<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
[ ] 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: 0-19902
DAMARK INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1551116
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7101 Winnetka Avenue North
Minneapolis, Minnesota 55428
(Address of principal executive offices)
(Zip code)
(612) 531-0066
(Registrant's telephone number, including area code)
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 Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
On October 21, 1996, there were 8,137,897 shares of Class A Common Stock, $.01
par value, of Damark International, Inc. outstanding.
<PAGE>
DAMARK INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1: Financial Statements.
Statements of Operations
For the quarter and the three quarters ended
September 28, 1996
and September 30, 1995 1
Balance Sheets
As of September 28, 1996 and December 31, 1995 2
Statements of Cash Flows
For the three quarters ended September 28, 1996
and September 30, 1995 3
Notes to Financial Statements 4
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 10
Item 6: Exhibits and Reports on Form 8-K 10
<PAGE>
DAMARK INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
------------------------------ ---------------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . . $ 112,196 $ 112,057 $ 353,226 $ 352,021
Cost of products and services. . . . . . . . . . . . . 78,936 83,071 253,591 264,855
----------- ---------- ---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . . . 33,260 28,986 99,635 87,166
Selling and administrative expenses. . . . . . . . . . 30,691 28,638 95,105 92,261
----------- ---------- ---------- ----------
Operating income (loss) . . . . . . . . . . . . . . 2,569 348 4,530 (5,095)
Interest income (expense), net . . . . . . . . . . . . (43) 28 31 (304)
Other expense, net . . . . . . . . . . . . . . . . . . (88) (119) (75) (218)
----------- ---------- ---------- ----------
Income (loss) before income taxes . . . . . . . . . 2,438 257 4,486 (5,617)
Income tax benefit (provision) . . . . . . . . . . . . (853) (89) (1,570) 1,907
----------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . $ 1,585 $ 168 $ 2,916 $ (3,710)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Income (Loss) Per Common Share and Common Share
Equivalents - Primary and Fully Diluted:
Net income (loss) . . . . . . . . . . . . . . . . . $ 0.18 $ 0.02 $ 0.33 $ (0.41)
Weighted average common shares and common share
equivalents outstanding . . . . . . . . . . . . . 8,881 9,148 8,837 9,134
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
DAMARK INTERNATIONAL, INC.
BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
September 28, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . $ 16 $ 8,670
Trade accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . 24,489 25,465
Due from vendors and other, net. . . . . . . . . . . . . . . . . . . . . . 5,048 5,177
Merchandise inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 65,177 53,544
Deferred catalog costs . . . . . . . . . . . . . . . . . . . . . . . . . . 8,266 6,167
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,346 567
------------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 104,342 99,590
Property and Equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . 34,499 33,335
Intangible and Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . 8,617 8,803
------------- ------------
$ 147,458 $ 141,728
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,215 $ 49,547
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,012 9,956
Deferred membership revenue, net . . . . . . . . . . . . . . . . . . . . . 14,901 13,588
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,724 2,038
Borrowing under revolving credit facility. . . . . . . . . . . . . . . . . 2,300 --
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . -- 250
------------- ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 86,152 75,379
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,327 1,413
------------- ------------
Shareholders' Equity:
Class A Common Stock, $.01 par, 20 million shares authorized;
8,137,897 and 8,899,895 shares issued and outstanding at
September 28, 1996 and December 31, 1995, respectively. . . . . . . . . . 81 90
Class B Common Stock, $.01 par, 2 million shares authorized;
none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . -- --
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,224 84,088
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,326) (19,242)
------------- ------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . 59,979 64,936
------------- ------------
$ 147,458 $ 141,728
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
DAMARK INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(in thousands - unaudited)
<TABLE>
<CAPTION>
Three Quarters Ended
-------------------------------
September 28, September 30,
1996 1995
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,916 $ (3,710)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 5,349 3,560
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . 600 (2,058)
Changes in operating assets and liabilities -
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,105 11,227
Merchandise inventories. . . . . . . . . . . . . . . . . . . . . . . . . (11,633) 11,469
Deferred catalog costs and other current assets. . . . . . . . . . . . . (2,878) 211
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 6,724 (1,582)
Deferred membership revenue. . . . . . . . . . . . . . . . . . . . . . . 1,313 521
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 80
---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . . 3,496 19,718
---------- ----------
INVESTING ACTIVITIES:
