<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 27, 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 incorporation or (I.R.S. Employer
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 November 7, 1997, there were 8,049,964 shares of Class A Common Stock,
$.01 par value, of Damark International, Inc. outstanding.
<PAGE>
DAMARK INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C> <C>
Item 1: Financial Statements.
Consolidated Statements of Operations
For the quarter and the three quarters ended September 27, 1997
and September 28, 1996 1
Consolidated Balance Sheets
As of September 27, 1997 and December 31, 1996 2
Consolidated Statements of Cash Flows
For the three quarters ended September 27, 1997
and September 28, 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 6: Exhibits and Reports on Form 8-K 11
</TABLE>
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
------------------------------- ------------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . $ 134,824 $ 112,196 $ 410,940 $ 353,226
Cost of products and services . . . . . . . . . . . . 93,613 78,936 292,575 253,591
------------- ------------- ------------- -------------
Gross profit . . . . . . . . . . . . . . . . . . . . 41,211 33,260 118,365 99,635
Marketing and administrative expenses . . . . . . . . 39,435 30,691 112,235 95,105
------------- ------------- ------------- -------------
Operating income . . . . . . . . . . . . . . . . . . 1,776 2,569 6,130 4,530
Interest income (expense), net . . . . . . . . . . . (602) (43) (1,057) 31
Other expense, net . . . . . . . . . . . . . . . . . (15) (88) (67) (75)
------------- ------------- ------------- -------------
Income before income taxes . . . . . . . . . . . . . 1,159 2,438 5,006 4,486
Income tax provision . . . . . . . . . . . . . . . . (394) (853) (1,701) (1,570)
------------- ------------- ------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . . $ 765 $ 1,585 $ 3,305 $ 2,916
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings Per Share - Primary and Fully Diluted:
Net income . . . . . . . . . . . . . . . . . . . . . $ 0.09 $ 0.18 $ 0.39 $ 0.33
Weighted average common and dilutive common
equivalent shares outstanding . . . . . . . . . . . 8,602 8,881 8,535 8,837
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 27, December 31,
1997 1996
--------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51 $ 2
Trade accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . 53,294 30,985
Due from vendors and other, net . . . . . . . . . . . . . . . . . . . . . . . . . 7,585 6,602
Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,029 53,016
Deferred catalog costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,289 6,613
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,565 1,257
--------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,813 98,475
Property and Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,369 35,904
Intangible and Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,798 8,411
--------------- -------------
$ 184,980 $ 142,790
--------------- -------------
--------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,550 $ 41,880
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,363 15,226
Deferred membership income, net . . . . . . . . . . . . . . . . . . . . . . . . . 17,356 16,292
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,413 2,413
Borrowing under revolving credit facility . . . . . . . . . . . . . . . . . . . . 28,100 3,000
--------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 117,782 78,811
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,435 1,435
--------------- -------------
Shareholders' Equity:
Class A Common Stock, $.01 par, 20 million shares authorized;
8,049,964 and 8,052,147 shares issued and outstanding at
September 27, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,551 75,637
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,869) (13,174)
--------------- -------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 65,763 62,544
--------------- -------------
$ 184,980 $ 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>
Three Quarters Ended
-----------------------------------
September 27, September 28,
1997 1996
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,305 $ 2,916
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 6,202 5,349
Gain on sale of land . . . . . . . . . . . . . . . . . . . . . . . . . . . . (152) --
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . -- 600
Changes in working capital items -
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,292) 1,105
Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (13,013) (11,633)
Deferred catalog costs and other current assets . . . . . . . . . . . . . . (4,985) (2,878)
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . 12,807 6,724
Deferred membership revenue . . . . . . . . . . . . . . . . . . . . . . . . 1,064 1,313
--------------- ---------------
Net cash provided by (used in) operating activities . . . . . . . . . . . . (18,064) 3,496
--------------- ---------------
INVESTING ACTIVITIES:
Property and equipment additions, net . . . . . . . . . . . . . . . . . . . . . . (6,829) (5,859)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (72) (468)
--------------- ---------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (6,901) (6,327)
--------------- ---------------
FINANCING ACTIVITIES:
Borrowings on revolving credit facility, net . . . . . . . . . . . . . . . . . . 25,100 2,300
Payments on long term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (250)
Repurchase and retirement of common stock . . . . . . . . . . . . . . . . . . . . (454) (8,016)
Net proceeds from employee exercise of stock options. . . . . . . . . . . . . . . 368 143
--------------- ---------------
Net cash provided by (used in) financing activities . . . . . . . . . . . . 25,014 (5,823)
--------------- ---------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . 49 (8,654)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . 2 8,670
--------------- ---------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . $ 51 $ 16
--------------- ---------------
--------------- ---------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period . . . . . . . . . . . . . . . . . . . . . . . . . $ 717 $ 129
Income taxes paid during the period . . . . . . . . . . . . . . . . . . . . . . . 728 1,190
--------------- ---------------
--------------- ---------------
</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 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 1996 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
27, 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 three
quarters ended September 27, 1997 and September 28, 1996 included 270 and
272 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) 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 quarter and the three quarters ended September 27,
1997 and September 28, 1996:
<TABLE>
<CAPTION>
Basic Diluted
Quarter Ended EPS EPS
------------------------- ------------- ---------------
<S> <C> <C>
September 27, 1997. . . . $.10 $.09
September 28, 1996. . . . .19 .18
------------- ---------------
------------- ---------------
Three Quarters Ended
-------------------------
September 27, 1997. . . . $.41 $.39
September 28, 1996. . . . .34 .33
------------- ---------------
------------- ---------------
</TABLE>
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 September 27, 1997, the Company had borrowings outstanding of
$28.1 million under its revolving line of credit and letters of credit
outstanding of $6.3 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 was in
compliance with all covenants of its credit facility at September 27, 1997.
