DAMARK INTERNATIONAL INC, 10-Q, 2000-11-14

DAMARK INTERNATIONAL INC
10-Q, 2000-11-14
CATALOG & MAIL-ORDER HOUSES

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

FORM 10-Q

(Mark One)

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-19902

DAMARK INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)

Minnesota (State or other jurisdiction of incorporation or organization)		41-1551116 (IRS Employer Identification Number)
301 Carlson Parkway, Suite 201 Minneapolis, Minnesota 55305 (Address of principal executive offices)		952-258-2000 (Registrant's telephone number including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Act of 1934 during the preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

On November 3, 2000, there were 5,852,269 shares of Class A Common Stock and no shares of Class B Common Stock outstanding.

DAMARK INTERNATIONAL, INC.
INDEX

			Page
Part I.	FINANCIAL INFORMATION
	Item 1:	Financial Statements
		Consolidated Statements of Operations (unaudited) For the three and nine months ended September 30, 2000 and October 2, 1999	3
		Consolidated Balance Sheets As of September 30, 2000 (unaudited) and December 31, 1999	4
		Consolidated Statements of Cash Flows (unaudited) For the nine months ended September 30, 2000 and October 2, 1999	5
		Condensed Notes to Consolidated Financial Statements	6
	Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Part II.	OTHER INFORMATION
	Item 1:	Legal Proceedings	22
	Item 2:	Changes in Securities and Use of Proceeds	22
	Item 6:	Exhibits and Reports on Form 8-K	23
		Signature	24

DAMARK INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three months ended						Nine months ended
		September 30, 2000			October 2, 1999			September 30, 2000			October 2, 1999
		(Amounts in thousands except per share data)
Net revenues:
Product and other revenues		$	2,120		$	56,590		$	59,234		$	218,632
Membership and related revenues			31,766			35,996			101,954			95,628

	Total net revenues		33,886			92,586			161,188			314,260

Costs and expenses:
Costs of products sold			488			40,001			48,986			157,131
Operating and marketing expenses			26,871			41,403			106,263			120,697
General and administrative expenses			11,009			14,991			34,264			43,565
Restructuring charges			227			—			9,226			—

	Total costs and expenses		38,595			96,395			198,739			321,393

	Operating loss		(4,709	)		(3,809	)		(37,551	)		(7,133	)
Interest (income) expense, net			335			(205	)		812			339
Other expenses, net			216			22			375			153

	Loss before income taxes, extraordinary gain and cumulative effect of change in accounting		(5,260	)		(3,626	)		(38,738	)		(7,625	)
Income tax benefit			1,997			1,233			14,697			2,593

	Net loss before extraordinary gain and cumulative effect of change in accounting		(3,263	)		(2,393	)		(24,041	)		(5,032	)
Extraordinary gain on condemnation of land, net of taxes of $153			—			—			—			297
Cumulative effect of change in accounting, net of taxes of $8,703			—			—			(14,201	)		—

	Net loss		(3,263	)		(2,393	)		(38,242	)		(4,735	)
Beneficial conversion feature related to issuance of Series D Preferred Stock			(1,989	)		—			(1,989	)		—

	Net loss available to common shareholders	$	(5,252	)	$	(2,393	)	$	(40,231	)	$	(4,735	)

Loss per common share, basic and diluted:
	Loss available to common shareholders before extraordinary gain and cumulative effect of change in accounting	$	(0.91	)	$	(0.40	)	$	(4.54	)	$	(0.84	)
	Extraordinary gain		—			—			—			0.05
	Cumulative effect of change in accounting		—			—			(2.48	)		—

	Net loss available to common shareholders	$	(0.91	)	$	(0.40	)	$	(7.02	)	$	(0.79	)

Weighted average common shares outstanding			5,795			5,985			5,733			5,988

Pro forma amounts assuming retroactive application of Staff Accounting Bulletin No. 101:
	Net income (loss) available to common shareholders	$	(5,252	)	$	1,442		$	(26,030	)	$	(7,415	)

	Basic and diluted income (loss) per common share	$	(0.91	)	$	0.23		$	(4.54	)	$	(1.24	)

See accompanying condensed notes to consolidated financial statements.

