DAMARK INTERNATIONAL INC, 10-K, 1999-03-12

DAMARK INTERNATIONAL INC
10-K, 1999-03-12
CATALOG & MAIL-ORDER HOUSES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------

FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1998
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

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 (IRS Employer Identification Number)
incorporation or organization)

7101 Winnetka Avenue North 612-531-0066
Minneapolis, Minnesota 55428 (Registrant's telephone number
(Address of principal executive including area code)
offices)

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 there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K contained herein, and such disclosure
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 hereof: Yes _X_ No ___.

As of the latest practicable date, indicate the number of shares of each of
the Registrant's classes of common stock outstanding: On March 9, 1999, there
were 5,911,208 shares of Class A Common Stock and no shares of Class B Common
Stock outstanding.

As of the latest practicable date, indicate the aggregate market value of
the Registrant's voting stock held by non-affiliates: On March 9, 1999, based on
the last sale price reported by The Nasdaq Stock Market ($8.625 per share), such
securities had an aggregate market value of $40,637,300.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held April 21, 1999 filed with the Securities and Exchange Commission (the "1998
Proxy Statement") are incorporated by reference into Part III of this Form 10-K.

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TABLE OF CONTENTS

<TABLE>
<S> <C>
PART I. ITEM 1. BUSINESS............................................................... 3

General.............................................................................. 3
Membership Services.................................................................. 3
Catalog Retail....................................................................... 7
Operations........................................................................... 10
Information Systems.................................................................. 10
Competition.......................................................................... 10
Employees............................................................................ 11
Trademarks and Trade Names........................................................... 11

PART I. ITEM 2. PROPERTIES............................................................. 11

PART I. ITEM 3. LEGAL PROCEEDINGS...................................................... 12

PART I. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 12

PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.............................................................................. 12

PART II. ITEM 6. SELECTED FINANCIAL DATA............................................... 13

PART II. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION................................................................. 14

Results of Operations................................................................ 14
Liquidity and Capital Resources...................................................... 17
Year 2000 Compliance................................................................. 18
Seasonality.......................................................................... 19
Inflation............................................................................ 19
Pending Securities and Exchange Commission Interpretation............................ 19
Governmental Regulations............................................................. 19
Recently Issued Accounting Pronouncements............................................ 20
Forward-Looking Information.......................................................... 20

PART II. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................... 21

Index to Consolidated Financial Statements........................................... 21

PART II. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................................. 40

PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 40

PART III. ITEM 11. EXECUTIVE COMPENSATION.............................................. 41

PART III. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...... 41

PART III. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 41

PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...... 41

SIGNATURES............................................................................. 42
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K............................................ 43
</TABLE>

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PART I

ITEM 1. BUSINESS

GENERAL

DAMARK International, Inc. ("DAMARK" or the "Company") has been undergoing a
business transformation. The primary driver of this major strategic change was
the recognition that its core catalog formula was likely to come under extreme
competitive pressure. Consequently, DAMARK began to re-deploy the direct
marketing competencies gained in the catalog retail business in what it believes
to be an under-penetrated growth industry--membership services. In this field of
competition, in addition to serving its own customers, the Company serves large
list-owning companies ("clients") by creating membership and merchandising
offers targeted to their customers using their brand names.

The Company's overall strategic objective is to develop mutually beneficial,
long-term relationships with clients and consumers. In pursuit of this
objective, the Company seeks to leverage three principal assets: proprietary
customer lists; a unique value delivery system; and intellectual capital. The
Company believes it differentiates itself by its ability to develop high value
renewable programs, products and services, the capability to deliver these value
propositions seamlessly, and the competency to construct customized and
integrated direct response marketing offers.

DAMARK now competes in the marketplace for its own account as well as for
the accounts of others and operates in two businesses--Membership Services and
Catalog Retail. In both, the Company utilizes targeted, information-based
strategies to bring a broad range of products, programs, and services to
consumers via direct mail, telesales, and the Internet. In its Membership
Services business, the Company develops, markets and manages fee-based programs
that provide purchase price discounts and other benefits related to consumer
needs in the areas of shopping, travel, hospitality, entertainment,
health/fitness and household financial management. The Catalog Retail business
offers brand name, value-priced merchandise in the categories of computers, home
office, electronics, home decor, home improvement and sports/fitness through a
variety of catalog titles.

In the near term, the Company is focused on three operating priorities:

- Aggressively expanding its position in the Membership Services industry by
increasing revenues, programs, client relationships and the share of
clients served;

- Improving the economic model of the Catalog Retail business to position it
for future profitable growth in new customer segments and channels; and

- Providing high-impact member and client service in all business
activities.

Finally, the Company believes there are new marketing opportunities through
the Internet and will seek ways to leverage the uniqueness of this medium across
its operating segments.

MEMBERSHIP SERVICES

Although the Company has provided membership opportunities since 1987, it
believes the overall market for such services is still nascent and expanding.
DAMARK currently offers nine core membership value propositions through two
distribution channels using three direct marketing methods. In general, key
factors that drive economic results are market size and growth prospects, sales
conversion rates, new member acquisition costs, renewal rates and operating
costs. Further, there is a new member acquisition effort that may require an
investment, and a membership renewal effort, where the Company recoups it
original investment and earns a return. The level of profitability in any
particular year is therefore dependent on the mix of acquisition and renewal
business.

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The following table summarizes the operating performance of the Company's
Membership Services segment over the past three years:

KEY MEMBERSHIP SERVICES STATISTICS

CLUBS

In general, membership in the Company's clubs provide purchase price
discounts and other benefits related to consumer needs in the areas of shopping,
travel, hospitality, entertainment, health/fitness and household financial
management. The Company currently markets the nine membership value propositions
described below under its own brand names and those of its clients. During 1998,
DAMARK introduced four new clubs and intends to continue to bring to market what
it believes to be individually relevant and uniquely compelling concepts. The
Company currently has several new membership value propositions in various
stages of development, including line extensions to existing offerings and
affinity clubs.

MEMBERSHIP VALUE PROPOSITIONS

<TABLE>
<CAPTION>
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<S> <C>
CLUB MAJOR BENEFITS
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- A full year catalog subscription including member exclusive offers
- 10% off DAMARK's everyday prices
- Marketplace Best Price Guarantee refunds 125% of difference if
member finds identical product available at a lower price within 30
PREFERRED BUYERS' days of purchase and notifies DAMARK
CLUB-REGISTERED TRADEMARK- - Catalog Best Price Guarantee pays 100% of the difference upon
- Introduced in 1987 request if DAMARK reduces the price of a purchased item within 60
- Membership fee of $59.99 days
- PBC-REGISTERED TRADEMARK- Members' Only toll free number for
ordering and customer service
- On-line Internet ordering and Members' Only Store featuring
additional exclusive savings
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</TABLE>

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<TABLE>
<CAPTION>
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CLUB MAJOR BENEFITS
<S> <C>
- All benefits of the PREFERRED BUYERS' CLUB-REGISTERED TRADEMARK-
- Insiders Hotline-Registered Trademark- toll free number and
priority customer service
- Marketplace Best Price Guarantee refunds 150% of difference if
INSIDERS-REGISTERED TRADEMARK- member finds identical product available at a lower price within 60
- Introduced in 1996 days of purchase and notifies DAMARK
- Membership fee of $109.99 - Extended warranty discounts and free express shipping upgrades
- Priority service labels to identify member correspondence
- Complimentary memberships in other premier clubs
- Exclusive merchandise offers including sneak previews and exclusive
discounts
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- Full service travel agency
VACATION - Cash rebates on flights booked through Vacation Passport travel
PASSPORT-REGISTERED TRADEMARK- agency
- Introduced in 1996 - 50% off hotel rates worldwide
- Membership fee of $59.99 - Car rental discounts
- Cruise packages with 125% Best Price Guarantee
- Subscription to PASSPORT PRESS, DAMARK's travel newsletter
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- Wide variety of discounted shopping and entertainment values
GREAT DEAL PACK-SM- - Marketplace Best Price Guarantee refunds 125% of difference if
- Introduced in 1997 member finds identical product available at a lower price within 30
- Membership fee of $54.99 days of purchase and notifies DAMARK
- Express shipping upgrades and discounts on extended service plans
- Over $350 in entertainment benefits
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- Full year subscription to the Home Comforts catalog
ESSENTIALS FOR - $75 in Members' Only discounts
HOME-REGISTERED TRADEMARK- - Marketplace Best Price Guarantee refunds 125% of difference if
- Introduced in 1997 member finds identical product available at a lower price within
- Membership fee of $59.99 30 days of purchase and notifies DAMARK
- $10 new members decorating allowance
- Over $2,000 in savings on home-related services
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VALUE PLUS-SM- - Quarterly newsletters on product trends and emerging technologies
- Introduced in 1998 - Access to the lowest prices available on select DAMARK merchandise
- Membership fee of $59.99 - $60 in Members' Only discounts
- Extended warranty discounts and free shipping coupons
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GIFT GALLERY-SM- - Shopping catalog containing more than 50 gift offers from over 20
- Introduced in 1998 renowned gift companies at discounted, Members' Only prices
- Membership fee of $59.99 - $20 new member gift allowance
- Additional catalog offers from several of the companies included
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- Double Warranty Guard--doubles the manufacturer's warranty on any
BUYER'S GUARD -SM- member's purchases charged to a registered credit card
- Introduced in 1998 - Price Guard--assures members the best price on all of their
- Membership fee of $59.99 purchases
- Repair Guard--reimburses 20% of all registered product repair costs
up to $100
</TABLE>

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<TABLE>
<CAPTION>
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CLUB MAJOR BENEFITS
<S> <C>
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- $250 in grocery coupons
BUDGET SAVERS-SM- - Discounts on automotive needs from car care to gas
- Introduced in 1998 - Low rates for auto, home, life, and long term care insurance
- Membership fee of $59.99 - Up to 60% off prescription drug prices
- Discounts on long distance telephone calls, water softener
services, Internet access, home security systems and much more
</TABLE>

All memberships are one year in duration, renewable, and offered on a free
trial basis for periods of 30 to 60 days. The Company does not record any
revenue during this period, however, during this time, members may use benefits
without obligation as detailed in the original customer contact and the
fulfillment literature subsequently delivered. Written materials for each
program detail terms and conditions and how to access benefits. In the event a
consumer elects to cancel their membership during the trial period, they must
contact the Company to avoid billing. If a membership is not canceled, the
annual fee is charged to the member's credit card on file with the Company.
Renewal communications are delivered in advance of the expiration of a
membership term and, unless the Company is notified to the contrary, members are
charged the next year's fee. For those clubs that place a continuing obligation
on the Company to provide benefits, membership revenues are recorded on the
balance sheet net of direct solicitation costs and are amortized into income
over the membership period. Membership solicitation costs principally include
telemarketing costs, transaction fees, printing, postage and membership kit
costs. All members are permitted to return their memberships at any time for
either a full or pro-rated refund depending upon the terms and conditions of the
club. On average, consumers have historically tended to maintain memberships
with the Company for about 3.5 years.

DISTRIBUTION CHANNELS

In the direct-to-consumer channel, the Company markets primarily to its
proprietary customer lists while in the client services business, offers are
made to the customers of other organizations. The Company believes that the
economics of each channel are attractive for different reasons. The
direct-to-consumer business is characterized by comparatively low acquisition
costs, moderate growth prospects and a mature renewal base. The client services
business is distinguished by relatively higher new member acquisition costs and
high growth potential. Prior to 1997, the Company operated solely in the
direct-to-consumer channel. During 1998, the Company entered the client services
channel, executing marketing contracts with five large clients in the financial
services industry. These contracts provided the Company with access to large
numbers of prospective members and significantly accelerated the growth of new
member acquisitions.

DIRECT-TO-CONSUMER. Historically, member acquisition through the
direct-to-the-consumer channel was driven by mailing a catalog to consumers
fitting the criteria of the Company's targeted customer base and then offering
the PREFERRED BUYERS' CLUB-REGISTERED TRADEMARK- during an inbound telephone
call in response to the catalog order. With the deployment of the Company's
proprietary order capture system in mid-1997, however, in response to an inbound
call, the Company's database analyzes the available information using
proprietary algorithms that indicate the club that is most likely to be relevant
and compelling for that individual. Membership in that club is then offered to
that specific consumer by one of the Company's marketing representatives. In
other situations, names of prospective members selected from the Company's
proprietary lists are called on an outbound basis by third-party telesales
providers for the sole purpose of marketing a specific membership opportunity.

CLIENT SERVICES. To more fully utilize the competencies and capabilities it
has developed as a direct marketer of consumer products and services, the
Company also offers core or customized membership programs to customers of its
clients to enhance their brand equity and promote loyalty within their customer
base. Clients provide their customer lists to the Company and the Company
analyzes such using its proprietary database marketing methods to identify
likely prospective membership purchasers. These prospects are then targeted with
either a direct mail or outbound telesales campaign managed by the Company using
third-party providers. Additionally, some clients sell the Company's membership
programs in their own call centers during an inbound customer service contact.

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The Company records revenues associated with membership sales made under the
client's name in accordance with its normal accounting policies, and with the
exception of the client-inbound business, incurs all marketing expenses. The
Company also bears all order processing and customer service expenses for client
programs and pays success fees to clients based on membership revenues generated
from their customer lists. These payments average about 20% of initial and
renewal membership fees.

The Company markets its services to prospective clients as an integrated
marketing solution using a three-pronged, proprietary approach named MARKET
BUILDERS-SM-. BRAND BUILDER-SM- provides high-quality, creative marketing
literature in a seamless way to maximize client brand value. BEHAVIOR
BUILDER-SM- accurately segments customer files to make individually targeted and
highly relevant offers to consumers. OPPORTUNITY BUILDER-SM- supplies access to
the Company's unique value delivery system and provides one-to-one marketing
opportunities for merchandise and services.

CATALOG RETAIL

The Company has been engaged in the discount durable goods catalog retailing
business since its founding in 1986 and it believes the overall market is in a
mature growth stage. In general, key factors that drive economic results for the
segment are the number of catalogs mailed, response rates, average order size,
product mix and margins, advertising costs and operating costs. Like Membership
Services, there is a new customer acquisition effort, or "front-end", that may
require an investment, and a "back-end" consisting of repeat business with
existing customers where the Company recoups it original investment and earns a
return.

Prior to 1998, the Company made substantial investments to increase catalog
revenue growth. Early in 1998, the Company recognized that this strategy would
not produce acceptable economic returns over the long term, and therefore moved
its emphasis from increasing sales to recapturing margin and positioning its
segment investment for sustainable, long-term performance. The Company
purposefully reduced segment revenues by eliminating unprofitable mailings and
promotions. However, the core "Great Deal" catalog formula also experienced
response rates that were below expectations in traditionally profitable consumer
segments. As a result, the Company experienced de-leveraging of its costs. In
response, among other measures, the Company reduced the size of its salaried
staff by over 10%. During 1998, DAMARK also introduced a new catalog title that
uses its existing infrastructure and expertise in merchandising, membership and
credit marketing, but targets a different consumer segment than that of the core
catalog.

Overall, the Company will continue to seek better, more efficient and
profitable ways of competing in a mature industry with the goals of profitable
growth and earning an acceptable rate of return on invested capital. In 1999,
management plans to continue the drive begun in 1998 to recapture margin,
control costs and manage assets more efficiently by seeking to market to new
customer segments, revitalize the "Great Deal" catalog formula, improve product
merchandising and innovate in the credit marketing arena.

MARKETING

Historically, the Company's Catalog Retail marketing strategy centered on
offering brand name, value-priced products that could be offered as "Great
Deals". The Company has differed from most catalog retailers by targeting
well-educated males with above average incomes and a propensity to shop by
direct response as its primary market. Based on a recent study by an independent
marketing company, DAMARK's customers have a median family income of $48,000.
Furthermore, 69% are male, 55% are aged 25 to 44 and 55% have at least a college
degree. During 1998, the Company introduced a new catalog title directed at a
consumer segment with different demographics. In general, this formula is
targeted to appeal to consumers with median household incomes of $30,000 to
$35,000 and less available credit than the Company's current customers.

The Company uses sophisticated techniques to select names of potential new
customers to rent from other direct marketing companies. Mailings to these and
other prospects and the initial purchases made constitute the Company's
front-end business. Mailings and sales to customers that have made one or more
repeat purchases, including those that have taken advantage of a membership
opportunity, make up DAMARK's back-end business.

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The table below summarizes the operating performance of the Company's
Catalog Retail segment over the past three years:

KEY CATALOG RETAIL STATISTICS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
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PERCENTAGE CHANGE
---------------------
1998 1997
1998 1997 1996 OVER 1997 OVER 1996
------- ------- ------- --------- ---------
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE
INDICATED)
<S> <C> <C> <C> <C> <C>
Catalogs mailed:
Front-end prospects................... 75,800 83,400 73,900 (9.1)% 12.9%
Back-end customers.................... 60,600 82,700 71,100 (26.7)% 16.3%
------- ------- -------
Total............................... 136,400 166,100 145,000 (17.9)% 14.6%
------- ------- -------
------- ------- -------
Sales per mailing ($):
Front-end prospects................... $ 1.95 $ 1.90 $ 2.06 2.6% (7.8)%
Back-end customers.................... 5.12 5.55 7.00 (7.8)% (20.7)%
------- ------- -------
Weighted average.................... $ 3.58 $ 3.91 $ 3.66 (8.4)% 6.8%
------- ------- -------
------- ------- -------
Average order ($):
Front-end prospects................... $ 132 $ 131 $ 135 0.8% (3.0)%
Back-end customers.................... 191 225 183 (15.1)% 23.0%
------- ------- -------
Weighted average.................... $ 169 $ 176 $ 166 (4.0)% 6.0%
------- ------- -------
------- ------- -------
Response rates (%):
Front-end prospects................... 1.48% 1.45% 1.53% 2.1% (5.2)%
Back-end customers.................... 2.69% 2.46% 2.91% 9.3% (15.5)%
------- ------- -------
Weighted average.................... 2.12% 2.23% 2.21% (4.9)% 0.9%
------- ------- -------
------- ------- -------
Sales mix (%):
Front-end prospects................... 32.3% 25.7% 23.4% 25.7% (10.5)%
Back-end customers.................... 67.7% 74.3% 76.6% (8.9)% 4.2%
------- ------- -------
Total............................... 100.0% 100.0% 100.0%
------- ------- -------
------- ------- -------
</TABLE>

All available information for each customer, including demographic and
purchase history, is added to the Company's database. This data is processed
using proprietary algorithms in addition to conventional recency/frequency
modeling and regression analyses and used with the objective of maximizing the
long-term revenue and profit potential of the Company's customer and member
base. Merchandising, mailing and operations decisions are all based on this
information. The Company's proprietary customer list exceeded 13 million names
at December 31, 1998.