(4) COMMITMENTS AND CONTINGENCIES
During the three quarters ended September 27, 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........................ 123,000 14.54
Options canceled....................... (8,756) 7.79
Options exercised...................... (45,334) 8.15
------------- ------------------
Options outstanding, September 27,1997.. 1,257,582 $ 8.90
------------- ------------------
------------- ------------------
Options exercisable, September 27,1997.. 804,419 $ 8.23
------------- ------------------
------------- ------------------
</TABLE>
(5) COMMON STOCK REPURCHASE
During the three quarters ended September 27, 1997 and September 28, 1996,
the Company repurchased 47,500 and 833,000 shares, respectively, of its
Class A common stock in open market transactions.
5
<PAGE>
MANAGEMENTS'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>
Third Quarter Three Quarters Ended
------------------------- ---------------------
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...................................... 30.6 29.6 28.8 28.2
Marketing and administrative expenses............. 29.2 27.4 27.3 26.9
Operating income.................................. 1.3 2.3 1.5 1.3
Net income........................................ 0.6 1.4 0.8 0.8
--------- ------- ---------- --------
--------- ------- ---------- --------
</TABLE>
Net revenues for third quarter 1997 increased 20% or $22.6 million to $134.8
million as compared to $112.2 million for third quarter 1996. This increase
was primarily attributable to the success of new membership programs and an
increase in catalogs mailed during third quarter 1997, as compared to third
quarter 1996. The impact of the increased circulation was partially offset
by a lower overall customer response rate of 1.99% in third quarter 1997, as
compared to 2.07% in third quarter 1996. The customer response rate during
third quarter 1997 was unfavorably affected by the UPS strike. Even though
the Company was able to provide alternative shipping arrangements, the
Company experienced a precipitous decline in new customer orders during the
UPS strike. Total sales per catalog mailed increased to $3.38 in third
quarter 1997, as compared to $3.37 in third quarter 1996. Average order size
in third quarter 1997 increased to $170, partially due to the Company's
offering of six-pay and ten-pay installment billing plans, as compared to an
average order size of $163 in third quarter 1996.
During the first three quarters of 1997, net revenues increased 16% or $57.7
million to $410.9 million, as compared to $353.2 million for the first three
quarters of 1996. During this period, the Company mailed approximately 13.5%
more catalogs to its customers while total sales per catalog decreased to
$3.56, as compared to $3.59 for the same period in 1996.
<TABLE>
<CAPTION>
Third Quarter Three Quarters Ended
--------------------------- -----------------------
1997 1996 1997 1996
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
CATALOG STATISTICS:
Number of catalogs mailed (in thousands)............ 40,800 34,100 115,700 101,900
Average order - total company....................... $ 170 $ 163 $ 170 $ 167
Response rate - total company....................... 1.99% 2.07% 2.09% 2.15%
Sales per catalog:..................................
Front-end (new) customers...................... $ 1.74 $ 1.91 $ 1.85 $ 2.03
Non-club (back-end) customers.................. $ 3.20 $ 3.08 $ 3.30 $ 3.27
Club (back-end) customers...................... $ 7.33 $ 6.94 $ 7.66 $ 7.64
Total company................................. $ 3.38 $ 3.37 $ 3.56 $ 3.59
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------
</TABLE>
Product returns from customers decreased to 13.4% of gross product sales in
third quarter 1997, as compared with 15.9% in third quarter 1996, due
partially to the Company's new product return policy which was implemented
during second quarter 1997. Product returns for the first three quarters of
1997, as a percentage of gross product sales, were 14.5% as compared to 15.4%
for the first three quarters of 1996.
