordicTrack that the conditions set forth in ss.12 and ss.13, in the case of the initial NordicTrack Loans to be made on the Restatement Effective Date, and ss.13, in the case of all other NordicTrack Loans, have been satisfied on the date of such request. INTENTIONALLY OMITTED. COMMITMENT TO LEND S&H LOANS. Subject to the terms and conditions set forth in this Credit Agreement (including without limitation, the provisions of ss.11.4), each of the Lenders severally agrees, and in reliance upon the representations and warranties of S&H contained herein, to lend to S&H and S&H may borrow, repay, and reborrow from time to time between the Restatement Effective Date and the Maturity Date upon notice by S&H to the Administrative Agent given in accordance with ss.2.6, such sums as are requested by S&H, PROVIDED that the sum of the outstanding amount of the S&H Loans (after giving effect to all amounts requested) PLUS S&H's Letter of Credit Exposure shall not at any time exceed the lesser of (a) S&H's Sub-Commitment and (b) the S&H Borrowing Base PLUS S&H's Sub-Overadvance Amount in effect at such time. The S&H Loans shall be made PRO RATA in accordance with each Lender's Commitment Percentage. Each request for a S&H Loan hereunder shall constitute a representation and warranty by S&H that the conditions set forth in ss.12 and ss.13, in the case of the initial S&H Loans to be made on the Restatement Effective Date, and ss.13, in the case of all other S&H Loans, have been satisfied on the date of such request. INTENTIONALLY OMITTED. OVERADVANCE FACILITY. 2.1.5(A). MAXIMUM OVERADVANCE AMOUNT. As of any date of determination, the sum of the Overadvances shall not exceed the Maximum Overadvance Amount then in effect. Each Overadvance outstanding from time to time shall bear interest calculated pursuant to ss.2.5. 2.1.5(B). SUB-OVERADVANCE AMOUNTS. The sum of the Overadvances made to any Borrower shall not exceed, (i) as of the end of any month described in SCHEDULE 2.1.5 hereto, the amount for such Borrower set forth opposite such month in such SCHEDULE 2.1.5, or (ii) during any month described in SCHEDULE 2.1.5 hereto, the greater of (A) the amount for such month in such SCHEDULE 2.1.5 and (B) the amount for such Borrower set 30 forth opposite the month immediately preceding the month referred to in clause (A) above (such amount being referred to herein as a "SUB-OVERADVANCE AMOUNT" for such Borrower and such period). The Administrative Agent shall keep a record of the Sub-Overadvance Amount of each Borrower as in effect on each date and such record shall be conclusive, in the absence of manifest error. The sum of the Borrowers' Sub-Overadvance Amounts shall not at any time exceed the Maximum Overadvance Amount. 1. UNUSED LINE FEE. Each Borrower agrees to pay to the Administrative Agent for the accounts of the Lenders in accordance with their respective Commitment Percentages an unused line fee (the "UNUSED LINE FEE") calculated at the rate of one-half percent (0.50%) per annum on the average daily amount during each calendar quarter or portion thereof from the date hereof to the Maturity Date by which such Borrower's Sub-Commitment MINUS such Borrower's Letter of Credit Exposure exceeds the outstanding amount of such Borrower's Loans during such calendar quarter. The Unused Line Fee shall be payable quarterly in arrears on the first day of each calendar quarter for the immediately preceding calendar quarter commencing on the first such date following the date hereof, with a final payment on the Maturity Date or any earlier date on which the Commitments shall terminate. REALLOCATION AND REDUCTION OF TOTAL COMMITMENT. REALLOCATION OF TOTAL COMMITMENT. On the Restatement Effective Date, CML shall by written notice to the Administrative Agent allocate the Total Commitment among the Borrowers (such amount allocated to any Borrower and set forth on SCHEDULE 1, a "Sub-Commitment"), PROVIDED that the sum of the Borrowers' Sub-Commitments shall not exceed the Total Commitment. CML shall have the right, no more frequently than once in any calendar month (unless otherwise permitted by the Administrative Agent) to request that the Lenders reallocate the unborrowed and unused portion of the Total Commitment. Concurrently with its delivery of the Borrowing Base Report for the previous month pursuant to ss.9.4(f), CML shall give to the Administrative Agent written notice in the form of EXHIBIT H-2 hereto of each reallocation requested under this ss.2.3.1 (a "COMMITMENT REALLOCATION REQUEST"). Each such notice shall specify (i) each Borrower's Sub-Commitment as of the date of such notice, (ii) each Borrower's Sub-Commitment after giving effect to such notice, and (iii) the effective date of such reallocation, which date shall be no less than two (2) Business Days after the date of such notice (the "COMMITMENT REALLOCATION DATE"). Upon giving effect to a Commitment Reallocation Request, the sum of the Borrowers' Sub-Commitments shall not exceed the Total Commitment in effect at that time. On the Commitment Reallocation Date, the Sub-Commitment of each of the Borrowers shall be reallocated in accordance with the Commitment Reallocation Request and SCHEDULE 1 shall be deemed revised to reflect the reallocation. The Administrative Agent shall keep a record of each Commitment Reallocation Request and the Sub-Commitment of each Borrower as in effect on each date and such record shall be conclusive, in the absence of manifest error. A reallocation of the Total Commitment under this ss.2.3.1 shall not be deemed to be a reduction of the Total Commitment. REDUCTION OF SUB-COMMITMENT. Each of the Borrowers and CML shall have the right at any time and from time to time upon five (5) Business Days prior written notice to the Administrative Agent to reduce by $500,000 or an integral multiple thereof or terminate entirely its Sub-Commitment or, in the case of CML, any Borrower's Sub-Commitment, whereupon the Total Commitment shall be reduced by the amount specified in such notice or, as the case may be, terminated and the Commitments of the Lenders shall be reduced PRO RATA in accordance with their respective Commitment Percentages of the amount specified in such notice or, as the case may be, terminated. Promptly after receiving any notice of any Borrower or CML delivered pursuant to this ss.2.3.2, the Administrative Agent will notify the Lenders of the substance thereof. Upon the effective date of any such reduction or termination, the applicable Borrower shall pay to the Administrative Agent for the respective accounts of the Lenders the full amount of any Unused 31 Line Fee then accrued on the amount of the reduction. No reduction or termination of the Commitments may be reinstated. MANDATORY REDUCTION OF TOTAL COMMITMENT. Without limiting the obligations of CML, the Borrowers and their Subsidiaries to comply with the provisions of ss.10.5.2 of the Credit Agreement, in the event of any (a) disposition of assets (including Capital Stock of any Subsidiary of CML) by CML or any of its Subsidiaries (other than a Permitted Disposition; PROVIDED that, for purposes of this ss.2.3.3, the sale or other disposition by CML of Capital Stock of NT, or an NT Spin-Off shall be treated as if it were not a Permitted Disposition, and the requirements of this ss.2.3.3 shall apply in the case of any such sale or other disposition or spin-off) or (b) issuance by CML of any of its Capital Stock (other than a Permitted Employee Issuance), the Total Commitment shall be permanently reduced on the date of receipt by CML or any of its Subsidiaries of any Net Cash Proceeds from such disposition or issuance (it being understood that the parties hereto do not expect the conversion of the Wisconsin Note into common stock of CML to result in any Net Cash Proceeds) by an amount equal to such Net Cash Proceeds. On or prior to the date of any such sale, disposition, issuance or spin-off, CML shall (i) allocate the reduction of the Total Commitment among the Sub-Commitments of the Borrowers as CML and the Lenders agree and (ii) give to the Administrative Agent written notice setting forth the Total Commitment allocation after giving effect to any reduction pursuant to this ss.2.3.3. In the event CML fails, by the date of the receipt by CML or any of its Subsidiaries of any Net Cash Proceeds from such sale, disposition, issuance or spin-off, to reallocate the Sub-Commitments of the Borrowers to give effect to such reductions, the Administrative Agent shall reallocate the Sub-Commitments of the Borrowers in its sole discretion. 1. THE NOTES. THE NORDICTRACK NOTES. The NordicTrack Loans shall be evidenced by promissory notes of NordicTrack in substantially the form of EXHIBIT A-1 hereto (each a "NORDICTRACK NOTE"), dated as of the Restatement Effective Date (or other such date on which a Lender may become a party hereto in accordance with ss.20 hereof) and completed with appropriate insertions. One NordicTrack Note shall be payable to the order of each Lender in a principal amount equal to such Lender's Commitment or, if less, the outstanding amount of all NordicTrack Loans made by such Lender, plus interest accrued thereon, as set forth below. NordicTrack irrevocably authorizes each Lender to make or cause to be made, at or about the time of the Drawdown Date of any NordicTrack Loan or at the time of receipt of any payment of principal on such Lender's NordicTrack Note, an appropriate notation on such Lender's NordicTrack Note Record reflecting the making of such NordicTrack Loan or (as the case may be) the receipt of such payment. The outstanding amount of the NordicTrack Loans set forth on such Lender's NordicTrack Note Record shall be PRIMA FACIE evidence of the principal amount thereof owing and unpaid to such Lender, but the failure to record, or any error in so recording, any such amount on such Lender's NordicTrack Note Record shall not limit or otherwise affect the obligations of NordicTrack hereunder or under any NordicTrack Note to make payments of principal of or interest on any NordicTrack Note when due. INTENTIONALLY OMITTED. THE S&H NOTES. The S&H Loans shall be evidenced by promissory notes of S&H in substantially the form of EXHIBIT A-2 hereto (each an "S&H NOTE"), dated as of the Restatement Effective Date (or other such date on which a Lender may become a party hereto in accordance with ss.20 hereof) and completed with appropriate insertions. One S&H Note shall be payable to the order of each Lender in A principal amount equal to such Lender's Commitment or, if less, the outstanding amount of all S&H Loans made by such Lender, plus interest accrued thereon, as set forth below. S&H irrevocably authorizes each Lender to make or cause to be made, at or about 32 the time of the Drawdown Date of any S&H Loan or at the time of receipt of any payment of principal on such Lender's S&H Note, an appropriate notation on such Lender's S&H Note Record reflecting the making of such S&H Loan or (as the case may be) the receipt of such payment. The outstanding amount of the S&H Loans set forth on such Lender's S&H Note Record shall be PRIMA FACIE evidence of the principal amount thereof owing and unpaid to such Lender, but the failure to record, or any error in so recording, any such amount on such Lender's S&H's Note Record shall not limit or otherwise affect the obligations of S&H hereunder or under any S&H Note to make payments of principal of or interest on any S&H Note when due. INTENTIONALLY OMITTED. 1. INTEREST ON LOANS. Except as otherwise provided in ss.5.11. (a) During the period from the Restatement Effective Date through the earlier to occur of (i) the Maturity Date, or (ii) the PIK Event Date (such earlier date being referred to herein as the "PIK DATE"), each Loan shall bear interest at the rate of four percent (4.00%) per annum above the Base Rate. On the PIK Date (A) each Borrower shall issue to each Lender a PIK Note in the principal amount equal to interest which would have accrued at the rate of one and one-half of one percent (1.50%) per month, compounded monthly, on the outstanding principal amount of the Loans of such Lender to such Borrower during the period commencing on January 1, 1999 and ending on the PIK Date, and (B) all Loans will from and after the PIK Date bear interest at the rate equal to (x) the annual rate equal to the Base Rate plus four percent (4.00%), payable monthly in arrears on each Interest Payment Date in cash, plus (y) one and one-half of one percent (1.50%) per month, payable monthly in arrears on each Interest Payment Date by the issuance of PIK Notes on such Interest Payment Date in the principal amount of such accrued unpaid interest at the rate of one and one-half of one percent (1.50%) per month. Each PIK Note issuable pursuant to this ss.2.5(a) shall bear interest, from and after the date that such PIK Note was required by this ss.2.5 to be issued, at the rate of one and one-half of one percent (1.50%) per month, compounded monthly, and shall be payable upon the earlier to occur of (a) the Maturity Date, or (b) the acceleration or payment in full of all the other Loans. In the event that any Borrower fails to issue any PIK Note on any PIK Date or within five (5) Business Days after any Interest Payment Date or on any other date as required by this ss.2.5, (i) such failure shall be an immediate and automatic Event of Default hereunder, and (ii) without derogation or waiver of any of the rights and remedies of the Administrative Agent or the Lenders as a result of such Event of Default, interest shall accrue on the Obligations as if all PIK Notes required to be issued pursuant to this ss.2.5 had been timely issued in accordance with the requirements of this ss.2.5. (b) Each of the Borrowers promises to pay interest on each of its Loans in arrears on each Interest Payment Date with respect thereto. 1. REQUESTS FOR LOANS. LOAN REQUESTS. Each of the Borrowers shall give to the Administrative Agent written notice in the form of EXHIBIT B hereto (or telephonic notice confirmed in a writing in the form of EXHIBIT B hereto) of each Loan requested by such Borrower hereunder (a "LOAN REQUEST") not later than (i) 10:00 a.m. (Boston time) on the proposed Drawdown Date of any Loan. Each such notice shall specify (A) the principal amount of the Loan requested, (B) the proposed Drawdown Date of such Loan, (C) the Interest Period for such Loan, and (D) the Borrower requesting such Loan. Promptly upon receipt of any such notice, the Administrative Agent shall notify each of the Lenders thereof. Each Loan Request shall be irrevocable and binding on the requesting Borrower and shall obligate the requesting Borrower to accept the Loan requested from the Lenders on the 33 proposed Drawdown Date. Each Loan Request shall be in a minimum aggregate amount of $100,000 or a larger integral multiple thereof. DAILY BORROWINGS. Notwithstanding the notice and minimum amount requirements set forth in ss.2.6.1 but otherwise in accordance with the terms and conditions of this Credit Agreement, the Administrative Agent may, in its sole discretion and without conferring with the Lenders, make Loans to each Borrower (i) by entry of credits to such Borrower's Controlled Disbursement Account to cover checks or other charges which such Borrower has drawn or made against such account or (ii) in an amount as otherwise requested by such Borrower. Each Borrower hereby requests and authorizes the Administrative Agent to make from time to time such Loans by means of appropriate entries of such credits sufficient to cover checks and other charges then presented. Each Borrower acknowledges and agrees that the making of such Loans shall, in each case, be subject in all respects to the provisions of this Credit Agreement as if they were Loans covered by a Loan Request including, without limitation, the limitations set forth in ss.2.1 and the requirements that the applicable provisions of secs.12 and 13 (in the case of Loans made on the Restatement Effective Date) and ss.13 (in all other cases) be satisfied. All actions taken by the Administrative Agent pursuant to the provisions of this ss.2.6.2 shall be conclusive and binding on the applicable Borrower absent the Administrative Agent's gross negligence or willful misconduct. 1. INTENTIONALLY OMITTED. 2. INTENTIONALLY OMITTED. 3. INTENTIONALLY OMITTED. 4. INTENTIONALLY OMITTED. 2.7.4. INTENTIONALLY OMITTED. SETTLEMENT; FAILURE TO MAKE FUNDS AVAILABLE. SETTLEMENT AND FUNDING PROCEDURES. On each Settlement Date, the Administrative Agent shall, not later than 11:30 a.m. (Boston time), give telephonic or facsimile notice (i) to the Lenders and the Borrowers of the respective outstanding amount of Loans made by the Administrative Agent on behalf of the Lenders from the immediately preceding Settlement Date through the close of business on the prior day and (ii) to the Lenders of the amount (a "SETTLEMENT AMOUNT") that each Lender (the "SETTLING LENDER") shall pay to effect a Settlement of any Loan. A statement of the Administrative Agent submitted to the Lenders and the applicable Borrower or to the Lenders with respect to any amounts owing under this ss.2.8.1 shall be PRIMA FACIE evidence of the amount due and owing. The Settling Lender shall, not later than 3:00 p.m. (Boston time) on such Settlement Date, effect a wire transfer of immediately available funds to the Administrative Agent in the amount of such Lender's Settlement Amount. All funds advanced by any Lender as a Settling Lender pursuant to this ss.2.8.1 shall for all purposes be treated as a Loan made by such Settling Lender to the applicable Borrower and all funds received by any Lender pursuant to this ss.2.8.1 shall for all purposes be treated as repayment of amounts owed with respect to Loans made by such Lender. In the event that any bankruptcy, reorganization, liquidation, receivership or similar cases or proceedings in which any of the Borrowers is a debtor prevent a Settling Lender from making any Loan to effect a Settlement as contemplated hereby, such Settling Lender will make such disposition and arrangements with the other Lenders with respect to such Loans, either by way of purchase of participations, distribution, PRO TANTO assignment of claims, subrogation or otherwise as shall result in each Lender's share of the outstanding Loans being equal, as nearly as 34 may be, to such Lender's Commitment Percentage of the outstanding amount of the Loans. Each Lender's obligation to fund its Settlement Amount in connection with any Settlement pursuant to this ss.2.8.1 shall be absolute and unconditional and shall not be affected by any circumstance, including (v) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Administrative Agent, any Borrower or any other Person for any reason whatsoever; (w) the occurrence and continuation of any Default or Event of Default; (x) any adverse change in the condition (financial or otherwise) of any of CML or its Subsidiaries or any other Lender; (y) any breach of any of the Loan Documents by any of CML or its Subsidiaries or any other Lender; or (z) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. ADVANCES BY ADMINISTRATIVE AGENT. The Administrative Agent may, unless notified to the contrary by any Lender prior to a Settlement Date, assume that such Lender has made or will make available to the Administrative Agent on such Settlement Date the amount of such Lender's Settlement Amount, and the Administrative Agent may (but it shall not be required to), in reliance upon such assumption, make available to the applicable Borrower a corresponding amount. If any Lender makes available to the Administrative Agent such amount on a date after such Settlement Date, such Lender shall pay to the Administrative Agent on demand an amount equal to the product of (i) the average computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Administrative Agent for federal funds acquired by the Administrative Agent during each day included in such period, TIMES (ii) the amount of such Settlement Amount, TIMES (iii) a fraction, the numerator of which is the number of days that elapse from and including such Settlement Date to the date on which the amount of such Settlement Amount shall become immediately available to the Administrative Agent, and the denominator of which is 360. A statement of the Administrative Agent submitted to such Lender with respect to any amounts owing under this paragraph shall be PRIMA FACIE evidence of the amount due and owing to the Administrative Agent by such Lender. If such Lender's Settlement Amount is not made available to the Administrative Agent by such Lender within three (3) Business Days following such Settlement Date, the Administrative Agent shall be entitled to recover such amount from the applicable Borrower on demand, with interest thereon at the rate per annum applicable to the Loans (but not PIK Notes) as of such Settlement Date. FAILURE TO MAKE FUNDS AVAILABLE. The failure or refusal of any Lender to make available to the Administrative Agent at the aforesaid time and place on any Settlement Date the amount of its Settlement Amount (i) shall not relieve any other Lender from its several obligations hereunder to make available to the Administrative Agent the amount of such other Lender's Settlement Amount and (ii) shall not impose upon such other Lender any liability with respect to such failure or refusal or otherwise increase the Commitment of such other Lender. 1. CHANGE IN BORROWING BASES. Each Borrowing Base shall be determined weekly (or at such other interval as may be specified pursuant to ss.9.4(f)) by the Administrative Agent by reference to the Borrowing Base Report. The Administrative Agent shall give to the Lenders and the applicable Borrower(s) written notice of any change in such Borrower's Borrowing Base determined by the Administrative Agent resulting from the Administrative Agent's determination to add reserves or decrease the advance rates with respect to such Borrowing Base based on commercial finance examinations, inventory appraisals or other credit or collateral considerations, which notice shall be effective upon receipt by the applicable Borrower(s). The Administrative Agent will not give any such notice to the applicable Borrower(s) without the consent of the Majority Lenders. Prior to such time as the applicable Borrower receives such notice, such Borrower's Borrowing Base shall be the amount in effect in the absence of such notice. For purposes of this Credit Agreement and the other Loan Documents, the Administrative Agent may assume, subject to adjustment based upon the provisions of this Credit Agreement, that each Borrower's Borrowing Base in effect on any given date is such Borrower's Borrowing Base as indicated on 35 the most recent Borrowing Base Report delivered on a timely basis to the Lenders and the Administrative Agent in accordance with the provisions of ss.9.4(f) hereof. 1. REPAYMENT OF THE LOANS. 2. MATURITY. Each Borrower promises to pay on the Maturity Date, and there shall become absolutely due and payable on the Maturity Date, all of its Loans outstanding on such date, together with any and all accrued and unpaid interest thereon. 1. MANDATORY REPAYMENTS OF LOANS. NORDICTRACK LOANS. If at any time the sum of the outstanding amount of the NordicTrack Loans and NordicTrack's Letter of Credit Exposure exceeds the lesser of (i) NordicTrack's Sub-Commitment in effect at such time and (ii) the NordicTrack Borrowing Base plus NordicTrack's Sub-Overadvance Amount in effect at such time, then NordicTrack shall immediately pay the amount of such excess to the Administrative Agent for the respective accounts of the Lenders for application: FIRST, to any Unpaid Reimbursement Obligations in respect of Letters of Credit issued at the request of NordicTrack; SECOND, to the NordicTrack Loans; and THIRD, to provide to the Administrative Agent cash collateral for Reimbursement Obligations in respect of Letters of Credit issued at the request of NordicTrack as contemplated by ss.4.2(b) and (c). Each payment of any Unpaid Reimbursement Obligations or prepayment of NordicTrack Loans shall be allocated among the Lenders, in proportion, as nearly as practicable, to each Unpaid Reimbursement Obligation or (as the case may be) the respective unpaid principal amount of each Lender's NordicTrack Note, with adjustments to the extent practicable to equalize any prior payments or repayments not exactly in proportion. 3.2.2. INTENTIONALLY OMITTED. 3.2.3. S&H LOANS. If at any time the sum of the outstanding amount of the S&H Loans and S&H's Letter of Credit Exposure exceeds the lesser of (i) S&H's Sub-Commitment in effect at such time and (ii) the S&H Borrowing Base PLUS S&H's Sub-Overadvance Amount in effect at such time, then S&H shall immediately pay the amount of such excess to the Administrative Agent for the respective accounts of the Lenders for application: FIRST, to any Unpaid Reimbursement Obligations in respect of Letters of Credit issued at the request of S&H; SECOND, to the S&H Loans; and THIRD, to provide to the Administrative Agent cash collateral for Reimbursement Obligations in respect of Letters of Credit issued at the request of S&H as contemplated by ss.4.2(b) and (c). Each payment of any Unpaid Reimbursement Obligations or prepayment of S&H Loans shall be allocated among the Lenders, in proportion, as nearly as practicable, to each Unpaid Reimbursement Obligation or (as the case may be) the respective unpaid principal amount of each Lender's S&H Note, with adjustments to the extent practicable to equalize any prior payments or repayments not exactly in proportion. 3.2.4. REPAYMENTS FROM NET CASH PROCEEDS. (a) CML shall, not later than the Business Day next following each day any Net Cash Proceeds arising from any (i) sale or other disposition by CML of the Capital Stock of any Subsidiary of CML, or (ii) issuance by CML of any Capital Stock (other than a Permitted Employee Issuance), are received by CML, pay to the Administrative Agent the full amount of such Net Cash Proceeds for application to the Loans. 36 (b) The Borrowers and its Subsidiaries shall, not later than the Business Day next following each day any Net Cash Proceeds arising from (i) a Permitted Disposition set forth in ss.10.5.2(c), or (ii) an NT Spin-Off are received by the any Borrower or its Subsidiaries, pay to the Administrative Agent the full amount of such Net Cash Proceeds for application to the Loans. (c) On or prior to the date of any prepayment made pursuant to ss.3.2.4, CML shall (a) allocate the payment of the Loans among the respective Loans of NordicTrack and S&H as CML and the Lenders agree and (b) give to the Administrative Agent written notice setting forth the allocation of such prepayment after giving effect to any prepayment pursuant to ss.3.2.4. In the event CML fails, by the date of such prepayment, to allocate the payments to the Loans of the Borrowers to give effect to such payments the Administrative Agent shall allocate the payments in its sole discretion. Each prepayment of Loans, pursuant to ss.3.2.4 shall be allocated among the Lenders, in proportion, as nearly as practicable, to the respective unpaid principal amount of each Lender's respective Note, with adjustments to the extent practicable to equalize any prior payments or repayments not exactly in proportion. (d) The Borrowers shall be permitted, subject to (i) any mandatory reductions in the Total Commitment required under ss.2.3.3, and (ii) borrowing availability requirements under this Credit Agreement, to reborrow all amounts repaid under this ss.3.2.4, in compliance with the provisions of this Credit Agreement. 1. DEPOSITORY ARRANGEMENTS. THE BORROWERS' DEPOSITORY ARRANGEMENTS. Each of the Borrowers will (i) on or prior to the Original Closing Date, maintain a depository concentration account (such Borrower's "CONCENTRATION ACCOUNT") with and under the control of the Administrative Agent, as contemplated by the terms of this Credit Agreement, (ii) direct each Agency Account Institution pursuant to the Agency Account Agreements (whereby such Agency Account Institution shall, among other things, waive any right of set off, other than for service charges and returns incurred in connection therewith), to cause all funds held by such Agency Account Institution in the Agency Accounts to be transferred daily (or such other period as the Administrative Agent requests) to, and only to, the Administrative Agent for deposit in such Borrower's Concentration Account and (iii) direct its account debtors and obligors on instruments or other obligors of such Borrower with respect to any of the Collateral to make all payments on or with respect to any of the Collateral due or to become due to such Borrower directly to such Borrower's Concentration Account or the Agency Accounts. If, notwithstanding the requirements of the foregoing sentence, any of the Borrowers receives any cash proceeds of any of the Collateral, whether in the form of money, checks or otherwise, such Borrower will hold such cash proceeds in trust for the benefit of the Administrative Agent and the Lenders and turn such cash proceeds promptly over to the Administrative Agent in the identical form received by deposit to any Agency Account or Concentration Account. The Administrative Agent shall, (i) with respect to all funds and cash proceeds in the form of money, checks and like items received in any Borrower's Concentration Account, on the same Business Day on which the Administrative Agent determines that good collected funds have been received, and prior to the final collection of good collected funds, on a provisional basis until such final collection, (ii) with respect to all funds and cash proceeds in the form of a wire transfer received in any Borrower's Concentration Account, on the same Business Day as the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received) and (iii) with respect to all funds and cash proceeds in the form of an automated clearing house transfer received in any Borrower's Concentration Account, on the next Business Day following the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), in each case, apply to the principal of the applicable Borrower's Loans all such funds and cash proceeds which were deposited to such 37 Borrower's Concentration Account and, so long as no Default or Event of Default has occurred and is continuing, the Administrative Agent shall cause any excess to be credited to the applicable Borrower's Operating Account. From and after the occurrence and during the continuance of a Default or an Event of Default, the Administrative Agent may, from time to time in the Administrative Agent's discretion, retain any or all of such excess to pay any Obligations then due and payable in accordance with ss.14.4 and to provide cash collateral for any Obligations not then due and payable, including an amount equal to 105% of the Maximum Drawing Amount to secure Reimbursement Obligations with respect to Letters of Credit issued at the request of the applicable Borrower, with the Administrative Agent causing any surplus, subject to the rights of any other persons entitled thereto, to be credited to the applicable Borrower's Operating Account. For purposes of the foregoing provisions of this ss.3.3.1, the Administrative Agent shall not be deemed to have received any such cash proceeds on any day unless received by the Administrative Agent before 4:00 p.m. (Boston time) on such day. Each of the Borrowers further acknowledges and agrees that any such provisional credit by the Administrative Agent shall be subject to reversal if final collection in good collected funds of the related item is not received by the Administrative Agent in accordance with the Administrative Agent's customary procedures and practices for collecting provisional items. CML'S DEPOSITORY ARRANGEMENTS. CML will (i) on or prior to the Original Closing Date, maintain a depository concentration account (CML's "CONCENTRATION ACCOUNT") with and under the control of the Administrative Agent, as contemplated by the terms of this Credit Agreement, (ii) direct each Agency Account Institution pursuant to the Agency Account Agreements (whereby such Agency Account Institution shall, among other things, waive any right of set off, other than for service charges and returns incurred in connection therewith), to cause all funds held by such Agency Account Institution in the Agency Accounts to be transferred daily (or such other period as the Administrative Agent requests) to, and only to, the Administrative Agent for deposit in such Borrower's Concentration Account, (iii) direct its account debtors and obligors on instruments or other obligors of CML with respect to any of the Collateral to make all payments on or with respect to any of the Collateral due or to become due to CML directly to CML's Concentration Account or the Agency Accounts and (iv) cause any and all tax refunds received by CML to be immediately deposited into CML's Concentration Account. If, notwithstanding the requirements of the foregoing sentence, CML receives any cash proceeds of any of the Collateral, whether in the form of money, checks or otherwise, CML will hold such cash proceeds in trust for the benefit of the Administrative Agent and the Lenders and turn such cash proceeds promptly over to the Administrative Agent in the identical form received by deposit to any Agency Account or Concentration Account. The Administrative Agent shall, (i) with respect to all funds and cash proceeds in the form of money, checks and like items received in CML's Concentration Account, on the same Business Day on which the Administrative Agent determines that good collected funds have been received, and prior to the final collection of good collected funds, on a provisional basis until such final collection, (ii) with respect to all funds and cash proceeds in the form of a wire transfer received in CML's Concentration Account, on the same Business Day as the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), and (iii) with respect to all funds and cash proceeds in the form of an automated clearing house transfer received in CML's Concentration Account, on the next Business Day following the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), in each case, apply to the principal of the Borrowers' Loans in such proportions as the Administrative Agent shall determine in its sole discretion all such funds and cash proceeds which were deposited to CML's Concentration Account and, so long as no Default or Event of Default has occurred and is continuing, the Administrative Agent shall cause any excess to be credited to CML's Operating Account. From and after the occurrence and during the continuance of a Default or an Event of Default, the Administrative Agent may, from time to time in the Administrative Agent's discretion, retain any or all of such excess to pay any 38 Obligations then due and payable in accordance with ss.14.4 and to provide cash collateral for any Obligations not then due and payable, including an amount equal to 105% of the Maximum Drawing Amount to secure Reimbursement Obligations of the Borrowers and CML, with the Administrative Agent causing any surplus, subject to the rights of any other persons entitled thereto, to be credited to CML's Operating Account. For purposes of the foregoing provisions of this ss.3.3.2, the Administrative Agent shall not be deemed to have received any such cash proceeds on any day unless received by the Administrative Agent before 4:00 p.m. (Boston time) on such day. CML further acknowledges and agrees that any such provisional credit by the Administrative Agent shall be subject to reversal if final collection in good collected funds of the related item is not received by the Administrative Agent in accordance with the Administrative Agent's customary procedures and practices for collecting provisional items. THE OTHER GUARANTORS' DEPOSITORY ARRANGEMENTS. Each of the Guarantors not subject to secs.3.3.1 or 3.3.2 will (i) direct each Agency Account Institution pursuant to the Agency Account Agreements (whereby such Agency Account Institution shall, among other things, waive any right of set off, other than for service charges and returns incurred in connection therewith), to cause all funds held by such Agency Account Institution in the Agency Accounts to be transferred daily (or such other period as the Administrative Agent requests) to, and only to, the Administrative Agent for deposit in the Concentration Account of the Borrower which is such Guarantor's direct or indirect parent, in accordance with this ss.3.3.3 and (ii) direct its account debtors and obligors on instruments or other obligors of such Guarantor with respect to any of the Collateral to make all payments on or with respect to any of the Collateral due or to become due to such Guarantor directly to the Concentration Account of such Guarantor's direct or indirect parent or the Agency Accounts of such Guarantor or such Guarantor's direct or indirect parent. If, notwithstanding the requirements of the foregoing sentence, any of the Guarantors receives any cash proceeds of any of the Collateral, whether in the form of money, checks or otherwise, such Guarantor will hold such cash proceeds in trust for the benefit of the Administrative Agent and the Lenders and turn such cash proceeds promptly over to the Administrative Agent in the identical form received by deposit to any Agency Account or Concentration Account. The Administrative Agent shall, (i) with respect to all funds and cash proceeds in the form of money checks and like items received in any Borrower's or CML's Concentration Account, on the same Business Day on which the Administrative Agent determines that good collected funds have been received, and prior to the final collection of good collected funds, on a provisional basis until such final collection, (ii) with respect to all funds and cash proceeds in the form of a wire transfer received in any Borrower's or CML's Concentration Account, on the same Business Day as the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), and (iii) with respect to all funds and cash proceeds in the form of an automated clearing house transfer received in any Borrower's or CML's Concentration Account, on the next Business Day following the Administrative Agent's receipt of such amounts (or such later date as the Administrative Agent determines that good collected funds have been received), in each case, apply, in accordance with the provisions of ss.3.3.1 or ss.3.3.2, as the case may be, all such funds and cash proceeds so long as no Default or Event of Default has occurred and is continuing, the Administrative Agent shall cause any excess to be credited in accordance with the provisions of ss.3.3.1 or ss.3.3.2, as the case may be. From and after the occurrence and during the continuance of a Default or an Event of Default, the Administrative Agent may, from time to time in the Administrative Agent's discretion, retain any or all of such excess to pay any Obligations then due and payable in accordance with ss.14.4 and to provide cash collateral for any Obligations not then due and payable, including an amount equal to 105% of the Maximum Drawing Amount to secure Reimbursement Obligations of the Borrowers, with the Administrative Agent causing any surplus, subject to the rights of any other persons entitled thereto, to be credited in accordance with the provisions of ss.3.3.1 or ss.3.3.2, as the case may be. For purposes of the foregoing provisions of this ss.3.3.3, the Administrative Agent shall not be deemed to have received any such cash proceeds on any day unless received by the 39 Administrative Agent before 4:00 p.m. (Boston time) on such day. Each of the Guarantors subject to this ss.3.3.3 further acknowledges and agrees that any such provisional credit by the Administrative Agent shall be subject to reversal if final collection in good collected funds of the related item is not received by the Administrative Agent in accordance with the Administrative Agent's customary procedures and practices for collecting provisional items. FEES AND EXPENSES; APPLICATION OF PAYMENT. Each of the Borrowers and the Guarantors agrees to pay to the Administrative Agent any and all reasonable fees, costs and expenses which the Administrative Agent incurs in connection with the opening and maintaining of the Concentration Accounts, the Controlled Disbursement Accounts and the depositing for collection by the Administrative Agent of any check or other item of payment. Absent gross negligence or willful misconduct by the Administrative Agent, each of the Borrowers and each of the Guarantors agrees to indemnify the Administrative Agent and to hold the Administrative Agent harmless from and against any loss, cost or expense sustained or incurred by the Administrative Agent on account of any claims of third parties arising in connection with the Administrative Agent's operation of the Concentration Account. Each partial prepayment of Loans under this ss.3.3 shall be allocated among the Lenders in proportion, as nearly as practicable, to the respective unpaid principal amount of each Lender's applicable Note, with adjustments to the extent practicable to equalize any prior repayments not exactly in proportion. 1. OPTIONAL REPAYMENTS OF LOANS. Each Borrower shall have the right, at its election, to repay the outstanding amount of its Loans, as a whole or in part, at any time without penalty or premium. The applicable Borrower shall give the Administrative Agent, no later than 1:00 p.m., (Boston time), at least one (1) Business Day prior written notice of any proposed prepayment pursuant to this ss.3.4 of Loans, in each case specifying the proposed date of prepayment of its Loans and the principal amount to be prepaid. Each such partial prepayment of the Loans shall be in an integral multiple of $500,000 and shall be applied to the principal of the applicable Borrower's Loans. Each partial prepayment shall be allocated among the Lenders, in proportion, as nearly as practicable, to the respective unpaid principal amount of each Lender's applicable Note, with adjustments to the extent practicable to equalize any prior repayments not exactly in proportion. Any prepayment of the Loans made pursuant to ss.3.3 shall not be subject to the provisions of this ss.3.4. 1. LETTERS OF CREDIT. 2. LETTER OF CREDIT COMMITMENTS. 3. COMMITMENT TO ISSUE LETTERS OF CREDIT. Subject to the terms and conditions hereof and the execution and delivery by any of the Borrowers and CML of a letter of credit application on the Issuing Bank's customary form (a "LETTER OF CREDIT Application"), the Issuing Bank on behalf of the Lenders and in reliance upon the agreement of the Lenders set forth in ss.4.1.4 and upon the representations and warranties of the applicable Borrower and CML contained herein, agrees, in its individual capacity, to issue, extend and renew for the account of such Borrower and CML one or more standby or documentary letters of credit (individually, a "LETTER OF CREDIT"), in such form as may be requested from time to time by the applicable Borrower and agreed to by the Issuing Bank; PROVIDED, HOWEVER, that, after giving effect to such request, (a) the sum of the aggregate Letter of Credit Exposure of the Borrowers shall not exceed $10,000,000 at any one time and (b) the sum of (i) each Borrower's Letter of Credit Exposure and (ii) the amount of all Loans of such Borrower outstanding shall not exceed the lesser of (A) such Borrower's Sub-Commitment and (B) such Borrower's Borrowing Base PLUS such Borrower's Sub-Overadvance Amount. 40 1. LETTER OF CREDIT APPLICATIONS. Each Letter of Credit Application shall be completed to the satisfaction of the Issuing Bank. In the event that any provision of any Letter of Credit Application shall be inconsistent with any provision of this Credit Agreement, then the provisions of this Credit Agreement shall, to the extent of any such inconsistency, govern. 1. TERMS OF LETTERS OF CREDIT. Each Letter of Credit issued, extended or renewed hereunder shall, among other things, (i) provide for the payment of sight drafts for honor thereunder when presented in accordance with the terms thereof and when accompanied by the documents described therein, (ii) subject to clause (iii) hereof, with respect to documentary Letters of Credit, have a term of not more than one hundred eighty (180) days from the date of issuance, extension or renewal thereof (unless the Issuing Bank, in its sole discretion, shall have agreed to a longer term of up to but not exceeding two hundred seventy (270) days) and with respect to standby Letters of Credit, have a term of not more than one (1) year from the date of issuance, extension or renewal thereof, and (iii) have an expiry date no later than July 24, 1999. 1. REIMBURSEMENT OBLIGATIONS OF LENDERS. Each Lender severally agrees that it shall be absolutely liable, without regard to the occurrence of any Default or Event of Default or any other condition precedent whatsoever, to the extent of such Lender's Commitment Percentage, to reimburse the Issuing Bank on demand for the amount of each draft paid by the Issuing Bank under each Letter of Credit to the extent that such amount is not reimbursed by the Borrowers or CML pursuant to ss.4.2 (such agreement for a Lender being called herein the "LETTER OF CREDIT PARTICIPATION" of such Lender). 1. PARTICIPATIONS OF LENDERS. Each such payment made by a Lender shall be treated as the purchase by such Lender of a participating interest in CML's and the Borrowers' Reimbursement Obligations under ss.4.2 in an amount equal to such payment. Each Lender shall share in accordance with its participating interest in any interest which accrues pursuant to ss.4.2. 1. REIMBURSEMENT OBLIGATION OF CML AND THE BORROWERS. In order to induce the Issuing Bank to issue, extend and renew each Letter of Credit and the Lenders to participate therein, each Borrower and CML hereby agrees to reimburse or pay to the Issuing Bank, for the account of the Issuing Bank or (as the case may be) the Lenders, with respect to each Letter of Credit issued, extended or renewed by the Issuing Bank hereunder at the request of such Borrower and CML, (a) except as otherwise expressly provided in ss.4.2(b) and (c), on each date that any draft presented under such Letter of Credit is honored by the Issuing Bank, or the Issuing Bank otherwise makes a payment with respect thereto, (i) the amount paid by the Issuing Bank under or with respect to such Letter of Credit, and (ii) the amount of any taxes, fees, charges or other costs and expenses whatsoever incurred by the Issuing Bank or any Lender in connection with any payment made by the Issuing Bank or any Lender under, or with respect to, such Letter of Credit, (b) upon the reduction (but not termination) of such Borrower's Sub-Commitment to an amount less than the Maximum Drawing Amount with respect to Letters of Credit issued at the request of such Borrower, an amount equal to 105% of such difference, which amount 41 shall be held by the Issuing Bank for the benefit of the Lenders, the Issuing Bank and the Administrative Agent as cash collateral for all Reimbursement Obligations with respect to Letters of Credit issued at the request of such Borrower, and (c) upon the termination of the such Borrower's Sub-Commitment, or the acceleration of the Reimbursement Obligations with respect to Letters of Credit issued at the request of such Borrower in accordance with ss.14, an amount equal to 105% of the then Maximum Drawing Amount with respect to Letters of Credit issued at the request of such Borrower, which amount shall be held by the Issuing Bank for the benefit of the Lenders, the Issuing Bank and the Administrative Agent as cash collateral for all Reimbursement Obligations with respect to Letters of Credit issued at the request of such Borrower. Each such payment shall be made to the Issuing Bank at the Issuing Bank's head office located at 100 Federal Street, Boston, Massachusetts in immediately available funds. Interest on any and all amounts remaining unpaid by the Borrowers under this ss.4.2 at any time from the date such amounts become due and payable (whether as stated in this ss.4.2, by acceleration or otherwise) until payment in full (whether before or after judgment) shall be payable to the Issuing Bank on demand at the rate specified in ss.5.11 for overdue principal on the Loans. 1. LETTER OF CREDIT PAYMENTS. If any draft shall be presented or other demand for payment shall be made under any Letter of Credit, the Issuing Bank shall notify the applicable Borrower of the date and amount of the draft presented or demand for payment and of the date and time when it expects to pay such draft or honor such demand for payment. If the applicable Borrower or CML fails to reimburse the Issuing Bank as provided in ss.4.2 on or before the date that such draft is paid or other payment is made by the Issuing Bank, the Issuing Bank may at any time thereafter notify the Lenders of the amount of any such Unpaid Reimbursement Obligation. No later than 3:00 p.m. (Boston time) on the Business Day next following the receipt of such notice, each Lender shall make available to the Issuing Bank, at its head office located at 100 Federal Street, Boston, Massachusetts, in immediately available funds, such Lender's Commitment Percentage of such Unpaid Reimbursement Obligation, together with an amount equal to the product of (i) the average, computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Issuing Bank for federal funds acquired by the Issuing Bank during each day included in such period, TIMES (ii) the amount equal to such Lender's Commitment Percentage of such Unpaid Reimbursement Obligation, TIMES (iii) a fraction, the numerator of which is the number of days that elapse from and including the date the Issuing Bank paid the draft presented for honor or otherwise made payment to the date on which such Lender's Commitment Percentage of such Unpaid Reimbursement obligation shall become immediately available to the Issuing Bank, and the denominator of which is 360. The responsibility of the Issuing Bank to CML, the Borrowers and the Lenders shall be only to determine that the documents (including each draft) delivered under each Letter of Credit in connection with such presentment shall be in conformity in all material respects with such Letter of Credit. 1. OBLIGATIONS ABSOLUTE. Each Borrower's and CML's obligations under this ss.4 shall be absolute and unconditional under any and all circumstances and irrespective of the occurrence of any Default or Event of Default or any condition precedent whatsoever or any setoff, counterclaim or defense to payment which any Borrower or CML may have or have had against the Issuing Bank, any Lender, any Agent or any beneficiary of a Letter of Credit. Each Borrower and CML further agrees with the Issuing Bank and the Lenders that the Issuing Bank and the Lenders shall not be responsible for, and each Borrower's and CML's Reimbursement Obligations under ss.4.2 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among any Borrower, CML, the beneficiary of any Letter of Credit or any financing institution or other party to which any Letter of Credit may be transferred or any claims or defenses whatsoever of any Borrower against the beneficiary of any Letter of Credit or any such transferee. The Issuing Bank and the Lenders shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. Each Borrower and CML agrees that any action taken or omitted by the Issuing Bank or any Lender under or in connection with each Letter of Credit and the related drafts and documents, if done in good faith, shall be binding upon such Borrower and CML and shall not result in any liability on the part of the Issuing Bank or any Lender to such Borrower. 42 1. RELIANCE BY ISSUER. To the extent not inconsistent with ss.4.4, the Issuing Bank shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel, independent accountants and other experts selected by the Issuing Bank. The Issuing Bank shall be fully justified in failing or refusing to take any action under this Credit Agreement unless it shall first have received such advice or concurrence of the Majority Lenders as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Issuing Bank shall in all cases be fully protected in acting, or in refraining from acting, under this Credit Agreement in accordance with a request of the Majority Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and all future holders of the Notes or of a Letter of Credit Participation. 4.6 LETTER OF CREDIT FEE. Each Borrower shall, on the date of issuance, or any extension or renewal of any Letter of Credit, pay a fee (in each case, a "LETTER OF CREDIT FEE") to the Issuing Bank (i) in respect of each standby Letter of Credit issued at the request of such Borrower equal to four percent (4.00%) per annum of the face amount of such standby Letter of Credit, and (ii) in respect of each documentary Letter of Credit issued at the request of such Borrower equal to four percent (4.00%) per annum of the face amount of such documentary Letter of Credit. The Issuing Bank shall, in turn, remit to each Lender its PRO RATA portion of such Letter of Credit Fee. In addition, the applicable Borrower shall pay to the Issuing Bank, for its own account, on the date of issuance, or any extension or renewal of any Letter of Credit and at such other time or times as such charges are customarily made by the Issuing Bank, a fronting fee equal to one-half percent (0.50%) per annum of the face amount of such Letter of Credit and the Issuing Bank's standard issuance, processing, negotiation, amendment and administrative fees, determined in accordance with customary fees and charges for similar facilities. For all Letters of Credit issued prior to the Restatement Effective Date, the provisions contained in ss.4.6 prior to the Restatement Effective Date shall govern. 4.7 EXISTING LETTERS OF CREDIT. CML, the Borrowers and the Lenders each agree that (a) all letters of credit which have previously been issued by BKB under the Existing Credit Agreement (the "EXISTING LETTERS OF CREDIT") for the account of CML or any Borrower, shall be deemed Letters of Credit issued under and governed by this Credit Agreement, (b) this Credit Agreement supersedes any and all prior agreements between CML and the Borrowers and BKB with respect to the Existing Letters of Credit, other than as specifically provided for in ss.4.6, and (c) all the Existing Letters of Credit, from and after the Restatement Effective Date, shall be subject to and governed by the terms of this Credit Agreement. 1. CERTAIN GENERAL PROVISIONS. 2. COMMITMENT FEES. The Borrowers jointly and severally agree to pay to the Administrative Agent the commitment and other fees described in the Fee Letter as and when due and payable under the Fee Letter. 1. ADMINISTRATIVE AGENT'S FEE. The Borrowers jointly and severally shall pay to the Administrative Agent an Administrative Agent's fee as provided in the Fee Letter. 1. FUNDS FOR PAYMENTS. 2. PAYMENTS TO ADMINISTRATIVE AGENT. All payments of principal, interest, Reimbursement Obligations, Unused Line Fees, Letter of Credit Fees and any other amounts due 43 hereunder or under any of the other Loan Documents shall be made to the Administrative Agent, for the respective accounts of the Lenders and the Administrative Agent, at the Administrative Agent's Head Office or at such other location in the Boston, Massachusetts area that the Administrative Agent may from time to time designate, in each case in immediately available funds. 1. NO OFFSET, ETC. All payments by the Borrowers hereunder and under any of the other Loan Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless any Borrower is compelled by law to make such deduction or withholding. If any such obligation is imposed upon any Borrower with respect to any amount payable by it hereunder or under any of the other Loan Documents, such Borrower will pay to the Administrative Agent, for the account of the Lenders or (as the case may be) the Administrative Agent, on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Lenders or the Administrative Agent to receive the same net amount which the Lenders or the Administrative Agent would have received on such due date had no such obligation been imposed upon such Borrower. Such Borrower will deliver promptly to the Administrative Agent certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by such Borrower hereunder or under such other Loan Document. 1. COMPUTATIONS. All computations of interest on the Loans and of Unused Line Fees, Letter of Credit Fees or other fees shall, unless otherwise expressly provided herein, be based on a 360-day year and paid for the actual number of days elapsed. Whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day, and interest shall accrue during such extension. The outstanding amount of the Loans as reflected on the Note Records from time to time shall be considered correct and binding on the applicable Borrower unless within five (5) Business Days after receipt of any notice by the Administrative Agent or any of the Lenders of such outstanding amount, the Administrative Agent or such Lender shall notify such Borrower to the contrary. 1. INTENTIONALLY OMITTED. 2. INTENTIONALLY OMITTED. 3. ADDITIONAL COSTS, ETC. If any present or future applicable law, which expression, as used herein, includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time hereafter made upon or otherwise issued to any Lender or the Administrative Agent by any central bank or other fiscal, monetary or other authority (whether or not having the force of law), shall: (a) subject any Lender or the Administrative Agent to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Credit Agreement, the other Loan Documents, any Letters of Credit, such Lender's Commitment or the Loans (other than taxes based upon or measured by the income or profits of such Lender or the Administrative Agent), or (b) materially change the basis of taxation (except for changes in taxes on income or profits) of payments to any Lender of the principal of or the interest on any Loans or any other 44 amounts payable to any Lender or the Administrative Agent under this Credit Agreement or any of the other Loan Documents, or (c) impose or increase or render applicable (other than to the extent specifically provided for elsewhere in this Credit Agreement) any special deposit, reserve, assessment, liquidity, capital adequacy or other similar requirements (whether or not having the force of law) against assets held by, or deposits in or for the account of, or loans by, or letters of credit issued by, or commitments of an office of any Lender, or (d) impose on any Lender or the Administrative Agent any other conditions or requirements with respect to this Credit Agreement, the other Loan Documents, any Letters of Credit, the Loans, such Lender's Commitment, or any class of loans, letters of credit or commitments of which any of the Loans or such Lender's Commitment forms a part, and the result of any of the foregoing is (i) to increase the cost to any Lender of making, funding, issuing, renewing, extending or maintaining any of the Loans or such Lender's Commitment or any Letter of Credit, or (ii) to reduce the amount of principal, interest, Reimbursement Obligation or other amount payable to such Lender or the Administrative Agent hereunder on account of such Lender's Commitment, any Letter of Credit or any of the Loans, or (iii) to require such Lender or the Administrative Agent to make any payment or to forgo any interest or Reimbursement Obligation or other sum payable hereunder, the amount of which payment or forgone interest or Reimbursement Obligation or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by such Lender or the Administrative Agent from the Borrowers hereunder, then, and in each such case, the Borrowers will, upon demand made by such Lender or (as the case may be) the Administrative Agent at any time and from time to time and as often as the occasion therefor may arise, pay to such Lender or the Administrative Agent such additional amounts as will be sufficient to compensate such Lender or the Administrative Agent for such additional cost, reduction, payment or forgone interest or Reimbursement Obligation or other sum. 1. CAPITAL ADEQUACY. If after the date hereof any Lender or the Administrative Agent determines that (i) the adoption of or change in any law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) regarding capital requirements for banks or bank holding companies or any change in the interpretation or application thereof by a court or governmental authority with appropriate jurisdiction, or (ii) compliance by such Lender or the Administrative Agent or any corporation controlling such Lender or the Administrative Agent with any law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) of any such entity regarding capital adequacy, has the effect of reducing the return on such Lender's or the Administrative Agent's capital as a result of such Lender's obligations hereunder to a level below that which such Lender or the Administrative Agent could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or the Administrative Agent's then existing policies with respect to capital adequacy and assuming full utilization of such entity's capital) by any amount deemed by such Lender or (as the case may be) the Administrative Agent to be material, then such Lender or the Administrative Agent may notify the Borrowers of such fact. To the extent that the amount of such reduction in the return on capital is not reflected in the Base Rate, the Borrowers agree to pay such Lender or (as the case may be) the Administrative Agent for the amount of such reduction in the return on capital as and when such reduction is determined upon presentation by such Lender or (as the case may be) the Administrative 45 Agent of a certificate in accordance with ss.5.9 hereof. Each Lender shall allocate such cost increases among its customers in good faith and on an equitable basis. 1. CERTIFICATE. A certificate setting forth any additional amounts payable pursuant to secs.5.7 or 5.8 and a brief explanation of such amounts which are due, submitted by any Lender or the Administrative Agent to the Borrowers, shall be conclusive, absent manifest error, that such amounts are due and owing. 1. INTENTIONALLY OMITTED. 2. INTEREST AFTER DEFAULT. 3. OVERDUE AMOUNTS. Overdue principal and (to the extent permitted by applicable law) interest on the Loans and all other overdue amounts payable hereunder or under any of the other Loan Documents shall bear interest compounded monthly and payable on demand at a rate per annum equal to two percent (2.00%) above the rate of interest otherwise applicable thereto until such amount shall be paid in full (after as well as before judgment). 1. AMOUNTS NOT OVERDUE. During the continuance of an Event of Default the principal of the Loans and any of the PIK Notes not overdue shall, until such Event of Default has been cured or remedied or such Event of Default has been waived by the Majority Lenders pursuant to ss.27, bear interest at a rate per annum equal to the rate of interest applicable to overdue principal pursuant to ss.5.11.1. 1. COLLATERAL SECURITY AND GUARANTIES. 2. SECURITY OF BORROWERS. The Obligations shall be secured by a perfected first priority security interest (subject only to Permitted Liens entitled to priority under applicable law) in all of the assets of the Borrowers, (with such exceptions as are acceptable to the Majority Lenders), including, without limitation, the stock of all Borrowers, Guarantors (other than CML) and Foreign Guarantors, and all intercompany obligations owing to the Borrowers, in each case wherever located and whether now owned or hereafter acquired, pursuant to the terms of the Security Documents to which any of such Borrower is a party. 1. GUARANTY, FOREIGN GUARANTIES AND SECURITY OF GUARANTORS. The Obligations shall also be guaranteed pursuant to the terms of the Guaranty and the Foreign Guaranties. The obligations of the Guarantors under the Guaranty shall be in turn secured by a perfected first priority security interest (subject only to Permitted Liens entitled to priority under applicable law) in all of the assets of each such Guarantor (with such exceptions as are acceptable to the Majority Lenders) and all intercompany obligations owing to the Guarantors, in each case wherever located and whether now owned or hereafter acquired, pursuant to the terms of the Security Documents to which such Guarantor is a party. GUARANTY. 