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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 27, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM___________ TO ____________
Commission file number 0-12628
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CML GROUP, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 04-2451745
-------- ----------
(State of Incorporation) (IRS Employer Identification Number)
524 Main Street, Acton, Massachusetts 01720
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508)264-4155
-------------
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common stock:
49,219,704 shares of common stock, $.10 par value, as of June 6, 1996.
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CML GROUP, INC. AND SUBSIDIARIES
--------------------------------
Form 10-Q
Index
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Page
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Part I: Financial Information
Item 1: Financial Statements
Consolidated Condensed Balance Sheets as of
April 27, 1996 and July 31, 1995 3 - 4
Consolidated Condensed Statements of Operations for the
three-month and nine-month periods ended April 27, 1996
and April 29, 1995 5
Consolidated Condensed Statements of Cash Flows for the
nine-month periods ended April 27, 1996
and April 29, 1995 6
Notes to Consolidated Condensed Financial Statements 7 -11
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 14
Part II: Other Information
Item 1: Legal Proceedings 15 - 17
Item 6: Exhibits and Reports on Form 8-K 17
Signatures 17
Exhibit Index 18
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Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
CML GROUP, INC. & SUBSIDIARIES
Consolidated Condensed Balance Sheets
-------------------------------------
ASSETS
April 27, 1996 July 31, 1995
-------------- -------------
Current assets:
Cash and cash equivalents $ 3,475,000 $ 8,338,000
Accounts receivable 16,529,000 51,949,000
Refundable income taxes 36,647,000 --
Prepaid income taxes 17,667,000 8,710,000
Inventories:
Raw materials 2,942,000 12,970,000
Work in process 1,302,000 3,096,000
Finished goods 26,070,000 49,378,000
------------ ------------
Total inventories 30,314,000 65,444,000
Other current assets 16,390,000 30,286,000
Net assets of businesses held for sale 39,870,000 34,314,000
------------ ------------
Total current assets 160,892,000 199,041,000
------------ ------------
Property, plant and equipment, at cost:
Land and buildings 19,337,000 19,865,000
Machinery and equipment 42,649,000 77,522,000
Leasehold improvements 31,093,000 80,710,000
------------ ------------
93,079,000 178,097,000
Less accumulated depreciation 32,799,000 65,057,000
------------ ------------
60,280,000 113,040,000
------------ ------------
Goodwill 8,841,000 12,521,000
Other assets 11,811,000 15,479,000
------------ ------------
$241,824,000 $340,081,000
============ ============
See Notes to Consolidated Condensed Financial Statements.
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CML GROUP, INC. & SUBSIDIARIES
Consolidated Condensed Balance Sheets
-------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
April 27, 1996 July 31, 1995
-------------- -------------
Current liabilities:
Current portion of long-term debt $ 160,000 $ 203,000
Accounts payable 20,386,000 35,156,000
Accrued compensation 6,075,000 6,905,000
Accrued advertising 7,338,000 4,381,000
Accrued sales returns 4,680,000 4,572,000
Accrued income taxes 132,000 1,892,000
Accrued expenses of businesses held for sale 8,782,000 --
Accrued expenses related to discontinued
operations 6,710,000 3,234,000
Other accrued expenses 32,597,000 26,165,000
------------ ------------
Total current liabilities 86,860,000 82,508,000
------------ ------------
Noncurrent liabilities:
Long-term debt 2,876,000 10,082,000
Convertible subordinated debentures 41,593,000 41,593,000
Other noncurrent liabilities 6,746,000 17,346,000
------------ ------------
Total noncurrent liabilities 51,215,000 69,021,000
------------ ------------
Stockholders' equity:
Common stock, par value $.10 per share
Authorized - 120,000,000 shares
Issued - 52,215,924 shares and
52,076,674 shares 5,222,000 5,207,000
Additional paid-in capital 79,715,000 79,805,000
Retained earnings 56,668,000 140,444,000
------------ ------------
141,605,000 225,456,000
Less treasury stock, at cost,
2,966,941 shares and 2,797,791 shares 37,856,000 36,904,000
------------ ------------
103,749,000 188,552,000
------------ ------------
$241,824,000 $340,081,000
============ ============
See Notes to Consolidated Condensed Financial Statements.
