<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number: 0-19902
DAMARK INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1551116
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7101 Winnetka Avenue North
Minneapolis, Minnesota 55428
(Address of principal executive offices)
(Zip code)
(612) 531-0066
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
On August 11, 1998, there were 7,308,250 shares of Class A Common Stock, $.01
par value, of Damark International, Inc. outstanding.
<PAGE>
DAMARK INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1: Financial Statements
Consolidated Statements of Operations
For the Three and Six Months ended June 27, 1998 and June 28, 1997 1
Consolidated Balance Sheets
As of June 27, 1998 and December 31, 1997 2
Consolidated Statements of Cash Flows
For the Six Months ended June 27, 1998 and June 28, 1997 3
Notes to Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 14
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
Signature 15
</TABLE>
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- --------------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenues............................... $ 115,645 $ 147,494 $ 250,781 $ 276,116
Cost of products and services.............. 79,028 105,738 170,144 198,962
---------- ---------- ---------- ----------
Gross profit........................ 36,617 41,756 80,637 77,154
Marketing and administrative expenses...... 41,894 38,172 84,753 72,800
Unusual expenses (Note 6).................. 767 -- 767 --
---------- ---------- ---------- ----------
Operating (loss) income............. (6,044) 3,584 (4,883) 4,354
Interest expense, net...................... (797) (278) (1,650) (455)
Other expense, net......................... (139) (66) (241) (52)
---------- ---------- ---------- ----------
(Loss) income before income taxes.. (6,980) 3,240 (6,774) 3,847
Income tax benefit (provision)............. 2,374 (1,101) 2,303 (1,307)
---------- ---------- ---------- ----------
Net (loss) income................... $ (4,606) $ 2,139 $ (4,471) $ 2,540
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic (loss) earnings per share............ $ (.62) $ .27 $ (.58) $ .32
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted (loss) earnings per share.......... $ (.62) $ .25 $ (.58) $ .30
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 27, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................ $ 43 $ 474
Trade accounts receivable, net................................... 61,608 77,573
Merchandise inventories, net..................................... 42,845 70,744
Deferred membership solicitation and catalog costs............... 11,970 9,849
Other current assets............................................. 3,590 1,643
--------- ----------
Total current assets........................................... 120,056 160,283
Property and equipment, net........................................... 40,343 38,351
Other assets, net..................................................... 6,884 7,555
--------- ----------
Total assets................................................ $167,283 $ 206,189
--------- ----------
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. $ 32,562 $ 49,532
Accrued liabilities.............................................. 21,224 18,439
Deferred membership income, net.................................. 17,303 20,938
Deferred income taxes............................................ 2,675 2,675
Borrowings under revolving credit facility....................... 34,800 44,400
--------- ----------
Total current liabilities...................................... 108,564 135,984
Deferred income taxes................................................. 1,542 1,542
Shareholders' Equity:
Class A Common Stock, $.01 par, 20 million shares authorized;
7,308,250 and 8,025,964 shares issued and outstanding at
June 27, 1998 and December 31, 1997, respectively.............. 73 80
Class B Common Stock, $.01 par, 2 million shares authorized;
none issued and outstanding.................................... -- --
Paid-in capital.................................................. 68,444 75,452
Accumulated deficit.............................................. (11,340) (6,869)
--------- ----------
Total shareholders' equity..................................... 57,177 68,663
--------- ----------
Total liabilities and shareholders' equity.................. $ 167,283 $ 206,189
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
DAMARK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
June 27, June 28,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income............................................................... $ (4,471) $ 2,540
Adjustments to reconcile net (loss) income to net cash provided by
(used for) operations:
Depreciation and amortization................................................. 5,225 3,898
Loss (gain) on disposal of property and equipment............................. 51 (152)
Changes in working capital items -
Trade accounts receivable, net.............................................. 15,965 (14,817)
Merchandise inventories, net................................................ 27,899 (21,044)
Deferred membership solicitation and catalog costs and other current assets. (4,068) (4,062)
Accounts payable and accrued liabilities.................................... (14,185) 26,487
Deferred membership income, net............................................. (3,635) 369
--------- --------
Net cash provided by (used for) operations...................................... 22,781 (6,781)
--------- --------
INVESTING ACTIVITIES:
Property and equipment additions, net........................................... (6,785) (3,340)
Other, net...................................................................... 188 (70)
--------- --------
Net cash used for investing activities.......................................... (6,597) (3,410)
--------- --------
FINANCING ACTIVITIES:
(Payments) borrowings under revolving credit facility, net...................... (9,600) 10,600
Repurchase and retirement of common stock....................................... (7,576) (454)
Net proceeds from employee exercise of stock options and issuance of stock...... 561 79
--------- --------
Cash (used for) provided by financing activities................................ (16,615) 10,225
--------- --------
Net (decrease) increase in cash and cash equivalents............................ (431) 34
Cash and cash equivalents, beginning of period.................................. 474 2
--------- --------
Cash and cash equivalents, end of period........................................ $ 43 $ 36
--------- --------
--------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period................................................. $ 1,322 $ 240
Income taxes paid during the period............................................. 986 630
--------- --------
--------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have
been prepared by Damark International, Inc. (the "Company") pursuant to
the Rules and Regulations of the Securities and Exchange Commission.
The information furnished in these financial statements includes normal
recurring adjustments and reflects all adjustments, which are, in the
opinion of management, necessary for a fair presentation of such
financial statements. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although the Company believes
that the disclosures are adequate to make the information presented not
misleading, it is suggested that these financial statements be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's 1997 Annual Report to Shareholders and
the Form 10-K filed with the Securities and Exchange Commission.
Due to the seasonality of the Company's business, net revenues and
operating results for the three and six months ended June 27, 1998 are
not necessarily indicative of the results to be expected for the full
year.