1. GUARANTY OF PAYMENT AND PERFORMANCE. Each of the Guarantors hereby jointly and severally guarantees to the Lenders, the Issuing Bank and the Administrative Agent the full and punctual payment when due (whether at stated maturity, by required pre-payment, by acceleration or otherwise), as well as the performance, of all of the Obligations including all such which would become due but for the operation of the automatic stay pursuant to ss.362(a) of the Federal Bankruptcy Code and the operation of secs.502(b) and 506(b) of the Federal Bankruptcy Code. This Guaranty is an absolute, unconditional and continuing guaranty of the full and punctual payment and performance of all of the Obligations and not of their collectability only and is in no way conditioned upon any requirement that any Agent, the Issuing Bank or any Lender first attempt to collect any of the Obligations from the applicable Borrower or resort to any collateral security or other means of obtaining payment. Should any of the Borrowers default in the 46 payment or performance of any of the Obligations, the obligations of the Guarantors hereunder with respect to such Obligations in default shall, upon demand by the Administrative Agent, become immediately due and payable to the Administrative Agent, for the benefit of the Lenders, the Issuing Bank and the Administrative Agent, without demand or notice of any nature, all of which are expressly waived by each of the Guarantors. Payments by the Guarantors hereunder may be required by the Administrative Agent on any number of occasions. All payments by any of the Guarantors hereunder shall be made to the Administrative Agent, in the manner and at the place of payment specified therefor in ss.5 hereof, for the account of the Lenders, the Issuing Bank and the Administrative Agent. 1. GUARANTORS' AGREEMENT TO PAY ENFORCEMENT COSTS, ETC. Each of the Guarantors further jointly and severally agrees, as the principal obligor and not as a guarantor only, to pay to the Administrative Agent, on demand, all reasonable costs and expenses (including court costs and legal expenses, including the allocated cost of staff counsel) incurred or expended by any Agent, the Issuing Bank or any Lender in connection with the Obligations, this Guaranty and the enforcement thereof, together with interest on amounts recoverable under this ss.7 from the time when such amounts become due until payment, whether before or after judgment, at the rate of interest for overdue principal set forth in ss.5.11 hereof, PROVIDED that if such interest exceeds the maximum amount permitted to be paid under applicable law, then such interest shall be reduced to such maximum permitted amount. 1. WAIVERS BY THE GUARANTORS; LENDERS' FREEDOM TO ACT. Each of the Guarantors agrees that the Obligations will be paid and performed strictly in accordance with their respective terms, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Agent, the Issuing Bank or any Lender with respect thereto. Each of the Guarantors waives promptness, diligence, presentment, demand, protest, notice of acceptance, notice of any Obligations incurred and all other notices of any kind, all defenses which may be available by virtue of any valuation, stay, moratorium law or other similar law now or hereafter in effect, any right to require the marshalling of assets of the applicable Borrower or any other entity or other Person primarily or secondarily liable with respect to any of the Obligations, and all suretyship defenses generally. Without limiting the generality of the foregoing, each of the Guarantors agrees to the provisions of any instrument evidencing, securing or otherwise executed in connection with any Obligation and agrees that the obligations of such Guarantor hereunder shall not be released or discharged, in whole or in part, or otherwise affected by (i) the failure of any Agent, the Issuing Bank or any Lender to assert any claim or demand or to enforce any right or remedy against the applicable Borrower or any other entity or other person primarily or secondarily liable with respect to any of the Obligations; (ii) any extensions, compromise, refinancing, consolidation or renewals of any Obligation; (iii) any change in the time, place or manner of payment of any of the Obligations or any rescissions, waivers, compromise, refinancing, consolidation or other amendments or modifications of any of the terms or provisions of this Credit Agreement, the other Loan Documents or any other agreement evidencing, securing or otherwise executed in connection with any of the Obligation, (iv) the addition, substitution or release of any entity or other person primarily or secondarily liable for any Obligation; (v) the adequacy of any rights which any Agent, the Issuing Bank or any Lender may have against any collateral security or other means of obtaining repayment of any of the Obligations; (vi) the impairment of any collateral securing any of the Obligations, including without limitation the failure to perfect or preserve any rights which any Agent, the Issuing Bank or any Lender might have in such collateral security or the substitution, exchange, surrender, release, loss or destruction of any such collateral security; or (vii) any other act or omission which might in any manner or to any extent vary the risk of such Guarantor or otherwise operate as a release or discharge of such Guarantor, all of which may be done without notice to such Guarantor. To the fullest extent permitted by law, each of the Guarantors hereby expressly waives any and all rights or defenses arising by reason of (A) any "one action" or "anti-deficiency" law which would otherwise prevent any Agent, the Issuing Bank or any Lender from bringing any action, including any claim for a deficiency, or exercising any other right or remedy (including any right of set-off), against such Guarantor before or after such Agent's, the Issuing Bank's or such Lender's commencement or completion of any foreclosure action, whether judicially, by exercise of power of sale or otherwise, or (B) 47 any other law which in any other way would otherwise require any election of remedies by any Agent, the Issuing Bank or any Lender. 1. UNENFORCEABILITY OF OBLIGATIONS AGAINST BORROWERS. If for any reason any of the Borrowers has no legal existence or is under no legal obligation to discharge any of the Obligations, or if any of the Obligations have become irrecoverable from such Borrower by reason of such Borrower's insolvency, bankruptcy or reorganization or by other operation of law or for any other reason, this Guaranty shall nevertheless be binding on each of the Guarantors to the same extent as if each such Guarantor at all times had been the principal obligor on all such Obligations. In the event that acceleration of the time for payment of any of the Obligations is stayed upon the insolvency, bankruptcy or reorganization of such Borrower, or for any other reason, all such amounts otherwise subject to acceleration under the terms of this Credit Agreement, the other Loan Documents or any other agreement evidencing, securing or otherwise executed in connection with any Obligation shall be immediately due and payable by each of the Guarantors. 1. SUBROGATION; SUBORDINATION. POSTPONEMENT OF RIGHTS AGAINST BORROWERS. Until the final payment and performance in full in cash of all of the Obligations: none of the Guarantors shall exercise any rights against any Borrower arising as a result of payment by each such Guarantor hereunder, by way of subrogation, reimbursement, restitution, contribution or otherwise, and will not prove any claim in competition with any Agent, the Issuing Bank or any Lender in respect of any payment hereunder in any bankruptcy, insolvency or reorganization case or proceedings of any nature; none of the Guarantors will claim any setoff, recoupment or counterclaim against any Borrower in respect of any liability of any such Guarantor to such Borrower; and each of the Guarantors waives any benefit of and any right to participate in any collateral security which may be held by any Agent, the Issuing Bank or any Lender. SUBORDINATION. The payment of any amounts due with respect to any indebtedness of the Borrowers for money borrowed or credit received now or hereafter owed to any of the Guarantors is hereby subordinated to the prior payment in full in cash of all of the Obligations. Each of the Guarantors agrees that, after the occurrence of any default in the payment or performance of any of the Obligations, such Guarantor will not demand, sue for or otherwise attempt to collect any such indebtedness of any Borrower to such Guarantor until all of the Obligations shall have been paid in full. If, notwithstanding the foregoing sentence, any of the Guarantors shall collect, enforce or receive any amounts in respect of such indebtedness while any Obligations are still outstanding, such amounts shall be collected, enforced and received by such Guarantor as trustee for the Lenders, the Issuing Bank and the Administrative Agent and be paid over to the Administrative Agent, for the benefit of the Lenders, the Issuing Bank and the Administrative Agent, on account of the Obligations without affecting in any manner the liability of the Guarantors under the other provisions of this Guaranty. PROVISIONS SUPPLEMENTAL. The provisions of this ss.7.5 shall be supplemental to and not in derogation of any rights anD remedies of the Lenders, the Issuing Bank and the Administrative Agent under any separate subordination agreement which the Administrative Agent may at any time and from time to time enter into with any of the Guarantors for the benefit of the Lenders, the Issuing Bank and the Administrative Agent. 1. SECURITY; SETOFF. Each of the Guarantors grants to each of the Administrative Agent, the Issuing Bank and the Lenders, as security for the full and punctual payment and performance of all of the Guarantors' obligations hereunder, a continuing lien on and security interest in all securities or other property belonging to each such Guarantor now or hereafter held by such Agent, the Issuing Bank or such 48 Lender and in all deposits (general or special, time or demand, provisional or final) and other sums credited by or due from such Agent, the Issuing Bank or such Lender to such Guarantor or subject to withdrawal by such Guarantor. Regardless of the adequacy of any collateral security or other means of obtaining payment of any of the Obligations, each of the Administrative Agent, the Issuing Bank and the Lenders is hereby authorized at any time and from time to time, without notice to any of the Guarantors (any such notice being expressly waived by each of the Guarantors) and to the fullest extent permitted by law, to set off and apply such deposits and other sums against the obligations of such Guarantor under this Guaranty, whether or not such Agent, the Issuing Bank or such Lender shall have made any demand under this Guaranty and although such obligations may be contingent or unmatured. 1. FURTHER ASSURANCES. Each of the Guarantors agrees that it will from time to time, at the request of the Administrative Agent, do all such things and execute all such documents as the Administrative Agent may consider necessary or desirable to give full effect to this Guaranty and to perfect and preserve the rights and powers of the Lenders, the Issuing Bank and the Administrative Agent hereunder. Each of the Guarantors acknowledges and confirms that such Guarantor itself has established its own adequate means of obtaining from the Borrowers on a continuing basis all information desired by such Guarantor concerning the financial condition of the Borrowers and that such Guarantor will look to the Borrowers and not to any Agent, the Issuing Bank or any Lender in order for such Guarantor to keep adequately informed of changes in any of the Borrowers' financial condition. 1. TERMINATION. Notwithstanding any termination of this Guaranty, this Guaranty shall continue to be effective or be reinstated, if at any time any payment made or value received with respect to any Obligation is rescinded or must otherwise be returned by any Agent, the Issuing Bank or any Lender upon the insolvency, bankruptcy or reorganization of any Borrower, or otherwise, all as though such payment had not been made or value received. 1. SUCCESSORS AND ASSIGNS. This Guaranty shall be binding upon each of the Guarantors, its successors and assigns, and shall inure to the benefit of the Administrative Agent, the Issuing Bank and the Lenders and their respective successors, transferees and assigns. Without limiting the generality of the foregoing sentence, each Lender may, in accordance with the provisions of ss.20, assign or otherwise transfer this Credit Agreement, the other Loan Documents or any other agreement or note held by it evidencing, securing or otherwise executed in connection with the Obligations, or sell participations in any interest therein, to any other entity or other person, and such other entity or other person shall thereupon become vested, to the extent set forth in the agreement evidencing such assignment, transfer or participation, with all the rights in respect thereof granted to such Lender herein. None of the Guarantors may assign any of its obligations hereunder. 1. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers and, to the extent the representation relates to CML, CML represents and warrants to the Lenders and the Administrative Agent as follows: 1. CORPORATE AUTHORITY. 2. INCORPORATION; GOOD STANDING. Each of CML, the Borrowers and each of their Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (ii) has all requisite corporate power to own its property and conduct its business as now conducted and as presently contemplated, and (iii) is in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction where such qualification is necessary except where a failure to be so qualified would not have a materially adverse effect on the business, assets or financial condition of CML, such Borrower or such Subsidiary. 49 1. AUTHORIZATION. The execution, delivery and performance of this Credit Agreement and the other Loan Documents to which CML, any of the Borrowers or any of their Subsidiaries is or is to become a party and the transactions contemplated hereby and thereby (i) are within the corporate authority of such Person, (ii) have been duly authorized by all necessary corporate proceedings, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which CML, any of the Borrowers or any of their Subsidiaries is subject or any judgment, order, writ, injunction, license or permit applicable to CML, any of Borrower or any of their Subsidiaries and (iv) do not conflict with any provision of the corporate charter or bylaws of, or any agreement or other instrument binding upon, CML, any of the Borrowers or any of their Subsidiaries. 1. ENFORCEABILITY. The execution and delivery of this Credit Agreement and the other Loan Documents to which CML, any of the Borrowers or any of their Subsidiaries is or is to become a party will result in valid and legally binding obligations of such Person enforceable against it in accordance with the respective terms and provisions hereof and thereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. 1. GOVERNMENTAL APPROVALS. The execution, delivery and performance by CML, any of the Borrowers and any of their Subsidiaries of this Credit Agreement and the other Loan Documents to which CML, any of the Borrowers or any of their Subsidiaries is or is to become a party and the transactions contemplated hereby and thereby do not require the approval or consent of, or filing with, any governmental agency or authority other than those already obtained. 1. TITLE TO PROPERTIES; LEASES. Except as indicated on SCHEDULE 8.3 hereto, CML, the Borrowers and their Subsidiaries own all of the assets reflected in the consolidated balance sheet of CML, the Borrowers and their Subsidiaries as at the Balance Sheet Date or acquired since that date (except property and assets sold or otherwise disposed of in the ordinary course of business since that date), subject to no rights of others, including any mortgages, leases, conditional sales agreements, title retention agreements, liens or other encumbrances except Permitted Liens. 1. FINANCIAL STATEMENTS AND PROJECTIONS. 2. FINANCIAL STATEMENTS. There has been furnished to each of the Lenders (a) the consolidated balance sheet of CML, the Borrowers and their Subsidiaries as at the Balance Sheet Date, and the consolidated statements of income and cash flows of CML, the Borrowers and their Subsidiaries for the fiscal year then ended, certified by Deloitte and Touche LLP and (b) the consolidated balance sheet of CML, the Borrowers and their Subsidiaries as at May 2, 1998 and the consolidated statements of income and cash flows of CML, the Borrowers and their Subsidiaries for the fiscal quarters then ended. All such balance sheets, statements of income and statements of cash flows have been prepared in accordance with generally accepted accounting principles and fairly present the consolidated financial condition of CML, the Borrowers and their Subsidiaries as at the close of business on the dates thereof and the results of operations for the fiscal year or quarter, as the case may be, then ended. There are no contingent liabilities of CML, any of the Borrowers or any of their Subsidiaries as of May 2, 1998 involving material amounts, known to the officers of CML or any the Borrowers, which were not disclosed in the balance sheet as of May 2, 1998 or the notes related thereto. 1. PROJECTIONS. The projections of the annual operating budgets of CML, the Borrowers and their Subsidiaries on a consolidated basis, balance sheets and cash flow statements for the 50 1998 to 1999 fiscal years, copies of which have been delivered to each Lender, disclose all assumptions made with respect to general economic, financial and market conditions used in formulating such projections. To the knowledge of CML, any of Borrowers or any of their Subsidiaries, no facts exist that (individually or in the aggregate) would result in any material change in any of such projections. The projections are based upon reasonable estimates and assumptions, have been prepared on the basis of the assumptions stated therein and reflect the reasonable estimates of CML, the Borrowers and its Subsidiaries of the results of operations and other information projected therein. 1. NO MATERIAL CHANGES, ETC.; SOLVENCY. CHANGES. Since May 2, 1998 there has occurred no materially adverse change in the condition (financial or otherwise), operations, assets, liabilities and/or prospects of CML, the Borrowers and their Subsidiaries other than as disclosed to the Administrative Agent and the Lenders in writing (including the Monthly Budget attached as ANNEX A hereto) on or prior to the Restatement Effective Date. 8.5.2. SOLVENCY. CML, each of the Borrowers and each of their Subsidiaries, taken as a whole (after giving effect to the transactions contemplated by this Credit Agreement and the other Loan Documents), is Solvent. As used herein, "SOLVENT" shall mean such Person, (i) has assets having a fair value in excess of its liabilities, (ii) has assets having a fair value in excess of the amount required to pay its liabilities on existing debts as such debts become absolute and matured, and (iii) has, and expects to continue to have, access to adequate capital for the conduct of its business and the ability to pay its debts from time to time incurred in connection with the operation of its business as such debts mature. 1. FRANCHISES, PATENTS, COPYRIGHTS, ETC. Each of CML, the Borrowers and their Subsidiaries possesses all franchises, patents, copyrights, trademarks, trade names, licenses and permits, and rights in respect of the foregoing, adequate for the conduct of its business substantially as now conducted without known conflict with any rights of others. 1. LITIGATION. Except as set forth in SCHEDULE 8.7 hereto, there are no actions, suits, proceedings or investigations of any kind pending or threatened against CML, any of the Borrowers or any of their Subsidiaries before any court, tribunal or administrative agency or board that, if adversely determined, might, either in any case or in the aggregate, materially adversely affect the properties, assets, financial condition or business of CML, the Borrowers and their Subsidiaries or materially impair the right of CML, the Borrowers and their Subsidiaries, considered as a whole, to carry on business substantially as now conducted by them, or result in any substantial liability not adequately covered by insurance, or for which adequate reserves are not maintained on the consolidated balance sheet of CML, the Borrowers and their Subsidiaries, or which question the validity of this Credit Agreement or any of the other Loan Documents, or any action taken or to be taken pursuant hereto or thereto. 1. NO MATERIALLY ADVERSE CONTRACTS, ETC. None of CML, any of the Borrowers nor any of their Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation that has or is expected in the future to have a materially adverse effect on the business, assets or financial condition of CML, any of the Borrowers or any of their Subsidiaries. None of CML, any of the Borrowers nor any of their Subsidiaries is a party to any contract or agreement that has or is expected, in the judgment of CML's officers, to have any materially adverse effect on the business of CML, any of the Borrowers or any of their Subsidiaries. 1. COMPLIANCE WITH OTHER INSTRUMENTS, LAWS, ETC. None of CML, any of the Borrowers nor any of their Subsidiaries is in violation of any provision of its charter documents, bylaws, or any agreement 51 or instrument to which it may be subject or by which it or any of its properties may be bound or any decree, order, judgment, statute, license, rule or regulation, in any of the foregoing cases in a manner that could result in the imposition of substantial penalties or materially and adversely affect the financial condition, properties or business of CML, any of the Borrowers or any of their Subsidiaries. 1. TAX STATUS. Each of CML, the Borrowers and their Subsidiaries (i) have made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which any of them is subject, (ii) have paid all taxes and other governmental assessments and charges shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and by appropriate proceedings and (iii) have set aside on their books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. Except as set forth on SCHEDULE 8.10, there are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and none of the officers of CML or any of the Borrowers knows of any basis for any such claim. 1. NO EVENT OF DEFAULT. No Default or Event of Default has occurred and is continuing. 1. HOLDING COMPANY AND INVESTMENT COMPANY ACTS. None of CML, any of the Borrowers nor any of their Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an affiliate" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935; nor is it an "investment company", or an "affiliated company" or a "principal underwriter" of an "investment company", as such terms are defined in the Investment Company Act of 1940. 1. ABSENCE OF FINANCING STATEMENTS, ETC. Except with respect to Permitted Liens, there is no financing statement, security agreement, chattel mortgage, real estate mortgage or other document filed or recorded with any filing records, registry or other public office, that purports to cover, affect or give notice of any present or possible future lien on, or security interest in, any assets or property of CML, any of the Borrowers or any of their Subsidiaries or any rights relating thereto. 1. PERFECTION OF SECURITY INTEREST. All filings, assignments, pledges and deposits of documents or instruments have been made and all other actions have been taken that are necessary or advisable, under applicable law, to establish and perfect the Administrative Agent's security interest in the Collateral (with such exceptions as are acceptable to the Majority Lenders). The Collateral and the Administrative Agent's rights with respect to the Collateral are not subject to any setoff, claims, withholdings or other defenses. CML, one of the Borrowers or one of their Subsidiaries, as specified in the Security Documents, is the owner of the Collateral free from any lien, security interest, encumbrance and any other claim or demand, except for Permitted Liens. 1. CERTAIN AFFILIATE TRANSACTIONS. None of CML, any of the Borrowers nor any of their Subsidiaries is a party to any transaction in violation of ss.10.11. None of CML, any of Borrowers nor any of their Subsidiaries is a party to any tax sharing agreement. 1. EMPLOYEE BENEFIT PLANS. 2. IN GENERAL. Each Employee Benefit Plan has been maintained and operated in compliance in all material respects with the provisions of ERISA and, to the extent applicable, the Code, including but not limited to the provisions thereunder respecting prohibited transactions. The Borrowers have heretofore delivered to the Administrative Agent the most recently completed annual report, Form 5500, with all required attachments, and actuarial statement required to be submitted under ss.103(d) of ERISA, with respect to each Guaranteed Pension Plan. 52 1. TERMINABILITY OF WELFARE PLANS. Under each Employee Benefit Plan which is an employee welfare benefit plan within the meaning of ss.3(1) or ss.3(2)(B) of ERISA, no benefits are due unless the event giving rise to the benefit entitlement occurs prior to plan termination (except as required by Title I, Subtitle B, Part 6 of ERISA). Any of CML, the Borrowers or an ERISA Affiliate, as appropriate, may terminate each such Plan at any time (or at any time subsequent to the expiration of any applicable bargaining agreement) in the discretion of CML, such Borrower or such ERISA Affiliate without liability to any Person other than for benefits accrued prior to such termination. 1. GUARANTEED PENSION PLANS. None of CML, any of the Borrowers nor any ERISA Affiliate maintains or operates a Guaranteed Pension Plan. 1. MULTIEMPLOYER PLANS. None of CML, any of the Borrowers nor any ERISA Affiliate maintains or operates a Multiemployer Plan. 1. REGULATIONS U, X AND G. The proceeds of the Loans shall be used solely to (a) pay in full, on the Restatement Effective Date, (i) all exit fees and reimbursable expenses required to be paid under the Existing Credit Agreement, and (ii) the Commitment Fee, the Agency Fee (each as defined in the Fee Letter), and all other amounts required by the Amendment Agreement to be paid on the Restatement Effective Date, and (b) for working capital and general corporate purposes of the Borrowers. Each of the Borrowers will obtain Letters of Credit solely for working capital purposes. No portion of any Loan is to be used, and no portion of any Letter of Credit is to be obtained, for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations U, X and G of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. 1. ENVIRONMENTAL COMPLIANCE. The Borrowers have taken all necessary steps to investigate the past and present condition and usage of the Real Estate and the operations conducted thereon and have determined that: (a) none of CML, any Borrower, any of their Subsidiaries nor any of their operations is in violation, or alleged violation, of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment (hereinafter "ENVIRONMENTAL LAWS"), which violation could have a material adverse effect on the environment or the business, assets or financial condition of CML, any of the Borrowers or any of their Subsidiaries; (b) except as set forth on SCHEDULE 8.18 attached hereto, none of CML, any of the Borrowers nor any of their Subsidiaries has received notice from any third party including, without limitation, any federal, state or local governmental authority, (i) that any one of them has been identified by the United States Environmental Protection Agency ("EPA") as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii) that any hazardous waste, as defined by 42 U.S.C. ss.6903(5), any hazardous substances as defined by 42 U.S.C. ss.9601(14), any pollutant or contaminant as defined by 42 U.S.C. ss.9601(33) and any toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental LawS ("HAZARDOUS SUBSTANCES") which any one of them has generated, transported or disposed of has been found at any site at which a federal, state or local agency or other third party has conducted or has ordered that CML, any Borrower or any 53 of their Subsidiaries conduct a remedial investigation, removal or other response action pursuant to any Environmental Law; or (iii) that it is or shall be a named party to any claim, action, cause of action, complaint, or legal or administrative proceeding (in each case, contingent or otherwise) arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances; (c) except as set forth on SCHEDULE 8.18 attached hereto: (i) no portion of the Real Estate has been used for the handling, processing, storage or disposal of Hazardous Substances except in accordance with applicable Environmental Laws; and no underground tank or other underground storage receptacle for Hazardous Substances is located on any portion of the Real Estate; (ii) in the course of any activities conducted by CML, the Borrowers, their Subsidiaries or operators of their properties, no Hazardous Substances have been generated or are being used on the Real Estate except in accordance with applicable Environmental Laws; (iii) there have been no releases (i.e. any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping) or threatened releases of Hazardous Substances on, upon, into or from the properties of CML, the Borrowers or their Subsidiaries, which releases would have a material adverse effect on the value of any of the Real Estate or adjacent properties or the environment; (iv) to the best of CML's and the Borrowers' knowledge, there have been no releases on, upon, from or into any real property in the vicinity of any of the Real Estate which, through soil or groundwater contamination, may have come to be located on, and which would have a material adverse effect on the value of, the Real Estate; and (v) in addition, to the best of CML's and the Borrowers' knowledge, any Hazardous Substances that have been generated on any of the Real Estate have been transported offsite only by carriers having an identification number issued by the EPA, treated or disposed of only by treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which transporters and facilities have been and are, to the best of CML's and each Borrowers' knowledge, operating in compliance with such permits and applicable Environmental Laws; and (d) except as set forth on SCHEDULE 8.18 attached hereto, none of CML, the Borrowers and their Subsidiaries, any Mortgaged Property or any of the other Real Estate is subject to any applicable environmental law requiring the performance of Hazardous Substances site assessments, or the removal or remediation of Hazardous Substances, or the giving of notice to any governmental agency or the recording or delivery to other Persons of an environmental disclosure document or statement by virtue of the transactions set forth herein and contemplated hereby, or as a condition to the recording of any Mortgage or to the effectiveness of any other transactions contemplated hereby. 1. SUBSIDIARIES, ETC. Set forth on SCHEDULE 8.19 hereto is a complete and accurate list of all Subsidiaries of CML, each Borrower and each of their Subsidiaries, showing as of the Restatement Effective Date (as to each such Subsidiary) the jurisdiction of its incorporation, the number of shares of each class of Capital Stock authorized and the number outstanding on the Restatement Effective Date and the percentage of the outstanding shares of each such class owned (directly or indirectly) by CML, such Borrower or such Subsidiary at the Restatement Effective Date and the number of shares covered by all outstanding options, warrants, rights of conversion or purchase and similar rights at the date hereof. All of the outstanding Capital Stock of all such Subsidiaries has been validly issued, is fully paid and non-assessable and is owned by CML or one or more of its Subsidiaries free and clear of all liens except those created by the Security Documents. Except as set forth on SCHEDULE 8.19 hereto, none of CML, any of the Borrowers nor any of their Subsidiaries is engaged in any joint venture or partnership with any other Person. None of the Guarantors (other than the Borrowers and CML) or the Foreign Guarantors has assets having an aggregate net book value in excess of $1,000,000. 54 1. BANK ACCOUNTS. SCHEDULE 8.20 sets forth the account numbers, location and a description of all bank accounts of CML, each of the Borrowers and each of their Subsidiaries. 1. CHIEF EXECUTIVE OFFICES. Set forth on SCHEDULE 8.21 hereto is a complete and accurate list of the chief executive office of each of CML, each Borrower and each of their Subsidiaries, at which location such Person keeps its books and records. FISCAL YEAR. Each of CML, each Borrower and each of their Subsidiaries has a fiscal year which is the twelve (12) months ending on July 31 of each year. DISCLOSURE No representation or warranty made by CML or any of the Borrowers in this Credit Agreement or in any agreement, instrument, document, certificate, statement or letter furnished to any Agent or any Lender by or on behalf of CML and the Borrowers in connection with any of the transactions contemplated by any of the Loan Documents contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which they are made. INSURANCE. CML, the Borrowers and each of their Subsidiaries maintains with financially sound and reputable insurers insurance with respect to its properties and businesses against such casualties and contingencies as are in accordance with sound business practices, with the details of such coverage being more fully described on SCHEDULE 8.24 hereto. EQUITY DOCUMENTS, WISCONSIN DOCUMENTS. All representations and warranties (a) (except by Wisconsin) set forth in the Wisconsin Documents and (b) (except by a Lender) set forth in the Equity Documents and, to the knowledge of CML and the Borrowers and each of their Subsidiaries, all representations and warranties of Wisconsin and any Lender set forth, respectively, in the Wisconsin Documents and the Equity Documents, were true and correct in all material respects as of the Restatement Effective Date as if made on and as of such date, except to the extent that such representations and warranties expressly relate to an earlier date. 1. AFFIRMATIVE COVENANTS OF CML AND THE BORROWERS. Each of CML and each of the Borrowers covenants and agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit, Note or any other Obligation is outstanding or any Lender has any obligation to make any Loans or the Issuing Bank has any obligation to issue, extend or renew any Letters of Credit: 1. PUNCTUAL PAYMENT. Each Borrower will duly and punctually pay or cause to be paid the principal and interest on its Loans, all Reimbursement Obligations in respect of letters of credit issued at the request of such Borrower, the Letter of Credit Fees relating to such Letters of Credit, its Unused Line Fees, the Administrative Agent's fee and all other amounts provided for in this Credit Agreement and the other Loan Documents to which CML, any of the Borrowers or any of their Subsidiaries is a party, all in accordance with the terms of this Credit Agreement and such other Loan Documents. 1. MAINTENANCE OF OFFICE. Each of CML and each of the Borrowers will maintain its chief executive office at the location set forth on SCHEDULE 8.21 hereto, or at such other place in the United States of America as CML or such Borrower shall designate upon prior written notice to the Administrative Agent, where notices, presentations and demands to or upon such Person in respect of the Loan Documents to which such Person is a party may be given or made. 1. RECORDS AND ACCOUNTS. Each of CML and each of the Borrowers will (i) keep, and cause each of its Subsidiaries to keep, true and accurate records and books of account in which full, true and 55 correct entries will be made in accordance with generally accepted accounting principles and (ii) maintain adequate accounts and reserves for all taxes (including income taxes), depreciation, depletion, obsolescence and amortization of its properties and the properties of its Subsidiaries, contingencies, and other reserves. 1. FINANCIAL STATEMENTS, CERTIFICATES AND INFORMATION. CML and the Borrowers will deliver to each of the Lenders: (a) as soon as practicable, but in any event not later than ninety (90) days after the end of each fiscal year of CML, the consolidated balance sheet of CML and its Subsidiaries and the consolidating balance sheets of CML and its Subsidiaries, each as at the end of such year, and the related consolidated statement of income and consolidated statement of cash flow and consolidating statements of income and consolidating statements of cash flow for such year, each setting forth in comparative form the figures for the previous fiscal year and all such consolidated and consolidating statements to be in reasonable detail, prepared in accordance with generally accepted accounting principles, and all such consolidated statements to be certified without qualification by Deloitte and Touche LLP or by other independent certified public accountants satisfactory to the Administrative Agent, together with a written statement from such accountants to the effect that they have read a copy of this Credit Agreement, and that, in making the examination necessary to said certification, they have obtained no knowledge of any Default or Event of Default, or, if such accountants shall have obtained knowledge of any then existing Default or Event of Default they shall disclose in such statement any such Default or Event of Default; PROVIDED that such accountants shall not be liable to the Lenders for failure to obtain knowledge of any Default or Event of Default; (b) as soon as practicable, but in any event not later than forty-five (45) days after the end of each of the first three fiscal quarters in each fiscal year of CML, copies of the unaudited consolidated balance sheet of CML and its Subsidiaries and the unaudited consolidating balance sheets of CML and its Subsidiaries, each as at the end of such quarter, and the related consolidated statement of income and consolidated statement of cash flow and consolidating statements of income and consolidating statements of cash flow for the portion of CML's fiscal year then elapsed, all in reasonable detail and prepared in accordance with generally accepted accounting principles, together with a certification by the principal financial or accounting officer of CML that the information contained in such financial statements fairly presents the financial position of CML and its Subsidiaries on the date thereof (subject to year-end adjustments); (c) as soon as practicable, but in any event within twenty (20) days after the end of the first eleven months in each fiscal year of CML, copies of the unaudited monthly consolidated balance sheet of CML and its Subsidiaries and the unaudited consolidating balance sheets of CML and its Subsidiaries, each as at the end of such month and the related consolidated statement of income, consolidated statement of cash flow, consolidating statements of income and consolidating statements of cash flow for such month, each prepared in accordance with generally accepted accounting principles, together with a certification by the principal financial or accounting officer of CML that the information contained in such financial statements fairly presents the financial condition of CML and its Subsidiaries on the date thereof (subject to quarter and year-end adjustments); (d) simultaneously with the delivery of the financial statements referred to in subsections (a), (b) and (c) above, a statement certified by the principal financial or accounting officer of CML in substantially the form of EXHIBIT D hereto (a "COMPLIANCE CERTIFICATE") and setting forth in reasonable detail computations evidencing compliance with the covenants contained in ss.11 and (iF applicable) reconciliations to reflect changes in generally accepted accounting principles since the Balance Sheet Date; 56 (e) contemporaneously with the filing or mailing thereof, copies of all material of a financial nature filed with the Securities and Exchange Commission or sent to the stockholders of CML; (f) (i) within three (3) Business Days after the end of each calendar week or at such earlier time as the Administrative Agent may reasonably request, a Borrowing Base Report setting forth the Borrowing Bases as at the end of such calendar week or other date so requested by the Administrative Agent and (ii) within fifteen (15) days after the end of each calendar month, a Borrowing Base Report setting forth the Borrowing Bases as at the end of such calendar month, containing such adjustments to the applicable weekly Borrowing Base Reports as may be appropriate; (g) within fifteen (15) days after the end of each calendar month, an Accounts Receivable aging report with respect to the Borrowers; (h) from time to time as the Administrative Agent may request detailed management prepared reports summarizing the Borrowers' inventory, including information on the aging and obsolescence of such inventory; (i) as soon as practicable, but in any event not later than thirty (30) days prior to the beginning of each fiscal year, management- prepared financial forecasts of CML and its Subsidiaries with respect to such fiscal year; (j) prior to the opening by any Borrower of any new retail store, distribution center or manufacturing facility at which Eligible Inventory or Eligible NordicTrack Inventory, as the case may be, is to be located, a supplement to SCHEDULE 2 hereto in the form of EXHIBIT I hereto, listing any additions or deletions to the list of retail stores, distribution centers and manufacturing facilities of the Borrowers located in the United States, which supplement, together with SCHEDULE 2 hereto and any prior supplements, shall be deemed to constitute SCHEDULE 2 for all purposes of this Credit Agreement; (k) when completed, copies of final or substantially final drafts of any offering memorandum or prospectus prepared by or for CML or any Borrower and relating to any proposed sale of stock or assets of CML or any Borrower or any other Subsidiary of CML; (l) from time to time at the request of any Agent or any Lender, any current list of prospective purchasers of any stock or assets of CML or any Borrower or any other Subsidiary of CML; (m) any proposal letter or letter of intent or purchase agreement or similar writing received or signed by CML or any Borrower or any other Subsidiary of CML relating to the proposed sale of any stock or assets of CML or any Borrower or any other Subsidiary of CML; (n) from time to time at the request of the Administrative Agent or any Lender, periodic updates on the status of any efforts to sell the stock or assets of CML or any Borrower or any other Subsidiary of CML; (o) within three (3) Business Day after the end of each calendar week, a report of the sales of each of the Borrowers for the immediately preceding calendar week; (p) as soon as practicable, but in any event within twenty (20) days after the end of each month (commencing on August 20, 1998), a report of the Capital Expenditures of each of the Borrowers for the immediately preceding month; 57 (q) as soon as practicable, but in any event within twenty (20) days after the end of each month (commencing on August 20, 1998), a report containing a comparison of (i) each Borrower's forecasted monthly outstandings (including Loans and Letter of Credit Exposure), Overadvances, and Borrowing Base availability to (ii) each Borrower's actual monthly outstandings (including Loans and Letter of Credit Exposure), Overadvances, and Borrowing Base availability, each for the immediately preceding month; and (r) from time to time such other financial data and information (including accountants' management letters) as the Administrative Agent or any Lender may reasonably request. 1. NOTICES. 2. DEFAULTS. The Borrowers and CML will promptly notify the Administrative Agent and each of the Lenders in writing of the occurrence of any Default or Event of Default. If any Person shall give any notice or take any other action in respect of a claimed default (whether or not constituting an Event of Default) under (a) this Credit Agreement or (b) any other note, evidence of indebtedness, indenture or other obligation to which or with respect to which CML, any Borrower or any of their Subsidiaries is a party or obligor, whether as principal, guarantor, surety or otherwise and the aggregate amount of such obligations referred to in this clause (b) in default is in excess of $1,000,000, the Borrowers and CML shall forthwith give written notice thereof to the Administrative Agent and each of the Lenders, describing the notice or action and the nature of the claimed default. 1. ENVIRONMENTAL EVENTS. The Borrowers and CML will promptly give notice to the Administrative Agent and each of the Lenders (i) of any violation of any Environmental Law that CML, any of the Borrowers or any of their Subsidiaries reports in writing or is reportable by such Person in writing (or for which any written report supplemental to any oral report is made) to any federal, state or local environmental agency and (ii) upon becoming aware thereof, of any inquiry, proceeding, investigation, or other action, including a notice from any agency of potential environmental liability, of any federal, state or local environmental agency or board, that has the potential to materially affect the assets, liabilities, financial conditions or operations of CML, any of the Borrowers or any of their Subsidiaries, or the Administrative Agent's mortgages, deeds of trust or security interests pursuant to the Security Documents. 1. NOTIFICATION OF CLAIM AGAINST COLLATERAL. The Borrowers and CML will, immediately upon becoming aware thereof, notify the Administrative Agent and each of the Lenders in writing of any setoff, claims (including, with respect to the Real Estate, environmental claims), withholdings or other defenses to which any of the Collateral, or the Administrative Agent's rights with respect to the Collateral, are subject. 1. NOTICE OF LITIGATION AND JUDGMENTS. CML and each of the Borrowers will, and will cause each of their Subsidiaries to, give notice to the Administrative Agent and each of the Lenders in writing within fifteen (15) days of becoming aware of any litigation or proceedings threatened in writing or any pending litigation and proceedings affecting CML, any of the Borrowers or any of their Subsidiaries or to which CML, any of the Borrower or any of their Subsidiaries is or becomes a party involving an uninsured claim against CML, any of the Borrowers or any of their Subsidiaries that could reasonably be expected to have a materially adverse effect on CML, any of the Borrowers or any of their Subsidiaries and stating the nature and status of such litigation or proceedings. Each of CML and each of the Borrowers will, and will cause each of its Subsidiaries to, give notice to the Administrative Agent and each of the Lenders, in writing, in form and detail satisfactory to the Administrative Agent, within ten (10) 58 days of any judgment not covered by insurance, final or otherwise, against CML, any of the Borrowers or any of their Subsidiaries in an amount in excess of $1,000,000. 1. NOTICE OF TAX REFUNDS. CML and each of the Borrowers will give notice promptly to the Administrative Agent of such Person's receipt of any federal or state tax refund in excess of $1,000,000 and will, within fifteen (15) days of the end of each fiscal quarter, give notice to the Administrative Agent of the aggregate amount of federal and state tax refunds received by such Person during such fiscal quarter. 1. CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. CML and the Borrowers will do or cause to be done all things necessary to preserve and keep in full force and effect their corporate existence, rights and franchises and those of their Subsidiaries and will not, and will not cause or permit any of their Subsidiaries to, convert to a limited liability company or a limited liability partnership. They (i) will cause all of their properties and those of their Subsidiaries used or useful in the conduct of their business or the business of their Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment, (ii) will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of CML or the Borrowers, may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times, and (iii) will, and will cause each of their Subsidiaries to, continue to engage primarily in the businesses now conducted by them and in related businesses; PROVIDED that nothing in this ss.9.6 shall prevent CML or the Borrowers from discontinuing the operation and maintenance of any of their properties or any of those of their Subsidiaries if such discontinuance is, in the judgment of CML or the Borrowers as the case may be, desirable in the conduct of its or their business and that do not in the aggregate materially adversely affect the business of CML, the Borrowers and their Subsidiaries on a consolidated basis. 1. INSURANCE. Each of CML and each Borrower will, and will cause each of their Subsidiaries to, maintain with financially sound and reputable insurers having an A.M. Best rating of not less than A- (or an equivalent rating reasonably satisfactory to the Administrative Agent) (except that NordicTrack's workers' compensation insurance may be self-insured) insurance with respect to its properties and business against such casualties and contingencies as shall be in accordance with the general practices of businesses engaged in similar activities in similar geographic areas and in amounts, containing such terms, in such forms and for such periods as described on SCHEDULE 8.24 hereto and as may be reasonable and prudent and in accordance with the terms of the Security Agreement. Each of CML and each Borrower will, and will cause each of their Subsidiaries to, maintain insurance on the Mortgaged Properties in accordance with the terms of the Mortgages. 1. TAXES. Each of CML and each Borrower will, and will cause each of their Subsidiaries to, duly pay and discharge, or cause to be paid and discharged, before the same shall become overdue, all taxes, assessments and other governmental charges imposed upon it and its real properties, sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies that if unpaid might by law become a lien or charge upon any of its property; PROVIDED that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if CML, such Borrower or such Subsidiary shall have set aside on its books adequate reserves with respect thereto; and PROVIDED FURTHER that CML, each Borrower and each Subsidiary of such Persons will pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien that may have attached as security therefor. 59 1. INSPECTION OF PROPERTIES AND BOOKS, ETC. 2. GENERAL. Each of CML and each Borrower shall permit the Lenders, through the Administrative Agent or any of the Lenders' other designated representatives, to visit and inspect any of the properties of CML, any of the Borrowers or any of their Subsidiaries, to examine the books of account of CML, the Borrowers and their Subsidiaries (and to make copies thereof and extracts therefrom), and to discuss the affairs, finances and accounts of the Borrowers and their Subsidiaries with, and to be advised as to the same by, its and their officers, all at such reasonable times and intervals as the Administrative Agent or any Lender may reasonably request. 9.9.2. INVENTORY REPORTS AND APPRAISALS. From time to time, upon the request of the Administrative Agent, the Borrowers will obtain and deliver to the Administrative Agent a report of an independent collateral auditor or appraiser satisfactory to the Administrative Agent (which may be affiliated with one of the Lenders) with respect to the inventory components included in the Borrowing Bases, which report (i) shall indicate whether or not the information set forth in the Borrowing Base Report most recently delivered is accurate and complete in all material respects based upon a review by such auditors of the inventory (including verification as to the value, location and respective types) and (ii) shall, in any event, be not less extensive in scope than the Gordon Brothers Report delivered to the Administrative Agent prior to the Restatement Effective Date. All such collateral value reports shall be conducted and made at the expense of the applicable Borrower. 9.9.3. COMMERCIAL FINANCE EXAMINATIONS. From time to time, upon the Administrative Agent's request, CML and the Borrowers shall permit the Administrative Agent's commercial finance examiners to conduct commercial finance examinations of CML's, the Borrowers' and their Subsidiaries' property, all at such reasonable times and intervals as the Administrative Agent may reasonably request. All such commercial finance examinations shall be conducted and made at the expense of the Borrowers. 9.9.4. APPRAISALS. From time to time, upon the request of the Administrative Agent, the Borrowers will obtain and deliver to the Administrative Agent appraisal reports in form and substance and from appraisers satisfactory to the Administrative Agent, stating the then current fair market, orderly liquidation and forced liquidation values of all or any portion of the equipment or real estate owned by CML, any of the Borrowers or any of their Subsidiaries. From time to time, upon the request of the Administrative Agent, the Borrowers will obtain and deliver to the Administrative Agent appraisal reports in form and substance and from appraisers satisfactory to the Administrative Agent stating the then current business value of each of CML, each Borrower and their Subsidiaries. No later than June 30th of each year, the Borrowers will obtain and deliver to the Administrative Agent appraisal reports in form and substance and from appraisers satisfactory to the Administrative Agent, stating the then current fair market value of (i) NordicTrack's Mortgaged Property and (ii) NordicTrack's machinery and equipment. All such appraisals referred to in this ss.9.9.4 shall be conducted and made at the expense of the Borrowers. 9.9.5. ENVIRONMENTAL ASSESSMENTS. Whether or not an Event of Default shall have occurred, upon prior notice to CML and the Borrowers, the Administrative Agent may, from time to time, in its discretion for the purpose of assessing and ensuring the value of any Mortgaged Property, obtain one or more environmental assessments or audits of such Mortgaged Property prepared by a hydrogeologist, an independent engineer or other qualified consultant or expert approved by the Administrative Agent to evaluate or confirm (i) whether any Hazardous Materials are present in the soil or water at such Mortgaged Property and (ii) whether the use and operation of such Mortgaged Property complies with all Environmental Laws. Environmental assessments may include without limitation detailed visual inspections of such Mortgaged Property including any and all storage areas, storage tanks, drains, dry wells and leaching areas, and the taking of soil samples, surface water samples and ground water samples, as well as such other investigations or analyses as the Administrative Agent deem appropriate. All such environmental assessments shall be 60 conducted and made at the expense of the Borrowers. Prior to requiring that such inspections be performed, the Administrative Agent shall discuss with CML and the Borrowers the views of CML and the Borrowers as to whether the results of such inspections would be confidential and would be required to be reported to governmental authorities and the consequences of potential findings from such inspections. 9.9.6. COMMUNICATIONS WITH ACCOUNTANTS. Each of CML and each Borrower authorizes the Administrative Agent and, if accompanied by the Administrative Agent, the Lenders to communicate directly with CML's and the Borrowers' independent certified public accountants and authorizes such accountants to disclose to the Administrative Agent and the Lenders any and all financial statements and other supporting financial documents and schedules including copies of any management letter with respect to the business, financial condition and other affairs of CML, any of the Borrowers or any of their Subsidiaries. At the request of the Administrative Agent, CML and the Borrowers shall deliver a letter addressed to such accountants instructing them to comply with the provisions of this ss.9.9.6. 9.9.7. COMMUNICATIONS WITH OTHER REPRESENTATIVES. CML and each of the Borrowers hereby irrevocably authorizes each Lender and its representatives, agents and counsel (each referred to in this ss.9.9.7 as a "LENDER REPRESENTATIVE") to have discussions directly witH any representatives or agents (including Lehman Brothers) engaged by CML or any Borrower to assist in selling any of the stock or assets of CML or any Borrower or any other Subsidiary of CML, and has authorized and directed and will continue to authorize and direct such representatives and agents to have such discussions with the Lenders and their Lender Representatives. Any such discussions between any Lender or its Lender Representative and any such representative or agent engaged by CML or any Borrower shall be subject to prior notice given by such Lender or its Lender Representative to CML or such Borrower, and an opportunity given to CML or such Borrower to participate in such discussions. 1. COMPLIANCE WITH LAWS, CONTRACTS, LICENSES, AND PERMITS. Each of CML and each Borrower will, and will cause each of their Subsidiaries to, comply with (i) the applicable laws and regulations wherever its business is conducted, including all Environmental Laws, (ii) the provisions of its charter documents and by-laws, (iii) all agreements and instruments by which it or any of its properties may be bound and (iv) all applicable decrees, orders, and judgments. If any authorization, consent, approval, permit or license from any officer, agency or instrumentality of any government shall become necessary or required in order that CML, any of the Borrowers or any of their Subsidiaries may fulfill any of its obligations hereunder or any of the other Loan Documents to which CML, such Borrower or such Subsidiary is a party, CML or such Borrower will, or (as the case may be) will cause such Subsidiary to, immediately take or cause to be taken all reasonable steps within the power of CML or such Borrower or such Subsidiary to obtain such authorization, consent, approval, permit or license and furnish the Administrative Agent and the Lenders with evidence thereof. 1. INVENTORY RESTRICTIONS. Each of the Borrowers shall cause all Eligible Inventory and, in the case of NordicTrack, all Eligible NordicTrack Inventory, to be located at all times solely at Permitted Inventory Locations, and to be sold or otherwise disposed of in the ordinary course of such Borrower's business, consistent with past practices or as required pursuant to the terms of this Credit Agreement. 1. USE OF PROCEEDS. Each Borrower will use the proceeds of its Loans and will obtain Letters of Credit solely for the purposes set forth in ss.8.17. 1. ADDITIONAL MORTGAGED PROPERTY. If, after the Original Closing Date, CML, any of the Borrowers or any of their Subsidiaries acquires real estate used as a manufacturing or warehouse facility, CML or such Borrower shall, or shall cause such Subsidiary to, forthwith deliver to the Administrative Agent a fully executed mortgage or deed of trust over such real estate, in form and substance satisfactory to the Administrative 61 Agent, together with title insurance policies, surveys, evidences of insurance with the Administrative Agent named as loss payee and additional insured, legal opinions and other documents and certificates with respect to such real estate as was required for Real Estate of NordicTrack as of the Original Closing Date. CML and each Borrower further agrees that, following the taking of such actions with respect to such real estate, the Administrative Agent shall have for the benefit of the Lenders and the Administrative Agent a valid and enforceable first priority mortgage or deed of trust over such real estate, free and clear of all title defects and encumbrances except for Permitted Liens. AGENCY ACCOUNT AGREEMENTS. The Borrowers have delivered to the Administrative Agent Agency Account Agreements in form and substance satisfactory to the Administrative Agent from each of the Agency Account Institutions. Each of CML and the Borrowers will, and will cause each of their Subsidiaries to, use its best efforts to obtain Agency Account Agreements from each other depository institution with which any of the Borrowers or any of the Guarantors has an account. INVESTMENTS IN BORROWERS. Within five (5) Business Days of receipt by CML of any tax refund from any governmental authority or any other funds received by CML from a third party, CML will invest all such refunds and other funds in the Borrowers as subordinated loans or as contributions to capital. 1. OWNERSHIP OF SUBSIDIARIES. Except as otherwise permitted by ss.10.4.2, ss.10.5.2 or ss.10.15 of this Credit Agreement, (a) CML will maintain legal and beneficial ownership of one hundred percent (100%) of the equity interests of each of the Guarantors (other than CML and NA) and (b) NT will maintain legal and beneficial ownership of one hundred percent (100%) of the equity interests of NA. 1. COLLATERAL NOTES. In addition to the NordicTrack Notes and the S&H Notes, the Borrowers agree that with respect to any or all of the Mortgaged Properties, they will execute and deliver or cause to be executed and delivered such Collateral Notes as the Administrative Agent may request, it being understood, however, that (a) the aggregate of all payments or recoveries on such Collateral Notes shall not exceed the amount of the Obligations (exclusive of the Collateral Notes), and (b) any payments or recoveries on such Collateral Notes shall be credited to the unpaid amount of the Obligations and in such order of application as may be required by ss.3.3 and ss.14.4 hereof. In the event that the appraised value of any Mortgaged Property, a lien on which secures any of the Collateral Notes, exceeds the amount of the Obligations secured by the applicable Collateral Note, the applicable Borrower will execute and deliver such amended Collateral Notes, amendments to Mortgages and other documents, and will obtain such endorsements to the Title Policy covering such Mortgaged Property, so as to reflect such altered appraised value. FURTHER ASSURANCES; ADDITIONAL LOCATIONS. FURTHER ASSURANCES. (a) CML and each Borrower will, and will cause each of their Subsidiaries to, cooperate with the Lenders and the Administrative Agent and execute such further instruments and documents as the Lenders or the Administrative Agent shall reasonably request to carry out to their satisfaction the transactions contemplated by this Credit Agreement and the other Loan Documents. (b) CML and each Borrower will, and will cause each of their Subsidiaries to, cooperate with the Lenders and the Administrative Agent, and execute such further instruments and documents, including without limitation, the execution and delivery of any amendments to the Foreign Guaranties and the Foreign Pledge Agreements or any other instruments or documents 62 related thereto, deemed appropriate by the Administrative Agent or any of the Lenders as a result of amending and restating the Existing Credit Agreement. (c) NordicTrack will, (i) within thirty (30) days following the Restatement Effective Date, (A) execute and deliver an amended and restated Mortgage to the Administrative Agent in respect of each of the Mortgaged Properties located in Minnesota, (B) cause its counsel to deliver a favorable legal opinion, in form and substance satisfactory to the Lenders, in connection with the execution and delivery of such Mortgages, and (ii) within thirty (30) days following the delivery of such Mortgages, deliver (A) a new Title Policy, or (B) new endorsements to each existing Title Policy with respect to each such Mortgage, and (iii) execute such further instruments and documents deemed appropriate by the Administrative Agent or any of the Lenders as a result of amending any such Mortgage. The form and substance of each such Mortgage, and each new Title Policy or endorsement shall be satisfactory to the Administrative Agent. (d) CML and each Borrower will, and will cause each of their Subsidiaries to, (i) within thirty (30) days following the Restatement Effective Date, deliver (A) a new Title Policy, or (B) a new endorsements to each existing Title Policy with respect to each Mortgage, and (ii) execute such further instruments and documents deemed appropriate by the Administrative Agent or any of the Lenders as a result of amending the Mortgages. The form and substance of each such endorsement shall be satisfactory to the Administrative Agent. ADDITIONAL LOCATIONS. Prior to the opening by any Borrower of any new retail store, distribution center or manufacturing facility at which Eligible Inventory or Eligible NordicTrack Inventory, as the case may be, is to be located, such Borrower shall take all actions necessary or advisable, under applicable law, to establish and perfect the Administrative Agent's security interest in the Collateral located or to be located at such retail store, distribution center or manufacturing facility (with such exceptions as are acceptable to the Majority Lenders). 