Customer payments are accepted through major credit cards, checks or money
orders. Historically, on certain qualifying orders, the Company offered its
customers four, six or ten payment installment plans with no finance charges
payable to the Company. During 1998, the Company limited its offerings of
longer-duration installment billing programs resulting in a significant decline
in receivables arising from its installment billing plans. At December 31, 1998
and 1997, the Company had $23.4 million and $50.5 million respectively, in
installment plan receivables outstanding.

MERCHANDISING

The Company provides customers with a broad selection of "Great Deals" by
offering merchandise at or below the prices available from dominant discount
retailers across six major categories. Product categories with higher price
points, such as computers, home office and consumer electronics ("hard lines")
generally have lower gross profit percentages but

8
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provide more gross margin dollars per unit. Conversely, items with lower price
points, such as home decor, home improvement and sports/fitness products ("soft
lines") generally have higher gross profit percentages but provide less gross
margin dollars per unit. Year-to-year changes in sales mix generally reflect
changes in product offerings made in response to changes in consumer demand.

The Company's sales and margin percentages by product category over the last
three years are presented below:

SALES AND GROSS MARGINS BY PRODUCT CATEGORIES

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
PERCENTAGE CHANGE
---------------------
1998 OVER 1997 OVER
1998 1997 1996 1997 1996
----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales by product categories:
Computer.............................. 27.1% 30.7% 29.8% (11.7)% 3.0%
Consumer electronics.................. 18.7% 18.3% 18.2% 2.2% 0.5%
Home office........................... 13.7% 14.5% 16.3% (5.5)% (11.0)%
----- ----- -----
Subtotal, hard lines................ 59.5% 63.5% 64.3% (6.3)% (1.2)%
Home improvement...................... 17.8% 16.1% 14.8% 10.6% 8.8%
Home decor............................ 16.2% 14.3% 13.5% 13.3% 5.9%
Sports/fitness........................ 6.5% 6.1% 7.4% 6.6% (17.6)%
----- ----- -----
Subtotal, soft lines................ 40.5% 36.5% 35.7% 11.0% 2.2%
----- ----- -----
Total............................. 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----

Gross margins by product categories(1):
Computer.............................. 18.9% 19.1% 21.3% (1.0)% (10.3)%
Consumer electronics.................. 29.8% 28.9% 30.6% 3.1% (5.6)%
Home office........................... 32.5% 32.5% 31.8% 0.0% 2.2%
----- ----- -----
Weighted average, hard lines........ 25.5% 25.0% 26.6% 2.0% (6.0)%

Home improvement...................... 39.6% 39.6% 39.6% 0.0% 0.0%
Home decor............................ 40.9% 40.0% 40.5% 2.3% (1.2)%
Sports/fitness........................ 40.8% 37.4% 39.0% 9.1% (4.1)%
----- ----- -----
Weighted average, soft lines........ 40.3% 39.4% 39.8% 2.3% (1.0)%
----- ----- -----
Weighted average, total........... 31.5% 30.2% 31.3% 4.3% (3.5)%
----- ----- -----
----- ----- -----
</TABLE>

- - ------------------------

(1) On a pre-discount net shipped basis.

In addition to product sales, the Company also generates revenues and fees
from shipping, handling and order processing charges, extended warranty sales,
list rentals and co-marketing arrangements and such revenues and fees are
significant components of segment operating income. In 1997, the Company altered
its merchandise return policy, and now allows free returns up to 30 days after
receipt; thereafter, it charges certain restocking fees. Product returns are
closely monitored at the stock keeping unit level to assist in identifying
favorable and unfavorable sales trends, chronic product defects and other
quality issues. The Company's marketing and merchandising staffs also
continually evaluate current and new offerings based on market trends, current
inventory positions and expected profitability. The Company buys merchandise
from over 1,200 suppliers, none of which accounted for more than 10% of total
purchases during the last three years. To the extent possible, the Company
mitigates its exposure to overstock, product returns and other inventory risks
through arrangements with its vendors.

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OPERATIONS

CATALOG PRODUCTION. Most of the catalogs produced by the Company are 64 to
79 pages in length and contain about 300 to 350 product advertisements.
Periodically, the Company develops certain specialty catalogs, generally 48
pages, which feature single categories such as electronics, home decor, home
office or refurbished merchandise. In addition, the Company produces its "Big
Book", a 160 to 172 page general merchandise catalog. In 1998, the Company
produced 19 catalogs under the nameplates of its clients as well as three
editions of its new title. Under the DAMARK name, the Company produced and
mailed 24 front-end, 71 back-end, eight specialty, and four Big Book catalog
editions. In-house personnel produce advertising copy, photographs and page
layouts for substantially all of its catalogs and promotional materials.
Printing and mailing services are provided by outside vendors.

ORDER CAPTURE. On average, DAMARK receives 23% of its order volume by mail
and 77% by telephone. The Company's toll-free lines are answered 24 hours per
day, seven days a week. In aggregate, depending on staffing levels, the Company
has the capacity to handle over 1,000 orders per hour at its three call centers
in Junction City, Kansas, Fayetteville, North Carolina and Brooklyn Center,
Minnesota. Marketing representatives employed in these centers enter orders
directly into the Company's proprietary on-line value delivery system. The
system has the capability to model and score each customer during an inbound
call and assists the Company's representatives in making appropriate membership
or credit offers to that specific customer, in addition to providing product
availability, specifications, accessories, extended warranties and expected
shipping date information.

ORDER FULFILLMENT. Although a growing proportion of the products sold by
the Company are shipped directly from vendor facilities, the majority of order
fulfillment activities including receiving, quality assurance, storage,
retrieval, packing and shipping functions are conducted out of the Company's
400,000 square foot distribution facility built in 1994. To process a customer
order, the Company uses a computer-based system that monitors the in-stock
status of each item, directs distribution center employees to the appropriate
storage locations for the ordered goods and any related packing materials, and
prints shipping labels, including a full invoice and return instructions. The
Company has the capacity to pick, pack and ship up to 25,000 packages during an
eight-hour shift. The Company estimates that over 90% of goods ordered by
customers are in stock and, of those orders which are credit approved,
substantially all are shipped within 24 hours of receipt.

CUSTOMER SERVICE. Customer service activities conducted in the call centers
consist principally of processing requests for information on the status of
orders and refunds, answering questions regarding products and memberships,
authorizing returns and referral of product warranty claims which are generally
the responsibility of the manufacturer.

INFORMATION SYSTEMS

The Company believes that the effective and efficient use of information
systems technology is critical to its long-term success and its operations are
highly dependent upon multiple management information systems consisting of
computer hardware and software. The Company utilizes custom software solutions
based on n-tiered client-server architecture for its on-line transaction
processing systems that manage order capture, fulfillment and customer service
operations. This architecture supports a common way of providing customer
interaction via the telephone, World Wide Web or e-mail. Off-the-shelf packages
and custom software utilizing a multi-terabyte data warehouse support marketing,
merchandising and accounting functions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Year 2000 Compliance".

COMPETITION

Within its Membership Services segment, the Company's principal competitors
include Cendant Corporation, Signature Group, MemberWorks, Metris Companies and
BrandDirect, some of which have substantially greater human and financial
resources. However, the Company believes that based on reported revenues, it is
either the second or third largest publicly traded membership services firm in
the U.S.

The Company's principal competitors within its Catalog Retail segment
include storefront and catalog retailers, many of which have substantially
greater human and financial resources. Depending upon product category, the

10
<PAGE>
Company competes for sales with such companies as CompUSA, Gateway 2000 and
Creative Computers (computers); Circuit City and Best Buy (consumer electronics
and computers); Office Depot and OfficeMax (home office); Home Depot (home
improvement); and Wal-Mart, Sears, Roebuck, the Target division of
Dayton-Hudson, Fingerhut and Sharper Image (soft lines and general merchandise).
According to CATALOG AGE magazine, in 1997, the Company ranked as the
seventeenth largest catalog retailer in the U.S. in terms of revenues.

In terms of access to capital, the Company competes with other publicly
traded companies, particularly those with small market capitalizations, and
therefore believes that the Russell 2000 represents the most comparable stock
index.

EMPLOYEES

As of March 4, 1999, the Company employed 1,945 persons including 11
officers, 23 directors, 53 managers, 226 other salaried personnel and 1,632
full-time and part-time hourly workers. Salaried personnel perform principally
management, marketing, merchandising, information systems, accounting, and
operations support functions, while the Company's call centers and distribution
center use primarily hourly labor. The Company also employs seasonal labor,
principally during the fourth quarter. 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.

TRADEMARKS AND TRADE NAMES

The Company owns certain trademarks registered with the U.S. Patent and
Trademark Office including, among others, "DAMARK", "The Great Deal Company",
"Preferred Buyers' Club", "PBC", "Insiders", "Vacation Passport" and "Essentials
for Home". The Company has several registration applications pending and will
pursue other registrations as appropriate to establish and preserve its
intellectual property rights.

PART I.

ITEM 2. PROPERTIES

The Company owns a 400,000 square foot distribution facility on an 80-acre
parcel in Brooklyn Park, Minnesota and leases the following properties:

- A 250,000 square foot office and warehouse facility and adjoining 12-acre
parcel in Brooklyn Park, Minnesota under a ten year net lease expiring in
June 2002,

- A 38,000 square foot telemarketing center facility in Junction City,
Kansas under a ten year net lease expiring in May 2006,

- A 30,000 square foot telemarketing center facility in Fayetteville, North
Carolina under a five year net lease expiring in July 2002,

- A 25,000 square foot telemarketing facility in Brooklyn Center, Minnesota
under a ten year net lease expiring in January 2008, and

- A 17,000 square foot marketing support and office facility in Brooklyn
Center, Minnesota under a five year net lease expiring in March 2003.

The Company believes that its properties are well maintained and in good
operating condition and will be sufficient to accommodate its operations in
1999.

11
<PAGE>
PART I.

ITEM 3. LEGAL PROCEEDINGS

On October 25, 1996, a current PREFERRED BUYERS' CLUB-REGISTERED TRADEMARK-
member commenced an action against the Company in a New Jersey state court. This
action was styled on his behalf and on behalf of a class of the Company
customers, each of which are members of the Company's PREFERRED BUYERS'
CLUB-REGISTERED TRADEMARK-. The plaintiff alleges that he and the other members
of the proposed class have not received their full anticipated benefits as
PREFERRED BUYERS' CLUB-REGISTERED TRADEMARK- members. The complaint alleges
various violations of state consumer fraud and contract law and seeks
compensatory and punitive damages. Discovery has been completed and a motion for
class certification has been briefed and is pending argument. It is likely that
the case will be tried in 1999. The Company believes it has strong factual and
legal defenses and 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 that may occur are adequately covered
by insurance or are otherwise provided for and the ultimate outcome of these
matters will not have a material effect on the financial position or operations
of the Company.

PART I.

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.

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
Stock Market under the symbol "DMRK". As of February 23, 1999, there were
5,911,208 shares outstanding and 597 holders of record.

The following table sets forth, for the periods indicated, the range of high
and low sale prices of the Common Stock.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1998
Fourth quarter (September 27 to December 31)............................. $ 8.750 $ 5.625
Third quarter (June 28 to September 26).................................. 8.938 5.344
Second quarter (March 29 to June 27)..................................... 12.438 8.125
First quarter (January 1 to March 28).................................... 13.250 7.875

1997
Fourth quarter (September 28 to December 31)............................. $ 14.500 $ 9.750
Third quarter (June 29 to September 27).................................. 18.875 14.250
Second quarter (March 30 to June 28)..................................... 16.750 9.125
First quarter (January 1 to March 29).................................... 11.500 9.125
</TABLE>

The Company has never declared or paid cash or stock dividends on its Common
Stock. The Company currently intends to retain earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying dividends
in the foreseeable future. In addition, the Company's credit agreement provides
for limitations on the payment of dividends.

12
<PAGE>
PART II.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below is derived from the consolidated
financial statements of the Company. This information is qualified in its
entirety by, and should be read in conjunction with, the consolidated financial
statements and notes thereto and other financial and statistical information
referenced elsewhere herein, including the information under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues......................................... $ 484,416 $ 594,627 $ 513,716 $ 500,024 $ 477,381
Costs and expenses(1)................................ 510,385 583,253 504,462 501,915 468,162
---------- ---------- ---------- ---------- ----------
Operating (loss) income............................ (25,969) 11,374 9,254 (1,891) 9,219
Interest expense, net................................ 3,210 1,757 66 191 239
Other expense, net................................... 541 67 65 709 690
---------- ---------- ---------- ---------- ----------
(Loss) income before income taxes.................. (29,720) 9,550 9,123 (2,791) 8,290
Income tax benefit (provision)....................... 10,105 (3,245) (3,055) 935 (2,419)
---------- ---------- ---------- ---------- ----------
Net (loss) income)................................. $ (19,615) $ 6,305 $ 6,068 $ (1,856) $ 5,871
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings per share:
Net (loss) earnings per share...................... $ (2.71) $ 0.78 $ 0.72 $ (0.20) $ 0.61
Weighted average common shares outstanding......... 7,250 8,033 8,417 9,093 9,547
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted earnings per share:
Net (loss) earnings per share...................... $ (2.71) $ 0.74 $ 0.70 $ (0.20) $ 0.59
Weighted average common and common-equivalent
shares outstanding............................... 7,250 8,480 8,713 9,093 10,003
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 789 $ 24,299 $ 19,664 $ 24,211 $ 35,048
Total assets......................................... 140,347 206,189 142,790 141,728 155,531
Long term debt, excluding current maturities......... -- -- -- -- 250
Total indebtedness................................... 5,140 44,400 3,000 250 500
Common shareholders' equity.......................... 34,062 68,663 62,544 64,936 71,980
</TABLE>

- - ------------------------

(1) 1998 expenses include $9,852 of asset impairment charges including $2,301 of
software written off as part of the Company's Year 2000 compliance
initiative.

13
<PAGE>
PART II.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

RESULTS OF OPERATIONS

The data presented below are derived from the Company's consolidated
financial statements and notes thereto and should be read in conjunction
therewith. The Company operates in two business segments, Membership Services
and Catalog Retail. These reportable operating segments offer different products
and services and are managed separately based on fundamental differences in
their operations. A Corporate segment is also used to account for certain
unallocated items and capital allocation and tax purposes. See Note 9 to the
consolidated financial statements.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------------------------
PERCENTAGE CHANGE
-----------------------------
1998 OVER 1997 OVER
1998 1997 1996 1997 1996
-------- -------- -------- ------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Catalog Retail(1)..................... $395,047 $530,271 $464,716 (25.5)% 14.1%
Membership Services................... 89,369 64,356 49,000 38.9% 31.3%
-------- -------- --------
Total............................... 484,416 594,627 513,716 (18.5)% 15.8%
-------- -------- --------
Costs and expenses:
Catalog Retail cost of products
sold................................ 311,157 423,411 371,145 (26.5)% 14.1%
Catalog Retail expenses(2)............ 114,959 113,723 97,307 1.1% 16.9%
Membership Services expenses(2)....... 73,175 45,295 35,186 61.6% 28.7%
Corporate expenses(3)................. 11,094 824 824 1,246.4% 0.0%
-------- -------- --------
Total............................... 510,385 583,253 504,462 (12.5)% 15.6%
-------- -------- --------
Operating (loss) income:
Catalog Retail........................ (31,069) (6,863) (3,736) 352.7% 83.7%
Membership Services................... 16,194 19,061 13,814 (15.0)% 38.0%
Corporate............................. (11,094) (824) (824) 1,246.4% 0.0%
-------- -------- --------
Total............................... (25,969) 11,374 9,254 (328.3)% 22.9%
Interest expense, net................... 3,210 1,757 66 82.7% 2,562.1%
Other expense, net...................... 541 67 65 707.5% 3.1%
-------- -------- --------
(Loss) income before income taxes..... (29,720) 9,550 9,123 (411.2)% 4.7%
Income tax benefit (provision).......... 10,105 (3,245) (3,055) (411.4)% 6.2%
-------- -------- --------
Net (loss) income..................... $(19,615) $ 6,305 $ 6,068 (411.1)% 3.9%
-------- -------- --------
-------- -------- --------
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used for)
operations:
Catalog Retail(2)..................... $ 27,659 $(43,195) $ (7,010) (164.0)% 516.2%
Membership Services(2)................ 38,218 17,029 15,332 124.4% 11.1%
Corporate(3).......................... (6,250) (4,282) (2,046) 46.0% 109.3%
-------- -------- --------
Total............................... 59,627 (30,448) 6,276 (295.8)% (585.1)%
Property and equipment additions, net... (7,653) (9,999) (8,580) (23.5)% 16.5%
(Repayments) borrowings, net............ (39,260) 41,400 2,750 (194.8)% 1,405.5%
Repurchases and retirements of Common
Stock................................. (15,780) (701) (8,779) 2,151.1% (92.0)%
Net proceeds from issuance of Common
Stock................................. 691 376 152 83.8% 147.4%
</TABLE>

- - ------------------------

(1) Discounts provided to PREFERRED BUYERS' CLUB-REGISTERED TRADEMARK- and
INSIDERS-REGISTERED TRADEMARK- members are allocated to Catalog Retail and
totaled $29,552, $46,105 and $44,723 in 1998, 1997 and 1996, respectively.
See Note 9 to the Company's consolidated financial statements.