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CML GROUP, INC. & SUBSIDIARIES
Consolidated Condensed Statements of Operations
-----------------------------------------------
For the periods ended April 27, 1996
and April 29, 1995
Three Months Nine Months
------------ -----------
1996 1995 1996 1995
---- ---- ---- ----
Net sales $138,341,000 $179,525,000 $469,753,000 $587,715,000
------------ ------------ ------------ ------------
Less costs and expenses:
Cost of goods sold 63,952,000 70,998,000 220,039,000 227,570,000
Selling, general and administrative expenses 98,882,000 110,655,000 318,659,000 299,027,000
Loss on disposition of assets 30,824,000 -- 30,824,000 --
Interest expense (income) 520,000 (147,000) 2,093,000 806,000
------------ ------------ ------------ ------------
194,178,000 181,506,000 571,615,000 527,403,000
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes and extraordinary credit (55,837,000) (1,981,000) (101,862,000) 60,312,000
Provision (benefit) for income taxes (19,592,000) (1,301,000) (36,161,000) 22,557,000
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before extraordinary credit (36,245,000) (680,000) (65,701,000) 37,755,000
------------ ------------ ------------ ------------
Discontinued operations:
Loss from operations, net of income tax benefit -- (4,345,000) -- (1,346,000)
Provision for loss on disposal, net of
income tax benefit -- (35,678,000) (15,615,000) (35,678,000)
------------ ------------ ------------ ------------
-- (40,023,000) (15,615,000) (37,024,000)
------------ ------------ ------------ ------------
Income (loss) before extraordinary credit (36,245,000) (40,703,000) (81,316,000) 731,000
Extraordinary credit - early extinguishment
of debt, net of income taxes -- 1,073,000 -- 2,198,000
------------ ------------ ------------ ------------
Net income (loss) $(36,245,000) $(39,630,000) $(81,316,000) $ 2,929,000
============ ============ ============ ============
Earnings (loss) per share:
Income (loss) from continuing operations
before extraordinary credit:
Primary $ (0.74) $ (0.01) $ (1.33) $ 0.75
============ ============ ============ ============
Fully diluted $ (0.74) $ (0.01) $ (1.33) $ 0.75
============ ============ ============ ============
Income (loss) before extraordinary credit:
Primary $ (0.74) $ (0.82) $ (1.65) $ 0.01
============ ============ ============ ============
Fully diluted $ (0.74) $ (0.82) $ (1.65) $ 0.01
============ ============ ============ ============
Net income (loss):
Primary $ (0.74) $ (0.80) $ (1.65) $ 0.06
============ ============ ============ ============
Fully diluted $ (0.74) $ (0.80) $ (1.65) $ 0.06
============ ============ ============ ============
Weighted average number of shares outstanding 49,470,085 50,216,999 49,600,446 50,565,802
See Notes to Consolidated Condensed Financial Statements.
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CML GROUP, INC. & SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
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For the Nine Months Ended
-------------------------
April 27, 1996 April 29, 1995
-------------- --------------
Cash flows from operating activities:
Net income (loss) $(81,316,000) $ 2,929,000
------------ ------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loss on disposition of assets 30,824,000 --
Provision for loss on disposal of discontinued operations 24,023,000 40,988,000
Gain on early extinguishment of debt -- (2,198,000)
Depreciation and amortization 23,682,000 22,432,000
Loss on disposal of property, plant and equipment 3,831,000 2,367,000
Changes in working capital items 12,497,000 (26,663,000)
(Increase) decrease in other assets 2,341,000 (2,657,000)
Decrease in other noncurrent liabilities (2,414,000) (264,000)
------------ ------------
Total adjustments 94,784,000 34,005,000
------------ ------------
Net cash provided by operating activities 13,468,000 36,934,000
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment (18,987,000) (26,818,000)
Net proceeds from sale of discontinued operation 11,516,000 --
Reduction in notes receivable 44,000 72,000
------------ ------------
Net cash used in investing activities (7,427,000) (26,746,000)
------------ ------------
Cash flows from financing activities:
Decrease in long-term debt (7,249,000) (1,169,000)
Acquisition of convertible debentures -- (11,991,000)
Dividends paid (2,460,000) (2,998,000)
Exercise of stock options 101,000 529,000
Acquisition of treasury stock (1,296,000) (8,236,000)
------------ ------------
Net cash used in financing activities (10,904,000) (23,865,000)
------------ ------------
Net decrease in cash and cash equivalents during the period (4,863,000) (13,677,000)
Cash and cash equivalents at the beginning of the period 8,338,000 28,929,000
------------ ------------
Cash and cash equivalents at the end of the period $ 3,475,000 $ 15,252,000
============ ============
See Notes to Consolidated Condensed Financial Statements.
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CML GROUP, INC & SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
----------------------------------------------------
Note 1
- ------
The accompanying consolidated condensed financial statements and notes should be
read in conjunction with the financial statements contained in the Company's
Annual Report on Form 10-K. In the opinion of management, the accompanying
consolidated condensed financial statements include all adjustments necessary
for a fair presentation of the results of the interim periods presented and,
except for the adjustments relating to the sale of Britches of Georgetowne (see
Note 2) and the planned divestitures of The Nature Company and Hear Music (see
Note 3), all such adjustments are of a normal recurring nature. The retail
industry is seasonal in nature and the results of operations for the interim
periods presented may not be indicative of the results for a full year.
Certain 1995 amounts have been reclassified to conform to the 1996 presentation.
Note 2 - Discontinued Operations
- --------------------------------
On April 12, 1996, the Company sold the common stock of its Britches of
Georgetowne subsidiary for $13,400,000 (including $1,884,000 placed in escrow)
in cash plus the assumption of certain liabilities. Included in the Company's
net loss for the nine month period ended April 27, 1996 is an additional
$15,615,000 provision for loss on disposal, net of an $8,408,000 income tax
benefit, to write-down Britches' net assets to net realizable value and accrue
for operating losses through the disposal date.