The Company's fiscal year ends on December 31; however, each quarter
ends on the last Saturday of a thirteen-week period. As a result, the
operating results for the first half of 1998 and 1997 included 178 and
179 days, respectively. It is the Company's opinion that the difference
in days does not materially affect the comparability of the financial
results for the periods presented.
(2) MEMBERSHIP FEE REVENUE RECOGNITION
On clubs in which the Company has a continuing obligation, net deferred
membership fees and initial direct acquisition related costs are
recorded when the trial period has elapsed and are amortized over the
membership period, generally twelve months.
(3) EARNINGS PER COMMON SHARE
Basic earnings per common share ("EPS") is computed based on the
weighted average shares of common stock outstanding during the
applicable periods while diluted EPS assumes conversions of potentially
dilutive shares of common stock outstanding during the applicable
periods. Potential dilutive shares of common stock include stock
options, which have been granted to employees and directors of the
Company. For the three and six month periods ended June 27, 1998,
options to purchase 1,807,000 shares of common stock were outstanding
but were not included in the computation of diluted EPS as their
inclusion would have been antidilutive. Had the inclusion of these
options not been antidilutive, the Company would have assumed conversion
of stock options of approximately 320,000 and 355,000 for the second
quarter and first half of 1998. The components of basic and diluted EPS
for the three and six-month periods ended June 27, 1998 and June 28,
1997 are as follows:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended
----------------------- ----------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net (loss) income....................... $ (4,606) $ 2,139 $ (4,471) $ 2,540
--------- -------- --------- --------
--------- -------- --------- --------
Weighted average shares outstanding..... 7,485 8,026 7,672 8,040
--------- -------- --------- --------
--------- -------- --------- --------
Basic EPS............................... $ (.62) $ .27 $ (.58) $ .32
--------- -------- --------- --------
--------- -------- --------- --------
Weighted average shares outstanding..... 7,485 8,026 7,672 8,040
Assumed conversions of stock options.... -- 417 -- 386
--------- -------- --------- --------
Common equivalent shares outstanding.... 7,485 8,443 7,672 8,426
--------- -------- --------- --------
--------- -------- --------- --------
Diluted EPS........................... $ (.62) $ .25 $ (.58) $ .30
--------- -------- --------- --------
--------- -------- --------- --------
EPS as previously reported............ $ .25 $ .30
-------- --------
-------- --------
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) FINANCING ARRANGEMENTS
For the quarter and six-month period ended June 27, 1998, the Company
obtained financing through a $60 million revolving line of credit and
letter of credit facility. The entire facility was available for stand-by
and documentary letters of credit and working capital requirements, in each
case, subject to a defined borrowing base. Borrowings outstanding under
the line of credit bore interest, at the Company's option, at the reference
rate of interest or LIBOR plus 1.50% and were collateralized by
receivables, inventories, intangible assets and property and equipment
other than buildings, land and vehicles. At June 27, 1998, the Company had
borrowings of $34.8 million outstanding under this revolving line of credit
and $1.8 million of letters of credit outstanding, issued primarily for the
purchase of inventory from foreign sources.
The agreement with respect to the credit facility included covenants,
which, among other matters, required the Company to satisfy certain
financial tests and ratios and placed certain limitations on incurring
additional indebtedness and on the level of capital expenditures. The
Company was not in compliance with the tangible net worth, fixed charge
coverage ratio and restricted payments requirements at June 27, 1998;
however, the Company had obtained waivers of such technical defaults
effective for the period from and including June 27, 1998 to and including
August 31, 1998. In addition, the agreement was amended such that
borrowings outstanding under the line of credit subsequent to June 27, 1998
would bear interest, at the Company's option, at the reference rate of
interest or LIBOR plus 1.75%.
On July 29, 1998 the Company obtained a signed commitment letter from a
financial institution to provide a new $75 million revolving line of credit
and letter of credit facility, to be used for general working capital and
other corporate purposes. Up to $20 million of the facility will be
available for stand-by and documentary letters of credit. Borrowings
outstanding under the line of credit will bear interest, at the Company's
option, at the reference rate or LIBOR plus an interest rate spread, which
will be based on the Company's excess availability. Borrowings under
the facility will be secured by certain assets of the Company and the
new agreement will include one financial covenant. The Company
anticipates closing on the new agreement by August 31, 1998.
(5) COMMON STOCK AND STOCK OPTION TRANSACTIONS
During the first half of 1998, the Company repurchased 784,000 of its Class
A Common Stock ("Common Stock"), at an aggregate cost of approximately $7.6
million. This total includes the 400,000-share open-market repurchase
program and a series of private transactions, as authorized by the
Company's Board of Directors. During the first six months of 1997, the
Company repurchased 47,500 shares of Common Stock at an aggregate cost of
approximately $363,000.
On April 15, 1998, the Board of Directors and shareholders approved an
amendment to the Company's 1991 Stock Option Plan, which increased the
number of shares of the Company's Common Stock reserved for issuance to
1,600,000. On June 12, 1998, the Company granted, under this plan, options
to selected employees of the Company to purchase approximately 157,000
shares of the Company's Common Stock at $8.25 per share. The options vest
over three years and expire 10 years from the date of grant.
On January 30, 1998, the Company granted to Mark A. Cohn an option to
purchase 400,000 shares of the Company's Common Stock at $10.00 per share.
The option vests in five equal annual installments beginning in 1999 and
expires 10 years from the date of grant.