Property and equipment additions, net. . . . . . . . . . . . . . . . . . . . (5,859) (6,332)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (468) (85)
---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . (6,327) (6,417)
---------- ----------
FINANCING ACTIVITIES:
Borrowings on revolving credit facility, net . . . . . . . . . . . . . . . . 2,300 --
Payments on long term debt . . . . . . . . . . . . . . . . . . . . . . . . . (250) (250)
Repurchase and retirement of common stock. . . . . . . . . . . . . . . . . . (8,016) (4,822)
Net proceeds from employee exercise of stock options . . . . . . . . . . . . 143 111
---------- ----------
Net cash used in financing activities . . . . . . . . . . . . . . . . . (5,823) (4,961)
---------- ----------
Increase (decrease) in cash and cash equivalents. . . . . . . . . . . . (8,654) 8,340
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . 8,670 7,205
---------- ----------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . $ 16 $ 15,545
---------- ----------
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period. . . . . . . . . . . . . . . . . . . . . . . $ 129 $ 370
Income taxes paid during the period. . . . . . . . . . . . . . . . . . . . . 1,190 347
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
DAMARK INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The financial statements included herein have been prepared by Damark
International, Inc. (the "Company"), without audit, pursuant to the Rules
and Regulations of the Securities and Exchange Commission. The
information furnished in these financial statements includes normal
recurring adjustments and reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of such financial
statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
it is suggested that these financial statements be read in conjunction
with the audited financial statements and notes thereto included in the
Company's 1995 Annual Report to Shareholders and Form 10-K filed with the
Securities and Exchange Commission.
Due to the seasonality of the Company's business, net revenues and
operating results for the quarter or for the three quarters ended
September 28, 1996 are not necessarily indicative of the results to be
expected for the full year.
The Company's fiscal year ends on December 31; however, each quarter ends
on the last Saturday of a thirteen week period. As a result, the three
quarters ended September 28, 1996 and September 30, 1995 included 272 and
273 days, respectively. In the Company's opinion, this difference in days
does not materially affect the comparability of the financial results of
the periods presented.
(2) EARNING PER COMMON SHARE
Primary and fully diluted earnings per common share are based on the
weighted average number of common shares and common share equivalents
outstanding during each period. Common share equivalents include, among
others, the dilutive effects of stock options which are assumed to be
exercised or converted into common shares as of the beginning of the
applicable periods. Stock options were not included in the weighted
average share calculation for the three quarters ended September 30, 1995
as their inclusion would be antidilutive.
(3) FINANCING ARRANGEMENTS
In March 1996, the Company arranged a $30 million credit facility
consisting of a revolving line of credit and letter of credit facility
available through March 1999. The credit facility includes a $20 million
sublimit available for working capital and stand-by letter of credit
requirements with the entire facility available for documentary letters of
credit, in each case subject to a defined borrowing base. Borrowings
outstanding under the line of credit bear interest, at the Company's
option, at the prime rate of interest or LIBOR plus 1.75% and are
collateralized by receivables, inventories, intangible assets and property
and equipment other than buildings, land and vehicles. The Company had
letters of credit outstanding of $4.4 million at September 28, 1996.
The agreement with respect to the credit facility includes covenants
which, among other matters, require the Company to satisfy certain
financial tests and ratios and place certain limitations on the incurrence
of additional indebtedness and the level of capital expenditures. The
Company is in compliance with all covenants of its credit facility, as
amended.
4
<PAGE>
DAMARK INTERANTIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(4) OTHER MATTERS
Commitments and Contingencies -
During the three quarters ended September 28, 1996, incentive stock
options, non-statutory stock options and non-qualified stock option
transactions were as follows:
<TABLE>
<CAPTION>
Management and
1991 Stock Directors Nonqualified Options Exercise
Option
Plan Stock Options Price Per Share
---------------- ---------------- ----------------
<S> <C> <C> <C>
Options outstanding, January 1, 1996 . . . . 567,669 457,421 $ 1.31 - 21.25
Options granted . . . . . . . . . . . . . . 131,500 -- 6.63 - 15.75
Options canceled. . . . . . . . . . . . . . (23,000) -- 5.88 - 14.50
Options exercised . . . . . . . . . . . . . (11,002) (60,000) 1.31 - 7.75
---------------- ---------------- ----------------
Options outstanding, September 28, 1996. . . 664,667 397,421 $ 1.31 - 21.25
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Options exercisable, September 28, 1996. . . 297,667 377,421
---------------- ----------------
---------------- ----------------
</TABLE>
Income Taxes -
In September 1996, the Company entered into a settlement agreement with the
Internal Revenue Service (the "Service") relating to tax examinations of
its 1991 and 1992 federal income tax returns. In addition, the Service
elected to close the Company's 1993 federal tax return without formal
examination. In connection therewith, the Company paid additional income
taxes relating to these years of approximately $160,000.