DAMARK INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

ASSETS

				September 30, 2000			December 31, 1999
				(Amounts in thousands except per share data)
Current assets:
	Cash and cash equivalents			$	702		$	3,927
	Trade accounts receivable, net				47,140			43,847
	Merchandise inventories, net				—			30,739
	Deferred membership solicitation and catalog costs				42,569			15,186
	Deferred income taxes				1,360			1,360
	Officer note receivable				848			—
	Other				1,744			1,366

		Total current assets			94,363			96,425
Property and equipment, net					35,307			25,464
Officer note receivable					—			1,633
Other assets, net					61			465
Noncurrent deferred income taxes					26,071			2,059

		Total assets		$	155,802		$	126,046

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
	Accounts payable			$	16,894		$	30,568
	Accrued liabilities				54,432			41,312
	Deferred membership income, net				50,195			24,749
	Construction bridge loan				9,549			—
	Borrowings under revolving credit facility				11,763			—

		Total current liabilities			142,833			96,629

Series D redeemable convertible preferred stock, liquidation preference $25,000, net of unamortized discount of $4,050					15,950			—

Shareholders' (deficit) equity:
	Class A Common Stock, $.01 par, 20,000 shares authorized; 5,848 and 5,520 shares issued and outstanding at September 30, 2000 and December 31, 1999, respectively				58			55
	Class B Common Stock, $.01 par, 2,000 shares authorized; none issued or outstanding				—			—
	Class C Junior Participating Preferred Stock, $.01 par, 400 shares authorized; none issued or outstanding				—			—
	Common stock warrants				2,800			—
	Paid-in capital				57,651			54,610
	Accumulated deficit				(63,490	)		(25,248	)

		Total shareholders' (deficit) equity			(2,981	)		29,417

			Total liabilities and shareholders' (deficit) equity	$	155,802		$	126,046

See accompanying condensed notes to consolidated financial statements.

DAMARK INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

				Nine Months Ended
				September 30, 2000			October 2, 1999
				(Amounts in thousands)
OPERATING ACTIVITIES:
	Net loss			$	(38,242	)	$	(4,735	)
	Adjustments to reconcile net loss to net cash (used for) provided by operations:
		Extraordinary gain on condemnation of land			—			(297	)
		Cumulative effect of change in accounting, net			14,201			—
		Depreciation and amortization			9,872			5,792
		Deferred income taxes			(14,697	)		(2,595	)
		Loss on disposal of property and equipment			67			89
		Changes in working capital items:
			Trade accounts receivable, net		(3,293	)		17,069
			Merchandise inventories, net		30,739			16,356
			Other current assets		(4,461	)		(1,540	)
			Accounts payable and accrued liabilities		(11,266	)		(10,138	)
			Deferred membership income, net		(10,519	)		658

	Net cash (used for) provided by operations				(27,599	)		20,659

INVESTING ACTIVITIES:
	Property and equipment additions				(19,869	)		(2,631	)
	Proceeds from sale of property and equipment				741			1,027
	Repayment (issuance) of officer note receivable				652			(1,500	)
	Other, net				155			(126	)

	Net cash used for investing activities				(18,321	)		(3,230	)

FINANCING ACTIVITIES:
	Borrowings (payments) under revolving credit facility, net				11,763			(5,140	)
	Repurchase and retirement of common stock				—			(4,805	)
	Net proceeds from issuance of bridge loan				9,549			—
	Net proceeds from issuance of Series D Preferred Stock and warrants				18,950			—
	Net proceeds from employee exercise of stock options and issuance of stock				2,433			852

	Net cash provided by (used for) financing activities				42,695			(9,093	)

	Net (decrease) increase in cash and cash equivalents				(3,225	)		8,336
	Cash and cash equivalents, beginning of period				3,927			49

	Cash and cash equivalents, end of period			$	702		$	8,385

SUPPLEMENTAL CASH FLOW INFORMATION:
	Interest paid during the period			$	661		$	396

	Income taxes paid (refunded) during the period			$	834		$	(4,368	)

See accompanying condensed notes to consolidated financial statements.

DAMARK INTERNATIONAL, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared by Damark International, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The information furnished in these financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 1999 Annual Report on Form 10-K filed with the SEC.

The Company's fiscal year ends on December 31; however, each quarter ends on the last Saturday of a thirteen-week period. As a result, the operating results for the first nine months of 2000 and 1999 included 274 and 275 days, respectively. Management believes that the difference in days does not materially affect the comparability of financial results for the periods presented.

In January 2000, the Company announced that it would wind-down its non-member catalog marketing and merchandising activities. Going forward, catalog mailings will be limited to members of the Company's shopping clubs. The wind-down was substantially completed by the end of the second quarter. The Company will continue to operate its membership services business under the name Provell. The order capture, product fulfillment and customer service capabilities developed by the Company were redeployed into a subsidiary named ClickShip Direct, Inc. ("ClickShip"), which was formed in January 2000. The Company had planned to separate ClickShip as an independent company during the third or fourth quarter of 2000. However, market conditions for companies in the outsourced fulfillment and customer care segment have significantly deteriorated during 2000 and financing has not been readily available to ClickShip. Consequently, the Company is exploring all options relating to ClickShip, including raising sufficient capital to separate the companies and other alternatives. A decision on ClickShip is expected by December 31, 2000 and there is no assurance as to which alternative the Company will pursue.