Note 3 - Divestiture of The Nature Company and Hear Music
- ---------------------------------------------------------
During the third quarter of fiscal 1996, the Company decided to divest its
Nature Company and Hear Music subsidiaries. The Nature Company, Hear Music and
Smith & Hawken comprise the Nature Company Segment ("NC Segment"). Included in
the loss from continuing operations for the third quarter of fiscal 1996 is a
pretax charge of $30,824,000 to write-down The Nature Company and Hear Music's
net assets to estimated net realizable value and to accrue estimated operating
losses until disposition, estimated lease termination and assignment costs and
other transaction costs. In June 1996, the Company sold substantially all of the
assets of The Nature Company for a cash purchase price of $39,870,000 plus the
assumption of certain liabilities. The estimated net realizable value of The
Nature Company and Hear Music's net assets have been included in current assets
on the accompanying consolidated condensed balance sheet at April 27, 1996.
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Note 4 - Long-term Debt
- -----------------------
Consolidated long-term debt is summarized as follows:
April 27, 1996 July 31, 1995
-------------- -------------
Revolving credit loan $2,835,000 $10,000,000
Note payable 92,000 199,000
Obligations under capital leases 109,000 86,000
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3,036,000 10,285,000
Less current portion 160,000 203,000
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Long-term debt $2,876,000 $10,082,000
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On April 17, 1996, the Company entered into a new senior secured revolving
credit agreement with two banks. The revolving credit agreement allows the
Company to borrow up to $80.0 million through April 15, 1999. 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 agreement also requires the Company to pay the
outstanding loan balance down to a specified level for a period of forty-five
consecutive days each fiscal year and provides for a reduction in the
commitment for net cash proceeds received from the sale of assets not in the
ordinary course of business or from the issuance of subordinated debt or equity
securities. Advances outstanding under the agreement bear interest at the prime
rate plus 0.75%.
Note 5 - Contingencies
- ----------------------
Litigation
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In May 1994, ICON Health & Fitness, Inc. ("ICON") commenced a civil suit
against NordicTrack in the United States District Court for the District of Utah
alleging infringement of three patents arising out of NordicTrack's design of
its WalkFit treadmill and certain other similar products. Discovery has been
completed. In November 1995, the Court granted NordicTrack's Motion for Summary
Judgement relating to one of ICON's three patent infringement claims. ICON's
other two claims have been scheduled for trial during the summer of 1996. While
the Company believes it has meritorious defenses, no assurance can be given of a
favorable outcome in the ICON lawsuit. An unfavorable outcome could have a
material adverse effect on the Company's operating results for the period in
which such decision occurs and could also have a material adverse effect on the
Company's financial condition.
In January 1995, an individual, William Wilkinson, filed a demand for
arbitration and statement of claim alleging that NordicTrack breached the terms
of a licensing and product development agreement by failing to compensate him
with royalties for certain design features of its WalkFit treadmill and certain
similar products. Included in the Company's loss from continuing operations for
the nine month period ended April 27, 1996 is a $4.0 million pretax charge for
the settlement of this claim in January 1996.
On October 25, 1994, four stockholders, owning an aggregate of 2,400
shares of CML Group, Inc. Common Stock, filed a class action lawsuit in U.S.
District Court for the District of Massachusetts against the Company and its
Chairman, Charles M. Leighton, and President, G. Robert Tod. The complaint
alleged that the Company failed to properly disclose the extent of its
NordicTrack advertising expenditures and the impact of those expenditures on its
future operating results, thereby violating federal securities laws. On December
19, 1994, the defendants filed a motion to dismiss the complaint, and on April
7, 1995, the plaintiffs responded by filing an amended complaint which added an
allegation that Messrs. Leighton and Tod violated the securities laws by selling
CML stock in the Spring of
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1994. In April 1995, the defendants filed a motion to dismiss this lawsuit. The
court allowed defendants' motion and dismissed the lawsuit on March 21, 1996.
The plaintiffs did not appeal.
In February 1996, the proposed consent that NordicTrack agreed to with the
Federal Trade Commission ("FTC") was published. The purpose of the proposed
consent was to settle allegations that NordicTrack made false and
unsubstantiated weight loss and weight maintenance claims in advertising its
cross-country ski exercise machines. The FTC alleged that NordicTrack based
these claims on studies with various methodological flaws. The proposed consent
agreement would prohibit NordicTrack from misrepresenting the existence or
results of any study or survey relating to weight loss and making certain claims
with respect to its exercise equipment without reliable supporting evidence. One
public comment was received by the FTC during the permitted public comment
period which ended on April 29, 1996. No civil penalties have been imposed by
the FTC pursuant to the proposed consent agreement.
On or about February 23, 1996, an alleged purchaser of a NordicTrack
cross-country ski exercise machine filed a Class Action Complaint, entitled
Elissa Crespi, on behalf of Herself and All Others Similarly Situated v.