Common Stock -
During the three quarters ended September 28, 1996, the Company repurchased
833,000 shares of its Class A common stock, in open market transactions, at
an aggregate cost of approximately $8.0 million.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The selected financial data presented below under the caption "Statements of
Operations Data" for each of the periods presented are derived from the
Company's financial statements and express the specific item noted as a
percentage of net revenues.
<TABLE>
<CAPTION>
Third Quarter Three Quarters Ended
------------------ --------------------
1996 1995 1996 1995
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net revenues . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . . . 29.6 25.9 28.2 24.8
Selling and administrative expenses. . . . . . . 27.4 25.6 26.9 26.2
Operating income (loss). . . . . . . . . . . . . 2.3 0.3 1.3 (1.4)
Net income (loss). . . . . . . . . . . . . . . . 1.4 0.2 0.8 (1.1)
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
Net revenues for third quarter 1996 of $112.2 million approximated the net
revenues reported for third quarter 1995. Total sales per catalog declined to
$3.37 in third quarter 1996, as compared to $4.10 per catalog in third quarter
1995, primarily as a result of the continued softness in consumer response,
missed catalog delivery dates caused by production and other issues at the
Company's printing vendor and a change in sales mix towards lower ticket product
categories. To offset the softness in consumer response, the Company circulated
14.4% more catalogs in third quarter 1996, as compared to third quarter 1995.
Due to improved inventory in-stock rates and changes made in its shipping and
delivery schedules, the Company was able to ship a larger percentage of its
marketed orders during third quarter 1996 than it did in third quarter 1995.
During the first three quarters of 1996, net revenues increased to $353.2
million, as compared to $352.0 million for the first three quarters ended 1995.
During this period, the Company mailed approximately 5.0 million (4.7%) fewer
catalogs. Due to overall softness in consumer response, total sales per catalog
decreased by 4.0% to $3.59, as compared to $3.74 for the same period in 1995.
<TABLE>
<CAPTION>
Third Quarter Three Quarters Ended
----------------------- --------------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
CATALOG STATISTICS:
Number of catalogs mailed (in thousands) . . . . 34,100 29,800 101,900 106,900
Average order - total company. . . . . . . . . . $163 $164 $167 $163
Response rate - total company. . . . . . . . . . 2.07% 2.49% 2.15% 2.29%
Sales per catalog:
Front-end (new) customers. . . . . . . . . . . $1.91 $2.36 $2.03 $2.32
Non-club (back-end) customers. . . . . . . . . $3.08 $3.83 $3.27 $3.28
Club (back-end) customers. . . . . . . . . . . $6.94 $7.61 $7.64 $8.37
Total company. . . . . . . . . . . . . . . . . . . . $3.37 $4.10 $3.59 $3.74
-------- -------- ---------- ----------
-------- -------- ---------- ----------
</TABLE>
Product returns from customers increased to 15.9% of gross product sales in
third quarter 1996, as compared with 15.7% in third quarter 1995, due primarily
to increased returns of selected computer and electronic products. Product
returns for the first three quarters of 1996, as a percentage of gross product
sales, of 15.4% were relatively flat with the product return percentage for
first three quarters of 1995. Although the Company continues to place greater
emphasis on product quality, vendor criteria standards and more timely shipment
of products to customers, other potential actions are being investigated by the
Company in an attempt to reduce its product return rates.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In addition to product shipments, net revenues include, among other things,
membership fees relating to the Company's membership clubs. These fees
increased to $13.2 million in third quarter 1996, as compared to $12.7 million
in 1995. During third quarter 1996, approximately 132,000 new members were
added to the Company's clubs, as compared to 143,000 new members added during
third quarter 1995. The decrease in additional new club members, as compared to
third quarter 1995, was primarily the result of soft consumer response in the
front-end customer segment which generates fewer sale opportunities to convert
first-time customers into Preferred Buyers' Club members. During third quarter
1996, the Company launched a new membership club, Vacation Passport. This club,
sold as part of an outbound telemarketing effort, retails for an annual fee of
$39.99 and offers members several travel discounts and services. During third
quarter 1996, the Company continued to experience improvement in the number of
Preferred Buyers' Club members who renewed their membership for an additional
year as 178,000 members renewed during third quarter 1996, as compared to
143,000 members in third quarter 1995.