Note 2. Cumulative Effect of Change in Accounting Principle

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101—Revenue Recognition in Financial Statements ("SAB 101"). The Company adopted SAB 101 effective January 1, 2000 and recorded a non-cash charge of $22.9 million ($14.2 million net of taxes). Prior to the adoption of SAB 101, membership revenues with respect to clubs for which the Company had an ongoing obligation were recorded on the balance sheet net of direct solicitation and other costs and amortized into income over the membership period, generally twelve months. Revenues and related expenses on clubs for which the Company had no significant ongoing obligation were recognized immediately, net of an accrual for future anticipated returns, once any trial period had elapsed.

Effective January 1, 2000 with the adoption of SAB 101, the Company defers all membership revenues, net of estimated returns, and amortizes them into revenue on a straight line basis after the trial period has elapsed and over the remaining membership period, generally eleven months. The allowance for returns is based on the Company's most recent return experience and is updated each

quarter. Most of the Company's members can return their memberships at any time prior to expiration of the membership term and receive either a pro-rated or full refund for the remaining portion of the membership period. Third quarter and nine month activity in the deferred membership income and accrued membership returns accounts is summarized as follows (000's):

Quarter ended September 30, 2000:

	Balance at July 1, 2000		Additions		Reductions			Adjustments(1)			Balance at Sept. 30, 2000
Deferred membership income	$	46,549	$	32,888	$	(29,722	)	$	480		$	50,195

Accrued membership returns	$	23,539	$	36,630	$	(25,143	)	$	(585	)	$	34,441

Nine months ended September 30, 2000:

	Balance at Dec. 31, 1999		Additions		Reductions			Adjustments(2)		Balance at Sept. 30, 2000
Deferred membership income	$	24,749	$	76,456	$	(92,665	)	$	41,655	$	50,195

Accrued membership returns	$	16,911	$	91,968	$	(77,575	)	$	3,137	$	34,441

(1): Adjustments relate primarily to reclassifications between accrued returns and deferred income.
(2): Adjustments relate primarily to the initial adoption of SAB 101.

During the third quarter and first nine months of 2000, the Company recognized $6.0 million and $33.4 million, respectively, of net revenue which was included as a component of the "cumulative effect of change in accounting" adjustment.

In accordance with SAB 101, the cost of membership kits and vouchers are expensed when distributed. Refundable fees for commissions paid to clients and transaction processing costs, net of expected refunds, together with direct response advertising costs (i.e., telemarketing and direct mail), are capitalized as part of deferred membership solicitation costs and are amortized as expense in the same manner in which the related revenue is recognized. Other direct and indirect costs incurred with enrolling customers are expensed when incurred. Membership solicitation costs incurred to obtain new members are generally less than the initial fee. However, if membership solicitation costs were to exceed membership fees, an adjustment would be made to the extent of any impairment.

Effective with the adoption of SAB 101, the Company also defers the recognition of costs and revenues associated with extended warranty service contracts until the end of the return period, generally three months. Previously, such revenues and costs were recognized immediately.

Note 3. Earnings Per Common Share

Basic earnings per share ("EPS") is computed based on the weighted average shares of common stock outstanding during the applicable periods while diluted EPS is computed based on the weighted average shares of common stock outstanding plus potentially dilutive securities outstanding during the applicable periods. Potentially dilutive securities include outstanding stock options, warrants and

convertible preferred stock. These securities have not been included in the calculation of diluted EPS as their effect would be anti-dilutive. Accordingly, at September 30, 2000 and October 2, 1999, options to purchase approximately 1,875,000 and 1,802,000 shares of the Company's Class A Common Stock (the "Common Stock"), respectively, were not included in the computation of diluted loss per share. At September 30, 2000, 2,318,393 shares issuable upon conversion of the Series D preferred stock and exercise of the common stock warrants were also excluded from the calculation of diluted EPS.