1. FURTHER ASSURANCES AS TO TRUST. CML will take all steps reasonably requested by the Administrative Agent or any of the Lenders which are necessary to grant in favor of the Administrative Agent, for the benefit of the Lenders and the Administrative Agent, a security interest in all of CML's right, title and interest in and to the Trust and the Trust Assets, and all proceeds thereof, to the extent that such grant of a security interest by CML would not breach any of CML's obligations under the Trust Agreement or limit CML's performance of its obligations under the Trust. 1. SALE OF S&H. On the PIK Date CML shall (a) immediately commence the sale of S&H, and (b) consummate and complete the sale of S&H within 120 days of the PIK Date for Net Cash Proceeds from such sale sufficient to cause all the Loans, PIK Notes, and all other Obligations to be paid in full and all Letters of Credit to be cash collateralized on terms satisfactory to the Lenders. 1. CERTAIN NEGATIVE COVENANTS OF CML AND THE BORROWERS. Each of CML and each of the Borrowers covenants and agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit, Note or any other Obligation is outstanding or any Lender has any obligation to make any Loans or the Issuing Bank has any obligations to issue, extend or renew any Letters of Credit: 10.1 RESTRICTIONS ON INDEBTEDNESS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, create, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any Indebtedness other than: 63 (a) Indebtedness to the Lenders and the Administrative Agent arising under any of the Loan Documents; (b) current liabilities of CML, such Borrower or such Subsidiary incurred in the ordinary course of business not incurred through (i) the borrowing of money, or (ii) the obtaining of credit except for credit on an open account basis customarily extended and in fact extended in connection with normal purchases of goods and services; (c) Indebtedness in respect of taxes, assessments, governmental charges or levies and claims for labor, materials and supplies to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of ss.9.8; (d) Indebtedness in respect of judgments or awards that have been in force for less than the applicable period for taking an appeal so long as execution is not levied thereunder or in respect of which CML, such Borrower or such Subsidiary shall at the time in good faith be prosecuting an appeal or proceedings for review and in respect of which a stay of execution shall have been obtained pending such appeal or review; (e) endorsements for collection, deposit or negotiation and warranties of products or services, in each case incurred in the ordinary course of business; (f) Subordinated Debt not exceeding $41,593,000 in aggregate principal amount at any time outstanding; (g) obligations under Capitalized Leases and purchase money Indebtedness incurred in connection with the acquisition of any real or personal property by CML, such Borrower or such Subsidiary, in each case which were outstanding as of March 6, 1998; (h) Indebtedness not otherwise permitted by thisss.10.1 existing on the date hereof and listed and described on SCHEDULE 10.1 hereto; (i) Indebtedness of a Guarantor which is a Subsidiary of any Borrower to such Borrower in respect of loans permitted by ss.10.3(e); (j) Indebtedness of any Borrower to CML in respect of Investments by CML in such Borrower permitted under ss.10.3(i); (k) Indebtedness of NordicTrack under the Monogram Credit Card Program and the GE Capital Credit Card Program; (l) Indebtedness consisting of guaranties by CML or any of its Subsidiaries of obligations of any direct or indirect Subsidiaries of such Person in respect of operating leases of such Subsidiary; (m) Indebtedness of CML to any Borrower in respect of Investments by such Borrower in CML permitted under ss.10.3(k); (n) Indebtedness consisting of the guaranty by CML of the liabilities of NordicTrack to Air Express International Corporation ("AEI CORP.") for services rendered by AEI Corp. to NT and/or NA under air waybills or Bills of Lading issued by AEI Corp. prior to September 16, 1998 up to an amount not in excess of $1,500,000; and 64 (o) Indebtedness to Wisconsin arising under (i) the Wisconsin Subordinated Note, in an aggregate principal amount not to exceed $20,000,000, and (ii) the Wisconsin Guaranties. 10.2 RESTRICTIONS ON LIENS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, (i) create or incur or suffer to be created or incurred or to exist any lien, encumbrance, mortgage, pledge, charge, restriction or other security interest of any kind upon any of its property or assets of any character whether now owned or hereafter acquired, or upon the income or profits therefrom; (ii) transfer any of such property or assets or the income or profits therefrom for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors; (iii) acquire, or agree or have an option to acquire, any property or assets upon conditional sale or other title retention or purchase money security agreement, device or arrangement; (iv) suffer to exist for a period of more than thirty (30) days after the same shall have been incurred any Indebtedness or claim or demand against it that if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever over its general creditors; or (v) sell, assign, pledge or otherwise transfer any accounts, contract rights, general intangibles, chattel paper or instruments, with or without recourse; PROVIDED that CML, any of the Borrowers and any of their Subsidiaries may create or incur or suffer to be created or incurred or to exist: (a) liens in favor of such Borrower on all or part of the assets of Subsidiaries of such Borrower securing Indebtedness owing by Subsidiaries of such Borrower to such Borrower; (b) liens to secure taxes, assessments and other government charges in respect of obligations not overdue or liens on properties other than Mortgaged Properties to secure claims for labor, material or supplies in respect of obligations not overdue; (c) deposits or pledges made in connection with, or to secure payment of, workmen's compensation, unemployment insurance, old age pensions or other social security obligations; (d) liens on properties other than Mortgaged Properties in respect of judgments or awards, the Indebtedness with respect to which is permitted by ss.10.1(d); (e) liens of carriers, warehousemen, mechanics and materialmen, and other like liens on properties other than Mortgaged Properties, in existence less than 120 days from the date of creation thereof in respect of obligations not overdue; (f) encumbrances on Real Estate other than the Mortgaged Property consisting of easements, rights of way, zoning restrictions, restrictions on the use of real property and defects and irregularities in the title thereto, landlord's or lessor's liens under leases to which CML, any of the Borrowers or any of their Subsidiaries is a party, and other minor liens or encumbrances none of which in the opinion of CML or such Borrower interferes materially with the use of the property affected in the ordinary conduct of the business of CML, such Borrower or their Subsidiaries, as the case may be, which defects do not individually or in the aggregate have a materially adverse effect on the business of CML or such Borrower, as the case may be individually or of CML, the Borrowers and their Subsidiaries on a consolidated basis; (g) liens existing on the date hereof and listed on SCHEDULE 10.2 hereto; (h) liens to secure Capitalized Lease obligations of the type and amount permitted by ss.10.1(g), so long as such liens cover only the property subject to such Capitalized Leases, and purchase money security interests in or purchase money mortgages on real or personal property other than Mortgaged Properties acquired after the date hereof to secure purchase money Indebtedness of the type and amount permitted by ss.10.1(g), incurred in connection with the 65 acquisition of such property, which security interests or mortgages cover only the real or personal property so acquired; (i) liens and encumbrances on each Mortgaged Property as and to the extent permitted by the Mortgage applicable thereto; (j) liens in favor of the Administrative Agent under the Loan Documents; and (k) liens on assets of NordicTrack granted in accordance with the Monogram Credit Card Program and the GE Capital Credit Card Program. 10.3 RESTRICTIONS ON INVESTMENTS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, make or permit to exist or to remain outstanding any Investment except Investments in: (a) marketable direct or guaranteed obligations of the United States of America that mature within one (1) year from the date of purchase by CML or such Borrower; (b) demand deposits, certificates of deposit, bankers acceptances and time deposits of United States banks having total assets in excess of $1,000,000,000 and money market accounts of brokerage firms acceptable to the Administrative Agent; (c) securities commonly known as "commercial paper" issued by a corporation organized and existing under the laws of the United States of America or any state thereof that at the time of purchase have been rated and the ratings for which are not less than "P 1" if rated by Moody's Investors Services, Inc., and not less than "A 1" if rated by Standard and Poor's Ratings Group, a division of McGraw-Hill, Inc.; (d) Investments existing on the date hereof and listed on SCHEDULE 10.3 hereto; (e) Investments by any Borrower in any Subsidiary of that Borrower that is a Guarantor in the form of loans made in cash; (f) Investments consisting of the Guaranty; (g) Investments consisting of promissory notes received as proceeds of asset dispositions permitted by ss.10.5.2; (h) Investments consisting of loans and advances to employees for moving, entertainment, travel and other similar expenses in the ordinary course of business not to exceed $2,000,000 in the aggregate at any time outstanding; (i) Investments by CML in any of the Borrowers in the form of contributions to capital, subordinated loans or a repayment of a loan previously made to such Borrower so long as such entities remain Borrowers hereunder; (j) Investments consisting of guaranties by CML or any of its Subsidiaries of obligations of any direct or indirect Subsidiaries of such Person in respect of operating leases of such Subsidiary; (k) Investments by any Borrower in CML in the form of distributions, subordinated loans or a repayment of a loan previously made to CML by such Borrower, provided such Investment would be permitted under ss.10.4 hereof; and 66 (l) Investments consisting of the guaranty by CML of the liabilities of NordicTrack to AEI Corp. for services rendered by AEI Corp. to NT and/or NA under air waybills or Bills of Lading issued by AEI Corp. prior to September 16, 1998 up to an amount not in excess of $1,500,000. PROVIDED, HOWEVER, that, with the exception of loans and advances referred to in ss.10.3(h), such Investments will be considered Investments permitted by this ss.10.3 only if all actions have been taken to the satisfaction of the Administrative Agent to provide to the Administrative Agent, for the benefit of the Lenders and the Administrative Agent, a first priority perfected security interest in all of such Investments free of all encumbrances other than Permitted Liens. 10.4 DISTRIBUTIONS AND RESTRICTED PAYMENTS. 10.4.1. INTERCOMPANY DISTRIBUTIONS AND RESTRICTED PAYMENTS. The Borrowers will not make any Restricted Payments, PROVIDED HOWEVER, that the Borrowers may make Restricted Payments to CML (a) in amounts required to pay income and other taxes and governmental levies owed or payable by CML, and (b) in amounts required to pay Approved Budgeted Expenses, in the case of each of the foregoing clauses (a) and (b), such amounts to be paid by CML not later than five (5) Business Days after the date on which the relevant Restricted Payment to CML in respect thereof is made. CML will not incur any payment obligations or expenses except for (x) those permitted to be funded by Restricted Payments in accordance with the provisions of the immediately foregoing sentence, (y) those permitted to be funded with the net proceeds from the sale of any of the assets described on SCHEDULE 10.5.2 hereto in accordance with the provisions of ss.10.5.2(b); PROVIDED that in the case of any such payment obligations or expenses of CML incurred in accordance with the foregoing clause (y), the amount of payment obligations or expenses permitted to be funded by Restricted Payments in accordance with the provisions of the immediately foregoing sentence shall be reduced dollar for dollar by the amount of such payment obligations or expenses incurred in accordance with the foregoing clause (y). The Borrowers will not make any Restricted Payments to CML for the purpose of funding (A) payments of interest on the Subordinated Debentures if any Event of Default is continuing, (B) any prepayment, redemption or repurchase of any of the Subordinated Debentures, or (C) any payment, prepayment, redemption or repurchase of, on or in respect of any Wisconsin Subordinated Note or any other Wisconsin Document, to the extent that such payment, prepayment, redemption or repurchase would be prohibited by the Intercreditor Agreement. 10.4.2. CML DISTRIBUTIONS. CML will not make any Distributions other than (a) purchases or redemptions by CML of the stock of CML resulting solely from any holder of any stock option issued by CML paying (a) all or a portion of the exercise price of such stock option or (b) any taxes due from such holder as a result of the exercise of such stock option, by such holder's relinquishment of rights under such stock option, and (b) a distribution by CML, to holders of its common stock, of shares of stock of NT (an "NT SPIN-OFF"), PROVIDED THAT, (i) prior to any such distribution, CML and the Borrowers have (A) permanently reduced the Total Commitment to not more than $35,000,000, and (B) prepaid all outstanding Loans such that, as of April 1, 1999, the outstanding Loans and Letter of Credit Exposure of CML and the Borrowers does not exceed $35,000,000 in the aggregate, (ii) all (if any) Net Cash Proceeds from any such distribution are applied to prepay the Loans as required by ss.3.2.4, (iii) concurrently with receipt of any such Net Cash Proceeds by CML or any of its Subsidiaries, the Total Commitment shall be permanently reduced as required by ss.2.3.3, (iv) the terms and documentation for such NT Spin-Off are reasonably satisfactory to the Majority Lenders, 67 and (v) prior to such NT Spin-Off, the Loan Documents shall have been amended in all respects deemed appropriate by the Administrative Agent and the Majority Lenders. 10.5. MERGER, CONSOLIDATION AND DISPOSITION OF ASSETS. 10.5.1. MERGERS AND ACQUISITIONS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, become a party to any merger or consolidation, or agree to or effect any asset acquisition or stock acquisition (other than the acquisition of assets in the ordinary course of business consistent with past practices). 10.5.2. DISPOSITION OF ASSETS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, become a party to or agree to or effect any disposition of assets, other than (a) the disposition of assets in the ordinary course of business, consistent with past practices, (b) the disposition of any of the assets listed and described on SCHEDULE 10.5.2 hereto so long as such assets are sold on terms consented to by the Administrative Agent and the Majority Lenders and so long as the net proceeds from the sale of such assets are deposited in the applicable Concentration Account and applied to the Obligations in accordance with the applicable provisions of ss.3.3 hereof; PROVIDED that CML shall be permitted to pay with such net proceeds, promptly after receipt of such net proceeds, any expenses (and CML shall be permitted to reduce the amount of such net proceeds which are required to be applied to the Obligations by the amount of any such expenses so paid by CML) which would otherwise be permitted to be funded by Restricted Payments in accordance with the provisions of ss.10.4.1, (c) the termination or assignment of store leases of any Borrower or its Subsidiaries; provided that all Net Cash Proceeds from any such termination or assignment referred to in this clause (c) are applied to prepay the Loans of the applicable Borrower, or, in the case of CML, any of the Borrowers as required by ss.3.2.4, (d) the sale of accounts receivable of NordicTrack to General Electric Capital Corporation in accordance with the GE Capital Credit Card Program Agreement, and (e) the sale by CML of NT; PROVIDED that (i) concurrently with such sale, all principal of and interest on all NordicTrack Loans and all PIK Notes issued or then required to be issued pursuant to ss.2.5 are paid in full and all Letters of Credit issued for the account of NordicTrack are cash collateralized on terms satisfactory to the Lenders, (ii) any Net Cash Proceeds from any such sale which are remaining following the payments made pursuant to the preceding subclause (i) shall be applied to prepay the S&H Loans as required by ss.3.2.4, (iii) concurrently with receipt of such Net Cash Proceeds by CML or any of its Subsidiaries, the Total Commitment shall be permanently reduced as required by ss.2.3.3, (iv) the terms and documentation for such sale are reasonably satisfactory to the Majority Lenders, and (v) prior to such sale, the Loan Documents shall have been amended in all respects deemed appropriate by the Administrative Agent and the Majority Lenders. 10.6. SALE AND LEASEBACK. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, enter into any arrangement, directly or indirectly, whereby CML, any of the Borrowers or any of their Subsidiaries shall sell or transfer any property owned by it in order then or thereafter to lease such property or lease other property that CML, any of the Borrowers or any of their Subsidiaries intends to use for substantially the same purpose as the property being sold or transferred, other than the sale and subsequent leaseback described on Schedule 10.6. 10.7. COMPLIANCE WITH ENVIRONMENTAL LAWS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, (i) use any of the Real Estate or any portion thereof for the handling, processing, storage or disposal of Hazardous Substances in violation of Environmental Laws, (ii) cause or permit to be located on any of the Real Estate any underground tank or other underground storage receptacle for Hazardous Substances in violation of Environmental Laws, (iii) generate any Hazardous Substances on any of the Real Estate in violation of Environmental Laws, (iv) conduct any activity at any Real Estate or use any Real Estate in any manner so as to cause a release (i.e. releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping) or 68 threatened release of Hazardous Substances on, upon or into the Real Estate or (v) otherwise conduct any activity at any Real Estate or use any Real Estate in any manner that would violate any Environmental Law or bring such Real Estate in violation of any Environmental Law. 10.8. SUBORDINATED DEBT. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, amend, supplement or otherwise modify the terms of any of the Subordinated Debentures or Fiscal Agency Agreement or prepay, redeem or repurchase any of the Subordinated Debentures. 10.9. EMPLOYEE BENEFIT PLANS. None of CML, any Borrower nor any ERISA Affiliate will (a) engage in any "prohibited transaction" within the meaning of ss.406 of ERISA or ss.4975 of the Code which could result in a material liability for CML, any of the Borrowers or any of their Subsidiaries; or (b) operated or maintain any Guaranteed Pension Plan or Multiemployer Plan. 10.10. BANK ACCOUNTS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, (i) establish any bank accounts other than those listed on SCHEDULE 8.20 (as such may be amended from time to time to include those depository institutions which have executed and delivered to the Administrative Agent Agency Account Agreements) unless such new account is subject to an Agency Account Agreement, (ii) violate directly or indirectly any Agency Account Agreement in favor of the Administrative Agent for the benefit of the Lenders and the Administrative Agent with respect to such account or (iii) deposit into any of the payroll accounts listed on SCHEDULE 8.20 any amounts in excess of amounts necessary to pay current payroll obligations from such accounts. 10.11. TRANSACTIONS WITH AFFILIATES. Neither CML nor any of the Borrowers will, nor will they permit any of their Subsidiaries to, enter into, or cause, suffer or permit to exist any transaction or agreement with any Affiliate except: (a) employment agreements entered into in the ordinary course of business by CML, any of the Borrowers or any of their Subsidiaries and loans and advances to employees of CML, any of the Borrowers or any of their Subsidiaries in the ordinary course of business for travel expenses, drawing accounts or other similar business related expenses; (b) any transaction or agreement having terms not less favorable to CML, the Borrowers and their Subsidiaries than would be the case if such transaction or agreement had been entered into with a Person that is not an Affiliate, PROVIDED that the aggregate potential value payable or receivable by CML, the Borrowers and their Subsidiaries in connection with all such transactions during any fiscal year of CML (excluding transactions or agreements exclusively among or between CML, the Borrowers and their Subsidiaries) shall not exceed $500,000; (c) tax sharing agreements in form and substance satisfactory to the Administrative Agent among CML and any of its Subsidiaries; (d) the Wisconsin Documents, and CML's performance of its obligations in accordance with the terms of the Wisconsin Documents. 10.12. RESTRICTIVE OR INCONSISTENT AGREEMENTS. Neither CML nor any of the Borrowers will, nor will they permit any of their Subsidiaries to, enter into any agreement: (a) other than the Loan Documents and the Wisconsin Documents, which, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or otherwise imposes any materially 69 adverse or burdensome condition upon, the declaration or payment of dividends or distributions, the incurrence of Indebtedness, the granting of liens, the making of loans or advances to any of CML, any Borrower or any of their Subsidiaries or the amendment or modification of any of the Loan Documents; or (b) containing any provision that would be violated or breached by any Loan or by the performance by CML, any Borrower or any of their Subsidiaries of their obligations hereunder or under any of the Loan Documents. 10.13. BUSINESS ACTIVITIES. CML will not engage in any business activity except its ownership of its Subsidiaries, including the Borrowers, activities reasonably related thereto, its performance from time to time of its obligations under this Credit Agreement, the other Loan Documents, the Subordinated Debentures and the Fiscal Agency Agreement and each other agreement, instrument or document contemplated hereby, whether or not executed on or before the Original Closing Date. 10.14. PRIVATE LABEL CREDIT CARD PROGRAMS. Neither CML nor NordicTrack will amend, supplement or otherwise modify any terms or provisions of any Private Label Credit Card Program without the prior written consent of the Administrative Agent. Without limitation of the foregoing, neither CML nor NordicTrack will (a) increase the Credit Review Point (as such term is defined in the Monogram Credit Card Program Agreement) above $123,000,000 without the prior written consent of the Administrative Agent or (b) increase the Credit Review Point (as such term is defined in the GE Capital Credit Card Program Agreement) above $20,000,000 without the prior written consent of the Administrative Agent. Notwithstanding anything contained herein to the contrary, CML and NordicTrack may terminate any Private Label Credit Card Program without the prior written consent of the Administrative Agent, PROVIDED, that CML and NordicTrack will promptly notify the Administrative Agent of the termination of any Private Label Credit Card Program and of the termination of the Intercreditor Agreement dated as of December 10, 1996 among General Electric Capital Corporation, the Lenders and the Administrative Agent. 10.15. ISSUANCE OF CAPITAL STOCK. Neither CML nor any of the Borrowers will, nor will they permit any of their Subsidiaries to, issue any Capital Stock; PROVIDED, HOWEVER, that a CML may (i) issue Capital Stock, including the issuance of Capital Stock pursuant to CML's employee stock option plan and employee stock purchase program, if (A) such Capital Stock is Permitted Capital Stock, (B) the issuance of such Capital Stock, or the exercise or conversion thereof, would not result in a Change in Control, (C) all Net Cash Proceeds from any such issuance shall be applied concurrently with receipt of such Net Cash Proceeds by CML to prepay the Loans to the extent required by ss.3.2.4, (D) concurrently with receipt of such Net Cash Proceeds by CML, the Total Commitment shall be permanently reduced to the extent required by ss.2.3.3, and (E) the terms and documentation for such issuance (except any Permitted Employee Issuance) are reasonably satisfactory to the Majority Lenders, (ii) issue Capital Stock pursuant to the terms of the Wisconsin Note Purchase Agreement, PROVIDED that (a) such Stock (A) is Permitted Capital Stock, or (B) preferred stock or other securities issued in exchange for, in substitution for, or upon the conversion of, any Wisconsin Subordinated Note; PROVIDED that (1) such preferred stock or other securities have rights and benefits substantially identical to the Wisconsin Subordinated Note and are issued on terms and pursuant to documentation satisfactory to the Lenders, and (2) the Lenders are satisfied that the Intercreditor Agreement adequately subordinates any claims of the holders of any such securities to the Senior Debt (as such term is defined in the Intercreditor Agreement). b NT may issue Capital Stock, or options to acquire Capital Stock, to senior management of NT, if (A) such Capital Stock is Permitted Capital Stock which is common stock, or such options are to acquire such Permitted Capital Stock, (B) after giving effect to any such issuance, the total number of shares of common stock of NT then or previously issued to 70 senior management (on a fully diluted basis, after giving effect to the exercise of all options granted to senior management) shall not exceed ten percent (10%) of the issued and outstanding shares of common stock of NT (on a fully diluted basis, after giving effect to the exercise of all options granted to senior management), (C) all Net Cash Proceeds from any such issuance shall be applied concurrently with receipt of such Net Cash Proceeds by NT to prepay the Loans pursuant to the provisions of ss.3.2.4, (D) concurrently with receipt of such Net Cash Proceeds by NT, the Total Commitment shall be permanently reduced pursuant to the provisions of ss.2.3.3, and (E) the terms and documentation for such issuance are reasonably satisfactory to the Majority Lenders. 10.16. WISCONSIN DOCUMENTS. Neither CML nor any of the Borrowers will, and none will permit any of their Subsidiaries to, amend, supplement or otherwise modify the terms of any of the Wisconsin Documents or prepay, redeem or repurchase any principal of or interest on the Wisconsin Subordinated Note. 1. FINANCIAL COVENANTS OF CML AND THE BORROWERS. Each of CML and each of the Borrowers covenants and agrees that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of Credit, Note or any other Obligation is outstanding or any Lender has any obligation to make any Loans or the Issuing Bank has any obligation to issue, extend or renew any Letters of Credit: 1. CAPITAL EXPENDITURES. Neither CML nor any of the Borrowers will make, nor will they permit any of their Subsidiaries to make, Capital Expenditures, except that (a) S&H may make Capital Expenditures during the period from August 1, 1998 through July 31, 1999 not to exceed $9,532,000 in the aggregate, PROVIDED that the aggregate amount of Capital Expenditures of CML and its Subsidiaries in connection with S&H opening up to twelve (12) new stores during the period from August 1, 1998 through July 31, 1999, shall not exceed $8,000,000 and (b) NordicTrack may make Capital Expenditures during the period from August 1, 1998 through July 31, 1999 not to exceed $2,815,000 in the aggregate. During the period from August 1, 1998 through July 31, 1999, S&H shall have earned an aggregate amount of not less than $1,200,000 in landlord allowances in connection with S&H's leasehold improvement projects and shall have collected such amounts in respect of such landlord allowances as are reflected in the Monthly Budget. MAXIMUM MONTHLY BORROWER EXPOSURE. Notwithstanding any provision to the contrary contained herein, CML and the Borrowers will not permit the aggregate Borrower Exposure of any Borrower at the end of any month set forth in SCHEDULE 11.2 hereto to exceed the amount for such Borrower set forth opposite such month end in such SCHEDULE 11.2. 1. CLOSING CONDITIONS. The obligations of the Lenders to make the initial Loans and of the Issuing Bank to issue any initial Letters of Credit shall be subject to the satisfaction of the following conditions precedent on or prior to the Original Closing Date. 1. LOAN DOCUMENTS. Each of the Loan Documents shall have been duly executed and delivered by the respective parties thereto, shall be in full force and effect and shall be in form and substance satisfactory to each of the Lenders. Each Lender shall have received a fully executed copy of each such document. 1. CERTIFIED COPIES OF CHARTER DOCUMENTS. Each of the Lenders shall have received from CML, each of the Borrowers and each of their Subsidiaries a copy, certified by a duly authorized officer of 71 such Person to be true and complete on the Original Closing Date, of each of (i) its charter or other incorporation documents as in effect on such date of certification, and (ii) its by-laws as in effect on such date. 1. CORPORATE ACTION. All corporate action necessary for the valid execution, delivery and performance by CML, each of the Borrowers and each of their Subsidiaries of this Credit Agreement and the other Loan Documents to which it is or is to become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Lenders shall have been provided to each of the Lenders. 1. INCUMBENCY CERTIFICATE. Each of the Lenders shall have received from CML, each of the Borrowers and each of their Subsidiaries an incumbency certificate, dated as of the Original Closing Date, signed by a duly authorized officer of CML, such Borrower or such Subsidiary, and giving the name and bearing a specimen signature of each individual who shall be authorized: (i) to sign, in the name and on behalf of each of CML, such Borrower or such Subsidiary, each of the Loan Documents to which CML, such Borrower or such Subsidiary is or is to become a party; (ii) in the case of such Borrower, to make Loan Requests and Conversion Requests and to apply for Letters of Credit; and (iii) to give notices and to take other action on its behalf under the Loan Documents. 1. VALIDITY OF LIENS. The Security Documents shall be effective to create in favor of the Administrative Agent a legal, valid and enforceable first (except for Permitted Liens entitled to priority under applicable law) security interest in and lien upon the Collateral (with such exceptions as are acceptable to the Majority Lenders). All filings, recordings, deliveries of instruments and other actions necessary or desirable in the opinion of the Administrative Agent to protect and preserve such security interests shall have been duly effected (with such exceptions as are acceptable to the Majority Lenders). The Administrative Agent shall have received evidence thereof in form and substance satisfactory to the Administrative Agent. 1. PERFECTION CERTIFICATES AND UCC SEARCH RESULTS. The Administrative Agent shall have received from each of CML, each of the Borrowers and their Subsidiaries a completed and fully executed Perfection Certificate and the results of UCC, patent, trademark and copyright searches with respect to the Collateral, indicating no liens other than Permitted Liens and otherwise in form and substance satisfactory to the Administrative Agent. 1. APPRAISALS; TAXES. The Administrative Agent shall have received (i) appraisals of NordicTrack's Mortgaged Property performed by appraisers mutually agreed upon by the Administrative Agent and the Borrowers and such appraisals shall be in form and substance satisfactory to the Administrative Agent; and (ii) evidence of payment of real estate taxes and municipal charges on all Real Estate not delinquent on or before the Original Closing Date. 1. TITLE INSURANCE. The Administrative Agent shall have received a Title Policy covering each Mortgaged Property (or commitments to issue such policies, with all conditions to issuance of the Title Policy deleted by an authorized agent of the Title Insurance Company) together with proof of payment of all fees and premiums for such policies, from the Title Insurance Company and in amounts satisfactory to the Administrative Agent, insuring the interest of each of the Administrative Agent and each of the Lenders as mortgagee under the Mortgages. 1. CERTIFICATES OF INSURANCE. The Administrative Agent shall have received (i) a certificate of insurance from an independent insurance broker dated as of the Original Closing Date, identifying insurers, types of insurance, insurance limits, and policy terms, and otherwise describing the insurance obtained in accordance with the provisions of the Security Agreement and (ii) certified copies of all policies evidencing such insurance (or certificates therefore signed by the insurer or an agent authorized to bind the insurer) and the Administrative Agent shall be satisfied with the adequacy of all such insurance. 72 1. AGENCY ACCOUNT AGREEMENTS. The Administrative Agent shall have received an Agency Account Agreement, from each depository institution at which CML, any of the Borrowers or any of the Guarantors maintains depository accounts which the Administrative Agent in its sole discretion has identified as a key concentration account concerning the Administrative Agent's interest for the benefit of the Lenders and the Administrative Agent in such accounts. 1. BORROWING BASE REPORT. The Administrative Agent shall have received from the Borrowers the initial Borrowing Base Report dated as of the Original Closing Date. 1. ACCOUNTS RECEIVABLE AGING REPORT. The Administrative Agent shall have received from NordicTrack and S&H the most recent Accounts Receivable aging report of NordicTrack and S&H dated as of a date which shall be no more than fifteen (15) days prior to the Original Closing Date and, as applicable shall have notified the Administrative Agent in writing on the Original Closing Date of any material deviation from the Accounts Receivable values reflected in such Accounts Receivable aging report and shall have provided the Administrative Agent with such supplementary documentation as the Administrative Agent may reasonably request. 1. HAZARDOUS WASTE ASSESSMENTS. The Administrative Agent shall have received hazardous waste site assessments from environmental engineers and in form and substance satisfactory to the Administrative Agent, covering (a) all currently owned real estate and (b), as requested by the Administrative Agent, all other real property in respect of which CML, any of the Borrowers or any of their Subsidiaries may have material liability, whether contingent or otherwise, for dumping or disposal of Hazardous Substances. 1. SOLVENCY CERTIFICATE. Each of the Lenders shall have received an officer's certificate of CML dated as of the Original Closing Date as to the solvency of CML and its Subsidiaries following the consummation of the transactions contemplated herein and in form and substance satisfactory to the Lenders. 1. OPINION OF COUNSEL. Each of the Lenders and the Administrative Agent shall have received a favorable legal opinion addressed to the Lenders and the Administrative Agent, in form and substance satisfactory to the Lenders and the Administrative Agent, from: (a) Hale and Dorr, counsel to CML, the Borrowers and the Guarantors; and (b) local counsel to CML, the Borrowers and their Subsidiaries in the United Kingdom, Germany, Canada, the U.S. Virgin Islands and the states of California and Minnesota, as applicable. Each of CML, the Borrowers and their Subsidiaries have instructed each such counsel to deliver its opinion to the Lenders and the Administrative Agent. 1. PAYMENT OF FEES. The Borrowers shall have paid to the Administrative Agent the Closing Fee and Administrative Agent's fee pursuant to secs.5.1 and 5.2. 1. PAYOFF LETTER. The Administrative Agent shall have received a payoff letter from Citibank and the other lenders under the Citibank Facility, indicating the amount of the loan obligations of CML to Citibank to be discharged on the Original Closing Date and an acknowledgment by Citibank that upon receipt of such funds it will forthwith execute and deliver to the Administrative Agent for filing all termination statements and take such other actions as may be necessary to discharge all mortgages, deeds of trust and security interests granted by CML, any of the Borrowers or any of their Subsidiaries in favor of Citibank and the other lenders under the Citibank Facility. 73 1. DISBURSEMENT INSTRUCTIONS. The Administrative Agent shall have received disbursement instructions from the Borrowers, indicating that a portion of the proceeds of the Loans, in an amount equal to the aggregate loan obligations of CML under the Citibank Facility, are paid to Citibank. 1. UPDATED COLLATERAL EXAMINATIONS. The Administrative Agent shall have reviewed and been satisfied with the update of the commercial finance examinations performed by the Administrative Agent's field examiners, including satisfactory review of the Borrowers' books and records in connection with the calculation of the Borrowing Base and the Administrative Agent's satisfaction with the components and the Borrowers' method of calculating the Borrowing Base. 1. LANDLORD LIEN WAIVERS. The Administrative Agent shall have received landlord waivers with respect to material leased locations of the Borrowers located in Kentucky, Minnesota, South Dakota and Virginia in form and substance satisfactory to the Administrative Agent. 1. BORROWING AVAILABILITY. The Administrative Agent shall have received evidence satisfactory to the Administrative Agent that after giving effect to all transactions to occur on the Original Closing Date and after deducting the amount of accounts payable of the Borrowers' more than thirty (30) days past due, the Borrowers shall have aggregate borrowing availability under the Credit Agreement on the Original Closing Date of not less than $9,000,000. 1. CONDITIONS TO ALL BORROWINGS. The obligations of the Lenders to make any Loan, and of the Issuing Bank to issue, extend or renew any Letter of Credit, in each case whether on or after the Original Closing Date, shall also be subject to the satisfaction of the following conditions precedent: 1. REPRESENTATIONS TRUE; NO EVENT OF DEFAULT. Each of the representations and warranties of any of CML, the Borrowers and their Subsidiaries contained in this Credit Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with this Credit Agreement shall be true as of the date as of which they were made and shall also be true at and as of the time of the making of such Loan or the issuance, extension or renewal of such Letter of Credit, with the same effect as if made at and as of that time (except to the extent that such representations and warranties relate expressly to an earlier date) and no Default or Event of Default shall have occurred and be continuing. 1. NO LEGAL IMPEDIMENT. No change shall have occurred in any law or regulations thereunder or interpretations thereof that in the reasonable opinion of any Lender would make it illegal for such Lender to make such Loan or to participate in the issuance, extension or renewal of such Letter of Credit or in the reasonable opinion of the Issuing Bank would make it illegal for the Issuing Bank to issue, extend or renew such Letter of Credit. 1. GOVERNMENTAL REGULATION. Each Lender shall have received such statements in substance and form reasonably satisfactory to such Lender as such Lender shall require for the purpose of compliance with any applicable regulations of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System or the Securities and Exchange Commission. 1. PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the transactions contemplated by this Credit Agreement, the other Loan Documents and all other documents incident thereto shall be satisfactory in substance and in form to the Lenders and to the Administrative Agent and the Administrative Agent's Special Counsel, and the Lenders, the Administrative Agent and such counsel shall have received all information and such counterpart originals or certified or other copies of such documents as the Administrative Agent may reasonably request. 74 1. BORROWING BASE REPORT. The Administrative Agent shall have received the most recent Borrowing Base Report required to be delivered to the Administrative Agent in accordance with ss.9.4(f). 1. EVENTS OF DEFAULT; ACCELERATION; ETC. 2. EVENTS OF DEFAULT AND ACCELERATION. If any of the following events ("EVENTS OF DEFAULT" or, if the giving of notice or the lapse of time or both is required, then, prior to such notice or lapse of time, "DEFAULTS") shall occur: (a) any of the Borrowers shall fail to pay any principal of the Loans or any Reimbursement Obligation when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (b) CML, any of the Borrowers or any of their Subsidiaries shall fail to pay any interest on the Loans, the Unused Line Fees, any Letter of Credit Fee, the Administrative Agent's fee, or other sums due hereunder or under any of the other Loan Documents, when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (c) CML or any of the Borrowers shall fail to comply with any of its covenants contained in secs.9.1, 9.4, 9.5, 9.7, 9.9, 9.12, 9.14 through 9.20, 10 or 11 or any of the covenants contained in any of the Mortgages; (d) CML, any of the Borrowers or any of their Subsidiaries shall fail to perform any term, covenant or agreement contained herein or in any of the other Loan Documents (other than those specified elsewhere in this ss.14.1) for fifteen (15) days after written notice of such failure has been given to the Borrowers by the Administrative Agent; (e) any representation or warranty of CML, any of the Borrowers or any of their Subsidiaries in this Credit Agreement or any of the other Loan Documents or in any other document or instrument delivered pursuant to or in connection with this Credit Agreement shall prove to have been false in any material respect upon the date when made or deemed to have been made or repeated; (f) CML, any of the Borrowers or any of their Subsidiaries shall fail to pay at maturity, or within any applicable period of grace, (i) any obligation for borrowed money or credit received or in respect of any Capitalized Leases, and the aggregate amount of such obligations and Capitalized Leases is in excess of $2,000,000, or (ii) any Indebtedness under the Wisconsin Documents or the Subordinated Debt, or fail to observe or perform any term, covenant or agreement contained in any agreement by which it is bound, evidencing or securing any indebtedness or obligations described in subclauses (i) or (ii) of this clause (f), for such period of time as would permit (assuming the giving of appropriate notice if required) the holder or holders thereof or of any obligations issued thereunder to accelerate the maturity thereof; (g) CML, any of the Borrowers or any of their Subsidiaries shall make an assignment for the benefit of creditors, or admit in writing its inability to pay or generally fail to pay its debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of CML, any of the Borrowers or any of their Subsidiaries or of any substantial part of the assets of CML, any of the Borrowers or any of their Subsidiaries or shall commence any case or other proceeding relating to CML, any of the Borrowers or any of their Subsidiaries under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or 75 shall take any action to authorize or in furtherance of any of the foregoing, or if any such petition or application shall be filed or any such case or other proceeding shall be commenced against CML, any of the Borrowers or any of their Subsidiaries and CML, any of the Borrowers or any of their Subsidiaries shall indicate its approval thereof, consent thereto or acquiescence therein or such petition or application shall not have been dismissed within sixty (60) days following the filing thereof; (h) a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating CML, any of the Borrowers or any of their Subsidiaries bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of CML, any of the Borrowers or any of their Subsidiaries in an involuntary case under federal bankruptcy laws as now or hereafter constituted; (i) there shall remain in force, undischarged, unsatisfied and unstayed, for more than thirty (30) days, whether or not consecutive, any final judgment against CML, any of the Borrowers or any of their Subsidiaries that, with other outstanding final judgments, undischarged, against CML, any of the Borrowers or any of their Subsidiaries exceeds in the aggregate $2,000,000; (j) the holders of (i) any of the Subordinated Debt shall accelerate prior to the maturity thereof or any of the Subordinated Debt shall be prepaid, redeemed or repurchased in whole or in part, or CML shall become obligated to prepay, redeem or repurchase, in whole or in part, any of the Subordinated Debt, or (ii) any of the Wisconsin Subordinated Note shall accelerate prior to the maturity thereof or any of the Wisconsin Subordinated Note shall be prepaid, redeemed or repurchased in whole or in part, or CML shall become obligated to prepay, redeem or repurchase, in whole or in part, any of the Wisconsin Subordinated Note; (k) if any of the Loan Documents shall be cancelled, terminated, revoked or rescinded or the Administrative Agent's security interests, mortgages or liens in a substantial portion of the Collateral shall cease to be perfected, or shall cease to have the priority contemplated by the Security Documents, in each case otherwise than in accordance with the terms thereof or with the express prior written agreement, consent or approval of the Lenders, or any action at law, suit or in equity or other legal proceeding to cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of CML, any of the Borrowers or any of their Subsidiaries party thereto or any of their respective stockholders, or any court or any other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable in accordance with the terms thereof; (l) CML, any of the Borrowers or any of their Subsidiaries shall be enjoined, restrained or in any way prevented by the order of any court or any administrative or regulatory agency from conducting any material part of its business and such order shall continue in effect for more than thirty (30) days; (m) there shall occur any material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty, which in any such case causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of CML, any of the Borrowers or any of their Subsidiaries if such event or circumstance is not covered by business interruption insurance and would have a material adverse effect on the business or financial condition of CML, such Borrower or such Subsidiary; 76 (n) there shall occur the loss, suspension or revocation of, or failure to renew, any license or permit now held or hereafter acquired by CML, any of the Borrowers or any of their Subsidiaries if such loss, suspension, revocation or failure to renew would have a material adverse effect on the business or financial condition of CML, such Borrower or such Subsidiary; (o) CML, any of the Borrowers or any of their Subsidiaries shall be indicted for a state or federal crime, or any civil or criminal action otherwise shall have been brought against CML, any of the Borrowers or any of their Subsidiaries, a punishment for which in any such case could include the forfeiture of any assets of such Person included in any of the Borrowing Bases or any assets of such Person not included in the Borrowing Bases but having a fair market value in excess of $2,000,000; (p) (i) CML shall at any time, legally or beneficially own less than one hundred percent (100%) of the shares of Capital Stock of the Borrowers (other than NA), or (ii) NT shall at any time, legally or beneficially own less than one hundred percent (100%) of the common stock of NA; PROVIDED, that (i) the sale of NT by CML in compliance with the provisions of ss.10.5.2(e), (ii) an NT Spin-Off in compliance with the provisions of ss.10.4.2, and (iii) the issuance of Capital Stock of NT to NT's senior management in compliance with the provisions of ss.10.15, shall not result in an Event of Default under this paragraph (p), (q) any Change in Control shall have occurred, or any Change in Control (as defined in the Subordinated Debentures) shall have occurred; (r) there shall have occurred any materially adverse change in the condition (financial or otherwise), operations, assets, liabilities and/or prospects of CML and its Subsidiaries since May 2, 1998 other than as disclosed to the Administrative Agent and the Lenders in writing (including the Monthly Budget attached hereto) on or prior to the Restatement Effective Date; (s) CML shall fail to perform any term, covenant or agreement contained in any of the Equity Documents; then, and in any such event, so long as the same may be continuing, the Administrative Agent may, and upon the request of the Majority Lenders shall, by notice in writing to the Borrowers declare all amounts owing with respect to this Credit Agreement, the Notes and the other Loan Documents and all Reimbursement Obligations to be, and they shall thereupon forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers; PROVIDED that in the event of any Event of Default specified in secs.14.1(g), 14.1(h) or 14.1(j), all such amounts shall become immediately due and payable automatically and without any requirement of notice from the Administrative Agent or any Lender. 1. TERMINATION OF COMMITMENTS. If any one or more of the Events of Default specified in ss.14.1(g), ss.14.1(h) or ss.14.1(j) shall occur, any unused portion of the credit hereunder shall forthwith terminate and each of the Lenders shall be relieved of all further obligations to make Loans to the Borrowers and the Issuing Bank shall be relieved of all further obligations to issue, extend or renew Letters of Credit. If any other Event of Default shall have occurred and be continuing, or if on any Drawdown Date or other date for issuing, extending or renewing any Letter of Credit the conditions precedent to the making of the Loans to be made on such Drawdown Date or (as the case may be) to issuing, extending or renewing such Letter of Credit on such other date are not satisfied, the Administrative Agent may and, upon the request of the Majority Lenders, shall, by notice to the Borrowers, terminate the unused portion of the credit hereunder, and upon such notice being given such unused portion of the credit hereunder shall terminate immediately and each of the Lenders shall be relieved of all further obligations to make Loans and the Issuing Bank shall be relieved of all further obligations to issue, extend or renew Letters of Credit. 77 No termination of the credit hereunder shall relieve CML, any of the Borrowers or any of their Subsidiaries of any of the Obligations. 1. REMEDIES. In case any one or more of the Events of Default shall have occurred and be continuing, and whether or not the Lenders shall have accelerated the maturity of the Loans pursuant to ss.14.1, each Lender, if owed any amount with respect to the Loans or the Reimbursement Obligations, may, with the consent of the Majority Lenders but not otherwise, proceed to protect and enforce its rights by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Credit Agreement and the other Loan Documents or any instrument pursuant to which the Obligations to such Lender are evidenced, including as permitted by applicable law the obtaining of the EX PARTE appointment of a receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of such Lender. No remedy herein conferred upon any Lender or the Administrative Agent or the holder of any Note or purchaser of any Letter of Credit Participation is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. 1. DISTRIBUTION OF COLLATERAL PROCEEDS. In the event that following the occurrence or during the continuance of any Default or Event of Default, the Administrative Agent or any Lender, as the case may be, receives any monies in connection with the enforcement of any the Security Documents, or otherwise with respect to the realization upon any of the Collateral, such monies shall be distributed for application (x) so long as the Collateral Agency Agreement is in effect, as provided in the Collateral Agency Agreement, and (y) to the extent required or permitted by the Collateral Agency Agreement or after the Collateral Agency Agreement is no longer in effect, as follows: (a) First, to the payment of, or (as the case may be) the reimbursement of the Administrative Agent for or in respect of the Administrative Agent's fee payable pursuant to ss.5.2 and all reasonable costs, expenses, disbursements and losses which shall have been incurred or sustained by the Administrative Agent in connection with the collection of such monies by the Administrative Agent, for the exercise, protection or enforcement by the Administrative Agent of all or any of the rights, remedies, powers and privileges of the Administrative Agent under this Credit Agreement or any of the other Loan Documents or in respect of the Collateral or in support of any provision of adequate indemnity to the Administrative Agent against any taxes or liens which by law shall have, or may have, priority over the rights of the Administrative Agent to such monies; (b) Second, to all other Obligations in such order or preference as the Majority Lenders may determine; PROVIDED, HOWEVER, that distributions in respect of Obligations owing to the Lenders with respect to each type of Obligation such as interest, principal, fees and expenses, shall be made among the Lenders PRO RATA; and PROVIDED, FURTHER, that the Administrative Agent may in its discretion make proper allowance to take into account any Obligations not then due and payable; (c) Third, upon payment and satisfaction in full or other provisions for payment in full satisfactory to the Lenders and the Administrative Agent of all of the Obligations, as required by the Collateral Agency Agreement, to the extent then in effect, and thereafter, to the payment of any obligations required to be paid pursuant to ss.9-504(1)(c) of the Uniform Commercial Code of the Commonwealth of Massachusetts; and (d) Fourth, the excess, if any, shall be returned to the Borrowers or to such other Persons as are entitled thereto. 78 1. SETOFF. Regardless of the adequacy of any collateral, during the continuance of any Event of Default, any deposits or other sums credited by or due from any of the Lenders to any of the Borrowers and any securities or other property of any of the Borrowers in the possession of such Lender may be applied to or set off by such Lender against the payment of Obligations and any and all other liabilities, direct, or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of such Borrower to such Lender. Each of the Lenders agrees with each other Lender that (i) if an amount to be set off is to be applied to Indebtedness of such Borrower to such Lender, other than Indebtedness evidenced by the Notes held by such Lender or constituting Reimbursement Obligations owed to such Lender, such amount shall be applied ratably to such other Indebtedness and to the Indebtedness evidenced by all such Notes held by such Lender or constituting Reimbursement Obligations owed to such Lender, and (ii) if such Lender shall receive from such Borrower, whether by voluntary payment, exercise of the right of setoff, counterclaim, cross action, enforcement of the claim evidenced by the Notes held by, or constituting Reimbursement Obligations owed to, such Lender by proceedings against such Borrower at law or in equity or by proof thereof in bankruptcy, reorganization, liquidation, receivership or similar proceedings, or otherwise, and shall retain and apply to the payment of the Note or Notes held by, or Reimbursement Obligations owed to, such Lender any amount in excess of its ratable portion of the payments received by all of the Lenders with respect to the Notes held by, and Reimbursement Obligations owed to, all of the Lenders, such Lender will make such disposition and arrangements with the other Lenders with respect to such excess, either by way of distribution, PRO TANTO assignment of claims, subrogation or otherwise as shall result in each Lender receiving in respect of the Notes held by it or Reimbursement Obligations owed it, its proportionate payment as contemplated by this Credit Agreement; PROVIDED that if all or any part of such excess payment is thereafter recovered from such Lender, such disposition and arrangements shall be rescinded and the amount restored to the extent of such recovery, but without interest. 1. THE ADMINISTRATIVE AGENT. 2. AUTHORIZATION. (a) The Administrative Agent is authorized to take such action on behalf of each of the Lenders and to exercise all such powers as are hereunder and under any of the other Loan Documents and any related documents delegated to the Administrative Agent, together with such powers as are reasonably incident thereto, PROVIDED that no duties or responsibilities not expressly assumed herein or therein shall be implied to have been assumed by the Administrative Agent. (b) The relationship between the Administrative Agent and each of the Lenders is that of an independent contractor. The use of the term "Administrative Agent" is for convenience only and is used to describe, as a form of convention, the independent contractual relationship between the Administrative Agent and each of the Lenders. Nothing contained in this Credit Agreement nor the other Loan Documents shall be construed to create an agency, trust or other fiduciary relationship between the Administrative Agent and any of the Lenders. (c) As an independent contractor empowered by the Lenders to exercise certain rights and perform certain duties and responsibilities hereunder and under the other Loan Documents, the Administrative Agent is nevertheless a "representative" of the Lenders, as that term is defined in Article 1 of the Uniform Commercial Code, for purposes of actions for the benefit of the Lenders and the Administrative Agent with respect to all collateral security and guaranties contemplated by the Loan Documents. Such actions include the designation of the Administrative Agent as "secured party", "mortgagee" or the like on all financing statements and other documents and instruments, whether recorded or otherwise, relating to the attachment, perfection, priority or enforcement of any security interests, mortgages or deeds of trust in collateral security intended to 79 secure the payment or performance of any of the Obligations, all for the benefit of the Lenders and the Administrative Agent. 1. EMPLOYEES AND AGENTS. The Administrative Agent may exercise its powers and execute its duties by or through employees or agents and shall be entitled to take, and to rely on, advice of counsel concerning all matters pertaining to its rights and duties under this Credit Agreement and the other Loan Documents. The Administrative Agent may utilize the services of such Persons as the Administrative Agent in its sole discretion may reasonably determine, and all reasonable fees and expenses of any such Persons shall be paid by the Borrower. 1. NO LIABILITY. Neither the Administrative Agent nor any of its shareholders, directors, officers or employees nor any other Person assisting them in their duties nor any agent or employee thereof, shall be liable for any waiver, consent or approval given or any action taken, or omitted to be taken, in good faith by it or them hereunder or under any of the other Loan Documents, or in connection herewith or therewith, or be responsible for the consequences of any oversight or error of judgment whatsoever, except that the Administrative Agent or such other Person, as the case may be, may be liable for losses due to its willful misconduct or gross negligence. NO REPRESENTATIONS. The Administrative Agent shall not be responsible for the execution or validity or enforceability of this Credit Agreement, the Notes, the Letters of Credit, any of the other Loan Documents or any instrument at any time constituting, or intended to constitute, collateral security for the Notes, or for the value of any such collateral security or for the validity, enforceability or collectability of any such amounts owing with respect to the Notes, or for any recitals or statements, warranties or representations made herein or in any of the other Loan Documents or in any certificate or instrument hereafter furnished to it by or on behalf of CML, any of the Borrowers or any of their Subsidiaries, or be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements herein or in any instrument at any time constituting, or intended to constitute, collateral security for the Notes or to inspect any of the properties, books or records of CML, any of the Borrowers or any of their Subsidiaries. The Administrative Agent shall not be bound to ascertain whether any notice, consent, waiver or request delivered to it by any of the Borrowers or any holder of any of the Notes shall have been duly authorized or is true, accurate and complete. The Administrative Agent has not made nor does it now make any representations or warranties, express or implied, nor does it assume any liability to the Lenders, with respect to the credit worthiness or financial conditions of CML, any of the Borrowers or any of their Subsidiaries. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based upon such information and documents as it has deemed appropriate, made its own credit analysis and decision to enter into this Credit Agreement. 1. PAYMENTS. 2. PAYMENTS TO ADMINISTRATIVE AGENT. A payment by any of the Borrowers to the Administrative Agent hereunder or any of the other Loan Documents for the account of any Lender shall constitute a payment to such Lender. The Administrative Agent agrees promptly to distribute to each Lender such Lender's PRO RATA share of payments received by the Administrative Agent for the account of the Lenders except as otherwise expressly provided herein or in any of the other Loan Documents. 