For the first three quarters of 1996, the Company reported membership related
fees of $37.3 million, as compared to $36.0 million in the first three quarters
of 1995. Approximately 376,000 new members were added to the Company's clubs
during the first three quarters of 1996, as compared to 462,000 new members
added during the first three quarters of 1995. As stated above, this decrease
was due primarily to the soft consumer response in the front-end customer
segment. The decline in revenue generated by new members was offset by an
increased number of Preferred Buyers' Club members who renewed their membership.
Club membership totaled 1,026,000 as of September 28, 1996, as compared with
999,000 members as of September 30, 1995.
<TABLE>
<CAPTION>
Third Quarter Three Quarters Ended
------------------------ --------------------------
1996 1995 1996 1995
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
CLUB STATISTICS:
Number of new Club members . . . . . . 132,000 143,000 376,000 462,000
Number of members renewed. . . . . . . 178,000 143,000 539,000 411,000
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
The Company's overall product margin is affected by the mix of sales of the six
primary product categories which the Company sells, the mix of sales to
Preferred Buyers' Club members who receive a 10% discount, and shipping and
handling fee revenue generated from product shipments. Products with higher
price points, such as computers, consumer electronics and home office products,
generally have lower percentage profit margins but provide higher actual dollar
margin contribution per unit. Conversely, products with lower price points,
such as home decor, home improvement and sporting goods/fitness products,
generally have higher percentage profit margins but provide less actual dollar
margin contribution per unit.
<TABLE>
<CAPTION>
Third Quarter Three Quarters Ended
----------------------- --------------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
PERCENT OF SALES BY CUSTOMER SEGMENT:
Front-end customers . . . . . . . . . 29% 31% 29% 34%
Non-club customers. . . . . . . . . . 24 21 24 22
Club customers. . . . . . . . . . . . 47 48 47 44
-------- -------- ---------- ----------
100% 100% 100% 100%
-------- -------- ---------- ----------
-------- -------- ---------- ----------
PERCENT OF SALES BY PRODUCT SEGMENT:
Computers. . . . . . . . . . . . . . . 28.0% 26.2% 29.8% 26.1%
Home office. . . . . . . . . . . . . . 16.6 15.4 17.1 15.5
Consumer electronics . . . . . . . . . 19.0 17.7 17.5 18.3
Home decor . . . . . . . . . . . . . . 13.9 14.7 12.9 16.0
Home improvements. . . . . . . . . . . 15.6 16.2 14.7 15.0
Sporting goods/fitness . . . . . . . . 6.9 9.8 8.0 9.1
-------- -------- ---------- ----------
100.0% 100.0% 100.0% 100.0%
-------- -------- ---------- ----------
-------- -------- ---------- ----------
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The overall gross profit margin, as a percentage of net revenues, increased to
29.6% in third quarter 1996, as compared to 25.9% for third quarter 1995, and
increased to 28.2% in the first three quarters of 1996, as compared to 24.8% in
the first three quarters of 1995, primarily as a result of increased product
margins, reduced outbound freight costs and increased membership renewal fees
from Preferred Buyers' Club members. The increased product margins realized
during 1996, as compared to 1995, were partially offset by the higher mix of
product sales to Preferred Buyers' Club members and an increased sales mix of
computer products which generally have a lower percentage gross profit margin.
Selling and administrative expenses were $30.7 million, or 27.4% of net
revenues, in third quarter 1996, as compared with $28.6 million, or 25.6% of net
revenues in third quarter 1995. This increase in selling and administrative
expenses, as a percentage of net revenues, is primarily due to the decline in
advertising leverage which resulted from the overall softness in customer
response, the decreased sales per catalog mailed and the untimely delivery of
catalogs caused by production and other issues at the Company's printing vendor.