Note 4. Preferred Stock

On September 29, 2000, the Company completed a $20.0 million private placement of Series D Preferred Stock with four institutional investors. The Company issued 200,000 shares of Series D Preferred Stock with a par value of $0.01 per share and a stated value of $100 per share. The net proceeds were used to supplement working capital needs. The Series D Preferred Stock is convertible at any time at the option of the holder into the Company's Class A Common Stock at $12.94 per share, subject to certain adjustments for future events, including the spinoff of ClickShip or any delay therein. The Series D Preferred Stock has a dividend rate of 6.5% per annum payable quarterly in cash or shares of the Company's Class A Common Stock valued at 90% of its then current market price. Unless previously converted to Class A Common Stock, the Series D Preferred Stock will be redeemed on September 29, 2002 at the stated value of the shares in cash or, at the Company's option, for shares of the Company's Class A Common Stock valued at 90% of its then current market price. The Company may also be required to redeem the Series D preferred stock for cash at any time following a consolidation or merger with another company or the occurrence of other triggering events as detailed in the Certificate of Designations, Preferences and Rights of the Series D Preferred Stock.

In addition, the Company issued Common Stock Purchase Warrants to the purchasers of the Series D Preferred Stock for an aggregate of 772,798 shares of Class A Common Stock at an exercise price of $16.17 per share, subject to adjustments similar to the Series D Preferred Stock. The Company allocated the net proceeds of $18.75 million (cash proceeds of $20.0 million net of accrued transaction costs of $1.25 million) from the issuance of the Series D Preferred Stock and warrants between the relative fair values of the preferred stock and warrants. The value allocated to the warrants, $2.8 million, is reflected as a component of shareholders' equity. In the event of a spinoff of ClickShip, the holders of the Series D Preferred Stock will also receive warrants to purchase ClickShip common stock as provided in the securities purchase agreement.

Because the proceeds allocated to the Series D preferred shares were less than the fair value of the common stock that would be issuable upon assumed conversion as of September 29, 2000, the issuance of the preferred shares resulted in a non-detachable beneficial conversion feature that was recognized by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in-capital. The beneficial conversion feature of $1,989,000 was treated as an immediate dividend to the Series D preferred shareholders since the Series D preferred shareholders have immediate conversion rights. Since the Company had an accumulated deficit as of the approval date, the accretion was netted against additional paid-in-capital rather than accumulated deficit, resulting in no net change to shareholders' equity.

Note 5. Stock Repurchase Program

During the first nine months of 1999, the Company repurchased approximately 567,000 shares of its Common Stock in open market transactions at aggregate costs of approximately $4.8 million. During the fourth quarter of 1999, the Board authorized a one million share open market repurchase program. No shares have been repurchased under this program through September 30, 2000.

Note 6. Restructuring Charges

In conjunction with the restructuring of the Company's catalog operations discussed in Note 1, approximately 150 jobs were eliminated, primarily in catalog marketing, merchandising and in closing the Brooklyn Center, Minnesota telemarketing center.

As a result of these activities, the Company recorded a pre-tax restructuring charge of $9.2 million during the first nine months of 2000. Included in the charge is approximately $1.3 million related to employee severance and termination costs, $1.9 million for future lease and other minimum commitments with no future benefit and $6.0 million for accelerated depreciation expense as a result of changes in the estimated useful lives of fixed assets that will only be used during certain transition periods. The Company does not expect to record significant additional restructuring charges during the fourth quarter.

Note 7. Business Segments

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 taxes, capital allocation, and certain other unallocated items. The segment financial information presented below is consistent with the basis and manner in which management evaluates results to assist in making internal operating decisions.

The Membership Services operating segment develops, markets and manages leading edge membership and customer relationship management programs. The Company's proprietary programs provide purchase price discounts and other benefits related to consumer and small business needs in the areas of shopping, travel, hospitality, entertainment, health/fitness and finance. The Company's Catalog Retail segment is comprised of the wind-down of its former catalog operations, its subsidiary ClickShip, and the elimination of intercompany results from services provided by ClickShip to Provell. The former catalog operations offered brand name merchandise in the categories of computers, home office, consumer electronics, home décor, home improvement and sports/fitness. ClickShip provides outsourcing of order fulfillment and customer care services to retailers, e-tailers, direct marketers, and manufacturers. These services include online and offline order-capture, payment processing, inventory receipt, warehousing, merchandise shipment, after-the-sale customer service and support, and returns management.

The Catalog Retail segment provided certain discounts to members of the Preferred Buyers' Club® and Insiders® membership programs managed by the Membership Services segment. Due to considerably higher sales productivity by the Company's club members, the retail segment experienced measurably higher advertising leverage on catalogs sent to these customers. For this reason, discounts were allocated entirely to the Catalog Retail segment.

DAMARK INTERNATIONAL, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Business Segments (Continued)

Selected statement of operations and statement of cash flows data for the three and nine months ended September 30, 2000 and October 2, 1999 by business segment are set forth below.