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. Membership fees
increased 40.9% or $5.4 million to $18.6 million in third quarter 1997, as
compared to $13.2 million in third quarter 1996. During third quarter 1997,
approximately 218,000 new members were added to the Company's clubs, as
compared to 132,000 new members during third quarter 1996. This increase in
new members was primarily the result of the continued success of marketing
the Vacation Passport and Insiders' clubs (which were first offered to
customers during 1996). During the third quarter, the Company continued to
successfully test two new club concepts, Essentials for Home and the Great
Deal Pak. As in prior quarters, the Company continued to experience an
increased number of members who renewed their annual membership for an
additional year.
For the first three quarters of 1997, membership fees increased 27.6% or
$10.3 million to $47.6 million, as compared to $37.3 million for the first
three quarters of 1996. Approximately 578,000 new members were added to the
Company's clubs during this period, as compared to 376,000 new members during
the first three quarters of 1996. For the first three quarters of 1997,
577,000 members renewed their memberships, an increase of more than 38,000
members during the first three quarters of 1996. Club membership totaled
1,211,000 members as of September 27, 1997.
<TABLE>
<CAPTION>
Third Quarter Three Quarters Ended
--------------------------- -----------------------
1997 1996 1997 1996
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
MEMBERSHIP STATISTICS:
Members, at period end.............................. 1,211,000 1,026,000 1,211,000 1,026,000
Number of new members............................... 218,000 132,000 578,000 376,000
Number of members renewed........................... 182,000 178,000 577,000 539,000
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------
</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 ("PBC") and Insiders' members who receive
a 10% discount on products purchased, and shipping and handling fees
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 sports/fitness
products, generally have higher percentage profit margins but provide
less actual dollar margin contribution per unit.
<TABLE>
<CAPTION>
Third Quarter Three Quarters Ended
--------------------------- -----------------------
1997 1996 1997 1996
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
PERCENT OF SALES BY CUSTOMER SEGMENT:
Front-end customers............................... 26% 29% 26% 29%
Non-club customers................................ 27 24 25 24
Club customers.................................... 47 47 49 47
--------- ----------- ---------- ----------
100% 100% 100% 100%
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------
PERCENT OF SALES BY PRODUCT SEGMENT:
Computers......................................... 29.5% 28.0% 31.3% 29.8%
Home Office....................................... 14.6 16.6 14.8 17.1
Consumer Electronics.............................. 17.2 19.0 17.6 17.5
Home Decor........................................ 15.0 13.9 14.0 12.9
Home Improvements................................. 17.7 15.6 16.0 14.7
Sports/Fitness.................................... 6.0 6.9 6.3 8.0
--------- ----------- ---------- ----------
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 30.6% in third quarter 1997, as compared to 29.6% for third quarter 1996,
and increased to 28.8% in the first three quarters of 1997, as compared to
28.2% in the first three quarters of 1996, primarily as a result of the
increased revenue generated by the Company's membership programs (which
generally carry larger gross margins than product sales) and the Company's
introduction of Free Trial Offer ("FTO") selling for its membership programs.
Under the FTO selling program, the customer is allowed to join one of the
Company's membership clubs on a free trial basis for 30 to 60 days prior to
being billed for the club membership. During the free trial offer period, the
customer generally is entitled to all the benefits of a club member except
that the PBC and Insiders' trial members are not entitled to receive the 10%
discount on products purchased on an initial product order. The increased
product margins realized during the first three quarters of 1997, as compared
to 1996, were partially offset by the higher mix of product sales to PBC and
Insiders' members and the increased sales mix of product categories carrying
a lower margin.
Marketing and administrative expenses were $39.4 million, or 29.2% of net
revenues, in third quarter 1997, as compared with $30.7 million, or 27.4% of
net revenues in third quarter 1996. The increase in marketing and
administrative expenses, as a percentage of net revenues, is primarily due to
a decrease in advertising leverage partially caused by the reduction in
customer response rates related to the UPS strike, and increased startup and
training costs associated with the opening of the Company's new call center
in Fayetteville, North Carolina. On a year-to-date basis, marketing and
administrative expenses increased slightly as a percent of net revenues to
27.3% for the first three quarters of 1997, as compared to 26.9% for the
first three quarters of 1996. The Company is continuing to incur costs
associated with the expansion of its information technology capabilities,
development of new club concepts and its entry into the client membership
marketing arena.
The increase in interest expense during third quarter 1997 was primarily
associated with increased borrowings under the Company's revolving credit
facility caused by increased working capital requirements to fund the
Company's installment billing programs.
The Company's effective tax rate was 34.0% and 35.0% for 1997 and 1996,
respectively.