On a year to date basis, selling and administrative expenses increased slightly
as a percent of net revenues to 26.9% in the first three quarters of 1996, from
26.2% for the first three quarters of 1995. During 1996, the Company continued
to incur administrative and other costs in connection with building additional
infrastructure capabilities and information technology resources to handle
anticipated future growth, provide enhanced customer service and continue
expansion of its membership club concepts.
The Company reported net interest expense of $43,000 in third quarter 1996,
primarily as a result of interest costs associated with borrowings and related
fees under the Company's bank credit facility. In third quarter 1995, the
Company reported net interest income of $28,000 resulting from income earned
from short term investment of its excess cash.
The Company's effective tax rate was 35.0% and 34.6% for third quarter 1996 and
1995, respectively.
As a result of the above, the Company reported net income of $1.6 million, or
$0.18 per share, for third quarter 1996, as compared with $0.2 million, or $0.02
per share, for third quarter 1995. For the first three quarters of 1996, the
Company reported net income of $2.9 million or $0.33 per share, as compared to a
net loss of $3.7 million or $0.41 per share in the first three quarters of 1995.
At September 28, 1996, the Company had 8.1 million shares of common stock
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its net working capital, was $18.2
million at September 28, 1996, as compared to $24.2 million at December 31,
1995. The Company's current ratio was 1.2 to 1.0 at September 28, 1996, as
compared with 1.3 to 1.0 at December 31, 1995.
Net cash provided by operating activities totaled $3.5 million for the first
three quarters of 1996, as compared with $19.7 million during the same period in
1995. The Company's increased level of merchandise inventories at
September 28, 1996 was primarily the result of lower than expected sales volumes
during third quarter 1996, the Company's continued emphasis on improving
inventory in-stock rates, and anticipated higher sales volumes in the fourth
quarter of 1996. Deferred club membership revenue, recorded net of initial
direct acquisition-related costs, of $14.9 million at September 28, 1996
increased, as compared with the amount deferred at year end 1995, primarily due
to the increase in club membership and the larger mix of renewed club members,
as compared to recently acquired members.
During the first three quarters of 1996, the Company had capital expenditures of
approximately $5.9 million, as compared with approximately $6.3 million during
the same period of 1995. The expenditures during the first three quarters of
1996 consisted primarily of additional computer hardware and software
development costs to accommodate the Company's expected product sales and
membership growth, its enhanced customer service levels and higher operational
efficiency standards. While the Company continues to evaluate its needs for
additional investment to further enhance customer satisfaction and its
information technologies and infrastructure capabilities, management currently
anticipates that it will spend between $8 to $10 million on capital expenditures
during the year ended December 31, 1996.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In March 1996, the Company arranged a $30 million credit facility consisting of
a revolving line of credit and letter of credit facility available through March
1999. The credit facility includes a $20 million sublimit available for working
capital and stand-by letter of credit requirements with the entire facility
available for documentary letters of credit, in each case subject to a defined
borrowing base. Borrowings outstanding under the line of credit bear interest,
at the Company's option, at the prime rate of interest or LIBOR plus 1.75% and
are collateralized by receivables, inventories, intangible assets and property
and equipment other than buildings, land and vehicles. At September 28, 1996,
borrowings of $2.3 million were outstanding under the revolving credit facility.
The Company offers its customers a four-pay installment credit plan with no
finance fee. As a result, the Company supported installment plan receivables
aggregating approximately $14.7 million and $22.2 million at September 28, 1996
and December 31, 1995, respectively. The Company's receivable balance at any
time is generally reflective of sales volume fluctuations as approximately 27%
to 30% of the Company's net revenues are generally financed by customers on the
Company's installment plan. Continuation of the four-pay installment credit
plan will require the allocation of capital resources which the Company expects
to fund from internal operations and availability under its revolving credit
facility. The Company also issues its own private label credit card which
provides credit to DAMARK customers, without recourse to the Company, through an
independent third party.
During the first three quarters of 1996, the Company repurchased 833,000 shares
of its Class A Common Stock at an aggregate cost of $8.0 million.
The Company anticipates that its cash generated from operations and available
borrowing capacity under its current credit facility will be sufficient to fund
the Company's operations, expected working capital requirements and capital
expenditures for the next twelve months.
