<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number: 0-19902
DAMARK INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA 41-1551116
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
7101 WINNETKA AVENUE NORTH (612) 531-0066
MINNEAPOLIS, MINNESOTA 55428 (Registrant's telephone
(Address of principal number, including area code)
executive offices and zip
code)
</TABLE>
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, $.01 par value
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: On March 3, 1997,
there were 8,057,814 shares of Class A Common Stock, $.01 par value, of the
Registrant outstanding. The aggregate market value of the Class A Common Stock
of the Registrant held on March 3, 1997 (based on the last reported sale price
of the Common Stock on that date by the NASDAQ National Market System) owned by
non-affiliates was approximately $71,186,612.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Report to Shareholders for the year ended
December 31, 1996 filed with the Securities and Exchange Commission (the "1996
Annual Report") are incorporated by reference into Parts II and IV of this Form
10-K.
2. Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held April 16, 1997 filed with the Securities and Exchange Commission (the
"Proxy Statement") are incorporated by reference into Part III of this Form
10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
DAMARK International, Inc.-Registered Trademark-
("DAMARK-Registered Trademark-" or the "Company"), incorporated in Minnesota in
1986, is a direct marketing company built on 10 years of membership services
experience and proprietary database management expertise. DAMARK's products and
services are offered through mail order catalogs and a variety of membership
clubs which provide members discounts on travel, hospitality, entertainment and
merchandise purchased through its catalogs. Currently, over one million
customers belong to DAMARK's targeted membership clubs which are designed to
build long-term customer loyalty. Brand-name, value-priced merchandise is sold
through its catalogs in six major product categories: computers, home office,
consumer electronics, home decor, home improvement and sports/fitness.
DAMARK's driving force is its club membership strategy. In 1987, DAMARK
introduced the Preferred Buyers' Club-Registered Trademark- ("PBC-SM-"). PBC
members are among DAMARK's most loyal customers who, on average, spend
approximately three times as much as DAMARK's other non-member customers and
produce the highest dollar volume of business. In a continuing effort to become
a more dominant membership services company, DAMARK introduced Insiders-SM- and
Vacation Passport-SM- membership clubs during 1996.
During 1993, the Company acquired certain assets and assumed certain
obligations of the COMB-Registered Trademark- Corporation ("COMB"), a direct
marketer of discount, discontinued and close-out merchandise. Prior to the
acquisition, COMB had been a competitor of the Company. As part of this
acquisition, the Company obtained COMB's proprietary customer list of
approximately 3.6 million names, including approximately 185,000 members of
COMB's subscription membership clubs. The COMB acquisition was accounted for
under the purchase method of accounting, whereby the Company's results of
operations include COMB's operating results since the date of acquisition.
DESCRIPTION OF BUSINESS
DAMARK's products and services are offered through mail order catalogs and a
variety of membership clubs that include discounts on travel, hospitality and
entertainment as well as other convenience needs. Brand-name, value-priced
merchandise is sold through catalogs in six major categories: computers, home
office, consumer electronics, home decor, home improvement and sports/fitness.
The Company's business activities are summarized below under the captions
entitled "Membership Marketing" and "Catalog Retail Marketing."
MEMBERSHIP MARKETING
The Company offers its customers opportunities to join the following
membership clubs--
PREFERRED BUYERS' CLUB-REGISTERED TRADEMARK-
This club entitles members to a 10% discount on all merchandise purchased
from DAMARK, as well as discounts on travel, hospitality, entertainment,
sports/fitness and other valuable services provided by third party marketing
partners. Since its introduction in 1987, the Preferred Buyers' Club has grown
to over one million current members. Management believes this growth reflects
the Company's success in making PBC members feel they receive significant value
from their membership. PBC members are among the Company's most loyal customers,
and are the highest volume and most frequent purchasers of name brand,
value-priced merchandise offered in the Company's catalogs. PBC members are also
the Company's most profitable customer segment, have the highest sale
productivity per catalog mailed, and have the most predictable purchasing
patterns and longest lasting relationship with the Company. As DAMARK acquires
new customers, it strives to convert them to PBC members in order to build
greater loyalty and to encourage repeat purchases of merchandise from the
Company's catalogs. PBC members are mailed club
1
<PAGE>
catalogs approximately every two weeks and are periodically mailed other single
category and customer segmented catalogs throughout the year.
As part of the Company's continuing effort to increase customer loyalty by
further enhancing the value proposition to its existing club members, Insiders,
a premier shopping club, was introduced in 1996 to DAMARK customers who shop
most frequently and desire premium membership benefits.
INSIDERS-SM-
Insiders, introduced in November 1996, is a premium shopping club offering
members all of the benefits of DAMARK's Preferred Buyers' Club, as well as
lowest price guarantee on product purchases and discounts on extended warranty
service plans and express shipping. In addition, membership in Insiders entitles
members to complimentary memberships in a dining club and premium rental car
clubs.
VACATION PASSPORT-SM-
Vacation Passport, introduced in September 1996, further expanded DAMARK's
business as a membership services company. Vacation Passport is a travel club
offering its members up to a 50 percent discount on hotels worldwide, airline
frequent flyer miles or cash rebates, car rental discounts and upgrades,
services from a full service travel agency, as well as discounts on cruises,
theme park attractions, sailing, skiing and golfing vacations and many other
benefits. Unlike the Preferred Buyers' Club and Insiders, Vacation Passport is
not dependent on customers purchasing merchandise from DAMARK. Rather, Vacation
Passport allows the Company the opportunity to offer new and enhanced benefits
to its current customer base while, attracting customers who are not necessarily
interested in joining DAMARK's product orientated clubs.
The Company's overall membership strategy includes bringing individually
relevant and compelling new club concepts to market. The Company currently has
several new club concepts in various stages of development and include such
clubs as line extensions to existing clubs and new discount and affinity clubs.
CATALOG RETAIL MARKETING
PRODUCTS
The Company's retail marketing strategy is centered around identifying
attractively priced, brand-named products that appeal to its targeted customer
base and can be offered as "Great Deals." These products are classified into two
broad types: "continuity" goods consisting primarily of new and mid-life cycle
products; and "opportunity" goods which are products towards the end of their
life cycle and which may be classified as remanufactured, refurbished goods or
discontinued and overstocked goods. As the Company's business has grown, the
portion of continuity goods offered by the Company has increased and currently
represents the vast majority of the Company's product sales. The Company offers
a variety of items in six major product categories. Each product category's
percentage of aggregate net product sales for the last two years is presented
below:
<TABLE>
<CAPTION>
PRODUCT CATEGORY 1996 1995
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Computers.................................................................... 29.8% 27.2%
Home Office.................................................................. 16.3 15.6
Consumer Electronics......................................................... 18.2 18.1
Home Decor................................................................... 13.5 15.2
Home Improvement............................................................. 14.8 14.5
Sports/Fitness............................................................... 7.4 9.4
--------- ---------
100.0% 100.0%
--------- ---------
--------- ---------
</TABLE>
During 1996, purchases by PBC and Insiders members represented approximately 47%
of the Company's net product sales.
2
<PAGE>
PRODUCT PROFITABILITY
The overall product profit margin depends on the mix of sales among the six
primary product categories. Products with higher price points, such as
computers, consumer electronics and home office products (the "hardline product
categories"), generally have lower percentage profit margins but provide higher
actual dollar margin contribution per unit. Conversely, items with lower price
points, such as home decor, home improvement and sports/fitness products (the
"softline product categories"), generally have higher percentage profit margins
but provide less actual dollar margin contribution per unit. During 1996, the
gross profit margins ranged between 19.0% and 22.5% for the hardline product
categories and between 34.8% and 36.7% for the softline product categories. The
increase or decrease in the sales mix of the product categories between years
generally reflect the changes in product offerings in the Company's catalogs
which are made in response to changes in consumer demand. During the third
quarter of 1995, the Company began to analyze product profitability at an
individual SKU level within the slotting criteria for each major type of catalog
mailed to its customer segments. As a result, overall gross margins on net
product sales have improved over the last six quarters.
PRODUCT ACQUISITION AND PLANNING
The Company's buyers and product planning staff continuously evaluate new
product offerings based on emerging merchandise trends, consumer demand, product
performance histories, current inventory positions, product quality and expected
product profitability. Empirical analyses of the Company's database on
historical product sales allow the Company to model expected customer purchasing
behaviors based on past performance of similar products. Inventory levels are
managed through careful analyses of, among other things, the size of each
purchase, the return rates and other privileges obtained from over 1,200
different suppliers, none of which accounted for more than ten percent of total
purchases in 1995 or 1996. Short lead times from product acquisition to product
offering enable the Company to purchase smaller quantities of a new product and
allow more of the purchases to be based on the product's actual sales
performance. Periodically, the Company pursues opportunistic purchases to offer
such merchandise in its catalogs.
PRODUCT PRESENTATION
The Company's in-house staff produces the advertising copy and layouts for
each of the Company's full-color catalog versions and other DAMARK promotional
materials using a variety of methods, including sophisticated desktop publishing
systems. Substantially all of the photographs used in the catalogs and other
DAMARK promotions are taken at the Company's in-house photo studio. The
Company's catalogs and promotional materials are printed by outside vendors.
DAMARK uses several catalog formats to market its products to its customers:
NEW PROSPECTS "FRONT-END" AND NON-CLUB CATALOGS--The front-end and non-club
catalogs are generally 64 page catalogs offering approximately 300 products. The
purpose of this catalog is to generate opportunities (in the form of telephone
calls from potential customers) for the Company to sell merchandise and convert
customers to Preferred Buyers' Club members. The Company chooses products for
this type of catalog which, based on the Company's experience, are expected to
be attractive to its targeted customers. Various promotions are used to help
generate initial and additional purchases. The front-end catalog is sent to
prospective customers meeting the Company's targeted demographic profile whose
names are generally obtained from mailing lists rented from other direct
marketing companies. The non-club catalog is mailed to selected customers who
have shopped with DAMARK previously but have not yet become a club member.