1. DISTRIBUTION BY ADMINISTRATIVE AGENT. If in the opinion of the Administrative Agent the distribution of any amount received by it in such capacity hereunder, under the Notes or under any of the other Loan Documents might involve it in liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction. If a court of competent jurisdiction shall adjudge that any amount received and 80 distributed by the Administrative Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Administrative Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. 1. DELINQUENT LENDERS. Notwithstanding anything to the contrary contained in this Credit Agreement or any of the other Loan Documents, any Lender that fails (i) to make available to the Administrative Agent its PRO RATA share of any Loan or to purchase any Letter of Credit Participation or (ii) to comply with the provisions of ss.15 with respect to making dispositions and arrangements with the other Lenders, where such Lender's share of any payment received, whether by setoff or otherwise, is in excess of its PRO RATA share of such payments due and payable to all of the Lenders, in each case as, when and to the full extent required by the provisions of this Credit Agreement, shall be deemed delinquent (a "DELINQUENT LENDER") and shall be deemed a Delinquent Lender until such time as such delinquency is satisfied. A Delinquent Lender shall be deemed to have assigned any and all payments due to it from the Borrowers, whether on account of outstanding Loans, Unpaid Reimbursement Obligations, interest, fees or otherwise, to the remaining nondelinquent Lenders for application to, and reduction of, their respective PRO RATA shares of all outstanding Loans and Unpaid Reimbursement Obligations. The Delinquent Lender hereby authorizes the Administrative Agent to distribute such payments to the nondelinquent Lenders in proportion to their respective PRO RATA shares of all outstanding Loans and Unpaid Reimbursement Obligations. A Delinquent Lender shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans and Unpaid Reimbursement Obligations of the nondelinquent Lenders, the Lenders' respective PRO RATA shares of all outstanding Loans and Unpaid Reimbursement Obligations have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. Until such time as its delinquency is satisfied, a Delinquent Lender shall have no right to vote with respect to any matters under or in respect of the Credit Agreement and shall not be entitled to receive its portion of any Unused Line Fee paid in accordance with ss.2.2 of this Credit Agreement. 1. HOLDERS OF NOTES. The Administrative Agent may deem and treat the payee of any Note or the purchaser of any Letter of Credit Participation as the absolute owner or purchaser thereof for all purposes hereof until it shall have been furnished in writing with a different name by such payee or by a subsequent holder, assignee or transferee. 1. INDEMNITY. The Lenders ratably agree hereby to indemnify and hold harmless the Administrative Agent from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses (including any expenses for which the Administrative Agent has not been reimbursed by the Borrowers as required by ss.17), and liabilities of every nature and character arising out of or related to this Credit Agreement, the Notes, or any of the other Loan Documents or the transactions contemplated or evidenced hereby or thereby, or the Administrative Agent's actions taken hereunder or thereunder, except to the extent that any of the same shall be directly caused by the Administrative Agent's willful misconduct or gross negligence. 1. ADMINISTRATIVE AGENT AS LENDER. In its individual capacity, BKB shall have the same obligations and the same rights, powers and privileges in respect to its Commitment and the Loans made by it, and as the holder of any of the Notes and as the purchaser of any Letter of Credit Participations, as it would have were it not also the Administrative Agent. 1. RESIGNATION. The Administrative Agent may resign at any time by giving sixty (60) days prior written notice thereof to the Lenders and the Borrowers. Upon any such resignation, the Majority Lenders shall have the right to appoint a successor Administrative Agent in such capacity. Unless a Default or 81 Event of Default shall have occurred and be continuing, such successor Administrative Agent shall be reasonably acceptable to the Borrowers. If no successor Administrative Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent's giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a financial institution having a rating of not less than A or its equivalent by Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. Upon the acceptance of any appointment as an Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation, the provisions of this Credit Agreement and the other Loan Documents shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. 1. NOTIFICATION OF DEFAULTS AND EVENTS OF DEFAULT. Each Lender hereby agrees that, upon learning of the existence of a Default or an Event of Default, it shall promptly notify the Administrative Agent thereof. The Administrative Agent hereby agrees that upon receipt of any notice under this ss.16.10 it shall promptly notify the other Lenders of the existence of such Default or Event of Default. 1. DUTIES IN THE CASE OF ENFORCEMENT. In case one of more Events of Default have occurred and shall be continuing, and whether or not acceleration of the Obligations shall have occurred, the Administrative Agent shall, if (i) so requested by the Majority Lenders and (ii) the Lenders have provided to the Administrative Agent such additional indemnities and assurances against expenses and liabilities as the Administrative Agent may reasonably request, proceed to enforce the provisions of the Security Documents authorizing the sale or other disposition of all or any part of the Collateral and exercise all or any such other legal and equitable and other rights or remedies as it may have in respect of such Collateral. The Majority Lenders may direct the Administrative Agent in writing as to the method and the extent of any such sale or other disposition, the Lenders hereby agreeing to indemnify and hold the Administrative Agent, harmless from all liabilities incurred in respect of all actions taken or omitted in accordance with such directions, PROVIDED that the Administrative Agent need not comply with any such direction to the extent that the Administrative Agent reasonably believes the Administrative Agent's compliance with such direction to be unlawful or commercially unreasonable in any applicable jurisdiction. 1. EXPENSES. Each of the Borrowers jointly and severally agrees to pay (i) the reasonable costs of producing and reproducing this Credit Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (ii) any taxes (including any interest and penalties in respect thereto) payable by the Administrative Agent or any of the Lenders (other than taxes based upon the Administrative Agent's or any Lender's net income) on or with respect to the transactions contemplated by this Credit Agreement (the Borrowers hereby agreeing to indemnify the Administrative Agent and each Lender with respect thereto); (iii) the reasonable fees, expenses and disbursements of the Administrative Agent's Special Counsel or any local counsel to the Administrative Agent or any counsel to any Initial Lender incurred in connection with the preparation, administration, interpretation or syndication of the Loan Documents and other instruments mentioned herein, each closing hereunder, and amendments, modifications, approvals, consents or waivers hereto or hereunder (including in each case the allocated cost of staff counsel) and the syndication and the termination hereof; (iv) the reasonable fees, expenses and disbursements of the Administrative Agent incurred by the Administrative Agent in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, including all title insurance premiums and surveyor, engineering and appraisal charges and the fees, expenses and disbursements of the Administrative Agent and the Initial Lenders for waivers and modifications of the Loan Documents; (v) any reasonable fees, costs, expenses and bank charges, including bank charges for 82 returned checks, incurred by the Administrative Agent in establishing, maintaining or handling agency accounts, lock box accounts and other accounts for the collection of any of the Collateral; (vi) all reasonable out-of-pocket expenses (including without limitation reasonable attorneys' fees and costs, which attorneys may be employees of any Lender or the Administrative Agent, and reasonable consulting, accounting, appraisal, investment banking and similar professional fees and charges) incurred by any Lender or the Administrative Agent in connection with (A) the enforcement of or preservation of rights under any of the Loan Documents against CML, any of the Borrowers or any of their Subsidiaries or the administration thereof after the occurrence of a Default or Event of Default and (B) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to any Lender's or the Administrative Agent's relationship with CML, any of the Borrowers or any of their Subsidiaries; (vii) all reasonable fees, expenses and disbursements of any Lender or the Administrative Agent incurred in connection with UCC searches, UCC filings, intellectual property searches, intellectual property filings, or mortgage recordings and (viii) all reasonable costs of conducting commercial finance examinations and appraisals of the Borrowers' properties, including the applicable daily time charges of the Administrative Agent's commercial finance examiners, agents, consultants and representatives engaged in such examinations and appraisals as in effect from time to time and reasonable out-of-pocket travel and other related expenses. The covenants of this ss.17 shall survive payment or satisfaction of all other Obligations. 1. INDEMNIFICATION. Each of the Borrowers jointly and severally agrees to indemnify and hold harmless the Administrative Agent and the Lenders from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Credit Agreement or any of the other Loan Documents or the transactions contemplated hereby including, without limitation, (i) any actual or proposed use by CML, any of the Borrowers or any of their Subsidiaries of the proceeds of any of the Loans or Letters of Credit, (ii) the reversal or withdrawal of any provisional credits granted by the Administrative Agent upon the transfer of funds from bank agency or lock box accounts or in connection with the provisional honoring of checks or other items, (iii) any actual or alleged infringement of any patent, copyright, trademark, service mark or similar right of CML, any of the Borrowers or any of their Subsidiaries comprised in the Collateral, (iv) CML, any of the Borrowers or any of their Subsidiaries entering into or performing this Credit Agreement or any of the other Loan Documents or (v) with respect to CML, the Borrowers and their Subsidiaries and their respective properties and assets, the violation of any Environmental Law, the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threatened release of any Hazardous Substances or any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to, claims with respect to wrongful death, personal injury or damage to property), in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding. In litigation, or the preparation therefor, the Lenders and the Administrative Agent shall be entitled to select their own counsel and, in addition to the foregoing indemnity, the Borrowers agree to pay promptly the reasonable fees and expenses of such counsel. If, and to the extent that the obligations of the Borrowers under this ss.18 are unenforceable for any reason, the Borrowers hereby agree to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law. The covenants contained in this ss.18 shall survive payment or satisfaction in full of all other Obligations. 1. SURVIVAL OF COVENANTS, ETC. All covenants, agreements, representations and warranties made herein, in the Notes, in any of the other Loan Documents or in any documents or other papers delivered by or on behalf of CML, any of the Borrowers or any of their Subsidiaries pursuant hereto shall be deemed to have been relied upon by the Lenders and the Administrative Agent, notwithstanding any investigation heretofore or hereafter made by 83 any of them, and shall survive the making by the Lenders of any of the Loans and the issuance, extension or renewal of any Letters of Credit, as herein contemplated, and shall continue in full force and effect so long as any Letter of Credit or any amount due under this Credit Agreement or the Notes or any of the other Loan Documents remains outstanding or any Lender has any obligation to make any Loans or the Issuing Bank has any obligation to issue, extend or renew any Letter of Credit, and for such further time as may be otherwise expressly specified in this Credit Agreement. All statements contained in any certificate or other paper delivered to any Lender or the Administrative Agent at any time by or on behalf of CML, any of the Borrowers or any of their Subsidiaries pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by CML, such Borrower or such Subsidiary hereunder. 1. ASSIGNMENT AND PARTICIPATION. 2. CONDITIONS TO ASSIGNMENT BY LENDERS. Except as provided herein, each Lender may assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Credit Agreement (including all or a portion of its Commitment Percentage and Commitment and the same portion of the Loans at the time owing to it, the Notes held by it and its participating interest in the risk relating to any Letters of Credit); PROVIDED that (i) the Administrative Agent shall have given its prior written consent to such assignment, (ii) so long as BIII holds at least fifty-one percent (51%) of the outstanding principal amount of the Notes, BIII shall have given its prior written consent to such assignment, (iii) each such assignment shall be a constant PRO RATA percentage, and not a varying percentage, of all the assigning Lender's rights and obligations under this Credit Agreement, (iv) each assignment shall be in an amount that at least $5,000,000 or, if less, the entire remaining Commitment of such Lender and (v) the parties to such assignment shall execute and deliver to the Administrative Agent, for recording in the Register (as hereinafter defined), an Assignment and Acceptance, substantially in the form of EXHIBIT G hereto (an "ASSIGNMENT AND ACCEPTANCE"), together with any Notes subject to such assignment. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, (i) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder, and (ii) the assigning Lender shall, to the extent provided in such assignment and upon payment to the Administrative Agent of the registration fee referred to in ss.20.3, be released from its obligations under this Credit Agreement. Upon each such consent to an assignment by BIII given pursuant to this ss.20.1, the assigning Lender agrees to pay to BIII a consent fee in the sum of $1,000. 1. CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS. By executing and delivering an Assignment and Acceptance, the parties to the assignment thereunder confirm to and agree with each other and the other parties hereto as follows: (a) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, the assigning Lender makes no representation or warranty, express or implied, and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or the attachment, perfection or priority of any security interest or mortgage; (b) the assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of CML, the Borrowers and their Subsidiaries or any other Person primarily or secondarily liable in respect of any of the Obligations, or the performance or observance by CML, the Borrowers and their Subsidiaries or any other Person primarily or secondarily liable in respect of any of the Obligations of any of their obligations 84 under this Credit Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (c) such assignee confirms that it has received a copy of this Credit Agreement, together with copies of the most recent financial statements referred to in ss.8.4 and ss.9.4 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (d) such assignee will, independently and without reliance upon the assigning Lender, the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Credit Agreement; (e) such assignee represents and warrants that it is an Eligible Assignee; (f) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Credit Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; (g) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Credit Agreement are required to be performed by it as a Lender; (h) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; and (i) such assignee acknowledges that it has made arrangements with the assigning Lender satisfactory to such assignee with respect to its PRO RATA share of Letter of Credit Fees in respect of outstanding Letters of Credit. 1. REGISTER. The Administrative Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register or similar list (the "REGISTER") for the recordation of the names and addresses of the Lenders and the Commitment Percentage of, and principal amount of the Loans owing to and Letter of Credit Participations purchased by, the Lenders from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Credit Agreement. The Register shall be available for inspection by the Borrowers and the Lenders at any reasonable time and from time to time upon reasonable prior notice. Upon each such recordation, the assigning Lender agrees to pay to the Administrative Agent a registration fee in the sum of $1,000. 1. NEW NOTES. Upon its receipt of an Assignment and Acceptance executed by the parties to such assignment, together with each Note subject to such assignment, the Administrative Agent shall (i) record the information contained therein in the Register, and (ii) give prompt notice thereof to the Borrowers and the Lenders (other than the assigning Lender). Within five (5) Business Days after receipt of such notice, each Borrower, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for each surrendered Note, a new Note with respect to such Borrower to the order of such Eligible Assignee in an amount equal to the amount assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and, if the assigning Lender has retained some portion of its obligations hereunder, a new Note to the order of the assigning Lender in an amount equal to the amount retained by it hereunder. Such new Notes shall provide that they are replacements for the surrendered Notes, shall be in an aggregate principal 85 amount equal to the aggregate principal amount of the surrendered Notes, shall be dated the effective date of such in Assignment and Acceptance and shall otherwise be substantially the form of the assigned Notes. Within five (5) days of issuance of any new Notes pursuant to this ss.20.4, the Borrowers shall deliver an opinion of counsel, addressed to the Lenders and the Administrative Agent, relating to the due authorization, execution and delivery of such new Notes and the legality, validity and binding effect thereof, in form and substance satisfactory to the Lenders. The surrendered Notes shall be cancelled and returned to the Borrowers. 1. PARTICIPATIONS. Each Lender may sell participations to one or more banks or other entities in all or a portion of such Lender's rights and obligations under this Credit Agreement and the other Loan Documents; PROVIDED that (i) each such participation shall be in an amount of not less than $5,000,000, (ii) any such sale or participation shall not affect the rights and duties of the selling Lender hereunder to the Borrowers and (iii) the only rights granted to the participant pursuant to such participation arrangements with respect to waivers, amendments or modifications of the Loan Documents shall be the rights to approve waivers, amendments or modifications that would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the Commitment of such Lender as it relates to such participant, reduce the amount of any Unused Line Fees or Letter of Credit Fees to which such participant is entitled or extend any regularly scheduled payment date for principal or interest. 1. DISCLOSURE. CML and each of the Borrowers agrees that in addition to disclosures made in accordance with standard and customary banking practices any Lender may disclose information obtained by such Lender pursuant to this Credit Agreement to assignees or participants and potential assignees or participants hereunder; PROVIDED that such assignees or participants or potential assignees or participants shall agree (i) to treat in confidence such information unless such information otherwise becomes public knowledge, (ii) not to disclose such information to a third party, except as required by law or legal process and (iii) not to make use of such information for purposes of transactions unrelated to such contemplated assignment or participation. 1. ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE BORROWERS. If any assignee Lender (other than BIII or any Affiliate of BIII) is controlled by or under common control with CML or any Borrower, then any such assignee Lender shall have no right to vote as a Lender hereunder or under any of the other Loan Documents for purposes of granting consents or waivers or for purposes of agreeing to amendments or other modifications to any of the Loan Documents or for purposes of making requests to the Administrative Agent pursuant to ss.14.1 or ss.14.2, and the determination of the Majority Lenders shall for all purposes of this Credit Agreement and the other Loan Documents be made without regard to such assignee Lender's interest in any of the Loans. If any Lender sells a participating interest in any of the Loans or Reimbursement Obligations to a participant, and such participant is CML, a Borrower or an entity controlled by or under common control with a Borrower or CML, then such transferor Lender shall promptly notify the Administrative Agent of the sale of such participation. A transferor Lender shall have no right to vote as a Lender hereunder or under any of the other Loan Documents for purposes of granting consents or waivers or for purposes of agreeing to amendments or modifications to any of the Loan Documents or for purposes of making requests to the Administrative Agent pursuant to ss.14.1 or ss.14.2 to the extent that such participation is beneficially owned by CML, a Borrower or an entity controlled by or under common control with a Borrower, and the determination of the Majority Lenders shall for all purposes of this Agreement and the other Loan Documents be made without regard to the interest of such transferor Lender in the Loans to the extent of such participation. 1. MISCELLANEOUS ASSIGNMENT PROVISIONS. Any assigning Lender shall retain its rights to be indemnified pursuant to ss.17 with respect to any claims or actions arising prior to the date of such assignment. If any assignee Lender is not incorporated under the laws of the United States of America or any state thereof, it shall, prior to the date on which any interest or fees are payable hereunder or under any of the other Loan Documents for its account, deliver to the Borrowers and the Administrative Agent 86 certification as to its exemption from deduction or withholding of any United States federal income taxes. If the Reference Bank transfers all of its interest, rights and obligations under this Credit Agreement, the Administrative Agent shall, in consultation with the Borrowers and with the consent of the Borrowers and the Majority Lenders, appoint another Lender to act as the Reference Bank hereunder. Anything contained in this ss.20 to the contrary notwithstanding, any Lender may at any time pledge all or any portion of its interest and rights under this Credit Agreement (including all or any portion of its Notes) to any of the twelve Federal Reserve Banks organized under ss.4 of the Federal Reserve Act, 12 U.S.C. ss.341. No such pledge or the enforcement thereof shall release the pledgor Lender from its obligations hereunder or under any of the other Loan Documents. 1. ASSIGNMENT BY BORROWERS OR GUARANTORS None of CML, any of the Borrowers nor any of the Guarantors shall assign or transfer any of its rights or obligations under any of the Loan Documents without the prior written consent of each of the Lenders. 1. NOTICES, ETC. Except as otherwise expressly provided in this Credit Agreement, all notices and other communications made or required to be given pursuant to this Credit Agreement or the Notes or any Letter of Credit Applications shall be in writing and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by telegraph, telecopy, facsimile or telex and confirmed by delivery via courier or postal service, addressed as follows: (a) if to CML, at 524 Main Street, Acton, Massachusetts 01720, Attention: Chief Financial Officer, or at such other address for notice as CML shall last have furnished in writing to the Person giving the notice; (b) if to any of the Borrowers, at c/o CML Group, Inc., 524 Main Street, Acton, Massachusetts 01720, Attention: Chief Financial Officer, or at such other address for notice as such Borrower shall last have furnished in writing to the Person giving the notice with a copy to the Chief Financial Officer of such Borrower at the address set forth for such Borrower on SCHEDULE 8.21 hereto; (c) if to any of the Guarantors or Foreign Guarantors, at c/o CML Group, Inc., 524 Main Street, Acton, Massachusetts 01720, Attention: Chief Financial Officer, or at such other address for notice as such Guarantor shall last have furnished in writing to the Person giving the notice with a copy to the Chief Financial Officer of such Guarantor or Foreign Guarantor at the address set forth for such Guarantor or Foreign Guarantor on SCHEDULE 8.21 hereto; (d) if to the Administrative Agent, at 100 Federal Street, Boston, Massachusetts 02110, USA, Attention: Mark J. Forti, Vice President, or such other address for notice as the Administrative Agent shall last have furnished in writing to the Person giving the notice; and (e) if to any Lender, at such Lender's address set forth on SCHEDULE 1 hereto, or such other address for notice as such Lender shall have last furnished in writing to the Person giving the notice. Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier or facsimile to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer or the sending of such facsimile and (ii) if sent by registered or certified first-class mail, postage prepaid, on the third Business Day following the mailing thereof. 87 1. GOVERNING LAW. THIS CREDIT AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). CML, EACH OF THE BORROWERS AND EACH OF THE GUARANTORS AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON CML, THE BORROWERS AND THE GUARANTORS BY MAIL AT THE ADDRESS SPECIFIED IN SS.21. CML, EACH OF THE BORROWERS AND EACH OF THE GUARANTORS HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT. 1. HEADINGS. The captions in this Credit Agreement are for convenience of reference only and shall not define or limit the provisions hereof. 1. COUNTERPARTS. This Credit Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Credit Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. 1. ENTIRE AGREEMENT, ETC. The Loan Documents express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Credit Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in ss.27. 1. WAIVER OF JURY TRIAL. CML, each Borrower and each Guarantor hereby waives its right to a jury trial with respect to any action or claim arising out of any dispute in connection with this Credit Agreement, the Notes or any of the other Loan Documents, any rights or obligations hereunder or thereunder or the performance of which rights and obligations. Except as prohibited by law, CML, each Borrower and each Guarantor hereby waives any right it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. CML, each Borrower and each Guarantor (i) certifies that no representative, agent or attorney of any Lender or the Administrative Agent has represented, expressly or otherwise, that such Lender or the Administrative Agent, would not, in the event of litigation, seek to enforce the foregoing waivers and (ii) acknowledges that the Administrative Agent and the Lenders have been induced to enter into this Credit Agreement, the other Loan Documents to which it is a party by, among other things, the waivers and certifications contained herein. 88 1. CONSENTS, AMENDMENTS, WAIVERS, ETC. The provisions of this Credit Agreement and the other Loan Documents may from time to time be amended, modified or waived, and any Collateral may be released, if such amendment, modification, waiver or release is consented to in writing by the Majority Lenders and, in the case of any amendment or modification, CML or its Subsidiaries party to the relevant Loan Document. Notwithstanding the foregoing, no such amendment, modification, waiver or release: (a) which would modify any requirement hereunder that any particular action be taken by all the Lenders shall be effective unless consented to by each Lender; (b) which would modify this ss.27 or change the definition of "Majority Lenders" shall be effective unless consented to by eacH Lender; (c) which would release any Collateral from the lien of the Security Documents shall be effective unless consented to by each Lender, unless (i) such release is in connection with the sale of such Collateral and such sale is permitted by this Credit Agreement, or such sale is consented to by the Majority Lenders, all Net Cash Proceeds of such sale are used to prepay the Loans and, except with respect to Permitted Dispositions (other than the disposition of the Capital Stock of NT or an NT Spin-Off), the Total Commitment is reduced, concurrently with such prepayment, by the amount of such prepayment, as provided for herein, (ii) such release is of Collateral consisting of cash or cash equivalents and substantially all such cash or cash equivalents is used to pay or prepay Obligations in accordance with the Credit Agreement, (iii) such release is "cash collateral", as defined in Section 363(a) of the federal Bankruptcy Code, in any case where CML, a Borrower or a Guarantor is a debtor, and the release is made under a cash collateral stipulation with the debtor approved by the Majority Lenders and the Administrative Agent, (iv) such release is of foreign Collateral and such release is effected with the approval of the Administrative Agent pursuant to the last sentence of this ss.27, or (v) such release is of other Collateral and the aggregate value of all Collateral releases permitted under this clause (v) from and after the Restatement Effective Date shall not exceed $1,000,000; (d) which would increase the Commitment or Commitment Percentage of any Lender, reduce any Unused Line Fee, Letter of Credit Fee or other fees payable to any Lender, extend the Maturity Date, increase the advance rates of any Borrowing Base, or make any other change which would have the effect of increasing the credit available to any Borrower hereunder or reduce the principal amount of or rate of interest on any Loan of any Lender shall be effective unless consented to by such Lender; a which would adversely affect the interests, rights or obligations of the Administrative Agent, in its capacity as the Administrative Agent, or would amend the provisions of ss.ss.2.1 or 2.8 relating to the transfer of funds between The Administrative Agent and the Lenders (including the types of funds or the method of such transfer), shall be effective unless consented to by the Administrative Agent; or b which would adversely affect the interests, rights or obligations of the Issuing Bank, in its capacity as the Issuing Bank, or would amend the provisions of ss.4.3 relating to the transfer of funds between the Issuing Bank and the Lenders (including thE types of funds or the method of such transfer), shall be effective unless consented to by the Issuing Bank. 89 The Guarantors (other than CML and the Borrowers) shall not be deemed a party to this Credit Agreement for any purpose except for purposes of ss.3.3, ss.7 and ss.ss.20 through 28. The consent of any Guarantor (other than CML and the Borrowers) shall not be required for any amendment, modification or waiver of any provision of this Credit Agreement, unless such amendment, modification or waiver relates to ss.3.3, ss.7, and ss.ss.20 through 28 and adversely affects such Guarantor. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Administrative Agent or any Lender in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon CML or any of the Borrowers shall entitle CML or any of the Borrowers to other or further notice or demand in similar or other circumstances. If CML has demonstrated to the reasonable satisfaction of the Administrative Agent that the pledge of the stock of any foreign Subsidiary of CML (to the extent greater than sixty-five percent (65%) of the outstanding stock of such foreign Subsidiary) or the Foreign Guaranty given by any such foreign Subsidiary will result in material tax obligations for CML and its Subsidiaries, which tax obligations would not arise if such pledge or guaranty were released by the Administrative Agent and/or the Lenders, the Administrative Agent and/or the Lenders, as appropriate, upon ten (10) days' prior written request of CML delivered to the Administrative Agent and the Lenders shall release such pledge (to the extent applicable to greater than sixty-five percent (65%) of the outstanding stock of the relevant foreign Subsidiary) or guaranty; PROVIDED that (i) no such release shall be required if any Event of Default is continuing and (ii) no such release shall be required in any event prior to July 15, 1997. 1. SEVERABILITY. The provisions of this Credit Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Credit Agreement in any jurisdiction. 90 IN WITNESS WHEREOF, the undersigned have duly executed this Credit Agreement as a sealed instrument as of the date first set forth above. CML GROUP, INC. By: ________________________________________ Glenn E. Davis, Vice President - Finance NORDICTRACK, INC. NORDIC ADVANTAGE, INC. SMITH & HAWKEN, LTD. By: ________________________________________________ Glenn E. Davis, Vice President BANKBOSTON N.A. (f/k/a The First National Bank of Boston), individually and as Administrative Agent By: ________________________________________________ Name: Title: B III CAPITAL PARTNERS, L.P. By: DDJ Capital III, L.L.C., its General Partner By: DDJ Capital Management, LLC, Manager By: ________________________________________________ Title: Member: For purposes of ss.3.3, ss.7, and ss.ss.20 through 28 hereof: OCR, INC. OBW, INC. WFH GROUP, INC. OTNC, INC. BFPI, INC. By: ___________________________________________ Glenn E. Davis, Vice President EX-10.(Q) 3 SEVERANCE AGREEMENT - CHARLES M. LEIGHTON 1 CML GROUP, INC. 524 MAIN STREET ACTON, MASSACHUSETTS 01720 March 17, 1998 Mr. Charles M. Leighton P. O. Box 247 51 Vaughan Hill Road Bolton, Massachusetts 01740-0247 Dear Charlie: In order to resolve amicably your separation from the Company and establish the terms of your severance, CML Group, Inc. agrees to pay you the following severance benefits in return for the execution of a copy of this letter with the release it includes. Your termination of employment with CML Group, Inc. (the "Company") is effective March 31, 1998. In addition, effective as of the end of February, 1998 you will no longer use the Company plane. In connection with your termination, the Company will provide the following: 1. As severance, you will receive $240,000 payable as follows: (a) $80,000 will be paid on or about August 1, 1998; (b) $80,000 will be paid on or about November 1, 1998; and (c) $80,000 will be paid on or about January 1, 1999. 2. In addition, the Company will immediately take steps to (a) notify the Trustee of said so-called Rabbi Trust established in connection with the terms of the Retirement Income and Survivor Security Program (" Retirement Income Program") that the Retirement Income Program established for your benefit has been modified and amended to provide for immediate distribution to you of the policies currently held in 2 Mr. Charles M. Leighton March 17, 1998 Page 2 said Trust for the purpose of providing your benefits under the Retirement Income Program and (b) issue to you 38,310 shares of common stock of the Company to which you are entitled under the Company's Incentive Deferred Compensation Plan. These distributions will constitute full payment and satisfaction of the Company's obligations to you under the Retirement Income Program and of all other retirement or severance obligations to you, other than as stated in this letter and other than retirement benefits provided under the terms of any qualified retirement plan under Section 401 of the Internal Revenue Code. 3. You and the Company agree to take steps promptly to surrender the three split-dollar insurance policies listed in APPENDIX A hereto in exchange for their respective cash surrender values (cumulatively "Insurance Proceeds") and further agree to distribute $8,039 of the Insurance Proceeds to the Company (being the amount equal to the aggregate cumulative premiums paid by the Company to the extent not previously withdrawn) and the balance of the Insurance Proceeds to you. 4. As you know, it is the Company's intention to sell the plane it now owns. The Company intends to offer you the opportunity to purchase the plane if you are willing to purchase it on terms which are equivalent to the best offer the Company receives. In consideration of the Company's undertakings, you agree as follows: 1. You hereby fully, forever, irrevocably and unconditionally release the Company, its officers, directors, stockholders, corporate affiliates, attorneys, agents and employees from any and all claims of every kind and nature which you ever had or now have against the Company, its officers, directors, stockholders, corporate affiliates, attorneys, agents and employees, including, but not limited to, all claims arising out of your employment, all employment discrimination claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2999e Et Seq., the Americans With Disabilities Act, 42 U.S.C. Section 12191 Et Seq., the Age Discrimination in Employment Act, 29 U.S.C. Section 621 Et Seq., and Massachusetts Fair Employment Practices Act, M.G. L. c.151B, Section 1 Et Seq., wrongful discharge claims or other common law claims. 2. You agree that, during the two year period beginning on the date of your execution of a copy of this letter, you will not, without the prior specific consent of the Company, in any capacity, either separately, jointly, or in association with others, directly or indirectly, encourage, solicit, initiate, engage or participate in discussions or negotiations with any person or entity concerning any merger, consolidation, purchase of material assets, tender offer, accumulation of shares of the Company's capital stock, 3 Mr. Charles M. Leighton March 17, 1998 Page 3 proxy solicitation or other business combination involving the Company, any subsidiary of the Company or any division of the Company or any such subsidiary; PROVIDED, HOWEVER, that nothing herein shall prevent you from bringing to the attention of the Company any unsolicited offer or proposal relating to the foregoing. 3. You agree that, as a condition for these payments to you, you will not make any false, disparaging or derogatory statements in public or private regarding the Company or any of its directors, officers, employees, agents, or representatives or the Company's business affairs and financial condition; and the Company agrees that it will not make any false, disparaging or derogatory statements in public or private regarding you. 4. You will not, directly or indirectly, during the two year period beginning on the date of your execution of this letter, recruit, solicit or hire any key employee of the Company, or induce or attempt to induce any key employee of the Company to terminate his or her employment with, or otherwise cease his or her relationship with, the Company. 5. You expressly agree that breach of your agreement to the provisions in Paragraphs 2, 3 and 4 would result in irreparable injuries to the Company, that the remedy at law for any such breach would be inadequate and that upon breach of either of these provisions, the Company, in addition to all other available remedies, shall be entitled as a matter of right to injunctive relief in any court of competent jurisdiction without the necessity of proving the actual damage to the Company. This agreement will be governed by the laws of the Commonwealth of Massachusetts and is binding upon and shall inure to the benefit of the parties and their respective agents, assigns, heirs, executors, successors and administrators. This letter contains and constitutes the entire understanding and agreement between you and the Company with respect to severance and supercedes and cancels all previous oral and written negotiations, agreements, commitments and writings in connection with your severance. To the extent permitted by law, you agree that the contents of our discussions and negotiations resulting in this letter and agreement, shall be maintained as confidential by you, your agents and representatives, and any dispute resolved by this document shall also remain confidential, and none of the above shall be disclosed except to the extent required by federal or state law or as otherwise agreed to in writing by the authorized agent of each party. 4 Mr. Charles M. Leighton March 17, 1998 Page 4 You hereby acknowledge you have been given twenty-one (21) days to consider this agreement and that the Company advised you to consult with any attorney of your choosing prior to signing this agreement. You may revoke this agreement for a period of seven (7) days after its execution, and the agreement will not be effective or enforceable until the expiration of this seven (7) day revocation period. Very truly yours, CML Group, Inc. By /s/ John A.C. Pound ------------------------------------ John A.C. Pound, Chairman I agree to all the terms of this letter. /s/ Charles M. Leighton - ------------------------------------ Charles M. Leighton Dated: March 17, 1998 EX-10.(R) 4 EMPLOYMENT AGREEMENT - KATHLEEN TIERNEY 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this ______ day of ____________, is entered into by CML Group, Inc., a corporation with its principal place of business at 524 Main Street, Acton, MA (the "CML"), Facsimile Number 978-263-2178, Smith & Hawken, Ltd., a wholly-owned subsidiary of CML, with its principal place of business at 117 E. Strawberry Drive, Mill Valley, CA (the "Company") Facsimile Number , and Kathleen Tierney, residing at 3069 West Dry Creek Road, Healdsburg, CA 95448, (the "Employee") Facsimile Number . The Company desires to continue to employ the Employee, and the Employee desires to continue to be employed by the Company. In consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties agree as follows: 1. TERM OF EMPLOYMENT. The Company hereby agrees to continue to employ the Employee, and the Employee hereby accepts continued employment with the Company, upon the terms set forth in this Agreement, commencing on April 1, 1998 (the "Commencement Date") and continuing hereunder until a termination in accordance with the provisions of Section 4 (the "Employment Period"). 2. TITLE; CAPACITY. 3 2.1 The Employee shall serve as President and Chief Executive Officer of the Company and be subject to the supervision of the Board of Directors of the Company (the "Board"). She shall have such authority as is consistent with her service as President and Chief Executive Officer. 4 The Employee hereby agrees to continue employment with the Company and serve as President and Chief Executive Officer and perform the duties and responsibilities of such positions and such other duties and responsibilities, consistent with her position as President and Chief Executive Officer or the Chief Operating Officer of the Company, 1 2 as the Board or as the CML Board or its designee shall from time to time reasonably assign to her. 1 2.2 The Employee shall continue to be based at the Company's headquarters in Mill Valley, California, or such other place or places within the San Francisco metropolitan area in which the headquarters is located, without her prior consent. The Employee agrees to devote her entire business time, attention and energies to the business and interests of the Company during the Employment Period. 2. COMPENSATION AND BENEFITS. 3 3.1 SALARY. Effective April 1, 1998, the Company shall pay the Employee, in monthly installments, an annual base salary of $260,000 during the Employment Period ("Annual Base Salary"). Such salary shall be reviewed annually by the CML Board at the beginning of each fiscal year of the Company, beginning with the fiscal year commencing August 1, 1999. 4 3.2 BONUSES. Set forth in Sections 3.2 and 3.3.2 are the terms of the cash and option bonuses for which the Employee is eligible, based on (i) an objective formula, and (ii) discretionary criteria, which may be awarded to the Employee for the Company's fiscal year ending July 31, 1998 (the "98 Bonuses"). In addition, the Company, CML, and the Employee shall work together, in good faith, beginning as soon as practicable after the Company's financial goals for the fiscal year ending July 31, 1999 have been determined, to establish the terms of bonuses, based on concepts set forth on SCHEDULE A (to be completed by the parties as soon as practicable), for which the Employee will be eligible, based on the performance of the Employee and the Company, during the Company's fiscal year ending July 31, 1999 (the "99 Bonuses"). The terms of the 99 Bonuses will be set forth in a written instrument signed by all parties to this Agreement. 5 3.2.1 FORMULA BONUS. The Company shall pay the Employee a cash bonus for the Company's fiscal year ending July 31, 1998 ("FY 98"), if the Employee is employed on July 31, 1998, equal to the largest amount for which she qualifies under the provisions of the attached SCHEDULE B. 6 7 "EBIT" as used in this Agreement, and in any Schedules to this Agreement, means the Company's Earnings Before Interest and Taxes as determined in accordance with generally accepted accounting principles by the Company's independent accountants; provided that in determining EBIT the bonus that would otherwise have been payable to the Employee and to Messrs. McCreight and Shahan under the bonus program set forth on SCHEDULE C, which is no longer in effect, shall be included as a 2 3 compensation expense in determining FY 98 EBIT and not the bonuses payable under Sections 3.2.1 and 3.2.2. 8 3.2.2 DISCRETIONARY BONUS. The Company may, in the sole discretion of the Board, pay the Employee a discretionary bonus of up to 25% of Annual Base Salary. In determining the amount of the discretionary bonus, if any, to be paid under this provision, the Board will consider those factors it deems appropriate, including, without limitation, the extent of Employee's attainment of those operational and organizational goals set forth in SCHEDULE D annexed hereto. 9 3.2.3 BONUS PAYMENT. Employee must be employed by the Company on July 31, 1998 in order to receive any bonus and any bonus will be paid within 30 days following the completion of the FY 98 audit by the Company's independent accountants. 10 3.3 OPTIONS. 11 3.3.1 IMMEDIATE OPTION GRANT. Upon execution of this Agreement, Employee will be granted an option to purchase 100,000 shares of common stock of CML with an exercise price equal to the closing price of CML's common stock on the New York Stock Exchange (the "Fair Market Value") on the date of grant. Such option will vest as to 50% of the shares covered thereby on the date of grant, an additional 25% on April 1, 1999, if she is then still employed by the Company, and the remaining 25% on April 1, 2000, if she is then still employed by the Company. The option shall be subject to such other provisions as are set forth in the stock option agreements attached hereto as APPENDIX I. 12 3.3.2 PERFORMANCE OPTION. 13 (a) FORMULA GRANT. After completion of the audit of CML's financial statements for FY 98, the Company will grant to the Employee an option to purchase the largest number of shares of common stock of CML for which she qualifies in accordance with the provisions of the attached SCHEDULE E, provided that she is then employed by the Company. 14 (b) DISCRETIONARY GRANT. After the end of FY 98, the Company may, in the sole discretion of the Board, grant Employee an option to purchase up to an additional 100,000 shares of CML common stock. In determining whether to grant any such additional options, the Board will consider those factors it deems appropriate, including, without limitation, the extent of Employee's attainment of those operational and organizational goals set forth on the attached SCHEDULE D. 15 (c) GRANT PROCESS. Options to be granted to the Employee pursuant to this Section 3.3.2. shall be granted promptly after completion of the FY 98 audit by the Company's independent accountants. Such options will be exercisable at 3 4 Fair Market Value on the date of grant and will vest as to 50% of the shares covered thereby on the date of grant, an additional 25% on July 31, 1999, if the Employee is then still employed by the Company and the remaining 25% on July 31, 2000, if the Employee is then still employed by the Company. The option will be subject to such other provisions as are set forth in the stock option agreements attached hereto as APPENDIX I. To the extent consistent with the law, the Company will grant options intended to qualify as incentive stock options to the Employee under this Section 3. 16 3.4 SALE BONUS. In the event that, during the Employment Period (or within 90 days thereafter if Employee is terminated without Cause under Section 4.3), CML sells the Company, either through (i) a sale of all of the Company stock held by CML, or (ii) a sale of all or substantially all of the assets of the Company, or, a merger or consolidation involving the Company (other than a merger or consolidation with CML) in which the Company is not the surviving Company, Company is merged into or consolidated with another company or otherwise consummates a business combination with another company (each hereinafter referred to as a "Sale"), the Company agrees to pay the Employee a bonus ("Sale Bonus") calculated as a percentage of the "Net Consideration" received in connection with the Sale. The Sale Bonus shall be calculated as follows: (a) If the Net Consideration is $50 Million or less, the Sale Bonus is Zero ($0). (b) If the Net Consideration is greater than $50 Million but less than or equal to $70 Million the Sale Bonus shall equal three-fourths of one percent (3/4%) of the amount by which the Net Consideration exceeds $50 Million. (c) If the Net Consideration is greater than $70 Million, the Sale Bonus shall be equal to (i) $150,000, plus (ii) one and one-quarter percent (1 and 1/4%) of the amount by which the Net Consideration exceeds $70 Million. The Sale Bonus will be paid in twelve (12) equal monthly installments over the 12-month period following receipt of the Net Consideration, PROVIDED, HOWEVER, that in the event the Employee's employment with the Company is terminated for death or disability pursuant to Section 4.2, or the Employee is terminated without Cause under Section 4.3, the balance of the Sale Bonus shall be paid to the Employee in a lump-sum at the time of such termination. The term "Net Consideration" means the fair market value on the date of the consummation of the Sale of all consideration in the form of cash or securities received 4 5 by CML or the Company in connection with the Sale, less (i) all fees and expenses incurred in connection with the Sale, and (ii) any liabilities of the Company not assumed in the Sale and any expenses incurred in the settlement of such liabilities. If any portion of the Net Consideration is other than cash, then for the purpose of computing any Sale Bonus payable to the Employee, the Net Consideration shall be valued as follows: (i) publicly traded securities shall be valued at the average of their closing prices (as reported in the Wall Street Journal) for the twenty (20) trading days prior to the consummation of the Sale; (ii) any other consideration such as straight or convertible debt securities or obligations, or installment sale notes, unmarketable securities or other securities shall be valued at the fair market value thereof as determined in good faith by CML. In the event of any acquisition of Company assets, the face amount of debt assumed by the acquiring party shall be valued at the time of the sale and included as part of the Net Consideration. Any Sale Bonus calculated on amounts paid into escrow will be payable at the time or times such amounts are released from such escrow. If the payment of any portion of the Net Consideration is contingent on any future event, that portion of the Net Consideration will be calculated and payable if and when such contingent payment is made. 3.5 BENEFITS. The Employee shall be entitled to participate in all other benefit programs that the Company provides to its employees, if any, to the extent that Employee's position, tenure, salary, age, health and other qualifications make her eligible to participate. In addition, she shall be entitled to the benefits as set forth on SCHEDULE F to this Agreement. 3.6 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the Employee for all reasonable travel, entertainment and other expenses incurred or paid by the Employee in connection with, or related to, the performance of her duties, responsibilities or services under this Agreement, upon presentation by the Employee of documentation, expense statements, vouchers and/or such other supporting information as the Company may request, PROVIDED, HOWEVER, that the amount available for such travel, entertainment and other expenses may be fixed in advance by the Board, consistent with past practice. 1. EMPLOYMENT TERMINATION. The employment of the Employee by the Company pursuant to this Agreement shall terminate upon the occurrence of any of the following: 2 4.1 At the election of the Board, for Cause, immediately upon written notice by the Board to the Employee. For the purposes of this Section 4.1, Cause for termination shall be deemed to exist upon (a) a good faith finding by the Board of a material failure of the Employee to perform her assigned duties for the Company (a 5 6 "Material Failure"), dishonesty, gross negligence or misconduct, or (b) the conviction of the Employee of, or the entry of a pleading of guilty or nolo contendere by the Employee to, any crime involving moral turpitude or any felony; provided that any termination based on a Material Failure can only occur after the Employee has received a written notice identifying such Material Failure (whether or not such Material Failure existed prior to the notice but was not the subject of a notice) and giving her at least thirty (30) days within which to correct such Material Failure (the "Warning") and such correction has not occurred within such thirty (30) days period, and; provided further that only one Warning will be required under this Agreement and thereafter, even if correction occurred after the Warning, the Employee may be terminated without any further Warning, if the Board determines that any previously identified Material Failure has recurred after such 30-day period. 3 4.2 Thirty days after the death or disability of the Employee. As used in this Agreement, the term "disability" shall mean the inability of the Employee, due to a physical or mental disability, for a period of ninety (90) days, whether or not consecutive, during any 360-day period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician satisfactory to both the Employee and the Company, PROVIDED THAT if the Employee and the Company do not agree on a physician, the Employee and the Company shall each select a physician and these two together shall select a third physician, whose determination as to disability shall be binding on all parties; 4 4.3 At the election of the Company, without Cause, or, at the election of the Employee, upon written notice to the other parties to this Agreement. 5. EFFECT OF TERMINATION. 6 5.1 TERMINATION FOR CAUSE OR UPON EMPLOYEE'S ELECTION TO TERMINATE. In the event the Employee's employment is terminated for cause pursuant to Section 4.1 or at the Employee's election under Section 4.3, the Company shall pay to the Employee the compensation and benefits otherwise payable to her under Section 3 through the last day of her actual employment by the Company including any payment due to Employee under the terms of any Formula Bonus provision in effect for the fiscal year of the Company ended prior to the Employee's last day of employment. 7 5.2 TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment is terminated by death or because of disability pursuant to Section 4.2, the Company shall pay to the estate of the Employee or to the Employee, as the case may be, the compensation which would otherwise be payable to the Employee up to the end of the month in which the termination of her employment because of death or disability occurs and any payment due to Employee under the terms of any Formula Bonus 6 7 provision in effect for the fiscal year of the Company ended prior to the Employee's last day of employment. 8 5.3 TERMINATION OTHER THAN FOR CAUSE, OR UPON DEATH OR DISABILITY. If the Employee's employment is terminated by the Company other than on account of Cause, Death or Disability, then the Employee will receive: (i) all compensation and benefits payable to her under Section 3 of this Agreement, through the end of the month in which her employment terminates, (ii) monthly payments of 1/12 of her Annual Base Salary at the rate she is being paid at the time of such termination, for thirty (30) months following the end of the month in which or with which such termination occurs, (iii) a fraction of any bonus she would have received after the end of the fiscal year in which such termination occurs, under any formula bonus program in which she is participating at the time of such termination, determined by multiplying the amount she would have received by a fraction, the numerator of which is the number of full or partial months of the fiscal year in which she was employed and the denominator of which is 12, and (iv) any payment due to Employee under the terms of any Formula Bonus provision in effect for the fiscal year of the Company ended prior to the Employee's last day of employment. 9 5.4 SURVIVAL. The provisions of Sections 3.4, 5, 6 and 7 shall survive the termination of this Agreement. 10. NON-SOLICITATION. 11 (a) During the Employment Period, and for a period of 30 months after the termination thereof, the Employee will not directly or indirectly: 12 (i) recruit, solicit or induce, or attempt to induce, any employee or employees of the Company to terminate their employment with, or otherwise cease their relationship with, the Company; or 13 (ii) solicit, divert or take away, or attempt to divert or to take away, the Company's relationship with vendors or suppliers, or with customers with which the Company has a contract, which were contacted, solicited or served by the Employee while employed by the Company. 14 (b) If any restriction set forth in this Section 6 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 15 (c) The restrictions contained in this Section 6 are necessary for the protection of the business and goodwill of the Company and are considered by the Employee to be reasonable for such purpose. The Employee agrees that any breach of 7 8 this Section 6 may cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief. 16. PROPRIETARY INFORMATION AND DEVELOPMENTS. 17 7.1 PROPRIETARY INFORMATION. 18 (a) Employee agrees that all information and know-how, whether or not in writing, of a private, secret or confidential nature concerning the Company's business or financial affairs (collectively, "Proprietary Information") is and shall be the exclusive property of the Company. By way of illustration, but not limitation, Proprietary Information may include inventions, products, processes, methods, techniques, formulas, compositions, compounds, projects, developments, plans, research data, clinical data, financial data, personnel data, computer programs, and customer and supplier lists. Except as required by law, Employee will not disclose any Proprietary Information to others outside the Company or, use the same, for any unauthorized purposes without written approval by an officer of CML, either during or after her employment, unless and until such Proprietary Information has become public knowledge without fault by the Employee. 19 (b) Employee agrees that all files, letters, memoranda, reports, records, data, sketches, drawings, laboratory notebooks, program listings, or other written, photographic, or other tangible material containing Proprietary Information, whether created by the Employee or others, which shall come into her custody or possession, shall be and are the exclusive property of the Company to be used by the Employee only in the performance of her duties for the Company. 20 (c) Employee agrees that her obligation not to disclose or use information, know-how and records of the types set forth in paragraphs (a) and (b) above, also extends to such types of information, know-how, records and tangible property of customers of the Company or suppliers to the Company or other third parties who may have disclosed or entrusted the same to the Company or to the Employee in the course of the Company's business unless such information, know-how, records or tangible property is in the public domain. 21 7.2 DEVELOPMENTS. 22 (a) Employee will make full and prompt disclosure to the Company of all inventions, improvements, discoveries, methods, developments, software, and works of authorship, whether patentable or not, which are created, made, conceived or reduced to practice by the Employee or under her direction or jointly with others during her employment by the Company, whether or not during normal 8 9 working hours or on the premises of the Company (all of which are collectively referred to in this Agreement as "Developments"). 23 (b) Employee agrees to assign and does hereby assign to the Company (or any person or entity designated by the Company) all her right, title and interest in and to all Developments and all related patents, patent applications, copyrights and copyright applications. However, this Section 7(b) shall not apply to Developments which do not relate to the present or planned business or research and development of the Company and which are made and conceived by the Employee not during normal working hours, not on the Company's premises and not using the Company's tools, devices, equipment or Proprietary Information. 24 (c) Employee agrees to cooperate fully with the Company, both during and after her employment with the Company, with respect to the procurement, maintenance and enforcement of copyrights and patents (both in the United States and foreign countries) relating to Developments. Employee shall sign all papers, including, without limitation, copyright applications, patent applications, declarations, oaths, formal assignments, assignment of priority rights, and powers of attorney, which the Company may reasonably deem necessary or desirable in order to protect its rights and interests in any Development. 25 7.3 OTHER AGREEMENTS. Employee hereby represents that she is not bound by the terms of any agreement with any previous employer (other than any other company which was a subsidiary of CML) or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of her employment with the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. Employee further represents that her performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to her employment with the Company. 26. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon (a) personal delivery, or (b) deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other parties at the addresses shown above, or at such other address or addresses as any party shall designate to the others in accordance with this Section 8, or (c) sending by facsimile to the other parties at the facsimile numbers shown above, or at such other number or numbers as any party shall designate to the others in accordance with this Section 8. 9 10 27. PRONOUNS. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns and pronouns shall include the plural, and vice versa. 28. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement. 29. AMENDMENT. This Agreement may be amended or modified only by a written instrument executed by both the Company, CML and the Employee. 30. GOVERNING LAW. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the Commonwealth of Massachusetts. 31. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company or CML may be merged or which may succeed to its assets or business, provided, however, that the obligations of the Employee are personal and shall not be assigned by her. 32. MISCELLANEOUS. 33 a. No delay or omission by the Company, CML or the Employee in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company, CML or the Employee on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. 34 b. The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement. 35 c. In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby. 36 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth above. 37 CML GROUP,INC. SMITH & HAWKEN, LTD. By: /s/ John A.C. Pound By: /s/ Kathy Tierney -------------------------- ------------------------------ John A.C. Pound Kathleen Tierney Title: Chairman Title: CEP/President 6/19/98 Employee 10 11 /s/ Kathy Tierney ---------------------------------- Kathleen Tierney 11 12 SCHEDULE B FY 98 Formula Bonus FY 98 EBIT