SEASONALITY
The Company's business is subject to significant seasonal variations in consumer
demand which the Company believes are generally associated with the direct
marketing and retail industries. Historically, the Company's net revenues have
been the largest during the fourth calendar quarter and a significant portion of
its earnings have been realized during this same period. The Company's
operating results during this period may be affected by holiday spending
patterns, as well as the timing and effectiveness of catalog mailings and
general economic and other conditions. In anticipation of its peak selling
season, the Company hires additional flex-time employees in its teleservices,
order processing and distribution areas; increases its merchandise inventories;
and incurs significant catalog production and mailing costs. The Company's
annual operating results could be adversely affected if, among other factors,
the Company's revenues were to be substantially below seasonal expectations
during the October through December period or if a sufficient number of
qualified employees would not be available on a flex-time or other non-permanent
basis.
FORWARD-LOOKING INFORMATION
Forward-looking statements contained herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
important factors exist that could cause results to differ materially from those
anticipated by some of the statements made above. Investors are cautioned that
all forward-looking statements involve risks and uncertainty. The factors,
among others, that could cause actual results to differ materially include:
consumer spending and debt levels; interest rates; continuity of relationships
with or purchases from major vendors; product mix; competitive pressures on
sales and pricing, and increases in catalog production and other costs which
cannot be recovered through improved pricing of products and services.
INFLATION
While inflation, excluding increases in postage and paper costs, has not had,
and the Company does not expect it to have, a material impact on operating
results, there can be no assurance that the Company's business will not be
affected by inflation in the future. However, the Company did experience
significant increases in the cost of paper and postage during 1995. While the
increases in paper costs have subsided, significant cost increases in these
areas could have a material impact on advertising and other promotional costs in
future periods.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders on May 1, 1996.
Pursuant to Regulation 14 of the Securities Exchange Act of 1934,
proxies for such meeting were solicited. The following matters were
voted on at the meeting:
<TABLE>
<CAPTION>
VOTES BROKER VOTES
VOTES FOR ABSTAINED NON-VOTES AGAINST
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1) To elect the following individuals
to serve as members of the Company's
Board of Directors until the annual
meeting of shareholders in 1999:
Thomas A. Cusik 7,952,740 -- -- --
Joel N. Waller 7,953,950 -- -- --
2) To approve the Company's Deferred
Compensation Plan for Non-Employee
Directors 7,794,242 -- -- 136,255
3) To ratify the appointment of Arthur
Andersen LLP as the Company's
independent auditors for 1996 7,928,690 -- -- 21,230
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 10 - First Amendment to Credit Agreement, dated as
of October 18, 1996 by and between the
Registrant, the Banks named therein and First
Bank National Association, as Agent.
Exhibit 11 - Computation of Earnings per Share.
Exhibit 27 - Financial Data Schedule
b. No Form 8-K's were filed during the quarter ended September
28, 1996.
10
<PAGE>
SIGNATURE
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.
DAMARK INTERNATIONAL, INC.
Date: October 24, 1996 By: /s/Arlyn J. Lomen
------------------------------
Arlyn J. Lomen
Senior Vice President - Finance &
Administration Group and Chief
Financial Officer
11
<PAGE>
EXHIBIT 10
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT dated as of October 18, 1996
("this Amendment") by and between DAMARK INTERNATIONAL, INC., a Minnesota
corporation (the "Borrower"), the banks which are signatories hereto
(individually, a "Bank" and, collectively, the "Banks") and FIRST BANK NATIONAL
ASSOCIATION, a national banking association, one of the Banks, as agent for the
Banks (in such capacity, the "Agent").
RECITALS
A. The Borrower, the Banks and the Agent are parties to a Credit
Agreement dated as of March 22, 1996 (the "Credit Agreement").
B. The parties hereto desire to amend the Credit Agreement in the
respects hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
Section 1. DEFINITIONS. Capitalized terms used herein and not
otherwise defined herein, but which are defined in the Credit Agreement, shall
have the meanings ascribed to such terms in the Credit Agreement unless the
context otherwise requires.
Section 2. AMENDMENTS TO CREDIT AGREEMENT. Subject to Section 5
hereof, the Credit Agreement is hereby amended as follows:
(a) Section 1.3 thereof is amended by adding at the end thereof the
following:
All references in Sections 6.16, 6.17, 6.18 and 6.19 to any March
31, June 30 or September 30 date shall be deemed to mean and refer to
the last day of the Borrower's fiscal quarter ending nearest to such
date.