On January 30, 1998, the Company's Board of Directors approved a stock
purchase plan for non-employee directors consisting of 50,000 shares of the
Company's Common Stock. Under the plan, each director is limited to
purchasing a maximum of 5,000 shares per month, at a price equal to an
average of the last reported sale price for the Company's Common Stock for
the twenty trading days prior to notification.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(6) UNUSUAL EXPENSES
Operating income for the three and six-month periods ended June 27, 1998
includes unusual expenses of approximately $767,000 ($.07 per share
after-tax) related to the temporary closing in early May of the
Company's Junction City call center as a result of a number of worker
illnesses in the facility and resulting hospitalizations. Included in
the expenses are amounts incurred related to rerouting incoming calls to
the Fayetteville and Brooklyn Center call centers, as well as to three
external vendors, hiring temporary labor pools to handle the rerouted
calls, setting up temporary-site locations in Junction City, including
trailer rentals and electrical installations for computer and telephone
equipment, and retention of health officials and environmental
specialists. The expenses also include the salaries, wages and
commissions of Junction City employees, corresponding to the timeframe
that the facility was closed, and overtime costs incurred at the other
call centers as a result of the closing.
Although a cause was never identified, in mid-May, the Company reopened
the call center after the facility was declared safe for use by the
Kansas Department of Health and Environment, physicians from a local
hospital and an external environmental consulting firm. The Company
undertook several precautionary measures upon reopening the facility
including the installation of various monitoring equipment, such as
carbon monoxide detectors, air turnover units and activated charcoal
filters, as well as the retention of on-site medical professionals, the
costs of which are included above in the total of unusual expenses.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The selected financial data below for each of the periods presented are derived
from the Company's Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
June 27, 1998 June 28, 1997
--------------------------------------
<S> <C> <C> <C> <C>
($ in millions)
Net revenues........................... $ 115.6 100.0% $ 147.5 100.0%
Gross profit........................... 36.6 31.7 41.8 28.3
Marketing and administrative expenses.. 41.9 36.2 38.2 25.9
Unusual expenses....................... 0.8 0.7 -- --
Operating (loss) income................ (6.0) (5.2) 3.6 2.4
Net (loss) income...................... $ (4.6) (4.0)% $ 2.1 1.5%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------
June 27, 1998 June 28, 1997
--------------------------------------
<S> <C> <C> <C> <C>
($ in millions)
Net revenues........................... $ 250.8 100.0% $ 276.1 100.0%
Gross profit........................... 80.6 32.2 77.2 27.9
Marketing and administrative expenses.. 84.8 33.8 72.8 26.4
Unusual expenses....................... 0.8 0.3 -- --
Operating (loss) income................ (4.9) (1.9) 4.4 1.6
Net (loss) income...................... $ (4.5) (1.8)% $ 2.5 0.9%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
NET (LOSS) INCOME
The Company reported a net loss of $4.6 million, or $.62 per share for second
quarter 1998 as expected, compared to net income of $2.1 million, or $.25 per
share for second quarter 1997. The Company reported a net loss of $4.5
million, or $.58 per share year-to-date, compared to net income of $2.5
million, or $.30 per share for the comparable period in the prior year.
NET REVENUES
Net revenues of $115.6 million for the quarter ended June 27, 1998 decreased
$31.8 million, or 21.6% from net revenues for the comparable period last
year, reflecting a 22% reduction in catalog circulation as well as increased
credit card and installment plan denials. In addition, the ten-day closing
of one of the Company's call centers in May negatively impacted second
quarter results, as service levels were unable to be maintained during this
period, resulting in lost product revenues and lost opportunities to convert
customers to members. The second quarter decline in net revenues from the
Company's retail business was partially offset by an increase in membership
revenues, reflecting the Company's continued success in expanding its
membership portfolio through its client services marketing channel. On a
year-to-date basis, 1998 net revenues of $250.8 million reflected a 9.2%
decline from net revenues for the first six months of 1997. Net revenues
include membership fees earned from the Company's clubs, net product sales,
shipping and handling revenue and list revenue.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
NET REVENUES (CONTINUED)
MEMBERSHIP SERVICES FEE REVENUES
Membership fees increased 26.2% to $18.9 million in second quarter 1998, as
compared to $15.0 million for second quarter 1997. For the six-month period
then ended, membership fees of $40.9 million increased 40.6% over membership
fees of $29.1 million for the comparable period in the prior year, largely
due to the Company's continued strategic advancements in the client
membership services arena. The increased revenues were partially offset by
higher credit card denials and membership returns, in addition to an
unfavorable impact on membership conversions as a result of the temporary
closing of the Junction City call center in May.
In total, approximately 433,000 and 750,000 net new members were added to the
Company's clubs during the second quarter and first half of 1998,
representing a significant increase over the net new members acquired during
the comparable periods in the prior year. Of this total, approximately
283,000 new club members were added in the direct-to-consumer channel during
second quarter 1998, almost 100,000 more members than were added in second
quarter 1997. Despite significant reductions in catalog mailings, the Company
was able to attract more new members in this channel through strategically
increasing its usage of outbound telemarketing and an expanded suite of
membership products. In addition, as a result of these initiatives, the
Company has retained more members as evidenced by strengthened renewal rates.
Although the Company has been successful in obtaining new members through
the direct-to-consumer channel, the Company's long-term strategic growth
vehicle in the membership services business is through the client services
channel, in which the Company markets its membership programs on behalf of
large customer list-owning clients. Since this channel's inception, the
Company has secured client relationships with nationally recognized financial
institutions, such as Wachovia Bank Card Services, Associates Financial
Services Company, Inc. and Capital One Bank. Approximately 35% of the net new
members added during second quarter were obtained through the nascent client
service channel as compared to 29% for the first half of 1998. During second
quarter 1998, DAMARK's fifth shopping club, VALUE PLUS, was launched. This
club was designed to attract the value conscious shopper and give members
access to the lowest prices available on select DAMARK merchandise as well as
savings coupons from nationally known companies.
During second quarter 1998, club membership renewals of 271,000 increased
36.9% over the prior year comparable period, while renewals for the first six
months of 1998 increased 26.3% over renewals for the first half of 1997. As
of June 27, 1998, club membership totaled 1,443,000 members, including
approximately 106,000 free-trial members.