NordicTrack, Inc., against NordicTrack in the Supreme Court of the State of New
York, County of New York (the "Crespi Complaint"). On or about February 26,
1996, another alleged purchaser of a cross-country ski exercise machine filed a
Class Action Complaint in the same court, entitled Wendy Perel, on behalf of
Herself and All Others Similarly Situated, v. NordicTrack, Inc. (the "Perel
Complaint"). On or about April 10, 1996, another alleged purchaser of a
NordicTrack cross-country ski exercise machine filed a Class Action Complaint in
the Superior Court of Fulton County, Georgia, entitled John Lucien Ward, Jr. v.
NordicTrack, Inc. (the "Ward Complaint"). The Crespi Complaint alleges that
NordicTrack made false and misleading claims concerning the weight loss of
persons using its ski-exerciser and thereby defrauded its customers, breached
warranties and violated Section 349 of the New York General Business Law. The
Perel Complaint and Ward Complaint allege that NordicTrack misrepresented the
results of a weight loss study and made unsubstantiated claims regarding weight
loss and/or weight maintenance benefits from the use of NordicTrack's
cross-country ski exercise machines. The Perel Complaint and Ward Complaint
assert claims of negligent misrepresentation, breach of an express warranty and
common law fraud. Ms. Crespi seeks to represent a class consisting of all
persons in the United States who purchased NordicTrack ski exercisers on or
after January 1, 1994, excluding NordicTrack and its employees. Ms. Perel and
Mr. Ward seek to represent a class consisting of all persons in the United
States who purchased one or more NordicTrack cross-country ski exercise
machines, excluding the officers and directors of NordicTrack. The plaintiff in
the Crespi Complaint seeks for herself and the alleged class unspecified actual
and punitive damages with interest, rescission, attorneys' fees, costs, an order
requiring NordicTrack to make corrective disclosures and the imposition of a
constructive trust. The plaintiffs in the Perel Complaint and Ward Complaint
seek restitution of all amounts paid by them and the alleged class members for
NordicTrack cross-country ski exercise machines, together with interest,
attorneys' fees, costs, and any additional and consequential damages for
injuries suffered by the plaintiff and alleged class members. Both the Crespi
Complaint and the Perel Complaint have been removed to the United States
District Court for the Southern District of New York. The parties to the actions
have stipulated to the entry of a pre-trial order consolidating them, which they
have filed, but the Court has not yet entered. The plaintiffs have not yet filed
their consolidated complaint or moved for class certification. The Ward
Complaint has been removed to the United States District Court for the Northern
District of Georgia. On May 29, 1996, NordicTrack moved
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to dismiss it. NordicTrack believes it has meritorious defenses to these
complaints and intends to vigorously contest these lawsuits. These lawsuits are
in the earliest stages and the Company is unable to determine the likelihood and
possible impact on the Company of unfavorable outcomes.
The Company is involved in various other legal proceedings which have
arisen in the ordinary course of business. Management believes the outcome of
such proceedings will not have a material adverse impact on the Company's
financial condition or results of operations.
Environmental Matters
---------------------
On June 3, 1991, the Company received from the United States Environmental
Protection Agency ("EPA") a Special Notice Letter containing a formal demand on
the Company as a Potentially Responsible Party ("PRP") for reimbursement of the
costs incurred and expected to be incurred in response to environmental problems
at a so-called "Superfund" site in Conway, New Hampshire. The EPA originally
estimated the costs of remedial action and future maintenance and monitoring
programs at the site at about $7.3 million. The Superfund site includes a vacant
parcel of land owned by a subsidiary of the Company as well as adjoining
property owned by a third party. No manufacturing or other activities involving
hazardous substances have ever been conducted by the Company or its affiliates
on the Superfund site in Conway. The environmental problems affecting the land
resulted from activities by the owners of the adjoining parcel. Representatives
of the Company have engaged in discussions with the EPA regarding responsibility
for the environmental problems and the costs of cleanup. The owners of the
adjoining parcel are bankrupt. The EPA commenced cleanup activities at the site
in July 1992.
The EPA expended approximately $1.4 million for the removal phase of the
site cleanup, which has now been completed. The EPA had estimated that the
removal costs would exceed $3.0 million, but only a small portion of the solid
waste removed from the site was ultimately identified as hazardous waste.
Therefore, the EPA's actual response costs for the removal phase were less than
the EPA originally estimated. The EPA has implemented the groundwater phase of
the cleanup, which the EPA originally estimated would cost approximately $4.0
million.
The Company believes that the EPA's estimated cost for cleanup, including
the proposed remedial actions, is excessive and involves unnecessary actions. In
addition, a portion of the proposed remedial cost involves cleanup of the
adjoining property that is not owned by the Company or any of its affiliates.
Therefore, the Company believes it is not responsible for that portion of the
cleanup costs. The Company has reserves and insurance coverage (from its primary
insurer) for environmental liabilities at the site in the amount of
approximately $2.3 million. The Company also believes that it is entitled to
additional insurance from its excess insurance carriers. However, if excess
liability coverage is not available to the Company and the ultimate liability
substantially exceeds the primary insurance amount and reserves, the liability
would have a material adverse effect upon the Company's operating results for
the period in which the resolution of the claim occurs and could have a
material adverse effect upon the Company's financial condition.