During 1996, the Company mailed 17 front-end catalog editions and 21 non-club
catalog editions with an aggregate circulation of approximately 112 million.
3
<PAGE>
PBC AND INSIDERS "MEMBERS ONLY" CUSTOMER CATALOGS--These catalogs are
generally 64 to 80 page catalogs with approximately 300 to 350 product
offerings. This type of catalog highlights new products and gives club customers
frequent opportunities to shop for products. During 1996, the Company mailed
approximately 34 members only catalog editions with an aggregate circulation of
approximately 33 million.
SPECIAL CATALOGS--Periodically, the Company develops certain specialty
catalogs, generally 48 pages, which feature single categories such as
electronics, home decor, home office or re-manufactured merchandise. In 1996,
the Company produced three special category catalog editions. In addition, the
Company annually mails two editions of its Big Book which is a 160 to 172 page
general merchandise catalog.
THE DAMARK CUSTOMER
TARGETED CUSTOMER BASE
The Company is differentiated from most direct marketers by targeting
well-educated, male customers with higher-than-average income as its primary
market. Based on a study by an independent marketing company, 73% of DAMARK's
customers are males; 54% of its customers are 25 to 44 years of age; the median
family income of DAMARK's customer is $48,000; and 50% of DAMARK's customers
have at least a college degree. In order to add new customers cost effectively,
the Company uses sophisticated targeting techniques to select potential new
customer names to rent from other direct mail companies and analyzes strategic
list acquisition alternatives. Once a customer purchases from DAMARK, the
Company analyzes empirical data from its proprietary database to maximize the
long-term revenue potential of the customer.
NEW CUSTOMER ACQUISITION
Acquiring new customer names cost effectively is an important objective of
any direct marketing organization. The Company works towards this objective by
mailing its "new prospects catalog" or front-end catalog at least monthly to
more than four million prospective customers meeting the Company's targeted
demographic profile. The prospect names are selected from mailing lists rented
from various sources, but principally from other direct marketing companies
based on DAMARK's regression analysis, specific media analysis and other means
of evaluating customer and market data.
New customer name acquisition is important in maintaining or growing the
Company's active customer base and in providing for continued growth. During
fiscal years 1995 and 1996, approximately 750,000 and 675,000 new names,
respectively, were added to the Company's proprietary customer list. Front-end
customer sales from catalogs were approximately 33% and 28%, respectively, of
net product sales in 1995 and 1996.
CUSTOMER ASSET MANAGEMENT
The Company's overall objective is to identify and acquire as many new
customers that fit its customer profile and, once acquired, to market member
services to these customers and maximize the long-term revenue potential from
these customers. Through empirically based marketing and merchandising efforts,
the Company seeks to maximize sales of products and services to its existing
customers. Demographic and regression analysis of historical purchasing patterns
of existing customers, as well as recency and frequency modeling, is performed
to increase revenues from and maximize the profitability of these customers. The
Company mails non-club customers a modified version of the new prospects catalog
which periodically utilizes various promotional strategies to encourage
additional purchases.
During 1996, sales from repeat ("back-end") customers, including sales from
club members, represented approximately 72% of aggregate net product sales. The
Company's proprietary customer list currently exceeds 12 million names.
4
<PAGE>
VALUE PRICING AND SERVICE
The Company's overall pricing strategy is to provide its customers with a
broad selection of "Great Deals" by discriminately selecting brand-name and
other quality merchandise which it believes will be particularly attractive to
its customer base. The Company's objective is to offer this merchandise at or
below the available pricing from dominant discount retailers; in addition, PBC
and Insiders members receive a 10% discount on merchandise purchases. The
Company also seeks to build customer satisfaction and loyalty and encourages
repeat purchases by providing a "hassle-free" shopping experience and superior
customer satisfaction.
CREDIT AND PAYMENT CONCEPTS
Customer payments for product and service purchases are accepted through
major credit cards, private label credit cards, checks or money orders. The
Company offers its customers varying installment billing plans with no finance
charges payable to the Company. At December 31, 1996, the Company had
approximately $24.3 million in installment plan receivables. Receivables under
the Company's installment billing plans are generally outstanding approximately
90 days, but under certain circumstances, can be outstanding up to 270 days.
DAMARK introduced a private label credit card in 1993. All credit financing for
the DAMARK private label credit card is provided by an independent financial
institution which performs all credit approval and collection efforts. Under the
arrangements with the independent financial institution, all private label
credit sales are without recourse to the Company, and accordingly, the Company
does not bear any risk of collection. At December 31, 1996, DAMARK private label
credit cardholders totaled approximately 100,000.
During 1996, the Company entered into an agreement with a major credit card
issuer whereby the Company will be able to market a co-branded VISA credit card
with the DAMARK logo through a variety of means. The co-branded credit card,
which will provide a number of benefits to cardholders, is one of the strategies
by which the Company expects to build additional brand loyalty. During 1996, the
Company began test marketing its co-branded credit card. Further testing will be
performed prior to the Company's expected full scale launch later in 1997.
DIRECT MARKETING OPERATIONS
TELESERVICES AND ORDER ENTRY
DAMARK processes approximately 80% of its customer order volume through
24-hour toll-free telephone numbers and approximately 20% of its customer orders
are received by mail. Generally, telephone orders are processed within two to
four minutes depending on the nature of the order and whether or not the
customer is a club member. The Company has the capacity of handling up to 1,000
orders per hour. In order to meet expected increased order volume and to
minimize weather and other business risks, the Company opened a second
telemarketing center in Junction City, Kansas during 1996. Teleservices
representatives at each of the Company's call centers process orders directly
into the Company's on-line data processing system which provides product
availability information, product specifications, accessories, available product
substitution, if necessary, and expected ship date, each of which is available
to the customer during the telephone order process. Teleservices representatives
generally use a scripted sales system, are knowledgeable in key product features
and are trained to sell accessories and peripheral products, memberships in the
Company's clubs and extended service plans provided by third party vendors.
FULFILLMENT
Fulfillment activities include receiving merchandise from suppliers,
inspecting merchandise for damage or defects, storing product for easy access,
picking products ordered by customers from the distribution
5
<PAGE>
center, repackaging products in approved containers if necessary, and shipping
ordered products to the customer.
The Company uses an integrated computer picking, packing and shipping
system. The system monitors the in-stock status of each product ordered,
processes the order and generates the related packing and shipping materials,
taking into account the bin location of products within the distribution center.
DAMARK has the capacity to pick, pack and ship up to 25,000 packages per normal
work shift, but adjusts its employee levels and its processing system to meet
varying demand levels. During 1994, the Company constructed a 400,000 square
foot distribution facility and installed a new warehouse distribution system
during 1995. The Company estimates that over 90% of the products ordered by
customers are in stock and, of these orders which are credit approved,
substantially all are shipped no later than the next day.
CUSTOMER SERVICE AND RETURNS
Customer service activities consist principally of customer requests for
order and refund status, questions regarding club membership, response to
product inquiry questions, authorization of customer returns and referral of
product warranty claims which are generally the responsibility of the
manufacturer.
The Company's product return policy generally allows customers to return
products up to 60 days after the customer receives the products. During 1996,
the Company experienced customer returns of approximately 15% of gross product
sales. The Company believes its return experience is within the customary range
for similar direct marketing businesses. Product return experience is closely
monitored by the Company at the individual product level to assist in
identifying trends in product offerings, chronic product defects and quality
issues in order to assess future purchases and enhance customer satisfaction.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company has developed an integrated management information system which
allows telephone orders to be captured on-line and mail orders to be efficiently
entered into the system. The Company's automated order entry system edits orders
and generates distribution center pick tickets and packing slips for order
fulfillment operations. The Company's system is an on-line transaction
processing system which is a fully redundant, high availability order capture
and order fulfillment system. The information system also provides support for
merchandising, inventory management, marketing, financial and management
reporting. The on-line access to information allows management to monitor daily
trends, market conditions and performance of the product acquisitions and
planning functions.
COMPETITION
The Company competes with value marketers, convenience marketers and
relationship marketers. These competitors include a wide variety of department,
discount and specialty stores, as well as cable home shopping networks and other
mail order catalogers. Within the value marketing segment of the retail
business, the Company competes directly with regional and national firms,
including such retailers as Best Buy, Circuit City, J.C. Penney, Sears, Target
and Wal-Mart. The Company also competes on certain products with specialty
retailers including Comp USA, Home Depot, Staples and in the convenience
marketing segment with Lands' End, L.L. Bean, Spiegel and Williams-Sonoma.
Competitors of the Company from the relationship marketer segment include, among
others, CUC International, Inc. Many of the Company's competitors have greater
financial, distribution and marketing resources.
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. There
are certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are
6
<PAGE>
cautioned that all forward-looking statements involve risks and uncertainty. The
factors, among others, that could cause actual results to differ materially
include: consumer spending and debt levels; interest rates; continuity of
relationships with or purchases from major vendors; product mix; competitive
pressures on sales and pricing; and increases in catalog production and other
costs which cannot be recovered through improved pricing of products and
services.
EMPLOYEES
At March 3, 1997, the Company had approximately 1,366 employees, including
approximately 452 part-time employees. Historically, the Company has not
experienced any significant difficulty in obtaining, additional flex-time
teleservice, warehouse and distribution employees which are required during the
Company's seasonal peak period. See "Management's Discussion and
Analysis--Seasonality." None of the Company's employees are party to a
collective bargaining agreement.
