<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 June 28, 1997
[ ] 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)
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 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 August 11, 1997, there were 8,015,815 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.
Consolidated Statements of Operations
For the Quarter and First Half ended June 28, 1997
and June 29, 1996 1
Consolidated Balance Sheets
As of June 28, 1997 and December 31, 1996 2
Consolidated Statements of Cash Flows
For the First Half ended June 28, 1997 and June 29, 1996 3
Notes to Consolidated 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.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended First Half Ended
----------------------- -----------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . . . . $147,494 $124,133 $276,116 $241,030
Cost of products and services . . . . . . . . . . . . . . . 105,738 89,203 198,962 174,655
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 41,756 34,930 77,154 66,375
Marketing and administrative expenses . . . . . . . . . . . 38,172 32,695 72,800 64,414
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . . . . . . . 3,584 2,235 4,354 1,961
Interest income (expense), net . . . . . . . . . . . . . . (278) 89 (455) 74
Other income (expense), net . . . . . . . . . . . . . . . . (66) 8 (52) 13
---------- ---------- ---------- ----------
Income before income taxes . . . . . . . . . . . . . . . 3,240 2,332 3,847 2,048
Income tax provision . . . . . . . . . . . . . . . . . . . (1,101) (816) (1,307) (717)
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 2,139 $ 1,516 $ 2,540 $ 1,331
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings Per Share:
Net income per common share . . . . . . . . . . . . $ .25 $ .17 $ .30 $ .15
Weighted average number of common and dilutive
common equivalent shares outstanding . . . . . . . . 8,595 8,930 8,502 8,815
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 28, December 31,
1997 1996
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 36 $ 2
Trade accounts receivable, net. . . . . . . . . . . 46,605 30,985
Due from vendors and other, net . . . . . . . . . . 5,799 6,602
Merchandise inventories . . . . . . . . . . . . . . 74,060 53,016
Deferred catalog costs. . . . . . . . . . . . . . . 10,528 6,613
Other . . . . . . . . . . . . . . . . . . . . . . . 1,404 1,257
---------- ----------
Total current assets. . . . . . . . . . . . . . . 138,432 98,475
Property and Equipment, net . . . . . . . . . . . . . 35,950 35,904
Intangible and Other Assets, net. . . . . . . . . . . 8,029 8,411
---------- ----------
$182,411 $142,790
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 68,628 $ 41,880
Accrued liabilities . . . . . . . . . . . . . . . . 14,965 15,226
Deferred membership income, net . . . . . . . . . . 16,661 16,292
Deferred income taxes . . . . . . . . . . . . . . . 2,413 2,413
Borrowings under revolving credit facility. . . . . 13,600 3,000
---------- ----------
Total current liabilities . . . . . . . . . . . . 116,267 78,811
Deferred Income Taxes . . . . . . . . . . . . . . . . 1,435 1,435
---------- ----------
Shareholders' Equity:
Class A Common Stock, $.01 par, 20 million shares
authorized; 8,015,815 and 8,052,147 shares issued
and outstanding at June 28, 1997 and December 31,
1996, respectively. . . . . . . . . . . . . . . . 81 81
Class B Common Stock, $.01 par, 2 million shares
authorized; none issued and outstanding . . . . . -- --
Paid-in capital . . . . . . . . . . . . . . . . . . 75,262 75,637
Accumulated deficit . . . . . . . . . . . . . . . . (10,634) (13,174)
---------- ----------
Total shareholders' equity . . . . . . . . . . . 64,709 62,544
---------- ----------
$182,411 $142,790
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
First Half Ended
-------------------------
June 28, June 29,
1997 1996
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,540 $ 1,331
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . 3,898 3,467
Gain on sale of land . . . . . . . . . . . . . . . . . (152) --
Changes in working capital items -
Receivables . . . . . . . . . . . . . . . . . . . . (14,817) 4,241
Merchandise inventories . . . . . . . . . . . . . . (21,044) (2,831)
Deferred catalog costs and other current assets . . (4,062) (1,213)
Accounts payable and accrued liabilities . . . . . . 26,487 (1,375)
Deferred membership income . . . . . . . . . . . . . 369 1,323
----------- ----------
Net cash provided by (used in) operating activities. (6,781) 4,943
----------- ----------
INVESTING ACTIVITIES:
Property and equipment additions, net . . . . . . . . . . . (3,340) (2,844)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (70) (671)
----------- ----------
Net cash used in investing activities . . . . . . . (3,410) (3,515)
----------- ----------
FINANCING ACTIVITIES:
Borrowings under revolving credit facility, net . . . . . . 10,600 --
Payments on long term debt . . . . . . . . . . . . . . . . . -- (250)
Repurchase and retirement of common stock . . . . . . . . . (454) (3,757)
Net proceeds from employee exercise of stock options . . . . 79 131
----------- ----------
Net cash provided by (used in) financing activities. 10,225 (3,876)
----------- ----------
Increase (decrease) in cash and cash equivalents . . 34 (2,448)
Cash and cash equivalents, beginning of period . . . . . . . 2 8,670
----------- ----------
Cash and cash equivalents, end of period . . . . . . . . . . $ 36 $ 6,222
----------- ----------
----------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period . . . . . . . . . . . . . . $ 240 $ 50
Income taxes paid during the period . . . . . . . . . . . . 630 875
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The consolidated 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, in the opinion
of management, are 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 consolidated financial statements and notes
thereto included in the Company's 1996 Annual Report to Shareholders and
the 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 and first half ended June 28, 1997 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
operating results for the first half of 1997 and 1996 included 179 and
181 days, respectively. In the Company's opinion, this difference in
days does not materially affect the comparability of the financial
results for the periods presented.