(2) Includes inter-segment commissions charged to Membership Services from
Catalog Retail of $18,655, $18,168 and $16,356 in 1998, 1997 and 1996,
respectively. See Note 9 to the Company's consolidated financial statements.

(3) 1998 expenses include $9,852 of asset impairment charges including $2,301 of
software written off as part of the Company's Year 2000 compliance
initiative. See Note 3 to the Company's consolidated financial statements.

14
<PAGE>
GENERAL

The Company, a marketing solutions provider, brings a broad range of
products, programs and services to consumers through direct mail, telesales and
the Internet. DAMARK uses targeted, information-based strategies and makes
offers to consumers for its own account as well as for the accounts of its
corporate clients. The Company operates in two segments: Membership Services and
Catalog Retail.

In its Membership Services business, the Company develops, markets and
manages fee-based programs that provide purchase price discounts and other
benefits related to consumer needs in the areas of shopping, travel,
hospitality, entertainment, health/fitness, and household financial management.
The Company's Catalog Retail business offers brand name, value-priced
merchandise in the categories of computers, home office, electronics, home
decor, home improvement and sports/fitness through a variety of catalog titles.

For 1999, the Company is focused on three operating priorities:

- Aggressively expanding its position in the Membership Services industry by
increasing revenues, programs, client relationships and the share of
clients served;

- Improving the economic model of the Catalog Retail business to position it
for future profitable growth in new customer segments and channels; and

- Providing high-impact member and client service in all business
activities.

With respect to measuring its financial performance given the nature of its
businesses, the Company believes cash from operations is more useful in the near
term than earnings before interest, taxes, depreciation and amortization, net
income or earnings per share for three reasons:

- It is neutral with respect to revenue and expense recognition matters;

- It considers the changes in working capital that encompass approximately
75% of the Company's balance sheet; and

- It is used by many securities analysts to gauge operating performance when
cash flow diverges significantly from net income.

The Company uses the cash from operations metric as part of its internal
performance measurement system to ensure that its employees are focused on the
efficient use of capital as well as on operating profitability.

MEMBERSHIP SERVICES

Membership services revenues net of cancellations and returns grew by 38.9%
to $89.4 million during 1998 from $64.4 million in 1997. During 1997, net
revenues increased by 31.3% from $49.0 million. In 1998, the Company was able to
grow revenues and new member acquisitions by entry into the client services
channel, increased outbound telemarketing to its proprietary customer lists and
expanding its suite of membership products. In 1997, revenue growth was due
principally to increased catalog circulation compared to the prior year and
implementation of the Company's proprietary value delivery system resulting in
increased conversions. The Company acquired 2.0 million new memberships in 1998,
of which 37.3% were obtained via the client services channel, indicating that
the Company is no longer solely dependent on catalog mailing growth to increase
its membership.

Costs and expenses incurred in the Company's membership services business
include direct membership solicitation costs, payments to external vendors to
provide certain club benefits, customer service costs, commissions and success
fees paid to clients for use of their customer lists, and general and
administrative expenses. The financial statements of the Company's Membership
Services segment also provide for inter-company charges from Catalog Retail
intended to approximate the costs the segment would pay an external client for
name acquisition. Since independent parties did not negotiate such commissions,
the charges do not reflect what a third party might receive in an actual
business transaction. Consequently, financial information prepared as if the
segments were companies operating

15
<PAGE>
independently without such allocation could differ materially from that
presented. Such inter-segment commissions totaled $18.7 million, $18.2 million
and $16.4 million in 1998, 1997 and 1996 respectively.

Segment costs and expenses increased as a percentage of net revenue to 81.9%
in 1998 as compared to 70.4% in 1997 and 71.8% in 1996. Consequently, segment
operating income decreased by 15.0% between 1997 and 1998 to $16.2 million
compared to an increase of 38.0% between 1996 and 1997. The primary reasons for
the change in cost structure include increased use of outbound telemarketing to
obtain members, commissions and success fees paid to clients and the opening of
the Company's inbound client services call center. During 1998, the segment
provided $38.2 million of net cash from operations, an increase of 124.4% over
the $17.0 million supplied in 1997. The principal reason for the large increase
was the growth in membership revenues.

CATALOG RETAIL

Catalog Retail revenues, net of discounts and product returns, were down by
25.5% to $395.0 million in 1998 from $530.3 million in 1997. The decline was due
to reduced offerings of longer duration installment billing programs, a
purposeful shift away from an aggressive circulation strategy designed to grow
new member acquisitions, and decreased response from certain historically
profitable back-end customer segments. The Company maintains a web site which
generated $4.5 million of marketed revenues in 1998, an increase of 66.7% over
1997 Internet revenues.

The Company's Catalog Retail segment provides certain discounts to PREFERRED
BUYERS' CLUB-REGISTERED TRADEMARK- and INSIDERS-REGISTERED TRADEMARK- members.
Due to response rates that are typically two to three times higher than those
experienced in Catalog Retail's other customer segments and the consequent
increase in advertising leverage, such discounts are allocated entirely to the
Catalog Retail segment. In 1998, 1997 and 1996, such discounts totaled $29.6
million, $46.1 million and $44.7 million, respectively. Segment revenues could
vary significantly in an arm's length transaction and could differ materially
from the information presented.

In 1998, given the opening of the client services channel as a source of
membership acquisitions, the Company moved emphasis away from growing catalog
sales to recapturing margin. The Company's gross margin is influenced by changes
in product sales mix and merchandise return rates, with sales of computer
hardware having a particularly strong effect. Historically, the category has
represented approximately 25% to 30% of the Company's merchandise sales, yet it
also carries the lowest gross margin percentage, which, due to market pressures,
has been trending down. In 1998, the Company's return rate decreased to 12.7% of
gross product sales compared to 14.1% in 1997 and 15.0% in 1996, due principally
to revisions made to the Company's return policy and a decline in computer
sales. Overall, the Company's gross margin percentage on a post-discount net
shipped basis increased to 21.2% in 1998 from 20.2% in 1997 and 20.1% in 1996.

Operating expenses as a percentage of segment net revenues increased to
29.1% in 1998 from 21.4% in 1997 and 20.9% in 1996. The increase was due
primarily to a decline in the ratio of shipped to marketed orders
("ship-to-gross"), a decrease in advertising leverage and an increase in inbound
teleservices costs. Ship-to-gross decreased primarily due to higher credit
denials resulting from a more conservative credit policy and relatively weak
response to back-end catalogs decreased advertising cost leverage. To address
increased teleservices costs, the Company implemented a new inbound call
management plan in the fourth quarter. During the same period, the Company also
reduced the size of its salaried staff by over 10% and implemented other cost
control and process improvement measures.

For 1998, 1997 and 1996, the Company's Catalog Retail segment recorded
operating losses of $31.1 million, $6.9 million and $3.7 million, respectively.
However, due principally to reducing its investment in receivables and
inventory, Catalog Retail generated $27.7 million of net cash from operations in
1998, compared to using $43.2 million in 1997 and $7.0 million in 1996.

CORPORATE

During second quarter 1998, the Company incurred $767,000 in unusual
expenses related to the temporary closure of its Junction City call center as a
result of a number of worker illnesses and resulting hospitalizations. $419,000
of this incremental expense was not allocated to the Company's operating
segments.

16
<PAGE>
During fourth quarter 1998, in response to actual and projected net losses
in prior and future periods, and in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
performed a review of its long-lived assets for potential impairment. As a
result, the Company recorded asset impairment charges of $6.2 million related to
goodwill and $824,000 related to furniture and fixtures and computer hardware.
Further, in connection with its ongoing review of its Year 2000 compliance
status, $2.3 million of internally developed software was identified as obsolete
and without future value to the Company. Finally, the Company completed the
renovation of its corporate headquarters during fourth quarter 1998 and wrote
off $521,000 of unamortized leasehold improvements no longer in use. All of
these charges are included in the Company's 1998 losses from operations.

The Corporate segment also includes $824,000 of goodwill amortization in
1998, 1997 and 1996.

Interest expense in 1998 and 1997 reflects increased borrowings under the
Company's revolving credit facility necessary to fund working capital
requirements primarily related to its installment billing plans. The Company has
limited its offerings of longer-duration installment billing plans and, as a
result, realized interest expense reductions during the second half of 1998.

The Company's effective tax rate was 34.0% for 1998 and 1997 and 33.5% for
1996.

NET (LOSS) INCOME

The Company reported a net loss of $19.6 million, or $2.71 per diluted share
for 1998 compared to net income of $6.3 million, or $0.74 per share for 1997 and
$6.1 million, or $0.70 per share for 1996. Per share results in each year were
impacted by the repurchase of 2.0 million, 72,500, and 919,500 shares in 1998,
1997, and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

Net cash provided by operating activities totaled $59.6 million in 1998, as
compared to net cash used of $30.4 million during 1997. The Company was able to
substantially reduce its investment in receivables and inventories as well as
increase accounts payable and accrued liabilities. A $29.8 million reduction in
receivables resulted primarily from limited offerings of longer-duration
installment billing plans during 1998 as compared to 1997. Inventories declined
by $30.7 million and payables and accruals decreased by $9.2 million as a
consequence of the Company's revised Catalog Retail strategy. Payables and
accruals increased by $20.8 million in the Membership Services business due
principally to strong revenue growth.

The Company's liquidity, as measured by its working capital net of cash and
debt, was $5.9 million at December 31, 1998, as compared to $68.2 million at
December 31, 1997. The Company's current ratio was 1.0:1.0 at December 31, 1998
as compared with 1.2:1.0 at December 31, 1997. The decline in working capital
and the current ratio reflect reductions of inventory levels and receivables,
which exceeded the corresponding declines in current obligations.

CAPITAL EXPENDITURES

During 1998, the Company made capital expenditures of $7.7 million, as
compared to $11.3 million in 1997. Capital expenditures in 1998 included costs
associated with the opening of a new client services call center in Brooklyn
Center, Minnesota and improvements to the Company's corporate headquarters.
Capital expenditures in 1997 included costs associated with the opening of a
call center in Fayetteville, North Carolina and the development and deployment
of a proprietary value delivery system used during the order entry process. The
Company intends to continue to invest in information technology to achieve
operational efficiencies. Management anticipates that the Company will make $4.0
million to $6.0 million of capital expenditures during 1999.

17
<PAGE>
FINANCING

The Company obtained a new $75 million revolving line of credit and letter
of credit facility in 1998 to be used for general working capital and other
corporate purposes. In general, this facility provided an increased credit line,
more favorable advance rates against pledged collateral, and greater financial
flexibility than the Company's prior arrangements for only a modest increase in
interest rate. Borrowings outstanding under the line of credit are secured by
certain assets of the Company and bear interest, at the Company's option, at the
prime rate or LIBOR plus spreads that vary based on excess availability, as
defined. At December 31, 1998, the Company had $5.1 million of borrowings and
$3.6 million of letters of credit outstanding and was in compliance with its
financial covenant under the agreement.

During 1998, cash was used principally to retire short-term debt of $39.3
million compared to increased borrowings of $41.4 million in 1997 and $2.8
million in 1996. During 1998, 1997 and 1996, the Company repurchased shares of
its Common Stock at aggregate costs of $15.8 million, $701,000 and $8.8 million,
respectively. Repurchased shares were acquired under a series of programs
authorized by the Company's Board of Directors (the "Board") that included
private and open-market transactions. During third quarter 1998, the Board
authorized a two million share open-market repurchase program, and at December
31, 1998, authorization to purchase approximately 790,300 shares remained under
this program.

The Company anticipates that cash generated from operations and available
borrowing capacity under its current credit facility will be sufficient to fund
the Company's operations and capital expenditures during 1999.

YEAR 2000 COMPLIANCE

The Company utilizes both information technology ("IT") and non-IT systems
that will likely be affected by the date change in the Year 2000. The Company
has performed an extensive review of its systems, including assessing the affect
of, and developing plans directed at, achieving compliance. In addition, the
Company has and will be investing resources dedicated to achieving compliance.
The Company's primary objective with respect to such compliance is to mitigate
the risk of a significant business interruption. Progress toward achieving
compliance is reported on a regular basis to management and the Board.

To date, the Company has assessed its exposure to the issue and ascertained
areas of potential risk. The Company has exercised its best efforts to identify
and remedy any potential Year 2000 exposures within its internal systems and
will continue to do so. Based on the reviews and analysis performed to date, the
Company believes that the risk of significant non-compliance in its internal IT
systems is minimal since a majority have been developed or modified within the
last five years.

The Company has also identified and corresponded with key vendors and other
third parties whose inability to achieve compliance in a timely fashion would
negatively impact or disrupt operations. The Company believes that failure by
third parties to achieve compliance presents the largest risk of a significant
business interruption. Key services provided to the Company by external parties,
include, but are not limited to, telecommunications, credit processing,
printing, funds transfer and utilities. In addition, while the Company values
its relationships with its key vendors, it is identifying secondary vendors in
the event that certain of its business partners are delayed in achieving
compliance.

The Company has incurred operating and capital expenses related to the
evaluation and implementation of solutions to resolve the Year 2000 issue and
expects certain expenditures to continue through 2000. In accordance with the
Company's financial policies, software and hardware maintenance or modification
costs are expensed as incurred. The costs of new hardware and software assets
that primarily provide enhanced functionality beyond achieving compliance are
capitalized and amortized over their respective useful lives. The Company
anticipates total expenditures related to the issue of approximately $3.5
million, of which $2.3 million has been incurred to date in addition to $2.3
million of software written off in 1998. See Note 3 to the consolidated
financial statements.

The costs of addressing the Year 2000 issue are not expected to materially
affect the Company's financial position, results of operations or cash flows in
future periods. However, the Company's current estimates of the amount of time
and cost necessary to modify and test its IT and non-IT systems for compliance
are based upon assumptions regarding

18
<PAGE>
future events. New developments may occur that could affect such estimates and,
accordingly, there can be no assurance that actual costs will not be materially
higher than those anticipated.

SEASONALITY

Like most retailing businesses, the Company's Catalog Retail segment is
subject to significant seasonal variations in consumer demand. Historically, the
Company's net retail revenues have been the largest during the fourth quarter
and a significant portion of its annual earnings have been realized during that
period. The Company's annual operating results 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 season,
the Company hires additional flex-time employees in its call centers and 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 fourth quarter, 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.

PENDING SECURITIES AND EXCHANGE COMMISSION INTERPRETATION

Currently, when any trial period has elapsed, membership revenues with
respect to clubs for which the Company has an ongoing obligation to provide
benefits are recorded on the balance sheet net of direct solicitation costs and
are amortized into income over the membership period, generally 12 months, in
accordance with what it believes to be generally accepted accounting principles.
In August 1998, the Securities and Exchange Commission ("SEC") required another
company in the membership services industry to defer the recognition of revenue
from the sale of memberships until the expiration of the period during which a
full refund is offered and to record the expenses of soliciting memberships as
incurred rather than deferring and recognizing such over the membership period.
In September 1998, the SEC issued a press release stating that the "SEC will
formulate and augment new and existing accounting rules and interpretations
covering revenue recognition, restructuring reserves, materiality, and
disclosure" for all publicly traded companies. The timing of issuance of such
guidelines as well as the specific requirements of the final SEC interpretation
is uncertain and, therefore, the impact such guidance will have on the Company's
current accounting practices cannot be quantified. However, if the Company is
required to change its current accounting treatment for revenue and expense
recognition, it would have a material non-cash impact on the Company's financial
position and results of operations.

GOVERNMENTAL REGULATIONS

A 1992 Supreme Court decision confirmed that the Commerce Clause of the
United States Constitution prevents a state from requiring the collection of its
use tax by a mail order company unless the company has a physical presence in
the state. However, there continues to be uncertainty due to inconsistent
application of the Supreme Court decision by state and federal courts. The
Company attempts to conduct its operations in compliance with its interpretation
of the applicable legal standard, but there can be no assurance that such
compliance will not be challenged.

From time to time the Company has received notices and inquiries from states
with respect to collection of use taxes for sales to residents of these states.
The Company currently collects sales tax and pays state income tax where it has
a physical presence. The Company has not collected sales tax or paid income
taxes in other states, nor has it established significant reserves for the
payment of such taxes. Management believes that the amount of any income tax the
Company might ultimately be required to pay for prior periods would not
materially and adversely affect the Company's business, consolidated financial
position, results of operations or cash flows.

19
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

SFAS No. 133, "Accounting for Derivative Investments and Hedging
Activities", effective for fiscal years beginning after June 15, 1999,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. Management believes the adoption of SFAS No. 133 will not
have a material impact on the Company's financial position or results of
operations.

FORWARD-LOOKING INFORMATION

Certain of the matters discussed herein are "forward-looking statements"
intended to qualify for the safe harbor provisions from liability provided by
the Private Securities Litigation Reform Act of 1995. Important factors exist
that could cause results to differ materially from those anticipated by some of
the statements herein. In addition to statements that are forward-looking by
reason of context, the words "believe", "expect", "anticipate", "intend",
"designed", "goal", "priority", "will" and similar expressions identify
forward-looking statements. Investors are cautioned that all forward-looking
statements involve risks and uncertainties which could cause actual results to
differ materially from expectations, including those identified below:

- The economic outlook and its effects on credit availability, interest
rates, consumer spending patterns and response rates;

- Adverse changes in product mix and margins;

- Adverse changes in relationships with vendors;

- Competitive pressures on sales and pricing;

- Lower than expected membership renewal rates;

- Higher than expected membership cancellation and return rates;

- Inability to profitably expand in the membership services market;

- Excessive new member acquisition costs;

- Inability to retain existing clients and attract new clients;

- Inability to develop new membership programs;

- Increases in costs which cannot be recovered through product and service
price increases;

- Failure by the Company or key third parties to achieve Year 2000
compliance;

- Externally mandated changes in accounting guidelines; and

- Availability of financing on acceptable terms.

Shareholders, potential investors and other readers are urged to consider
these and other factors in evaluating the forward-looking statements made
herein, all of which speak only as of the date on which they are made and as to
which the Company has no obligation to update publicly.