The Company's operations depend in part on its ability to attract, train and
retain qualified personnel. As special employee incentives, the Company
provides, among other things, an on-site day care center and cafeterias operated
by third-party service companies. These services are subsidized by the Company.
TRADEMARKS AND TRADE NAMES
The "DAMARK", "C.O.M.B.", "The Great Deal Company" and "Preferred Buyers
Club" trademarks, among others, are owned by the Company and are registered with
the U.S. Patent and Trademark Office. The Company has other pending registration
applications and will pursue other registrations as appropriate to establish and
preserve its rights.
ITEM 2. PROPERTIES
The Company owns a 400,000 square foot distribution facility on an 80 acre
parcel in Brooklyn Park, Minnesota. The Company leases a 250,000 square foot
office, telemarketing center and warehouse facility also in Brooklyn Park,
Minnesota under a ten-year net lease expiring in July 2000. The Company owns a
12 acre parcel immediately adjoining its leased office and warehouse facility.
The Company also leases a 38,000 square foot call center facility in Junction
City, Kansas under a ten-year lease expiring in May 2006.
The Company believes that its properties are well maintained, in good
operating condition and its existing warehouse space will be sufficient to
accommodate its anticipated peak inventory level in 1997.
ITEM 3. LEGAL PROCEEDINGS
On October 25, 1996, a current PBC customer commenced an action against the
Company in state court in New Jersey. This action was styled on his behalf and
on behalf of a class of Company customers, each of which are members of the
Company's Preferred Buyers' Club. The plaintiff alleges that he and the other
members of the proposed class have not received anticipated benefits as members
of the PBC. The plaintiff's complaint alleges various violations of state
consumer fraud and contract law and seeks compensatory and punitive damages.
Although the litigation is in the early stages, the Company believes that it has
meritorious defenses and does not anticipate any material adverse financial
result. The Company is defending the action aggressively.
In addition to the foregoing, the Company is a party to various claims,
legal actions and other complaints arising in the ordinary course of business.
In the opinion of management, any losses which may occur are adequately covered
by insurance, are provided for in the Company's financial statements, or are
without merit and the ultimate outcome of these matters will not have a material
effect on the financial position or operations of the Company.
7
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders during
the fourth quarter of the fiscal year covered by this Annual Report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company at March 3, 1997,
their ages, titles, the year first appointed as an executive officer of the
Company and employment for the past five years:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Mark A. Cohn 39 Chairman, President and Chief Executive Officer
Arlyn J. Lomen 47 Senior Vice President--Finance and Administration Group, Chief
Financial Officer and Secretary
Kent A. Arett 54 Senior Vice President--Information Systems and Operations Group
Michael D. Moroz 33 Vice President Marketing--Retail Group
George S. Richards 32 Vice President Marketing--Membership and Partnership Group
</TABLE>
Executive officers of the Company are elected at the discretion of the Board
of Directors with no fixed term, except for Mark A. Cohn. Mr. Cohn serves as
Chairman and Chief Executive Officer under the terms of an employment agreement
which provides that Mr. Cohn's employment may not be terminated, other than for
cause, by the Company before July 31, 1999. There are no family relationships
between or among any of the executive officers or directors of the Company.
MR. COHN is a founder of the Company and has been the Chief Executive
Officer of the Company since its inception in 1986.
MR. LOMEN was named Senior Vice President--Finance and Administration Group
in January 1996. He joined the Company in May 1995 as Vice President-- Finance
and Administration, Chief Financial Officer and Secretary. From 1985 to 1995,
Mr. Lomen was Vice President, Treasurer and Chief Financial Officer of Genmar
Holdings, Inc., a pleasure boat manufacturer. Prior thereto, Mr. Lomen was
employed by Carlson Companies, Inc., and Arthur Andersen LLP.
MR. ARETT was named Senior Vice President--Information Systems and
Operations Group in January 1996. Prior thereto, he was Vice
President--Information Systems and Operations of the Company from May 1995. He
served as the Company's Vice President--Information Systems and New Business
Development from December 1993 to May 1995. From 1988 to 1993, Mr. Arett was
Vice President--Operations and Systems of Sears Catalog, a division of Sears,
Roebuck & Co., Inc. Prior thereto, he held various positions with Fingerhut
Companies, Inc., The Musicland Group, Inc. and Electronic Data Systems.
MR. MOROZ was named the Company's Vice President Marketing--Retail Group in
May 1995. From June 1994 to May 1995, Mr. Moroz served as the Company's Vice
President of Marketing. Since joining the Company in 1988, Mr. Moroz has held
various marketing positions with the Company. Prior thereto, Mr. Moroz held
various marketing positions with COMB Corporation.
MR. RICHARDS joined the Company in December 1995 as Vice President
Marketing--Membership and Partnership Group. From 1994 to 1995, Mr. Richards was
Vice President--Marketing and Business Development with Montgomery Ward Direct,
L.P., a catalog joint venture between Fingerhut Companies, Inc. and Montgomery
Ward. From 1993 to 1994, he was a Senior Engagement Manager with McKinsey &
Company, Inc., a global strategy marketing consulting firm. From 1990 to 1993,
Mr. Richards held various catalog and specialty retail marketing management
positions with Sears, Roebuck & Co., Inc.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock (the "Common Stock") trades on the NASDAQ
National Market System under the symbol "DMRK." As of February 20, 1997, there
were 432 holders of record of the Company's Common Stock.
The following table sets forth, for the periods indicated, the range of high
and low sale prices of the Company's Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1996
Fourth Quarter............................................................... $ 13 $ 81/4
(September 29, 1996 to December 31, 1996)
Third Quarter................................................................ 171/2 107/8
(June 30, 1996 to September 28, 1996)
Second Quarter............................................................... 151/2 87/8
(March 31, 1996 to June 29, 1996)
First Quarter................................................................ 91/2 6
(January 1, 1996 to March 30, 1996)
1995
Fourth Quarter............................................................... $ 71/2 $ 51/2
(October 1, 1995 to December 31, 1995)
Third Quarter................................................................ 77/8 55/8
(July 2, 1995 to September 30, 1995)
Second Quarter............................................................... 75/8 53/4
(April 2, 1995 to July 1, 1995)
First Quarter................................................................ 9 61/4
(January 1, 1995 to April 1, 1995)
</TABLE>
The Company has never declared or paid cash or stock dividends on its Common
Stock. The Company currently intends to retain earnings for use in the operation
and expansion of its business and does not anticipate paying cash dividends in
the foreseeable future. In addition, the Company's bank credit agreement
restricts the payment of dividends on its Common Stock.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" as of and for each of the years in the
five-year period ended December 31, 1996 are derived from the consolidated
financial statements of the Company. The selected financial data presented below
are qualified in their entirety by, and should be read in conjunction with, the
consolidated financial statements and notes thereto and other financial and
statistical information referenced elsewhere in this Report, including the
information referenced under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operation."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................................. $ 513,716 $ 500,024 $ 477,381 $ 364,274 $ 270,317
Cost of products and services................................. 371,145 375,188 360,645 272,958 199,922
--------- --------- --------- --------- ---------
Gross profit................................................ 142,571 124,836 116,736 91,316 70,395
Marketing and administrative expenses......................... 133,317 126,727 107,517 81,769 66,085
--------- --------- --------- --------- ---------
Operating income (loss)..................................... 9,254 (1,891) 9,219 9,547 4,310
Interest expense, net......................................... (66) (191) (239) (202) (1,595)
Other expense, net............................................ (65) (709) (690) (587) (332)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and change in accounting
principle................................................. 9,123 (2,791) 8,290 8,758 2,383
Income tax benefit (provision)................................ (3,055) 935 (2,419) (2,979) (834)
--------- --------- --------- --------- ---------
Income (loss) before change in accounting principle......... 6,068 (1,856) 5,871 5,779 1,549
Change in accounting principle................................ -- -- -- -- 91
--------- --------- --------- --------- ---------
Net income (loss)........................................... $ 6,068 $ (1,856) $ 5,871 $ 5,779 $ 1,640
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Per common and common equivalent share:
Income (loss) before change in accounting principle......... $ .70 $ (.20) $ .59 $ .67 $ (.45)
Change in accounting principle.............................. -- -- -- -- .01
--------- --------- --------- --------- ---------
Net income (loss)......................................... $ .70 $ (.20) $ .59 $ .67 $ (.44)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common and common equivalent shares
outstanding............................................. 8,730 9,093 10,028 8,568 7,415
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental income (loss) per common and common equivalent
share, excluding the impact of the increase in the value of
warrants of $4,891 in 1992:
Net income (loss)........................................... $ .70 $ (.20) $ .59 $ .67 $ .22
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common and common equivalent shares
outstanding............................................... 8,730 9,093 10,028 8,568 7,544
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................... $ 19,664 $ 24,211 $ 35,048 $ 43,567 $ 22,867
Total assets.................................................. 142,790 141,728 155,531 146,750 73,659
Total long-term debt excluding current maturities............. -- -- 250 500 951
Total indebtedness............................................ 3,000 250 500 2,027 2,187
Common shareholders' equity................................... 62,544 64,936 71,980 64,331 29,531
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
"Management's Discussion and Analysis" included in the Company's 1996 Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Registrant, included in the
Company's 1996 Annual Report are incorporated herein by reference:
Consolidated Balance Sheets--December 31, 1996 and 1995
Consolidated Statements of Operations--Years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Shareholders' Equity--Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Election of Directors--Information
Concerning Nominees and Directors" and "Section 16(a) Reporting" in the
Company's Proxy Statement is incorporated herein by reference. Information
concerning Executive Officers of the Company is included in this Report
following Item 4 under the caption "Executive Officers of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Information" in the Company's Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Company's Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the captions "Executive Compensation and Other
Information", "Employment Contracts and Termination of Employment Arrangements"
and "Certain Relationships" in the Company's Proxy Statement is incorporated
herein by reference.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF FORM 10-K REPORT
(1) FINANCIAL STATEMENTS
The consolidated financial statements of DAMARK International, Inc.
included in the Company's 1996 Annual Report are incorporated herein by
reference under Item 8 "Financial Statements and Supplementary Data."