Following is a summary of membership statistics for the three and six months
ended June 27, 1998 and June 28, 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands)
DIRECT-TO-CONSUMER CHANNEL:
New club members added................... 283 185 533 365
Club members renewed..................... 271 198 499 395
Membership expirations & cancellations... (652) (332) (1,106) (670)
Net membership, at period end............ 1,272 1,134 1,272 1,134
----- ----- ------ -----
----- ----- ------ -----
CLIENT SERVICES CHANNEL:
New club members added................... 150 -- 217 --
Club members renewed..................... -- -- -- --
Membership expirations & cancellations... (51) -- (58) --
Net membership, at period end............ 171 -- 171 --
----- ----- ------ -----
----- ----- ------ -----
TOTAL COMPANY MEMBERSHIP, AT PERIOD END.. 1,443 1,134 1,443 1,134
----- ----- ------ -----
----- ----- ------ -----
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
NET REVENUES (CONTINUED)
RETAIL SERVICES REVENUES
Pursuant to a revised circulation strategy, approximately 31.6 million and
69.3 million catalogs were mailed during the three and six months ended June
27, 1998 as compared to 40.4 million and 75.0 million catalogs for the
comparable periods in the prior year. Sales per catalog mailed for second
quarter 1998 were $3.52, reflecting a 6.4% decline from second quarter 1997.
On a year-to-date basis, sales per catalog mailed of $3.53 declined 9% from
sales per catalog mailed of $3.88 for the first half of 1997. The decrease
in sales productivity reflects continued soft response to the members only
catalogs, which have the highest sales productivity rates, partially offset
by improved response from front-end prospects. The decline additionally
reflects the ten-day closing of the Junction City call center during the
month of May, as the closing of the facility occurred within days of mailing
one of the Company's catalogs. Although the Company attempted to reroute
incoming calls to the Fayetteville and Brooklyn Center locations as well as
to three external vendors, the Company's overall service levels suffered for
May, resulting in a loss of product sales as well as opportunities to convert
customers to members.
The following table reflects catalog statistics for the three and six months
ended June 27, 1998 and June 28, 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Number of catalogs mailed (in thousands)..... 31,600 40,400 69,300 75,000
Response rate - total company................ 2.11% 2.09% 2.12% 2.21%
Sales per catalog:
Front-end prospect......................... $ 1.94 $ 1.86 $ 2.02 $ 1.93
Back-end customers......................... $ 3.51 $ 3.57 $ 3.37 $ 3.57
Back-end members........................... $ 7.82 $ 9.71 $ 7.15 $ 9.01
Total company............................ $ 3.52 $ 3.76 $ 3.53 $ 3.88
-------- -------- -------- --------
-------- -------- -------- --------
Average order - total company................ $ 168 $ 180 $ 168 $ 176
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
As a result of the change made to the Company's return policy in 1997, the
Company continues to realize improvement in its product return rates, as the
return rate of 12.1% for second quarter 1998 compared favorably to the rate
of 14.3% for second quarter 1997. The product return rate for the first half
of 1998 was 12.7% compared to 15.0% for the first half of 1997.
GROSS PROFIT
Despite a 21.6% decline in net revenues for the quarter, gross profit margin
dollars decreased by only 12.3%, reflecting a shift to the higher margin
membership sales. The overall gross profit margin as a percentage of net
revenues for second quarter 1998 increased to 31.7%, as compared to a gross
profit margin of 28.3% for second quarter 1997. On a year-to-date basis,
1998's gross profit margin of 32.2% compared favorably to a gross profit
margin of 27.9% for the prior year comparable period. The improvement was
primarily the result of increased membership revenues, partially offset by
the underperformance of the Company's retail business. Gross profit was also
impacted by the liquidation of certain inventories from the consummation, in
second quarter, of a new liquidator agreement and the recording of additional
reserves for anticipated future liquidations.
The Company's overall product profit margin is affected by the mix of sales
among the Company's six primary product segments, the mix of sales to
Preferred Buyers' Club and Insiders members who receive a 10% discount, and
shipping and handling revenue generated from product shipments. Products
such as computers, consumer electronics and home office products typically
have higher price points and lower percentage profit margins, yet provide
higher actual dollar margin contribution per unit. Conversely, product
categories with lower price points, such as home decor, home improvements and
sporting goods/fitness products, generally have higher percentage profit
margins, but provide less actual dollar margin contribution per unit.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
GROSS PROFIT (CONTINUED)
The following table illustrates the customer and product mix for the three
and six months ended June 27, 1998 and June 28, 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-----------------------------------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Percentage of Sales by Customer Segment:
Front-end prospect....................... 30.0% 28.0% 30.0% 26.0%
Back-end customers....................... 22.0 23.0 22.0 24.0
Back-end members......................... 48.0 49.0 48.0 50.0
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
----- ----- ----- -----
Percentage of Sales by Product Segment:
Computers................................ 28.5% 31.7% 29.8% 32.1%
Consumer electronics..................... 17.3 17.9 17.4 17.8
Home decor............................... 15.4 13.2 15.6 13.6
Home improvements........................ 18.8 16.8 16.9 15.2
Home office.............................. 13.8 13.7 14.5 14.9
Sporting goods/fitness................... 6.2 6.7 5.8 6.4
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
As indicated by the table above, 1998's percentage of sales derived from the
home decor and home improvements product segments reflected a substantial
increase over 1997's mix. This increase reflects the Company's successful
introduction of the HOME COMFORTS catalog and related home product offerings,
in conjunction with the recently introduced Essentials for Home club program.