20
<PAGE>
PART II.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Balance Sheets
December 31, 1998 and 1997............................................................................... 22

Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996............................................................. 23

Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996............................................................. 24

Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996............................................................. 25

Notes to Consolidated Financial Statements................................................................. 26

Report of Independent Public Accountants................................................................... 39
</TABLE>

21
<PAGE>
DAMARK INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

<TABLE>
<CAPTION>
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................................................ $ 49 $ 474
Trade accounts receivable, net....................................................... 47,795 77,573
Merchandise inventories.............................................................. 40,055 70,744
Deferred membership solicitation and catalog costs................................... 13,988 9,849
Other................................................................................ 5,187 1,643
---------- ----------
Total current assets............................................................... 107,074 160,283

Property and equipment, net............................................................ 30,150 38,351
Intangible and other assets, net....................................................... 681 7,555
Deferred income taxes.................................................................. 2,442 --
---------- ----------
Total assets....................................................................... $ 140,347 $ 206,189
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable..................................................................... $ 44,683 $ 49,532
Accrued liabilities.................................................................. 34,012 18,439
Deferred membership income, net...................................................... 21,957 20,938
Deferred income taxes................................................................ 493 2,675
Borrowings under revolving credit facility........................................... 5,140 44,400
---------- ----------
Total current liabilities.......................................................... 106,285 135,984
---------- ----------

Deferred income taxes.................................................................. -- 1,542
---------- ----------

Commitments and contingencies (Notes 4, 7 and 10)

Shareholders' equity:
Class A Common Stock, $.01 par, 20 million shares authorized; 6,119,208 and 8,025,964
shares issued and outstanding...................................................... 61 80
Class B Common Stock, $.01 par, 2 million shares authorized; none issued and
outstanding........................................................................ -- --
Paid-in capital...................................................................... 60,485 75,452
Accumulated deficit.................................................................. (26,484) (6,869)
---------- ----------
Total shareholders' equity......................................................... 34,062 68,663
---------- ----------
Total liabilities and shareholders' equity....................................... $ 140,347 $ 206,189
---------- ----------
---------- ----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

22
<PAGE>
DAMARK INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(AMOUNTS IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
NET REVENUES:
Product and other revenues................................................... $ 395,047 $ 530,271 $ 464,716
Membership and related revenues.............................................. 89,369 64,356 49,000
---------- ---------- ----------
Total net revenues......................................................... 484,416 594,627 513,716
---------- ---------- ----------
COSTS AND EXPENSES:
Costs of products sold....................................................... 311,157 423,411 371,145
Operating and marketing expenses............................................. 130,515 110,086 89,993
General and administrative expenses.......................................... 68,713 49,756 43,324
---------- ---------- ----------
Total costs and expenses................................................... 510,385 583,253 504,462
---------- ---------- ----------
OPERATING (LOSS) INCOME.................................................... (25,969) 11,374 9,254

Interest expense, net........................................................ 3,210 1,757 66
Other expenses, net.......................................................... 541 67 65
---------- ---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES.......................................... (29,720) 9,550 9,123

Income tax benefit (provision)............................................... 10,105 (3,245) (3,055)
---------- ---------- ----------
NET (LOSS) INCOME.......................................................... $ (19,615) $ 6,305 $ 6,068
---------- ---------- ----------
---------- ---------- ----------

Basic (loss) earnings per common share:
Net (loss) earnings........................................................ $ (2.71) $ 0.78 $ 0.72
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding................................. 7,250 8,033 8,417
---------- ---------- ----------
---------- ---------- ----------

Diluted (loss) earnings per common share:
Net (loss) earnings........................................................ $ (2.71) $ 0.74 $ 0.70
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding................................. 7,250 8,480 8,713
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

23
<PAGE>
DAMARK INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31

<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
---------------------- ----------------------
NUMBER NUMBER TOTAL
OF PAR OF PAR PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL DEFICIT EQUITY
----------- --------- ----------- --------- --------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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

Exercise of stock options................ 46 -- -- -- 515 -- 515
Repurchase and retirement of Common
Stock.................................. (72) (1) -- -- (700) -- (701)
Net income............................... -- -- -- -- -- 6,305 6,305
----------- --- --- --------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1997............... 8,026 80 -- -- 75,452 (6,869) 68,663

Exercise of stock options and issuance of
stock.................................. 87 1 -- -- 793 -- 794
Repurchase and retirement of Common
Stock.................................. (1,994) (20) -- -- (15,760) -- (15,780)
Net loss................................. -- -- -- -- -- (19,615) (19,615)
----------- --- --- --------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1998............... 6,119 $ 61 -- $ -- $ 60,485 $ (26,484) $ 34,062
----------- --- --- --------- --------- ----------- -----------
----------- --- --- --------- --------- ----------- -----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

24
<PAGE>
DAMARK INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income................................................................ $ (19,615) $ 6,305 $ 6,068
Adjustments to reconcile net (loss) income to net cash provided by (used for)
operating activities:
Depreciation and amortization.................................................. 20,486 8,716 6,890
Deferred income taxes.......................................................... (6,166) 369 397
Loss (gain) on disposal of property............................................ 292 (152) --
Changes in working capital items:
Trade accounts receivable, net............................................... 29,778 (39,986) (6,945)
Merchandise inventories, net................................................. 30,689 (17,728) 528
Deferred costs and other current assets...................................... (7,683) (3,622) (1,136)
Accounts payable and accrued liabilities..................................... 10,827 11,004 (2,230)
Deferred membership income, net.............................................. 1,019 4,646 2,704
--------- --------- ---------
Net cash provided by (used for) operating activities....................... 59,627 (30,448) 6,276
--------- --------- ---------

INVESTING ACTIVITIES:
Property and equipment additions, net............................................ (7,653) (9,999) (8,580)
Proceeds from assignment of note receivable...................................... 2,414 -- --
Other, net....................................................................... (464) (156) (487)
--------- --------- ---------
Net cash used in investing activities...................................... (5,703) (10,155) (9,067)
--------- --------- ---------

FINANCING ACTIVITIES:
(Repayments) borrowings under revolving credit facility, net..................... (39,260) 41,400 3,000
Repayments of long-term debt..................................................... -- -- (250)
Repurchase and retirement of Common Stock........................................ (15,780) (701) (8,779)
Net proceeds from exercise of stock options and issuance of Common Stock......... 691 376 152
--------- --------- ---------
Net cash (used in) provided by financing activities........................ (54,349) 41,075 (5,877)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents........................... (425) 472 (8,668)
Cash and cash equivalents, beginning of year..................................... 474 2 8,670
--------- --------- ---------
Cash and cash equivalents, end of year........................................... $ 49 $ 474 $ 2
--------- --------- ---------
--------- --------- ---------

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the year.................................................... $ 3,014 $ 1,540 $ 220
Income taxes paid during the year................................................ 990 2,417 2,810
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

25
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND DESCRIPTION OF BUSINESS

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 inter-company
transactions have been eliminated in consolidation.

DAMARK, a marketing solutions provider, brings a broad range of products,
programs and services to consumers via direct mail, telesales and the Internet.
The Company utilizes targeted, information-based strategies and makes offers for
the benefit of its own account as well as for the accounts of its corporate
clients. The Company develops, markets and manages membership programs that
provide purchase price discounts and other benefits related to consumer needs in
the areas of shopping, travel, hospitality, entertainment, health/fitness and
household financial management. In addition, brand name, value-priced
merchandise is offered through a variety of catalog titles in the categories of
computers, home office, consumer electronics, home decor, home improvement and
sports/fitness. The Company is headquartered in Minneapolis, Minnesota and was
founded in 1986.

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. Consequently, actual results could differ because of the use
of these estimates and assumptions.

REVENUE RECOGNITION

Revenue for products, reported net of sales allowances and other discounts,
is recognized at the time of shipment to customers. Shipping and handling fees
are reflected as part of net revenues; related freight costs associated with
shipping products to customers are included as a component of the cost of
products. Amounts received from customers for products pending shipment are
reflected in accrued liabilities. The Company allows customers to return
products for a specified period from the date of shipment and provides an
allowance for returns based on historical experience.

When any trial period has elapsed, membership revenues with respect to clubs
for which the Company has an on-going obligation are recorded on the balance
sheet net of direct solicitation costs and are amortized into income over the
membership period, generally 12 months. Membership solicitation costs
principally include telemarketing costs, transaction fees, printing, postage and
fulfillment kit costs ("direct response advertising costs"). In accordance with
Statement of Position 93-7, "Reporting on Advertising Costs", direct response
advertising costs are deferred and charged to operations as revenues from
membership fees are recognized. Membership solicitation costs incurred to obtain
a new member generally are less than the initial membership fee. However, if
membership solicitation costs were to exceed membership fees, an adjustment
would be made to the extent of any impairment.

In August 1998, the Securities and Exchange Commission (the "SEC") required
another company in the membership services industry to defer the recognition of
revenue from the sale of membership services until the expiration of the period
during which a full refund is offered and to record the expenses of soliciting
memberships as incurred rather than deferring and recognizing such costs over
the membership period. In September 1998, the SEC issued a press release stating
that the "SEC will formulate and augment new and existing accounting rules and
interpretations covering revenue recognition, restructuring reserves,
materiality, and disclosure" for all publicly traded companies. The timing of
issuance of such guidelines as well as the specific requirements of the final
SEC interpretation is uncertain and therefore, the impact such guidance will
have on the Company's current accounting practices cannot be quantified.
However, if the Company is required to adopt the accounting treatment for
revenue and expense recognition

26
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
mandated for the other company indicated above, it would have a material
non-cash impact on the Company's financial position and results of operations.

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 plans with no finance
charges payable to the Company. At December 31, 1998 and 1997, receivables
associated with such plans approximated $23.4 million and $50.5 million,
respectively and are included in trade accounts receivable. Allowances for
uncollectible trade and other accounts receivable were $2.3 million and $1.7
million at December 31, 1998 and 1997, respectively.

MERCHANDISE INVENTORIES

Merchandise inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or net realizable market value.

DEFERRED CATALOG COSTS

Costs directly associated with the production and mailing of the Company's
catalogs are deferred and amortized over 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 is generally accounted for based on the
straight-line method over the estimated useful lives of the respective assets as
follows:

<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Buildings and improvements......................................................... 10 to 30
Computer hardware and software..................................................... 3 to 5
Furniture, fixtures and warehouse equipment........................................ 7 to 10
Leasehold improvements............................................................. 2 to 10
</TABLE>

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 is
removed from the related accounts and any residual balance is charged or
credited to operations.

INTANGIBLE AND OTHER ASSETS

Intangible assets arose from the acquisition of COMB Corporation ("COMB")
during 1993 and consisted of a non-competition agreement, customer lists and the
excess purchase price over the book value of net assets acquired. In fourth
quarter 1998, the Company recorded a goodwill write-down in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which eliminated all remaining goodwill. See Note 3.

27
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prior to fourth quarter 1998, intangible assets were amortized on a
straight-line basis over various periods not exceeding 25 years and accumulated
amortization was $3.7 million as of December 31, 1997.

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.

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 SFAS No. 123,
"Accounting for Stock Based Compensation".

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments held by or owed to the Company are primarily of a
traditional nature. The carrying amounts as reported in the accompanying
consolidated balance sheets for cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities and short-term borrowings approximate
their fair values due principally to their short maturities.

NOTE 2. PROPERTY AND EQUIPMENT

At December 31, property and equipment consisted of the following:

<TABLE>
<CAPTION>
1998 1997
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Land and land improvements............................................. $ 2,702 $ 2,674
Building............................................................... 9,290 12,246
Furniture, fixtures and warehouse equipment............................ 7,267 8,154
Computer hardware and software......................................... 27,848 34,841
Leasehold improvements................................................. 5,132 4,598
Assets under construction.............................................. 401 --
--------- ---------
Property and equipment, gross........................................ 52,640 62,513
Accumulated depreciation and amortization.............................. (22,490) (24,162)
--------- ---------
Property and equipment, net.......................................... $ 30,150 $ 38,351
--------- ---------
--------- ---------
</TABLE>

NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS

During fourth quarter 1998, in response to actual and projected net losses
incurred during prior and future periods and in accordance with SFAS No. 121,
the Company performed a review of its long-lived assets for potential
impairment. As a result, the Company recorded asset impairment charges of $6.2
million related to goodwill and $824,000 relating to other impaired long-lived
assets such as furniture and fixtures and computer hardware. Also, during fourth
quarter 1998, in connection with the Company's ongoing review of its Year 2000
compliance status, approximately $2.3 million of internally developed software
was identified as obsolete and without future value to the Company. Finally, the
Company completed the renovation of its corporate headquarters during fourth
quarter 1998

28
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
and wrote off approximately $521,000 of unamortized leasehold improvements no
longer in use. All of these charges are included in the Company's 1998 loss from
operations.

The write-down of goodwill eliminated all remaining goodwill of the Company.
Goodwill was determined to have been impaired due to the Company's inability to
generate future operating income from catalog mailings under the COMB name
without substantial additional investment to revive this brand.

NOTE 4. FINANCING ARRANGEMENTS

The Company maintains a $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 is available for stand-by and
documentary letters of credit. Borrowings outstanding under the line of credit
are secured by certain assets of the Company and bear interest, at the Company's
option, at the reference rate or LIBOR plus spreads that vary based on excess
availability, as defined. At December 31, 1998, the Company had $5.1 million of
borrowings and $3.6 million of letters of credit outstanding and was in
compliance with its financial covenant under the credit agreement.

NOTE 5. EARNINGS (LOSS) PER SHARE

Basic earnings per share is computed based on the weighted average shares of
common stock outstanding during the applicable periods while diluted earnings
per share assumes conversion of potentially dilutive securities to shares of
common stock outstanding during the applicable periods. Potentially dilutive
securities include stock options that have been granted to employees and
directors of the Company. The components of basic earnings per share, diluted
earnings per share and earnings per share as previously reported are as follows:

<TABLE>
<CAPTION>
WEIGHTED
NET AVERAGE
(LOSS) SHARES PER SHARE
INCOME OUTSTANDING AMOUNT
--------- ------------- -----------
(AMOUNTS IN THOUSANDS EXCEPT
FOR PER SHARE DATA)
<S> <C> <C> <C>
1998
Basic earnings per share.................................. $ (19,615) 7,250 $ (2.71)
Dilutive effect of stock options.......................... -- -- --
--------- ----- -----------
Diluted earnings per share................................ $ (19,615) 7,250 $ (2.71)
--------- ----- -----------
--------- ----- -----------

1997
Basic earnings per share.................................. $ 6,305 8,033 $ 0.78
Dilutive effect of stock options.......................... -- 447 (0.04)
--------- ----- -----------
Diluted earnings per share................................ $ 6,305 8,480 $ 0.74
--------- ----- -----------
--------- ----- -----------

1996
Basic earnings per share.................................. $ 6,068 8,417 $ 0.72
Dilutive effect of stock options.......................... -- 296 (0.02)
--------- ----- -----------
Diluted earnings per share................................ $ 6,068 8,713 $ 0.70
--------- ----- -----------
--------- ----- -----------
Earnings per share as previously reported................. $ 6,068 8,730 $ 0.70
--------- ----- -----------
--------- ----- -----------
</TABLE>

29
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. EARNINGS (LOSS) PER SHARE (CONTINUED)
In 1998, options to purchase 1,901,333 shares of the Company's Class A
Common Stock (the "Common Stock") were not included in the computation of
diluted earnings per share as their inclusion would have been anti-dilutive.

NOTE 6. SHAREHOLDERS' EQUITY

During 1998, 1997 and 1996, the Company repurchased approximately 2.0
million, 72,500 and 919,500 shares, respectively, of its Common Stock at an
aggregate cost of $15.8 million, $701,000 and $8.8 million, respectively.
Repurchased shares were acquired under a series of programs authorized by the
Company's Board of Directors (the "Board") that included private and open-market
transactions. During third quarter 1998, the Board authorized a two million
share open-market repurchase program, and at December 31, 1998, authorization to
purchase approximately 790,300 shares remained under this program.

On January 30, 1998, the Board approved a stock purchase plan pursuant to
which non-employee directors could purchase an aggregate of 50,000 shares of
Common Stock at a price per share equal to the average of the last reported
selling price for the 20 trading days preceding the date of purchase. The plan
was amended in November 1998 to reduce the number of shares available for
purchase to 25,000. At December 31, 1998, 20,000 shares remained available for
purchase.

NOTE 7. STOCK OPTION PLANS

In 1991, the DAMARK International, Inc. Stock Option Plan (the "Plan") was
adopted to provide for the granting of incentive stock options ("ISOs") or
non-statutory stock options to key employees. At December 31, 1998, 1.6 million
shares of Common Stock were reserved for issuance of which approximately 345,000
shares remained 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 but shall not be less than 100% of market
value on the date of grant for ISOs or less than 85% of market value on the date
of grant for non-statutory options. Outstanding ISOs 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.

Prior to the adoption of the Plan, certain employees, including executive
management, were granted nonqualified stock options. In addition, from time to
time, options to purchase Common Stock have been granted to certain members of
the Board. These options vest in three equal annual installments on the
anniversary of the date of grant and expire upon the earlier of one year after
retirement from the Board or ten years from the date of grant.

On January 30, 1998, the Company granted its chief executive officer an
option to purchase 400,000 shares of Common Stock at $10.00 per share
contemporaneously with an assignment by him to the Company of his right to
purchase 456,548 shares of Common Stock. The option vests in five equal annual
installments beginning in 1999, expires ten years from the date of grant and was
not granted under the Plan. The Company exercised its assigned purchase rights
in 1998, which repurchased shares are included in the aggregate shares
repurchased in 1998. See Note 6.