Equal To or FY 98 Greater Than Less Than Formula Bonus - ------------ --------- ------------- $ 0 $3,200,000 $ 26,000 $3,200,000 $3,730,000 $ 65,000 $3,730,000 $4,200,000 $130,000 $4,200,000 $195,000
12 13 SCHEDULE D FY 98 Operational and Organizational Goals 1. Identify and recruit individuals to fill key executive positions including chief operating officer, vice president of retail and vice president of trade. 2. Retain and motivate key employees. 3. Resolve leadership issues relating to catalog business. 4. Develop and implement catalog strategy. 5. Successfully execute retail expansion strategy. 6. Work effectively with CML Group, Inc. during current restructuring. 13 14 SCHEDULE E FY 98 Performance Options - Formula Grant FY 98 EBIT
Equal To or FY 98 Greater Than Less Than Formula Option For: - ------------ --------- ------------------- $ 0 $3,730,000 50,000 shares $3,730,000 $4,200,000 100,000 shares $4,200,000 150,000 shares
14 15 SCHEDULE F 1. Continued lease by the Company of the automobile Employee currently uses to be replaced by a new automobile of comparable cost at the end of the lease term. 2. Continued use of Bayview Apartment by Employee while employed by the Company as long as it is owned by the Company and available for such use in the discretion of the Board. 15 EX-10.(S) 5 NORDICTRACK NOTE 1 NORDICTRACK NOTE $52,000,000 July 27, 1998 FOR VALUE RECEIVED, the undersigned NORDICTRACK, INC., a Minnesota corporation, and NORDIC ADVANTAGE, INC., a Minnesota corporation (together, the "COMPANIES" and each, individually, a "COMPANY"), hereby jointly and severally promise to pay to the order B III CAPITAL PARTNERS, L.P., a Delaware partnership (the "LENDER") at the Administrative Agent's Head Office (as defined in the Credit Agreement, as hereinafter defined): (a) prior to or on the Maturity Date the principal amount of FIFTY-TWO MILLION DOLLARS ($52,000,000) or, if less, the aggregate unpaid principal amount of the NordicTrack Loans advanced by the Lender to the Companies pursuant to the Revolving Credit Agreement dated as of April 17, 1996, and restated as of July 27, 1998 (as amended, supplemented, modified or restated and in effect from time to time, the "CREDIT AGREEMENT"), among (a) CML Group, Inc., (b) the Companies and certain other Borrowers party thereto, (c) the Lender and the other lending institutions as may become parties to the Credit Agreement from time to time, and (d) BankBoston, N.A. (f/k/a The First National Bank of Boston), as administrative, collateral, and documentation agent for the Lenders; (b) the principal outstanding hereunder from time to time at the times provided in the Credit Agreement; and (c) interest on the principal balance hereof from time to time outstanding until such amount is paid in full, at the times and at the rates provided in the Credit Agreement. This Note (this "NOTE") evidences borrowings under and has been issued by the Companies in accordance with the terms of the Credit Agreement. The Lender and any holder hereof is entitled to the benefits of the Credit Agreement, the Security Documents and the other Loan Documents, and may enforce the agreements of the Companies contained therein, and any holder hereof may exercise the respective remedies provided for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Note and not otherwise defined herein that are defined in the Credit Agreement shall have the same meanings herein as in the Credit Agreement. Each of the Companies irrevocably authorizes the Lender to make or cause to be made, at or about the time of the Drawdown Date of any NordicTrack Loan or at the time of receipt of any payment of principal of this Note, an appropriate notation on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, reflecting the making of such NordicTrack Loan or (as the case may be) the receipt of such payment. The outstanding amount of the NordicTrack Loans set forth on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, maintained by the Lender with respect to any NordicTrack Loans shall be PRIMA FACIE evidence of the principal amount thereof owing and unpaid to the Lender, but the failure to record, or any error in so recording, any such amount on any such grid, continuation or other record shall not limit or otherwise affect the obligation of any of the Companies hereunder or under the Credit Agreement to make payments of principal of and interest on this Note when due. 2 The Companies have the right in certain circumstances and the obligation under certain other circumstances to prepay the whole or part of the principal of this Note on the terms and conditions specified in the Credit Agreement. If any one or more of the Events of Default shall occur, the entire unpaid principal amount of this Note and all of the unpaid interest accrued thereon may become or be declared due and payable in the manner and with the effect provided in the Credit Agreement. No delay or omission on the part of the Lender or any holder hereof in exercising any right hereunder shall operate as a waiver of such right or of any other rights of the Lender or such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar or waiver of the same or any other right on any further occasion. Each of the Companies and every endorser and guarantor of this Note or the obligation represented hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. THIS NOTE AND THE OBLIGATIONS OF EACH COMPANY HEREUNDER SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). EACH COMPANY AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND EACH COMPANY HEREBY EXPRESSLY APPOINTS CML AT THE ADDRESS SPECIFIED IN ss.21 OF THE CREDIT AGREEMENT AS ITS AGENT FOR SERVICE OF PROCESS IN ANY SUCH SUIT. This Note may not be assigned to any Person or party except as permitted under ss.20 of the Credit Agreement. This Note shall be deemed to take effect as a sealed instrument under the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, each of the undersigned has caused this NordicTrack Note to be signed in its corporate name and its corporate seal to be impressed thereon by its duly authorized officer as of the day and year first above written. NORDICTRACK, INC. [Corporate Seal] By: ______________________________ Title: NORDIC ADVANTAGE, INC. [Corporate Seal] By: ______________________________ Title: 3 ___________________________________________________________________________ | Amount of Amount of Balance of | | NordicTrack Principal Paid Principal Notation | | Date Loan or Prepaid Unpaid Made By: | |___________________________________________________________________________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| EX-10.(T) 6 S&H NOTE 1 S&H NOTE $3,000,000 July 27, 1998 FOR VALUE RECEIVED, the undersigned SMITH & HAWKEN, LTD., a Delaware corporation (the "COMPANY"), hereby promises to pay to the order of BANKBOSTON, N.A., a national banking association (the "LENDER") at the Administrative Agent's Head Office (as defined in the Credit Agreement, as hereinafter defined): (a) prior to or on the Maturity Date the principal amount of THREE MILLION DOLLARS ($3,000,000) or, if less, the aggregate unpaid principal amount of the S&H Loans advanced by the Lender to the Company pursuant to the Revolving Credit Agreement dated as of April 17, 1996, and restated as of July 27, 1998 (as amended, supplemented, modified or restated and in effect from time to time, the "CREDIT AGREEMENT"), among (a) CML Group, Inc., (b) the Company and certain other Borrowers party thereto, (c) the Lender and the other lending institutions as may become parties to the Credit Agreement from time to time, and (d) BankBoston, N.A. (f/k/a The First National Bank of Boston), as administrative, collateral, and documentation agent for the Lenders; (b) the principal outstanding hereunder from time to time at the times provided in the Credit Agreement; and (c) interest on the principal balance hereof from time to time outstanding until such principal amount is paid in full, at the times and at the rates provided in the Credit Agreement. This Note (this "NOTE") evidences borrowings under and has been issued by the Company in accordance with the terms of the Credit Agreement. The Lender and any holder hereof is entitled to the benefits of the Credit Agreement, the Security Documents and the other Loan Documents, and may enforce the agreements of the Company contained therein, and any holder hereof may exercise the respective remedies provided for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Note and not otherwise defined herein that 2 are defined in the Credit Agreement shall have the same meanings herein as in the Credit Agreement. The Company irrevocably authorizes the Lender to make or cause to be made, at or about the time of the Drawdown Date of any S&H Loan or at the time of receipt of any payment of principal of this Note, an appropriate notation on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, reflecting the making of such S&H Loan or (as the case may be) the receipt of such payment. The outstanding amount of the S&H Loans set forth on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, maintained by the Lender with respect to any S&H Loans shall be PRIMA FACIE evidence of the principal amount thereof owing and unpaid to the Lender, but the failure to record, or any error in so recording, any such amount on any such grid, continuation or other record shall not limit or otherwise affect the obligation of the Company hereunder or under the Credit Agreement to make payments of principal of and interest on this Note when due. The Company has the right in certain circumstances and the obligation under certain other circumstances to prepay the whole or part of the principal of this Note on the terms and conditions specified in the Credit Agreement. If any one or more of the Events of Default shall occur, the entire unpaid principal amount of this Note and all of the unpaid interest accrued thereon may become or be declared due and payable in the manner and with the effect provided in the Credit Agreement. No delay or omission on the part of the Lender or any holder hereof in exercising any right hereunder shall operate as a waiver of such right or of any other rights of the Lender or such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar or waiver of the same or any other right on any further occasion. The Company and every endorser and guarantor of this Note or the obligation represented hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and assents to any extension or postponement of the 3 time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. 4 THIS NOTE AND THE OBLIGATIONS OF THE COMPANY HEREUNDER SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE COMPANY AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND THE COMPANY HEREBY EXPRESSLY APPOINTS CML AT THE ADDRESS SPECIFIED IN ss.21 OF THE CREDIT AGREEMENT AS ITS AGENT FOR SERVICE OF PROCESS IN ANY SUCH SUIT. This Note may not be assigned to any Person or party except as permitted under ss.20 of the Credit Agreement. This Note shall be deemed to take effect as a sealed instrument under the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the undersigned has caused this S&H Note to be signed in its corporate name and its corporate seal to be impressed thereon by its duly authorized officer as of the day and year first above written. SMITH & HAWKEN, LTD. [Corporate Seal] By: ________________________________ Title: 5 ___________________________________________________________________________ | Amount of Amount of Balance of | | S&H Principal Paid Principal Notation | | Date Loan or Prepaid Unpaid Made By: | |___________________________________________________________________________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| | | | | | | |______________|_____________|__________________|______________|____________| EX-10.(U) 7 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10(u) ================================================================================ CML GROUP, INC. --------------------- STOCK PURCHASE AGREEMENT --------------------- 11,814,718 SHARES OF COMMON STOCK, PAR VALUE $.10 PER SHARE OF CML GROUP, INC. Dated as of July 27, 1998 ================================================================================ 2 TABLE OF CONTENTS SECTION PAGE - ------- ---- 1. AGREEMENT TO SELL AND PURCHASE THE COMMON STOCK ........................... 1 ----------------------------------------------- 2. CLOSING OF SALE OF SHARES ................................................. 1 ------------------------- 3. CONDITIONS TO CLOSING ..................................................... 2 --------------------- 3.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER ON THE ------------------------------------------------------------ CLOSING DATE ..................................................... 2 ------------ (a) REPRESENTATIONS AND WARRANTIES ................................ 2 ------------------------------ (b) PERFORMANCE ................................................... 2 ----------- (c) COMPLIANCE CERTIFICATE ........................................ 2 ---------------------- (d) OPINION OF COUNSEL ............................................ 2 ------------------ (e) LEGAL INVESTMENT .............................................. 2 ---------------- (f) COMPLIANCE WITH SECURITIES LAWS ............................... 2 ------------------------------- (g) PROCEEDINGS AND DOCUMENTS ..................................... 2 ------------------------- (h) SALE OF OTHER SHARES .......................................... 3 -------------------- (i) REGISTRATION RIGHTS AGREEMENT ................................. 3 ----------------------------- (j) RELATED MATTERS ............................................... 3 --------------- (k) NO ADVERSE U.S. LEGISLATION, ACTION OR DECISION ............... 3 ----------------------------------------------- (l) GOVERNMENTAL AND THIRD PARTY PERMITS, CONSENTS, ETC. .......... 3 --------------------------------------------------- (m) SECRETARY'S CERTIFICATE ....................................... 3 ----------------------- (n) PAYMENT OF EXPENSES ........................................... 4 ------------------- (o) CREDIT AGREEMENT .............................................. 4 ---------------- (p) AMENDMENT TO STOCK PURCHASE WARRANT ........................... 4 ----------------------------------- (q) CANCELLATION OF ROTHSCHILD WARRANTS ........................... 4 ----------------------------------- (r) NOTE PURCHASE AGREEMENT ....................................... 4 ----------------------- 3.2.CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY ON THE ---------------------------------------------------------- CLOSING DATE ...................................................... 5 ------------ (a) REPRESENTATIONS AND WARRANTIES ................................ 5 ------------------------------ (b) PERFORMANCE ................................................... 5 ----------- (c) COMPLIANCE WITH SECURITIES LAWS ............................... 5 ------------------------------- (d) SALE OF OTHER SHARES .......................................... 5 -------------------- (e) NO ADVERSE U.S. LEGISLATION, ACTION OR DECISION ............... 5 ----------------------------------------------- 4. REPRESENTATIONS AND WARRANTIES, ETC. ...................................... 6 ------------------------------------ 4.1. ORGANIZATIONS AND QUALIFICATION: AUTHORITY ........................... 6 ------------------------------------------ 4.2. CORPORATE AND GOVERNMENTAL AUTHORIZATION: NO CONTRAVENTION ........... 6 ---------------------------------------------------------- 4.3. VALIDITY AND BINDING EFFECT .......................................... 6 --------------------------- 4.4. CAPITALIZATION ....................................................... 7 -------------- 4.5. OUTSTANDING DEBT ..................................................... 7 ---------------- 4.6. NO MATERIAL ADVERSE CHANGE ........................................... 7 -------------------------- 4.7. PRIVATE OFFERINGS .................................................... 8 ----------------- 4.8. BROKER'S OR FINDER'S COMMISSIONS ..................................... 8 -------------------------------- 4.9. DISCLOSURE ........................................................... 8 ---------- (i) 3 SECTION PAGE - ------- ---- 4.10. FOREIGN ASSETS CONTROL REGULATION, ETC. ........................... 9 -------------------------------------- 4.11. INVESTMENTS COMPANY ACT ........................................... 9 ----------------------- 4.12. PUBLIC UTILITY HOLDING COMPANY ACT ................................ 9 ---------------------------------- 4.13. INTERSTATE COMMERCE ACT ........................................... 9 ----------------------- 4.14. CREDIT AGREEMENT .................................................. 9 ---------------- 5. PURCHASE FOR INVESTMENT: SOURCE OF FUNDS ................................ 10 ----------------------------------------- 6. RESTRICTIONS ON TRANSFER ..................................................10 ------------------------ 6.1. RESTRICTIVE LEGENDS ............................................... 10 ------------------- 6.2. NOTICE OF TRANSFER: OPINIONS OF COUNSEL .......................... 11 ---------------------------------------- 7. ANTI-DILUTION PROTECTION ................................................. 12 ------------------------ 7.1. PURCHASE RIGHTS ................................................... 12 --------------- 7.2. RESERVATION OF STOCK .............................................. 13 -------------------- 8. DEFINITIONS .............................................................. 13 ----------- 9. MISCELLANEOUS ............................................................ 16 ------------- 9.1. INDEMNIFICATION: EXPENSES, ETC. ................................... 16 ------------------------------ 9.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; SEVERABILITY .......... 17 -------------------------------------------------------- 9.3. AMENDMENT AND WAIVER .............................................. 18 -------------------- 9.4. NOTICES, ETC. ..................................................... 18 ------------ 9.5. SUCCESSORS AND ASSIGNS ............................................ 18 ---------------------- 9.6. DESCRIPTIVE HEADINGS .............................................. 18 -------------------- 9.7. SATISFACTION REQUIREMENT .......................................... 19 ------------------------ 9.8. GOVERNING LAW ..................................................... 19 ------------- 9.9. SERVICE OF PROCESS: WAIVER OF OFFSETS ............................. 19 ------------------------------------- 9.10. COUNTERPARTS ...................................................... 19 ------------ 9.11. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS ..................... 19 --------------------------------------------- 9.12. WAIVER OF JURY TRIAL .............................................. 20 -------------------- (ii) 4 SCHEDULES --------- SCHEDULE 4.1 -- Qualified Jurisdictions SCHEDULE 4.2 -- Authorization SCHEDULE 4.4(a) -- Agreements Affecting Securities SCHEDULE 4.4(b) -- Capitalization SCHEDULE 4.5 -- Debt and Other Liabilities SCHEDULE 4.6 -- Material Developments EXHIBITS -------- EXHIBIT A -- Form of Opinion of Hale & Dorr LLP (iii) 5 CML GROUP, INC. 524 Main Street Acton, Massachusetts 01720 STOCK PURCHASE AGREEMENT dated as of July 27, 1998 between CML Group, Inc., a Delaware corporation (the "Company"), and the purchaser listed on the signature page hereto (the "Purchaser"). Unless otherwise defined, capitalized terms used in this Agreement are defined in Section 8; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement; references to a "section" or a "subdivision" are, unless otherwise specified, to a section or a subdivision of this Agreement. The Company in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, agrees with the Purchaser as follows: 1. AGREEMENT TO SELL AND PURCHASE THE COMMON STOCK. At the Closing provided for in Section 2, the Company will issue and sell to the Purchaser and, subject to the terms and conditions of this Agreement, the Purchaser will purchase from the Company (i) the number of shares of the Company's Common Stock, par value $.10 per share ("Common Stock"), specified opposite the Purchaser's name on the signature page hereto at the purchase price per share of $.10 payable in chase by wire transfer of immediately available funds. The term "Shares" refers to the shares of Common Stock to be purchased by the Purchaser under this Agreement. Contemporaneously with entering into this Agreement, the Company is entering into separate stock purchase agreements (the "Other Stock Purchase Agreements") identical with this Agreement with certain purchasers other than the Purchaser (the "Other Purchasers" and, together with the Purchaser, the "Purchasers"), providing for the sale to each of the Other Purchasers, at such Closing and at the purchase price set forth above, of the number of shares of Common Stock specified opposite such Other Purchaser's name on the signature pages to the Other Stock Purchase Agreements. 2. CLOSING OF SALE OF SHARES. The purchase and delivery of the Shares to be purchased by the Purchasers shall take place at the offices of Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts, at a closing (the "Closing") on July 27, 1998 or at such other place or on such other date as the Purchasers and the Company may agree upon (such date on which the Closing shall have actually occurred, the "Closing Date"). At the Closing, the Company will deliver or cause to be delivered to the Purchaser duly recorded on the books of the Company in the name the Purchaser or its nominee or designee in such denominations as the Purchaser may request in such form as to give the Purchaser title without adverse claims the Shares to be purchased by it against payment of the purchase price therefor. If at the Closing the Company shall fail to tender to the Purchaser any of the Shares to be purchased by it as provided in this Section 2, or any of the conditions specified in Section 3 shall not have been satisfied or waived by the Purchaser, the Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any other rights it may have by reason of such failure or such non-fulfillment. 6 3. CONDITIONS TO CLOSING. 3.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER ON THE CLOSING DATE. The Purchaser's obligation to purchase and pay for the Shares to be sold to it at the Closing is subject to the fulfillment prior to or at the Closing of the following conditions, any or all of which may be waived at the option of the Purchaser: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 4 hereof shall be correct in all material respects when made and at the time of the Closing, after giving effect to the sale of the Shares and the other transactions contemplated to be consummated at the Closing by this Agreement, except that any representations and warranties that relate to a particular date or period shall be true in all material respects as of such date or period. (b) PERFORMANCE. The company shall have performed and complied in all material respects with all agreements and conditions contained in this Agreement required to be performed or complied with prior to or at the Closing. (c) COMPLIANCE CERTIFICATE. The Company shall have delivered to the Purchaser an Officers' Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 3.1(a) and (b) have been fulfilled. (d) OPINION OF COUNSEL. The Purchaser shall have received from Hale & Dorr LLP, counsel for the Company, their favorable opinion substantially in the form set forth in EXHIBIT A, addressed to the Purchaser, dated the Closing Date and otherwise satisfactory in substance and form to the Purchaser. (e) LEGAL INVESTMENT. On the Closing Date, the Purchaser's purchase of the Shares shall be permitted by the laws and regulations of the jurisdiction to which the Purchaser is subject (including, without limitation, Section 5 of the Securities Act), and credit controls (whether voluntary or mandatory) or similar restraints applicable to the Purchaser shall not subject the Purchaser to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and shall not be enjoined (temporarily or permanently) under, prohibited by or contrary to any injunction, order or decree applicable to the Purchaser. (f) COMPLIANCE WITH SECURITIES LAWS. The offering, issuance and sale of the Shares under this Agreement shall have complied with all applicable requirements of federal securities laws and the Purchaser shall have received evidence, if any, of such compliance in form and substance satisfactory to the Purchaser. (g) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings contemplated by this Agreement shall be satisfactory to the Purchaser and the Purchasers' Counsel, and the Purchaser and the Purchasers' Counsel shall have received all such counterpart originals or certified or other copies of such documents as the Purchaser or the Purchasers' counsel may reasonably request. 2 7 (h) SALE OF OTHER SHARES. Concurrently with the Closing, the Company shall have issued and sold to each of the Other Purchasers, and each such Other Purchaser shall have purchased from the Company, the Shares to be issued and sold to each such Other Purchaser at the Closing as specified in the applicable signature page of each of the Other Stock Purchase Agreements. (i) REGISTRATION RIGHTS AGREEMENT. Simultaneously with or prior to the issuance and sale to the Purchasers of the Shares to be purchased by the Purchasers at the Closing, the company and the Purchasers shall have duly entered into a registration rights agreement satisfactory in substance and form to the Purchasers (the "Registration Rights Agreement"), the Purchasers shall have received fully-executed counterparts of the Registration Rights Agreement in such numbers reasonably requested by them, such agreement shall be in full force and effect and no term or condition thereof shall have been amended, modified or waived. (j) RELATED MATTERS. As of the Closing, the Company's and its Subsidiaries' By-laws and Certificates of Incorporation or documents equivalent thereto shall not have been modified or amended since the date such documents were delivered to the Purchaser by the Company. (k) NO ADVERSE U.S. LEGISLATION, ACTION OR DECISION. No legislation, order, rule, ruling or regulation shall have been enacted or made by or on behalf of any governmental body, department or agency of the United States, nor shall any legislation have been introduced and favorably reported for passage to either house of Congress by any committee of either such house to which such legislation has been referred for consideration, nor shall any decision of any court of competent jurisdiction within the United States have been rendered which, in the Purchaser's reasonable judgment, could materially and adversely affect any of the Shares or any part thereof as an investment. There shall be no action, suit, investigation or proceeding pending or threatened, against or affecting the Purchaser, any of its properties or rights, or any of its Affiliates, associates, officers or director, before any court, arbitrator or administrative or governmental body which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by this Agreement, or (ii) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions, and, to the Purchaser's knowledge, there shall be no valid basis for any such action, proceeding or investigation. (l) GOVERNMENTAL AND THIRD PARTY PERMITS, CONSENTS, ETC. The Company and its Subsidiaries shall have duly applied for and obtained all approvals, orders, licenses, consents and other authorizations (collectively, the "Approvals") from each federal, state and local government and governmental agency, department or body, or pursuant to any agreement to which the Company or any of its Subsidiaries is a party or to which any of them or any of their assets is subject, which may be required in connection with this Agreement. (m) SECRETARY'S CERTIFICATE. The Purchaser shall have received a certificate, dated the Closing Date, of the Secretary or Assistant Secretary of the Company, (i) certifying as true, complete and correct its Charter Documents (as appropriate) and 3 8 resolutions relating to the transactions contemplated hereby attached thereto, (ii) as to the absence of proceedings or other action for dissolution, liquidation or reorganization of the Company, (iii) as to the incumbency and specimen signatures of officers who shall have executed instruments, agreements and other documents in connection with the transactions contemplated hereby, (iv) as to the effect that certain agreements, instruments and other documents are in the form approved in the resolutions referred to in clause (i) above, and (v) covering such other matters, and with such other attachments thereto, as Purchasers' Counsel may reasonably request at least one Business Day before the Closing Date, which certificates and attachments thereto shall be satisfactory in form and substance to such Purchaser. (n) PAYMENT OF EXPENSES. The Company shall have paid the fees, expenses and disbursements of the Purchasers' Counsel, including, without limitation, reasonable legal fees and expenses, reflected in statements of such counsel rendered prior to or on the Closing Date. (o) CREDIT AGREEMENT. Simultaneously with or prior to the issuance and sale to the Purchasers of the Shares to be purchased by the Purchasers at the Closing, the Company shall have entered into an Amended and Restated Revolving Credit Agreement of even date herewith by and among the Company, certain Subsidiaries, the Purchasers, and BankBoston N.A. (the "Credit Agreement"), satisfactory in substance and form to the Purchasers, and the other agreements required under the Credit Agreement. (p) AMENDMENT TO STOCK PURCHASE WARRANT. Simultaneously with or prior to the issuance and sale to the Purchasers of the Shares to be purchased by the Purchasers at the Closing, the Company shall have amended that certain Common Stock Purchase Warrant No. 3 by the Company in favor of FSC Corp. dated March 11, 1998 such that the total number of warrants to purchase Company Common Stock outstanding under such Warrant is no more that 571,680 and such that the Warrant is otherwise satisfactory in substance and form to the Purchasers (the "Warrant Amendment"), the Purchasers shall have received fully-executed counterparts of such amendment in such numbers reasonably requested by them, such amendment shall be in full force and effect and no term or condition thereof shall have been amended, modified or waived. (q) CANCELLATION OF ROTHSCHILD WARRANTS. Simultaneously with or prior to the issuance and sale to the Purchasers of the Shares to be purchased by the Purchasers at the Closing, the Company shall have canceled that certain Common Stock Purchase Warrant No. 1 by the Company in favor of Rothschild Recovery Fund, L.P. dated March 11, 1998 (the "Rothschild Warrant"), the Purchasers shall have received fully-executed counterparts of such cancellation in such numbers reasonably requested by them, such cancellation shall be in full force and effect and no term or condition thereof shall have been amended, modified or waived. (r) NOTE PURCHASE AGREEMENT. Simultaneously with or prior to the issuance and sale to the Purchasers of the Shares to be purchased by the Purchasers at the Closing, the Company shall have entered into a Note Purchase Agreement of even date 4 9 herewith by and between the Company and the State of Wisconsin Investment Board (the "Note Purchase Agreement"), satisfactory in substance and form to the Purchasers, and the other agreements required under the Note Purchase Agreement. 3.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY ON THE CLOSING DATE. The Company's obligation to issue the Shares at the Closing is subject to the fulfillment prior to or at the Closing of the following conditions, any or all of which may be waived at the option of the Company: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser in Section 5 hereof shall be correct in all material respects when made and at the time of the Closing, after giving effect to the sale of the Shares and the other transactions contemplated to be consummated at the Closing by this Agreement, except that any representations and warranties that relate to a particular date or period shall be true in all material respects as of such date or period. (b) PERFORMANCE. The Purchaser shall have performed and complied in all material respects with all agreements and conditions contained in this Agreement required to be performed or complied with prior to or at the Closing. (c) COMPLIANCE WITH SECURITIES LAWS. The offering, issuance and sale of the Shares under this Agreement shall have complied with all applicable requirements of federal securities laws. (d) SALE OF OTHER SHARES. Concurrently with the Closing, the Company shall have issued and sold to each of the Other Purchasers, and each such Other Purchaser shall have purchased from the Company, the Shares to be issued and sold to each such Other Purchaser at the Closing as specified in the applicable signature page of each of the Other Stock Purchase Agreements. (e) NO ADVERSE U.S. LEGISLATION, ACTION OR DECISION. No legislation, order, rule, ruling or regulation shall have been enacted or made by or on behalf of any governmental body, department or agency of the United States, nor shall any legislation have been introduced and favorably reported for passage to either house of Congress by any committee of either such house to which such legislation has been referred for consideration, nor shall any decision of any court of competent jurisdiction within the United States have been rendered which, in the Company's reasonable judgment, could materially and adversely affect any of the Shares or any part thereof as an investment. There shall be no action ,suit, investigation or proceeding pending or threatened, against or affecting the Company, any of its properties or rights, or any of its Affiliates, associates, officers or directors, before any court, arbitrator or administrative or governmental body which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise affect the transactions contemplated by this Agreement, or (ii) questions the validity or legality of any such transactions or seeks to recover damages or to obtain other relief in connection with any such transactions, and, to the Company's knowledge, there shall be no valid basis for any such action, proceeding or investigation. 5 10 4. REPRESENTATIONS AND WARRANTIES, ETC. In order to induce the Purchaser to purchase the Shares, the Company represents and warrants that: 4.1 ORGANIZATION AND QUALIFICATION: AUTHORITY. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own and lease its properties and carry on its business as presently conducted, is duly qualified, registered or licensed as a foreign corporation to do business and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the character of its present operations makes such qualification, registration or licensing necessary, except where the failure so to qualify or be in good standing would not have a material adverse effect on the condition (financial or otherwise), assets, business or results of operations of (a "Material Adverse Effect" on) the company and its Subsidiaries on a consolidated basis. The Company has heretofore delivered to Purchasers' Counsel complete and correct copies of the certificate of incorporation or articles of organization or equivalent organizational document and of the by-laws or equivalent document of the Company, each as amended to date and as presently in effect (collectively, "Charter Documents"). A list of all jurisdictions in which the Company is qualified, registered or licensed to do business as a foreign corporation is attached hereto as Schedule 4.1. 4.2 CORPORATE AND GOVERNMENTAL AUTHORIZATION: NO CONTRAVENTION. Except as set forth on Schedule 4.2, the execution, delivery and performance by the Company and its Subsidiaries of the Transaction Documents to which they are a party and all other instruments or agreements to be executed in connection herewith or therewith, and the issuance and sale to the Purchasers of the Shares pursuant to this Agreement and the Other Stock Purchase Agreements, are within the Company's and Subsidiaries' respective corporate powers, having been duly authorized by all necessary corporate action on the part of the Company and each such Subsidiary; do not require any License, authorization, approval, qualification or formal exemption from, or other action by or in respect of, or filing of a declaration or registration with the New York Stock Exchange, any court, Governmental Authority, agency or official or other Person (except such as have been obtained or as may be required under the Securities Act or state securities or Blue Sky laws); do not contravene or constitute a default under or violation of (i) any provision of applicable law or regulation of any Governmental Authority, (ii) the Charter Documents of the Company or any of its Subsidiaries, (iii) any agreement (or require the consent of any Person under any agreement that has not been obtained) to which the Company or any of its Subsidiaries is a party, or (iv) any judgment, injunction, order, decree or other instrument binding upon the Company, any of its Subsidiaries or any of their respective properties, except where such contravention, default or violation would not have a Material Adverse Effect on the Company and its Subsidiaries on a consolidated basis or on the Subsidiaries, individually; and do not and will not result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. 4.3 VALIDITY AND BINDING EFFECT. Each of the Transaction Documents has been duly executed and delivered by the Company and Subsidiaries which are a party thereto and is a valid and binding agreement of the Company and its Subsidiaries, as applicable, enforceable against the Company and such Subsidiaries, as applicable, in accordance with its 6 11 terms, except for (a) the effect upon the Transaction Documents of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the rights of creditors generally, and (b) limitations imposed by a court of competent jurisdiction under general equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions of the Transaction Documents and upon the availability of injunctive relief or other equitable remedies. 4.4 CAPITALIZATION. As of the Closing Date, except as set forth on Schedule 4.4(a) hereto, there are no outstanding subscriptions, options, warrants, rights, convertible or exchangeable securities, "poison pill" or similar charter provisions or rights or other agreements or commitments of any character obligating the Company or its Subsidiaries to issue any securities. As of the Closing Date, except as set forth on Schedule 4.4(a), there are no voting trusts or other agreements or understandings to which the Company or its Subsidiaries is a party with respect to the voting of the Capital Stock of the Company or the Subsidiaries. Except as set forth on Schedule 4.4(a) or as contemplated by the Registration Rights Agreement, neither the Company nor any of its Subsidiaries has entered into any agreement to register its equity or debt securities under the Securities Act. Schedule 4.4(b) lists and describes the authorized capital stock of the Company on and as of the Closing Date, and all securities exercisable for or convertible into capital stock of the Company after giving effect to this Agreement, the Other Stock Purchase Agreements, the Warrant Amendment, the issuance of the Secured Redeemable Subordinated Note under the Note Purchase Agreement to the State of Wisconsin Investment Board, and the Cancellation of the Rothschild Warrant. 4.5 OUTSTANDING DEBT. Except as set forth in the Financial Statements or on Schedule 4.5 hereto, at and as of the Closing Date, neither the Company nor any of its Subsidiaries will have outstanding any debt for borrowed money, or obligations or liabilities evidenced by bonds, debentures, notes or other similar instruments or under capital leases other than short-term debt incurred in the ordinary course of business. Schedule 4.5 contains a complete and accurate list of all material guarantees, assumptions, purchase agreements and similar agreements and arrangements whereby the Company or any of its Subsidiaries is or may become directly or indirectly liable or responsible for the indebtedness or other obligations of another Person other than the Company or any of its Subsidiaries, except for negotiable instruments endorsed for collection or deposit in the ordinary course of its business, identifying, with respect to each of the respective parties, amounts and maturities. 4.6 NO MATERIAL ADVERSE CHANGE. Except as set forth on Schedule 4.6 or reports filed with the Commission since May 2, 1998, copies of which have been provided to the Purchasers, since May 2, 1998, there has been (i) no material adverse change in the condition (financial or other), assets, business, or results of operations of the Company or any of its Subsidiaries (except that the Company and its subsidiaries have incurred losses from operations), (ii) no obligation or liability (contingent or other) incurred by the Company or any of its Subsidiaries, other than obligations and liabilities incurred in the ordinary course of business, and no mortgage, encumbrance or Lien placed on any of the properties of the Company or any of its Subsidiaries which remains in existence on the date hereof, and (iii) no acquisition or disposition of any material assets by the Company or any of its Subsidiaries (or 7 12 any contract or arrangement therefor), or any other material transaction, otherwise than for fair value in the ordinary course of business. 4.7 PRIVATE OFFERINGS. No form of general solicitation or general advertising including, but not limited to, advertisements, articles, notices or other communications, published in any newspaper, magazine or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising, was used by the Company or any of its Subsidiaries or any of the Company's or such Subsidiary's representatives, or, to the knowledge of the Company, any other Person acting on behalf of the Company or any of its Subsidiaries, in connection with the offering of the Shares being purchased under this Agreement or under any other Transaction Document. Neither the Company, any of its Subsidiaries nor any Person acting on the Company's or such Subsidiary's behalf has directly or indirectly offered the Shares, or any part thereof or any other similar securities or the securities being purchased under any other Transaction Document, for sale to, or sold or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with any Person or Persons other than the Purchasers and other investors who the Company reasonably believed has such knowledge and experience in financial and business matters that they were capable of evaluating the merits and risks of purchasing the Shares. The Company further represents to the Purchaser that, assuming the accuracy of the representations of the Purchaser as set forth in Section 5 hereof, neither the Company, any of its Subsidiaries nor any Person acting on the Company's or such Subsidiary's behalf has taken or will take any action which would subject the issue and sale of the Shares or the securities being purchased under any other Transaction Document to the provisions of Section 5 of the Securities Act, except as contemplated by the Registration Rights Agreement. 4.8 BROKER'S OR FINDER'S COMMISSIONS. In addition to and not in limitation of any other rights hereunder, the Company and the Subsidiaries agree that they will indemnify and hold harmless the Purchaser from and against any and all claims, demands or liabilities for broker's, finder's, placement agent's or other similar fees or commissions and any and all liabilities with respect to any taxes (including interest and penalties) payable or incurred or alleged to have been incurred by the Company or any of its Subsidiaries or any Person acting or alleged to have been acting on the Company's or such Subsidiary's behalf, in connection with this Agreement, the issuance or sale of the Shares, or any other transaction contemplated by any of the Transaction Documents. 4.9 DISCLOSURE. (a) As of the Closing Date, each report the Company has filed with the Commission with respect to events occurring, or periods ending, on or after May 2, 1998 (the "SEC Filings") complies in all material respects with the requirements of the 1934 Act and as of the date thereof, did not contain an untrue statement of material fact required to be stated therein or necessary to make statements therein not misleading. 8 13 (b) The SEC Filings, taken as a whole, do not as of the date of this Agreement contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make statements therein no misleading. (c) There is no material fact known to the Company which the Company has not disclosed in the SEC Filings which has or, insofar as the Company can reasonably foresee, may have or will have a Material Adverse Effect on the Company and its Subsidiaries on a consolidated basis or on the Subsidiaries, individually, or a Material Adverse Effect on the ability of the Company or any of its Subsidiaries to perform its obligations under any of the Transaction Documents to which it is a party or in respect of the Shares or any document contemplated hereby or thereby. 4.10 FOREIGN ASSETS CONTROL REGULATION, ETC. Neither the issue and sale of the Shares by the Company nor its use of the proceeds thereof as contemplated by this Agreement will violate the Foreign Assets Control Regulations, the Transaction Control Regulations, the Cuban Assets Control Regulations, the Foreign Funds Control Regulations, the Iranian Assets Control Regulations, the Nicaraguan Trade Control Regulations, the South African Transactions Control Regulations, the Libyan Sanctions Regulations, the Soviet Gold Coin Regulations, the Panamanian Transactions Regulations, the Haitian Transactions Regulations, or the Iraqi Sanctions Regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) or Executive Orders 12722 and 12724 (transactions with Iraq). 4.11 INVESTMENT COMPANY ACT. The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), and is not deemed to be an "investment company" for purposes of Section 12(d)(1) of the 1940 Act. 4.12 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Company nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 4.13 INTERSTATE COMMERCE ACT. Neither the Company nor any of its Subsidiaries is, nor will be, a "rail carrier," or a Person controlled by or affiliated with a "rail carrier," within the meaning of Title 49, U.S.C. Neither the Company nor any of its Subsidiaries is a "carrier" or other Person to which 49 U.S.C. Section 11301(b)(1) is applicable. 4.14 CREDIT AGREEMENT. The representations and warranties of the Company contained in the Credit Agreement, as modified by the Schedules thereto, are true and correct in all material respects as of the date hereof as if such representations and warranties were made herein and the Schedules incorporated herein by reference. 9 14 5. PURCHASE FOR INVESTMENT: SOURCE OF FUNDS. To induce the Company to enter into this Agreement and to issue the Shares, the Purchaser represents and warrants to, and covenants and agrees with, the Company, as follows: (a) Each Purchaser represents that (i) it is an accredited investor as defined in Regulation D under the Securities Act, or (ii) by reason of its business and financial experience, such Purchaser has such knowledge, sophistication and experience in business and financial matters as to be capable of evaluating the merits and risk of the prospective investment, and is acquiring the Shares for its own account (and/or on behalf of managed accounts that are purchasing for its own account) and with no present intention of distributing or reselling the same or any part thereof other than pursuant to a registration statement under the Securities Act or an exemption thereunder, without prejudice, however, to its right (subject to the terms of the Transaction Documents) at all times to sell or otherwise dispose of all or any part of the Securities pursuant to a registration under the Securities Act, or under an exemption from such registration available under the Securities Act, and subject, nevertheless, to the disposition of its assets being at all times within its control. (b) The Purchaser has full power and authority and has taken all action necessary to authorize it to enter into and perform its obligations under this Agreement, the Registration Rights Agreement and all other documents or instruments contemplated hereby to which it is a party. This Agreement and the Registration Rights Agreement are legal, valid and binding obligations of the Purchaser, and each such agreement is enforceable in accordance with its respective terms, except: (i) that such enforceability may be subject to bankruptcy, insolvency, reorganization, moratorium, or other similar laws now or hereafter in effect relating to creditors' rights generally; (ii) that such enforceability may be subject to general equitable principles, including, without limitation, the principle that the availability or equitable remedies, such as specific enforcement, injunctive relief or reformation, is subject to the discretion of the court before which any proceeding might be brought; and (iii) as rights to indemnity referred to or provided in any such agreements may be limited by federal or state securities laws or public policy underlying such laws. (c) The Purchaser acknowledges that the Shares being acquired by it are subject to the restrictions on transfer as provided in Section 6 hereof. 6. RESTRICTIONS ON TRANSFER. 6.1. RESTRICTIVE LEGENDS. Except as otherwise permitted by this Section 6, each certificate representing the Shares shall be stamped or otherwise imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR PURSUANT TO THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE. 10 15 SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER SUCH ACT, (ii) RULE 144 UNDER SUCH ACT, OR (iii) ANY OTHER EXEMPTION FROM REGISTRATION UNDER SUCH ACT RELATING TO SUCH ACT, PROVIDED THAT, IF REQUESTED BY THE COMPANY, AN OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM AND SUBSTANCE IS FURNISHED TO THE COMPANY THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE. The Company shall maintain a copy of this Agreement and any amendments thereto on file in its principal office, and will make such copy available during normal business hours for inspection to any party thereto or will provide such copy to the Purchaser upon its request. Whenever the legend requirement imposed by this section 6.1 shall terminate, as hereinabove provided, the respective holders of Shares for which such legend requirements have terminated shall be entitled to receive from the Company, at the Company's expense, certificates without such legend. 6.2. Notice of Transfer; Opinions of Counsel. The holder of each certificate representing the Shares bearing the restrictive legend set forth in Section 6.1 above ("Restricted Security"), agrees to provide to the Company (a) upon request, a written description of the manner or circumstances of any transfer of any Restricted Security and (b) upon reasonable request by the Company, an opinion of counsel (including in-house counsel), in form and substance reasonably satisfactory to the Company, to the effect that the proposed transfer of such Restricted Security may be effected without registration of such Restricted Security under the Securities Act. If for any reason the Company (after having been furnished with the opinion required to be furnished pursuant to this Section 6.2) shall fail to notify such holder within five business days after such holder shall have delivered such opinion to the Company that, in its or its counsel's opinion, the transfer may not be legally effective (the "Illegal Transfer Notice"), such holders shall thereupon be entitled to transfer the Restricted Security as proposed. If the holder of the Restricted Security delivers to the Company an opinion of counsel (including in-house counsel or regular counsel to such Purchaser or its investment adviser) in form and substance reasonably satisfactory to the Company that subsequent transfers of such Restricted Security will not require registration under the Securities Act, or if the Company does not provide the holders with an Illegal Transfer Notice as set forth above, the Company will promptly after such contemplated transfer deliver now certificates for such Restricted Security which do not bear the Securities Act legend set forth in Section 6.1 above. The restrictions imposed by this Section 6 upon the transferability of any particular Restricted Security shall cease and terminate when such Restricted Security has been sold pursuant to an effective registration statement under the Securities Act or transferred pursuant to Rule 144 promulgated under the Securities Act. The holder of any Restricted 11 16 Security as to which such restrictions shall have terminated shall be entitled to receive from the Company a new security of the same type but not bearing the restrictive Securities Act legend set forth in Section 6.1 and not containing any other reference to the restrictions imposed by this Section 6. Notwithstanding any of the foregoing, no opinion of counsel will be required to be rendered pursuant to this Section 6.2 with respect to the transfer of any Securities on which the restrictive legend has been removed in accordance with this Section 6.2. As used in this Section 6.2, the term "transfer" encompasses any sale, transfer or other disposition of any Securities referred to herein. 7. ANTI-DILUTION PROTECTION. 7.1. PURCHASE RIGHTS. On August 1, 1999, and each anniversary date thereafter until payment in full by the Company of all amounts owed under the Credit Agreement, the Purchaser shall have the right to purchase from the Company, at the purchase price per share of $.10, the number of shares of Common Stock (the "Amount") such that the ratio of (a) the number of Shares purchased by the Purchaser pursuant to this Agreement to (b) the Beginning Outstanding Shares (as defined below) is equal to the ration of (x) the number of Shares purchased by the Purchaser pursuant to this Agreement plus the Amount to (y) the total number of shares of Common Stock on a fully-diluted basis currently outstanding as of such date. Notwithstanding the foregoing, if (and on each occasion that) at any time prior to the later of (a) August 1, 1999 or (b) payment in full by the Company of all amounts owed under the Credit Agreement, there shall occur: (x) any issuance or sale of any shares of Common Stock (including pursuant to any options, warrants or other rights exercisable for shares of Common Stock) or any shares of other classes of capital stock of the Company or other securities or rights then convertible into or exercisable for shares of Common Stock for a purchase price of $10 million or greater, (y) there shall be any adjustment to any conversion rate for any convertible securities convertible into or exercisable for Common Stock, or (z) an NT Spin-Off (as defined in the Credit Agreement), then the Purchaser shall have the right from and after such occurrence to purchase from the Company, at the purchase price per share of $.10, the number of shares of Common Stock (the "Amount") such that the ratio of (a) the number of Shares purchased by the Purchaser pursuant to this Agreement to (b) the Beginning Outstanding Shares is equal to the ratio of (x) the number of Shares purchased by the Purchaser pursuant to this Agreement plus the Amount to (y) the Increased Outstanding Shares (as defined below) immediately after such event of transaction. For purposes of this Section 7.1, "Beginning Outstanding Shares" shall mean the total number of shares of Common Stock on a fully-diluted basis (excluding, however, the number of shares of Common Stock into which the Subordinated Debentures (as defined in the Credit Agreement) are convertible) immediately following the issuance of Shares under this Purchase Agreement and the shares of Common Stock under the Other Stock Purchase Agreements, the effectiveness of the Warrant Amendment, the issuance of the Secured Redeemable Subordinated Note under the Note Purchase Agreement, and the cancellation of the Rothschild Warrant. For purposes of this Section 7.1, "Increased Outstanding Shares" shall mean the total number of shares of Common Stock of the Company on a fully-diluted basis immediately 12 17 following (a) any issuance or sale of any shares of Common Stock (including pursuant to any options, warrants or other rights exercisable for shares of Common Stock) or any shares of other classes of capital stock of the Company or other securities or rights then convertible into or exercisable for shares of Common Stock, or any adjustment to any conversion rate for any convertible securities convertible into or exercisable for Common Stock; or (b) a NT Spin-Off (as defined in the Credit Agreement), as the case may be. For purposes of this Section 7.1, any amendment to the exercise or conversion price or any other repricing of any of the Subordinated Debentures (as defined in the Credit Agreement) shall constitute an issuance of securities, exercisable for or convertible into Common Stock. 7.2. RESERVATION OF STOCK. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of Purchaser's rights set forth in Section 7.1 hereof, such number of Shares, as from time to time shall be issuable upon the exercise of such rights. 8. DEFINITIONS. As used herein the following terms have the following respective meanings: "AFFILIATE," except as otherwise defined in this Agreement, means any Person directly or indirectly controlling or controlled by or under common control with the Company, provided, however, that, for purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "AGREEMENT" means this Agreement, as amended, modified or supplemented from time to time, together with any exhibits, schedules or other attachments thereto. "BUSINESS DAY" means any day other than a day on which banks are authorized or required to be closed in the State of New York. "CAPITAL STOCK" means, with respect to any Person, any and all shares, interests, participations, rights in or other equivalents (however designated) of such Person's capital stock, and any rights (other than debt securities convertible into capital stock), warrants or options exchangeable for or convertible into such capital stock. "CHARTER DOCUMENTS" has the meaning ascribed thereto in Section 4.1 hereof. "CLOSING" has the meaning ascribed thereto in Section 2 hereof. "CLOSING DATE" has the meaning ascribed thereto in Section 2 hereof. 13 18 "COMMISSION" means the United States Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act. "COMMON STOCK" means the common stock, par value $.10 per share, of the Company. "COMPANY" has the meaning ascribed thereto in the introduction hereof. "CREDIT AGREEMENT" has the meaning ascribed thereto in Section 3.1(q) hereto. "FINANCIAL STATEMENTS" means complete the consolidated financial statements for the fiscal year ended July 31, 1997 and the nine months ended May 2, 1998 and pro forma financial statements for the fiscal year ended July 31, 1997 and the nine months ended May 2, 1998 for the Company, together with the notes thereto. "GOVERNMENTAL AUTHORITY" means any governmental or quasi-governmental authority including, without limitation, any federal, state, territorial, county, municipal or other governmental or quasi-governmental agency, board, branch, bureau, committee, court, department or other instrumentality or political unit or subdivision, whether domestic or foreign. "ILLEGAL TRANSFER NOTICE" has the meaning ascribed thereto in Section 6.2 hereof. "INDEMNIFIED PARTY" or "INDEMNIFIED PARTIES" has the meaning ascribed thereto in Section 9.1(a) hereof. "LICENSE" or "LICENSES" means all material licenses, franchises, permits, consents, registrations, certificates and other approvals (individually, a "License" and collectively, "Licenses") required for the conduct of the Company's or such Subsidiary's business, as the case may be, as now being conducted. "LIEN" means any mortgage, lien (statutory or otherwise), charge, pledge, hypothecation, conditional sales agreement, adverse claim, title retention agreement or other security interest, encumbrance or other title defect in or on any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale, trust receipt or other title retention agreement with respect to any Property or asset of such Person. "LOSSES" has meaning ascribed thereto in Section 9.1(a) hereof. "MATERIAL ADVERSE EFFECT" has the meaning ascribed thereto in Section 4.1. hereof. "NOTE PURCHASE AGREEMENT" has the meaning ascribed thereto in Section 3.1(r) hereof. 14 19 "OFFICERS' CERTIFICATE" means a certificate executed on behalf of the Company by (a) the Chairman of the Board of Directors (if an officer) or the President or one of the Vice Presidents of the Company and (b) the Treasurer or one of the Assistant Treasurers or the Secretary or one of the Assistant Secretaries of the Company. "OTHER PURCHASERS" has the meaning ascribed thereto in Section 1 hereof. "OTHER STOCK PURCHASE AGREEMENTS" has the meaning ascribed thereto in Section 1 hereof. "PERSON" means any individual, corporation, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof. "PROPERTY" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "PURCHASER" except as defined elsewhere in this Agreement, has the meaning ascribed thereto in the introduction hereof. "PURCHASERS" except as defined elsewhere in this Agreement, shall mean the Purchaser and the Other Purchasers. "PURCHASERS' COUNSEL" means Goodwin, Procter & Hoar LLP, a partnership including professional corporations, acting as counsel to the Purchasers in connection with the transactions contemplated hereunder. "REGISTRATION RIGHTS AGREEMENT" has the meaning ascribed thereto in Section 3.1(j), as amended or supplemented from time to time in accordance with the terms thereof. "RESTRICTED SECURITY" has the meaning ascribed thereto in Section 6.2 hereof. "RULE 144" means Rule 144 as promulgated by the Commission under the Securities Act, and any successor rule or regulation thereto. "ROTHSCHILD WARRANT" has the meaning ascribed thereto in Section 3.1(q) hereof. "SECURITIES ACT" means the Securities Act of 1933, and the rules and regulations of the Commission promulgated thereunder, as amended. "SHARES" has the meaning ascribed thereto in Section 1 hereof. "SUBSIDIARY" means with respect to any Person, any corporation, association or other business entity of which securities representing more than 50% of the combined voting power of the total Voting Stock (or in the case of an association or other business entity which is not a corporation, more than 50% of the equity interest) is at the time owned or controlled, 15 20 directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. "TRANSACTION DOCUMENTS" means, collectively, this Agreement, the Other Stock Purchase Agreements, the Registration Rights Agreement and any and all agreements, certificates, instruments and other documents contemplated thereby or executed and delivered in connection therewith. "VOTING STOCK" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to vote for the election of directors, managers or trustees of any Persons (irrespective of whether or not at the time, stock of any class or classes will have, or might have, voting power by the reason of the happening of any contingency). "WARRANT AMENDMENT" has the meaning ascribed thereto in Section 3.1(p) hereof. 