(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted as the required
information is inapplicable or the information is presented in the
consolidated financial statements or related notes.
(3) EXHIBITS
The exhibits required to be a part of this Report are listed in the
Exhibit Index which follows the signatures page included herein.
A copy of any of these exhibits will be furnished by the Company at a
reasonable cost to any person upon receipt from any such person of a
written request for any such exhibit. Such request should be sent to
DAMARK International, Inc., 7101 Winnetka Avenue North, Minneapolis,
Minnesota 55428, Attention: Director of Investor Relations.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1996.
(c) EXHIBITS
Included as part of Item 14(a) (3) above.
(d) FINANCIAL STATEMENT SCHEDULES
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereto duly authorized.
DAMARK INTERNATIONAL, INC.
Date: March 4, 1997 /s/ MARK A. COHN
--------------------------------------
Mark A. Cohn
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/S/ MARK A. COHN Chairman, Chief Executive Officer and March 4, 1997
- ------------------------------------ Director (Principal Executive
Mark A. Cohn Officer)
/S/ ARLYN J. LOMEN Senior Vice President--Finance and March 4, 1997
- ------------------------------------ Administration Group, Chief Financial
Arlyn J. Lomen Officer (Principal Financial and
Accounting Officer)
* Director March 4, 1997
- ------------------------------------
Thomas A. Cusick
* Director March 4, 1997
- ------------------------------------
Jack W. Eugster
* Director March 4, 1997
- ------------------------------------
Harold Roitenberg
* Director March 4, 1997
- ------------------------------------
Ralph Strangis
* Director March 4, 1997
- ------------------------------------
Joel N. Waller
*By: /s/ MARK A. COHN March 4, 1997
-------------------------------
(Mark A. Cohn
ATTORNEY-IN-FACT)
</TABLE>
* Mark A. Cohn, pursuant to Powers of Attorney executed by each of the
directors listed above whose name is marked by an "*" and filed as an
exhibit hereto, by signing his name hereto does hereby sign and execute this
report of DAMARK International, Inc. on behalf of each of such directors.
13
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF
DAMARK INTERNATIONAL, INC.
FOR
FISCAL YEAR ENDED DECEMBER 31, 1996
------------------------
EXHIBITS
<PAGE>
DAMARK INTERNATIONAL, INC.
EXHIBIT INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PAGE IN
REGULATION S-K SEQUENTIAL
EXHIBIT TABLE NUMBERING
REFERENCE TITLE OF DOCUMENT SYSTEM
- ----------------- ------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
3 Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the *
Company's Registration Statement on Form S-1 (No. 33-45056))
3 Article IV of the Restated Articles of Incorporation of the Registrant (filed as *
Exhibit 4.1 to the Company's Registration Statement on Form S-1 (No. 33-45056))
3 Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the Company's Registration *
Statement on Form S-1 (No. 33-45056))
4 Specimen Certificate of Class A Common Stock (filed as Exhibit 4.2 to the Company's *
Registration Statement on Form S-1 (No. 33-45056))
10 Facilities Lease between the Registrant and Steven B. Hoyt (filed as Exhibit 10.2 to *
the Company's Registration Statement on Form S-1 (No. 33-45056))
10 1991 Stock Option Plan (filed as Exhibit 10.3 to the Company's Registration Statement *
on Form S-1 (No. 33-45056))
10 Nonqualified Stock Option Agreement for Jeff G. Palkovich (filed as Exhibit 10.9 to *
the Company's Registration Statement on Form S-1 (No. 33-45056))
10 Nonqualified Stock Option Agreement for Jack W. Eugster (filed as Exhibit 10.10 to *
the Company's Registration Statement on Form S-1 (No. 33-45056))
10 Nonqualified Stock Option Agreement for Harold Roitenberg (filed as Exhibit 10.11 to *
the Company's Registration Statement on Form S-1 (No. 33-45056))
10 Nonqualified Stock Option Agreement for Ralph Strangis (filed as Exhibit 10.12 to the *
Company's Registration Statement on Form S-1 (No. 33-45056))
10 Nonqualified Stock Option Agreement for Thomas A. Cusick (filed as Exhibit 10.1 to *
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1993)
10 Nonqualified Stock Option Agreement for Joel N. Waller (filed as Exhibit 10.2 to the *
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993)
10 Nonqualified Stock Option Agreement, dated May 10, 1995, for Ralph Strangis (filed as *
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995)
10 Employment Agreement among the Registrant and Mark A. Cohn , dated as of August 12, *
1992 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992)
</TABLE>
<PAGE>
DAMARK INTERNATIONAL, INC.
EXHIBIT INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PAGE IN
REGULATION S-K SEQUENTIAL
EXHIBIT TABLE NUMBERING
REFERENCE TITLE OF DOCUMENT SYSTEM
- ----------------- ------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
10 Amendment to Employment Agreement among the Registrant and Mark A. Cohn, dated as of *
July 17, 1995 (filed as Exhibit 10 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended July 1, 1995)
10 Shareholder Agreement among the Registrant and Mark A. Cohn, dated August 12, 1992 *
(filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992)
10 DAMARK International, Inc. Deferred Compensation Plan for Non-Employee Directors *
(filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No.
33-45056))
10 Credit Agreement, dated as of March 22, 1996, by and between the Registrant and First *
Bank National Association as Agent for the Banks named therein (the "Credit
Agreement") (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 30, 1996)
10 First Amendment, dated as of October 18, 1996, to the Credit Agreement (filed as *
Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 28, 1996)
10 Second Amendment, dated as of February 10, 1997, to the Credit Agreement
11 Computation of Earnings Per Share
13 Management's Discussion and Analysis of Financial Condition and Results of Operation
covering the years ended December 31, 1996 and 1995
13.1 Consolidated Financial Statements as of December 31, 1996 and 1995
21 Subsidiaries of DAMARK International, Inc.
23 Consent of Arthur Andersen LLP
24 Powers of Attorney
27 Financial Data Schedule
</TABLE>
- ------------------------
* Document has been incorporated by reference
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT dated as of February 10, 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 (as so amended, the "Credit Agreement").
B. The parties hereto desire to amend the Credit Agreement in the
respects hereinafter set forth, and the Borrower desires that the Banks waive
an Event of Default which existed under Section 6.9 of the Credit Agreement
with respect to the fiscal year ended on that date.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
Section 1. DEFINITIONS. Capitalized terms used herein and not otherwise
defined herein, but which are defined in the Credit Agreement, shall have the
meanings ascribed to such terms in the Credit Agreement unless the context
otherwise requires.
Section 2. AMENDMENTS TO CREDIT AGREEMENT. Subject to Section 5 hereof,
the Credit Agreement is hereby amended as follows:
(a) Section 6.18 thereof is amended to read as follows:
Section 6.18 TRADE SUPPORT RATIO. The Borrower will not permit the
ratio of (a) its trade accounts payable to inventory vendors to (b) its
inventory as of any date set forth below to be less than the minimum ratio
set opposite that date:
Minimum Trade
Dates Support Ratio
----- -------------
Any March 31 0.50 to 1.00
Any June 30 0.50 to 1.00
Any September 30 0.55 to 1.00
Any December 31 0.55 to 1.00
<PAGE>
Section 3. WAIVER. The Banks hereby waive any Default or Event of
Default existing as of December 31, 1996 as the result of the Borrower's
noncompliance with Section 6.9 of the Credit Agreement for the fiscal year
ended on said date; PROVIDED, HOWEVER, that this waiver shall be effective
only if the Borrower's actual Capital Expenditures for the fiscal year ended
on said date are not more than $8,750,000. This waiver is limited to the
express terms hereof, and nothing herein shall be deemed to be a waiver of
any other covenant of the Credit Agreement or a waiver of any other Default
or Event of Default that may have existed on December 31, 1996 or at any time
thereafter.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To induce
the Banks and the Agent to execute and deliver this Amendment (which
representations and warranties shall survive the execution and delivery of
this Amendment), the Borrower represents and warrants to the Agent and the
Banks that:
(a) this Amendment has been duly authorized, executed and delivered
by it and this Amendment constitutes the legal, valid and binding
obligation of the Borrower enforceable against the Borrower in
accordance with its terms, subject to limitations as to enforceability
which might result from bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles relating to or
limiting creditors' rights generally;
(b) the Credit Agreement, as amended by this Amendment, constitutes
the legal, valid and binding obligation of the Borrower enforceable
against the Borrower in accordance with its terms, subject to
limitations as to enforceability which might result from bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable
principles relating to or limiting creditors' rights generally;
(c) the execution, delivery and performance by the Borrower of this
Amendment (i) have been duly authorized by all requisite corporate
action and, if required, shareholder action, (ii) do not require the
consent or approval of any governmental or regulatory body or agency,
and (iii) will not (A) violate (1) any provision of law, statute, rule
or regulation or its certificate of incorporation or bylaws, (2) any
order of any court or any rule, regulation or order of any other agency
or government binding upon it, or (3) any provision of any material
indenture, agreement or other instrument to which it is a party or by
which any of its properties or assets are or may be bound, or (B) result
in a breach of or constitute (alone or with due notice or lapse of time
or both) a default under any indenture, agreement or other instrument
referred to in clause (iii)(A)(3) of this Section 4(c);
-2-
<PAGE>
(d) as of the date hereof and after giving effect to the waiver
contained in Section 3 hereof, no Default or Event of Default has occurred
which is continuing; and
(e) all the representations and warranties contained in Article IV of
the Credit Agreement are true and correct in all material respects with
the same force and effect as if made by the Borrower on and as of the
date hereof.