(2) EARNINGS PER COMMON SHARE
Primary and fully diluted earnings per common share are based on the
weighted average number of common and common equivalent shares
outstanding during each period. Common equivalent shares include, among
others, the dilutive effect of stock options which are assumed to be
exercised or converted into common shares as of the beginning of the
applicable period. Fully diluted earnings per share did not differ
significantly from primary earnings per share for any period presented.
On March 3, 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FASB No. 128"). FASB No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and is effective December 15, 1997.
Under FASB No. 128, the presentation of primary EPS is replaced with a
presentation of basic EPS and fully diluted EPS is replaced with diluted
EPS. Although early adoption of FASB No. 128 is not permitted, FASB No.
128 requires the restatement of prior years' earnings per share amounts.
Earnings per share, determined in accordance with FASB No. 128, would
have been as follows for the second quarter and first half of 1997 and
1996:
Basic Diluted
Quarter Ended EPS EPS
------------------------------ --------- ----------
June 28, 1997. . . . . . . . . $.27 $.25
June 29, 1996. . . . . . . . . .18 .17
--------- ----------
--------- ----------
First Half Ended
------------------------------
June 28, 1997. . . . . . . . . $.32 $.30
June 29, 1996. . . . . . . . . .15 .15
--------- ----------
--------- ----------
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) FINANCING ARRANGEMENTS
In June 1997, the Company amended its bank credit facility. The Company
currently has a $50 million credit facility, consisting of a revolving
line of credit and letter of credit facility available through March
1999. The credit facility includes a $45 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 June 28, 1997, the Company had
borrowings outstanding of $13.6 million under its revolving line of
credit and letters of credit outstanding of $5.9 million.
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 places 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 at June 28, 1997.
(4) COMMITMENTS AND CONTINGENCIES
During first half 1997, stock option transactions were as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
----------- -----------------
<S> <C> <C>
Options outstanding, January 1, 1997 . . 1,188,672 $ 8.31
Options granted. . . . . . . . . . . . 64,000 13.15
Options canceled . . . . . . . . . . . (8,335) 8.11
Options exercised. . . . . . . . . . . (11,168) 7.11
----------- ----------
Options outstanding, June 28, 1997 . . . 1,233,169 $ 8.56
----------- ----------
----------- ----------
Options exercisable, June 28, 1997 . . . 768,185 $ 8.19
----------- ----------
----------- ----------
</TABLE>
(5) COMMON STOCK
During the first half of 1997 and 1996, the Company repurchased 47,500
and 508,000 shares, respectively, of its Class A Common Stock in open
market transactions.
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 consolidated financial statements and express the specific item
noted as a percentage of the Company's net revenues for the applicable
period.
<TABLE>
<CAPTION>
Second Quarter First Half
------------------ -------------------
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Gross profit . . . . . . . . . . . . . 28.3 28.1 27.9 27.5
Marketing and administrative expenses. 25.9 26.3 26.4 26.7
Operating income . . . . . . . . . . . 2.4 1.8 1.6 0.8
Net income . . . . . . . . . . . . . . 1.5 1.2 0.9 0.6
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
Net revenues for second quarter 1997 of $147.5 million increased $ 23.4
million, or 18.8%, as compared with net revenues for second quarter 1996.
This increase in net revenues was primarily the result of an increase in
overall circulation from 34.1 million catalogs mailed during second quarter
1996 to 40.4 million catalogs mailed during second quarter 1997 and an
increase in sales per catalog mailed to $3.76, as compared with sales
productivity per catalog mailed of $3.71 in second quarter 1996. The sales
productivity, on a per catalog basis, in second quarter 1997 reflects the
increased mix of product sales to members of the Company's club, members
generally have the highest sales productivity rate, to 49% of product sales,
as compared with 46% of product sales in second quarter 1996 and the
availability of more flexible installment billing plans being offered to its
customers.