In June 1992, the EPA notified the Company it may be liable for the release
of hazardous substances by the Company's former Boston Whaler subsidiary at a
hazardous waste treatment and storage facility in Southington, Connecticut. The
EPA has calculated the Company's volumetric contribution at less than two tenths
of one percent. The EPA has not completed its
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Remedial Investigation/Feasibility Study and, therefore, an estimate of cleanup
costs is not available.
Tax Matters
-----------
The Internal Revenue Service ("IRS") has been engaged in an examination of
the Company's tax returns for the fiscal years 1987 through 1991. The Company
has been advised by the IRS that the examination will be completed in the near
future. Although the Company has not received an official notice, based on
discussions with IRS personnel, the Company expects that the IRS will propose
certain adjustments which, if sustained by the IRS, would result in a tax
deficiency for the years under examination. The adjustments expected to be
proposed by the IRS primarily relate to: (i) the disallowance of deductions
taken by the Company with respect to incentive compensation payments made to the
former owners of NordicTrack (acquired in June 1986) and to the former owners of
Britches of Georgetowne (acquired in August 1983); and (ii) the valuation of
certain assets acquired in connection with the acquisition of Britches.
The Company believes that the tax deductions taken were valid and in
accordance with the Internal Revenue Code. However, at this stage no assurance
can be given of a favorable outcome on these matters. If the IRS proposed
adjustments are sustained, any back taxes owed and associated interest could
have a material adverse effect on the Company's operating results for the period
in which such issues are finally resolved and could also have a material adverse
effect on the Company's financial condition.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
--------------
Introduction
- ------------
After reviewing their performance and strategic fit with the Company's other
businesses, the Company decided to divest The Nature Company and Hear Music
subsidiaries during the third quarter of fiscal 1996. The Nature Company, Hear
Music and Smith & Hawken comprise the Nature Company Segment ("NC Segment").
Accordingly, the planned dispositions of The Nature Company and Hear Music are
accounted for in continuing operations in the accompanying consolidated
condensed financial statements. The dispositions of The Nature Company and Hear
Music will enable the Company to focus on businesses which have the greatest
growth prospects and offer the greatest potential return on investment.
Financial Condition
- -------------------
Stockholders' equity at April 27, 1996 decreased $84.9 million to $103.7 million
from $188.6 million at July 31, 1995 due primarily to a net loss of $81.3
million, including a $15.6 million loss from discontinued operations, net of an
income tax benefit, relating to the sale of Britches of Georgetowne. Britches
was sold in April 1996 for $13.4 million in cash (including $1.9 million placed
in escrow) plus the assumption of certain liabilities. The net loss for the
three and nine month periods ended April 27, 1996 also includes a pretax loss
of $30.8 million resulting from the planned dispositions of The Nature Company
and Hear Music, an early stage retail concept included within the Nature
Company Segment. In June 1996, the Company sold The Nature Company for
$39.9 million in cash plus the assumption of certain liabilities. The Company's
working capital decreased to $74.0 million at April 27, 1996 from $116.5
million at July 31, 1995. The decrease in working capital is primarily
attributable to decreases in accounts receivable, inventories and other current
assets and increases in accrued advertising, accrued expenses of businesses
held for sale, accrued expenses related to discontinued operations and other
accrued expenses partially offset by increases in refundable and prepaid income
taxes and decrease in accounts payable. During the first nine months of fiscal
1996, the Company spent approximately $19.0 million on additions to property,
plant and equipment, received $11.6 million in cash, net of amounts held in
escrow, for the sale of Britches of Georgetowne and repaid $7.2 million of
long-term debt. In April 1996, the Company entered into a new three-year $80.0
million revolving credit facility with two banks which will be secured by the
assets of the Company. The credit facility provides for a reduction in the
commitment for net cash proceeds received from the sale of assets not in the
ordinary course of business.
Results of Operations
- ---------------------
The Company's continuing operations consist of two segments, NordicTrack and the
NC Segment. The NC Segment includes The Nature Company, Smith & Hawken and Hear
Music. During the third quarter of fiscal 1996, the Company decided to divest
The Nature Company and Hear Music.
During the third quarter of fiscal 1996, net sales of the Company's continuing
operations decreased by $41.2 million to $138.3 million, or 23.0%, over the
third quarter of fiscal 1995. The Company incurred a loss of $36.2 million from
continuing operations in the third quarter of fiscal 1996 compared with a loss
of $0.7 million from continuing operations during the same period of fiscal
1995. The increase in the loss from continuing operations is primarily due lower
sales and gross profits at NordicTrack and the $30.8 million pretax loss
recorded in connection with the planned dispositions of The Nature Company and
Hear Music partially offset by a reduction in selling, general and
administrative expenses.
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For the first nine months of fiscal 1996, sales from continuing operations
decreased by $118.0 million to $469.8 million, or 20.1%, compared with the first
nine months of fiscal 1995. Income from continuing operations during the first
nine months of fiscal 1996 declined by $103.5 million over the same period in
fiscal 1995, resulting in a loss from continuing operations of $65.7 million in
fiscal 1996. The decline in income from continuing operations is primarily
attributable to lower sales and gross profits at NordicTrack, the pretax loss
recorded in connection with the planned dispositions of The Nature Company and
Hear Music and higher selling, general and administrative expenses.