MARKETING AND ADMINISTRATIVE EXPENSES
Excluding unusual expenses related to the temporary closing of the Junction
City call center of approximately $767,000, marketing and administrative
expenses totaled $41.9 million in second quarter 1998, compared to $38.2
million for second quarter 1997. For the six-month period ended June 27,
1998, marketing and administrative expenses, excluding the unusual expenses,
totaled $84.8 million as compared to $72.8 million for the comparable period
for the prior year. The increase in marketing and administrative expenses
reflects certain costs incurred as the Company continues its expansion into
the membership services industry, including an increased usage of outbound
telemarketing, the opening of the Company's client service telemarketing
center, and costs associated with the enhancement of the Company's
infrastructure capabilities and information technology resources.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
UNUSUAL EXPENSES
During the month of May, the Company's Junction City call center was abruptly
closed as a result of a number of worker illnesses in the facility and
resulting hospitalizations. As a result of the closing the Company incurred
expenses related to rerouting incoming calls to the Fayetteville and Brooklyn
Center call centers, as well as to three external vendors, hiring temporary
labor pools to handle the rerouted calls, setting up temporary-site locations
in Junction City, including trailer rentals and electrical installations for
computer and telephone equipment, and retention of health officials and
environmental specialists. During the shutdown, the Company continued to pay
the salaries, wages and commissions of Junction City employees, and incurred
overtime costs at the other call centers.
Although a cause was never identified, in mid-May, the Company reopened the
call center after the facility was declared safe for use by the Kansas
Department of Health and Environment, physicians from a local hospital and an
external environmental consulting firm. The Company undertook several
precautionary measures upon reopening the facility including the installation
of various monitoring equipment, such as carbon monoxide detectors, air
turnover units and activated charcoal filters, as well as the retention of
on-site medical professionals.
For the quarter and six month period ended June 27, 1998, in addition to the
incurrence of additional expenses related to the shutdown, the closing of the
facility negatively impacted product sales and membership revenues, resulting
in a decline in service levels, in less calls being handled and,
correspondingly, less opportunities to convert customers to members.
INTEREST EXPENSE
Net interest expense for second quarter 1998 of $797,000 increased $519,000
over second quarter 1997, while net interest expense of $1.7 million for the
first six months of 1998 was $1.2 million higher than the prior year
comparable period. These increases reflect increased borrowings under the
Company's revolving credit facility necessary to fund working capital
requirements related to its installment billing plans. The Company has begun
to limit its offerings of the longer-duration installment billing plans and,
as a result, the Company realized interest reductions from first quarter.
INCOME TAX (BENEFIT) PROVISION
The Company's effective tax rate was 34.0% for second quarter 1998 and 1997,
as well as for the six-month periods then ended.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its net working capital, was $11.5
million at June 27, 1998, as compared with $24.3 million at December 31,
1997. The Company's current ratio was 1.1 to 1.0 at June 27, 1998 as
compared to 1.2 to 1.0 at December 31, 1997. The decline in the Company's
net working capital and current ratio from year-end reflects reductions of
inventory levels and receivables, in addition to increased capital
expenditures and purchases under the Company's Common Stock repurchase
program.
Cash provided by operations totaled $22.8 million for the first half of 1998,
as compared with cash used for operations of $6.8 million for the same period
in 1997, reflecting the reductions in receivables and merchandise
inventories, partially offset by decreases in accounts payable. Net deferred
membership income and initial direct acquisition-related costs, decreased
to $17.3 million at June 27, 1998 from $20.9 million at year-end 1997.
During the first six months of 1998, the Company made capital expenditures of
approximately $6.8 million, compared with $4.6 million for the first six
months of 1997. Capital expenditures in 1998 included costs associated with
the closing of an existing telemarketing center and the opening of a new
client services telemarketing center in Brooklyn Center, MN and improvements
made to the Company's corporate headquarters. The Company has invested and
will continue to evaluate its needs for additional investments in information
technology and infrastructure capabilities to achieve operational
efficiencies. Management currently anticipates that it will spend
approximately $10 to $12 million on capital expenditures during 1998.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's computer systems and those of third parties with whom it does
business will be affected when the year changes to 2000, commonly known as
the "year 2000 issue." The Company is currently conducting an internal study
to determine the full scope and related costs of modifying its computer
systems to ensure proper processing of transactions into and beyond the year
2000. The Company has begun to incur costs associated with addressing the
year 2000 issue. Although the total costs to be incurred are not expected to
be significant, failure to achieve timely completion of required
modifications or conversions or failure of the third parties with whom the
Company has relationships (vendors, clients, credit card processors and
others) to be year 2000 compliant could have a material adverse impact on the
operations and financial condition of the Company. Maintenance or
modification costs incurred by the Company will be expensed and costs of new
software (whether purchased or internally developed) will be capitalized and
amortized over its applicable useful life.
For the quarter and six-month period ended June 27, 1998, the Company
obtained financing through a $60 million revolving line of credit and letter
of credit facility. The entire facility was available for stand-by and
documentary letters of credit and working capital requirements, in each case,
subject to a defined borrowing base. Borrowings outstanding under the line
of credit bore interest, at the Company's option, at the reference rate of
interest or LIBOR plus 1.50% and were collateralized by receivables,
inventories, intangible assets and property and equipment other than
buildings, land and vehicles. At June 27, 1998, the Company had borrowings of
$34.8 million outstanding under this revolving line of credit and $1.8 million
of letters of credit outstanding, issued primarily for the purchase of
inventory from foreign sources.
The agreement with respect to the credit facility included covenants, which,
among other matters, required the Company to satisfy certain financial tests
and ratios and placed certain limitations on incurring additional
indebtedness and on the level of capital expenditures. The Company was not
in compliance with the tangible net worth, fixed charge coverage ratio and
restricted payments requirements at June 27, 1998; however, the Company had
obtained waivers of such technical defaults effective for the period from and
including June 27, 1998 to and including August 31, 1998. In addition, the
agreement was amended such that borrowings outstanding under the line of
credit subsequent to June 27, 1998 would bear interest, at the Company's
option, at the reference rate of interest or LIBOR plus 1.75%.