During first half 1997, net revenues of $276.1 million increased by $35.1
million or 14.6%, as compared to $241.0 million in first half 1996. This
increase in net revenues was primarily the result of the increase in catalogs
mailed in first half 1997, as compared to first half 1996 and an increase in
sales per catalog mailed to $3.88 in first half 1997, as compared to $3.69
per catalog mailed in first half 1996
<TABLE>
<CAPTION>
Second Quarter First Half
------------------ -------------------
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
CATALOG STATISTICS:
Number of catalogs mailed (in thousands) . . 40,400 34,100 75,000 67,800
Average order - total company. . . . . . . . $ 180 $ 168 $ 176 $ 168
Response rate - total company. . . . . . . . 2.09% 2.21% 2.21% 2.19%
Sales per catalog:
Front-end (new) customers . . . . . . . . $1.86 $2.06 $1.93 $2.07
Non-club (back-end) customers . . . . . . $3.57 $3.24 $3.57 $3.40
Club (back-end) customers . . . . . . . . $9.71 $8.51 $9.01 $8.02
Total company . . . . . . . . . . . . . . $3.76 $3.71 $3.88 $3.69
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
Product returns from customers decreased to 14.3% of gross product sales in
second quarter 1997, as compared with 15.4% in second quarter 1996, due
primarily to reduced product returns in the computer and electronic
categories. During second quarter, the Company implemented a revised product
return policy which, among other things, generally shortened the overall
period for which customers were allowed to return products . Product returns
for first half 1997 were 15.0%, consistent with the overall product return
rate for first half 1996.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In addition to product shipments, net revenues include membership fees earned
from the Company's clubs. These fees increased from $12.4 million in second
quarter 1996 to $15.7 million in second quarter 1997. Approximately 185,000
new club members were added during second quarter 1997, as compared with
134,000 new members in second quarter 1996. The increase in new members
added during second quarter 1997 was primarily the result of the success of
the Vacation Passport and Insiders' clubs which were introduced during the
last half of 1996. During second quarter 1997, the number of members
renewing their membership for an additional year continued to increase as
195,000 members renewed during second quarter 1997, as compared with 177,000
members in second quarter 1996. Total club membership was 1,134,000 at June
28, 1997, as compared with 1,015,000 members at June 29, 1996.
<TABLE>
<CAPTION>
Second Quarter First Half
---------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MEMBERSHIP STATISTICS:
Members, at period end . . . . . . . . . . . 1,134,000 1,015,000 1,134,000 1,015,000
Number of new members. . . . . . . . . . . . 185,000 134,000 364,000 244,000
Number of members renewed. . . . . . . . . . 195,000 177,000 392,000 361,000
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
The Company's overall product profit 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 and Insiders' Club members who receive a 10%
discount, and shipping and handling revenue. 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 sports/fitness products,
generally have higher percentage profit margins but provide less actual
dollar margin contribution per unit.
<TABLE>
<CAPTION>
Second Quarter First Half
------------------ -------------------
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
PERCENT OF SALES BY CUSTOMER SEGMENT:
Front-end customers . . . . . . . . . . . . . 28% 28% 26% 30%
Non-club customers. . . . . . . . . . . . . . 23 26 24 24
Club customers. . . . . . . . . . . . . . . . 49 46 50 46
-------- -------- -------- ---------
100% 100% 100.0% 100.0%
-------- -------- -------- ---------
-------- -------- -------- ---------
PERCENT OF SALES BY PRODUCT SEGMENT:
Computers . . . . . . . . . . . . . . . . . . 31.7% 29.1% 32.1% 30.6%
Home Office . . . . . . . . . . . . . . . . . 13.7 15.7 14.9 17.2
Consumer Electronics. . . . . . . . . . . . . 17.9 16.8 17.8 16.8
Home Decor. . . . . . . . . . . . . . . . . . 13.2 13.1 13.6 12.5
Home Improvements . . . . . . . . . . . . . . 16.8 16.0 15.2 14.3
Sports/Fitness. . . . . . . . . . . . . . . . 6.7 9.3 6.4 8.6
-------- -------- -------- ---------
100.0% 100.0% 100.0% 100.0%
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
The overall gross profit margin, as a percentage of net revenues, increased
to 28.3% in second quarter 1997, as compared with 28.1% for second quarter
1996 and increased to 27.9% in first half 1997, as compared to 27.5% in first
half 1996, primarily as a result of the increase in new club members and
increased membership fees received from the larger number of renewing club
members. The increased product margins realized during the second quarter
and first half of 1997, as compared with comparable periods in 1996, were
partially offset by a higher mix of product sales to Preferred Buyers' Club
and Insiders' members and the increased sales mix of lower margin computer
and other electronics products.