As a result of the above, the Company reported net income of $765,000, or
$0.09 per share, for third quarter 1997, as compared with $1.6 million, or
$0.18 per share, for third quarter 1996. For the first three quarters of
1997, the Company reported net income of $3.3 million or $0.39 per share, as
compared to net income of $2.9 million or $0.33 per share for the first three
quarters of 1996. At September 27, 1997, the Company had 8,049,964 shares of
common stock outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its net working capital, was $22.0
million at September 27, 1997, as compared to $19.7 million at December 31,
1996. The Company's current ratio was 1.2 to 1.0 at September 27, 1996, as
compared with 1.3 to 1.0 at December 31, 1996.
Net cash used in operating activities totaled $18.1 million for the first
three quarters of 1997, as compared with $3.5 million provided by operating
activities during the same period in 1996. During 1997, the Company's net
working capital requirements increased primarily due to the offering of
six-pay installment billing over a five month period and ten-pay installment
billing over a nine month period and increased inventory levels needed to
support its anticipated product sales growth. Deferred club membership
income, recorded net of initial direct acquisition-related costs, totaled
$17.4 million at September 27, 1997.
During the first three quarters of 1997, the Company had capital
expenditures, net of retirements, of approximately $6.8 million, as compared
with approximately $5.9 million during the same period of 1996. The
expenditures during the first three quarters of 1997 included costs
associated with the opening of an additional teleservices center in
Fayetteville, North Carolina and additional computer hardware and software
enhancements to enable the Company to provide improved customer service and
higher operational efficiencies during an anticipated period of revenue and
program growth. 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 gross capital expenditures between $10 to $12 million during the
year ended December 31, 1997.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In June 1997, the Company amended its bank credit facility. The Company
arranged 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 revolving 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 27, 1997, the Company had letters of credit of $6.3
million and borrowings of $28.1 million outstanding under its credit facility.
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 $34.7 million and $24.3 million at
September 27, 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 billing plans. With the recent
offering of six-pay and ten-pay installment billing 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 three
quarters of 1997, the Company repurchased 47,500 shares of its common stock
under this program.
The Company anticipates that cash generated from operations and the 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 longer term billing plans to
customers, it is currently exploring alternative methods of financing these
receivables. Of course, there can be no assurance that the Company will be
able, among other things, to 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 have been the largest during the fourth calendar quarter and a
significant portion of its earnings has 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 and
seasonal 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 the
Company does not expect it to have a material effect on 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 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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,
changes or consumer perceptions of changes in the domestic and or
international economic climates, continuity of relationships with or
purchases from major vendors and list owners, changes in product mix,
teleservices center integration, competitive pressures on sales, pricing and
membership services, availability of financing on favorable terms, higher
than expected installment plan default rates, and increases in catalog
production, product and other costs which cannot be recovered through
improved pricing of products and services.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
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 27, 1997.
11
<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: November 10, 1997 By: /s/Arlyn J. Lomen
-----------------
Arlyn J. Lomen
Senior Vice President -
Finance & Administration
Group and Chief Financial
Officer
12
<PAGE>
EXHIBIT 11
DAMARK INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER SHARE
(DOLLAR AND SHARE AMOUNT IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
---------------------------- ----------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income applicable to common stock................... $ 765 $ 1,585 $ 3,305 $ 2,916
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding............ 8,026 8,406 8,035 8,522
Dilutive effect of stock options after
application of treasury stock method................. 575 475 449 292
------------- ------------- ------------- -------------
8,601 8,881 8,484 8,814
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Income per share applicable to common stock............. .09 .18 .39 .33
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
FULLY DILUTED EARNINGS PER SHARE
Net income applicable to common stock................... $ 765 $ 1,585 $ 3,305 $ 2,916
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding............ 8,026 8,406 8,035 8,522
Dilutive effect of stock options after
application of treasury stock method................. 576 475 500 315
8,602 8,881 8,535 8,837
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Income per share applicable to common stock............. $ .09 $ .18 $ .39 $ .33
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-27-1997
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 60,879
<ALLOWANCES> 0
<INVENTORY> 66,029
<CURRENT-ASSETS> 139,813
<PP&E> 59,343
<DEPRECIATION> 21,974
<TOTAL-ASSETS> 184,980
<CURRENT-LIABILITIES> 117,782
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 65,682
<TOTAL-LIABILITY-AND-EQUITY> 184,980
<SALES> 134,824
<TOTAL-REVENUES> 134,824
<CGS> 93,613
<TOTAL-COSTS> 133,048
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 602
<INCOME-PRETAX> 1,159
<INCOME-TAX> 394
<INCOME-CONTINUING> 1,159
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 765
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