On July 29, 1998 the Company obtained a signed commitment letter from a
financial institution to provide a new $75 million revolving line of credit
and letter of credit facility, to be used for general working capital and
other corporate purposes. Up to $20 million of the facility will be
available for stand-by and documentary letters of credit. Borrowings
outstanding under the line of credit will bear interest, at the Company's
option, at the reference rate or LIBOR plus an interest rate spread, which
will be based on the Company's excess availability. Borrowings under the
facility will be secured by certain assets of the Company and the new
agreement will include one financial covenant. The Company anticipates
closing on the new agreement by August 31, 1998. The Company believes
that this new credit facility will provide it with the liquidity and the
financial flexibility necessary to support its current and future operations
growth.
The Company offers its customers varying installment-billing plans with no
finance charges payable to the Company. As a result, the Company supported
installment plan receivables aggregating $35.5 million and $50.5 million at
June 27, 1998 and December 31, 1997, respectively. The Company's receivable
balance at any time is generally reflective of sales volume fluctuations, as
approximately 30% to 40% of its net revenues are financed by customers on one
of the Company's installment billing plans. The decline in installment plan
receivables from year-end reflects a revised strategy, which limits the
offerings of the longer-duration installment billing plans. The Company will
continue to offer certain short-term installment billing plans to its
customers, requiring the allocation of capital resources expected to be
funded from internal operations as well as availability under the revolving
credit facility.
During the first half of 1998, the Company repurchased 784,000 of its Class A
Common Stock, at an aggregate cost of approximately $7.6 million. This total
includes the 400,000-share open-market repurchase program and a series of
private transactions, as authorized by the Company's Board of Directors.
During the first six months of 1997, the Company repurchased 47,500 shares of
Common Stock at an aggregate cost of approximately $363,000.
On April 15, 1998, the Board of Directors and shareholders approved an
amendment to the Company's 1991 Stock Option Plan, which increased the number
of shares of the Company's Common Stock reserved for issuance to 1,600,000.
On June 12, 1998, the Company granted, under this plan, options to selected
employees of the Company to purchase approximately 157,000 shares of the
Company's Common Stock at $8.25 per share. The options vest over three years
and expire 10 years from the date of grant.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On January 30, 1998, the Company granted to Mark A. Cohn an option to
purchase 400,000 shares of the Company's Common Stock at $10.00 per share.
The option vests in five equal annual installments beginning in 1999 and
expires 10 years from the date of grant.
On January 30, 1998, the Company's Board of Directors approved a stock
purchase plan for non-employee directors consisting of 50,000 shares of the
Company's Common Stock. Under the plan, each director is limited to
purchasing a maximum of 5,000 shares per month, at a price equal to an
average of the last reported sale price for the Company's Common Stock for
the twenty trading days prior to notification.
The Company expects to fund its operations, expected working capital
requirements and capital expenditures for the remainder of 1998 from cash
generated from operations and available borrowing capacity under its credit
facility.
SEASONALITY
The Company's business is subject to significant seasonal variations in
consumer demand, which the Company believes are generally associated with the
direct marketing and retail industries. Historically, the Company's net
revenues have been the largest during the fourth calendar quarter and a
significant portion of its earnings have been realized during that period.
The Company's operating results during this period may be affected by holiday
spending patterns, as well as the timing and effectiveness of catalog
mailings and general economic and other conditions. In anticipation of its
peak selling season, the Company hires additional flex-time employees in its
telemarketing, order processing and distribution areas, increases its
merchandise inventories, and incurs significant catalog production and
mailing costs. The Company's annual operating results could be adversely
affected if, among other factors, the Company's revenues were to be
substantially below seasonal expectations during the October through December
timeframe, or if a sufficient number of qualified employees would not be
available on a flex-time or other non-permanent basis.
INFLATION
Excluding increases in postage and paper costs, inflation has not had, and
the Company does not expect it to have, a material impact on operating
results. There can be no assurances, however, that the Company's business
will not be affected by inflation in the future. The Company could be
adversely impacted by substantial cost increases for paper and postage, as
significant cost increases in these areas could have a material impact on
advertising and other promotional costs in future periods. For the remainder
of fiscal year 1998, no such increases are anticipated.