(b) Section 6.6 thereof is amended to read as follows:
Section 6.6 RESTRICTED PAYMENTS. The Borrower will not make any
Restricted Payments other than (a) the payment of the purchase price
of capital stock of the Borrower owned by Mark Cohn solely from the
proceeds of key man life insurance on his life,
12
<PAGE>
and (b) the payment of the purchase price for other capital stock of
the Borrower repurchased by the Borrower, provided that the aggregate
purchase price paid by the Borrower for capital stock of Borrower
repurchased under this clause (b) shall not exceed (i) $6,000,000
during the period beginning on March 22, 1996 and ending March 21,
1997 or (ii) $5,000,000 during any period of 365 or 366 days, as the
case may be, which begins on any date occurring after March 21, 1997
and ends on the day preceding the same date in the following calendar
year.
Section 3. WAIVER. The Banks hereby waive any Default or Event of
Default existing as of September 28, 1996 as the result of the Borrower's
noncompliance with Section 6.18 of the Credit Agreement as of said date;
PROVIDED, HOWEVER, that this waiver shall be effective only if the actual Trade
Support Ratio as of said date is not less than 0.60 to 1.00. This waiver is
limited to the express terms hereof, and nothing herein shall be deemed to be a
waiver of any other covenant of the Credit Agreement or a waiver of any other
Default or Event of Default that may have existed on September 28, 1996 or at
any time thereafter.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To induce
the Banks and the Agent to execute and deliver this Amendment (which
representations and warranties shall survive the execution and delivery of this
Amendment), the Borrower represents and warrants to the Agent and the Banks
that:
(a) this Amendment has been duly authorized, executed and delivered
by it and this Amendment constitutes the legal, valid and binding
obligation of the Borrower enforceable against the Borrower in accordance
with its terms, subject to limitations as to enforceability which might
result from bankruptcy, insolvency, reorganization, moratorium or similar
laws or equitable principles relating to or limiting creditors' rights
generally;
(b) the Credit Agreement, as amended by this Amendment, constitutes
the legal, valid and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms, subject to limitations as to
enforceability which might result from bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles relating
to or limiting creditors' rights generally;
(c) the execution, delivery and performance by the Borrower of this
Amendment (i) have been duly authorized by all requisite corporate action
and, if required, shareholder action, (ii) do not require the consent or
approval of any governmental or regulatory body or agency, and (iii)
13
<PAGE>
will not (A) violate (1) any provision of law, statute, rule or regulation
or its certificate of incorporation or bylaws, (2) any order of any court
or any rule, regulation or order of any other agency or government binding
upon it, or (3) any provision of any material indenture, agreement or other
instrument to which it is a party or by which any of its properties or
assets are or may be bound, or (B) result in a breach of or constitute
(alone or with due notice or lapse of time or both) a default under any
indenture, agreement or other instrument referred to in clause (iii)(A)(3)
of this Section 4(c);
(d) as of the date hereof and after giving effect to the waiver
contained in Section 3 hereof, no Default or Event of Default has occurred
which is continuing; and
(e) all the representations and warranties contained in Article IV of
the Credit Agreement are true and correct in all material respects with the
same force and effect as if made by the Borrower on and as of the date
hereof.
Section 5. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This
Amendment shall not become effective until, and shall become effective when,
each and every one of the following conditions shall have been satisfied:
(a) executed counterparts of this Amendment, duly executed by the
Borrower and each of the Banks, shall have been delivered to the Agent;
(b) the Agent shall have received from each Subsidiary a Consent and
Agreement of Subsidiary in the form of Attachment 1 hereto (the "Subsidiary
Agreements") duly completed and executed by such Subsidiary;
(c) the Agent shall have received a copy of the resolutions of the
Board of Directors of the Borrower authorizing the execution, delivery and
performance by the Borrower of this Amendment, certified by an officer
thereof, together with a certificate of an officer of the Borrower
certifying as to the incumbency and the true signatures of the officers
authorized to execute this Amendment on behalf of the Borrower;
(d) the favorable opinion of counsel to Borrower, covering the
matters set forth in Sections 4(a), 4(b) and 4(c).