Section 5. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This
Amendment shall not become effective until, and shall become effective when,
each and every one of the following conditions shall have been satisfied:
(a) executed counterparts of this Amendment, duly executed by the
Borrower and each of the Banks, shall have been delivered to the Agent;
(b) the Agent shall have received from each Subsidiary a Consent and
Agreement of Subsidiary in the form of Attachment 1 hereto (the
"Subsidiary Agreements") duly completed and executed by such Subsidiary;
(c) the Agent shall have received a Uniform Commercial Code financing
statement prepared for filing with the Secretary of State of Kansas with
respect to collateral located at the Borrower's facility in Junction
City, Kansas, duly executed by the Borrower;
(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
Borrrower; and
(e) the Agent shall have received the favorable opinion of counsel
to Borrower, covering the matters set forth in Sections 4(a), 4(b) and
4(c).
Upon receipt of all of the foregoing, the Agent shall notify the Borrower and
the Banks that this Amendment has become effective, but the failure of the
Agent to give such notice shall not affect the validity of this Amendment or
prevent it from becoming effective.
Section 6. COUNTERPARTS AND EFFECTIVENESS. This Amendment may be
executed in any number of counterparts, and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but
one of the same instrument.
-3-
<PAGE>
Section 7. AFFIRMATION. Each party hereto affirms and acknowledges that
(a) the Credit Agreement as amended by this Amendment remains in full force
and effect in accordance with its terms, and (b) all references to the
"Credit Agreement" or any similar term contained in any other Loan Document
shall be deemed to be references to the Credit Agreement as amended hereby.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-4-
<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 Second Amendment to Credit Agreement]
S-1
<PAGE>
CONSENT AND AGREEMENT OF SUBSIDIARY
DAMARK FINANCIAL SERVICES, INC., a Minnesota corporation (the "Subsidiary"),
hereby acknowledges and consents to that certain Second Amendment to Credit
Agreement dated as of February 10, 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 August 21, 1996 (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 and shall remain in full force and effect with
respect to the Obligations (as defined in the Guaranty).
Dated: February 10, 1997
SUBSIDIARY:
DAMARK FINANCIAL SERVICES, INC.
By
-------------------------------------
Title
-----------------------------------
<PAGE>
CONSENT AND AGREEMENT OF SUBSIDIARY
TEXAS TELEMARKETING, INC., a Minnesota corporation (the "Subsidiary"),
hereby acknowledges and consents to that certain Second Amendment to Credit
Agreement dated as of February 10, 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 March 22, 1996 (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 and shall remain in full force and effect with
respect to the Obligations (as defined in the Guaranty).
Dated: February 10, 1997
SUBSIDIARY:
TEXAS TELEMARKETING, INC.
By
-------------------------------------
Title
-----------------------------------
<PAGE>
DAMARK INTERNATIONAL, INC.
EXHIBIT 11
----------
COMPUTATION OF EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1994 1995 1996
------ ------- ------
PRIMARY EARNINGS PER SHARE:
Income (loss) applicable to common stock . . . . . $5,871 $(1,856) $6,068
------ ------- ------
------ ------- ------
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding 9,547 9,093 8,417
Dilutive effect of stock options after
application of treasury stock method . . 456 -- 296
------ ------- ------
10,003 9,093 8,713
------ ------- ------
------ ------- ------
Income (loss) per common and common
equivalent share . . . . . . . . . . . . . . . $ 0.59 $ (0.20) $ 0.70
------ ------- ------
------ ------- ------
FULLY DILUTED EARNINGS PER SHARE:
Income (loss) applicable to common stock . . . . $5,871 $(1,856) $6,068
------ ------- ------
------ ------- ------
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding . 9,547 9,093 8,417
Dilutive effect of stock options after
application of treasury stock method . . 481 -- 313
------ ------- ------
10,028 9,093 8,730
------ ------- ------
------ ------- ------
Income (loss) per common and common
equivalent share . . . . . . . . . . . . . . . $ 0.59 $ (0.20) $ 0.70
------ ------- ------
------ ------- ------
<PAGE>
EXHIBIT 13
DAMARK INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION COVERING THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
<PAGE>
RESULTS OF OPERATIONS
Net revenues for 1996 of $513.7 million increased $13.7 million, or 2.7%, from
$500.0 million in 1995, which represented a 4.7% increase over 1994 net revenues
of $477.4 million. Total sales per catalog decreased approximately 4.4% in 1996
to $3.66, primarily as a result of overall softness in consumer response. This
decrease in sales per catalog reflects a 6.2% decline in the club customer sales
per catalog, partially offset by an increase in the mix of product sales to club
customers, (47% in 1996 as compared to 46% in 1995). Club customers are the
highest volume and most frequent purchasers of the Company's products.
Circulation of 145.0 million catalogs mailed in 1996 increased slightly from
144.6 million catalogs mailed in 1995.
1996 1995 1994
------- ------- -------
CATALOG STATISTICS:
Number of catalogs mailed
(in thousands) . . . . . . . . . . . . 145,000 144,600 150,900
Average customer order - total company. $166 $165 $165
Sales per catalog -
Front-end (new) customers . . . . . . $2.06 $2.28 $2.46
Non-club (back-end) customers . . . . $3.33 $3.36 $2.89
Club (back-end) customers . . . . . . $7.70 $8.21 $7.82
Total company . . . . . . . . . . . . $3.66 $3.83 $3.52
------- ------- -------
------- ------- -------
During 1995, net revenues increased as a result of an 8.8% increase in total
sales per catalog to $3.83, as compared to $3.52 in 1994, partially offset by a
4.2% decrease in circulation to 144.6 million catalogs mailed in 1995 from 150.9
million mailed in 1994. The customer product return rate of 15.0% of gross
product sales in 1996, remained relatively flat with the product return rate of
15.2% in 1995 and up from 14.2% in 1994, primarily due to increased sales of
selected computer and electronic products during the past two years which
generally return at a higher rate.
In addition to product shipments, net revenues include, among other things,
membership fees earned from the Company's membership clubs. These fees
increased to $50.6 million in 1996 from $47.8 million in 1995 and $34.2
million in 1994. During 1996, approximately 524,000 new members were added
to the Company's clubs, as compared to 613,000 members and 611,000 members
added in 1995 and 1994, respectively. The decrease in new club members in
1996 was primarily the result of generally softer consumer response in the
front-end customer segment which generated fewer sales opportunities for the
Company to convert first-time customers into Preferred Buyers' Club members.
In addition, the Company's ability to convert first-time customers into
members was impacted by opening a second inbound telemarketing center in
September 1996. The teleservice agents in this center generally converted
customers to members at a lower rate as a result of their less experience.
In addition, the Company received membership fees from the introduction of
two new clubs in 1996. In September, the Company launched a new membership
club, Vacation Passport which offers members several travel discounts and
services for an annual membership fee. In November, the Company introduced
its Insiders club, a premier shopping club. For an annual membership fee,
members receive all of the benefits of the Preferred Buyers' Club, plus a
lowest price guarantee on merchandise purchases and discounts on extended
warranty service plans and express shipping and other benefits.
During 1996, the Company continued to experience improvement in the number of
club members renewing their membership for an additional year. In 1996, the
number of renewing members totaled 789,000 members, as compared to 626,000
members and 368,000 members in 1995 and 1994, respectively. At year end
1996, 1995 and 1994, total club membership was 1,044,000, 987,000 and 874,000
members, respectively.
1996 1995 1994
------- ------- -------
MEMBERSHIP STATISTICS:
Membership at year end . . . . . 1,044,000 987,000 874,000
Number of new members . . . . . 524,000 613,000 611,000
<PAGE>
Number of members renewed. . . . 789,000 626,000 368,000
------- ------- -------
------- ------- -------
The Company's overall product profit margin is affected by the mix of sales
among the six primary product categories in which the Company sells, the mix
of sales to Preferred Buyers' Club and Insiders members who receive a 10 %
discount, and shipping and handling fee revenue generated from product
shipments. Products with higher price points, such as computers, consumer
electronics and home office products, generally have lower percentage profit
margins but provide higher actual dollar margin contribution per unit.
Conversely, products with lower price points, such as home decor, home
improvement and sports/fitness products, generally have higher percentage
profit margins but provide less actual dollar margin contribution per unit.
1996 1995 1994
------- ------- -------
PERCENT OF SALES BY CUSTOMER
SEGMENT:
Front-end customers . . . . . 28% 33% 28%
Non-club customers . . . . . 25% 21% 36%
Club customers . . . . . . . 47% 46% 36%
PERCENT OF SALES BY PRODUCT
SEGMENT:
Computers . . . . . . . . . . 29.8% 27.2% 25.1%
Home Office . . . . . . . . . 16.3 15.6 14.8
Consumer Electronics. . . . . 18.2 18.1 21.7
Home Decor . . . . . . . . . 13.5 15.2 18.8
Home Improvements . . . . . . 14.8 14.5 12.2
Sports/Fitness. . . . . . . . 7.4 9.4 7.4
------- ------- -------
100.0% 100.0% 100.0%
------- ------- -------
------- ------- -------
Overall gross profit margins, as a percentage of net revenues, increased to
27.8% in 1996, as compared with 25.0% for 1995 and 24.5% for 1994. This
increase is primarily a result of improved product margins which resulted from
the greater emphasis placed on increasing individual product profitability and
from increased membership fees. The increased product margins realized in 1996,
as compared to 1995 and 1994, were partially offset by the higher mix of product
sales to club members, increased shipping costs and an increase in sales mix of
computer products.