FORWARD-LOOKING INFORMATION
Forward-looking statements contained herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
important factors exist that could cause results to differ materially from those
anticipated by some of the statements made above. Investors are cautioned that
all forward-looking statements involve risks and uncertainty. The factors,
among others, that could cause actual results to differ materially include:
consumer spending and debt levels; interest rates; failure of the Company or
significant third parties to achieve year 2000 compliance, including material
costs being incurred in connection with such compliance; changes or consumer
perceptions of changes in the domestic and/or international economic and
political climates; continuity of relationships with or purchases from major
vendors; the Company's ability to retain existing clients and attract new
clients, the Company's dependence on membership renewals, the Company's
continuing ability to develop new programs which generate consumer interest,
arrangements with list owners; changes in marketing strategy; labor shortages;
changes in product mix; telemarketing center integration; competitive pressures
on sales, pricing and membership services; availability of financing on
favorable terms; higher than expected installment plan default rates; and
increases in catalog production, product, postage, shipping and other costs
which cannot be recovered through improved pricing of products and services.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company held its annual meeting of shareholders on April 15,
1998. Pursuant to Regulation 14 of the Securities Exchange Act
of 1934, proxies for such meeting were solicited. The following
matters were voted on at the meeting:
<TABLE>
<CAPTION>
Votes
Votes For Withheld
--------- --------
<S> <C> <C>
b. (1) To elect the following individuals to
serve as members of the Company's Board of Directors
until the Annual Meeting of Shareholders in the year
2000:
Mark A. Cohn 6,732,249 439,048
Stephen J. Hemsley 6,731,289 440,008
Ralph Strangis 6,725,989 445,308
Votes Votes Broker Votes
For Abstained Non-Votes Against
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
c. (2) To approve the amendment increasing to 1,600,000
the shares authorized under the DAMARK
International, Inc. 1991 Stock Option Plan. 5,008,588 16,865 1,107,014 1,038,830
(3) To ratify the appointment of Arthur Andersen LLP
as independent public accountants of the Company
for 1998. 7,155,758 6,461 -- 9,078
</TABLE>
ITEM 5. OTHER INFORMATION
By an action of the Board of Directors effective as of August 10, 1998,
the Board of Directors of the Company has adopted an amendment to the
Company's bylaws, which amendment provides that no business shall be
considered at an annual meeting of the shareholders except business
identified (a) pursuant to the Company's Notice of Meeting, (b) by or
at the direction of the Board of Directors, or (c) by any shareholder
of the Company who (i ) was a shareholder of record at the time of
giving of the notice specified in clause (iii) below, (ii) is
entitled to vote at the meeting, and (iii) gives notice of the matter,
which must otherwise be a proper matter for shareholder action, in a
writing received by the Secretary of the Company not less than 120
calendar days in advance of the date the Company's proxy statement
and notice was released to shareholders in connection with the
Company's previous year's annual shareholder meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
Exhibit 3 - Amended and Restated Bylaws effective as of
August 10, 1998.
Exhibit 27 - Financial Data Schedule.
b. REPORTS ON FORM 8-K:
Registrant did not file any reports on Form 8-K during the
quarter ended June 27, 1998.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAMARK INTERNATIONAL, INC.
Date: August 11, 1998 By: /s/ Kim H. Plahn
-------------------------
Kim H. Plahn
Vice President - Finance
15
<PAGE>
EXHIBIT 3
AMENDED AND RESTATED BYLAWS
OF
DAMARK INTERNATIONAL, INC.
DAMARK INTERNATIONAL, INC., a corporation organized under Minnesota
Statutes Chapter 302A.
ARTICLE I
MEETINGS OF SHAREHOLDERS
Section 1.01. REGULAR MEETINGS. Regular meetings of shareholders may be
called by the Chief Executive Officer, the Secretary, the Board of Directors,
or by shareholder demand in accordance with Minnesota Statutes Section
302A.431, subdivision 2. No meeting shall be designated a regular meeting
unless specifically described as such in the notice of meeting or unless all
the shareholders are present in person or by proxy and none of them objects
to this designation.
Section 1.02. SPECIAL MEETINGS. Special meetings of the shareholders may
be called for any purpose or purposes at any time by the Chief Executive
officer, Chief Financial Officer, two or more directors, or by shareholder
demand in accordance with Minnesota Statutes Section 302A.433, subdivision 2.
Section 1.03. TIME AND PLACE OF SHAREHOLDER MEETINGS. Except as otherwise
provided by statute, any meeting of shareholders shall be held on the date and
at the time and place fixed by the Chief Executive Officer or the Board of
Directors of the corporation.
Section 1.04. NOTICE OF SHAREHOLDER MEETING. Except as otherwise provided
by statute, written notice of the date, time, and place of any meeting of
shareholders shall be given to every holder of voting shares at such address as
appears on the stock book of the corporation at least ten days prior to the
meeting if by mail, or two days prior to the meeting if by telex, telegram, or
in person.
Section 1.05. VOTING. Except where a greater percentage is required by
statute, the Articles of Incorporation of the corporation or these Bylaws, the
shareholders shall take action by the affirmative vote of the holders of a
majority of the voting power of the shares present.
Section 1.06. NOTICE OF BUSINESS TO BE CONSIDERED. No business shall be
considered at an annual meeting of the shareholders except business identified
(a) pursuant to the Company's Notice of Meeting, (b) by or at the direction of
the Board of Directors, or (c) by any shareholder of the Company who (i) was a
shareholder of record at the time of giving of the notice specified in clause
(iii) below, (ii) is entitled to vote at the meeting, and (iii) gives notice of
the matter, which otherwise must be a proper matter for shareholder action, in a
writing received by the
<PAGE>
Secretary of the Company not less than 120 calendar days in advance of the
date the Company's proxy statement and notice was released to shareholders in
connection with the Company's previous year's annual shareholder meeting.
ARTICLE II
DIRECTORS
Section 2.01. GENERAL POWERS. The business and affairs of the
corporation shall be managed by or under the direction of the Board of
Directors.
Section 2. 02. NUMBER, CLASSIFICATION AND TERM OF OFFICE. The number
of directors shall not be less than six and no more than nine and shall be
fixed from time to time by the Board of Directors or by the affirmative vote
of the holders of a majority of the voting power of the shares present and
entitled to vote generally in the election of directors voting together as a
single class at a duly held meeting. The directors shall be divided into
three classes, as nearly equal in number as reasonably possible, with the
term of office of the first class to expire at the 1993 annual meeting of
shareholders, the term of office of the second class to expire at the 1994
annual meeting of shareholders and the term of office of the third class to
expire at the 1995 annual meeting of shareholders. At each annual meeting of
shareholders following such initial classification and election, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of
shareholders after their election.
Section 2.03. VACANCIES. Subject to the rights of the holders of any
series of preferred stock then outstanding, newly created directorships
resulting from any increase in the authorized number of directors or any
vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be
filled by a majority vote of the directors then in office though less than a
quorum, and directors so chosen shall hold office for a term expiring at the
next annual meeting of shareholders. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Section 2.04. REMOVAL. Any directors, or the entire Board of Directors,
may be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of two-thirds of the outstanding Shares of
the capital stock of the corporation entitled to vote generally in the
election of directors, voting together as a single class.