7
<PAGE>
Marketing and administrative expenses totaled $38.2 million, or 25.9% of net
revenues, in second quarter 1997, as compared with $32.7 million, or 26.3% of
net revenues, in second quarter 1996. This decrease in selling and
administrative expenses, as a percent of net revenue is the result of greater
advertising leverage during second quarter 1997 due to an increase in average
order and sales productivity rates which resulted from increased installment
plan sales and increased sales mix to club customers. On a year to date
basis, marketing and administrative expenses decreased, as a percent of net
revenues, from 26.7% in first half 1996 to 26.3% in first half 1997. The
Company is continuing to incur additional administrative and other costs in
connection with the expansion of its infrastructure capabilities and
information technology resources.
The Company reported net interest expense of $278,000 in second quarter 1997,
resulting from interest costs associated with increased borrowings under the
Company's bank credit facility. Currently, the Company is experiencing
increased working capital requirements as a result of its increased
receivable and inventory levels. In second quarter 1996, the Company
reported net interest income of $89,000, primarily as a result of income
earned from short term investment of its excess cash.
The Company's effective tax rate was 34.0% and 35.0% for second quarter 1997
and 1996, respectively.
As a result of the above factors, the Company reported net income of $2.1
million, or $.25 per share, for second quarter 1997, as compared with net
income of $1.5 million, or $.17 per share, for second quarter 1996. For
first half 1997, the Company reported net income of $2.5 million or $0.30 per
share, as compared to $1.3 million or $0.15 per share in first half 1996.
The weighted average number of common shares outstanding during second
quarter 1997 decreased to 8.6 million shares, as compared with 8.9 million
shares outstanding during second quarter 1996, primarily as a result of the
Company's ongoing stock repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its net working capital, was $22.2
million at June 28, 1997, as compared with $19.7 million at December 31,
1996. The Company's current ratio was 1.2 to 1.0 at June 28, 1997, as
compared with 1.3 to 1.0 at December 31, 1996.
Net cash used in operating activities totaled $6.8 million for first half
1997, as compared with cash provided by operating activities of $4.9 million
during the same period in 1996. During 1997, the Company's net working
capital requirements increased primarily due to its introduction of six and
ten pay installment payment billing plans offered to its customers and
increased inventory levels required to meet increased customer demand.
Deferred club membership revenue, recorded net of initial direct
acquisition-related costs, totaled $16.7 million at June 28, 1997.
During first half 1997, the Company made capital expenditures of
approximately $4.6 million, as compared with approximately $2.8 million
during first half 1996. The expenditures during first half 1997 consisted
primarily of computer hardware and software enhancements to enable the
Company to provide improved customer service levels and higher operational
efficiency standards in an anticipated future growth period. In addition,
the Company will open an additional teleservices center during third quarter
1997. The Company continues to evaluate its needs for additional investment
to further improve customer satisfaction and enhance information technologies
and infrastructure capabilities. Management currently anticipates that the
Company will spend between $9 and $11 million for capital expenditures during
the year ended December 31, 1997.
In June 1997, the Company amended its bank credit facility. The Company
currently has a $50 million credit facility consisting of a revolving line of
credit and letter of credit facility available through March 1999. The
credit facility includes a $45 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 June 28, 1997, the Company had letters of credit of $5.9 million and
borrowings of $13.6 million outstanding under its credit facility.
8
<PAGE>
The Company offers its customers varying installment billing plans with
no finance charges payable to the Company. As a result, the Company
supported installment plan receivables aggregating $35.9 million and $24.3
million at June 28, 1997 and December 31, 1996, respectively. The Company's
receivable balance at any time is generally reflective of sales volume
fluctuations as approximately 30% to 35% of its net revenues are financed by
customers on one of the Company's installment plans. With the recent
offering of six pay and ten pay installment plans to its customers, the
Company anticipates that its overall receivable balance will continue to
increase. As a result, the Company is currently exploring alternative
methods to finance these receivables over the longer term. In the shorter
term, the Company expects to fund its receivables from internal operations
and from availability under its revolving credit facility.
In December 1996, the Company's Board of Directors authorized the Company to
repurchase up to 400,000 shares of its common stock. During the first half
of 1997, the Company repurchased 47,500 shares of its common stock under this
program.
The Company currently anticipates that 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 remainder of 1997. Because the
Company anticipates the expansion of its offerings of extended payment plans
to customers, it is currently exploring alternative methods of financing
these receivables over the longer term. Of course, there can be no assurance
that the Company will be able to, among other things, consummate any such
alternative methods of financing.
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 are the largest during the fourth calendar quarter and a significant
portion of its earnings have been realized during that 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.
INFLATION
Excluding increases in postage and paper costs, inflation has not had and is
not expected to have a material impact on the Company's operating results but
there can be no assurance that the Company's business will not be affected by
inflation in the future. The Company did experience significant increases in
the cost of paper and postage during 1995. While the increases in these
areas have subsided, continued cost increases in these areas could have a
material impact on advertising and other promotional costs in future periods.