Upon receipt of all of the foregoing, the Agent shall notify the Borrower and
the Banks that this Amendment has become effective, but the failure of the Agent
to
14
<PAGE>
give such notice shall not affect the validity of this Amendment or prevent it
from becoming effective.
Section 6. COUNTERPARTS AND EFFECTIVENESS. This Amendment may be
executed in any number of counterparts, and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
of the same instrument.
Section 7. AFFIRMATION. Each party hereto affirms and acknowledges
that (a) the Credit Agreement as amended by this Amendment remains in full force
and effect in accordance with its terms, and (b) all references to the "Credit
Agreement" or any similar term contained in any other Loan Document shall be
deemed to be references to the Credit Agreement as amended hereby.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
DAMARK INTERNATIONAL, INC.
By
------------------------------
Its
---------------------------
FIRST BANK NATIONAL ASSOCIATION,
as a Bank and as Agent
By
------------------------------
Title
---------------------------
THE SUMITOMO BANK, LIMITED,
CHICAGO BRANCH
By
------------------------------
Title
---------------------------
By
------------------------------
Title
---------------------------
BANK ONE, MILWAUKEE,
NATIONAL ASSOCIATION
By
------------------------------
Title
---------------------------
[Signature Page to First Amendment to Credit Agreement]
16
<PAGE>
ATTACHMENT 1 TO FIRST AMENDMENT TO CREDIT AGREEMENT
CONSENT AND AGREEMENT OF SUBSIDIARY
____________________________________________________, a Minnesota
corporation (the "Subsidiary"), hereby acknowledges and consents to that certain
First Amendment to Credit Agreement dated as of October 18, 1996 (the
"Amendment") between Damark International, Inc., a Minnesota corporation (the
"Borrower"), the Banks which are signatories thereto (the "Banks") and First
Bank National Association as Agent for the Banks. The Subsidiary further
acknowledges and agrees as follows:
(a) All references to the "Credit Agreement" contained in the
Guaranty dated as of _____________ (the "Guaranty"), executed by the
Subsidiary in favor of the Banks and the Agent, shall hereafter mean and
refer to the Credit Agreement dated as of March 22, 1996 between the
Borrower, the Banks and the Agent, as amended by the Amendment and as the
same may hereafter be further amended, supplemented, restated, extended or
renewed from time to time.
(b) The Guaranty is and shall remain in full force and effect with
respect to the Obligations (as defined in the Guaranty).
Dated: October 18, 1996
SUBSIDIARY:
------------------------------
By
------------------------------
Title
----------------------------
17
<PAGE>
EXHIBIT 11
DAMARK INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED THREE QUARTERS ENDED
------------------------------ ------------------------------
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
- --------------------------
Net income (loss) applicable to common stock . . . . . . . . . . $ 1,585 $ 168 $ 2,916 $ (3,710)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding. . . . . . . . . . 8,406 8,971 8,522 9,134
Dilutive effect of stock options after application of
treasury stock method . . . . . . . . . . . . . . . . . . . 475 157 292 --
---------- ---------- ---------- ---------
8,881 9,128 8,814 9,134
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net income (loss) per share applicable to common stock . . . . . $ .18 $ .02 $ .33 $ (.41)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------
Net income (loss) applicable to common stock . . . . . . . . . . $ 1,585 $ 168 $ 2,916 $ (3,710)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding. . . . . . . . . . 8,406 8,971 8,522 9,134
Dilutive effect of stock options after application of
treasury stock method . . . . . . . . . . . . . . . . . . . 475 176 315 --
---------- ---------- ---------- ---------
8,881 9,147 8,837 9,134
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net income (loss) per share applicable to common stock . . . . . $ .18 $ .02 $ .33 $ (.41)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-28-1996
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 30,872
<ALLOWANCES> 1,335
<INVENTORY> 65,177
<CURRENT-ASSETS> 104,342
<PP&E> 49,799
<DEPRECIATION> 15,300
<TOTAL-ASSETS> 147,458
<CURRENT-LIABILITIES> 86,152
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 59,898
<TOTAL-LIABILITY-AND-EQUITY> 147,458
<SALES> 353,226
<TOTAL-REVENUES> 353,226
<CGS> 253,591
<TOTAL-COSTS> 95,105
<OTHER-EXPENSES> 75
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> 4,486
<INCOME-TAX> 1,570
<INCOME-CONTINUING> 2,916
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,916
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