Retail sales decreased by $1.8 million to $93.2 million, or 1.9%, over the third
quarter of fiscal 1995 primarily due to a decrease in Nordic Advantage
comparable store sales partially offset by an increase in the NC Segment's
comparable store sales. During the third quarter of fiscal 1996, comparable
store sales decreased by 24.6%. Direct response and mail order sales in the
third quarter of fiscal 1996 decreased by $39.4 million to $45.1 million, or
46.6%, over the third quarter of fiscal 1995 primarily due to lower direct
response sales at NordicTrack.
Retail sales during the first nine months of fiscal 1996 increased by 3.6%, to
$329.4 million, over the same period in fiscal 1995 primarily due to the
addition of new Smith & Hawken stores and Nordic Advantage stores and kiosks.
Comparable store sales declined 20.8% in the first nine months of fiscal 1996.
Direct response and mail order sales declined by $129.4 million, or 48.0%, to
$140.4 million during the first nine months of fiscal 1996 over the comparable
period in fiscal 1995 primarily due to lower direct response sales at
NordicTrack.
Cost of goods sold increased as a percentage of sales from 39.5% in the third
quarter of fiscal 1995 to 46.2% in the third quarter of fiscal 1996. For the
first nine months in fiscal 1996, cost of goods sold increased to 46.8% from
38.7% in fiscal 1995. Cost of goods sold increased as a percentage of sales
primarily due to increased sales promotions offered by NordicTrack and the NC
Segment in response to a more competitive consumer environment, higher materials
prices, higher overhead rate and labor costs at NordicTrack and an increase in
the proportion of NordicTrack's sales which are accounted for by products with
higher costs of goods sold.
Selling, general and administrative expenses increased as a percentage of sales
from 61.6% in the third quarter of fiscal 1995 to 71.5% in the third quarter of
fiscal 1996, and from 50.9% in the first nine months of fiscal 1995 to 67.8% in
the first nine months of fiscal 1996. The increase in selling, general and
administrative expenses as a percentage of sales is due to less efficient
advertising at NordicTrack, fixed costs at stores which experienced a decrease
in comparable store sales, and higher operating expenses attributable to the
increased number of kiosks.
During the third quarter of fiscal 1996, the Company decided to divest The
Nature Company and Hear Music subsidiaries. The loss from continuing operations
for the three months ended April 27, 1996 includes a pretax charge of
$30.8 million to write-down The Nature Company and Hear Music's net assets to
estimated net realizable value and to accrue estimated operating losses until
disposition and estimated lease termination and assignment costs and other
transaction costs. In June 1996, the Company sold substantially all of the
assets of The Nature Company for a cash purchase price of $39.9 million plus the
assumption of certain liabilities.
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The Company incurred net interest expense of $0.5 million, or 0.4% of sales, in
the third quarter of fiscal 1996 compared to net interest income of $0.1 million
in the third quarter of fiscal 1995. For the first nine months of the year, net
interest expense was $0.8 million, or 0.1% of sales, in fiscal 1995 and $2.1
million, or 0.4% of sales, in fiscal 1996.
The Company's income tax benefit as a percentage of pretax loss was 35.1% in the
third quarter of fiscal 1996 compared to 65.7% during the third quarter of
fiscal 1995. During the first nine months of fiscal 1996, the Company's income
tax benefit as a percentage of pretax loss was 35.5% compared to a 37.4% income
tax provision as a percentage of pretax income during the first nine months of
fiscal 1995.
During the third quarter of fiscal 1996, NordicTrack's total sales decreased by
$44.2 million to $102.3 million, or 30.2%, over the third quarter of fiscal
1995. NordicTrack sales declined by $109.6 million to $316.7 million in the
first nine months of fiscal 1996 compared with the same period in fiscal 1995.
The decrease in NordicTrack's total sales during the third quarter and first
nine months was primarily attributable to a decrease in direct response sales.
Approximately 61.8% and 63.7% of NordicTrack's total sales in the third quarter
and first nine months of fiscal 1996, respectively, were accounted for by sales
at its Nordic Advantage subsidiary which operates retail stores and mall kiosks.
Nordic Advantage's retail sales decreased from $68.7 million in the third
quarter of fiscal 1995 to $63.2 million in the similar fiscal 1996 quarter due
primarily to the decline in comparable store sales by 37.5%. Nordic Advantage's
retail sales increased from $189.6 million in the first nine months of fiscal
1995 to $201.8 million in the first nine months of fiscal 1996 primarily due to
the opening of new mall kiosks partially offset by the decline in comparable
store sales by 29.5%. At the end of the third fiscal quarter of 1996, Nordic
Advantage operated 214 mall kiosks, up from 115 at the end of the third quarter
of fiscal 1995. Nordic Advantage also had 128 stores open at the end of the
third quarter of fiscal 1996 compared with 110 stores at the end of the third
quarter of fiscal 1995. In the third quarter of fiscal 1996, direct response
sales decreased $38.7 million to $39.1 million, or 49.7%, and decreased $121.8
million to $114.9 million, or 51.5%, in the first nine months of fiscal 1996
compared to the similar periods in fiscal 1995. The decrease in direct response
sales is primarily attributable to a reduction in advertising expenditures
combined with less effective advertisements.