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 pressure on sales and pricing, increases in catalog
production and other costs which cannot be recovered through improved pricing
of products and services, and the Company's ability to design, develop, and
successfully introduce and market new and existing club concepts.
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 April 17, 1997.
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>
Withhold
Votes For Authority
------------ -------------
<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 the
year 2000:
Jack W. Eugster 7,209,784 396,662
Harold Roitenberg 7,209,625 396,821
Votes Votes Broker Votes
For Abstained Non-Votes Against
------------ ------------- ------------ -------------
2) To approve the amendment increasing
to 1,200,000 the shares authorized
under the DAMARK International, Inc.
1991 Stock Option Plan.
6,066,192 20,903 -- 1,519,350
3) To ratify the appointment of Arthur
Andersen LLP as independent auditors
of the Company for 1997.
7,588,584 7,753 -- 10,107
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 10.1 - Third Amendment to Credit Agreement, dated as of
June 23, 1997, by and between the Registrant, the
Banks named therein and First Bank National
Association, as Agent for the Banks.
Exhibit 10.2 - Nonqualified Stock Option Agreement for Stephen J.
Hemsley (Filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-8
(no. 333-31773)).
Exhibit 11 - Computation of Earnings per Share.
Exhibit 27 - Financial Data Schedule
b. No Form 8-K's were filed during the quarter ended June 28, 1997.
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: August 11, 1997 By: /s/ Arlyn J. Lomen
-----------------------------------
Arlyn J. Lomen
Senior Vice President - Finance &
Administration Group and Chief
Financial Officer
11
<PAGE>
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT dated as of June23, 1997
("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, as amended by a First Amendment dated
as of October 18, 1996 and a Second Amendment dated as of February 10, 1997
(as so amended, the "Credit Agreement").
B. The obligations of the Borrower to the Banks under the Credit
Agreement are evidenced by three separate Promissory Notes of the Borrower in
favor of the Banks each dated March 22, 1996 (collectively, the "Existing
Notes").
C. The parties hereto desire to amend the Credit Agreement in the
respects hereinafter set forth and to cause the Existing Notes to be amended
and restated in their entireties.
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 4
hereof, the Credit Agreement is hereby amended as follows:
(a) The definition of the term "Commitment Amount" set forth in
Section 1.1 thereof is amended to read as follows:
"COMMITMENT AMOUNT": With respect to a Bank, the amount set
opposite such Bank's name on Exhibit 1.1-E hereto as its Commitment Amount,
but as the same may be reduced from time to time pursuant to Section 2.14.
(b) The definition of the term "Loan/Standby Letter of Credit
Sublimit" set forth in Section 1.1 thereof is amended to read as follows:
<PAGE>
"LOAN/STANDBY LETTER OF CREDIT SUBLIMIT": With respect to a
Bank, the amount set opposite such Bank's name on Exhibit 1.1-E hereto as
its Loan/Standby Letter of Credit Sublimit, but as the same may be reduced
from time to time pursuant to Section 2.14.
(c) Section 6.9 thereof is amended to read as follows:
Section 6.9 CAPITAL EXPENDITURES. The Borrower will not, and
will not permit any Subsidiary to, make Capital Expenditures in an amount
exceeding, on a consolidated basis, (a) $11,500,000 in its fiscal year
ending December31, 1997 or (b) $10,000,000 in its fiscal year ending
December 31, 1998 or in any fiscal year thereafter; provided, however, that
Capital Expenditures made, with the prior written consent of the Majority
Banks, from equity capital specifically raised by the Borrower for the
purpose of making such Capital Expenditures shall not be subject to the
foregoing limitations.
(d) Section 6.19 thereof is amended to read as follows:
Section 6.19 EBITDA. The Borrower will not permit EBITDA as of
any date set forth below, for the period of four consecutive fiscal
quarters ending on such date, to be less than the minimum amount set
opposite that date:
Four-Quarter Minimum
Period Ending EBITDA
------------- -------
6/30/97 $11,400,000
9/30/97 $11,700,000
12/31/97 and on the
last day of any fiscal
quarter thereafter $11,900,000
-2-
<PAGE>
(e) Section 6.21 thereof is amended to read as follows:
Section 6.21 CLEAN-DOWN. The Borrower shall cause the sum of
(a) the aggregate principal balance of all Loans
outstanding, plus
(b) the remainder of (i) the aggregate maximum amount
available to be drawn under outstanding Standby Letters of Credit plus
the aggregate amount of Unpaid Drawings relating to Standby Letters of
Credit, minus (ii) the average daily amount of funds on deposit in
accounts maintained by the Borrower with the Agent during the
calculation period, plus
(c) the sum of the aggregate maximum amount available to be
drawn under outstanding Documentary Letters of Credit having
expiration dates more than 180 days later than the date of
determination plus the aggregate amount of Unpaid Drawings relating to
Documentary Letters of Credit
not to exceed $4,000,000 for at least 60 consecutive days during the period
of twelve consecutive months beginning on September1, 1997 and during each
period of twelve consecutive months beginning on the first day of each
month thereafter occurring.