Section 2.05. COMMITTEES. A resolution approved by the affirmative vote
of a majority of the Board of Directors may establish committees having the
authority of the Board in the management of the business of the corporation
to the extent provided in the resolution. A committee shall consist of one
or more persons, who need not be directors, appointed by the affirmative vote
of a majority of the directors present. Committees are subject to the
direction and control of, and vacancies in the membership thereof shall be
filled by, the Board of Directors. A majority of the members of the
committee holding office immediately prior to a
2
<PAGE>
meeting of the committee shall constitute a quorum for the transaction of
business, unless a larger or smaller proportion or number is provided in the
resolution establishing the committee.
Section 2.06. BOARD MEETINGS, NOTICE. The Chief Executive Officer (if a
director) , the Chairman of the Board (if one is elected), the President (if
a director) or Directors comprising at least one-third of the number of
directors then in office may call a Board meeting by giving ten days notice
if by mail, or two days notice if by telephone, telex, telegram, or in
person, to all directors of the day or date and time of the meeting.
Meetings of the Board of Directors may be held at the day or date, time, and
place, as shall be determined by the Board. If the day or date, time, and
place have been announced at a previous meeting of the Board, or if a meeting
schedule is adopted by the Board, no notice is required. In the absence of a
designation by the Board of Directors, Board meetings shall be held at the
principal executive offices of the corporation.
Section 2.07. (a) ADVANCE WRITTEN CONSENT OR OPPOSITION. Any member of
the Board or a committee thereof, as the case may be, may give advance
written consent or opposition to a proposal to be acted on at a Board or
committee meeting. If a director or committee member is not present at the
meeting, advance written consent or opposition to a proposal does not
constitute presence for the purpose of determining whether a quorum exists,
but such advance written consent or opposition shall be a vote in favor of or
against the proposal or resolution if the proposal or resolution acted upon
at the meeting is substantially the same or has substantially the same effect
as the proposal or resolution to which the member of the Board or committee
has consented or objected.
(b) ACTION WITHOUT MEETING. Any action, other than an action
requiring shareholder approval, may be taken by written action signed by the
number of directors that would be required to take the same action at a
meeting of the Board at which all directors were present. An action
requiring shareholder approval required to be taken at a Board meeting may be
taken by written action signed by all of the directors. Any such written
action is effective when signed by the required number of directors, unless a
different effective time is provided in the written action. When written
action is taken by less than all directors, all directors shall be notified
immediately of its text and effective date. Failure to provide the notice
does not invalidate the written action. A director who does not sign or
consent to the written action has no liability for the action or actions
taken thereby.
Section 2.08 (a) ELECTRONIC CONFERENCES. A conference among directors
by any means of communication through which the directors may simultaneously
hear each other during the conference constitutes a regular or special
meeting of directors, if the same notice is given of the conference to every
director. Participation in a conference by that means constitutes presence at
the meeting in person or by proxy if all the other requirements of Section
302A.449 of the Minnesota Business Corporation Act are met.
(b) PARTICIPATION BY ELECTRONIC MEANS. A director may participate
in a regular or special meeting of directors by any means of communication
through which the director, other directors so participating, and all
directors physically present at the meeting may simultaneously
3
<PAGE>
hear each other during the meeting. Participation in a meeting by that means
constitutes presence at the meeting in person.
ARTICLE III
OFFICERS
Section 3.01. ELECTION; TERM OF OFFICE; REMOVAL. The Board of Directors
shall elect a Chief Executive Officer and Chief Financial Officer or one or
more officers exercising the functions of such offices, and may elect such
other officers as it may deem necessary for the operation and management of
the corporation, each of whom shall have the duties and responsibilities
incident to the offices which they hold or as determined by the Board.
Officers need not be directors or shareholders. Without limiting the
foregoing, the Board may elect a Chairman of the Board, President, a Chief
Operating Officer, one or more Vice Presidents, a Treasurer, a Secretary and
such assistant officers as it may designate with titles to describe their
duties, functions or special responsibilities. Officers shall hold office at
the will of the Board for an indefinite term until their successors are
elected and qualified. Any officer elected or appointed by the Board of
Directors may be removed by the Board at any time with or without cause.
ARTICLE IV
AMENDMENTS
Section 4.01. Subject to the power of shareholders to adopt, amend, or
repeal these Bylaws as provided in Minnesota Statutes Section 302A.181,
subdivision 3, any Bylaw may be amended or repealed by the Board of Directors
at any meeting, provided that, after adoption of the initial Bylaws, the
Board shall not adopt, amend, or repeal a Bylaw fixing a quorum for meetings
of shareholders, prescribing procedures for removing directors or filling
vacancies in the Board, or fixing the number of directors or their
classifications, qualifications, or terms of office.
ARTICLE V
INDEMNIFICATION
Section 5. 01. The corporation shall indemnify persons for such expenses and
liabilities in such manner, under such circumstances, and to the extent
required by Minnesota Statutes Section 302A.521.
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-27-1998
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 63,067
<ALLOWANCES> 1,459
<INVENTORY> 42,845
<CURRENT-ASSETS> 120,056
<PP&E> 68,960
<DEPRECIATION> 28,617
<TOTAL-ASSETS> 167,283
<CURRENT-LIABILITIES> 108,564
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 57,104
<TOTAL-LIABILITY-AND-EQUITY> 167,283
<SALES> 250,781
<TOTAL-REVENUES> 250,781
<CGS> 170,144
<TOTAL-COSTS> 170,144
<OTHER-EXPENSES> 83,970
<LOSS-PROVISION> 1,550
<INTEREST-EXPENSE> 1,650
<INCOME-PRETAX> (6,774)
<INCOME-TAX> (2,303)
<INCOME-CONTINUING> (4,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,471)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
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