The NC Segment sales increased by $3.0 million, or 9.1%, to $36.0 million,
during the third quarter of fiscal 1996 and declined by $8.4 million to $153.1
million, or by 5.2%, during the first nine months of fiscal 1996 over the same
period in fiscal 1995. Retail sales for the third quarter of fiscal 1996,
increased $3.7 million to $30.0 million, or 14.1%, compared with retail sales
for the third quarter of fiscal 1995. The increase in retail sales during the
third quarter of fiscal 1996 is primarily attributable to the addition of new
Smith & Hawken stores and an increase in comparable store sales for the NC
Segment by 2.3%. During the first nine months of fiscal 1996, retail sales
decreased by $0.7 million, or 0.5%, to $127.5 million compared to $128.2 million
during the first nine months of fiscal 1995. Comparable store sales for the NC
Segment decreased by 10.4% in the first nine months of fiscal 1996. The NC
Segment operated 157 stores at the end of the third quarter of fiscal 1996. In
the third quarter, the NC Segment's mail order sales declined by $0.7 million to
$6.0 million and in the first nine months of fiscal 1996 decreased by $7.7
million to $25.6 million, compared to the similar periods in fiscal 1995.
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PART II: OTHER INFORMATION
Item 1: Legal Proceedings.
Environmental Matters
---------------------
Note 5 of Notes to Consolidated Condensed Financial Statements in
Item 1 of Part I hereof is hereby incorporated by reference for
information concerning environmental matters.
Litigation
----------
In May 1994, ICON Health & Fitness, Inc. ("ICON") commenced a
civil suit against NordicTrack in the United States District Court
for the District of Utah alleging infringement of three patents
arising out of NordicTrack's design of its WalkFit treadmill and
certain other similar products. Discovery has been completed. In
November 1995, the Court granted NordicTrack's Motion for Summary
Judgement relating to one of ICON's three patent infringement claims.
ICON's other two claims have been scheduled for trial during the
summer of 1996. While the Company believes it has meritorious
defenses, no assurance can be given of a favorable outcome in the
ICON lawsuit. An unfavorable outcome could have a material adverse
effect on the Company's operating results for the period in which
such decision occurs and could also have a material adverse effect on
the Company's financial condition.
In January 1995, an individual, William Wilkinson, filed a demand
for arbitration and statement of claim alleging that NordicTrack
breached the terms of a licensing and product development agreement
by failing to compensate him with royalties for certain design
features of its WalkFit treadmill and certain similar products.
Included in the Company's loss from continuing operations for the
nine month period ended April 27, 1996 is a $4.0 million pretax
charge for the settlement of this claim in January 1996.
On October 25, 1994, four stockholders, owning an aggregate of
2,400 shares of CML Group, Inc. Common Stock, filed a class action
lawsuit in U.S. District Court for the District of Massachusetts
against the Company and its Chairman, Charles M. Leighton, and
President, G. Robert Tod. The complaint alleged that the Company
failed to properly disclose the extent of its NordicTrack advertising
expenditures and the impact of those expenditures on its future
operating results, thereby violating federal securities laws. On
December 19, 1994, the defendants filed a motion to dismiss the
complaint, and on April 7, 1995, the plaintiffs responded by filing
an amended complaint which added an allegation that Messrs. Leighton
and Tod violated the securities laws by selling CML stock in the
Spring of 1994. In April 1995, the defendants filed a motion to
dismiss this lawsuit. The court allowed defendants' motion and
dismissed the lawsuit on March 21, 1996. The plaintiffs did not
appeal.
In February 1996, the proposed consent that NordicTrack agreed to
with the Federal Trade Commission ("FTC") was published. The purpose
of the proposed consent was to settle allegations that NordicTrack
made false and unsubstantiated weight loss and weight maintenance
claims in advertising its cross-country ski exercise machines. The
FTC alleged that NordicTrack based these claims on studies with
various methodological flaws. The proposed consent agreement would
prohibit NordicTrack from misrepresenting the existence or results
of any study or survey relating to weight loss and making certain
claims with respect to its exercise equipment without reliable
supporting evidence. One public comment was received by the FTC
during the permitted public comment period which ended on April 29,
1996. No civil penalties have been imposed by the FTC pursuant to the
proposed consent agreement.
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On or about February 23, 1996, an alleged purchaser of a
NordicTrack cross-country ski exercise machine filed a Class Action
Complaint, entitled Elissa Crespi, on behalf of Herself and All
Others Similarly Situated v. NordicTrack, Inc., against NordicTrack
in the Supreme Court of the State of New York, County of New York
(the "Crespi Complaint"). On or about February 26, 1996, another
alleged purchaser of a cross-country ski exercise machine filed a
Class Action Complaint in the same court, entitled Wendy Perel, on
behalf of Herself and All Others Similarly Situated, v. NordicTrack,
Inc. (the "Perel Complaint"). On or about April 10, 1996, another
alleged purchaser of a NordicTrack cross-country ski exercise
machine filed a Class Action Complaint in the Superior Court of
Fulton County, Georgia, entitled John Lucien Ward, Jr. v.