(f) Exhibit 1.1-A thereto is amended and restated to be in the form
of Exhibit 1.1-A attached to this Amendment.
(g) Exhibit 1.1-B thereto is amended and restated to be in the form
of Exhibit 1.1-B attached to this Amendment.
(h) A new Exhibit 1.1-E is added thereto, which new Exhibit 1.1-E
shall be in the form of Exhibit 1.1-E attached to this Amendment.
Section 3. 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 and the Amended Notes (as hereinafter defined)
have been duly authorized, executed and delivered by it and this Amendment
and the Amended Notes constitute the legal, valid and binding obligations
of the Borrower enforceable against the Borrower in accordance with their
respective terms, subject to limitations as to enforceability which
-3-
<PAGE>
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 and the Amended Notes (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) 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 3(c);
(d) as of the date 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 4. 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) each Bank shall have received a new promissory note substantially
in the form attached as Exhibit 1.1-C to the Credit Agreement, payable to
such Bank and in a maximum amount equal to such Bank's Commitment Amount as
amended by this Amendment, duly executed by the Borrower (as to such Bank,
its "Amended Note"), which Amended Note shall constitute an amendment and
restatement of the Existing Note payable to such Bank;
-4-
<PAGE>
(c) 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;
(d) 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; and
(e) the Agent shall have received the favorable opinion of counsel to
Borrower, covering the matters set forth in Sections 3(a), 3(b) and 3(c).
Upon receipt of all of the foregoing, (i) the Agent shall notify the Borrower
and the Banks that this Amendment has become effective, but the failure of
the Agent to give such notice shall not affect the validity of this Amendment
or prevent it from becoming effective, (ii) each Bank shall surrender to the
Borrower such Bank's Existing Note, marked "renewed but not paid" or words to
similar effect; and (iii) the unpaid principal balance outstanding under each
Bank's Existing Note, and the interest accrued but unpaid thereon, shall be
outstanding under such Bank's Amended Note.
Section 5. UCC FILINGS. The Borrower agrees that it will, by not
later than September 1, 1997, deliver to the Agent Uniform Commercial Code
financing statements prepared for filing with the appropriate filing offices
in the State of North Carolina with respect to collateral located at the
Borrower's facility in Fayetteville, North Carolina, duly executed by the
Borrower. The Borrower further agrees that failure on its part to comply
with the foregoing requirement shall constitute an Event of Default under the
Credit Agreement.
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. LEGAL EXPENSES. The Borrower agrees to reimburse the
Agent for all reasonable out-of-pocket expenses (including attorneys' fees
and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred
in connection with the negotiation, preparation, execution and delivery of
this Amendment.
Section 8. 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, (b) all references to the "Credit
Agreement"
-5-
<PAGE>
or any similar term contained in any other Loan Document shall be deemed to
be references to the Credit Agreement as amended hereby and (c) all
references to the "Notes" or any similar term contained in the Credit
Agreement or any other Loan Document shall be deemed to be references to the
Amended Notes.
Section 9. CHOICE OF LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS,
OF THE STATE OF MINNESOTA, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO
NATIONAL BANKS.
Section 10. SUCCESSORS AND ASSIGNS. This Amendment shall be
binding upon the Borrower, the Banks, the Agent and their respective
successors and assigns, and shall inure to the benefit of the Borrower, the
Bank and the successors and assigns of the Banks and the Agent.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-6-
<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 Third Amendment to Credit Agreement]
S-1
<PAGE>
EXHIBIT 1.1-A TO
CREDIT AGREEMENT
FORMULA FOR
BORROWING BASE
1. BORROWING BASE. The "Borrowing Base" as of any date of
determination shall be the sum of the following:
(a) the product of (i) the aggregate face amount of Eligible
Accounts (provided, that the aggregate face amount of Eligible Accounts
attributable to installments payable under the Ten Pay Installment Plan that
can be taken into account for purposes of this clause 1(a)(i) shall not
exceed 30% of the aggregate face amount of all Eligible Accounts), MULTIPLIED
BY (ii) 50%; and
(b) an amount equal to the lesser of (i) 40% of the lower of
cost (determined on a first-in, first-out basis) or market value of Eligible
Inventory or (ii) $30,000,000.