9. MISCELLANEOUS. 9.1. INDEMNIFICATION; EXPENSES, ETC. (a) In addition to any and all obligations of the Company to indemnify the Purchaser hereunder or under the other Transaction Documents, the Company agrees, without limitation as to time, to indemnify and hold harmless the Purchaser, the Affiliates, and the employees, officers, directors, and agents of the Purchaser and the Affiliates (individually, an "Indemnified Party" and, collectively the "Indemnified Parties") from and against any and all losses, claims, damages, liabilities, costs (including the cost of preparation and attorneys' fees) and expenses (including expenses of investigation) (collectively, "Losses") incurred or suffered by an Indemnified party (i) in connection with or arising out of any breach of any warranty, or the inaccuracy of any representation, as the case may be, made by the Company, or the failure of the Company to fulfill any agreement or covenant contained in this Agreement or (ii) in connection with any proceeding against the Company or any Indemnified Party brought by an third party arising out of or in connection with this Agreement or the other Transaction Documents or the transactions contemplated hereby or thereby or any action taken in connection herewith or therewith (or any other document or instrument executed herewith or pursuant hereto or thereto), whether or not the transactions contemplated by this Agreement are consummated and whether or not any Indemnified party is a formal party to an Proceeding; PROVIDED, HOWEVER, that the Company shall not be liable for any losses resulting from action on the part of any Indemnified party which is finally determined in such proceeding to be wrongful or which is an act of gross negligence, recklessness, or willful misconduct by such Indemnified Party. The Company agrees promptly to reimburse any Indemnified party for all such Losses as they are incurred or suffered by such Indemnified Party. Except as otherwise provided herein, the Company agrees (for the benefit of the Purchaser) to pay, and to hold the Purchaser harmless from and against, all costs and expenses 16 21 (including, without limitation, attorneys' fees, expenses and disbursements), if any, in connection with the enforcement against the Company, as the case may be, of this Agreement or any other Transaction Document or any other agreement or instrument furnished pursuant hereto or thereto or in connection herewith or therewith in any action in which the Purchaser in attempting to enforce any of the foregoing shall prevail or in any action in which the Purchaser shall in good faith assert any provision of any of the foregoing as a defense. (b) If any Indemnified party is entitled to indemnification hereunder, such Indemnified party shall give prompt notice to the Company of any claim or of the commencement of any proceeding against the Company or any Indemnified party brought by any third party with respect to which such Indemnified party seeks indemnification pursuant hereto; PROVIDED, HOWEVER, that the failure so to notify the Company shall not relieve the Company from any obligation or liability except to the extent the Company is prejudiced by such failure. The Company shall have the right, exercisable by giving written notice to an Indemnified Party promptly after the receipt of written notice from such Indemnified Party of such claim or proceeding, to assume, at the expense of the Company, the defense of any such claim or proceeding with counsel reasonably satisfactory to such Indemnified party. The Indemnified party or Parties will not be subject to any liability for any settlement that does not include as an unconditional term thereof the giving by claimant or plaintiff to such Indemnified party or Parties of a release, inform and substance satisfactory to the Indemnified party or Parties, from all liability in respect of such claim, litigation or proceeding. (c) In addition to any other obligations of the Company to indemnify the Purchasers herein or pursuant to any of the Transaction Documents or any other agreements or documents executed and delivered in connection therewith, the Company will save the Purchaser and each other holder of any of the Securities harmless from liability for the payment of all expenses arising in connection with such transactions, including, without limitation: (i) all document production and duplication charges and the reasonable fees, charges and expenses of Purchasers' Counsel (whether arising before or after the Closing Date), the transactions contemplated hereby and any subsequent proposed modification shall be effected or proposed consent granted; (ii) the costs and expenses, including attorneys' fees, incurred by the Purchaser in enforcing any rights under this Agreement or in responding to any subpoena or other legal process issued in connection with this Agreement or the transactions contemplated hereby or thereby or by reason of the Purchaser's having acquired any of the Securities, including without limitation costs and expenses incurred by the Purchaser in any bankruptcy case; (iii) the cost of delivering to the Purchaser's principal office, insured to its satisfaction, the Shares delivered to the Purchaser hereunder; and (iv) the reasonable out-of-pocket expenses incurred by the Purchaser in connection with such transactions and any such amendments or waivers. 9.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; SEVERABILITY. All representations and warranties contained in this Agreement or the Transaction Documents or made in writing by or on behalf of the Company in connection with the transactions 17 22 contemplated by this Agreement or the Transaction Documents shall survive, for the duration of any statutes of limitation applicable thereto, the execution and delivery of this Agreement, any investigation at any time made by the Purchaser or on its behalf, the purchase of the Shares by the Purchasers under this Agreement and the Other Stock Purchase Agreements and any disposition of or payment on the Shares. All statements contained in any certificate or other instrument delivered to the Purchaser by or on behalf of the Company pursuant to this Agreement or the Transaction Documents shall be deemed representations and warranties of the Company under this Agreement. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. 9.3. AMENDMENT AND WAIVER. This Agreement may be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may be given, provided that the same are in writing and signed by the Purchaser and the Company. 9.4. NOTICES, ETC. Except as otherwise provided in this Agreement, notices and other communications under this Agreement shall be in writing and shall be delivered, or mailed by registered or certified mail, return receipt requested, or by a nationally recognized overnight courier, postage prepaid, addressed, (a) if to the Purchaser, at such address as the Purchaser shall have furnished to the Company in writing, or (b) if to any other holder of any Shares, at such address as such other holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Shares who has furnished an address to the Company, or (c) if to the Company, at its address set forth at the beginning of this Agreement, to the attention of its President, or at such other address, or to the attention of such other officer, as the Company shall have furnished to the Purchaser and each such other holder in writing. This Agreement and the other Transaction Documents and all documents delivered in connection herewith or therewith embody the entire agreement and understanding between the Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 9.5. SUCCESSORS AND ASSIGNS. Whenever in this Agreement any of the parties hereto are referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the respective parties which are contained in this Agreement shall bind and inure to the benefit of the successors and assigns of all other parties. The terms and provisions of this Agreement and the other Transaction Documents shall inure to the benefit of and shall be binding upon any assignee or transferee of the Purchaser, and in the event of such transfer or assignment, the rights and privileges herein conferred upon the Purchaser shall automatically extend o and be vested in, and become an obligation of, such transferee or assignee, all subject to the terms and conditions hereof. 9.6 DESCRIPTIVE HEADINGS. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. 18 23 9.7 SATISFACTION REQUIREMENT. If any agreement, certificate or other writing, or an action taken or to be taken, is by the terms of this Agreement required to be satisfactory to the Purchaser or to the holders of a specified portion of the Shares, the determination of such satisfaction shall be made by the Purchaser or such holders, as the case may be, in the sole and exclusive judgment (exercised in good faith) of the Person or Persons making such determination. 9.8 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAW. 9.9 SERVICE OF PROCESS; WAIVER OF OFFSETS. The Company (a) hereby irrevocably submits itself to the jurisdiction of the state courts of the Commonwealth of Massachusetts and to the jurisdiction of the United States District Court for the Commonwealth of Massachusetts for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, the Shares, the other Transaction Documents or the subject matter hereof or thereof brought by the Purchaser (or the Other Purchasers) or their successors or assigns, and (b) hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court, and (c) hereby waives any offsets or counterclaims in any such action, suit or proceeding (other than compulsory counterclaims). The Company hereby consents to service of process by registered mail at the address to which notices are to be given . The Company agrees that its submission to jurisdiction and its consent to service of process by mail is made for the express benefit of the Purchaser. Final judgment against the Company in any such action, suit or proceeding shall be conclusive and may be enforced in other jurisdictions (a) by suit, action or proceeding on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and of the amount of any indebtedness or liability of the Company therein described or (b) in any other manner provided by or pursuant to the laws of such other jurisdiction. Notwithstanding the foregoing, however, the Purchaser and any successors and assigns may at its option bring suit or institute other judicial proceedings against the Company or any of the Company's assets in any state or federal court of the Untied States or in any country or place where the Company or such assets may be found. 9.10. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 9.11. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Agreement may not be used to interpret another agreement, indenture, loan or debt agreement of the Company or an Subsidiary. Any such agreement, indenture, loan or debt agreement may not be used to interpret this Agreement. 19 24 9.12. WAIVER OF JURY TRIAL. THE COMPANY HEREBY WAIVES ITS RIGHT TO TRIAL BY JURY IN ANY LITIGATION, SUIT OR PROCEEDING, IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE SHARES, ANY OTHER TRANSACTION DOCUMENTS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, OR RELATING TO THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT, THEREOF. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 20 25 [THIS PAGE INTENTIONALLY LEFT BLANK] 21 26 STOCK PURCHASE AGREEMENT If this Agreement is satisfactory, please so indicate by signing the applicable attached signature page of this Agreement and delivering such counterpart to the Company, whereupon this Agreement will become binding among the parties hereto in accordance with its terms. CML GROUP, INC., a Delaware corporation By: /s/ John Pound ------------------------ Name: John Pound Title: Chairman & CEO /s/ Glenn E. Davis Exec. V.P. 27 STOCK PURCHASE AGREEMENT PURCHASER SIGNATURE PAGE Accepted and agreed as of the Aggregate Number of date first written above: Shares of Common Stock to be Purchased: 9,909,118 B III CAPITAL PARTNERS, L.P., a Delaware limited partnership Purchase Price: $990,911.80 By: DDJ Capital III, LLC, its General Partner By: DDJ Capital Management, LLC, its Manager By: /s/ Judy K. Mencher ----------------------------- Name: Judy K. Mencher Title: Member Address: c/o DDJ Capital Management, LLC Attn: Wendy Schnipper Clayton 141 Linden Street, Suite 4 Wellesley, MA 02181 Telephone: (617) 283-8500 Telecopy: (617) 283-8541 Nominee (name in which the Units are to be registered, if different than name of Purchaser): GOLDMAN SACHS & COMPANY FFC: BIII CAPITAL PARTNERS, L.P. - --------------------------------------------------------- (Nominee's Name) 28 STOCK PURCHASE PRICE AGREEMENT PURCHASER SIGNATURE PAGE Accepted and agreed as of the Aggregate Number of date first written above: Shares of Common Stock to be Purchased: 1,905,600 Mellon Bank, N.A. solely in its capacity as Trustee for General Motors Employees Domestic Purchase Price: $190,560 Group Pension Trust as directed by DDJ Capital Management, LLC, and not in its individual capacity By: /s/ Bernadette T. Rist ------------------------------- Name: BERNADETTE RIST Title: AUTHORIZED SIGNATORY Address: c/o DDJ Capital Management, LLC Attn: Wendy Schnipper Clayton 141 Linden Street, Suite 4 The decision to participate in this Wellesley, MA 02181 investment, any representations made herein by the participant, and any actions taken hereunder by the participant has/have been made solely at the direction of the investment Telephone: (617) 283-8500 fiduciary who has sole investment Telecopy: (617) 283-8541 discretion with respect to this investment. Nominee (name in which the Units are to be registered, if different than name of Purchaser): MELLON BANK, N.A. SOLELY IN ITS CAPACITY AS TRUSTEE FOR - ------------------------------------------------------- GENERAL MOTORS EMPLOYEES DOMESTIC GROUP PENSION TRUST - ----------------------------------------------------- (Nominee's Name) 29 SCHEDULE 4.1 JURISDICTIONS The Company is qualified, registered or licensed to do business as a foreign corporation in the following jurisdictions: 1. Massachusetts 2. California 30 SCHEDULE 4.2 AUTHORIZATION N O N E 31 SCHEDULE 4.4(b) CAPITALIZATION - OTHER AUTHORIZED CAPITAL STOCK: Common Stock: 120,000,000, $0.10 par value * Preference Stock: 2,000,000, $0.10 par value * As of July 21, 1998, the Company had 50,274,694 shares of Common Stock and -0- shares of Preference Stock issued and outstanding. Such amounts do not include 11,814,718 shares of Common Stock issued on July 27, 1998 pursuant to the terms of the Agreement and the Other Stock Purchase Agreements. OTHER SECURITIES EXERCISABLE OR CONVERTIBLE INTO COMMON STOCK: Shares issuable upon conversion/exercise of or pursuant to: 1. 5-1/2% Subordinated Convertible Debentures Due 2003 ($41,593,000/$25.917 shares): 1,604,854 2. Warrants issued to BankBoston, N.A. on March 11, 1998 as amended July 27, 1998 576,300 3. Third Offering of the Company's 1996 Employee Stock Purchase Plan: 296,332 4. 1982 Stock Option Plan: 465,858 5. 1991 Stock Option Plan: 1,458,388 6. 1993 Director Option Plan: 54,000 7. 1996 Director Option Plan: 227,757 8. Incentive Deferred Compensation Plan: 28,140 9. 15% Secured Convertible Redeemable Subordinated Note due 2003 ($20,000,000/$4.00 share): 5,000,000 32 SCHEDULE 4.5 OUTSTANDING DEBT Outstanding Debt that is permitted by, or disclosed in, the Credit Agreement is incorporated herein by reference. 33 SCHEDULE 4.6 NO MATERIAL ADVERSE CHANGE Items and information that are disclosed in the Credit Agreement is incorporated herein by reference. EX-10.(V) 8 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 10(v) REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of July 27, 1998 by and among CML Group, Inc., a Delaware corporation (the "Company"), and each Holder (as hereinafter defined) executing a signature page hereto. This Agreement is made pursuant to those certain Stock Purchase Agreements dated as of the date hereof by and between the Company and each of the purchasers named therein ( the "Purchase Agreements"). In order to induce the purchasers to enter into the Purchase Agreements, the Company has agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing of the transactions contemplated by the Purchase Agreements. In consideration of the foregoing, the parties hereby agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "ADVICE" has the meaning set forth in Section 4. "AFFILIATE" means, with respect to any specified Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such specified Person. "BUSINESS DAY" means any day other than a day on which banks are authorized or required to be closed in the State of New York. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the common stock, par value $.10 per share, of the Company. "COMPANY" has the meaning set forth in the preamble and shall include the Company's successors by merger, acquisition, reorganization or otherwise. "CONTROLLING PERSONS" has the meaning set forth in Section 6(a). "DAMAGES" has the meaning set forth in Section 6(a). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute, and the rules and regulations of the Commission promulgated thereunder. 2 "HOLDER" means (i) each Person (other than the Company and its Affiliates) who is a signatory to this Agreement and (ii) each Person (other than the Company and its Affiliates) to whom a Holder transfers Securities if such Person acquires such Securities as Registrable Securities. "HOLDERS' COUNSEL" means Goodwin, Procter & Hoar LLP, special counsel to the Holders, or any successor counsel selected by Holders of a majority in interest of the Registrable Securities. "INSPECTORS" has the meaning set forth in Section 4(m). "NASD" has the meaning set forth in Section 4(q). "Nasdaq" has the meaning set forth in Section 4(o). "Objection Notice" has the meaning set forth in Section 4(a). "Objecting Party" has the meaning set forth in Section 4(a). "PERSON" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization, government or other agency or political subdivision thereof, or any other entity of whatever nature. "PIGGY-BACK REGISTRATION" has the meaning set forth in Section 3(a). "PROSPECTUS" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement, and all other amendments and supplements to the prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such prospectus. "PUBLIC OFFERING" means a public offering of Securities registered on Form S-11 or Form S-3 (or any successor or equivalent forms) under the Securities Act for the Company's own or others' account. "PURCHASE AGREEMENTS" means the Securities Purchase Agreements, dated as of the date hereof, between the Company and the Holders pursuant to which the Securities are being issued as amended, modified or supplemented from hereto time, together with any exhibits, schedules or other attachments thereto. "RECORDS" has the meaning set forth in Section 4(m). 2 3 "REGISTRABLE SECURITIES" means the Securities; PROVIDED, HOWEVER, that any Securities shall cease to be Registrable Securities when (i) a Registration Statement covering such Registrable Securities has been declared effective and such Registrable Securities have been disposed of by the holder thereof pursuant to such effective Registration Statement, (ii) such Registrable Securities are transferred by the holder thereof to any Person other than a Holder pursuant to Rule 144 (or any successor rule or similar provision then in effect, but not Rule 144A) under the Securities Act, including a sale pursuant to the provisions of Rule 144(k), or (iii) such Securities shall have ceased to be outstanding. "REGISTRATION EXPENSES" has the meaning set forth in Section 5. "REGISTRATION STATEMENT" means any registration statement of the Company that covers any of the Registrable Securities pursuant to the provisions of this Agreement (including any Shelf Registration Statement), and all amendments and supplements to any such registration statement, including post-effective amendments, in each case including the Prospectus, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "REQUIRED FILING DATE" has the meaning set forth in Section 2(a). "SECURITIES" means (I) all shares of Common Stock held by any Holder, (ii) all shares of Common Stock issued to any Holder upon exercise of any options, warrants or other rights to subscribe for, purchase or otherwise acquire Common Stock and (iii) all shares of Common Stock directly or indirectly issued or issuable in respect of the securities referred to in clauses (i) and (ii) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation, or other reorganization. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, or any successor statute, and the rules and regulations of the Commission promulgated thereunder. "SHELF REGISTRATION STATEMENT" has the meaning set forth in Section 2(a). "SUSPENSION NOTICE" has the meaning set forth in Section 4. "SUSPENSION PERIOD" has the meaning set forth in Section 4. "TARGET EFFECTIVE DATE" means the date 60 days after the earlier of (i) the Required Filing Date or (ii) the date on which the Shelf Registration Statement is actually filed with the Commission. "TARGET EFFECTIVE PERIOD" means the period of time between the date on which a Shelf Registration Statement is actually declared effective and the later of (i) the date which is 24 months following the date hereof, and (ii) the date which is three months after the date on which a Holder 3 4 ceases to be an Affiliate of the Company, provided that the Company first provides each Holder with an opinion of counsel to such effect. SECTION 2. SHELF REGISTRATION. (a) FILING; EFFECTIVENESS. As soon as practicable but not later than the sixtieth (60th) day following the date hereof (the "Required Filing Date"), the Company shall prepare and file with the Commission a "shelf" registration statement (the "Shelf Registration Statement") on the appropriate form for an offering to be made on a continuous basis pursuant to Rule 415 under the Securities Act (or any successor rule or similar provision then in effect) covering all of the Registrable Securities. The Company shall use its best efforts to have the Shelf Registration Statement declared effective on or before the Target Effective Date and to keep such Shelf Registration Statement continuously effective for the Target Effective Period. Any Holder of Registrable Securities shall be permitted to withdraw all or any part of the Registrable Securities from a Shelf Registration Statement at any time prior to the effective date of such Shelf Registration Statement. (b) SUPPLEMENTS; AMENDMENTS. The Company agrees, if necessary, to supplement or amend the Shelf Registration Statement, as required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the Securities Act or as requested (which request shall result in the filing of a supplement or amendment) by any Holder of Registrable Securities to which such Shelf Registration Statement relates, and the Company agrees to furnish to the Holders, Holders' Counsel and any managing underwriter copies of any such supplement or amendment prior to its being used and/or filed with the Commission. (c) LIQUIDATED DAMAGES. If the Shelf Registration Statement is not filed on or before the Required Filing Date, the company shall pay liquidated damages to each Holder in an amount equal to $8,300 beginning on the Required Filing Date. If the Shelf Registration Statement is filed, but has not become effective on or before the Target Effective Date, the Company shall pay liquidated damages to each Holder in an amount equal to $8,300 beginning on the Target Effective Date. The liquidated damages payable by the Company to the Holders as a result of a late filing or a late declaration of effectiveness shall increase to $16,600 one month after the Required Filing Date or the Target Effective Date, as the case may be, and shall thereafter increase to $24,900 at the end of each subsequent one month period for so long as the Shelf Registration Statement is not filed or is not declared effective. If a stop order is imposed or if for any other reason the effectiveness of the Shelf Registration Statement is suspended during the Target Effective Period, then the Company shall pay liquidated damages to each Holder of the Registrable Securities in an amount equal to $8,300 beginning on the date of such stop order or other suspension of effectiveness. The liquidated damages payable by the Company to the Holders as a result of the imposition of a stop order or such other suspension of the effectiveness of the Shelf Registration Statement during the Target Effective Period shall increase to $16,600 one month after the stop order was imposed or the effectiveness of the Shelf Registration Statement was otherwise suspended and shall thereafter increase to $24,900 at the end of each subsequent 4 5 one month period for so long as such stop order remains in effect or the effectiveness of the Shelf Registration Statement continues to be suspended. For purposes of the two preceding sentences, the Holders will not be entitled to receive liquidated damages under this Agreement during a Suspension Period (as hereinafter defined) except to the extent permitted by Section 4 of this Agreement. The Registrable Securities with respect to which liquidated damages shall accrue and be payable in accordance with this Section 2(c) shall be those Registrable Securities held by the Holders which are included or proposed to be included in the Shelf Registration Statement. The liquidated damages payable by the Company to the Holders pursuant to this Section 2(c) shall be deemed to commence accruing on the day on which the event triggering such liquidated damages occurs. Such liquidated damages shall cease to accrue (i) with respect to the liquidated damages payable as a result of the Company's failure to file the Shelf Registration Statement on or prior to the Required Filing Date, on the day after the Shelf Registration Statement is filed, (ii) with respect to the liquidated damages payable as a result of the Company's failure to have the Shelf Registration Statement declared effective on or prior to the Target Effective Date, on the day after the Shelf Registration Statement is declared effective, or (iii) with respect to the liquidated damages payable as a result of the imposition of a stop order or the suspension for any other reason of the effectiveness of the Shelf Registration Statement, on the day after the stop order is withdrawn or the effectiveness of the Shelf Registration Statement is otherwise reinstated. The parties hereto agree that the liquidated damages provided for in this Section 2 constitute a reasonable estimate as of the date hereof of the damages that will be suffered by Holders of Registrable Securities by reason of the failure of the Shelf Registration Statement to be filed, to be declared effective and/or to remain effective, as the case may be, in accordance with this Agreement. However, the right of the Holders to be paid the liquidated damages provided for in this Section 2(c) is not intended to be and shall not be construed or deemed to be an exclusive remedy, it being understood that the Holders shall have the full right to pursue all available remedies at law or in equity for any breach by the Company of any of its obligations under this Agreement. (d) EFFECTIVE REGISTRATION. A registration will not be deemed to have been effected as a Shelf Registration Statement unless the Shelf Registration Statement with respect thereto has been declared effective by the Commission and the Company has complied in all material respects with its obligations under this Agreement with respect thereto; PROVIDED, HOWEVER, that if after the Shelf Registration Statement has been declared effective, the offering of Registrable Securities pursuant to such Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the Commission or any other governmental agency or court, such Shelf Registration Statement will be deemed not to have become effective during the period of such interference (and liquidated damages shall accrue and be payable under Section 2(c)) until the offering of Registrable Securities pursuant to such Shelf Registration Statement may legally resume. If a registration requested pursuant to this Section 2 is deemed not to have been effected, then the Company shall continue to be obligated to effect a registration pursuant to this Section 2. 5 6 (e) SELECTION OF UNDERWRITER. If the Holders so elect, the offering of Registrable Securities pursuant to a Shelf Registration Statement shall be in the form of an underwritten offering. If they so elect, the Holders participating in such Shelf Registration Statement shall select one or more nationally recognized firms of investment bankers to act as the book-running managing underwriter or underwriters in connection with such offering and shall select any additional investment bankers and managers to be used in connection with the offering; PROVIDED, HOWEVER, that such selection shall be subject to the consent of the Company, which consent shall not be unreasonably withheld. SECTION 3. PIGGY-BACK REGISTRATION. (a) REQUEST FOR REGISTRATION. Each time the Company proposes to file a registration statement under the Securities Act with respect to an offering by the Company for its own account or for the account of any of its securityholders of any class of equity security (other than (i) a registration statement on form S-4 or S-8 (or any substitute form that is adopted by the Commission) or (ii) a registration statement filed in connection with an exchange offer or the offering of securities solely to the Company's existing securityholders), then the Company shall give written notice of such proposed filing to each Holder of Registrable Securities as soon as practicable (but in no event less than 30 days before the anticipated filing date), and such notice shall offer such Holder the opportunity to register such number of shares of Registrable Securities as each such Holder may request (which request must be made in writing and shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method of distribution thereof) (a "Piggy-Back Registration"). The Company shall permit, or, if the offering relating to a Piggy-Back Registration is an underwritten offering, shall use its best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Registrable Securities requested to be included in such Piggy-Back Registration to be included on the same terms and conditions as any similar securities of the Company or any other securityholder included therein and shall permit, or use its best efforts to cause such managing underwriter or underwriters to permit, the sale or other disposition of such Registrable Securities in accordance with such Holder's intended method of distribution thereof. Any Holder shall have the right to withdraw its request for inclusion of its Registrable Securities in any registration statement pursuant to this Section 3 by giving written notice to the Company of such withdrawal. The Company may withdraw a Piggy-Back Registration at any time prior to the time it becomes effective, provided that the Company shall give immediate notice of such withdrawal to the Holders who requested Registrable Securities to be included in such Piggy-Back Registration and shall reimburse such Holders for all reasonable out-of-pocket expenses (including counsel fees and expenses) incurred prior to such withdrawal. (b) REDUCTION OF OFFERING. In connection with an underwritten offering where Holders have requested a Piggy-Back Registration pursuant to Section 3(a), the company shall use its best efforts to cause all Registrable Securities requested to be included in such Piggy-Back Registration to be included as provided in Section 3(a). If the managing underwriter or underwriters of any such Piggy-Back Registration which is an underwritten offering have informed, in writing, the Holders requesting inclusion of Registrable Securities in such offering 6 7 that it is their opinion that the total number of shares which the Company, Holders of Registrable Securities and any other Persons participating in such registration intend to include in such offering is such as to materially and adversely affect the success of such offering, then the number of shares to be offered for the account of all Persons (other than the Holders) participating in such Piggy-Back Registration shall be reduced or limited (to zero if necessary) PRO RATA in proportion to the respective number of shares requested to be included in such offering by such Persons to the extent necessary to reduce the total number of shares requested to be included in such offering to the number of shares, if any, recommended by such managing underwriter or underwriters. Although the specific shares of Common Stock disposed of pursuant to a Piggy-Back Registration will cease to be Registrable Securities, the mere registration of Registrable Securities under this Section 3 shall not relieve the Company of its obligation to effect or maintain a Shelf Registration Statement pursuant to Section 2. No failure by the Holders to elect a Piggy-Back Registration under this Section 3 or to complete the sale of Registrable Securities pursuant to the registration statement effected in connection therewith, and no withdrawal of Registrable Securities from a Piggy-Back Registration, shall relieve the Company of any other obligation under this Agreement, including without limitation, the Company's obligations under Sections 5 and 6. SECTION 4. REGISTRATION PROCEDURES. In connection with the obligations of the Company to effect or cause the registration of any Registrable Securities pursuant to the terms and conditions of this Agreement, the Company shall use its best efforts to effect the registration and sale of such Registrable Securities in accordance with the intended method of distribution thereof as quickly as practicable, and in connection therewith: (a) The Company shall prepare and file with the Commission a Registration Statement on the appropriate form under the Securities Act, which Registration Statement shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the Commission to be filed therewith, and use its best efforts to cause such Registration Statement to become effective and remain effective in accordance with the provisions of this Agreement; PROVIDED, HOWEVER, that, at least ten Business Days prior to filing a Registration Statement or Prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of the Registration Statement, the Company shall furnish to the Holders of the Registrable Securities covered by such Registration Statement, Holders' Counsel and the underwriters, if any, draft copies of all such documents proposed to be filed, which documents will be subject to the review of Holders' Counsel and the underwriters, if any, and the Company will not, unless required by law or this Agreement, file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which Holders holding a majority in interest of the Registrable Securities covered by such Registration Statement or the underwriters with respect to such Securities, if any, shall object; PROVIDED, HOWEVER, that any such objection to the filing of any Registration Statement or amendment thereto or any Prospectus or supplement thereto shall be made by 7 8 written notice (the "OBJECTION NOTICE") delivered to the Company no later than ten Business Days after the party or parties asserting such objection (the "OBJECTING PARTY") receives draft copies of the documents that the Company proposes to file. The Objection Notice shall set forth the objections and the specific areas in the draft documents where such objections arise. The Company shall have five Business Days after receipt of the Objection Notice to correct such deficiencies to the satisfaction of the Objecting Party, and will notify each Holder of any stop order issued or threatened by the Commission in connection therewith and shall use its best efforts to prevent the entry of such stop order or, if entered, to have such stop order withdrawn at the earliest possible moment. (b) The Company shall promptly prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep such Registration Statement effective for as long as the Company is required to keep such Registration Statement effective pursuant to the terms hereof; shall cause the Prospectus to be supplemented by any required Prospectus supplement, and, as so supplemented, to be filed pursuant to Rule 424 under the Securities Act; and shall comply with the provisions of the Securities Act applicable to it with respect to the disposition of all Registrable Securities covered by such Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders set forth in such Registration Statement or amendment thereto or such Prospectus or supplement thereto; (c) The Company shall promptly furnish to any Holder and the underwriters, if any, without charge, such number of conformed copies of such Registration Statement and any post-effective amendment thereto and such number of copies of the Prospectus (including each preliminary Prospectus) and any amendments or supplements thereto, any documents incorporated by reference therein and such other documents as any such Holder or underwriter may request in order to facilitate the public sale or other disposition of the Registrable Securities being sold by such Holder. (d) The Company shall, on or prior to the date on which a Registration Statement is declared effective, (i) use its best efforts to register or qualify the Registrable Securities covered by such Registration Statement under the securities or "blue sky" laws of each of the 50 states of the United States (or such jurisdictions as any Holder, Holders' counsel or underwriter may request) or obtain appropriate exemptions therefrom; (ii) do any and all other acts and things which may be necessary or advisable to enable the Holders of Registrable Securities included in such Registration Statement to consummate the disposition of such Registrable Securities in accordance with their intended method of distribution thereof; (iii)use its best efforts to keep each such state securities or "blue sky" registration or qualification (or exemption therefrom) effective during the period in which the Company is required to keep the Registration Statement effective; and (iv) do any and all other acts or things which may be necessary or advisable to enable the Holders of Registrable Securities included in such Registration Statement to complete the disposition in such jurisdictions of such Registrable Securities in accordance with their intended 8 9 method of distribution thereof; PROVIDED, HOWEVER, that the Company shall not be required (A) to qualify to do business in any jurisdiction where it would not otherwise be required to so qualify but for this Section 4(d) or (B) to file any general consent to service of process. (e) The Company shall use its best efforts to cause the Registrable Securities covered by a Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Holders to consummate the disposition of such Registrable Securities in accordance with their intended method of distribution thereof. (f) The Company shall promptly notify each Holder, Holders' Counsel and any underwriter and (if requested by any such Person) confirm such notice in writing, (i) when a Registration Statement or a Prospectus or any post-effective amendment or any Prospectus supplement has been filed and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission or any state securities authority for amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement or the initiation or threatening of any proceedings for that purpose, (iv) of the issuance by any state securities commission or other regulatory authority of any order suspending the registration or qualification or exemption from registration or qualification of any of the Registrable Securities under state securities or "blue sky" laws or the initiation of any proceedings for that purpose, (v) if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering of such Registrable Securities cease to be true and correct in all material respects, and (vi) of the happening of any event which makes any statement of a material fact made in a Registration Statement or related Prospectus untrue or which requires the making of any changes in such Registration Statement or Prospectus so that such Registration Statement or prospectus will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and, as promptly as practicable thereafter, prepare and file an amendment to such Registration Statement with the Commission and furnish to the Holders and any underwriter a supplement or amendment to such Prospectus so that, as thereafter deliverable to the purchasers of such Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (g) The Company shall make generally available to the Holders an earnings statement satisfying the provisions of Section 11(a) of the Securities Act no later than 30 9 10 days after the end of the 12-month period beginning with the first day of the Company's first fiscal quarter commencing after the effective date of a Registration Statement, which earnings statement shall cover said 12-month period, and which requirement will be deemed to be satisfied if the Company timely files complete and accurate information on Forms 10-Q, 10-K and 8-K under the Exchange Act and otherwise complies with Rule 158 under the Securities Act. (h) The Company shall promptly use its best efforts to prevent the issuance of any order suspending the effectiveness of a Registration Statement, and, if any such order suspending the effectiveness of a Registration Statement is issued, shall promptly use its best efforts to obtain the withdrawal of such order at the earliest possible moment. (i) The Company shall, if requested by the managing underwriter or underwriters, if any, Holders' Counsel, or any Holder promptly incorporate in a Prospectus supplement or post-effective amendment such information as such managing underwriter or underwriters or Holder or Holders' Counsel requests to be included therein, including, without limitation, with respect to the Registrable Securities being sold by such Holder to such underwriter or underwriters, the purchase price being paid therefore by such underwriter or underwriters and any other terms of an underwritten offering of the Registrable Securities to be sold in such offering, and the Company shall promptly make all required filings of such Prospectus supplement or post-effective amendment. (j) The Company shall, as promptly as practicable after the filing with the Commission of any document which is incorporated by reference into a Registration Statement (in the form in which it was incorporated), deliver a copy of each such document to each of the Holders and to Holders' Counsel. (k) The Company shall cooperate with the Holders and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (which shall not bear any restrictive legends unless required under applicable law) representing Registrable Securities sold under a Registration Statement to the purchasers thereof, and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriter or underwriters, if any, or such Holders may request and keep available and make available to the Company's transfer agent prior to the effectiveness of such Registration Statement a supply of such certificates. (l) The Company shall enter into such customary agreements (including, if applicable, an underwriting agreement in customary form) and take such other actions as the Holders or the underwriters retained by the Holders participating in an underwritten public offering, if any, may request in order to expedite or facilitate the disposition of Registrable Securities (the Holders may, at their option, require that any or all of the representations, warranties and covenants of the Company to or for the benefit of any underwriters also be made to and for the benefit of the Holders). 10 11 (m) The Company shall promptly make available to each Holder, any underwriter participating in any disposition of Registrable Securities pursuant to a Registration Statement, and any attorney, accountant or other agent or representative retained by any such Holder or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information requested by any such Inspector in connection with such Registration Statement. (n) The Company shall furnish to each underwriter, if any, a signed counterpart, addressed to such underwriter, of (i) an opinion or opinions of counsel to the Company, and (ii) a comfort letter or comfort letters from the company's independent public accountants, each in customary form and covering matters of the type customarily covered by opinions or comfort letters, as the case may be. (o) The Company shall use its best efforts to cause the Registrable Securities included in a Registration Statement (if the company and the Registrable Securities so qualify) (i) to be listed on each national securities exchange, if any, on which similar securities issued by the Company are then listed, or (ii) if similar securities of the Company are not then listed, to be authorized for quotation or listing, as applicable, on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market, Inc.'s ("Nasdaq") National Market. (p) The Company shall provide a CUSIP number for all Registrable Securities covered by a Registration Statement not later than the effective date of such Registration Statement. (q) The Company shall cooperate with each Holder and each underwriter participating in the disposition of Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. ("NASD"). (r) The Company shall, during the period when the Prospectus is required to be delivered under the Securities Act, promptly file all documents required to be filed with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act. (s) The Company shall appoint or maintain a transfer agent and registrar for all Registrable Securities covered by a Registration Statement not later than the effective date of such Registration Statement. (t) In connection with an underwritten offering, the Company shall participate, to the extent reasonably requested by the managing underwriter for the offering or the 11 12 Holders, in customary efforts to sell the securities being offered, including without limitation, participating in "road shows". (u) If a holder proposes to sell a block of Registrable Securities with a value in excess of $5 million, the Company shall make members of the management of the Company available for reasonable selling efforts, including senior management attendance at road shows, provided, however, that the selling Holder or Holders shall reimburse the Company for its reasonable out-of-pocket expenses actually incurred at the request of such selling Holder or Holders in connection with such selling efforts. (v) If the Registrable Securities are of a class of securities that is listed on a national securities exchange, the Company shall file copies of any Prospectus with such exchange in compliance with Rule 153 under the Securities Act so that the Holders shall benefit from the prospectus delivery procedures described therein. In the case of a Shelf Registration Statement, each Holder, upon receipt of any notice (a "Suspension Notice") from the Company of the happening of any event of the kind described in Section 4(f)(vi), shall forthwith discontinue disposition of the Registrable Securities pursuant to the Shelf Registration Statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 4(f) or until such Holder is advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and such Holder has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such Holder will, or will request the managing underwriter or underwriters, if any, to, deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice; PROVIDED, HOWEVER, that the Company shall not give a Suspension Notice until after the Shelf Registration Statement has been declared effective and shall not give more than one Suspension Notice during any period of 12 consecutive months and in no event shall the period from the date on which any Holder receives a Suspension Notice to the date on which any Holder receives either the Advice or copies of the supplemented or amended Prospectus contemplated by Section 4(f) (the "Suspension Period") exceed 30 days. In the event that the Company shall give any suspension Notice, (i) the Company shall use its best efforts and take such actions as are reasonably necessary to render the Advice and end the Suspension Period as promptly as practicable and (ii) the time periods for which a shelf Registration Statement is required to be kept effective pursuant to Section 2 hereof shall be extended by the number of days during the suspension Period. If any Suspension Period exceeds 30 days or more than one Suspension Notice is given during any period of 12 consecutive months, the Company shall pay liquidated damages to each Holder of Registrable Securities in an amount equal to $8,300 beginning on the 31st day of such Suspension Period or the date of such additional suspension Notice, as the case may be. The liquidated damages payable by the Company to the Holders as a result of the continuance of a Suspension Period beyond 30 days or as a result of the giving of more than one Suspension Notice during any 12 months period shall increase to $16,600 one month after the event triggering such liquidated damages and shall thereafter increase by an 12 13 amount equal to $24,900 at the end of each subsequent one month period for so long as the event triggering such liquidated damages has not been eliminated. The Company shall pay the liquidated damages due with respect to any Registrable Securities at the end of each week during which such damages accrue. Liquidated damages shall be paid to the Holders of Registrable Securities entitled to received such liquidated damages by wire transfer in immediately available funds to the accounts designated by such Holders. If any Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (i) the insertion therein of language, in form and substance reasonably satisfactory to such Holder, to the effect that the holding by such Holder of such securities is not to be construed as a recommendation by such Holder of the investment quality of the Company's securities covered thereby and that such holding does not imply that such Holder will assist in meeting any future financial requirements of the Company, or (ii) in the event that such reference to such Holder by name or otherwise is not required by the Securities act or any similar Federal or state securities or "blue sky" statute and the rules and regulations thereunder then in force, the deletion of the reference to such Holder. SECTION 5. REGISTRATION EXPENSES. Any and all expenses incident to the Company's performance of or compliance with this Agreement, including without limitation, all Commission and securities exchange, Nasdaq or NASD registration, listing and filing fees, all fees and expenses incurred in connection with compliance with state securities or "blue sky" laws (including reasonable fees and disbursements of counsel for any underwriters or Holder in connection with the state securities or "blue sky" qualifications of the Registrable Securities), printing expenses, messenger and delivery expenses, internal expenses (including, without limitation, all salaries and expenses of the Company's officers and employees performing legal or accounting duties), all expenses for word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, the fees and expenses incurred in connection with the listing of the Registrable Securities, the fees and disbursements of counsel for the Company and of the independent certified public accountants of the Company (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letter requested pursuant to Section 4(n), Securities Act liability insurance (if the Company elects to obtain such insurance), the reasonable fees and expenses of any special experts or other Persons retained by the Company in connection with any registration, the reasonable fees and disbursements of Holders' counsel and any reasonable out-of-pocket expenses of the Holders and their agents, including any reasonable travel costs (but excluding underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities) (all such expenses being herein called "Registration Expenses"), will be borne by the Company whether or not the Shelf Registration Statement or Piggy-Back Registration to which such expenses relate becomes effective. SECTION 6. INDEMNIFICATION AND CONTRIBUTION. 13 14 (a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each Holder, its partners, officers, directors, trustees, stockholders, employees, agents and investment advisers, and each Person who controls such Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under common control with, or is controlled by, such Holder, together with the partners, officers, directors, trustees, stockholders, employees, agents and investment advisors of such controlling Person (collectively, the "CONTROLLING PERSONS"), from and against all losses, claims, damages, liabilities and expenses (including, without limitation, any legal or other fees and expenses incurred by an Holder or any such Controlling Person in connection with defending or investigating any action or claim in respect thereof) (collectively, the "DAMAGES") to which such Holder, its partners, officers, directors, trustees, stockholders, employees, agents and investment advisers, and any such Controlling Person, may become subject under the Securities Act or otherwise, insofar as such Damages (or proceedings in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Registrable Securities were registered under the Securities Act, including all documents incorporated therein by reference, or are caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or are caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that the Company shall not be liable for Damages to any Holder under this Section 5(a) to the extent that any such Damages (i) arise out of or are based upon any such untrue statement or omission which is based upon information relating to such Holder furnished in writing to the Company by such Holder expressly for use in any such Registration Statement (or any amendment thereto) or Prospectus (or amendment or supplement thereto); or (ii) were caused by the fact that such Holder sold Securities to a Person as to whom it shall be established that there was not sent or given, or deemed sent or given pursuant to Rule 153 under the Securities Act, at the time of or prior to the written confirmation of such sale, a copy of the Prospectus as then amended or supplemented if, and only if, (a) the Company has previously furnished copies of such amended or supplemented Prospectus to such Holder and (b) such Damages were caused by any untrue statement or omission or alleged untrue statement or omission contained in the Prospectus so delivered which was corrected in such amended or supplemented Prospectus. In connection with an underwritten offering, the Company will indemnify the underwriters thereof, their officers and directors and each Person who controls such underwriters (within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders of Registrable Securities except with respect to information provided by the underwriter specifically for inclusion therein. (b) INDEMNIFICATION BY THE HOLDERS. Each holder agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors and officers and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act 14 15 or Section 20 of the Exchange Act from and against all Damages to the same extent as the foregoing indemnity from the Company to such Holder, but only to the extent such Damages arise out of or are based upon any untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) or Prospectus (or any amendment or supplement thereto) or are caused by any omission to state therein a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, which untrue statement or omission is based upon information relating to such Holder furnished in writing to the Company by such Holder expressly for use in any such Registration Statement (or any amendment thereto) or any such Prospectus (or any amendment or supplement thereto); PROVIDED, HOWEVER, that such Holder shall not be obligated to provide such indemnity to the extent that such Damages result from the failure of the Company to promptly amend or take action to correct or supplement any such Registration Statement or Prospectus on the basis of corrected or supplemental information furnished in writing to the Company by such Holder expressly for such purpose. In no event shall the liability of any Holder of Registrable Securities hereunder be greater in amount than the amount of the proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) INDEMNIFICATION PROCEDURES. In case any proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to either paragraph (a) or (b) above, such Person (the "indemnified party") shall promptly notify the Person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceedings and shall pay the fees and disbursements of such counsel relating to such proceeding. The failure of an indemnified party to notify the indemnifying party with respect to a particular proceeding shall not relieve the indemnifying party from any obligation or liability (i) which it may have pursuant to this Agreement if the indemnifying party is not materially prejudiced by such failure to so notify it or (ii) which it may otherwise have pursuant to this Agreement. The failure of an indemnified party to notify the indemnifying party with respect to a particular proceeding shall not relieve the indemnifying party from any obligation or liability (i) which it may have pursuant to this Agreement if the indemnifying party is not substantially prejudiced by such failure to so notify it or (ii) which it may have otherwise than pursuant to this Agreement. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, or (ii) the indemnifying party fails promptly to assume the defense of such proceeding or fails to employ counsel reasonably satisfactory to such indemnified party, or (iii) (A) the named parties to any such proceeding (including any impleaded parties) include both such indemnified party or an Affiliate of such indemnified party and any indemnifying party or an Affiliate of such indemnifying party, (B) there may be one or more defenses available to such indemnified party or any Affiliate of such indemnified party that are different from or additional to those available to any indemnifying party or any Affiliate of any indemnifying party and (C) such indemnified party shall have been advised by such counsel that there may exist a conflict of interest between 15 16 or among such indemnified party or any Affiliate of such indemnified party and such indemnifying party or any Affiliate of such indemnifying party, in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel of its choice at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the indemnifying party, it being understood, however, that unless there exists a conflict among indemnified parties, the indemnifying parties shall not, in connection with any one such proceeding or separate but substantially similar or related proceedings in the same jurisdiction, arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for such indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify each indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of each indemnified party, effect any settlement of any pending or threatened proceeding in respect of which such indemnified party is a party, and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding with no payment by such indemnified party of consideration in connection with such settlement. (d) CONTRIBUTION. If the indemnification from the indemnifying party provided for in this Section 6 is found, pursuant to a final judicial determination not subject to appeal, to be unavailable to an indemnified party hereunder or insufficient in respect of any Damages incurred by such indemnified party, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the Damages paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative fault of the indemnifying party and the indemnified parties in connection with the actions or omissions that resulted in such Damages, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action or omission in question, including any untrue or alleged untrue statement of a material fact of the omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the Damages referred to above shall be deemed to include, subject to the limitations set forth in Section 6(c), any legal or other expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just or equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 6(d), no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public (less any 16 17 underwriting discounts or commissions) exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no selling Holder shall be required to contribute any amount in excess of the amount by which the total net proceeds received by such selling Holder with respect to Registrable Securities sold by such selling Holder exceeds the amount of any damages which such selling Holder has otherwise been required to pay by reason of such untrue statement or alleged untrue statement or omission or alleged omission. Each Holder's obligation to contribute pursuant to this Section 6(d) is several and not joint and shall be determined by reference to the proportion that the proceeds of the offering received by such Holder bears to the total proceeds of the offering received by all the Holders. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 6 are not exclusive and shall not limit any rights or remedies that may otherwise be available to any indemnified party at law or in equity. Notwithstanding the foregoing, if indemnification is available under paragraph (a) or (b) of this Section 6, the indemnifying parties shall indemnify each indemnified party to the full extent provided in such paragraphs without regard to the relative fault of said indemnifying party or indemnified party or any other equitable consideration provided for in this Section 6(d). SECTION 7. RULE 144. The Company covenants that it will file any reports required to be filed by it under the Securities Act and the Exchange Act, and the rules and regulations adopted by the Commission thereunder (or, if the Company is not required to file such reports, it will, upon the request of any Holder, make publicly available other information so long as necessary to permit sales of the Registrable Securities under Rule 144 under the Securities Act), and it will take such further action as any Holder may request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any successor rule or similar provision or regulation hereafter adopted by the Commission. Upon the request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. SECTION 9. MISCELLANEOUS. (a) NO INCONSISTENT AGREEMENTS. The Company has not entered into nor will the Company on or after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. 17 18 (b) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least a majority in interest of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or consent; PROVIDED, HOWEVER, that, no amendment, modification, supplement, waiver or consent to any departure from the provisions of Section 4 hereof (other than any immaterial amendment, modification, supplement, waiver or consent) shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder. (c) NOTICES. All notices and other communications provided for or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or sent by telecopier, registered or certified mail (return receipt requested), postage prepaid or courier to the parties at their respective addresses set forth on the signature pages hereof (or at such other address for any party as shall be specified by like notice, provided that notices of a change of address shall be effective only upon receipt thereof). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; by confirmed receipt of transmission, if telecopied; and on the next Business Day if timely delivered to a courier guaranteeing overnight delivery. (d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders. If any transferee of any Holder shall acquire Registrable Securities in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such person shall be entitled to receive the benefits hereof. (e) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts without regard to principles or rules of conflicts of law. 18 19 (h) SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Holders shall be enforceable to the fullest extent permitted by law. (i) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final expression of their agreement and is intended to be the complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (j) ATTORNEYS' FEES. In any action or proceeding brought to enforce any provision of this Agreement or where any provision hereof is validly asserted as a defense, the successful party shall, to the extent permitted by applicable law, be entitled to recover reasonable attorneys' fees in addition to any other available remedy. (k) FURTHER ASSURANCES. Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. (l) REMEDIES. In the event of a breach or a threatened breach by any party to this Agreement of its obligations under this Agreement, any party injured or to be injured by such breach will be entitled to specific performance of its rights under this Agreement or to injunctive relief, in addition to being entitled to exercise all rights provided in this Agreement and granted by law. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that remedies at law for violations hereof, including monetary damages, are inadequate and that the right to object in any action for specific performance or injunctive relief hereunder on the basis that a remedy at law would be adequate is waived. [Remainder of Page Intentionally Left Blank] 19 20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. CML GROUP, INC. By: /s/ John Pound -------------------------- Name: John Pound Title: Chairman & CEO /s/ Glenn E. Davis ------------------------------ Name: Glenn E. Davis Title: Exec. V.P. Notice Information: Mr. Glenn E. Davis CML Group, Inc. 524 Main Street Acton, Massachusetts 01720 Phone: (978) 264-4155 Fax: (978) 264-4073 21 REGISTRATION RIGHTS AGREEMENT PURCHASER SIGNATURE PAGE B III CAPITAL PARTNERS, L.P., a Delaware limited partnership By: DDJ CAPITAL III, LLC, its General Partner By: DDJ CAPITAL MANAGEMENT, LLC, its Manager By: /s/ Judy K. Mencher ------------------------------------ Name: Judy K. Mencher Title: Member Notice Information: c/o DDJ Capital Management, LLC Attn: Wendy Schnipper Clayton, Esq. 141 Linden Street, Suite 4 Wellesley, Massachusetts 02181 Phone: (781) 283-8500 Fax: (781) 283-8541 22 REGISTRATION RIGHTS AGREEMENT PURCHASER SIGNATURE PAGE Mellon Bank, N.A., solely in its capacity as Trustee for General Motors Employees Domestic Group Pension Trust as directed by DDJ Capital Management, LLC, and not in its individual capacity By: /s/ Bernadette Rist ------------------------------------ Name: BERNADETTE RIST Title: AUTHORIZED SIGNATORY Notice Information: c/o DDJ Capital Management, LLC Attn: Wendy Schnipper Clayton, Esq. 141 Linden Street, Suite 4 Wellesley, Massachusetts 02181 Phone: (781) 283-8500 Fax: (781) 283-8541 The decision to participate in this investment, any representations made herein by the participant, and any actions taken hereunder by the participant has/have been made solely at the direction of the investment fiduciary who has sole investment discretion with respect to this investment. EX-10.(W) 9 COMMON STOCK PURCHASE WARRANT NO. 3 1 CML GROUP, INC. AMENDMENT NO. 1 TO COMMON STOCK PURCHASE WARRANT NO. 3 AMENDMENT NO. 1, dated as of July 27, 1998, to the Common Stock Purchase Warrant No. 3, dated as of March 11, 1998, (the "WARRANT"), executed by CML GROUP, INC., a Delaware corporation ("COMPANY"), in favor of FSC Corp. ("HOLDER"). The Company and the Holder hereby agree as follows: 1. The number of shares of Common Stock for which the Warrant shall be exercisable as of the date of this Amendment No. 1 ("AMENDMENT") shall be 576,300. The first paragraph of the Warrant is hereby amended accordingly. 2. The following new ss.7.1 is hereby added to the Warrant in appropriate order: SS.7.1. GENERAL. If (and on each occasion that) at any time during the period commencing July 27, 1998 and ending on the earlier to occur of August 1, 1999 or the date all the obligations under the Credit Agreement have been paid in full there shall occur any issuance or sale of any shares of Common Stock (including pursuant to any options, warrants or other rights exercisable for shares of Common Stock) or any shares of other classes of capital stock of the Company or other securities or rights then convertible into or exercisable for shares of Common Stock, or there shall be any adjustment to any conversion rate for any convertible securities convertible into or exercisable for Common Stock, so that in any such case the total number of shares of Common Stock on a Fully-Diluted Basis immediately following such issuance, sale or adjustment exceeds the total number of shares of Common Stock on a Fully-Diluted Basis as of July 27, 1998 immediately following the effectiveness of Amendment No. 1 to this Warrant, the issuance of the July 1998 Securities and the cancellation of certain Warrants issued to Rothschild Recovery Group, L.P., then the number of shares of Common Stock to be received by the holder of this Warrant shall be appropriately and automatically adjusted such that, with respect to the unexercised portion of this Warrant the proportion of (a) the number of shares of Common Stock issuable hereunder immediately prior to such event or transaction to (b) the total number of shares of Common Stock of the Company on a Fully-Diluted Basis immediately prior to such event or transaction is equal to the proportion of (x) the number of shares of Common Stock issuable hereunder immediately after such event or transaction to (y) the total number of shares of Common Stock on a Fully-Diluted Basis immediately after such event or transaction and the Exercise Price shall be appropriately adjusted such that the aggregate Exercise Price for the total number of shares of Common Stock of the Company issuable hereunder immediately prior to such event or transaction is equal to the aggregate Exercise Price for the total number of shares 2 of Common Stock of the Company issuable hereunder immediately after such event or transaction. No adjustment to the number of shares of Common Stock to be received by the holder of this Warrant or to the Exercise Price shall be made pursuant to this ss.7.1 as a result of any transaction for which an adjustment shall be required under ss.6, the other provisions of ss.7 or ss.8. For purposes of this ss.7.1, any amendment to the exercise or conversion price or any other re-pricing of any of the Excluded Securities shall constitute an issuance of securities exercisable for or convertible into Common Stock. Upon any such amendment or re-pricing, such securities shall no longer constitute Excluded Securities hereunder. The existing provisions of ss.7 shall be re-numbered (i.e. ss.7.2 ET SEQ.), as appropriate. 1. The following new defined terms are hereby added to ss.12: EXCLUDED SECURITIES means the 5 1/2% Subordinated Debentures Due 2003 of the Company. FULLY-DILUTED BASIS means, with respect to the Common Stock of the Company at any time, the number of issued and outstanding shares of Common Stock at such time, calculated assuming (i) the exercise in full of the Warrants (as defined in the Warrant Agreement), and (ii) the conversion into shares of Common Stock of all shares of other classes of capital stock of the Company or other securities then convertible into shares of Common Stock (other than Excluded Securities) and (iii) the exercise in full of all options, warrants, convertible securities or other rights for the issuance of shares of Common Stock (other than Excluded Securities). JULY 1998 SECURITIES means, collectively, (i) the Secured Redeemable Subordinated Note, dated July 27, 1998, issued by the Company to the State of Wisconsin Investment Board, and (ii) the 11,814,718 shares of Common Stock of the Company issued by the Company as of July 27, 1998 to certain funds advised or managed by DDJ Capital Management, LLC. 1. The Warrant Agreement is hereby amended in each of the following respects: a. the reference to "400,000" set forth in the definition of "Minimum Number" is hereby amended to read "200,000"; and b. the reference to "$1,000,000" set forth in ss.8.1(a)(i) is hereby amended to read "$500,000." 1. The Company hereby represents and warrants to the Holder and covenants with the Holder that: a. The SCHEDULE attached hereto lists and describes the authorized capital stock of the Company on and as of the date hereof, and all securities exercisable for or convertible into capital stock of the Company (other than Excluded Securities), after giving effect to this Amendment, the issuance of the July 1998 Securities 3 and the cancellation of Warrants issued to Rothschild Recovery Group, L.P.; b. the execution and delivery by the Company of this Agreement and the performance by the Company of its agreements and obligations under this Agreement, the Warrant Agreement and the Warrant have been duly and properly authorized by all necessary corporate or other action on the part of the Company, and do not and will not conflict with, result in any violation of, or constitute any default under (i) any provision of any governing document of the Company, (ii) any contractual obligation of the Company or (iii) any applicable law; c. each of this Amendment, the Warrant Agreement and the Warrant, as amended hereby, constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, reorganization, insolvency, moratorium or other similar laws, and to general equitable principles; and d. all obligations of the Company under the Warrant Agreement and the Warrant are hereby ratified and confirmed in all respects. 1. Except as otherwise expressly provided herein, all of the terms, conditions and provisions of the Warrant and the Warrant Agreement, and all the rights of the Holder thereunder, shall remain unchanged. 4 IN WITNESS WHEREOF, the parties hereto have caused this AMENDMENT NO. 1 TO COMMON STOCK PURCHASE WARRANT NO. 3 to be executed by their respective authorized officers as of the date first above written. COMPANY: HOLDER: CML GROUP, INC. FSC CORP. By: _____________________________ By: __________________________ Name: Name: Title: Title EX-10.(X) 10 COMMON STOCK PURCHASE WARRANT NO. 1 1 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OR CONVERSION OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT OR IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE 1933 ACT. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OR CONVERSION OF THIS WARRANT ARE SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN A WARRANT PURCHASE AGREEMENT, DATED AS OF MARCH 11, 1998. THE COMPANY WILL FURNISH COPIES OF SUCH AGREEMENT TO THE HOLDER OF THIS WARRANT UPON WRITTEN REQUEST. CML GROUP, INC. 524 Main Street Acton, Massachusetts 01720 COMMON STOCK PURCHASE WARRANT Dated as of March 11, 1998 Void after Warrant Expiration Date No. 1 Common Stock THIS CERTIFIES that Rothschild Recovery Fund, L.P. (the "ORIGINAL HOLDER"), or registered assigns, is entitled, at any time during the Warrant Exercise Period (as hereinafter defined), to subscribe for and purchase from CML GROUP, INC., a Delaware corporation (including any corporation which shall succeed to or assume the obligations of the company hereunder, the "COMPANY"), up to 810,870 fully paid and non-assessable shares of the Company's Common Stock (as defined below), at an initial purchase (footnote continued from previous page) 2 price per share of $.10 (such price per share as adjusted from time to time as provided herein is referred to herein as the "EXERCISE PRICE"). The number and character of such shares of Common Stock and the Exercise Price are subject to adjustment as provided herein. This Warrant was originally issued by the Company to the Original Holder under the terms of, and as provided and contemplated by, that certain Warrant Purchase Agreement, dated as of March 11, 1998 (herein, as so amended and from time to time in effect, called the "WARRANT AGREEMENT"), between the Company, the Original Holder, and the other parties thereto. Copies of the Warrant Agreement are on file and available for inspection at the principal office of the Company or at such other office of the Company as the Company shall designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company. This Warrant is subject to the following terms and conditions: SS.1. DEFINITIONS. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: COMMON STOCK shall mean and include (i) the Company's Common Stock, $.10 par value per share, (ii) any other capital stock of any class or classes (however designated) of the Company, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating distributions after the payment of dividends and distributions on any shares entitled to preference, and (iii) any other securities into which or for which any of the securities described in clauses (i) or (ii) above have been converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. COMPANY shall have the meaning set forth in the first introductory paragraph. CREDIT AGREEMENT shall mean the Revolving Credit Agreement, dated as of April 17, 1996, by and among the (footnote continued from previous page) 3 Company, certain of the Company's subsidiaries, the Original Holder, certain other lenders party thereto and the Administrative Agent (as defined therein), as amended and in effect from time to time. EXERCISE PRICE shall have the meaning set forth in the first introductory paragraph. EXERCISE SHARES shall have the meaning set forth in ss.2.1 hereof. ORIGINAL HOLDER shall have the meaning set forth in the first introductory paragraph. ORIGINAL ISSUE DATE shall mean March 11, 1998. OTHER SECURITIES shall mean any stock (other than Common Stock) and other securities of the Company or any other entity (corporate or otherwise) which (i) the holder of this Warrant at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock, or (ii) at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or other securities, in each case pursuant to ss.ss.6, 7 or 8 hereof. WARRANT AGREEMENT shall have the meaning set forth in the second introductory paragraph. WARRANT EXERCISE PERIOD shall mean the period beginning on the date of this Warrant and ending on the Warrant Expiration Date. WARRANT EXPIRATION DATE shall have the meaning set forth in ss.2.4 hereof. WARRANT STOCK shall mean: (i) the Company's Common Stock authorized as at the date of this Warrant and issuable upon the exercise or conversion of this Warrant or any warrants delivered in substitution or exchange therefor; and (ii) shall include also any other capital stock of any other class which may become and be issuable upon such exercise or conversion. SS.2. EXERCISE OF WARRANT. (footnote continued from previous page) 4 SS.2.1. EXERCISE. This Warrant may be exercised prior to its expiration pursuant to ss.2.4 hereof by the holder hereof at any time or from time to time, by surrender of this Warrant, with the form of subscription attached as EXHIBIT A hereto duly executed by such holder, to the Company at its principal office, accompanied by payment, by certified or official bank check payable to the order of the Company or by wire transfer to its account, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then being exercised by the Exercise Price then in effect. In the event the Warrant is not exercised in full, the Company, at its expense, will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares (without giving effect to any adjustment therein) for which this Warrant shall have been exercised. Upon any exercise of this Warrant, in whole or in part, the holder hereof may pay the aggregate Exercise Price with respect to the shares of Common Stock for which this Warrant is then being exercised (collectively, the "EXERCISE SHARES") by surrendering its rights to a number of Exercise Shares having a fair market value in excess of the aggregate Exercise Price for such Exercise Shares that is equal to or greater than the required aggregate Exercise Price, in which case the holder hereof would receive the number of Exercise Shares to which it would otherwise be entitled upon such exercise, less the surrendered shares. For purposes of this ss.2.1, the fair market value of one share of Common Stock as at any date shall be equal to the average of the closing prices (if listed on a stock exchange or quoted on the NASDAQ National Market System or any successor thereto) or the average of the bid and asked prices (if quoted on NASDAQ or otherwise publicly traded) of the Common Stock on the five trading days preceding such date. SS.2.2. CONFLICT WITH OTHER LAWS. Any other provisions hereof to the contrary notwithstanding, no holder of this Warrant that is a subsidiary of a bank (footnote continued from previous page) 5 holding company shall be entitled to exercise this Warrant to purchase any share or shares of Common Stock if, under any law or any regulation, rule or other requirement of any governmental authority at any time applicable to such holder or any of its affiliates, (a) as a result of such purchase, such holder and all of its affiliates, taken as a whole, would own, control or have power to vote a greater quantity of securities of any kind than such holder and its affiliates shall be permitted to own, control or have power to vote, or (b) such purchase would not be permitted. For purposes of this ss.2.2, a written statement of such holder or its affiliate exercising this Warrant, delivered upon surrender of the Warrant to the effect that such holder or its affiliate is legally entitled to exercise its right under this Warrant to purchase securities and that such purchase will not violate the prohibitions set forth in the preceding sentence, shall be conclusive and binding upon the Company and shall absolutely obligate the Company to deliver certificates representing the shares of Common Stock so purchased in accordance with the other provisions hereof. SS.2.3. WARRANT AGENT. In the event that a bank or trust company shall have been appointed as trustee for the holder of this Warrant pursuant to ss.6.2 hereof, such bank or trust company shall have all the powers and duties of a warrant agent appointed pursuant to ss.16 hereof and shall accept, in its own name for the account of the Company or such successor entity as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this ss.2. SS.2.4. TERMINATION. This Warrant shall terminate upon the earlier to occur of (i) exercise in full, or (ii) March 11, 2008 (the "WARRANT EXPIRATION DATE"). SS.3. REGISTRATION RIGHTS. The original holder of this Warrant and its Permitted Transferees have the right to cause the Company to register shares of Warrant Stock issued upon exercise or conversion hereof under the Securities Act and any blue sky or securities laws of any jurisdictions within the United States at the time and in the manner specified in ss.8 of the Warrant Agreement. (footnote continued from previous page) 6 SS.4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise or conversion of this Warrant or any portion thereof. With respect to any fraction of a share called for upon the exercise or conversion of this Warrant or any portion thereof, an amount equal to such fraction multiplied by the then current fair market value of a share of Warrant Stock (as determined in good faith by the Board of Directors of the Company) shall be paid to the holder hereof in cash by the Company. SS.5. CHARGES, TAXES AND EXPENSES. Issuance of certificates for shares of Warrant Stock upon the exercise or conversion of this Warrant or any portion thereof shall be made without charge to the holder hereof for any issue or transfer taxes or any other incidental expenses in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant; PROVIDED, HOWEVER, that any income taxes or capital gains taxes or similar taxes shall be payable by the holder of this Warrant. SS.6. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. SS.6.1. CERTAIN ADJUSTMENTS. In case at any time or from time to time the Company shall (a) effect a capital reorganization, reclassification or recapitalization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then in each such case, the holder of this Warrant, on the exercise hereof as provided in ss.2 hereof at any time after the consummation of such reorganization, recapitalization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or effective date, the stock and Other Securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in ss.ss.7 and 8 hereof. SS.6.2. APPOINTMENT OF TRUSTEE FOR WARRANT HOLDERS UPON DISSOLUTION. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall, at its expense, deliver or cause to be delivered the stock and Other Securities and property (including cash, where applicable) receivable by the holders of this Warrant after the effective date of such dissolution pursuant to this ss.6 to a bank or trust company having its principal office in Boston, Massachusetts, as trustee for the holder or holders of this Warrant. (footnote continued from previous page) 7 SS.6.3. CONTINUATION OF TERMS. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this ss.6, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and Other Securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or Other Securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in ss.9 hereof. SS.7. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The Exercise Price and number of shares of Warrant Stock issuable upon exercise or conversion hereof shall be subject to adjustment from time to time at any time after the Original Issue Date as follows: SS.7.1. ADJUSTMENTS FOR STOCK DIVIDENDS, STOCK SPLITS AND COMBINATIONS. If (and on each occasion that) the Company shall, at any time after the Original Issue Date, (a) issue any shares of Common Stock as a dividend or distribution, or (b) issue any shares of Common Stock in subdivision of outstanding shares of Common Stock by reclassification or otherwise, or (c) combine outstanding shares of Common Stock by reclassification or otherwise, the then current number of shares of Warrant Stock issuable upon exercise or conversion hereof shall be proportionately adjusted to an amount equal to the number of shares of Warrant Stock the holder hereof would have received had such holder exercised or converted this Warrant immediately prior to such event, plus the number of shares of Common Stock the holder would have received in connection with such event and the Exercise Price shall be proportionately adjusted so that the aggregate Exercise Price is the same after as before such adjustment in the number of shares of Warrant Stock issuable hereunder. SS.7.2. ADJUSTMENTS FOR CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case the Company shall, at any time after the Original Issue Date, declare a dividend or make a distribution upon the Common Stock payable otherwise than in Common Stock, then the holder hereof will be entitled to receive (and the Company shall distribute to such holder) on the date thereof the dividend or distribution to which such holder would have been entitled if such holder had exercised this Warrant in full on or prior to the declaration of such dividend or (footnote continued from previous page) 8 the making of such distribution so as to be entitled thereto. If the Company is prohibited by applicable law from making any such dividend or distribution to the holder hereof on the date of such dividend or distribution in accordance with the prior sentence, then the holder hereof, upon the exercise or conversion of any of the rights represented by this Warrant, will be entitled to receive the number of shares of Warrant Stock being purchased upon such exercise or conversion and, in addition and without further payment, the cash, stock or other securities and other property which the holder hereof would have received by way of dividends and distributions (otherwise than in Common Stock) if such holder (a) had exercised or converted this Warrant immediately prior to the declaration of such dividend or the making of such distribution so as to be entitled thereto, and (b) had retained all dividends in stock or securities payable in respect of such Common Stock or in respect of any stock or securities paid as dividends and distributions and originating directly or indirectly from such Common Stock. SS.8. ADJUSTMENTS FOR ISSUANCE OF OTHER SECURITIES. In case any Other Securities shall have been issued, or shall then be subject to issue upon the conversion or exchange of any stock (or Other Securities) of the Company (or any other issuer of Other Securities or any other entity referred to in ss.6 hereof) or to subscription, purchase or other acquisition pursuant to any rights or options granted by the Company (or such other issuer or entity), the holder hereof shall be entitled to receive upon exercise hereof such amount of Other Securities (in lieu of or in addition to Common Stock) as is determined in accordance with the terms hereof, treating all references to Common Stock herein as references to Other Securities to the extent applicable, and the computations, adjustments and readjustments provided for in ss.7 and this ss.8 with respect to the number of shares of Warrant Stock issuable upon exercise of this Warrant shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable on the exercise of the Warrant, so as to provide the holder of the Warrant with the benefits intended by ss.7 and this ss.8 and the other provisions of this Warrant. SS.9. NO DILUTION. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger or dissolution, avoid or seek to avoid the observance or performance of any of the terms of the Warrant. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of the Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of stock on the exercise of the Warrant from time to time outstanding, (c) will not issue any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding up, unless the rights of the holders thereof with respect to dividends and distributions shall be limited to a fixed sum or percentage of par value in respect of participation in (footnote continued from previous page) 9 dividends and in any such distribution of assets, and (d) will not transfer all or substantially all of its properties and assets to any other entity (corporate or otherwise), or consolidate with or merge into any other entity or permit any such entity to consolidate with or merge into the Company (if the Company is not the surviving entity), unless such other entity shall expressly assume in writing and will be bound by all the terms of this Warrant and the Warrant Agreement. SS.10. ACCOUNTANTS' CERTIFICATE AS TO ADJUSTMENTS. In the case of each event that may require any adjustment or readjustment in the shares of Warrant Stock issuable on the exercise of this Warrant, the Company at its expense will promptly prepare a certificate setting forth such adjustment or readjustment, or stating the reasons why no adjustment or readjustment is being made, and showing, in detail, the facts upon which any such adjustment or readjustment is based, including a statement of (a) the number of shares of the Company's Common Stock then outstanding on a fully diluted basis, and (b) the number of shares of Warrant Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted and readjusted (if required by ss.7 or ss.8) on account thereof. The Company will forthwith mail a copy of each such certificate to each holder of a Warrant, and will, on the written request at any time of any holder of a Warrant, furnish to such holder a like certificate setting forth the calculations used to determine such adjustment or readjustment. At its option, the holder of a Warrant may confirm the adjustment noted on the certificate by causing such adjustment to be computed by an independent certified public accountant at the expense of the Company. SS.11. NOTICES OF RECORD DATE. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any Other Securities or property, or to receive any other right; or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or any consolidation or merger of the Company with or into any other Person; or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, and in each such event, the Company will mail or cause to be mailed to the holder of this Warrant a notice specifying (a) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (b) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is anticipated to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice (footnote continued from previous page) 10 shall be mailed at least thirty (30) days prior to the date specified in such notice on which any such action is to be taken. SS.12. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. Sufficient shares of authorized but unissued Common Stock of the Company have been reserved by appropriate corporate action in connection with the prospective exercise of this Warrant. The issuance of this Warrant or the shares of Warrant Stock will not require any further corporate action by the stockholders or directors of the Company, will not be subject to pre-emptive rights in any present or future stockholders of the Company and will not conflict with any provision of any agreement to which the Company is a party or by which it is bound, and such Common Stock, when issued upon exercise of this Warrant in accordance with their terms or upon such conversion, will be duly authorized, fully paid and non-assessable. SS.13. NO RIGHTS OR RESPONSIBILITIES AS SHAREHOLDER. This Warrant neither entitles the holder hereof to any rights, nor subjects the holder hereof to any responsibilities, as a shareholder of the Company. SS.14. EXCHANGE. This Warrant is exchangeable, upon the surrender hereof by the registered holder at the principal office of the Company, for new warrants of like tenor and date representing in the aggregate the right to purchase the number of shares of Warrant Stock purchasable hereunder, each of such new warrants to represent the right to purchase such number of shares of Warrant Stock as shall be designated by said registered holder at the time of such surrender. SS.15. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new warrant of like tenor and date, in lieu of this Warrant. SS.16. WARRANT AGENT. The Company may, by written notice to the holder of this Warrant, appoint an agent having an office in Boston, Massachusetts for the purpose of issuing Common Stock on the exercise of this Warrant pursuant to ss.2 hereof, and exchanging or replacing this Warrant pursuant to this Warrant and the Warrant Agreement, or any of the foregoing, and thereafter any such (footnote continued from previous page) 11 issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. SS.17. REMEDIES. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. SS.18. TRANSFER OF WARRANT. This Warrant and all rights hereunder are transferable to any Permitted Transferee (as such term is defined in the Warrant Agreement), in whole or in part, at the office or agency of the Company by the registered holder hereof in person or by a duly authorized attorney, upon surrender of this Warrant together with an assignment hereof in the form of EXHIBIT B attached hereto properly endorsed. Until transfer hereof on the registration books of the Company, the Company may treat the registered holder hereof as the owner hereof for all purposes. SS.19. COMMUNICATIONS AND NOTICES. All communications and notices hereunder must be in writing, either delivered in hand or sent by first-class mail, postage prepaid, or sent by telecopier, and, if to the Company, shall be addressed to it at the address set forth on the first page hereof, or at such other address as the Company may hereafter designate in writing by notice to the registered holder of this Warrant, and, if to such registered holder, addressed to such holder at the address of such holder as shown on the books of the Company. SS.20. SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for the taking of any action required or the expiration of any right granted herein shall be a Sunday or a Saturday or shall be a legal holiday or a day on which banking institutions in Boston, Massachusetts, are authorized or required by law to remain closed, then such action may be taken or right may be exercised on the next succeeding day which is not a Sunday, a Saturday or a legal holiday and not a day on which banking institutions in Boston, Massachusetts, are authorized or required by law to remain closed. SS.21. MISCELLANEOUS. (a) THIS WARRANT SHALL BE BINDING UPON THE COMPANY'S SUCCESSORS IN TITLE AND ASSIGNS. THIS (footnote continued from previous page) 12 WARRANT SHALL CONSTITUTE A CONTRACT UNDER SEAL AND, FOR ALL PURPOSES, SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. (b) Reference is made to the Warrant Agreement. For all purposes of the Warrant Agreement the Original Holder hereof and its Permitted Transferees shall be bound by all of the terms and conditions contained in, and entitled to all of the benefits of, the Warrant Agreement. (footnote continued from previous page) 13 IN WITNESS WHEREOF, CML GROUP, INC. has caused this COMMON STOCK PURCHASE WARRANT to be signed in its corporate name and its corporate seal to be impressed hereon by its duly authorized officers. THE COMPANY: Dated as of: CML GROUP, INC. - --------------, ---- By: ----------------------------------------- Title: Attest: - -------------------- (footnote continued from previous page) 14 EXHIBIT A FORM OF SUBSCRIPTION (To be signed only on exercise or conversion of Common Stock Purchase Warrant) TO: [COMPANY] The undersigned, the registered holder of the within Common Stock Purchase Warrant of ___________________________, hereby irrevocably elects: (check one) A. _____ to exercise this Common Stock Purchase Warrant for, and to purchase thereunder, _____* shares of Common Stock of _________________________ and the undersigned herewith makes payment of $_______ therefor. B. _____ to convert _____* Warrants represented by this Common Stock Purchase Warrant into ______ shares of Common Stock of __________________________. The undersigned requests that the certificates for such shares be issued in the name of and delivered to __________________, whose address is ________________. Dated: ______________________ --------------------------------------------- (Signature must conform in all respects to name of registered holder as specified on the face of the Warrant) --------------------------------------------- (Address) Signed in the presence of: - -------------------------- - -------------------------- (footnote continued from previous page) 15 *Insert here the number of shares (all or part of the number of shares called for in the Common Stock Purchase Warrant) as to which the Common Stock Purchase Warrant is being exercised or converted without making any adjustment for any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Common Stock Purchase Warrant, may be deliverable on exercise or conversion. (footnote continued from previous page) 16 EXHIBIT B FORM OF ASSIGNMENT (To be signed only on transfer of Common Stock Purchase Warrant) ASSIGNMENT For value received, the undersigned, _______________________, hereby sells, assigns, and transfers unto ____________________ the right represented by the within Common Stock Purchase Warrant to purchase _____________ shares of Common Stock of _______________________ to which the within Common Stock Purchase Warrant relates, and appoints ___________ Attorney to transfer such right on the books of ____________________ with full power of substitution in the premises. Dated: _____________ ______________________________ ------------------------------------------------- (Signature must conform in all respects to name of registered holder as specified on the face of the Warrant) -------------------------------------------- (Address) Signed in the presence of: - -------------------------- (footnote continued from previous page) EX-10.(Y) 11 NOTE PURCHASE AGREEMENT 1 EXECUTION COPY NOTE PURCHASE AGREEMENT This Agreement dated as of July 27, 1998 (this "Agreement"), is entered into between CML Group, Inc., a Delaware corporation (the "Company"), and the State of Wisconsin Investment Board, an independent agency of the State of Wisconsin (the "Purchaser"). In consideration of the mutual promises and covenants contained in this Agreement, the parties hereto agree as follows: 1. AUTHORIZATION AND ISSUE OF NOTE. 1.1 AUTHORIZATION. The Company has, or before the Closing (as defined in Section 2) will have, duly authorized the sale and issuance, pursuant to the terms of this Agreement, of its Secured Convertible Redeemable Subordinated Note (the "Note"), in the aggregate principal amount of Twenty Million United States Dollars ($20,000,000), to be dated the Closing Date, to mature July 27, 2003, to bear interest on the unpaid principal balance from the date of issue until the principal shall have become due and payable at the rate of fifteen percent (15%) per annum, payable semi-annually in arrears, and to bear interest on overdue principal and, to the extent permitted by law, overdue interest at the rate of sixteen and one-half percent (16.5%) per annum, and to be substantially in the form attached hereto as EXHIBIT A. 1.2 PURCHASE AND SALE OF NOTE. Subject to the terms and conditions of this Agreement, at the Closing the Company will sell and issue to the Purchaser, and the Purchaser will purchase, the Note at a purchase price of Twenty Million United States Dollars ($20,000,000). 2. THE CLOSING. The closing ("Closing") of the sale and purchase of the Note shall take place at the offices of Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts, at 10:00 a.m. on July 27, 1998, or at such other location or on such other date as the Company and the Purchaser may agree. At the Closing the Company shall deliver to the Purchaser the Note against payment to the Company of the purchase price therefor, by wire transfer, certified check, or other method reasonably acceptable to the Company. The date of the Closing is herein referred to as the "Closing Date." 3. REPRESENTATIONS OF THE COMPANY. The Company hereby represents and warrants to the Purchaser as follows: 3.1 ORGANIZATION, ETC. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has full power and authority, corporate and otherwise, to own, operate and lease its property and to carry on its business as now being conducted. The Company has full power and authority, corporate or otherwise, to execute and deliver, and to perform its obligations under, this Agreement, the 2 Note, the Security Documents (as defined below) and each of the other agreements, documents, instruments, certificates and notices contemplated hereby or thereby (collectively, the "Transaction Documents"), and to issue and sell the Note. This Agreement and each other Transaction Document have been duly authorized by all necessary corporate action on the part of the Company, have been duly executed and delivered by authorized officers of the Company, are the legal, valid and binding obligations of the Company, and are enforceable against the Company in accordance with their respective terms. 3.2 CAPITALIZATION. The authorized capital stock of the Company (immediately prior to the Closing) consists of (a) 120,000,000 shares of Common Stock, $0.10 par value per share (the "Common Stock"), of which 50,274,694 shares are issued and outstanding as of July 21, 1998, and (b) 2,000,000 shares of Preference Stock, $0.10 par value per share (the "Preference Stock"), of which no shares are issued and outstanding as of the Closing Date. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. 3.3 ISSUANCE OF NOTE. The issuance, sale and delivery of the Note in accordance with this Agreement have been, or will be on or prior to the Closing, duly authorized by all necessary corporate action on the part of the Company. The Note, when so issued, sold and delivered against payment therefor, in accordance with the provisions of this Agreement, will be duly and validly issued. 3.4 AUTHORITY FOR AGREEMENT. The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents, and the consummation by the Company of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action. This Agreement and each of the other Transaction Documents has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms. The execution of and performance of the transactions contemplated by this Agreement and the other Transaction Documents and compliance with its and their provisions by the Company will not violate any provision of law and will not conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under, or require a consent or waiver under, its Certificate of Incorporation or By-Laws (each as amended to date) or any indenture, lease, agreement or other instrument to which the Company is a party or by which it or any of its properties is bound, or any decree, judgment, order, statute, rule or regulation applicable to the Company. 3.5 GOVERNMENTAL AND EXCHANGE CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority or the New York Stock Exchange is required on the part of the Company in connection with the execution and delivery of this Agreement and the other Transaction Documents, and the offer, issuance, sale and delivery of Shares, except such filings as shall have been made prior to and shall be effective on and as of the Closing. Based on the representations made by the Purchaser in Section 4 of this Agreement, the offer, issuance and sale of the Note to the Purchaser will be in compliance with applicable Federal and state securities laws. 3.6 DISCLOSURES. None of this Agreement, any other Transaction Document or -2- 3 any other document, certificate or statement furnished to the Purchaser by or on behalf of the Company in connection herewith, or filed by or on behalf of the Purchaser with the Securities and Exchange Commission, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein in light of the circumstances under which they were made not misleading. 3.7 NO CONFLICT OF INTEREST. To the best of its knowledge, no officer or employee of the Purchaser has or will receive, directly or indirectly, a personal interest in the Company or its property or anything of substantial economic value for his or her private benefit from the Company, or anyone acting on its behalf, in connection with the investment made pursuant to this Agreement. 3.8 NO BAD ACTOR. None of the Company, any of its affiliates, or any directors or officers of the Company or any of its officers is or has been the subject of, or a defendant in: (i) an enforcement action or prosecution (or settlement in lieu thereof) brought by a governmental authority relating to a violation of securities, tax, fiduciary or criminal laws, or (ii) a civil action (or settlement in lieu thereof) brought by investors in a common investment vehicle for violation of duties owed to the investors. The Company will notify the Purchaser within five days in the event any such action or prosecution is initiated during any period in which the Note is outstanding or the Purchaser holds any equity securities of the Company or NordicTrack. 4. REPRESENTATIONS OF THE PURCHASER. The Purchaser represents and warrants to the Company as follows: 4.1 INVESTMENT. The Purchaser is acquiring the Note for its own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same; and the Purchaser has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition thereof. 4.2 AUTHORITY. The Purchaser has the necessary power and authority to enter into and to perform this Agreement and the other Transaction Documents to which it is a party in accordance with their respective terms. 4.3 ACCREDITED INVESTOR. The Purchaser is an "accredited investor," within the meaning of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 5. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER. The obligation of the Purchaser to purchase the Note at the Closing is subject to the fulfillment, or the waiver by the Purchaser, of each of the following conditions on or before the Closing: 5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each representation and warranty contained in Section 3 shall be true on and as of the Closing Date with the same effect as though such representation and warranty had been made on and as of that date. -3- 4 5.2 PERFORMANCE. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by the Company prior to or at the Closing, and the Company shall deliver to the Purchaser a certificate of a senior officer of the Company to such effect. 5.3 OPINION OF COUNSEL. The Purchaser shall have received an opinion from Hale and Dorr LLP, counsel for the Company, dated the Closing Date, addressed to the Purchaser, and satisfactory in form and substance to the Purchaser, as to each of the matters set forth in Sections 3.1 through 3.5, inclusive. 5.4 CREDIT FACILITY. The Company, NordicTrack (as defined herein), Nordic Advantage, Inc. ("NA") and S&H (as defined herein) shall have entered into a credit agreement (the "Credit Agreement") with B III Capital Partners, L.P. ("B III"), General Motors Employees Domestic Group Pension Trust ("GM Trust"), and BankBoston, N.A., individually ("Bank Boston"; collectively with B III and GM Trust, the "Working Capital Lenders") and as Administrative Agent for the Working Capital Lenders (in such capacity, the "Administrative Agent"), in form and substance satisfactory to the Purchaser, in its sole and absolute discretion, wherein the Working Capital Lenders shall have committed to extend up to $65,000,000 in credit facilities to the Company. The Company shall have delivered a true, correct and complete copy of the Credit Agreement, and each of the related agreements, instruments, documents, certificates and notices completed thereby to the Purchaser. 5.5 INTERCREDITOR AGREEMENT. The Purchaser shall have entered into an intercreditor agreement with the Company and the Administrative Agent, in form and substance satisfactory to the Purchaser, in its sole and absolute discretion, which conforms to that certain term sheet executed by DDJ Capital Management, LLC, and the Purchaser. 5.6 COLLATERAL AGENCY AGREEMENT. The Purchaser shall have entered into a collateral agency agreement (the "Collateral Agency Agreement") with the Company, NordicTrack, NA, S&H and BankBoston, N.A., as collateral agent for the Working Capital Lenders and the Purchaser (in such capacity, the "Collateral Agent"), in form and substance satisfactory to the Purchaser, in its sole and absolute discretion, wherein the Collateral Agent agrees to act as collateral agent for and on behalf of the Administrative Agent and the Working Capital Lenders, as senior secured parties, and the Purchaser, as junior secured party. 5.7 SECURITY DOCUMENTS. The Company and each of its subsidiaries (whether direct or indirect), to the extent a party thereto, shall have executed and delivered each of the Security Documents, as defined in the Collateral Agency Agreement (other than (x) the Life Insurance Collateral Assignments and (y) that certain charge over securities dated as of April 29, 1996 between NordicTrack and the Administrative Agent, pledging the securities of NordicTrack (U.K.) Ltd., as amended by the First Amendment to Securities Documents (as defined in the Credit Agreement)) (collectively, all such Security Documents are referred to herein as the "Security Documents"), and the Purchaser shall have determined that the Collateral Agent, on behalf of the Working Capital Lenders and the Purchaser, has a first priority perfected lien and security interest in and to all assets and properties of the Company and such subsidiaries covered by the Security Documents. The Company shall have delivered a true, correct and complete -4- 5 copy of each of the Security Documents to the Purchaser. 5.8 GUARANTEES. Each of NordicTrack, NA, S&H, OCR, Inc., OBW, Inc., WFH Group, Inc., OTNC, Inc., BFPI, Inc., CML International (FSC), Ltd., The Nature Company Limited, NordicTrack (U.K.) Ltd., NordicTrack GmbH, and Nordic Advantage of Ontario, Inc. (each a "Guarantor", and collectively the "Guarantors") shall have executed and delivered its Guaranty (each a "Guaranty", and collectively the "Guarantees") of the Company's obligations to the Purchaser. 6. CONDITION OF THE OBLIGATIONS OF THE COMPANY. The obligations of the Company under Section 1.2 of this Agreement are subject to fulfillment, or the waiver, of the following condition on or before the Closing: 6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser contained in Section 4 shall be true on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of that date. 7. COVENANTS OF THE COMPANY. 7.1 REGISTRATION OF NOTE AND CONVERSION SHARES. The Company shall file on or before 60 days after the Closing Date registration statements (the "Registration Statements") with the Securities and Exchange Commission to register under the Securities Act of 1933, as amended, the Note and the shares of Common Stock into which it is convertible pursuant to the Note (the "Conversion Shares"). The Company shall use its best efforts to have the Registration Statements declared effective as soon as practicable after filing. Until the Registration Statements are declared effective, the Company shall not file any registration statement with respect to its securities (other than on Form S-8 or its equivalent) unless the Note and the Conversion Shares are included therein. 7.2 FUTURE ISSUANCE OF SECURITIES. (a) The Conversion Shares, the NordicTrack Warrants and the NordicTrack Warrant Shares (as such terms are defined below), when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable with no personal liability attaching to the ownership thereof and will be free and clear of all liens, charges, restrictions, claims and encumbrances. Neither the issuance, sale or delivery of the Conversion Shares, the NordicTrack Warrants or the NordicTrack Warrant Shares are subject to any preemptive right, right of first refusal, or are subject to any other similar rights (except as disclosed in the Credit Agreement) in favor of any person or entity. (b) On or before the date of issuance of any Conversion Shares, NordicTrack Warrants or NordicTrack Warrant Shares, the Purchaser shall have received an opinion from Hale and Dorr LLP, as counsel for the Company (or other reputable counsel retained by the Company as is satisfactory to the Purchaser) dated the date of issuance, addressed to the Purchaser, and satisfactory in form and substance to the Purchaser, as to each of the -5- 6 matters set forth in Sections 3.1 through 3.5, inclusive, except that such opinions shall be given as of the date of issuance with respect to the securities being issued rather than the Note, and that such securities are fully paid and non-assessable (assuming, in the case of the NordicTrack Warrants, the payment of $0.01 per NordicTrack Warrant Share). 7.3 ISSUANCE OF SHARES AND WARRANTS. The issuance, sale and delivery of the Conversion Shares and the NordicTrack Warrants in accordance with the Transaction Documents, and the NordicTrack Warrant Shares in accordance with the NordicTrack Warrants, will be on or prior to the issuance thereof, duly authorized by all necessary corporate action on the part of the Company or NordicTrack, Inc., a Minnesota corporation or its successor ("NordicTrack"), as the case may be. The Conversion Shares, NordicTrack Warrants and NordicTrack Warrant Shares, when so issued, sold and delivered in accordance with the provisions of this Agreement, will be duly and validly issued, fully paid and non-assessable and will be subject to an effective registration statement under the Securities Act of 1933, as amended, or will be issued pursuant to an exemption therefrom. 7.4 SMITH & HAWKEN. Upon the occurrence and during the continuation of any default in the payment of any installment of principal or interest on the Note, to the maximum extent consistent with the fiduciary duties of the Company's Board of Directors, the Company shall use its best efforts to sell all or substantially all of the assets or stock of Smith & Hawken, Ltd., a Delaware corporation ("S&H"), or its successor, for the maximum consideration of cash or securities (provided that such securities are subject to an effective registration statement under the Securities Act of 1933, as amended, and listed on a major United States stock exchange), obtainable on an arms-length basis from an unaffiliated third party (the "S&H Sale"). To the maximum extent consistent with the fiduciary duties of the Company's Board of Directors, the Company shall use its best efforts to close the S&H Sale within 120 days after the occurrence of any such default and, prior to S&H (i) making a composition or an assignment for the benefit of creditors or trust mortgage, (ii) applying for, consenting to, acquiescing in, filing a petition, seeking or admitting (by answer, default or otherwise) the material allegations of a petition filed against it seeking the appointment of a trustee, receiver or liquidator, in bankruptcy or otherwise, of itself or of all or a substantial portion of its assets, or a reorganization, arrangement with creditors or other remedy, relief or adjudication available to or against a bankrupt or insolvent debtor under any bankruptcy or insolvency law or any law affecting the rights of creditors generally, or (iii) admitting in writing its inability to pay its debts generally as they become due. 7.5 NORDICTRACK WARRANTS. In the event that the Company shall distribute any of the capital stock of NordicTrack to the Company's shareholders at any time prior to the full redemption or full conversion of the Note, the Company shall cause to be issued to the Purchaser perpetual warrants, exercisable in whole or in part, in form and substance satisfactory to the Purchaser (the "NordicTrack Warrants"), to purchase, at a purchase price per share equal to $0.01, that number of shares of NordicTrack capital stock which the Purchaser would have been entitled to receive in such distribution if it had converted the Note in full immediately prior to the record date for such distribution (upon the exercise of the NordicTrack Warrants, the "NordicTrack Warrant Shares"). -6- 7 7.6 NO REPRICING OF OPTIONS. At all times while the Note is outstanding or the Purchaser owns any shares of common stock of the Company, the Company shall not reprice any options with respect to the Company's capital stock. 7.7 CHAIRMAN OF BOARD OF DIRECTORS. At all times while the Note is outstanding or the Purchaser owns any shares of common stock of the Company, the Company shall cause John A.C. Pound ("Pound") to be Chairman of the Board of Directors of the Company and, at all times after a distribution of the capital stock of NordicTrack to the Company's shareholders, NordicTrack. In the event that Pound is unable to serve as Chairman of the Board of Directors of either the Company or NordicTrack, the Company shall cause only the Independent Directors on the respective Boards of Directors of the Company and NordicTrack to select the Chairman of the Board of Directors. 7.8 OUTSIDE AND INDEPENDENT DIRECTORS. At all times while the Note is outstanding or the Purchaser owns any shares of common stock of the Company, the Company shall cause a majority of the members of the Board of Directors of the Company and, at all times after a distribution of the capital stock of NordicTrack to the Company's shareholders, NordicTrack, to be comprised of outside and "independent directors," as such term is defined by the Council of Institutional Investors ("Independent Directors"). 7.9 NO BACKSTOPPED RIGHTS OFFERING. At all times while the Note is outstanding or the Purchaser owns any shares of common stock of the Company, the Company shall not conduct any "backstopped" rights offering without the consent of the Purchaser or any other rights offering in which any person or entity facilitating such transaction will receive securities of the Company or any of its subsidiaries for consideration less than the purchase price therefor offered to all shareholders of the Company. 7.10 NO DIVIDENDS DURING DEFAULT. At all times while the Note is outstanding, the Company shall not declare or pay any dividend on any capital stock of the Company, or make any other distribution to holders of capital stock of the Company (other than a distribution of the capital stock of NordicTrack to the Company's shareholders), following the occurrence and during the continuation of any default under the Note or this Agreement. 7.11 RIGHTS OFFERING. In the event that the Company undertakes a rights offering with respect to the holders of any of its capital stock at any time while the Note is outstanding, the Company shall grant the Purchaser the right to be issued its pro rata percentage of such rights based on the number of shares of capital stock into which the Note is then convertible. 7.12 NO DIRECTORS ELECTED BY WORKING CAPITAL LENDERS. At all times prior to the earlier of (a) August 1, 1999 or (b) the indefeasible payment in full of any loans or other extensions of credit and the termination of any commitments to extend credit (collectively, "Working Capital Credit Facilities") by the Working Capital Lenders, the Company shall not permit any Working Capital Lender to elect, directly or by proxy, any members of the Board of Directors of the Company, unless prior to such election the Working Capital Lenders have converted all or a portion (but not less than $20,000,000 of outstanding indebtedness) of the -7- 8 Working Capital Credit Facilities into common stock of the Company. 7.13 INDEBTEDNESS; LIENS. At all times while the Note is outstanding, the Company shall not incur any Indebtedness, or grant any Liens, with senior or pari passu rights in payment or collateral, except as permitted under the Note or the Working Capital Credit Facilities. As used herein, "Indebtedness" shall have the meaning ascribed thereto in the Credit Agreement. As used herein, "Lien" means any lien (statutory or other), security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, capitalized lease or other title retention agreement). 7.14 WORKING CAPITAL CREDIT FACILITIES. The Company shall give the Purchaser written notice as soon as practicable (but prior to the effectiveness) of any amendment of, waiver or consent, and any request therefor, under the Working Capital Credit Facilities. 7.15 DEFAULTS. The Company shall give the Purchaser written notice as soon as practicable after it becomes aware of any default, event of default or similar event (or any event or occurrence which, with the passage of time and/or notice would become a default, event of default or similar event) under this Agreement, any other Transaction Document, the Working Capital Credit Facilities or any indenture, lease, agreement or other instrument to which the Company is a party or by which it or any of its properties is bound, or any decree, judgment, order, statute, rule or regulation applicable to the Company. Upon the request of the Purchaser, the Company shall promptly provide the Purchaser with all such information, documentation and inspection rights provided to the Administrative Agent, the Working Capital Lenders, or any other person or entity in connection with such default, event of default or similar event and such other information, documentation and inspection rights as may be requested by the Purchaser. 7.16 RIGHT OF FIRST REFUSAL. The Company agrees that it will not issue (other than through (a) conversion of currently outstanding warrants, debentures and stock options, as disclosed on SCHEDULE 7.16 attached hereto or (b) the Company's stock plans existing on the date hereof or as subsequently approved by the Company's stockholders) any shares of its Common Stock, or any convertible securities, exchangeable or exercisable for shares of Common Stock ("Convertible Securities") unless the Company shall first have offered all of such Common Stock or Convertible Securities to the Purchaser, on terms and conditions, including without limitation with respect to price and method of payment, at least as favorable to the Purchaser as are proposed to be offered to any other person or entity. Any such offer shall be made in writing and shall remain open for a period of not less than 10 days after the receipt of such offer by the Purchaser. The Purchaser may accept the Company's offer as to the full amount of securities offered, but not any lesser number, by written notice thereof given by it to the Company prior to the expiration of the 10 day period, in which event the Company shall promptly sell and the Purchaser shall buy, upon the terms specified, such securities offered by the Company. 7.17 INFORMATION REQUIRED BY RULE 144A. The Company will, upon the request of the Purchaser or any transferee, provide the Purchaser or any transferee, and any qualified institutional buyer (as defined in Rule 144A promulgated by the Securities and Exchange -8- 9 Commission under the Securities Act of 1933, as amended) designated by the Purchaser or any transferee, such financial and other information as the Purchaser or any transferee may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A in connection with a resale or proposed resale of the Note, the Conversion Shares, the NordicTrack Warrants or the NordicTrack Warrant Shares. 7.18 CREDIT AGREEMENT COVENANTS. The Company will comply with each of the covenants set forth in Sections 9.1, 9.2, 9.3, 9.6, 9.7, 9.8, 9.10, 9.11, 9.13, 9.14, 10.7, 10.9, 10.11 and 10.13 of the Credit Agreement (the "Incorporated Covenants"), which are incorporated in this Agreement by reference by the terms set forth below. The Company and the Purchaser hereby agree that the Incorporated Covenants, and, to the extent they apply to such covenants, the definitions and other definitional provisions set forth in Section 1 of the Credit Agreement, together with the other sections of the Credit Agreement to which reference is made therein, are incorporated in this Agreement by reference as though specifically set forth herein, and they shall continue in full force and effect with respect to this Agreement notwithstanding the termination of the Credit Agreement and the payment of all indebtedness and obligations thereunder. 8. COVENANTS OF THE PURCHASER. 8.1 TERMINATION OF SECURITY INTEREST. Provided that no Event of Default (as defined under the Note), and no default, event of default or similar event hereunder, under the Note, any Guaranty or Security Document, has occurred and is continuing, the Purchaser agrees that upon the request of the Company it shall execute such documents and take such reasonable steps (in each case at the sole expense of the Company) to terminate any interest the Purchaser has in the liens and security interests held by the Collateral Agent (a) upon receiving satisfactory evidence that the Company has received gross proceeds of $30,000,000 or more from the sale of equity securities of the Company, other than pursuant to conversion of the Note, or (b) on August 1, 1999, upon receiving satisfactory evidence that the Company has received gross proceeds of $25,000,000 or more (but less than $30,000,000) from the sale of equity securities of the Company prior to August 1, 1999, other than pursuant to conversion of the Note. 8.2 RELEASE OF FOREIGN PLEDGE AND GUARANTY. If the Company has demonstrated to the reasonable satisfaction of the Purchaser that the pledge of stock of any foreign subsidiary of the Company to the Collateral Agent (to the extent greater than sixty-five percent (65%) of the outstanding stock of such foreign subsidiary) or any Guaranty given by a foreign Guarantor will result in material tax obligations for the Company and its subsidiaries, which tax obligations would not arise if such pledge or Guaranty were released by the Purchaser, the Purchaser, upon ten (10) days' prior written request of the Company delivered to the Purchaser, shall consent to the Collateral Agent's release of such pledge (to the extent applicable to greater than sixty-five percent (65%) of the outstanding stock of the relevant foreign subsidiary of the Company) or release such Guaranty, as applicable; PROVIDED that no such release shall be required if any Default (as defined in the Note) or any breach or violations of the provisions hereof or any Security Document or Guaranty has occurred and is continuing. 