30
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. STOCK OPTION PLANS (CONTINUED)
Information regarding the Company's stock options is summarized below:

<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding:
Beginning of year............................ 1,372 $ 9.30 1,189 $ 8.31 1,025 $ 7.63
Granted.................................... 814 8.53 253 13.66 279 9.61
Canceled................................... (203) 14.96 (24) 7.25 (43) 10.85
Exercised.................................. (82) 7.64 (46) 8.14 (72) 2.08
----- ----------- ----- ----------- ----- -----------
End of year.................................. 1,901 $ 8.43 1,372 $ 9.30 1,189 $ 8.31
----- ----------- ----- ----------- ----- -----------
----- ----------- ----- ----------- ----- -----------

Options exercisable:
End of year.................................. 902 $ 7.69 878 $ 8.26 714 $ 7.92
----- ----------- ----- ----------- ----- -----------
----- ----------- ----- ----------- ----- -----------
</TABLE>

Options outstanding at December 31, 1998 had exercise prices between $1.31
and $16.00 per share and a weighted average remaining contractual life of 6.9
years.

The Company accounts for its stock option grants under APB No. 25. Since
options have been granted at not less than fair market value on the date of
grant, no compensation expense has been recognized for stock options granted.
Had compensation cost for option grants been determined consistent with SFAS No.
123, the Company's net income and earnings per share, on a pro forma basis,
would have been reported as follows:

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net (loss) income (in thousands):
As reported.................................................. $ (19,615) $ 6,305 $ 6,068
Pro forma.................................................... $ (21,302) $ 5,734 $ 5,722

(Loss) earnings per share:
As reported:
Basic...................................................... $ (2.71) $ 0.78 $ 0.72
Diluted.................................................... $ (2.71) $ 0.74 $ 0.70
Pro forma:
Basic...................................................... $ (2.94) $ 0.70 $ 0.68
Diluted.................................................... $ (2.94) $ 0.67 $ 0.66
</TABLE>

Since the method of accounting required by SFAS No. 123 has not been applied
to options granted by the Company prior to January 1, 1995, the above pro forma
compensation cost may not be representative of that to be expected in future
years. In determining the compensation cost of options granted, as specified by
SFAS No. 123, the

31
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. STOCK OPTION PLANS (CONTINUED)
fair value of each option grant has been estimated on the date of grant using
the Black-Scholes option pricing model. The assumptions used in these
calculations are summarized below:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted average risk-free interest
rate.................................. 4.41% 6.25% 6.04%
Weighted average expected life.......... 8 years 5 years 5 years
Weighted average expected volatility.... 60.48% 57.53% 60.44%
Weighted average fair value............. $ 5.85 $ 7.76 $ 5.60
</TABLE>

NOTE 8. INCOME TAXES

The Company's (benefit) provision for income taxes for the years ended
December 31 is summarized as follows:

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Current........................................................ $ (3,950) $ 2,876 $ 2,658
Deferred....................................................... (6,155) 369 397
--------- --------- ---------
Total........................................................ $ (10,105) $ 3,245 $ 3,055
--------- --------- ---------
--------- --------- ---------
</TABLE>

A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended December 31 is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate.................................... (34.0)% 34.0% 34.0%
Deferred income tax adjustments and other............................ -- -- (0.5)%
--------- --- ---
Effective income tax rate............................................ (34.0)% 34.0% 33.5%
--------- --- ---
--------- --- ---
</TABLE>

32
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. INCOME TAXES (CONTINUED)

The components of the Company's net deferred income tax asset (liability) as
of December 31 are as follows:

<TABLE>
<CAPTION>
1998 1997
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Current deferred income tax asset (liability):
Deferred catalog costs................................................ $ (4,840) $ (3,392)
Merchandise and membership returns.................................... 6,382 2,070
Deferred initial direct costs of club memberships..................... (4,118) (2,861)
Inventory valuation................................................... 917 1,059
Allowance for doubtful accounts....................................... 820 592
Other, net............................................................ 346 (143)
--------- ---------
Net current deferred income tax asset (liability)................... (493) (2,675)

Long-term deferred income tax asset (liability):
Depreciation.......................................................... 63 (1,248)
Acquisition costs..................................................... 1,939 380
Tax credit carry-forwards............................................. 526 --
Other, net............................................................ (86) (674)
--------- ---------
Net long-term deferred income tax asset (liability)................. 2,442 (1,542)
--------- ---------
Total deferred income tax asset (liability)....................... $ 1,949 $ (4,217)
--------- ---------
--------- ---------
</TABLE>

NOTE 9. BUSINESS SEGMENTS

Pursuant to SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information", for fiscal years beginning after December 15, 1997, the
Company is required to report certain financial results by "business segment".
Based on the promulgated criteria, the Company operates in two business
segments: Membership Services and Catalog Retail. These reportable operating
segments are strategic business units that offer different products and services
and are managed separately based on fundamental differences in their operations.
Both operating segments sell exclusively to customers in the U.S. A Corporate
segment is also used to account for certain unallocated items and capital
allocation and tax purposes.

In its Membership Services operating segment, the Company develops, markets
and manages membership programs that provide purchase price discounts and other
benefits related to consumer needs in the areas of shopping, travel,
hospitality, entertainment, health/fitness and household financial management.
The Company's Catalog Retail segment offers brand name, value-priced merchandise
through a variety of catalog titles in the categories of computers, home office,
consumer electronics, home decor, home improvement and sports/fitness

Segment accounting policies are the same as those described in Note 1 except
that the disaggregated financial information presented below has been prepared
using the "management approach", which is consistent with the basis and manner
in which management evaluates results for purposes of assisting in making
internal operating decisions. Certain costs and expenses are allocated between
segments based upon standards established and applied by management. These
allocations and charges could vary significantly in "arm's length" transactions;
consequently, financial information prepared as if the segments were companies
operating independently without such allocations and charges could differ
materially from that presented.

33
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9. BUSINESS SEGMENTS (CONTINUED)
The Catalog Retail segment provides certain discounts to the PREFERRED
BUYERS' CLUB-REGISTERED TRADEMARK- and INSIDERS-REGISTERED TRADEMARK- membership
programs managed by Membership Services. Such discounts are allocated entirely
to the Catalog Retail segment due to the increase in advertising leverage
consequent to the fact that member response rates are typically two to three
times higher than those experienced by Catalog Retail in other customer
segments.

The Company's Catalog Retail segment also provides names of potential
members to its Membership Services segment on an on-going basis. Consequently,
inter-segment charges intended to approximate the success fees and commissions
paid by the Membership Services segment to external clients for name acquisition
is reflected to the benefit of the Catalog Retail segment. Since independent
parties did not negotiate such commissions, the charges do not reflect what a
third party might receive in an actual business transaction.

Selected statement of operations and statement of cash flows data for the
years ended December 31 by business segment is set forth below.

<TABLE>
<CAPTION>
CATALOG MEMBERSHIP
RETAIL(1) SERVICES CORPORATE CONSOLIDATED
--------- ---------- --------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Net revenues............................ $ 395,047 $ 89,369 $ -- $484,416
Cost of products sold................... 311,157 -- -- 311,157
Other expenses(2, 3).................... 114,959 73,175 11,094 199,228
--------- ---------- --------- ------------
Operating (loss) income............... (31,069) 16,194 (11,094) (25,969)
Interest and other expense, net......... -- -- 3,751 3,751
--------- ---------- --------- ------------
(Loss) income before taxes............ (31,069) 16,194 (14,845) (29,720)
Income tax benefit...................... -- -- 10,105 10,105
--------- ---------- --------- ------------
Net (loss) income..................... (31,069) 16,194 (4,740) (19,615)
Depreciation and amortization........... 7,152 2,659 10,675 20,486
Net changes in working capital and
other................................. 51,576 19,365 (12,185) 58,756
--------- ---------- --------- ------------
Net cash provided by (used for)
operations........................ $ 27,659 $ 38,218 $ (6,250) $ 59,627
--------- ---------- --------- ------------
--------- ---------- --------- ------------
Property and equipment additions, net... $ (5,740) $ (1,913) $ -- $ (7,653)
Net cash used for investments........... (3,674) (2,029) -- (5,703)
Net cash provided by (used for)
financing............................. (57,130) (21,944) 24,725 (54,349)
</TABLE>

34
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9. BUSINESS SEGMENTS (CONTINUED)

<TABLE>
<CAPTION>
CATALOG MEMBERSHIP
RETAIL(1) SERVICES CORPORATE CONSOLIDATED
--------- ---------- --------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Net revenues............................ $ 530,271 $ 64,356 $ -- $594,627
Cost of products sold................... 423,411 -- -- 423,411
Other expenses(2)....................... 113,723 45,295 824 159,842
--------- ---------- --------- ------------
Operating (loss) income............... (6,863) 19,061 (824) 11,374
Interest and other expense, net......... -- -- 1,824 1,824
--------- ---------- --------- ------------
(Loss) income before taxes............ (6,863) 19,061 (2,648) 9,550
Income tax (provision) benefit.......... -- -- (3,245) (3,245)
--------- ---------- --------- ------------
Net (loss) income..................... (6,863) 19,061 (5,893) 6,305
Depreciation and amortization........... 5,713 2,179 824 8,716
Net changes in working capital and
other................................. (42,045) (4,211) 787 (45,469)
--------- ---------- --------- ------------
Net cash (used for) provided by
operations........................ $ (43,195) $ 17,029 $ (4,282) $(30,448)
--------- ---------- --------- ------------
--------- ---------- --------- ------------
Property and equipment additions, net... $ (7,499) $ (2,500) $ -- $ (9,999)
Net cash used for investments........... (7,616) (2,539) -- (10,155)
Net cash provided by (used for)
financing............................. 42,275 6,286 (7,486) 41,075

1996
Net revenues............................ $ 464,716 $ 49,000 $ -- $513,716
Cost of products sold................... 371,145 -- -- 371,145
Other expenses(2)....................... 97,307 35,186 824 133,317
--------- ---------- --------- ------------
Operating (loss) income............... (3,736) 13,814 (824) 9,254
Interest and other expense, net......... -- -- 131 131
--------- ---------- --------- ------------
(Loss) income before taxes............ (3,736) 13,814 (955) 9,123
Income tax (provision) benefit.......... -- -- (3,055) (3,055)
--------- ---------- --------- ------------
Net (loss) income..................... (3,736) 13,814 (4,010) 6,068
Depreciation and amortization........... 4,343 1,723 824 6,890
Net changes in working capital and
other................................. (7,617) (205) 1,140 (6,682)
--------- ---------- --------- ------------
Net cash (used for) provided by
operations........................ $ (7,010) $ 15,332 $ (2,046) $ 6,276
--------- ---------- --------- ------------
--------- ---------- --------- ------------
Property and equipment additions, net... $ (6,435) $ (2,145) $ -- $ (8,580)
Net cash used for investments........... (6,800) (2,267) -- (9,067)
Net cash provided by (used for)
financing............................. 8,738 1,906 (16,521) (5,877)
</TABLE>

- - ------------------------

(1) Discounts provided to PREFERRED BUYERS' CLUB-REGISTERED TRADEMARK- and
INSIDERS-REGISTERED TRADEMARK- members are allocated entirely to Catalog
Retail and totaled $29,552, $46,105 and $44,723 in 1998, 1997 and 1996,
respectively.

(2) Includes inter-segment transfers to Catalog Retail from Membership Services
of $18,655, $18,168 and $16,356 in 1998, 1997 and 1996, respectively.

(3) 1998 Corporate expenses include $9,852 of asset impairment charges and $419
of unallocated unusual expense. See Note 3.

35
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9. BUSINESS SEGMENTS (CONTINUED)
Selected balance sheet data as of December 31 by business segment is as
follows:

<TABLE>
<CAPTION>
CATALOG MEMBERSHIP
RETAIL SERVICES CORPORATE CONSOLIDATED
-------- ---------- --------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Cash and cash equivalents............... $ -- $ -- $ 49 $ 49
Non-cash current assets................. 78,103 21,821 7,101 107,025
Net property, equipment and other
assets................................ 22,381 7,932 2,960 33,273
-------- ---------- --------- ------------
Total assets.......................... $100,484 $ 29,753 $ 10,110 $140,347
-------- ---------- --------- ------------
-------- ---------- --------- ------------
Non-interest bearing current
liabilities........................... $ 48,774 $ 51,878 $ 493 $101,145
Borrowings.............................. -- -- 5,140 5,140
Investment in segment/shareholders'
equity................................ 51,710 (22,125) 4,477 34,062
-------- ---------- --------- ------------
Total liabilities and equity.......... $100,484 $ 29,753 $ 10,110 $140,347
-------- ---------- --------- ------------
-------- ---------- --------- ------------

1997
Cash and cash equivalents............... $ -- $ -- $ 474 $ 474
Non-cash current assets................. 138,662 19,295 1,852 159,809
Net property, equipment and other
assets................................ 28,060 10,679 7,167 45,906
-------- ---------- --------- ------------
Total assets.......................... $166,722 $ 29,974 $ 9,493 $206,189
-------- ---------- --------- ------------
-------- ---------- --------- ------------
Non-interest bearing current
liabilities........................... $ 57,977 $ 30,059 $ 3,548 $ 91,584
Borrowings.............................. -- -- 44,400 44,400
Deferred income tax liability........... -- -- 1,542 1,542
Investment in segment/shareholders'
equity................................ 108,745 (85) (39,997) 68,663
-------- ---------- --------- ------------
Total liabilities and equity.......... $166,722 $ 29,974 $ 9,493 $206,189
-------- ---------- --------- ------------
-------- ---------- --------- ------------
</TABLE>

NOTE 10. 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, 1998, 1997
and 1996 was $5.7 million, $5.1 million, $4.6 million, respectively. Future
minimum lease commitments under non-cancelable operating leases as of December
31, 1998 are as follows:

<TABLE>
<CAPTION>
AMOUNT
-----------
(AMOUNTS IN
THOUSANDS)
<S> <C>
1999............................................................................. $ 4,756
2000............................................................................. 3,963
2001............................................................................. 2,428
2002............................................................................. 1,040
2003 and thereafter.............................................................. 1,195
-----------
Total.......................................................................... $ 13,382
-----------
-----------
</TABLE>

36
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CERTAIN AGREEMENTS

The Company has an employment agreement with its chief executive officer
that provides that his employment may not be terminated other than for cause
before December 31, 2001. The employment term automatically extends for one year
on each January 1, unless notice of non-extension is given. In addition, the
Company and its chief executive officer have also entered into an agreement
providing his estate the right to require the Company to repurchase all or a
portion of his shares of Common Stock at the then current market price, up to an
aggregate of $5,000,000. The Company carries insurance on its chief executive
officer's life in an amount in excess of its obligation under this agreement.

The Company has entered into severance, change of control and non-compete
agreements with several of its executive officers. In the event an officer is
terminated without cause in the absence of a change of control of the Company,
the officer is generally entitled to two years' base salary, except for the
chief executive officer who is entitled to three years' base salary, and other
benefits, including a bonus determined by formula. In the event an officer is
terminated by the Company without cause or by the officer with good reason
within 24 months following a change in control of the Company, as defined, the
officer is generally entitled to a lump sum payment equal to two times annual
base salary, except for the chief executive officer who is entitled to three
years' base salary, and other benefits, including a bonus determined by formula.
Further, in the event of a termination of an officer's employment by the Company
without cause or by voluntary resignation prior to a change in control, the
Company has the option to waive the non-compete covenant of the agreement and
pay no severance benefits, modify the terms of the non-compete covenant to one
year and pay 50% of the severance benefits or pay all severance benefits and
receive a two-year non-compete covenant.

The DAMARK International, Inc. 401(k) Retirement Plan (the "Retirement
Plan") is an employee 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, pre-tax salary reduction contributions of up to
20% 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 such contributions were made in
1998, 1997 or 1996.

The Company has a deferred compensation plan for non-employee members of its
Board. Under this plan, such directors are able to defer all or part of their
fees for service and have such fees invested in Common Stock equivalents
distributable as Common Stock upon termination of services, death or a change in
control.

CONTINGENCIES

In conjunction with the construction of its distribution and warehouse
facility in 1994, the Company entered into a contract with the Brooklyn Park
Economic Development Authority (the "Authority") in which the Authority agreed
to reimburse the Company for certain development costs incurred. Such costs were
reimbursable from tax increment funds directly attributed to the development. In
December 1998, the Company obtained a note from the Authority for the remaining
funds to be reimbursed and assigned such to the Authority in exchange for a
payment equal to the $2.4 million principal amount of the note. In the event
there is insufficient tax increment to make scheduled payments of principal and
interest on the note, the Company is obligated, at the Authority's request, to
repurchase the note.

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 that may occur are adequately covered by insurance or are otherwise

37
<PAGE>
DAMARK INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
provided for and the ultimate outcome of such matters will not have a material
effect on the financial position or operations of the Company.

NOTE 11. SUBSEQUENT EVENTS

On January 4, 1999 the Company made a loan to its chief executive officer
for $1.5 million evidenced by a promissory note which bears interest on the
unpaid principal balance at the prime rate plus 1%. Payment of principal and
interest is due January 4, 2001.

During January and February 1999 the Company repurchased 229,677 shares of
its Common Stock at an aggregate cost of approximately $1.7 million.

NOTE 12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

38
<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, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
The consolidated financial statements and the schedule referred to below 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and qualifying
accounts is presented for purposes of additional analysis and is not a required
part of the basic financial statements and, in our opinion, is fairly stated in
all material respects in relation to the basic financial statements taken as a
whole.

/s/ ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
January 19, 1999

39
<PAGE>
PART II.

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

Information regarding members of the Company's Board is included under the
captions "Election of Directors-- Information Concerning Nominees and Directors"
and "Section 16(a) Reporting" in the Company's 1998 Proxy Statement and is
incorporated herein by reference.

Set forth below are the executive officers of the Company as of March 10,
1999, their ages, titles, the date first appointed as an officer of the Company
and employment history for the past five years:

<TABLE>
<CAPTION>
NAME AGE TITLE
- - -------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Mark A. Cohn 41 Chairman and Chief Executive Officer
George S. Richards 34 President and Chief Operating Officer
Stephen P. Letak 43 Executive Vice President and Chief Financial Officer
Michael D. Moroz 35 Senior Vice President--Marketing Services
Rodney C. Merry 41 Senior Vice President and Chief Information Officer
Andrew J. Franzoni 37 Senior Vice President--Catalog Marketing
</TABLE>

Executive officers of the Company are elected at the discretion of the Board
with no fixed term, except for Mr. Cohn. Mr. Cohn serves as Chairman and Chief
Executive Officer under the terms of an employment agreement which provides that
his employment may not be terminated by the Company before December 31, 2001,
other than for cause. The agreement automatically extends for one year on each
January 1, unless notice of non-extension is given. There are no family
relationships between or among any of the executive officers or directors of the
Company.