Marketing and administrative expenses were $133.3 million in 1996, as
compared with $126.7 million and $107.5 million in 1995 and 1994,
respectively. These expenses increased as a percent of net revenues to 26.0%
in 1996, from 25.3% and 22.5% in 1995 and 1994, respectively. During 1996,
the Company continued to incur administrative and other costs in connection
with building additional infrastructure capabilities and information
technology resources to handle anticipated future growth, providing enhanced
customer service and continuing the expansion of its membership club
concepts. Advertising costs increased 2.7%, to $64.2 million in 1996 from
$62.4 million in 1995. Although the number of catalogs mailed in 1996
approximated the number mailed in 1995, advertising costs increased primarily
as a result of mailing catalogs with larger page counts to each of its
customer segments, partially offset by decreased paper costs when compared to
1995 costs. Additional costs associated with the opening of the Company's
new telemarketing center were also incurred during 1996. Marketing and
administrative expenses in 1995 increased when compared to 1994 costs as a
result of advertising costs increasing 7.2% from $58.3 million in 1994 to
$62.4 million in 1995, primarily as a result of the incremental cost
increases associated with paper and postage which aggregated approximately
$4.6 million.
Net interest expense was $66,000, $191,000 and $239,000 in 1996, 1995 and
1994, respectively. This expense results primarily from interest costs
associated with borrowings under the Company's revolving credit facility,
partially offset by income earned on short-term investment of the Company's
excess cash.
The Company's effective tax rate was 33.5 %, 33.5 % and 29.2 % for 1996, 1995
and 1994, respectively. The income tax provision for 1994 was reduced by
$400,000 reflecting a favorable settlement with the Internal Revenue Service
relating to an examination covering prior periods.
<PAGE>
As a result of the above factors, the Company reported net income of
$6.1 million, or $0.70 per share for 1996, as compared with a net loss of
$1.9 million, or $0.20 per share, for 1995 and net income of $5.9 million, or
$0.59 per share, for 1994. The weighted average number of common shares
outstanding decreased during 1996 by approximately 4.0 % to 8.7 million as
compared with 9.1 million outstanding for 1995, primarily as a result of stock
repurchases made during 1996. During 1995, the weighted average number of shares
outstanding decreased 9.3 % from 10.0 million in 1994 to 9.1 million in 1995
primarily as a result of stock repurchases made during 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its working capital, was $19.7
million at December 31, 1996, as compared to $24.2 million at December 31,
1995. The Company's current ratio was 1.3 to 1.0 at December 31, 1996, as
compared with 1.3 to 1.0 at December 31, 1995.
Net cash provided by operating activities decreased to $6.3 million for 1996, as
compared with $15.7 million during 1995, primarily as a result of the growth in
customer receivables in 1996, partially offset by the increase in deferred club
membership income, recorded net of initial direct acquisition-related costs, of
$16.3 million at December 31, 1996, as compared to $13.6 million at year end
1995, primarily due to the increase in overall club membership.
During 1996, the Company made capital expenditures of $8.6 million,
approximately the same as that spent in 1995. The 1995 and 1996 expenditures
consisted primarily of computer hardware and software enhancements to
accommodate the Company's anticipated future growth, enhance its customer
service levels and gain greater operational efficiencies. The Company
continues to evaluate its requirements for additional capital investment to
further enhance customer satisfaction and its information technologies and
infrastructure capabilities to accommodate future growth in merchandise sales
and membership services. Management currently anticipates that it will spend
between $8 to $10 million on capital expenditures during 1997.
In March 1996, the Company arranged a $30 million credit facility consisting
of a revolving line of credit and letter of credit facility available through
March 1999. The credit facility includes a $20 million sublimit available
for working capital and stand-by letter of credit requirements with the
entire facility available for documentary letters of credit, in each case
subject to a defined borrowing base. Borrowings outstanding under the line
of credit bear interest, at the Company's option, at the prime rate of
interest or LIBOR plus 1.75% and are collateralized by receivables,
inventories, intangible assets and property and equipment other than
building, land and vehicles. The credit agreement also contains certain
financial covenants which, among other things, requires the Company to
maintain certain financial ratios and limits the ability of the Company to
incur additional indebtedness, to make capital expenditures and to pay
dividends; the Company was in compliance with these covenants, as amended, at
December 31, 1996. At December 31, 1996, the Company had borrowings
outstanding of 3.0 million under its revolving line of credit and letters of
credit outstanding of $3.6 million.
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 $24.3 million and $22.2 million at
December 31, 1996 and 1995, respectively. The Company's receivable balances
at any point in time are generally reflective of sales volume fluctuations as
approximately 30 % of the Company's net revenues are generally placed by
customers on an installment plan. During the fourth quarter of 1996,
extended payment installment billing plans were tested by the Company. Based
on the results of these tests, the Company will, most likely, offer these
plans to its customers on a more full scale basis in 1997. Continuation of
the installment billing plans will require the allocation of capital
resources which the Company expects to fund from internal operations and
availability under its revolving credit facility. The Company also issues its
own private label credit card, which provides credit to Damark customers,
without recourse to the Company, through an independent financial institution.
During 1996, the Company repurchased 919,500 shares of its Class A Common Stock
at an aggregate cost of $8.8 million. At December 31, 1996, the Company has
been authorized by its Board of Directors to repurchase up to an additional
400,000 shares of its common stock.
The Company anticipates that the 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 next twelve months.
<PAGE>
SEASONALITY
The Company's business is subject to significant seasonal variations in
demand which the Company believes are generally associated with the direct
marketing and retail industries. Historically, a significant portion of the
Company's revenues and earnings have been realized during the period from
October through December. 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 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
While inflation, excluding increases in postage and paper costs, has not had,
and the Company does not expect it to have, a material impact on operating
results, there can be no assurance that the Company's business will not be
affected by inflation in the future. However, the Company did experience
significant increases in the cost of paper and postage during 1995. While the
increases in 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. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made above. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. The factors,
among others, that could cause actual results to differ materially include:
consumer spending and debt levels; interest rates; continuity of relationships
with or purchases from major vendors; product mix; competitive pressures on
sales and pricing, and increases in catalog production and other costs which
cannot be recovered through improved pricing of products and services.
<PAGE>
EXHIBIT 13.1
DAMARK INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollar amounts in thousands)
ASSETS
1996 1995
-------- --------
Current Assets:
Cash and cash equivalents.............................. $ 2 $ 8,670
Trade accounts receivable, net......................... 30,985 25,465
Due from vendors and other, net........................ 6,602 5,177
Merchandise inventories................................ 53,016 53,544
Deferred catalog costs................................. 6,613 6,167
Other.................................................. 1,257 567
-------- --------
Total current assets.................................. 98,475 99,590
Property and Equipment, net............................. 35,904 33,335
Intangible and Other Assets, net........................ 8,411 8,803
-------- --------
$142,790 $141,728
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 41,880 $ 49,547
Accrued liabilities.................................... 15,226 10,206
Deferred membership income, net........................ 16,292 13,588
Deferred income taxes.................................. 2,413 2,038
Borrowings under revolving credit facility............. 3,000 --
-------- --------
Total current liabilities............................. 78,811 75,379
Deferred Income Taxes................................... 1,435 1,413
Commitments and Contingencies...........................
-------- --------
Shareholders' Equity:
Class A Common Stock, $.01 par, 20 million shares
authorized; 8,052,147 and 8,899,895 shares issued
and outstanding....................................... 81 90
Class B Common Stock, $.01 par, 2 million shares
authorized; none issued and outstanding............... -- --
Paid-in capital........................................ 75,637 84,088
Accumulated deficit.................................... (13,174) (19,242)
-------- --------
Total shareholders' equity............................ 62,544 64,936
-------- --------
$142,790 $141,728
-------- --------
-------- --------
See accompanying notes to consolidated financial statements
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(Dollar amounts in thousands except per share amounts)
1996 1995 1994
---------- ---------- ----------
Net revenues........................... $ 513,716 $ 500,024 $ 477,381
Cost of products and services.......... 371,145 375,188 360,645
---------- ---------- ----------
Gross profit......................... 142,571 124,836 116,736
Marketing and administrative expenses.. 133,317 126,727 107,517
---------- ---------- ----------
Operating income (loss).............. 9,254 (1,891) 9,219
Interest expense, net.................. (66) (191) (239)
Other expense, net..................... (65) (709) (690)
---------- ---------- ----------
Income (loss) before income taxes.... 9,123 (2,791) 8,290
Income tax benefit (provision)......... (3,055) 935 (2,419)
---------- ---------- ----------
Net income (loss).................... $ 6,068 $ (1,856) $ 5,871
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common share... $ 0.70 $ (0.20) $ 0.59
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
(Dollar and share amounts in thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
---------------- --------------- Total
Number Par Number Par Paid-In Accumulated Shareholders'
of Shares Value of Shares Value Capital Deficit Equity
--------- ----- --------- ----- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993................. 9,493 $ 95 -- $ -- $87,493 $ (23,257) $ 64,331
Exercise of stock options.................. 78 1 -- -- 1,777 -- 1,778
Net income................................. -- -- -- -- -- 5,871 5,871
--------- ----- --------- ----- ------- ----------- -------------
Balance, December 31, 1994................. 9,571 96 -- -- 89,270 (17,386) 71,980
Exercise of stock options.................. 59 1 -- -- 192 -- 193
Repurchase and retirement of common stock.. (730) (7) -- -- (5,374) -- (5,381)
Net loss................................... -- -- -- -- -- (1,856) (1,856)
--------- ----- --------- ----- ------- ----------- -------------
Balance, December 31, 1995................. 8,900 90 -- -- 84,088 (19,242) 64,936
Exercise of stock options.................. 72 -- -- -- 319 -- 319
Repurchase and retirement of common stock.. (920) (9) -- -- (8,770) -- (8,779)
Net income................................. -- -- -- -- -- 6,068 6,068
--------- ----- --------- ----- ------- ----------- -------------
Balance, December 31, 1996................. 8,052 $ 81 -- $ -- $75,637 $ (13,174) $ 62,544
--------- ----- --------- ----- ------- ----------- -------------
--------- ----- --------- ----- ------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 6,068 $ (1,856) $ 5,871
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:.......................