9. MISCELLANEOUS. -9- 10 9.1 ENTIRE AGREEMENT. This Agreement and Exhibits hereto embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 9.2 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall be one and the same document. 9.3 SECTION HEADINGS. The section headings are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. 9.4 SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 9.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 9.6 EXPENSES. The Company agrees, whether or not the transaction provided for hereby shall be consummated, to pay on demand, and save the Purchaser and its transferees harmless against liability for the payment of, all out-of-pocket expenses arising in connection with such transactions ("Expenses"), including (i) all document production and duplication charges and the reasonable fees and expenses of Michael Best & Friedrich LLP, its special transaction counsel, and its agents and of any other special or local counsel or other special advisers engaged by the Purchaser in connection with the transactions contemplated by this Agreement and with any subsequent proposed modification of, or proposed waiver or consent, requested by the Company under the Transaction Documents, whether or not such transactions are consummated or proposed modification shall be effected or proposed waiver or consent granted, (ii) the costs (other than underwriting discounts and commissions) of issuance and obtaining an effective registration statement with respect to the Note, the Conversion Shares and the NordicTrack Shares under the Securities Act of 1933, as amended, and such state securities and blue sky laws as the Purchaser may reasonably request, and (iii) the costs and expenses, including reasonable attorneys' fees and the fees of any other special advisers, incurred by the Purchaser or any of its transferees in evaluating, monitoring or enforcing any rights under the Transaction Documents (including, without limitation, any costs, expenses or fees incurred in connection with perfecting or maintaining perfection of any lien now or hereafter existing in favor of the Purchaser or any of its transferees securing any of the obligations of the Company under the Transaction Documents or maintaining or protecting the collateral which is the subject of such lien) or in responding to any subpoena or other legal process issued in connection with the Transaction Documents or the transactions provided for hereby or thereby or by reason of the Purchaser or any transferee having acquire the Note or any of the Conversion Shares, NordicTrack Warrants or NordicTrack Warrant Shares, including without limitation costs and expenses incurred in connection with any bankruptcy or insolvency of any of the Company or any of its Subsidiaries or in connection with any workout or restructuring of any of the transactions contemplated by the Transaction Documents. The obligations of the Company under -10- 11 this Section 9.6 shall survive the transfer of any Note, any of the Conversion Shares, NordicTrack Warrants or NordicTrack Warrant Shares or portion of any of the Shares thereof or interest therein by the Purchaser or any transferee and the payment of the Note. 9.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained in any Transaction Document or made in any other writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of such Transaction Document or other writing, the transfer by the purchaser of the Note or any Conversion Shares, NordicTrack Warrants and NordicTrack Warrant Shares, or any portion thereof or interest therein and the payment of the Note and any redemption of Conversion Shares, NordicTrack Warrants and Nordic Track Shares and may be relied upon by any transferee, regardless of any investigation made at any time by or on behalf of the Purchase or any transferee. The Transaction Documents embody the entire agreement and understanding between the purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof and thereof. 9.8 SUCCESSOR AND ASSIGNS. All covenants and other agreements in this Agreement contained by or on behalf of either of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any transferee) whether so expressed or not; provided the Company may not assign any of its obligations hereunder. 9.9 NOTICES. All notices and other written communications provided for hereunder shall be given in writing and sent by overnight delivery service (with charges prepaid) or by facsimile transmission with the original of such transmission being sent by overnight delivery service (with charges prepaid) by the next succeeding Business Day and addressed to such party as follows: If to the Company: CML Group, Inc. 524 Main Street Acton, Massachusetts 01720 Attn: President Facsimile: (978) 264-4073 If to the Purchaser: State of Wisconsin Investment Board 121 East Wilson Street Madison, Wisconsin 53702 Attn: Investment Director, Small Cap Stocks Facsimile: (608) 266-2436 or at such other address or fax number as such party shall have specified to the other party in writing. Notice given in accordance with this Section 9.9 shall be effective upon the earlier of the date of delivery or the second Business Day at the place of delivery after dispatch. [SIGNATURE PAGE FOLLOWS] -11- 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. CML GROUP, INC. By: -------------------------------------- Name: Title: STATE OF WISCONSIN INVESTMENT BOARD By: -------------------------------------- Name: Title: EX-10.(Z) 12 SECURED REDEEMABLE SUBORDINATED NOTE 1 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS SO REGISTERED OR AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE. No. 1 CML GROUP, INC. Secured Redeemable Subordinated Note Due 2003 $20,000,000 Boston, Massachusetts July 27, 1998 --------------------- CML Group, Inc., a Delaware corporation (the "Company"), for value received, hereby promises to pay to the State of Wisconsin Investment Board ("SWIB"), or registered assigns, the principal sum of Twenty Million Dollars ($20,000,00) on July 27, 2003, and to pay interest (computed on the basis of a 365-day year) from the date hereof on the unpaid balance of such principal amount from time to time outstanding at the rate of fifteen percent (15%) per annum, subject to increase in accordance with Sections 5(a) and 6 hereof, such interest to be due and payable by wire transfer each June 30 and December 31 during the term of this Note. This note is issued by the Company pursuant to the Note Purchase Agreement dated July 27, 1998 between the Company and SWIB, the original holder of this Note (the "Purchase Agreement"), to which reference is made for a statement of certain additional rights and benefits to which the holder of this Note is entitled. 2 1. SUBORDINATION. 2. THE INDEBTEDNESS EVIDENCED BY THIS NOTE, AND THE PAYMENT OF THE PRINCIPAL HEREOF, AND ANY INTEREST HEREON, IS WHOLLY SUBORDINATED, JUNIOR AND SUBJECT IN RIGHT OF PAYMENT, TO THE EXTENT AND IN THE MANNER PROVIDED IN AN INTERCREDITOR AGREEMENT OF EVEN DATE HEREWITH AMONG THE COMPANY, SWIB AND BANKBOSTON, N.A., AS ADMINISTRATIVE AGENT ON BEHALF OF THE LENDERS UNDER THE AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, DATED JULY 27, 1998, BETWEEN THE COMPANY, THE ADMINISTRATIVE AGENT, THE LENDERS PARTY THERETO AND CERTAIN SUBSIDIARIES OF THE COMPANY AS BORROWERS, AND CERTAIN SUBSIDIARIES OF THE COMPANY AND THE BORROWERS AS GUARANTORS (THE "INTERCREDITOR AGREEMENT"). 1. SECURITY. 2. Payment of this Note is secured by a security interest in certain property of the Company and its subsidiaries (the "Collateral") pursuant to the Security Documents, as defined in the Purchase Agreement. 1. CONVERSION. 2. (a) GENERAL. This Note shall be subject to optional conversion as set forth below: (b) (i) CONVERSION AT OPTION OF HOLDER. The holder of this Note has the right, at its option, at any time prior to 5:00 p.m., Boston, Massachusetts time, on July 27, 2003, to convert the outstanding principal amount of this Note into fully-paid and non-assessable shares of Common Stock, $.10 par value per share, of the Company ("Common Stock"), at the rate of one share of Common Stock for each $4.00 of the principal amount hereof surrendered for conversion, subject to adjustment as set forth herein (the "Conversion Price"). In order to exercise this conversion privilege, the holder of this Note shall surrender this Note to the Company during usual business hours at the Company's principal executive office, accompanied by written notice in form satisfactory to the Company that the holder elects to convert the principal amount of this Note or a portion hereof specified in such notice. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued. (ii) (iii) CONVERSION AT OPTION OF THE COMPANY. So long as no default shall have occurred and be continuing, the entire outstanding principal amount of this Note may be converted, at the option of the Company, into fully-paid and non-assessable shares of Common Stock, at a price per share equal to the average per share closing price of the 2 3 Company's Common Stock on the New York Stock Exchange ("NYSE") or other exchange on which the Common Stock is then trading for a period of twenty (20) consecutive trading days ending on the third day immediately prior to the conversion, in the event that the Company receives gross proceeds of thirty million dollars ($30,000,000) or more from the sale of equity securities of the Company after the date hereof, including gross proceeds from the sale of any equity securities to the Purchaser, other than pursuant to conversion of this Note. The entire outstanding principal amount of this Note may also be converted, at the option of the Company, into fully-paid and non-assessable shares of Common Stock at the then effective Conversion Price in the event that the per share closing price of the Company's Common Stock on the NYSE or other exchange on which the Common Stock is then trading is above the then effective Conversion Price for a period of twenty (20) consecutive trading days. The Company shall cause notice of conversion to be mailed to the registered holder of this Note, at such holder's address appearing in the Note Register (as defined in Section 7(a)), at least three (3) days prior to the date fixed for conversion of this Note. On or before the date fixed for conversion, the holder shall surrender this Note at the place designated in such notice, together with a statement of the name or names (with address) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued. (iv) (v) LIMITATION ON OWNERSHIP BY SWIB. Notwithstanding any other provision of this Note, so long as SWIB is the holder of this Note, the Company may not convert the Note into a number of shares of Common Stock, which when added to other shares of Common Stock then owned by SWIB, would result in SWIB owning more than 19.9% of the Company's then outstanding Common Stock. The principal amount of this Note not converted into Common Stock due to the limitations set forth in the immediately preceding sentence shall simultaneously be converted into a to-be-established series of Nonconvertible Preference Stock of the Company which shall be subject to the Intercreditor Agreement and shall (i) have an annual dividend rate of 15% per annum, payable, to the extent of funds legally available therefor, on June 30 and December 31, (ii) have no voting rights, except as required by law, (iii) be redeemable at the option of the Company at any time after July 27, 2003 at a price equal to the principal amount of the Note converted into such Preference Stock plus accrued but unpaid dividends, and (iv) otherwise contain terms consistent with the Note (including, without limitation, that such Preference Stock will be secured by the Collateral and registered under the Securities Act, as defined below), to the extent permissible under applicable laws. (vi) (c) SURRENDER OF NOTE AND DELIVERY OF CERTIFICATES. When surrendered for conversion, this Note shall, unless the shares issuable on conversion are to be issued in the same name as the name in which this Note is then registered, be duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or his or its duly authorized attorney. As promptly as practicable after the surrender of this Note for conversion and the receipt of the notice specified above, the Company shall deliver or cause to be delivered at its principal 3 4 executive office to the holder, or on the holder's written order, a certificate or certificates for the number of full shares issuable upon the conversion of this Note, or portion hereof, in accordance with the provisions hereof. Such conversion shall be deemed to have been made at the time this Note shall have been surrendered for conversion and the notice specified above shall have been received by the Company at its principal executive office in the case of conversion pursuant to Section 3(a)(i) or by the registered holder at such holder's address appearing in the Note Register in the case of conversion pursuant to Section 3(a)(ii) (the "Conversion Date"), and the holder in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on the Conversion Date the holder of record of the shares represented thereby. If less than the entire outstanding principal amount of this Note is being converted (in the case of conversion pursuant to Section 3(a)(i)), a new Note shall promptly be delivered to the holder for the unconverted principal balance and shall be of like tenor as to all terms as the Note surrendered. (d) (e) ADJUSTMENT OF CONVERSION PRICE. (f) (i) In case the Company shall: (ii) (A) declare a dividend of its Common Stock on its Common Stock, (A) subdivide outstanding Common Stock into a larger number of shares of Common Stock by reclassification, stock split or otherwise, or (A) combine outstanding Common Stock into a smaller number of shares of Common Stock by reclassification or otherwise, the number of shares of Common Stock issuable upon conversion of this Note immediately prior to any such event shall be adjusted proportionately so that thereafter the holder of this Note shall be entitled to receive upon conversion of this Note the number of shares of Common Stock which such holder would have owned after the happening of any of the events described above had this Note been converted immediately prior to the happening of such event, provided that the Conversion Price shall in no event be reduced to less than the par value of the shares issuable upon conversion. An adjustment made pursuant to this Section 3(c) shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision or combination. (i) If, prior to maturity of this Note, the Company shall at any time consolidate or merge with another corporation (other than a merger or consolidation in 4 5 which the Company is the surviving corporation), the registered holder hereof will thereafter be entitled to receive, upon the conversion hereof, the securities or property to which a holder of the number of shares of Common Stock then deliverable upon the conversion hereof would have been entitled upon such consolidation or merger, and the Company shall take such steps in connection with such consolidation or merger as may be necessary to ensure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or property thereafter deliverable upon the conversion of this Note. (ii) (b) NOTICE. In case the Company proposes to take any action referred to in Section 3(c) above, or to effect the liquidation, dissolution or winding up of the Company, then the Company shall cause notice thereof to be mailed to the registered holder of this Note, at such holder's address appearing in the Note Register, at least twenty (20) days prior to the date on which the transfer books of the Company shall close or a record be taken for such stock dividend or the date when such reclassification, liquidation, dissolution or winding up shall be effective, as the case may be. (c) (d) STATEMENT OF ADJUSTMENT. Whenever the Conversion Price shall be adjusted as provided in Section 3(c) above, the Company shall forthwith file at each office designated for the conversion of this Note, a statement, signed by the Chairman of the Board, the President, any Vice President, the Treasurer or Secretary of the Company, showing in reasonable detail the facts requiring such adjustment and the Conversion Price that will be effective after such adjustment. The Company shall also cause a notice setting forth any such adjustment to be sent by mail, first class, postage prepaid, to the record holder of this Note at his or its address appearing on the Note Register. Where appropriate, such notice may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section 3(d) hereof. (e) (f) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issuable upon conversion of this Note, but a payment in cash will be made in respect of any fraction of a share which would otherwise be issuable upon the surrender of this Note, or portion hereof, for conversion. Such payment shall be based on the fair market value of the Common Stock at the time of conversion of this Note, as determined in good faith by the Board of Directors. (g) (h) ACCRUED INTEREST. Upon the conversion of this Note, the Company shall be required to pay accrued but unpaid interest on the amount so converted up to the Conversion Date. (i) (j) SECURITIES ACT OF 1933. Upon conversion of this Note, if the Common Stock issuable upon conversion of this Note is not then registered under the Securities Act of 1933, as amended (the "Securities Act"), the registered holder may be required to execute and deliver to the Company an instrument, in form satisfactory to the Company, representing that the shares issuable upon conversion hereof are being 5 6 acquired for investment and not with a view to distribution within the meaning of the Securities Act. 1. REDEMPTION. 2. (a) Subject to the Intercreditor Agreement, this Note may, at the option of the Company, be called for redemption, in whole or in part at any time or from time to time without premium or penalty at one hundred percent (100%) of the principal amount so redeemed, plus accrued and unpaid interest on such redeemed principal amount to the date fixed for redemption. The Company shall give at least thirty (30) days prior written notice of redemption to the registered owner at his or its address as shown in the Note Register, and the notice of redemption shall specify the date and place designated for redemption. (a) Subject to the Intercreditor Agreement, the entire unpaid principal amount of the Note, may be called for redemption at the option of the holder of this Note, after September 1, 2000, at one hundred percent (100%) of the principal amount of the Note then outstanding plus accrued and unpaid interest on such principal amount to the date fixed for redemption. The holder shall give at least thirty (30) days prior written notice of redemption to the Company, and the notice shall specify the date designated for redemption which shall take place at the Company's principal offices. (b) (c) On or after the redemption date fixed in the notice of redemption, no further interest shall accrue on the principal amount so redeemed, and this Note (to the extent so redeemed) shall cease to be convertible as set forth in Section 3. Payment of the redemption price shall be made to the registered holder of this Note upon presentation and surrender of this Note accompanied by a duly executed instrument of transfer in blank, at the principal executive office of the Company. In the event of a partial redemption, this Note shall be presented to the Company for endorsement of the amount of payment and date paid as a condition precedent to such payment. (d) 2. DEFAULT. 3. Subject to the Intercreditor Agreement, the entire unpaid principal of this Note and the interest then accrued on this Note shall become and be immediately due and payable upon written demand of the holder of this Note, without any other notice or demand of any kind or any presentment or protest, if any one of the following events shall occur and be continuing at the time of such demand, whether voluntarily or involuntarily, or, without limitation, occurring or brought about by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any governmental body (each, an "Event of Default"): (a) If default shall (i) be made in the payment of any installment of principal or interest on this Note, (ii) occur under the Note Purchase Agreement, 6 7 (b) (iii) occur under the Security Documents, or (iv) occur under the Company's senior credit facility and if any such default shall remain unremedied for the longer of (aa) the applicable grace period set forth in the Intercreditor Agreement or (bb) one hundred twenty (120) days after written notice of such default in the case of an event described in clause (ii), (iii) or (iv) has been delivered by the Holder to the Company during which period of default in the payment of interest the rate of interest on the unpaid principal amount of this Note shall increase to 16.5% per annum and decrease to 15% upon the payment of such interest. (c) (d) If the Company (i) makes a composition or an assignment for the benefit of creditors or trust mortgage, (ii) applies for, consents to, acquiesces in, files a petition seeking or admits (by answer, default or otherwise) the material allegations of a petition filed against it seeking the appointment of a trustee, receiver or liquidator, in bankruptcy or otherwise, of itself or of all or a substantial portion of its assets, or a reorganization, arrangement with creditors or other remedy, relief or adjudication available to or against a bankrupt, insolvent or debtor under any bankruptcy or insolvency law or any law affecting the rights of creditors generally, or (iii) admits in writing its inability to pay its debts generally as they become due; or (e) (f) If an order for relief shall have been entered by a bankruptcy court or if a decree, order or judgment shall have been entered adjudging the Company insolvent, or appointing a receiver, liquidator, custodian or trustee, in bankruptcy or otherwise, for it or for all or a substantial portion of its assets, or approving the winding-up or liquidation of its affairs on the grounds of insolvency or nonpayment of debts. (g) 2. REGISTRATION UNDER THE SECURITIES ACT. 3. 4. If this Note and the shares of Common Stock issuable upon conversion of this Note have not been registered under the Securities Act on or before November 24, 1998, the rate of interest on the unpaid principal amount of this Note shall increase commencing on November 25, 1998 at the annual rate of 0.5% per 30 day period up to a maximum of 16.5% until such registration statements are declared effective and decrease to 15% when such registration statements are declared effective. 5. 6. NOTE REGISTER. 7. (a) The Company shall keep at its principal executive office a register (herein sometimes referred to as the "Note Register"), in which, subject to such reasonable regulations as it may prescribe, but at its expense (other than transfer taxes, if any), the Company shall provide for the registration and transfer of this Note. (b) (c) Whenever this Note shall be surrendered at the principal executive office of the Company for transfer or exchange, accompanied by a written instrument of transfer in form reasonably satisfactory to the Company duly executed by the holder hereof or his 7 8 or its attorney duly authorized in writing, the Company shall execute and deliver in exchange therefor a new Note or Notes, as may be requested by such holder, in the same aggregate unpaid principal amount and payable on the same date as the principal amount of the Note or Notes so surrendered; each such new Note shall be dated as of the date to which interest has been paid on the unpaid principal amount of the Note or Notes so surrendered and shall be in such principal amount and registered in such name or names as such holder may designate in writing. (d) (e) Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note and of indemnity by SWIB or indemnity otherwise reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Note (in case of mutilation) the Company will make and deliver in lieu of this Note a new Note of like tenor and unpaid principal amount and dated as of the date to which interest has been paid on the unpaid principal amount of this Note in lieu of which such new Note is made and delivered. (f) 8. NO VOTING RIGHTS. 9. 10. The holder of this Note shall have no voting rights with respect to the shares of Common Stock into which this Note may be converted unless and until this Note is converted into shares of Common Stock. 1. GENERAL. 2. (a) SUCCESSORS AND ASSIGNS. This Note, and the obligations and rights of the Company hereunder, shall be binding upon and inure to the benefit of the Company, the holder of this Note, and their respective heirs, successors and assigns. (a) RECOURSE. Recourse under this Note shall be to the Collateral and the Company only and in no event to the officers, directors or stockholders of the Company. (b) (c) CURRENCY. All payments shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender therein for the payment of public and private debts. (d) (e) NOTICES. All notices, requests, consents and demands shall be made in writing and shall be mailed postage prepaid, telecopied (which is confirmed) or delivered by hand, to the Company or to the holder hereof at their respective addresses set forth below or to such other address as may be furnished in writing to the other party hereto: (f) (g) If to the holder: State of Wisconsin Investment Board (h) 121 East Wilson Street (i) Madison, WI 53707-7842 8 9 (j) Attention: Investment Director, Small (k) Cap Stocks (l) Facsimile: (608) 266-2436 (m) (n) If to the Company: CML Group, Inc. (o) 524 Main Street (p) Acton, MA 01720 (q) Attention: President (r) Facsimile: (978) 264-4073 (s) (t) SATURDAYS, SUNDAYS, HOLIDAYS. If any date that may at any time be specified in this Note as a date for the making of any payment of principal or interest under this Note shall fall on Saturday, Sunday or on a day which in the city of Boston, Massachusetts shall be a legal holiday, then the date for the making of that payment shall be the next subsequent day which is not a Saturday, Sunday or legal holiday. (u) (v) GOVERNING LAW. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the Commonwealth of Massachusetts. (w) IN WITNESS WHEREOF, this Note has been executed and delivered as a sealed instrument on the date first above written by the duly authorized representative of the Company. CML GROUP, INC. By: _______________________ John A.C. Pound President ATTEST: __________________________ Glenn E. Davis Secretary 9 EX-10.(AA) 13 SEVERANCE AGREEMENT - G. ROBERT TOD 1 CML GROUP, INC. 524 MAIN STREET ACTON, MASSACHUSETTS 01720 August 10, 1998 VIA TELECOPIER - -------------- 603-569-8082 Mr. G. Robert Tod P. O. Box 860 Wolfeboro, NH 03894 Dear Bob: In connection with your termination of employment, set forth below are the benefits which CML Group, Inc. agrees to pay you in return for the execution of a copy of this letter with the release it includes. Your termination of employment with CML Group, Inc. (the "Company") is effective as of June 30, 1998. In connection with your termination, the Company will provide the following: 1. As severance, you will receive $240,000 payable as follows: to be paid $20,000/mo. - 9 months - August 98 - April 99 and $60,000 - May 1, 99. 2. In addition, the Company will immediately take steps to (a) notify the Trustee of said so-called Rabbi Trust established in connection with the terms of the Retirement Income and Survivor Security Program (" Retirement Income Program") that the Retirement Income Program established for your benefit has been modified and amended to provide for immediate distribution to you of the policies currently held in said Trust for the purpose of providing all of your benefits under the Retirement Income Program; provided that if this cannot be accomplished for any reason then said Retirement Income Program shall be amended and modified to provide that the Trustee shall be directed by the Company to surrender any policies insuring your life which are owned by said Trust and promptly distribute to you the cash value of such policies which are received by the Trustee on such surrender, and has (b) issued to you 38,310 shares of common stock of the Company to which you are entitled under the Company's Incentive Deferred Compensation Plan. These distributions will constitute 2 Mr. G. Robert Tod August 1, 1998 Page 2 full payment and satisfaction of the Company's obligations to you under the Retirement Income Program and of all other retirement or severance obligations to you, other than as stated in this letter and other than retirement benefits provided under the terms of any qualified retirement plan under Section 401 of the Internal Revenue Code. 3. You and the Company agree to take steps promptly to surrender the three split-dollar insurance policies listed in APPENDIX A hereto in exchange for their respective cash surrender values (cumulatively "Insurance Proceeds") and further agree to distribute $_____________ of the Insurance Proceeds to the Company (being the amount equal to the aggregate cumulative premiums paid by the Company to the extent not previously withdrawn) and the balance of the Insurance Proceeds to you. In addition, the Company agrees to distribute to you the three salary deferral policies listed on APPENDIX B hereto in such manner as the insurer may require. 4. In addition, you will be permitted to continue your use of the leased automobile which you currently use, subject to your reimbursement of the Company at the rate of $200 per month, until the distributions under Sections 2 and 3 are completed. After the end of the month in which such distributions are completed, until December 31, 1998, you will be permitted to continue such automobile use, subject to reimbursement to the Company of all its expenses in maintaining said automobile as set forth in a written statement provided by the Company. 5. Effective as of your termination of employment you are eligible for (i) continuation of your medical benefits under the Company's health plans to the extent and on the terms required by Section 4980B of the Internal Revenue Code, as amended, ("COBRA"), (ii) such use of an office at the Company as President and Chief Executive Officer shall determine from time to time, and (iii) the benefits of the discount policy for employees in effect for employees of Nordic Track and Smith & Hawken, from time to time, until July 31, 1999. In consideration of the Company's undertakings, you agree as follows: 1. You hereby fully, forever, irrevocably and unconditionally release the Company, its officers, directors, stockholders, corporate affiliates, attorneys, agents and employees from any and all claims of every kind and nature which you ever had or now have against the Company, its officers, directors, stockholders, corporate affiliates, attorneys, agents and employees, including, but not limited to, all claims arising out of your employment, all employment discrimination claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2999e Et Seq., the Americans With Disabilities Act, 3 Mr. G. Robert Tod August 1, 1998 Page 3 42 U.S.C. Section 12191 Et Seq., the Age Discrimination in Employment Act, 29 U.S.C. Section 621 Et Seq., and Massachusetts Fair Employment Practices Act, M.G. L. c.151B, Section 1 Et Seq., wrongful discharge claims or other common law claims. 2. You agree that, during the two year period beginning on the date of your execution of a copy of this letter, you will not, without the prior specific consent of the Company, in any capacity, either separately, jointly, or in association with others, directly or indirectly, encourage, solicit, initiate, engage or participate in discussions or negotiations with any person or entity concerning any merger, consolidation, purchase of material assets, tender offer, accumulation of shares of the Company's capital stock, proxy solicitation or other business combination involving the Company, any subsidiary of the Company or any division of the Company or any such subsidiary; PROVIDED, HOWEVER, that nothing herein shall prevent you from bringing to the attention of the Company any unsolicited offer or proposal relating to the foregoing. 3. You agree that, as a condition for these payments to you, you will not make any false, disparaging or derogatory statements in public or private regarding the Company or any of its directors, officers, employees, agents, or representatives or the Company's business affairs and financial condition; and the Company agrees that it will not make any false, disparaging or derogatory statements in public or private regarding you. 4. You will not, directly or indirectly, during the two year period beginning on the date of your execution of this letter, recruit, solicit or hire any key employee of the Company, or induce or attempt to induce any key employee of the Company to terminate his or her employment with, or otherwise cease his or her relationship with, the Company. 5. You expressly agree that breach of your agreement to the provisions in Paragraphs 2, 3 and 4 would result in irreparable injuries to the Company, that the remedy at law for any such breach would be inadequate and that upon breach of either of these provisions, the Company, in addition to all other available remedies, shall be entitled as a matter of right to injunctive relief in any court of competent jurisdiction without the necessity of proving the actual damage to the Company. This agreement will be governed by the laws of the Commonwealth of Massachusetts and is binding upon and shall inure to the benefit of the parties and their respective agents, assigns, heirs, executors, successors and administrators. 4 Mr. G. Robert Tod August 1, 1998 Page 4 This letter contains and constitutes the entire understanding and agreement between you and the Company with respect to severance and supersedes and cancels all previous oral and written negotiations, agreements, commitments and writings in connection with your severance. To the extent permitted by law, you agree that the contents of our discussions and negotiations resulting in this letter and agreement, shall be maintained as confidential by you, your agents and representatives, and any dispute resolved by this document shall also remain confidential, and none of the above shall be disclosed except to the extent required by federal or state law or as otherwise agreed to in writing by the authorized agent of each party. You hereby acknowledge you have been given twenty-one (21) days to consider this agreement and that the Company advised you to consult with any attorney of your choosing prior to signing this agreement. You may revoke this agreement for a period of seven (7) days after its execution, and the agreement will not be effective or enforceable until the expiration of this seven (7) day revocation period. Very truly yours, CML Group, Inc. By /s/ John A.C. Pound ------------------------------------ John A.C. Pound, President and Chief Executive Officer I agree to all the terms of this letter. /s/ G. Robert Tod - ------------------------- G. Robert Tod Dated: August 18, 1998 EX-10.(AB) 14 AMEND 1 TO KATHLEEN TIERNEY EMPLOYMENT AGREEMENT 1 Kathleen Tierney Employment Agreement First Amendment Whereas, the undersigned, being all the parties to the Kathleen Tierney Employment Agreement previously executed in 1998 (the "Agreement"), wish to amend the terms of said Agreement; and Whereas, the amendment is intended to align the definition of a Sale set forth in Section 3.4 of the Agreement with such definition as set forth in the employment agreements of certain other key employees of Smith & Hawken which were executed a short time after the execution of the Agreement at a time when such definition had been further clarified. Now, Therefore, the said undersigned, being all the parties to the Agreement, hereby amend the first paragraph of Section 3.4 of the Agreement to read as follows: "In the event that, during the Employment Period (or within 90 days thereafter if Employee is terminated without Cause under Section 4.3), CML sells the Company if either (i) CML ceases to own at least 50% of the equity of the Company (except as a result of CML's "spinoff" of the Company into a separate publicly traded corporation where the shareholders of the Company and CML immediately after the spinoff are substantially the same), or (ii) all or substantially all of the assets of the Company are no longer owned by the Company (each hereinafter referred to as a "Sale"), the Company agrees to pay the Employee a bonus ("Sale Bonus") calculated as a percentage of the "Net Consideration" received in connection with the Sale. The Sale Bonus shall be calculated as follows:" Executed as of the effective date of the Agreement. CML GROUP, INC. SMITH & HAWKEN, LTD. By: /s/ John A.C. Pound By: /s/ Kathy Tierney -------------------------- ------------------------------ John A.C. Pound Kathleen Tierney Title: Chairman Title: CEP/President 8/14/98 Employee /s/ Kathy Tierney ---------------------------------- Kathleen Tierney EX-10.(AC) 15 EMPLOYMENT AGREEMENT - DAVID MCCREIGHT 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this ______ day of ____________, is entered into by CML Group, Inc., a corporation with its principal place of business at 524 Main Street, Acton, MA (the "CML"), Facsimile Number 978-263-2178, Smith & Hawken, Ltd., a wholly-owned subsidiary of CML, with its principal place of business at 117 E. Strawberry Drive, Mill Valley, CA (the "Company") Facsimile Number _______________, and David McCreight, residing at ____________________________, CA ______ (the "Employee"), Facsimile Number _________________. The Company desires to continue to employ the Employee, and the Employee desires to continue to be employed by the Company. In consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties agree as follows: 1. TERM OF EMPLOYMENT. The Company hereby agrees to continue to employ the Employee, and the Employee hereby accepts continued employment with the Company, upon the terms set forth in this Agreement, commencing on April 1, 1998 (the "Commencement Date") and continuing hereunder until a termination in accordance with the provisions of Section 4 (the "Employment Period"). 2. TITLE; CAPACITY. 3 2.1 The Employee shall serve as Senior Vice President and General Merchandise Manager of the Company and be subject to the supervision of the President and Chief Executive Officer of the Company. He shall have such authority as is consistent with his service as Senior Vice President and General Merchandise Manager. 4 The Employee hereby agrees to continue employment with the Company and serve as Senior Vice President and General Merchandise Manager and perform the duties and responsibilities of such positions and such other duties and responsibilities, consistent with his position as Senior Vice President and General Merchandise Manager of the Company, as the President and Chief Executive Officer of the Company shall from time to time reasonably assign to him. 5 2.2 The Employee shall continue to be based at the Company's headquarters in Mill Valley, California, or such other place or places within the San Francisco metropolitan area in which the headquarters is located, without his prior consent. The Employee agrees to devote his entire business time, attention and energies to the business and interests of the Company during the Employment Period. 1 2 6. COMPENSATION AND BENEFITS. 7 3.1 SALARY. Effective April 1, 1998, the Company shall pay the Employee, in monthly installments, an annual base salary of $200,000 during the Employment Period ("Annual Base Salary"). Such salary shall be reviewed annually by the Board of Directors of CML (the "Board") at the beginning of each fiscal year of the Company, beginning with the fiscal year commencing August 1, 1999. 8 3.2 BONUSES. Set forth in Sections 3.2 and 3.3.2 are the terms of the cash and option bonuses for which the Employee is eligible, based on (i) an objective formula, and (ii) discretionary criteria, which may be awarded to the Employee for the Company's fiscal year ending July 31, 1998 (the "98 Bonuses"). In addition, the Company, CML, and the Employee shall work together, in good faith, beginning as soon as practicable after the Company's financial goals for the fiscal year ending July 31, 1999 have been determined, to establish the terms of bonuses, based on concepts set forth on SCHEDULE A (to be completed by the parties as soon as practicable), for which the Employee will be eligible, based on the performance of the Employee and the Company, during the Company's fiscal year ending July 31, 1999 (the "99 Bonuses"). The terms of the 99 Bonuses will be set forth in a written instrument signed by all parties to this Agreement. 9 3.2.1 FORMULA BONUS. The Company shall pay the Employee a cash bonus for the Company's fiscal year ending July 31, 1998 ("FY 98"), if the Employee is employed on July 31, 1998, equal to the largest amount for which he qualifies under the provisions of the attached SCHEDULE B. "EBIT" as used in this Agreement, and in any Schedules to this Agreement, means the Company's Earnings Before Interest and Taxes as determined in accordance with generally accepted accounting principles by the Company's independent accountants; provided that in determining EBIT the bonuses that would otherwise have been payable to the Employee and to Kathleen Tierney and Kevin Shahan under the bonus program set forth on SCHEDULE C, which is no longer in effect, shall be included as a compensation expense in determining FY 98 EBIT and not the bonuses payable under Sections 3.2.1 and 3.2.2. 10 3.2.2 DISCRETIONARY BONUS. The Company may, in the sole discretion of the Board, pay the Employee a discretionary bonus of up to 12.5% of Annual Base Salary. In determining the amount of the discretionary bonus, if any, to be paid under this provision, the Board will consider those factors it deems appropriate, including, without limitation, the extent of Employee's attainment of those operational and organizational goals set forth in SCHEDULE D annexed hereto 11 3.2.3 BONUS PAYMENT. Employee must be employed by the Company on July 31, 1998 in order to receive any bonus and any bonus will be paid 2 3 within 30 days following the completion of the FY 98 audit by the Company's independent accountants. 12 3.3 OPTIONS. 13 3.3.1 IMMEDIATE OPTION GRANT. Upon execution of this Agreement, Employee will be granted an option to purchase 75,000 shares of common stock of CML with an exercise price equal to the closing price of CML's common stock on the New York Stock Exchange (the "Fair Market Value") on the date of grant. Such option will vest as to 50% of the shares covered thereby on the date of grant, an additional 25% on April 1, 1999, if he is then still employed by the Company, and the remaining 25% on April 1, 2000, if he is then still employed by the Company. The option shall be subject to such other provisions as are set forth in the stock option agreements attached hereto as APPENDIX I. 14 3.3.2 PERFORMANCE OPTION. 15 (a) FORMULA GRANT. After completion of the audit of CML's financial statements for FY 98, the Company will grant to the Employee an option to purchase the largest number of shares of common stock of CML for which he qualifies in accordance with the provisions of the attached SCHEDULE E, provided that he is then employed by the Company. 16 (b) DISCRETIONARY GRANT. After the end of FY 98, the Company may, in the sole discretion of the Board, grant Employee an option to purchase up to an additional 25,000 shares of CML common stock. In determining whether to grant any such additional options, the Board will consider those factors it deems appropriate, including, without limitation, the extent of Employee's attainment of those operational and organizational goals set forth on the attached SCHEDULE D. 17 (c) GRANT PROCESS. Options to be granted to the Employee pursuant to this Section 3.3.2. shall be granted promptly after completion of the FY 98 audit by the Company's independent accountants. Such options will be exercisable at Fair Market Value on the date of grant and will vest as to 50% of the shares covered thereby on the date of grant, an additional 25% on July 31, 1999, if the Employee is then still employed by the Company and the remaining 25% on July 31, 2000, if the Employee is then still employed by the Company. The option will be subject to such other provisions as are set forth in the stock option agreements attached hereto as APPENDIX I. To the extent consistent with the law, the Company will grant options intended to qualify as incentive stock options to the Employee under this Section 3. 18 3.4 SALE BONUS. In the event that, during the Employment Period (or within 90 days thereafter if Employee is terminated without Cause under Section 4.3), CML sells the Company, either (i) CML ceases to own at least 50% of the equity of 3 4 the Company (except as a result of CML's "spinoff" of the Company into a separate publicly traded corporation where the shareholders of the Company and CML immediately after the spinoff are substantially the same) or (ii) all or substantially all of the assets of the Company are no longer owned by the Company (each hereinafter referred to as a "Sale"), the Company agrees to pay the Employee a bonus ("Sale Bonus") calculated as a percentage of the "Net Consideration" received in connection with the Sale. The Sale Bonus shall be calculated as follows: (a) If the Net Consideration is $50 Million or less, the Sale Bonus is Zero ($0). (b) If the Net Consideration is greater than $50 Million but less than or equal to $70 Million the Sale Bonus shall equal three-eighths of one percent (3/8%) of the amount by which the Net Consideration exceeds $50 Million. (c) If the Net Consideration is greater than $70 Million, the Sale Bonus shall be equal to (i) $75,000, plus (ii) five-eighths of one percent (5/8%) of the amount by which the Net Consideration exceeds $70 Million. The Sale Bonus will be paid in twelve (12) equal monthly installments over the 12-month period following receipt of the Net Consideration, PROVIDED, HOWEVER, that in the event the Employee's employment with the Company is terminated for death or disability pursuant to Section 4.2, or the Employee is terminated without Cause under Section 4.3, the balance of the Sale Bonus shall be paid to the Employee in a lump-sum at the time of such termination. The term "Net Consideration" means the fair market value on the date of the consummation of the Sale of all consideration in the form of cash or securities received by CML or the Company in connection with the Sale, less (i) all fees and expenses incurred in connection with the Sale, and (ii) any liabilities of the Company not assumed in the Sale and any expenses incurred in the settlement of such liabilities. If any portion of the Net Consideration is other than cash, then for the purpose of computing any Sale Bonus payable to the Employee, the Net Consideration shall be valued as follows: (i) publicly traded securities shall be valued at the average of their closing prices (as reported in the Wall Street Journal) for the twenty (20) trading days prior to the consummation of the Sale; (ii) any other consideration such as straight or convertible debt securities or obligations, or installment sale notes, unmarketable securities or other securities shall be valued at the fair market value thereof as determined in good faith by CML. In the event of any acquisition of Company assets, 4 5 the face amount of debt assumed by the acquiring party shall be valued at the time of the sale and included as part of the Net Consideration. Any Sale Bonus calculated on amounts paid into escrow will be payable at the time or times such amounts are released from such escrow. If the payment of any portion of the Net Consideration is contingent on any future event, that portion of the Net Consideration will be calculated and payable if and when such contingent payment is made. 3.5 BENEFITS. The Employee shall be entitled to participate in all other benefit programs that the Company provides to its employees, if any, to the extent that Employee's position, tenure, salary, age, health and other qualifications make him eligible to participate. 3.6 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the Employee for all reasonable travel, entertainment and other expenses incurred or paid by the Employee in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement, upon presentation by the Employee of documentation, expense statements, vouchers and/or such other supporting information as the Company may request, PROVIDED, HOWEVER, that the amount available for such travel, entertainment and other expenses may be fixed in advance by the Board, consistent with past practice. 1. EMPLOYMENT TERMINATION. The employment of the Employee by the Company pursuant to this Agreement shall terminate upon the occurrence of any of the following: 2 4.1 At the election of the Board, for Cause, immediately upon written notice by the Board to the Employee. For the purposes of this Section 4.1, Cause for termination shall be deemed to exist upon (a) a good faith finding by the Board of a material failure of the Employee to perform his assigned duties for the Company, which will not be based solely on the Company's failure to meet its budget, (a "Material Failure"), dishonesty, gross negligence or misconduct, or (b) the conviction of the Employee of, or the entry of a pleading of guilty or nolo contendere by the Employee to, any crime involving moral turpitude or any felony; provided that any termination based on a Material Failure can only occur after the Employee has received a written notice identifying such Material Failure (whether or not such Material Failure existed prior to the notice but was not the subject of a notice) and giving him at least thirty (30) days within which to correct such Material Failure (the "Warning") and such correction has not occurred within such thirty (30) days period, and; provided further that only one Warning will be required under this Agreement and thereafter, even if correction occurred after the Warning, the Employee may be terminated without any further 5 6 Warning, if the Board determines that any previously identified Material Failure has recurred after such 30-day period. 3 4.2 Thirty days after the death or disability of the Employee. As used in this Agreement, the term "disability" shall mean the inability of the Employee, due to a physical or mental disability, for a period of ninety (90) days, whether or not consecutive, during any 360-day period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician satisfactory to both the Employee and the Company, PROVIDED THAT if the Employee and the Company do not agree on a physician, the Employee and the Company shall each select a physician and these two together shall select a third physician, whose determination as to disability shall be binding on all parties; 4 4.3 At the election of the Company, without Cause, or, at the election of the Employee, upon written notice to the other parties to this Agreement. 5. EFFECT OF TERMINATION. 6 5.1 TERMINATION FOR CAUSE OR UPON EMPLOYEE'S ELECTION TO TERMINATE. In the event the Employee's employment is terminated for cause pursuant to Section 4.1 or at the Employee's election under Section 4.3, the Company shall pay to the Employee the compensation and benefits otherwise payable to him under Section 3 through the last day of his actual employment by the Company including any payment due to Employee under the terms of any Formula Bonus provision in effect for the fiscal year of the Company ended prior to the Employee's last day of employment. 7 5.2 TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment is terminated by death or because of disability pursuant to Section 4.2, the Company shall pay to the estate of the Employee or to the Employee, as the case may be, the compensation which would otherwise be payable to the Employee up to the end of the month in which the termination of his employment because of death or disability occurs and any payment due to Employee under the terms of any Formula Bonus provision in effect for the fiscal year of the Company ended prior to the Employee's last day of employment. 8 5.3 TERMINATION OTHER THAN FOR CAUSE, OR UPON DEATH OR DISABILITY. If the Employee's employment is terminated by the Company other than on account of Cause, Death or Disability, then the Employee will receive: (i) all compensation and benefits payable to him under Section 3 of this Agreement, through the end of the month in which his employment terminates, (ii) monthly payments of 1/12 of his Annual Base Salary at the rate he is being paid at the time of such termination, for fifteen (15) months following the end of the month in which or with which such termination occurs, (iii) a fraction of any bonus he would have received after the end of 6 7 the fiscal year in which such termination occurs, under any formula bonus program in which he is participating at the time of such termination, determined by multiplying the amount he would have received by a fraction, the numerator of which is the number of full or partial months of the fiscal year in which he was employed and the denominator of which is 12, and (iv) any payment due to Employee under the terms of any Formula Bonus provision in effect for the fiscal year of the Company ended prior to the Employee's last day of employment. 9 5.4 SURVIVAL. The provisions of Sections 3.4, 5, 6 and 7 shall survive the termination of this Agreement. 10. NON-SOLICITATION. 11 (a) During the Employment Period, and for a period of fifteen (15) months after the termination thereof, the Employee will not directly or indirectly: 12 (i) recruit, solicit or induce, or attempt to induce, any employee or employees of the Company to terminate their employment with, or otherwise cease their relationship with, the Company; or 13 (ii) solicit, divert or take away, or attempt to divert or to take away, the Company's relationship with vendors or suppliers, or with customers with which the Company has a contract, which were contacted, solicited or served by the Employee while employed by the Company. 14 (b) If any restriction set forth in this Section 6 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 15 (c) The restrictions contained in this Section 6 are necessary for the protection of the business and goodwill of the Company and are considered by the Employee to be reasonable for such purpose. The Employee agrees that any breach of this Section 6 may cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief. 16. PROPRIETARY INFORMATION AND DEVELOPMENTS. 17 7.1 PROPRIETARY INFORMATION. 18 (a) Employee agrees that all information and know-how, whether or not in writing, of a private, secret or confidential nature concerning the Company's business or financial affairs (collectively, "Proprietary Information") is and shall be the exclusive property of the Company. By way of illustration, but not 7 8 limitation, Proprietary Information may include inventions, products, processes, methods, techniques, formulas, compositions, compounds, projects, developments, plans, research data, clinical data, financial data, personnel data, computer programs, and customer and supplier lists. Except as required by law, Employee will not disclose any Proprietary Information to others outside the Company or, use the same, for any unauthorized purposes without written approval by an officer of CML, either during or after his employment, unless and until such Proprietary Information has become public knowledge without fault by the Employee. 19 (b) Employee agrees that all files, letters, memoranda, reports, records, data, sketches, drawings, laboratory notebooks, program listings, or other written, photographic, or other tangible material containing Proprietary Information, whether created by the Employee or others, which shall come into his custody or possession, shall be and are the exclusive property of the Company to be used by the Employee only in the performance of his duties for the Company. 20 (c) Employee agrees that his obligation not to disclose or use information, know-how and records of the types set forth in paragraphs (a) and (b) above, also extends to such types of information, know-how, records and tangible property of customers of the Company or suppliers to the Company or other third parties who may have disclosed or entrusted the same to the Company or to the Employee in the course of the Company's business unless such information, know-how, records or tangible property is in the public domain. 7.2 DEVELOPMENTS. (a) Employee will make full and prompt disclosure to the Company of all inventions, improvements, discoveries, methods, developments, software, and works of authorship, whether patentable or not, which are created, made, conceived or reduced to practice by the Employee or under his direction or jointly with others during his employment by the Company, whether or not during normal working hours or on the premises of the Company (all of which are collectively referred to in this Agreement as "Developments"). (b) Employee agrees to assign and does hereby assign to the Company (or any person or entity designated by the Company) all his right, title and interest in and to all Developments and all related patents, patent applications, copyrights and copyright applications. However, this Section 7(b) shall not apply to Developments which do not relate to the present or planned business or research and development of the Company and which are made and conceived by the Employee not during normal working hours, not on the Company's premises and not using the Company's tools, devices, equipment or Proprietary Information. 8 9 (c) Employee agrees to cooperate fully with the Company, both during and after his employment with the Company, with respect to the procurement, maintenance and enforcement of copyrights and patents (both in the United States and foreign countries) relating to Developments. Employee shall sign all papers, including, without limitation, copyright applications, patent applications, declarations, oaths, formal assignments, assignment of priority rights, and powers of attorney, which the Company may reasonably deem necessary or desirable in order to protect its rights and interests in any Development. 7.3 OTHER AGREEMENTS. Employee hereby represents that he is not bound by the terms of any agreement with any previous employer (other than any other company which was a subsidiary of CML) or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of his employment with the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. Employee further represents that his performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to his employment with the Company. 1. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon (a) personal delivery, or (b) deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other parties at the addresses shown above, or at such other address or addresses as any party shall designate to the others in accordance with this Section 8, or (c) sending by facsimile to the other parties at the facsimile numbers shown above, or at such other number or numbers as any party shall designate to the others in accordance with this Section 8. 2. PRONOUNS. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns and pronouns shall include the plural, and vice versa. 3. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement. 4. AMENDMENT. This Agreement may be amended or modified only by a written instrument executed by both the Company, CML and the Employee. 5. GOVERNING LAW. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the Commonwealth of Massachusetts. 9 10 6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company or CML may be merged or which may succeed to its assets or business, provided, however, that the obligations of the Employee are personal and shall not be assigned by him. 7. MISCELLANEOUS. 8 a. No delay or omission by the Company, CML or Employee in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company, CML or Employee on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. 9 b. The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement. 10 c. In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby. 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth above. CML GROUP, INC. SMITH & HAWKEN, LTD. By:_________________________ By:________________________________ Title:_______________________ Title:_____________________________ EMPLOYEE ----------------------------------- David McCreight 10 11 SCHEDULE B FY 98 Formula Bonus FY 98 EBIT
Equal To or FY 98 Greater Than Less Than Formula Bonus ------------ --------- ------------- $ 0 $3,200,000 $20,000 $3,200,000 $3,730,000 $28,575 $3,730,000 $4,200,000 $50,000 $4,200,000 $75,000
11 12 SCHEDULE D FY 98 Operational and Organizational Goals 1. Lower Company Returns in FY'98 from 8.52% of gross sales in FY'97. 2. Assort Catalogs and Stores with seasonally appropriate and quality merchandise that is unique and priced competitively. 3. Develop a liquidation strategy for each channel. 4. Develop a Visual Merchandising Strategy: including Organization and Process for Execution of strategy. 5. Develop a Merchandising and Inventory Planning Team that is positioned for major revenue growth in the next 2 years. 12 13 SCHEDULE E FY 98 Performance Options - Formula Grant FY 98 EBIT
Equal To or FY 98 Greater Than Less Than Formula Option For: ------------ --------- ------------------- $ 0 $3,730,000 10,000 shares $3,730,000 $4,200,000 20,000 shares $4,200,000 33,333 shares
13 EX-21 16 SUBSIDIARIES OF REGISTRANT 1 Exhibit 21 ---------- CML GROUP, INC. SUBSIDIARIES OF CML GROUP, INC.* Jurisdiction Name of Subsidiary of Incorporation ------------------ ---------------- OBW, Inc. Massachusetts OCR, Inc. Delaware OTNC, Inc. California NordicTrack, Inc.+ Minnesota NordicTrack GmbH+ Germany NordicTrack (U.K.) Limited+ United Kingdom Nordic Advantage, Inc. Minnesota Nordic Advantage of Ontario, Inc. Canada WFH Group, Inc. Delaware BFPI, Inc. Massachusetts CML International (FSC), Ltd. U.S. Virgin Islands Smith & Hawken, Ltd.++ Delaware - ---------------------- * Direct and indirect wholly-owned subsidiaries + Does business as NordicTrack ++ Does business as Smith & Hawken EX-23 17 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23 ---------- INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 2-89564, No. 33-34998, No. 33-48864, No. 33-45073, No. 33-58952, No. 33-65385, No. 33-65387 and No. 33-55660 of CML Group, Inc. and its subsidiaries each on Form S-8, and Registration Statements No. 33-40936, No. 33-40224, No. 33-58054 and 333-01629 of CML Group, Inc. and its subsidiaries each on Form S-3, of our report dated September 28, 1998 except for Note 1, the second paragraph of Note 7 and the tenth paragraph of Note 10 as to which the dates are November 5, October 14 and November 2, 1998, respectively (which expresses an unqualified opinion and includes explanatory paragraphs relating to substantial doubt about the Company's ability to continue as a going concern and the filing under Chapter 11 of the United States Bankruptcy Code of the Company's NordicTrack operations), appearing in this Annual Report on Form 10-K of CML Group, Inc. and its subsidiaries for the year ended July 31, 1998. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts November 13, 1998 EX-27 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CML GROUP, INC. FOR THE TWELVE MONTHS ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS JUL-31-1998 AUG-01-1997 JUL-31-1998 1,851,000 0 9,405,000 2,115,000 24,753,000 37,648,000 75,419,000 43,474,000 94,332,000 150,563,000 0 0 0 6,493,000 (73,151,000) 94,332,000 274,360,000 274,360,000 161,875,000 161,875,000 0 1,026,000 11,074,000 (95,962,000) 31,416,000 (127,378,000) 0 0 0 (127,378,000) (2.54) (2.54)
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