MR. COHN has been Chairman, Chief Executive Officer and a director of the
Company since its inception in 1986. He is a founder of the Company. Mr. Cohn
was elected as a director of the Company at its Annual Meeting in 1998 for a
term expiring at the Annual Meeting in 2001.

MR. RICHARDS has been the Company's President and Chief Operating Officer
since September 1998 and has served it in various capacities as an officer since
December 1995 and as a consultant since February 1995. From January 1994 to
February 1995, Mr. Richards was Vice President of Marketing and Business
Development with Montgomery Ward Direct, LP.

MR. LETAK has been the Company's Executive Vice President and Chief
Financial Officer since September 1998. From August 1987 to September 1998, Mr.
Letak served in various capacities as an officer of Berkley Administrators, a
division of W.R. Berkley Corporation, most recently as President.

MR. MOROZ has been the Company's Senior Vice President--Marketing Services
since September 1998 and has served it in various capacities as an officer since
June 1994. Mr. Moroz joined the Company in 1988.

MR. MERRY has been the Company's Senior Vice President and Chief Information
Officer since September 1998 and has served it in various capacities both as an
officer since November 1997 and senior manager since September 1996. From
February to September 1996, Mr. Merry served as Vice President of Operations for
Publishing Business Systems. From January 1995 to February 1996, Mr. Merry
served as the Company's Director of Application Development.

MR. FRANZONI has been the Company's Senior Vice President--Catalog Marketing
since September 1998. From May 1993 to September 1998, Mr. Franzoni was employed
by GE Capital Consumer Financial Services in various marketing positions and
most recently served as Director of New Business Development.

40
<PAGE>
PART III.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is included under the captions
"Executive Compensation and Other Information" and "Board Compensation Committee
Report on Executive Compensation" in the Company's 1998 Proxy Statement and is
incorporated herein by reference.

PART III.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding ownership of the Company's securities is included
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's 1998 Proxy Statement and is incorporated herein by
reference.

PART III.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related party transactions
is included under the captions "Election of Directors--Certain Relationships and
Related Transactions" and "Executive Compensation and Other
Information--Employment Contracts, Severance and Change in Control Arrangements"
in the Company's 1998 Proxy Statement and is incorporated herein by reference.

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 the
Company are included herein as Part II. Item 8.

(2) FINANCIAL STATEMENT SCHEDULES: For the fiscal years ended December
31, 1998, 1997 and 1996, Schedule II. Valuation and Qualifying Accounts.

(3) EXHIBITS: The exhibits required to be a part of this Report are
listed in the Exhibit Index that follows the signature page included herein.
A copy of these exhibits will be furnished to any person at a reasonable
cost upon receipt of a written request. Such request should be sent to
DAMARK International, Inc., 7101 Winnetka Avenue North, Minneapolis,
Minnesota 55428, Attention: Investor Relations.

(b) REPORTS ON FORM 8-K

On December 4, 1998, DAMARK International, Inc. and First Union National
Bank entered into Amendment No. 1 to the Loan and Security Agreement between
the parties dated August 20, 1998. Such amendment modified the adjusted net
worth calculation and the adjusted net worth covenant set forth in the Loan
and Security Agreement.

Included herein as Part IV. Item 14. (a)(3).

(d) FINANCIAL STATEMENT SCHEDULES

Included herein as Part IV. Item 14. (a)(2).

41
<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, thereunto duly authorized.

DAMARK INTERNATIONAL, INC.

March 11, 1999 /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> <C> <S> <C>
/s/ MARK A. COHN Chairman, Chief Executive Officer and March 11, 1999
------------------------------------ Director (Principal Executive Officer)
Mark A. Cohn

/s/ STEPHEN P. LETAK Executive Vice President and Chief March 11, 1999
------------------------------------ Financial Officer (Principal Financial
Stephen P. Letak and Accounting Officer)

* Director March 11, 1999
------------------------------------
Thomas A. Cusick

* Director March 11, 1999
------------------------------------
Jack W. Eugster

* Director March 11, 1999
------------------------------------
Harold Roitenberg

* Director March 11, 1999
------------------------------------
Ralph Strangis

* Director March 11, 1999
------------------------------------
Joel N. Waller

* Director March 11, 1999
------------------------------------
Stephen J. Hemsley

*By: /s/ MARK A. COHN March 11, 1999
-------------------------------
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 Annual Report on Form 10-K on behalf of each of such directors.

42
<PAGE>
DAMARK INTERNATIONAL, INC.

EXHIBIT INDEX TO

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
NUMBERING
REGULATION S-K SYSTEM
EXHIBIT TABLE (* INCORPORATED
REFERENCE TITLE OF DOCUMENT BY REFERENCE)
- - -------------------- -------------------------------------------------- -----------------
<C> <S> <C>
3 Restated Articles of Incorporation of the *
Registrant (filed as Exhibit 3 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 Amended and restated Bylaws of the Registrant *
(filed as Exhibit 3.2 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal
quarter ended June 27, 1998)

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))

4 Shareholder Rights Plan (filed as Exhibit 1 to the *
Registrant's Form 8-K filed May 4, 1998)

4 First Amendment to Shareholder Rights Plan

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 Amended 1991 Stock Option Plan

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)
</TABLE>

43
<PAGE>
DAMARK INTERNATIONAL, INC.

EXHIBIT INDEX TO

ANNUAL REPORT ON FORM 10-K (CONTINUED)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
NUMBERING
REGULATION S-K SYSTEM
EXHIBIT TABLE (* INCORPORATED
REFERENCE TITLE OF DOCUMENT BY REFERENCE)
- - -------------------- -------------------------------------------------- -----------------
<C> <S> <C>
10 Nonqualified Stock Option Agreement, dated June *
16, 1997, for Stephen J. Hemsley (filed as
Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (No. 333-31773))

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 Nonqualified Stock Option Agreement, dated
December 17, 1998, for Stephen J. Hemsley

10 Amendment of Nonqualified Stock Option Agreement,
dated February 10, 1999, for Stephen J. Hemsley

10 Assignment of Stock Option Agreement, dated as of *
January 30, 1998 between Mark A. Cohn and the
Company (filed as Exhibit 10 to the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1997)

10 Stock Option Agreement (Non-Statutory Options) for *
Mark A. Cohn dated January 30, 1998 (filed as
Exhibit 10 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1997)

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)

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 Amended and Restated Employment Agreement, dated *
January 2, 1998 between the Company and Mark A.
Cohn (filed as Exhibit 10 to the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1997)

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. 333-16139))

10 DAMARK International, Inc. Non-Employee Director *
Stock Purchase Plan (filed as Exhibit 10 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997)

10 Restated 1998 DAMARK International, Inc.
Non-Employee Director Stock Purchase Plan
</TABLE>

44
<PAGE>
DAMARK INTERNATIONAL, INC.

EXHIBIT INDEX TO

ANNUAL REPORT ON FORM 10-K (CONTINUED)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
NUMBERING
REGULATION S-K SYSTEM
EXHIBIT TABLE (* INCORPORATED
REFERENCE TITLE OF DOCUMENT BY REFERENCE)
- - -------------------- -------------------------------------------------- -----------------
<C> <S> <C>
10 Credit Agreement, dated as of August 10, 1998 by *
and between Registrant and Congress Financial
Corp. (Central), as Agent for the banks named
therein (filed as Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal
quarter ended September 26, 1998)

10 Amendment to Credit Agreement, dated December 4, *
1998 (filed as Exhibit 1 to the Registrant's
Form 8-K filed December 21, 1998)

11 Computation of Earnings Per Share (years ended *
December 31, 1998, 1997 and 1996--see Note 5 to
the Company's consolidated financial statements
in the Company's 1998 Annual Report on Form
10-K)

21 Subsidiaries of DAMARK International, Inc. (filed *
as Exhibit 21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1996)

23 Consent of Arthur Andersen LLP

24 Powers of Attorney

27 Financial Data Schedule
</TABLE>

45
<PAGE>

DAMARK International, Inc.

Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997, 1996
(in Thousands)

Column C-Additions
------------------------
Column B- Charged to Column E-
Balance at Charged to other Column D- Balance
beginning costs and accounts Deductions at end of
Column A-Description of period expenses desribe describe period
- - ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Reserve for uncollectible accounts receivable
1998 $1,693 $4,850 -- $(4,200) (1) $2,343
1997 1,134 3,669 -- (3,110) (1) 1,693
1996 1,070 2,543 -- (2,479) (1) 1,134

Reserve for merchandise and membership returns
1998 $5,948 $59,326 -- $(47,005) (2) $18,269
1997 2,664 26,973 -- (23,689) (2) 5,948
1996 2,068 20,424 -- (19,828) (2) 2,664
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Accounts determined to be uncollectible are charged against the reserve,
net of collections of accounts previously written-off.

(2) Membership fee refunds and merchandise returns are charged against the
reserve

<PAGE>

FIRST AMENDMENT TO RIGHTS AGREEMENT

This First Amendment to Rights Agreement is entered into as of July 15,
1998 between DAMARK INTERNATIONAL, INC., a Minnesota corporation ("Company"),
and NORWEST BANK MINNESOTA, N.A. (the "Rights Agent").

RECITALS

1. The Company and the Rights Agent entered into a Rights Agreement dated
as of April 16, 1998 (the "Rights Agreement"), with respect to the Shareholder
Rights Plan ("SRP") adopted by the Company.

2. The Board of Directors of the Company has authorized an amendment to
the Rights Agreement for purposes of modifying the definition of Acquiring
Person.

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree to amend the Rights Agreement as
follows:

Section 1. MODIFICATION OF DEFINITION OF ACQUIRING PERSON. Section
1(a) is amended to substitute in total for Section 1(a) of the original
Rights Agreement the following:

(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates
and Associates (as such terms are hereinafter defined) of such
Person, shall be the Beneficial Owner (as such term is
hereinafter defined) of 20% or more of the Common Shares of the
Company then outstanding, but shall not include (i) the Company,
(ii) any Subsidiary (as such term is hereinafter defined) of the
Company, (iii) any employee benefit plan of the Company or any
Subsidiary of the Company, (iv) any Person holding Common Shares
for or pursuant to the terms of any such plan, or (v) any Person
holding Common Shares issued to that person from the Company in a
transfer approved by the Board of Directors of the Company (which
action shall be effective only with the concurrence of a majority
of the Continuing Directors and only if the Continuing Directors
constitute a majority of the number of directors then in office)
(each of (i) through (v) an "Exempt Person"). Notwithstanding
the foregoing, no Person shall (x) be an "Acquiring Person" as a
result of Common Shares beneficially owned on April 16, 1998, or
(y) become an "Acquiring Person" as the result of an acquisition
of Common Shares by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 20% or more of the Common
Shares of the Company then outstanding; PROVIDED, HOWEVER, that
if a Person, together with all Affiliates and Associates of such
Person, is or shall become the Beneficial Owner of 20% or more of
the Common Shares of the Company then outstanding by reason of
either clause (x) or clause (y) of this sentence, and shall
thereafter become the Beneficial Owner of additional Common
Shares representing more than 1% of the Common Shares of

<PAGE>

the Company, then such Person shall be deemed to be an
"Acquiring Person" unless within ten days of the determination
of such ownership the Board of Directors of the Company (which
action shall be effective only with the concurrence of a majority
of the Continuing Directors and only if the Continuing Directors
constitute a majority of the number of directors then in office)
acts to approve such ownership. Further, if the Board of
Directors of the Company (which action shall be effective only
with the concurrence of a majority of the Continuing Directors
and only if the Continuing Directors constitute a majority of the
number of directors then in office) determines in good faith that
a Person who would otherwise be an "Acquiring Person," as defined
pursuant to the foregoing provisions of this paragraph (a), has
become such inadvertently, and such Person divests as promptly as
practicable a sufficient number of Common Shares so that such
Person would no longer be an "Acquiring Person," as defined
pursuant to the foregoing provisions of this paragraph (a), then
such Person shall not be deemed to be an "Acquiring Person" for
any purposes of this Agreement.

Section 2. FULL FORCE AND EFFECT. Except as set forth in this First
Amendment, all other terms of the Rights Agreement shall continue in full
force and effect.

Section 3. GOVERNING LAW. This First Amendment, the Rights Agreement
and each Right Certificate issued thereunder shall be deemed to be a contract
under the laws of the State of Minnesota and for all purposes shall be
governed by and construed in accordance with the laws of such State
applicable to contracts to be made and performed entirely within such State.

Section 4. COUNTERPARTS. This First Amendment may be executed in any
number of counterparts and each such counterpart shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed, as of the day and year first above written.

DAMARK INTERNATIONAL, INC.

/s/ Mark A. Cohn
-------------------------------------------
By: Mark A. Cohn, Chairman, President and
Chief Executive Officer

NORWEST BANK MINNESOTA, N.A.

/s/ Karri Van Dell
-------------------------------------------
By: Karri Van Dell, Officer

<PAGE>

DAMARK INTERNATIONAL, INC.

1991 STOCK OPTION PLAN
(AS AMENDED)

______________________________

PART I

PURPOSES; DEFINITIONS; SHAREHOLDER APPROVAL;
RESERVATION OF SHARES; AND PARTICIPATION IN PLAN

ARTICLE I

Purposes

1.1 PURPOSES OF PLAN. The purpose of this Damark International, Inc. 1991
Stock Option Plan, as amended, (the "Plan") is to provide incentives to
employees of the Company and/or any Subsidiary who contribute, and are expected
to contribute, to the success of the Company and any Subsidiary, to provide a
means of rewarding outstanding performance, and to enhance the interest of such
employees in the Company's continued success and progress by providing them a
proprietary interest in the Company. Further, this Plan is designed to enhance
the Company's ability to maintain a competitive position in attracting and
retaining qualified personnel necessary for the continued success and progress
of the Company.

ARTICLE II

Definitions

2.1 Certain terms used herein shall have the meaning below stated, subject
to the provisions of Section 7.1.

"Board" or "Board of Directors" means the Board of Directors of the
Company.

"Code" means the Internal Revenue Code of 1986, as amended.

"Committee" means the committee appointed by the Board to administer this
Plan pursuant to Article VII or, if no Committee is appointed by the Board,
means the Board.

"Common Stock" means, subject to the provisions of Section 9.3, the
presently authorized Class A Common Stock of the Company, par value $.01 per
share.

"Company" means Damark International, Inc., a Minnesota corporation.

<PAGE>

"Disability" means (subject to Section 6.2) a physical or mental impairment
of sufficient severity such that an Employee is permanently unable to continue
his employment with the Company as determined by the Committee.

"Employee" means an employee (including an officer) of the Company or of
any Subsidiary of the Company.

"Fair Market Value" means the fair market value of the Company's Common
Stock as determined by the Committee on the basis of available prices for such
Common Stock or in such manner as may be authorized by applicable regulations
under the Code.

"Incentive Stock Option" means an option to purchase Common Stock, granted
by the Company to an Employee pursuant to Section 5.1, which is intended to meet
the requirements of Section 422A of the Code and which is designated at the time
of the award of an Incentive Stock Option.

"Non-Qualified Option" means an option to purchase Common Stock, granted by
the Company to an Optionee pursuant to Section 5.1, which is not an Incentive
Stock Option.

"Option" means an Incentive Stock Option or a Non-Qualified Option.

"Optionee" means the holder of an Option granted under the Plan.

"Plan" means the Damark International, Inc. 1991 Stock Option Plan, as set
forth herein and as from time to time amended.

"Subsidiary" means a subsidiary or parent corporation, as defined in
Section 425(e) and (f) of the Code, with respect to the Company.

"1933 Act" means the Securities Act of 1933, as amended.

ARTICLE III

Shareholder Approval; Reservations of Shares

3.1 SHAREHOLDER APPROVAL. This Plan as amended by the Board of Directors
on January 26, 1994 shall be subject to approval by the affirmative vote of the
holders of a majority of the Company's Common Stock at a meeting of
shareholders, which approval must be obtained no later than January 25, 1995.

3.2 SHARES RESERVED UNDER PLAN. Subject to adjustment under the
provisions of Section 9.3 hereof, the maximum number of shares of Common Stock
which may be issued and sold under this Plan is 1,600,000 shares. Such shares
may be either authorized and unissued shares or shares issued and thereafter
acquired by the Company. Shares issued pursuant to this Plan shall be subject
to all applicable provisions of the Articles of Incorporation and Bylaws of the
Company in existence at the time of issuance of such shares and at all times
thereafter. If Options granted under this Plan

<PAGE>

shall be exercised or shall terminate or cease to be exercisable by reason of
expiration, surrender for cancellation or otherwise without having been
exercised, new Options may be granted under this Plan covering the number of
shares to which such exercise, termination or cessation relates.

ARTICLE IV

Participation in Plan

4.1 ELIGIBILITY TO RECEIVE OPTIONS. Options under this Plan may be
granted only to Employees who are employed by the Company or a Subsidiary on the
date the Option is granted and who the Committee believes are in a position to
make an important contribution to the success of the Company, all as determined
by the Committee.

4.2 PARTICIPATION NOT GUARANTEE OF EMPLOYMENT. Nothing in this Plan or in
the instrument evidencing the grant of an Option shall in any manner be
construed to limit in any way the right of the Company or a Subsidiary to
terminate an Employee's employment at any time without regard to the effect of
such termination on any rights such Employee would otherwise have under this
Plan, or give any right to such an Employee to remain employed by the Company or
a Subsidiary in any particular position or at any particular rate of
compensation.