Depreciation and amortization......................... 6,890 5,058 3,631
Deferred income taxes................................. 397 (1,966) 969
Loss on disposal of property and equipment............ -- 487 4
Changes in working capital items -
Receivables.......................................... (6,945) 6,096 (15,463)
Merchandise inventories.............................. 528 10,930 2,728
Deferred catalog costs and other current assets...... (1,136) 1,393 1,916
Accounts payable and accrued liabilities............. (2,230) (4,874) (2,942)
Deferred membership income........................... 2,704 414 5,875
--------- --------- ---------
Net cash provided by operating activities............ 6,276 15,682 2,589
--------- --------- ---------
INVESTING ACTIVITIES:
Property and equipment additions, net.................... (8,580) (8,587) (19,131)
Other, net............................................... (487) (110) (10)
--------- --------- ---------
Net cash used in investing activities................ (9,067) (8,697) (19,141)
--------- --------- ---------
FINANCING ACTIVITIES:
Borrowings under revolving credit facility, net.......... 3,000 -- --
Repayments of long-term obligations...................... (250) (250) (1,527)
Repurchase and retirement of common stock................ (8,779) (5,381) --
Net proceeds from employee exercise of stock options..... 152 111 535
--------- --------- ---------
Net cash used in financing activities................ (5,877) (5,520) (992)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents..... (8,668) 1,465 (17,544)
Cash and cash equivalents, beginning of year............. 8,670 7,205 24,749
--------- --------- ---------
Cash and cash equivalents, end of year................... $ 2 $ 8,670 $ 7,205
--------- --------- ---------
--------- --------- ---------
Supplemental Cash Flow Information:
Interest paid during the year............................ $ 220 $ 441 $ 567
Income taxes paid (refunded) during the year............. 2,810 246 (420)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
DAMARK International, Inc.
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of DAMARK
International, Inc. and its subsidiaries, each of which is wholly-owned
(collectively, "DAMARK" or the "Company"). All significant intercompany
transactions have been eliminated in consolidation.
DAMARK is a direct marketing company built on more than 10 years of
membership services experience and proprietary database management expertise.
The Company's products and services are offered through mail order catalogs
and a variety of membership clubs which provide members discounts on travel,
hospitality, entertainment and merchandise purchased through its catalogs.
Brand-name, value-priced merchandise is sold through its catalogs in six
broad categories: computers, home office, consumer electronics, home decor,
home improvements and sports/fitness. Currently, over one million members
belong to DAMARK's targeted membership clubs which are designed to build
long-term customer loyalty.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the amounts reported in the financial statements
and accompanying notes. As a result, actual results could differ because of
the use of these estimates and assumptions.
REVENUE RECOGNITION
Revenue for products, reported net of sales and other discounts, is
recognized at the time products are shipped to customers. Shipping and
handling fees are included as a component of the product price and are
reflected as part of net revenues; the related freight costs associated with
shipping the products to DAMARK's customers are included as a component of
cost of products and services. Amounts received from customers for products
pending shipment are reflected as accrued liabilities. The Company allows
customers to return products for up to 60 days from the date of shipment and
provides an allowance for returns based on historical return experience.
Membership fees received from members for participation in the
Company's clubs, net of initial direct costs incurred by the Company to
obtain the memberships, are generally recognized as revenue on a
straight-line basis over the applicable membership period which averages
12 months.
CASH EQUIVALENTS
Cash includes cash equivalents consisting of highly liquid, short-term
investments purchased with original maturities of three months or less and
are recorded at cost, which approximates market value.
TRADE ACCOUNTS RECEIVABLE
The Company offers its customers varying installment billing plans with
no finance charges payable to the Company. At December 31, 1996 and 1995,
receivables associated with such installment billing plans approximated $24.3
million and $22.2 million, respectively. In addition, private label credit
cards are issued to DAMARK customers through an independent financial
institution. Receivables and related financing, credit approval, collection
efforts and supporting services on the DAMARK private label credit card are
provided, without recourse to the Company, by the independent financial
institution.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost, determined on
a first-in, first-out basis, or net realizable market value.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CATALOG COSTS
Costs directly associated with the production and mailing of the
Company's direct mail catalogs are deferred and amortized over the estimated
periods in which related revenues are generated, generally three months or
less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization for financial reporting purposes are generally provided on the
straight-line method over the estimated useful lives of the respective assets
as follows:
Years
-------
Building and improvements.......................... 10 - 30
Computer hardware and software..................... 3 - 6
Furniture, fixtures and warehouse equipment........ 7 - 10
-------
-------
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the applicable lease period.
The cost and accumulated depreciation of property and equipment retired
or otherwise disposed of are removed from the related accounts; any residual
balances are charged or credited to operations.
INTANGIBLE ASSETS
Intangible assets arising from the acquisition of certain assets of
COMB Corporation during 1993 consist of a non-competition agreement, customer
lists, and excess purchase price over net assets acquired and are being
amortized on a straight-line basis over various periods not exceeding 25
years. Accumulated amortization was $2.8 million and $1.9 million at
December 31, 1996 and 1995, respectively.
INCOME TAXES
Deferred income taxes are provided for differences between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes based on income tax rates in effect at the balance sheet
date.
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.
The weighted average number of common and dilutive common equivalent shares
was 8,730,000 in 1996, 9,093,000 in 1995 and 10,028,000 in 1994. In 1995,
common equivalent shares were not included in the calculation as their
inclusion would have been antidilutive. Fully diluted earnings per share did
not differ significantly from primary earnings per share for any year
presented.
STOCK OPTION PLANS
The Company accounts for its stock option grants under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25") and provides the pro forma footnote disclosures required by
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock
Based Compensation" ("FASB No. 123").
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments with which the Company is involved are
primarily of a traditional nature. The carrying amounts as reported in the
accompanying consolidated balance sheets for cash and cash equivalents,
receivables, accounts
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
payable, accrued liabilities and borrowings under the Company's credit facility
approximate fair values principally as the result of the short maturities of
these instruments.
(2) PROPERTY AND EQUIPMENT
At December 31, property and equipment consist of the following:
(Dollar amounts in thousands)
1996 1995
------- -------
Building.......................................... $12,216 $12,066
Land and improvements............................. 3,936 3,900
Computer hardware and software.................... 26,177 19,209
Furniture, fixtures and warehouse equipment....... 7,011 5,798
Leasehold improvements............................ 3,180 2,967
Accumulated depreciation and amortization......... (16,616) (10,605)
-------- --------
$35,904 $33,335
-------- --------
-------- --------
(3) FINANCING ARRANGEMENTS
In March 1996, the Company arranged a $30 million credit facility
consisting of a revolving line of credit and letter of credit facility
available through March 1999. The credit facility includes a $20 million
sublimit available for working capital and stand-by letter of credit
requirements with the entire facility available for documentary letters of
credit, in each case subject to a defined borrowing base. Borrowings
outstanding under the line of credit bear interest, at the Company's option,
at the prime rate of interest or LIBOR plus 1.75% and are collateralized by
receivables, inventories, intangible assets and property and equipment other
than building, land and vehicles. At December 31, 1996, the Company had
borrowings outstanding of $3.0 million under its revolving line of credit and
letters of credit outstanding of $3.6 million. These letters of credit were
issued primarily for the purchase of inventory from foreign sources.
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, as amended, at
December 31, 1996.
(4) SHAREHOLDERS' EQUITY
During 1996, the Company repurchased 919,500 shares of its Class A
Common Stock (the "Common Stock"), in open market transactions, at an
aggregate cost of approximately $8.8 million. During 1995, the Company
repurchased 150,000 shares of its Common Stock from a former officer of the
Company, at a negotiated price based on the closing price of the Company's
Common Stock on the date immediately preceding the effective date on which
the terms of the repurchase were agreed. In 1995, the Company also
repurchased 580,500 shares of its Common Stock, in open market transactions,
at an aggregate cost of approximately $4.4 million. At December 31, 1996, the
Board of Directors had authorized the Company to repurchase up to an
additional 400,000 shares of its Common Stock.
(5) STOCK OPTION PLANS
During 1991, DAMARK International, Inc. Stock Option Plan (the "Plan")
was adopted to provide for the granting of incentive stock options ("ISO's")
or non-statutory stock options to key employees. At December 31, 1996,
900,000 shares of Common Stock have been reserved for issuance, of which
approximately 23,000 shares remain available for grant. The purchase price of
the shares of Common Stock subject to options granted under the Plan is
determined by the Compensation Committee of the Board of Directors but shall
not be less than 100 % of the market value on the date of grant for ISO's or
less than 85 % of the market value on the date of grant for non-statutory
options. Outstanding ISO's under the Plan vest in three equal annual
installments beginning on the first anniversary of the date of grant and
expire ten years from the date of grant, subject to cancellation in the event
of termination of employment.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) STOCK OPTION PLANS (CONTINUED)
Prior to the adoption of the Plan, certain employees, including
executive management, were granted nonqualified stock options. In addition,
options to purchase common stock have been granted, from time to time, to
certain members of the Board of Directors. These options vest in three equal
annual installments on the anniversary of the date of grant and expire, the
earlier of, one year after ceasing to be a director or ten years from the
date of grant.