2. DEFINITIONS. Capitalized terms used herein which are defined in
the Credit Agreement are used herein with the respective meanings attributed
thereto in the Credit Agreement. In addition, for the purposes of this
Exhibit and for determining the Borrowing Base, the following terms shall
have the following respective meanings:
"ELIGIBLE ACCOUNTS": the right of the Borrower to receive
payment of installments owed to the Borrower on account of sales of inventory
(including related shipping and handling fees), membership and other services
in the ordinary course of the Borrower's business on the Borrower's
installment plans, provided such right to payment:
(a) has arisen out of the sale of goods and services by the
Borrower within the United States, or, if such goods and services are sold
outside the United States, is backed by a letter of credit issued or
confirmed by a bank chartered under the laws of the United States or of any
State;
(b) is the valid, binding and legally enforceable obligation of the
obligor and such right to payment has not been subordinated by the Borrower
to any other claim against the obligor and such obligor is not (i) the
Borrower or an Affiliate of the Borrower, (ii) the United States or any
department, agency or instrumentality thereof unless the Borrower shall have
complied with the Assignment of Claims Act to the satisfaction of the Agent,
(iii) a debtor under any proceeding under the
<PAGE>
Bankruptcy Code or comparable provision of state or foreign law, (iv) an
assignor for the benefit of creditors, or (v) a customer for whom the
Borrower has tried, but has been refused, an authorization by the applicable
credit card processor in whole or in part;
(c) is assignable;
(d) is subject to a perfected first security interest in favor of
the Agent and is free and clear of any other Lien;
(e) is not subject to any claimed offset, counterclaim or other
defense with respect thereto (except for return rights and warranty claims
not yet asserted);
(f) is not unpaid for more than 30 days from the date that payment
thereof is due or for more than (i) 300 days from the date of the relevant
invoice, in the case of installments payable on sales made under the Ten Pay
Installment Plan, (ii) 180 days from the date of the relevant invoice, in the
case of installments payable on sales made under the Six Pay Installment
Plan, or (iii) 120 days from the date of the relevant invoice, in the case of
installments payable under the Four Pay Installment Plan;
(g) is not owed by an obligor who is obligated on accounts owed to
the Borrower more than 10% of the aggregate unpaid balance of which remains
unpaid for longer than the relevant periods specified in clause (f) above; and
(h) is not, as reasonably determined by the Agent in its
discretion, uncollectible or otherwise disqualified;
PROVIDED, that the Agent shall, notwithstanding the foregoing, have the
right, in the reasonable exercise of its discretion, to establish reserves
against the aggregate amount of Eligible Accounts.
"ELIGIBLE INVENTORY": all inventory held by the Borrower for
sale in the ordinary course of business, less any reserves maintained by the
Borrower, and which:
(a) is subject to a perfected, first priority security interest in
favor of the Agent free and clear of all other Liens;
(b) is located at one of the locations set forth in the Security
Agreement or in any schedule delivered pursuant thereto as a location at
which inventory is kept, and is not in transit (other than inventory in
transit to a location set forth in the Security Agreement or in any schedule
delivered pursuant thereto as a location at which inventory is kept and which
has been shipped pursuant to a Documentary Letter of Credit);
<PAGE>
(c) is not so identified to a contract to sell that it is evidenced
by an account;
(d) is of good and merchantable quality free from any defects which
would affect the market value thereof;
(e) is not inventory that the Borrower has returned or is in the
process of returning, including, but not limited to, inventory classified by
the Borrower as "C-Goods";
(f) is insured against loss or damage in accordance with the
provisions of the Security Agreement;
(g) is not subject to or covered by a negotiable document of title,
including, without limitation, negotiable warehouse receipts and negotiable
bills of lading;
(h) is not stored in a public warehouse or held by any Person as
bailee, unless the terms of such storage or bailment are satisfactory to the
Agent; and
(i) does not consist of packaging supplies;
PROVIDED, that the Agent shall, notwithstanding the foregoing, have the
right, in the reasonable exercise of its discretion, to establish reserves
against the aggregate amount of Eligible Inventory.
"FOUR PAY INSTALLMENT PLAN": an installment payment plan of
the Borrower which requires the customer to make payment in four consecutive
monthly installments, the first installment of which is to be paid at or
before shipment of the item sold.
"SIX PAY INSTALLMENT PLAN": an installment payment plan of the
Borrower which requires the customer to make payment in six consecutive
monthly installments, the first installment of which is to be paid at or
before shipment of the item sold.
"TEN PAY INSTALLMENT PLAN": an installment payment plan of the
Borrower which requires the customer to make payment in ten consecutive
monthly installments, the first installment of which is to be paid at or
before shipment of the item sold.