PART II

OPTIONS;
TERMINATION OF EMPLOYMENT AND DEATH

ARTICLE V

Options

5.1 GRANTS OF OPTIONS.

(a) GRANT. The Committee may grant Incentive Stock Options and/or
Non-Qualified Options to Employees, subject to the limitations provided in
Section 5.1(f) and Section 7.1. All Options under this Plan shall be granted
within ten years of March 20, 1991, the date on which this Plan was adopted by
the Board of Directors subject to approval of the Plan by shareholders.

(b) OPTION PRICE. The purchase price per share of Common Stock under
each Incentive Stock Option and Non-Qualified Option shall be determined by the
Committee but shall be not less than 100% of the Fair Market Value per share of
such Common Stock on the date the Option is granted for Incentive Stock Options
and 85% of the Fair Market Value per share of such Common Stock on the date the
Option is granted for Non-Qualified Options. The purchase price per share may
be subject to adjustment in accordance with the provisions of Section 9.3
hereof.

<PAGE>

(c) OPTIONS AGREEMENTS. Options shall be evidenced by option
agreements in such form and containing such terms and conditions as the
Committee shall approve, which terms and conditions need not be the same for
all Options.

(d) OPTIONS NONTRANSFERABLE. An Option granted under this Plan shall
by its terms be nontransferable by the Optionee other than by will or the laws
of descent and distribution, and, during the lifetime of the Optionee, shall be
exercisable only by such Optionee. No transfer of an Option by an Optionee by
will or by the laws of descent and distribution shall be effective to bind the
Company unless the Company shall have been furnished with written notice thereof
and a copy of the will and/or such other evidence as the Committee may determine
necessary to establish the validity of the transfer.

(e) SUBSTITUTION AND CANCELLATION. The Committee, in its sole
discretion, may grant to an Optionee who has been granted an Option under
this Plan, in exchange for the surrender and cancellation of such Option, a
new Option having a purchase price lower (or higher) than the purchase price
provided in the Option so surrendered and cancelled and containing such other
terms as the Committee may deem appropriate, subject to Section 5.1(b) and
such other limitations or restrictions with respect to an Incentive Stock
Option as may be imposed by the Code.

(f) ANNUAL PER-EMPLOYEE LIMITATION. The number of shares of
Common Stock subject to all Options granted to any Employee during any
calendar year shall not exceed 150,000 shares.

(g) CHANGE OF CONTROL. Upon a Change of Control (as defined
herein) all of the shares of Common Stock subject to Options granted under
this Plan shall vest and become exercisable immediately at the time of a
Change of Control provided that the optionee is employed by the Company at
such time. For purposes of this paragraph, a "Change of Control" shall be
deemed to occur if (i) any "Person" (as such term is used in Sections 13(d)
and 14(d) of the Securities and Exchange Act of 1934, as amended, except that
such term shall not include the Company or any of its subsidiaries, any
employee benefit plan of the Company or a subsidiary, Mark A. Cohn or any
entity which reports beneficial ownership of the Company's outstanding
securities on Schedule 13G pursuant to Regulation 240.13d-1 promulgated under
the Exchange Act) becomes a beneficial owner, directly or indirectly, of
securities of the Company representing 35% of more of the voting power of all
of the Company's then outstanding securities, (ii) a merger, consolidation or
other corporation reorganization of the Company is consummated and the
shareholders of the Company immediately prior to the consummation of such
transaction own less than 50% of the voting power of the outstanding shares
of the entity resulting from such transaction immediately after the
consummation of such transaction, or (iii) all or substantially all of the
assets or business of the Company are sold.

5.2 EXERCISE.

(a) TERM OF OPTIONS; VESTING; AND EXERCISE. The term of each
Option granted under this Plan shall not exceed ten (10) years from the date
of grant. An Option granted under this Plan shall become vested and
exercisable at such rate and on such conditions as the Committee shall
determine at the time such Option is granted.

<PAGE>

(b) EXERCISE; PAYMENT ON EXERCISE. Options shall be exercised by
delivering to the Company an exercise notice in the form prescribed by the
Committee. No shares of Common Stock shall be issued on the exercise of an
Option unless paid for in full at the time of purchase as provided in the
next sentence and until the provisions of 9.4 shall have been satisfied.
Payment for shares of Common Stock purchased upon the exercise of an Option
shall be made (i) in cash, or (ii) the following alternative forms of
payment: (A) in whole or in part in shares of Common Stock held by the
Optionee for at least six months and valued at the then Fair Market Value
thereof, or (B) by delivery to the Company of irrevocable instructions to the
Optionee's broker, which instructions and broker shall be satisfactory to the
Company, to promptly deliver to the Company the total purchase price for the
shares of the Option being exercised from the sale proceeds for such shares
or the loan proceeds for such shares or any other securities which the
Optionee may have in his account with such broker, and the Company will
deliver such shares directly to such broker in accordance with such
procedures as the Committee may establish, which alternative forms of payment
may be permitted by the Committee at the time the Option is granted or at any
time thereafter during the term of the Option. Stock certificates for the
shares of Common Stock so paid for will be issued and delivered to the person
entitled thereto only at the Company's office in Minneapolis, Minnesota. No
Optionee shall have any rights as a shareholder with respect to any share of
Common Stock covered by an Option unless and until such Optionee shall have
become the holder of record of such share and, except as otherwise permitted
in Section 9.3 hereof, no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property or distributions
or other rights) in respect of such share for which the record date is prior
to the date on which such Optionee shall have become the holder of record
thereof.

(c) DISSOLUTION, LIQUIDATION, ETC. If at any time after an Option
has become exercisable and prior to its exercise and expiration, a voluntary
dissolution, liquidation (other than a liquidation into another corporation
which agrees to continue this Plan) or winding up of the affairs of the
Company shall be proposed, the Company shall cause notice in writing to be
mailed to each person holding an Option under this Plan, which notice shall
be mailed not less than twenty days prior to the closing of the transfer
books of the Company or the record date for determination of the holders of
Common Stock of the Company entitled to participate in such dissolution,
liquidation or winding up, as the case may be, to the end that during such
notice period the holder of any Option, to the extent that the same is then
exercisable by such holder, subject to the terms of Article V hereof, may
purchase Common Stock in accordance with the terms of the Option and be
entitled, in respect of the number of shares so purchased, to all the rights
of the other holders of Common Stock of the Company with respect to such
proposed dissolution, liquidation or winding up of the affairs of the
Company. Each Option at the time outstanding and all rights thereunder shall
terminate at the close of business on the twentieth day after mailing of such
notice to the holder of such Option or on the record date for determination
of holders of Common Stock entitled to participate in such dissolution,
liquidation or winding up, whichever date is later.

(d) EXERCISE OF OPTIONS. In the event that an Optionee exercises
Options, such Optionee shall comply with all requirements set forth in the
option agreement for such Options in connection with the purchase of shares
of Common Stock under this Plan.

5.3 INCENTIVE STOCK OPTIONS.

<PAGE>

(a) ANNUAL LIMITATION. In no event shall any Optionee be granted
an Incentive Stock Option under this Plan or any other plan of the Company or
any Subsidiary if such option would, during the calendar year in which the
option first becomes exercisable when combined with other Incentive Stock
Options which first become exercisable in such calendar year, entitle such
Optionee, to purchase shares of Common Stock or shares of any Subsidiary
having an aggregate fair market value (determined as of the time such option
or options were granted) in excess of $100,000. In the event an option
granted hereunder is designated an Incentive Stock Option and exceeds the
limitations set forth in this Section 5.4(a), whether at the time of grant or
thereafter, such option shall be an Incentive Stock Option only to the extent
permitted hereby and the balance thereof shall be a Non-Qualified Option for
the purposes of this Plan.

(b) INCENTIVE STOCK OPTIONS GRANTED TO TEN PERCENT SHAREHOLDERS.
No Incentive Stock Option shall be granted to any Employee who owns, directly
or indirectly pursuant to Section 425(d) of the Code, stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Subsidiary, unless at the time such Incentive
Stock Option is granted, the price of the Incentive Stock Option is at least
110% of the Fair Market Value of the Common Stock subject to the Incentive
Stock Option and such Incentive Stock Option, by its terms, is not
exercisable after the expiration of five (5) years from the date such
Incentive Stock Option is granted.

(c) NOTICE. Each Optionee shall give prompt notice to the Company
of any disposition of shares acquired upon exercise of an Incentive Stock
Option if such disposition occurs within either two years after the date of
grant or one year after the date of transfer of such shares to the Optionee
upon the exercise of such Incentive Stock Option.

(d) CONSENT. To the extent appropriate to avoid a "modification"
or other event described in Section 425(h) of the Code, a Optionee's rights
under an Incentive Stock Option (including the rights to pay the exercise
price in Common Stock) shall be set forth in the option agreement for such
Option entered into at the date of grant, so as to preclude any requirement
that further Committee consent be given after the date of grant.

ARTICLE VI

Termination of Employment

6.1 TERMINATION OF EMPLOYMENT. Unless earlier terminated in accordance
with its terms, an Option shall terminate 90 days after any termination of
the Optionee's employment with the Company or any Subsidiary for any reason
other than as a result of the death or disability of the Optionee or, in the
case of death or disability of any Optionee, 120 days after the death or the
termination of the Optionee's employment due to disability.

6.2 EMPLOYMENT. For all purposes of this Plan, and any Option granted
hereunder, "employment" shall be defined in accordance with the provisions of
Section 1.421-7(h) of the Income Tax Regulations (or any successor
regulations).

<PAGE>

PART III

ADMINISTRATION, AMENDMENT AND TERMINATION
OF PLAN; MISCELLANEOUS

ARTICLE VII

Administration of Plan

7.1 THE COMMITTEE. This Plan shall be administered by a Committee of
the Board of Directors of two or more persons, each of whom shall be a member
of the Board and shall be a "disinterested person" within the meaning of Rule
16b-3(c)(i) of the Securities and Exchange Commission as in effect on
January 26, 1994, and shall be appointed by, and serve at the pleasure of, the
Board. No person shall serve as a member of the Committee if such person is
eligible, or had been eligible at any time within one year prior to
appointment as a member, for selection as a person to whom stock may be
allocated or to whom Options may be granted under this Plan or any other plan
of the Company or any of its affiliates entitling the participants therein to
acquire stock or stock options of the issuer or any of its affiliates. A
majority of the Committee shall constitute a quorum thereof and the actions
of a majority of the Committee at a meeting at which a quorum is present, or
actions unanimously approved in writing by all members of the Committee,
shall be the actions of the Committee. Vacancies occurring on the Committee
shall be filled by the Board. The Committee shall have full and final
authority to interpret this Plan and the agreements evidencing Options
granted hereunder (which agreements need not be identical), to prescribe,
amend and rescind rules and regulations, if any, relating to this Plan and to
make all determinations necessary or advisable for the administration of this
Plan. The Committee's determination in all matters referred to herein shall
be conclusive and binding for all purposes and upon all persons including,
but without limitation, the Company, the shareholders of the Company, the
Committee and each of the members thereof, and the Employees and the
Optionees, and their respective personal representatives, heirs and assigns.

7.2 LIABILITY OF COMMITTEE. No member of the Committee shall be liable
for anything done or omitted to be done by such member or by any other member
of the Committee in connection with this Plan, except for the willful
misconduct or gross negligence of such member. The Committee shall have
power to engage outside consultants, auditors or other professional help to
assist in the fulfillment of the Committee's duties under this Plan at the
Company's expense.

7.3 DETERMINATIONS OF THE COMMITTEE. In making its determinations
concerning the Employees, who shall receive Options as well as the number of
shares to be covered thereby and time or times at which they shall be
granted, the Committee shall take into account the nature of the services
rendered by the respective Employees and their past, present, and potential
contribution to the Company's success and such other factors as the Committee
may deem relevant. The Committee shall also determine the form of option
agreements to be issued under this Plan and the terms and conditions to be
included therein, provided such terms and conditions are not inconsistent
with the terms of this Plan. In its discretion or in accordance with a
direction from the Board, the

<PAGE>

Committee may waive any provisions of any option agreement, provided such
waiver is not inconsistent with the terms of this Plan as then in effect.

ARTICLE VIII

Amendment and Termination of Plan

8.1 AMENDMENT OF PLAN.

(a) GENERALLY. The Plan may be amended at any time and from time
to time by the Board of Directors of the Company but no amendment which (i)
increases the aggregate number of shares of Common Stock which may be issued
and sold under this Plan other than adjustments pursuant to Section 9.3, (ii)
decreases the minimum option price provided in this Plan, (iii) extends the
period during which Options may be granted under this Plan, or (vi) changes
the class of Employees eligible to receive Options, shall be effective unless
and until the same is approved by the affirmative vote, in person or by
proxy, of the holders of a majority of the shares of Class A and Class B
Common Stock of the Company and Series A and Series B Preferred Stock of the
Company present and entitled to vote at a meeting held to take such action at
which a quorum is present. No termination or amendment of this Plan, without
the consent of the holder of any Option then existing, may terminate such
holder's Option or materially and adversely affect such holder's rights
thereunder.

(b) AMENDMENTS RELATING TO INCENTIVE STOCK OPTIONS. To the extent
applicable, this Plan is intended to permit the issuance of Incentive Stock
Options in accordance with the provisions of Section 422A of the Code. The
Plan may be modified or amended at any time, both prospectively and
retroactively, and in such manner as to affect Incentive Stock Options
previously granted (after taking into account Section 425(h) of the Code,
relating to "modifications," etc.), if such amendment or modification is
necessary for this Plan and the Incentive Stock Options granted hereunder to
qualify under said provisions of the Code.

8.2 TERMINATION. The Board of Directors of the Company may at any time
terminate this Plan as of any date specified in a resolution adopted by the
Board. If not earlier terminated, this Plan shall terminate on the tenth
anniversary of the effective date of the Plan. No Options may be granted
after this Plan has terminated. After this Plan shall terminate, the
function of the Committee will be limited to supervising the administration
of Options previously granted.

<PAGE>

ARTICLE IX

Miscellaneous Provisions

9.1 RESTRICTIONS UPON GRANT OF OPTIONS. The registration or
qualification under any Federal or state law of any shares of Common Stock to
be granted pursuant to this Plan (whether to permit the grant of Options or
the resale or other disposition of any such shares of Common Stock by or on
behalf of the Optionees receiving such shares) may be necessary or desirable
and, in any such event, delivery of the certificates for such shares of
Common Stock shall, if the Board of Directors, in its sole discretion, shall
determine, not be made until such listing, registration or qualification
shall have been completed.

9.2 RESTRICTIONS UPON RESALE OF UNREGISTERED STOCK. If the shares of
Common Stock that have been transferred to a Optionee pursuant to the terms
of this Plan are not registered under the 1933 Act, pursuant to an effective
registration statement, such Optionee, if the Committee shall deem it
advisable, may be required to represent and agree in writing (i) that any
shares of Common Stock acquired by such Optionee pursuant to this Plan will
not be sold except pursuant to an effective registration statement under the
1933 Act, or pursuant to an exemption from registration under the 1933 Act
and (ii) that such Optionee is acquiring such shares of Common Stock for such
Optionee's own account and not with a view to the distribution thereof.

9.3 ADJUSTMENTS. In the event of any change (through recapitalization,
merger, consolidation, stock dividend, split-up, or amount of the Company's
capital stock (or any other transaction described in Section 425(a) of the
Code) after any Option is granted hereunder and prior to the exercise
thereof, the Option, to the extent that it has not been exercised, shall
entitle the holder to such number and kind of securities as such holder would
have been entitled to had such holder actually owned the stock subject to the
Option at the time of the occurrence of such change. If any such event should
occur, the number of shares subject to Options which are authorized to be
issued hereunder, but which have not been issued, shall be similarly
adjusted. If any other event shall occur, prior to the exercise of an Option
granted to an Optionee hereunder, which shall increase or decrease the amount
of capital stock outstanding and which the Committee, in its sole discretion,
shall determine equitably requires an adjustment in the number of shares
which the holder should be permitted to acquire, such adjustment as the
Committee shall determine may be made, and when so made shall be effective
and binding for all purposes of this Plan.

9.4 WITHHOLDING OF TAXES. Each Optionee who exercises an Option to
purchase Common Stock shall, prior to the issuance of any shares, pay to the
Company, or make arrangements (including withholding of shares of Common
Stock purchased upon exercise of the Option at the Fair Market Value thereof)
satisfactory to the Committee regarding payment of, any taxes of any kind
required by law to be withheld with respect to the transfer to such Optionee
of such shares of Common Stock and/or amounts upon exercise of such Option.

9.5 USE OF PROCEEDS. The proceeds from the sale of Common Stock
pursuant to Options granted under this Plan shall constitute general funds of
the Company and may be used for such corporate purposes as the Company may
determine.

<PAGE>

9.6 OTHER GRANTS. Options may be granted under this Plan from time to
time in substitution for stock options held by employees of other
corporations who are or are about to become employees of the Company or a
Subsidiary as the result of a merger or consolidation of the employing
corporation with the Company or a Subsidiary, or the acquisition by the
Company or a Subsidiary of the assets of the employing corporation, or the
acquisition by the Company or a Subsidiary of stock of the employing
corporation as the result of which it becomes a Subsidiary of the Company.
The terms and conditions of the substituted Options so granted may vary from
the terms and conditions set forth in Part II to such extent as the Committee
may deem appropriate to conform, in whole or in part, to the provisions of
the substituted stock incentives.

9.7 OTHER BENEFITS. Nothing contained herein shall prevent the Company
from establishing other incentive plans in which Employees under the Plan may
also participate. No award under this Plan shall be considered as
compensation in calculating any insurance, pension or other benefit for which
the recipient is eligible unless any such insurance, pension or other benefit
is granted under a plan which expressly provides that compensation under this
Plan (and specifying the type of such compensation) shall be considered as
compensation under such plan.

<PAGE>

DAMARK INTERNATIONAL, INC.