NordicTrack, Inc. (the "Ward Complaint"). The Crespi Complaint
alleges that NordicTrack made false and misleading claims concerning
the weight loss of persons using its ski-exerciser and thereby
defrauded its customers, breached warranties and violated Section
349 of the New York General Business Law. The Perel Complaint and
Ward Complaint allege that NordicTrack misrepresented the results of
a weight loss study and made unsubstantiated claims regarding weight
loss and/or weight maintenance benefits from the use of
NordicTrack's cross-country ski exercise machines. The Perel
Complaint and Ward Complaint assert claims of negligent
misrepresentation, breach of an express warranty and common law
fraud. Ms. Crespi seeks to represent a class consisting of all
persons in the United States who purchased NordicTrack ski
exercisers on or after January 1, 1994, excluding NordicTrack and
its employees. Ms. Perel and Mr. Ward seek to represent a class
consisting of all persons in the United States who purchased one or
more NordicTrack cross-country ski exercise machines, excluding the
officers and directors of NordicTrack. The plaintiffs in the Crespi
Complaint seeks for herself and the alleged class unspecified
actual and punitive damages with interest, rescission, attorneys'
fees, costs, an order requiring NordicTrack to make corrective
disclosures and the imposition of a constructive trust. The
plaintiffs in the Perel Complaint and Ward Complaint seek
restitution of all amounts paid by them and the alleged class members
for NordicTrack cross-country ski exercise machines, together with
interest, attorneys' fees, costs, and any additional and
consequential damages for injuries suffered by the plaintiff and
alleged class members. Both the Crespi Complaint and the Perel
Complaint have been removed to the United States District Court for
the Southern District of New York. The parties to the actions have
stipulated to the entry of a pre-trial order consolidating them,
which they have filed, but the Court has not yet entered. The
plaintiffs have not yet filed their consolidated complaint or moved
for class certification. The Ward Complaint has been removed to the
United States District Court for the Northern District of Georgia. On
May 29, 1996, NordicTrack moved to dismiss it. NordicTrack believes
it has meritorious defenses to these complaints and intends to
vigorously contest these lawsuits. These lawsuits are in the earliest
stages and the Company is unable to determine the likelihood and
possible impact on the Company of unfavorable outcomes.
The Company is involved in various other legal proceedings which
have arisen in the ordinary course of business. Management believes
the outcome of such proceedings will not have a material adverse
impact on the Company's financial condition or results of operations.
Tax Matters
-----------
The Internal Revenue Service ("IRS") has been engaged in an
examination of the Company's tax returns for the fiscal years 1987
through 1991. The Company has been advised by the IRS that the
examination will be completed in the near future. Although the
Company has not received an official notice, based on discussions
with IRS personnel, the Company expects that the IRS will propose
certain adjustments which, if sustained by the IRS, would result in
a tax deficiency for the years under examination. The adjustments
expected to be proposed by the IRS primarily relate to: (i) the
disallowance of deductions taken by the Company with respect to
incentive compensation payments made to the former owners of
NordicTrack
16
17
(acquired in June 1986) and to the former owners of Britches of
Georgetowne (acquired in August 1983); and (ii) the valuation of
certain assets acquired in connection with the acquisition of
Britches.
The Company believes that the tax deductions taken were valid and
in accordance with the Internal Revenue Code. However, at this stage
no assurance can be given of a favorable outcome on these matters. If
the IRS proposed adjustments are sustained, any back taxes owed and
associated interest could have a material adverse effect on the
Company's operating results for the period in which such issues are
finally resolved and could also have a material adverse effect on the
Company's financial condition.
Items 2-5: None
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K:
On March 11, 1996, the Company filed a Current Report on
Form 8-K, dated February 22, 1996, announcing under Item 5
(Other Events) of the Form the election by the Company's
Board of Directors of Messrs. Robert J. Samuelson and Glenn
E. Davis and Ms. Nancy S. Wang as the Company's Executive
Vice President; Vice President, Finance and Chief Financial
Officer; and Vice President, Investor Relations and
Controller, respectively.
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CML GROUP, INC.
---------------
(Registrant)
Date: June 11, 1996 /s/Glenn E. Davis
------------- ---------------------------
Glenn E. Davis
Vice President, Finance
Principal Financial Officer
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EXHIBIT INDEX
Page No.
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10(a) The Company's Revolving Credit Agreement dated as of April 17, 1996 by
and among CML Group, Inc., NordicTrack, Inc., Nordic Advantage,
Inc., The Nature Company, Smith & Hawken, Ltd., Biscuit Factory
Publications Incorporated (D/B/A Hear Music), The First National
Bank of Boston and BankAmerica Business Credit, Inc. 19-141
11 -- Statement Regarding Computation of Earnings (Loss) Per Share 142
27 -- Financial Data Schedule 143
18