<PAGE>
EXHIBIT 1.1-B
TO CREDIT AGREEMENT
BORROWING BASE CERTIFICATE
Borrowing Base as of ______________________, 199___
To: First Bank National Association:
The undersigned hereby certifies to First Bank National Association
that as of the date above, the Borrowing Base for DAMARK INTERNATIONAL, INC.
was as follows:
1. Total Accounts $__________
2. LESS Ineligible Accounts ($_________ )
3. Eligible Accounts (Line 1 - Line 2) $__________
4. Total "Ten Pay" Eligible Accounts $__________
5. 30% of Line 3 $__________
6. Line 4 LESS Line 5 (but not less than
zero) $__________
7. Line 3 LESS Line 6 $__________
8. TIMES Availability Rate x 50%
9. Borrowing Base Amount
(Line 7 x Line 8) $__________
10. Total Inventory $__________
11. LESS Ineligible Inventory ($__________)
12. Eligible Inventory (Line 10 - Line 11) $__________
13. TIMES Availability Rate x 40%
14. Borrowing Base Amount
(Line 12 x Line 13 but not
more than $30,000,000) $__________
<PAGE>
15. Total Borrowing Base
(Line 9 + Line 14 but not
to exceed $50,000,000) $__________
16. Loans Outstanding $__________
17. Standby Letters of Credit Outstanding $__________
18. Documentary Letters of Credit
Outstanding $__________
19. Total Outstandings
(Line 16 + Line 17 + Line 18) $__________
20. Additional Availability or (Deficiency)
(Line 15 - Line 19) $__________
Capitalized terms are used herein as defined in the Credit Agreement
dated as of March 22, 1996 and the Exhibits thereto, as the same may be from
time to time amended, modified, supplemented or extended.
Date of Certificate:__________ , ____
--------------------------------------
Title
---------------------------------
For DAMARK INTERNATIONAL, INC.
<PAGE>
EXHIBIT 1.1-E
TO CREDIT AGREEMENT
BANK COMMITMENTS
Loan/Standby
Commitment Letter of Credit
Bank Amount Sublimit
- ---- ------------ -----------------
First Bank National Association $23,333,334 $21,000,000
The Sumitomo Bank, Limited
Chicago Branch 13,333,333 12,000,000
Bank One, Wisconsin 13,333,333 12,000,000
----------- -----------
Total $50,000,000 $45,000,000
<PAGE>
ATTACHMENT 1 TO THIRD AMENDMENT TO CREDIT AGREEMENT
CONSENT AND AGREEMENT OF SUBSIDIARY
_________________________, a Minnesota corporation (the "Subsidiary"),
hereby acknowledges and consents to that certain Third Amendment to Credit
Agreement dated as of June __, 1997 (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 heretofore amended, 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 hereby reaffirmed and shall remain
in full force and effect with respect to the Obligations (as
defined in the Guaranty).
Dated: June __, 1997
SUBSIDIARY:
--------------------------------------
By
------------------------------------
Title
---------------------------------
<PAGE>
EXHIBIT 11
DAMARK INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER SHARE
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended First Half Ended
---------------------- -----------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
- --------------------------
Income applicable to common stock . . . . . . . . . $2,139 $1,516 $2,540 $1,331
------- ------- -------- --------
------- ------- -------- --------
Weighted average number of common and
common equivalent shares outstanding:
Weighted average common shares outstanding . 8,026 8,461 8,040 8,581
Dilutive effect of stock options after
application of treasury stock method . . . . 417 402 386 201
------- ------- -------- --------
8,443 8,863 8,426 8,782
------- ------- -------- --------
------- ------- -------- --------
Income per common and common equivalent
share . . . . . . . . . . . . . . . . . . . . . $ .25 $ .17 $ .30 $ .15
------- ------- -------- --------
------- ------- -------- --------
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------
Income applicable to common stock . . . . . . . . . $2,139 $1,516 $2,540 $1,331
------- ------- -------- --------
------- ------- -------- --------
Weighted average number of common and
common equivalent shares outstanding:
Weighted average common shares outstanding . 8,026 8,461 8,040 8,581
Dilutive effect of stock options after
application of treasury stock method . . . . 569 469 462 234
------- ------- -------- --------
8,595 8,930 8,502 8,815
------- ------- -------- --------
------- ------- -------- --------
Income per common and common equivalent share . . . $ .25 $ .17 $ .30 $ .15
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-28-1997
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 52,404
<ALLOWANCES> 0
<INVENTORY> 74,060
<CURRENT-ASSETS> 138,432
<PP&E> 35,950
<DEPRECIATION> 19,904
<TOTAL-ASSETS> 182,411
<CURRENT-LIABILITIES> 116,267
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 64,628
<TOTAL-LIABILITY-AND-EQUITY> 182,411
<SALES> 276,116
<TOTAL-REVENUES> 276,116
<CGS> 198,962
<TOTAL-COSTS> 271,762
<OTHER-EXPENSES> 507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 455
<INCOME-PRETAX> 3,847
<INCOME-TAX> 1,307
<INCOME-CONTINUING> 3,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,540
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