STOCK OPTION AGREEMENT

THIS OPTION AGREEMENT made on December 17, 1998, by and between DAMARK
INTERNATIONAL, INC., a Minnesota corporation (the "Company"), and Stephen J.
Hemsley (the "Optionee");

W I T N E S S E T H:

WHEREAS, the Optionee serves as a member of the Company's Board of
Directors; and

WHEREAS, the Company desires to afford the Optionee an opportunity to
purchase shares of its Class A common stock, par value $.01, (the "Common
Stock"),

NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth and for other good and valuable consideration, the
parties hereto agree as follows:

1. GRANT OF OPTION. The Company hereby grants to the Optionee the
right and option (hereinafter called the "Option") to purchase all or any
part of an aggregate of twenty thousand (20,000) shares of Common Stock (the
"Option Shares") (such number being subject to adjustment as provided in
Paragraph 4 hereof) on the terms and conditions herein set forth.

2. PURCHASE PRICE. Subject to the provisions of Paragraph 4 hereof,
the purchase price for the Option Shares shall be $5.781 per share, which has
been determined to be the fair market value of the Option Shares at the date
of grant of the Option.

3. TERM AND VESTING OF OPTION. The Option shall expire (the
"Expiration Date") upon the earlier to occur of: (a) the close of business
on the tenth anniversary of the date hereof or (b) one (1) year after the
date on which the Optionee is no longer a director of the Company. Prior to
the Expiration Date, the Optionee shall be entitled to exercise the Option as
to all or any part of the Option Shares for which the Option may be exercised
at any time after (i) the first anniversary of the date hereof for one-third
of the total number of Option Shares if the Optionee is then a director of
the Company, (ii) the second anniversary of the date hereof for one-third of
the total number of Option Shares if the Optionee is then a director of the
Company, and (iii) the third anniversary of the date hereof for one-third of
the total number of Option Shares if the Optionee is then a director of the
Company; provided, however, in the event of a sale of all or substantially
all of the assets of the Company or a merger, consolidation or other
reorganization of the Company in which the shareholders of the Company
immediately prior to such merger, consolidation or reorganization constitute
less than eighty percent (80%) of the voting power of the surviving
corporation, all of the Option Shares shall be exercisable upon the
occurrence of such event. Notwithstanding the foregoing, the Option may in no
event be exercised by anyone to any extent in the event of a voluntary
dissolution, liquidation or winding up of the affairs of the Company, after
the close of business on the later of (i) the date of the twentieth day after
the mailing of written notice of such

<PAGE>

dissolution, liquidation or winding up, and (ii) the record date for
determination of holders of Common Stock entitled to participate therein.

4. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. If all or any
portion of this Option shall be exercised subsequent to any share dividend,
recapitalization, merger, consolidation, exchange of shares or reorganization
as a result of which shares of any class shall be issued in respect to
outstanding Common Stock, or if Common Stock shall be changed into the same
or a different number of shares of the same or another class or classes, the
person so exercising this Option shall receive, for the aggregate price paid
upon such exercise, the aggregate number and class of shares to which they
would have been entitled if Common Stock (as authorized at the date hereof)
had been purchased at the date hereof for the same aggregate price (on the
basis of the price per share set forth in Paragraph 2 hereof) and had not
been disposed of. No fractional share shall be issued upon any such exercise
and the aggregate price paid shall be appropriately reduced on account of any
fractional share not issued.

5. METHOD EXERCISE. Subject to the terms and conditions of this
Agreement, the Option may be exercised by written notice to the Company at
its principal office and place of business in the State of Minnesota. Such
notice shall state the election to exercise the Option and the number of
Option Shares in respect of which it is being exercised, and shall be signed
by the person so exercising the Option. Such notice shall be accompanied by
the payment of the full purchase price of such Option Shares and the delivery
of such payment to the Treasurer of the Company. The certificate for the
Option Shares as to which the Option shall have been so exercised shall be
registered in the name of the person exercising the Option. If the Optionee
shall so request in the notice exercising the Option, the certificate shall
be registered in the name of the Optionee and another person jointly with
right of survivorship, and shall be delivered as provided above to or upon
the written order of the person exercising the Option. In the event the
Option shall be exercised by any person other than Optionee, such notice
shall be accompanied by appropriate proof of the right of such person to
exercise the Option.

6. RESERVATION OF SHARES. The Company shall, at all times during the
term of the Option, reserve and keep available such number of shares of its
capital stock as will be sufficient to satisfy the requirements of this
Agreement, and shall pay all original issue and transfer taxes with respect
to the issue and transfer of Option Shares pursuant hereto, and all other
fees and expenses necessarily incurred by the Company in connection therewith.

7. NO RIGHTS AS STOCKHOLDER. The holder of the Option shall not have
any of the rights of a stockholder with respect to the Option Shares covered
by the Option except to the extent that one or more certificates for shares
shall be delivered to him upon the due exercise of the Option.

8. NO REGISTRATION REQUIREMENTS AND INVESTMENT PURPOSE. The Company
shall not be deemed by reason of issuance of any shares under the Option to
have any obligation to register such shares under the Securities Act of 1933,
as amended, or maintain in effect any registration of such Option Shares. In
addition, unless the Option Shares have been so registered, the Option is
granted on the condition that the acquisition of shares hereunder shall be
for investment purposes only and the person acquiring Option Shares upon
exercise of the Option must bear the economic risk of the investment for an
indefinite period of time since the shares so acquired cannot be sold unless
they

<PAGE>

are subsequently registered or an exemption from such registration is
available. Optionee agrees that a legend may be placed on the stock
certificates acknowledging the restrictions on subsequent distribution of the
shares issued upon exercise of this Option.

9. MISCELLANEOUS. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their heirs, successors, assigns and
representatives and shall be governed by the laws of the State of Minnesota.

IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and
year first above written.

DAMARK INTERNATIONAL, INC.

By /s/ Mark A. Cohn
------------------------------------------
Mark A. Cohn, Chairman and
Chief Executive Officer

/s/ Stephen J. Hemsley
------------------------------------------
Stephen J. Hemsley

<PAGE>

DAMARK INTERNATIONAL, INC.
RESTATED 1998 NON-EMPLOYEE
DIRECTOR STOCK PURCHASE PLAN

1. PURPOSE

The purpose of the Damark International, Inc. 1998 Non-Employee Director
Stock Purchase Plan (the "Plan") is to secure for Damark International, Inc.
(the "Corporation") and its stockholders the benefits of the incentive inherent
in increased ownership of common stock, par value $.01 per share (the "Common
Stock"), of the Corporation by the non-employee members of the Board of
Directors (the "Board") of the Corporation. It is expected that such ownership
will provide non-employer Directors with a more direct stake in the future
welfare of the Corporation and encourage them to remain directors of the
Corporation.

2. ADMINISTRATION

This Plan shall be administered by the Board or by such person or
persons designated by the Board. (All references herein to the "Board" shall
be deemed to include the Board's designees). The Board shall have all the
powers vested in it by the terms of this Plan. Subject to the provisions of
this Plan, the Board shall have the power to construe this Plan, to determine
all questions arising hereunder, and to adopt and amend such rules and
regulations for the administration of this Plan as it may deem desirable.
Any decision of the Board in the administration of this Plan, as described
herein, shall be final and conclusive. The Board may act only by a majority
of its members (or a majority of the members of any Committee designated by
the Board to administer the Plan). The members of the Board may authorize any
one or more of their number or the Secretary or any other officer of the
Corporation to execute, prepare and deliver documents on behalf of the Board.
No member of the Board shall be liable for anything done or omitted to be
done by such member or by any other member of the Board in connection with
this Plan, except for such member's own willful misconduct or as expressly
provided by statute.

3. AMOUNT OF STOCK

The stock which may be issued and sold under this Plan shall not exceed
250,000 shares of Common Stock, subject to adjustment as provided in Section 7.
The Common Stock to be issued may be either authorized and unissued shares or
issued shares acquired by the Corporation.

4. ELIGIBILITY TO PURCHASE COMMON STOCK

Each non-employee Director shall be eligible to purchase shares of Common
Stock under this Plan in accordance with the procedures set forth in Section 5.

<PAGE>

5. PROCEDURE FOR PURCHASING COMMON STOCK

(a) Each non-employee Director shall have the right to purchase Common
Stock under this Plan by stating in a writing filed with the Manager-Financial
Reporting of the Corporation (the "Notice"), the number of shares of Common
Stock he wishes to purchase (the "Share Amount"), provided that the maximum
purchase by a Director in any month shall be 5,000 shares. The date such Notice
and a check in an amount equal to the then current Market Value of the Share
Amount are properly delivered to the Manager-Financial Reporting of the
Corporation is hereinafter referred to as the "Notice Delivery Date".

(b) The number of shares of Common Stock to be issued to a Director who
delivers the Notice to the Manager-Financial Reporting of the Corporation
specifying a Dollar Amount for his desired purchase shall be determined based on
the Market Value (as hereinafter defined in Section 6) of a share of Common
Stock on the Notice Delivery Date, subject to adjustment as provided in Section
7.

(c) In the event that Notices are received for an aggregate number of
shares in excess of the number of shares remaining available under this Plan
(after limiting purchases in any month as described in clause (a) above), any
Director shall receive that number of shares that bears the same ratio to total
available shares as that Director's requested shares bear to total requested
shares.

(d) The number of shares issued shall be rounded to the nearest whole
number, and any excess funds shall be returned to the Director. If the check
delivered pursuant to clause (a) is insufficient because of a change in the
Market Value of the Share Amount, the Director shall promptly pay the amount of
any insufficiency to the Company upon notice thereof.

6. PURCHASE PRICE

The purchase price per share shall be determined by averaging the last
reported sale price per share of the Common Stock for the twenty (20) trading
days preceding the Notice Delivery Date, subject to adjustment as provided in
Section 7.

7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

(a) If the outstanding Common Stock is hereafter changed by reason of
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, forward or reverse stock split, combination, exchange of shares, or
the like, or dividends payable in shares of the Common Stock, an appropriate
adjustment shall be made by the Board in the aggregate number of shares of
Common Stock available under this Plan and in the number of shares of Common
Stock issued under this Plan.

<PAGE>

(b) Any adjustment in the number of shares shall apply proportionately.
If a fraction of a share would result from any such adjustment, the
adjustment shall be revised to the next higher whole number of shares.

8. MISCELLANEOUS PROVISIONS

(a) Except as expressly provided for in this Plan, no Director or other
person shall have any claim or right to purchase Common Stock under this Plan.
Neither this Plan nor any action taken hereunder shall be construed as giving
any Director any right to be retained in the service of the Corporation or to
continue service as a Director.

(b) The Corporation shall not be obligated to deliver any shares of Common
Stock hereunder until they have been listed on each securities exchange on which
the Common Stock may then be listed, or until there has been qualification under
or compliance with such state or federal laws, rules or regulations as the
Corporation may deem applicable.

(c) It shall be a condition to the obligation of the Corporation to issue
shares of Common Stock that the Director pay to the Corporation, upon its
demand, such amount as shall equal the Purchase Price, and as may be requested
by the Corporation for the purpose of satisfying any liability to withhold
federal, state, local or foreign income or other taxes. If the amount requested
is not paid, the Corporation may refuse to issue shares of Common Stock.

(d) The expenses of this Plan shall be borne by the Corporation.

(e) To the extent not preempted by federal law, this Plan, and all
agreements hereunder, shall be construed in accordance with and governed by the
laws of the State of Minnesota.

9. AMENDMENT OR DISCONTINUANCE

The Plan may be amended at any time and from time to time by the Board as
the Board shall deem advisable including, but not limited to, amendments
necessary to qualify for any exemption or to comply with applicable law or
regulations.

10. COMPLIANCE WITH SECTION 16(b) OF THE ACT

It is the intent of the Corporation that this Plan and any Common Stock
issued hereunder satisfy and be interpreted in a manner that satisfies the
applicable requirements of Section 16(b) of the Securities Exchange Act of 1934,
as amended (the "Act"), and Rule 16b-3 thereunder, so that such persons will be
entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16
of the Act and will not be subjected to liability thereunder. If any provision
of this Plan would otherwise conflict with the intent expressed herein, that
provision, to the extent possible, shall be interpreted and deemed amended so as
to avoid such conflict. To the extent of any remaining irreconcilable conflict
with such intent, such provision shall be deemed void as applicable to persons
who are or may be subject to Section 16 of the Act.

<PAGE>

11. TERMINATION

The Plan shall terminate upon the earlier to occur of (a) the adoption of a
resolution of the Board terminating this Plan and (b) January 29, 2008.

12. EFFECTIVE DATE OF PLAN

The Plan shall be deemed effective as of January 30, 1998.

<PAGE>

DAMARK INTERNATIONAL, INC.

AMENDMENT TO STOCK OPTION AGREEMENT

THIS AMENDMENT TO STOCK OPTION AGREEMENT is made on February 10, 1999, by
and between DAMARK INTERNATIONAL, INC., a Minnesota corporation (the "Company"),
and Stephen J. Hemsley (the "Optionee"),

WHEREAS, pursuant to a grant by the Compensation Committee of the Board of
Directors of the Company, the Optionee was granted options to purchase 20,000
shares of the Company's Class A Common Stock at a purchase price of $5.781 per
share, which options vest equally on December 17 of 1999, 2000 and 2001, and the
option grant was documented by a Stock Option Agreement between the Company and
the Optionee dated December 17, 1998; and

WHEREAS, the Compensation Committee of the Board of Directors of the
Company has determined that the vesting of all of Optionee's unvested options
should be accelerated to vest as of February 10, 1999, the date of the
Committee's action,

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:

1. VESTING OF OPTIONS. Paragraph 3 of the above-described Stock Option
Agreement is hereby deleted in its entirety and a new paragraph 3 added to read
as follows:

"3. TERM AND VESTING OF OPTION. The Option shall expire (the
"Expiration Date") upon the earlier to occur of: (a) the close of
business on the tenth anniversary of the date hereof or (b) one (1)
year after the date on which the Optionee is no longer a director of
the Company. Prior to the Expiration Date, the Optionee shall be
entitled to exercise the Option as to all or any part of the Option
Shares for which the Option may be exercised at any time after
February 10, 1999. Notwithstanding the foregoing, the Option may in
no event be exercised by anyone to any extent in the event of a
voluntary dissolution, liquidation or winding up of the affairs of the
Company, after the close of business on the later of (i) the date of
the twentieth day after the mailing of written notice of such
dissolution, liquidation or winding up, and (ii) the record date for
determination of holders of Common Stock entitled to participate
therein."

2. CONFIRMATION OF AGREEMENTS. Except as set forth here, the
above-described Stock Option Agreements are in all other respects ratified
and confirmed and shall remain in full force and effect.

<PAGE>

IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and
year first above written.

DAMARK INTERNATIONAL, INC.

By: /s/ Mark A. Cohn
-----------------------------------
Mark A. Cohn, Chairman and
Chief Executive Officer

/s/ Stephen J. Hemsley
-----------------------------------
Stephen J. Hemsley

<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 Statements File Nos. 333-16137, 333-16139, 333-31771 and
333-31773.

/s/ ARTHUR ANDERSEN LLP

Minneapolis, Minnesota
March 10, 1999

<PAGE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that DAMARK INTERNATIONAL, INC., a
Minnesota corporation (the "Company"), and each of the undersigned directors
of the Company, hereby constitutes and appoints Mark A. Cohn (with full power
to him to act alone) its/his true and lawful attorney-in-fact and agent, for
it/him and on its/his behalf in its/his name, place and stead, in any and all
capacities to sign, execute, affix its/his seal thereto and file the Annual
Report on Form 10-K for the year ended December 31, 1998 under the Securities
Exchange Act of 1934, as amended, including any amendment or amendments
thereto, with all exhibits and any and all documents required to be filed
with respect thereto with any regulatory authority.

There is hereby granted to said attorney full power and authority to do
and perform each and every act and thing, requisite and necessary to be done
in respect of the foregoing as fully as it/he or itself/himself might or
could do if personally present, thereby ratifying and confirming all that
said attorney-in-fact and agent, may lawfully do or cause to be done by
virtue hereof.

This Power of Attorney may be executed in any number of counterparts,
each of which shall be an original, but all of which taken together shall
constitute one and the same instrument and any of the undersigned directors
may execute this Power of Attorney by signing any such counterpart.

IN WITNESS WHEREOF, DAMARK INTERNATIONAL, INC. has caused this Power of
Attorney to be executed in its name by its Chairman and Chief Executive
Officer on the 4th day of February, 1999.

DAMARK INTERNATIONAL, INC.

By /s/ Mark A. Cohn
-----------------------------------
Mark A. Cohn, Chairman
and Chief Executive Officer

<PAGE>

The undersigned directors of DAMARK INTERNATIONAL, INC. have hereunto
set their hands as of the 4th day of February, 1999.

/s/ Mark A. Cohn /s/ Thomas A. Cusick
- - ---------------------------------- ----------------------------------
Mark A. Cohn Thomas A. Cusick

/s/ Jack W. Eugster /s/ Stephen J. Hemsley
- - ---------------------------------- ----------------------------------
Jack W. Eugster Stephen J. Hemsley

/s/ Harold Roitenberg /s/ Ralph Strangis
- - ---------------------------------- ----------------------------------
Harold Roitenberg Ralph Strangis

/s/ Joel N. Waller
- - ----------------------------------
Joel N. Waller

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 49
<SECURITIES> 0
<RECEIVABLES> 49,369
<ALLOWANCES> 1,574
<INVENTORY> 40,055
<CURRENT-ASSETS> 107,074
<PP&E> 52,640
<DEPRECIATION> 22,490
<TOTAL-ASSETS> 140,347
<CURRENT-LIABILITIES> 106,285
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 34,001
<TOTAL-LIABILITY-AND-EQUITY> 140,347
<SALES> 484,416
<TOTAL-REVENUES> 484,416
<CGS> 311,157
<TOTAL-COSTS> 311,157
<OTHER-EXPENSES> 199,228
<LOSS-PROVISION> 5,024
<INTEREST-EXPENSE> 3,210
<INCOME-PRETAX> (29,720)
<INCOME-TAX> (10,105)
<INCOME-CONTINUING> (19,615)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,615)
<EPS-PRIMARY> (2.71)
<EPS-DILUTED> (2.71)

</TABLE>