The Company accounts for its stock option grants under APB No. 25. Since
options have been granted at not less than the fair market value on the date
of grant, no compensation expense has been recognized for the stock options
granted. Had compensation cost for option grants been determined consistent
with FASB No. 123, the Company's net income and earnings per share, on a pro
forma basis, would have been reported as follows:
1996 1995
----------- ----------
Net income (loss) (dollar amounts in thousands) -
As reported. . . . . . . . . . . . . . . . . $ 6,068 $ (1,856)
Pro forma. . . . . . . . . . . . . . . . . . 5,722 (1,979)
Primary and fully diluted earnings per share -
As reported. . . . . . . . . . . . . . . . . 0.70 (0.20)
Pro forma. . . . . . . . . . . . . . . . . . 0.66 (0.22)
----------- ----------
----------- ----------
Because the Statement No. 123 method of accounting has not been applied to
options granted by the Company prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years.
Information regarding the Company's stock option plans is summarized below:
(Shares in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Exercise Price Exercise Price Exercise Price
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year. . . 1,025 $ 7.63 979 $ 7.94 962 $ 7.43
Granted. . . . . . . . 279 9.61 299 6.50 167 13.21
Canceled . . . . . . . (43) 10.85 (194) 9.20 (72) 14.49
Exercised. . . . . . . (72) 2.08 (59) 1.87 (78) 6.84
---------- ---------- ----------
Options outstanding,
end of year. . . . . . 1,189 $ 8.31 1,025 $ 7.63 979 $ 7.94
---------- -------------- ---------- -------------- ---------- --------------
---------- -------------- ---------- -------------- ---------- --------------
Options exercisable,
end of year. . . . . . 714 $ 7.92 601 $ 7.15 552 $ 5.44
---------- -------------- ---------- -------------- ---------- --------------
---------- -------------- ---------- -------------- ---------- --------------
Weighted average fair
value of options
granted. . . . . . . . $ 5.60 $ 3.67 $ --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Options outstanding at December 31, 1996 have an exercise price per share
ranging between $1.31 and $21.25 and a weighted average remaining contractual
life of 7.14 years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) STOCK OPTION PLANS (CONTINUED)
In determining the compensation cost of the options granted during 1995
and 1996, as specified by FASB No. 123, the fair value of each option grant
has been estimated on the date of grant using the Black-Scholes option
pricing model and the weighted average assumptions used in these calculations
are summarized below:
1996 1995
-------------- --------------
Risk free interest rate. . . . . . . 6.04% 5.25%
Expected life of options
granted . . . . . . . . . . . . . 5 years 5 years
Expected volatility of options
granted . . . . . . . . . . . . . 60.44% 60.44%
-------------- --------------
-------------- --------------
(6) INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31
is summarized as follows:
(Dollar amounts in thousands)
1996 1995 1994
--------- --------- ---------
Current. . . . . . . . . . $ 2,658 $ 1,031 $ 1,450
Deferred . . . . . . . . . 397 (1,966) 969
--------- --------- ---------
Total. . . . . . . . . . $ 3,055 $ (935) $ 2,419
--------- --------- ---------
--------- --------- ---------
The components of the deferred tax liability are as follows as of December 31:
(Dollar amounts in thousands)
1996 1995
---------- ----------
Net current deferred income taxes-
Deferred catalog costs. . . . . . . . . . . . . . $ 2,260 $ 2,103
Deferred initial direct costs of club memberships 2,431 2,382
Merchandise returns . . . . . . . . . . . . . . . (803) (711)
Inventory valuation . . . . . . . . . . . . . . . (767) (767)
Allowance for doubtful accounts . . . . . . . . . (397) (375)
Contribution carryforwards. . . . . . . . . . . . -- (173)
Other, net. . . . . . . . . . . . . . . . . . . . (311) (421)
---------- ----------
2,413 2,038
---------- ----------
Net long-term deferred income taxes -
Depreciation. . . . . . . . . . . . . . . . . . . 1,022 994
Acquisition costs . . . . . . . . . . . . . . . . 408 495
Other, net. . . . . . . . . . . . . . . . . . . . 5 (76)
---------- ----------
1,435 1,413
---------- ----------
Total deferred income taxes . . . . . . . . . . . $ 3,848 $ 3,451
---------- ----------
---------- ----------
<PAGE>
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate. . . . . . . . 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit . -- 0.1 0.1
Internal Revenue Service settlement. . . . . . . -- -- (4.8)
Non-taxable municipal interest income. . . . . . -- -- (0.5)
Deferred income tax adjustments and other. . . . (0.5) (0.6) 0.4
--------- --------- ---------
Effective income tax rate. . . . . . . . . . . . 33.5% 33.5% 29.2%
--------- --------- ---------
--------- --------- ---------
</TABLE>
In September 1996, the Company entered into a settlement agreement with the
Internal Revenue Service (the "Service") relating to tax examinations of its
1991 and 1992 federal income tax returns. In addition, the Service elected
to close the Company's 1993 federal tax return without formal examination.
In connection therewith, the Company paid additional income taxes relating to
these years of approximately $160,000. During 1994, the Company entered into
a settlement agreement with the Service relating to tax examinations for 1989
and 1990. The income tax provision for 1994 was reduced $400,000 to reflect
the favorable settlement for items which the Company had previously provided
income taxes.
(7) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its offices, certain warehouse facilities and certain
other equipment under renewable operating lease agreements expiring at
various dates through 2006. Lease expense for the years ended December 31,
1996, 1995 and 1994 was $4.6 million, $4.3 million, $4.0 million,
respectively. Future minimum lease commitments under non-cancelable
operating leases as of December 31, 1996 are as follows:
(Dollar amounts in thousands)
1997. . . . . . . . . . . . . . . . . . . . . . $ 4,535
1998. . . . . . . . . . . . . . . . . . . . . . 3,436
1999. . . . . . . . . . . . . . . . . . . . . . 2,786
2000. . . . . . . . . . . . . . . . . . . . . . 1,991
2001 and thereafter . . . . . . . . . . . . . . 756
---------
$ 13,504
---------
---------
CERTAIN AGREEMENTS
The Company has an employment agreement with its Chairman and Chief
Executive Officer which provides that his employment may not be terminated by
the Company, other than for cause, before July 31, 1999. In addition, the
Company and its Chairman have also entered into an agreement providing his
estate, in the event of his death, the right to require the Company to
purchase, at the then current market price, the shares of its common stock
which he owns, subject to specified limitations. The Company carries
insurance on the Chairman's life in an amount in excess of its obligation
under this agreement.
The DAMARK International, Inc. 401(k) Retirement Plan (the "Retirement
Plan") is an employees' savings plan qualified under Section 401(k) of the
Internal Revenue Code of 1954. The Retirement Plan covers substantially all
employees of the Company who have attained age 21 and have completed at least
one year of service, as defined. Under the plan, employees generally may
elect to make, subject to limitations, pretax salary reduction contributions
of up to 15 % of their annual base salary. The Company's matching
contribution to the Retirement Plan is currently 25 % of the employees'
contribution, subject to certain limitations. Although the Retirement Plan
also allows the Company to make certain discretionary contributions, no
discretionary contributions were made in 1996, 1995 or 1994.
The Company has adopted a deferred compensation plan for outside
directors. Under this plan, directors are able to defer all or part of their
fees for service and have such fees invested in common stock equivalents of
the Company.
<PAGE>
CONTINGENCIES
The Company is a party to various claims, legal actions and other
complaints arising in the ordinary course of business. In the opinion of
management, any losses which may occur are adequately covered by insurance,
are provided for in the financial statements, or are without merit and the
ultimate outcome of these matters will not have a material effect on the
financial position or operations of the Company.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Damark International, Inc.:
We have audited the accompanying consolidated balance sheets of Damark
International, Inc. (a Minnesota corporation) as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Damark International, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
January 20, 1997
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF DAMARK INTERNATIONAL, INC.
State of Incorporation
----------------------------------
Damark Financial Services, Inc. Minnesota
Texas Telemarketing, Inc. Minnesota
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-45056.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 4, 1997
<PAGE>
POWER OF ATTORNEY
I, the undersigned Director of Damark International, Inc. (the "Company")
do hereby name, constitute and appoint Mark A. Cohn and Arlyn J. Lomen, and each
of them, my agent and attorney-in-fact, for me and in my behalf as a Director of
Damark International, Inc. to sign and execute on my behalf and in such capacity
the Annual Report on Form 10-K for the Company's fiscal year ended December 31,
1996 and any amendments thereto.
Executed this 18th day of December, 1996.
/s/ Mark A. Cohn /s/ Harold Roitenberg
------------------------------ ------------------------------
Mark A. Cohn Harold Roitenberg
/s/ Thomas A. Cusick /s/ Ralph Strangis
------------------------------ ------------------------------
Thomas A. Cusick Ralph Strangis
/s/ Jack W. Eugster /s/ Joel N. Waller
------------------------------ ------------------------------
Jack W. Eugster Joel N. Waller
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 37,587
<ALLOWANCES> 0
<INVENTORY> 53,016
<CURRENT-ASSETS> 98,475
<PP&E> 35,904
<DEPRECIATION> 16,617
<TOTAL-ASSETS> 142,790
<CURRENT-LIABILITIES> 78,811
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 62,463
<TOTAL-LIABILITY-AND-EQUITY> 142,790
<SALES> 513,716
<TOTAL-REVENUES> 513,716
<CGS> 371,145
<TOTAL-COSTS> 504,462
<OTHER-EXPENSES> 131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> 9,123
<INCOME-TAX> 3,055
<INCOME-CONTINUING> 6,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,068
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