		Catalog Retail(1)			Provell Membership Services			Corporate			Consolidated
		(Amounts in thousands)
Three Months Ended Sept. 30, 2000
Net revenues		$	2,120		$	31,766		$	—		$	33,886
Cost of products sold			488			—			—			488
Restructuring charges			227			—			—			227
Other expenses			10,751			27,129			—			37,880

	Operating income (loss)		(9,346	)		4,637			—			(4,709	)
Interest and other, net			(24	)		31			(558	)		(551	)

	Income (loss) before taxes		(9,370	)		4,668			(558	)		(5,260	)
Income tax benefit			—			—			1,997			1,997

	Net income (loss)		(9,370	)		4,668			1,439			(3,263	)
Depreciation and amortization			895			309			57			1,261
Net changes in working capital and Other			14,905			(5,755	)		(18,923	)		(9,773	)

	Net cash provided by (used for) operations	$	6,430		$	(778	)	$	(17,427	)	$	(11,775	)

Three Months Ended October 2, 1999
Net revenues		$	56,590		$	35,996		$	—		$	92,586
Cost of products sold			40,001			—			—			40,001
Other expenses(2)			25,882			30,512			—			56,394

	Operating income (loss)		(9,293	)		5,484			—			(3,809	)
Interest and other, net			(67	)		(22	)		272			183

	Income (loss) before taxes		(9,360	)		5,462			272			(3,626	)
Income tax benefit			—			—			1,233			1,233

	Net income (loss)		(9,360	)		5,462			1,505			(2,393	)
Depreciation and amortization			1,026			567			48			1,641
Net changes in working capital and other			7,179			1,860			2,602			11,641

	Net cash provided by (used for) operations	$	(1,155	)	$	7,889		$	4,155		$	10,889

		Catalog Retail(1)			Provell Membership Services			Corporate			Consolidated
					(Amounts in thousands)
Nine Months Ended Sept. 30, 2000
Net revenues		$	59,234		$	101,954		$	—		$	161,188
Cost of products sold			48,986			—			—			48,986
Restructuring charges			9,226			—			—			9,226
Other expenses			64,209			76,318			—			140,527

	Operating income (loss)		(63,187	)		25,636			—			(37,551	)
Interest and other, net			(114	)		(5	)		(1,068	)		(1,187	)

	Income (loss) before taxes and other items		(63,301	)		25,631			(1,068	)		(38,738	)
Income tax benefit			—			—			14,697			14,697

	Net income (loss) before extraordinary gain		(63,301	)		25,631			13,629			(24,041	)
Cumulative effect of change in accounting, net of taxes			—			(22,904	)		8,703			(14,201	)

	Net income (loss)		(63,301	)		2,727			22,332			(38,242	)
Depreciation and amortization			9,093			706			73			9,872
Net changes in working capital and other			50,185			9,546			(58,960	)		771

	Net cash provided by (used for) operations	$	(4,023	)	$	12,979		$	(36,555	)	$	(27,599	)

Nine Months Ended October 2, 1999
Net revenues		$	218,632		$	95,628		$	—		$	314,260
Cost of products sold			157,131			—			—			157,131
Other expenses(2), (3)			83,785			79,167			1,310			164,262

	Operating income (loss)		(22,284	)		16,461			(1,310	)		(7,133	)
Interest and other, net			(67	)		(22	)		(403	)		(492	)

	Income (loss) before taxes and other Items		(22,351	)		16,439			(1,713	)		(7,625	)
Income tax benefit			—			—			2,593			2,593

	Net income (loss) before other items		(22,351	)		16,439			880			(5,032	)
Extraordinary gain on condemnation of land, net of taxes(4)			450			—			(153	)		297

	Net income (loss)		(21,901	)		16,439			727			(4,735	)
Depreciation and amortization			4,051			1,596			145			5,792
Net changes in working capital and Other			17,791			145			1,666			19,602

Net cash provided by (used for) Operations		$	(59	)	$	18,180		$	2,538		$	20,659

(1): Discounts provided to Preferred Buyers' Club® and Insiders® members are allocated entirely to Retail and totaled $86,000 and $2.5 million in the three months ended and $1.2 million and $8.8 million during the nine months ended September 30, 2000 and October 2, 1999, respectively.
(2): Includes inter-segment charge from Catalog Retail to Membership Services of $3,177 in the three months ended and $13,982 in the nine months ended October 2, 1999. In conjunction with the wind-down of the Catalog Retail business, these costs are no longer being incurred.

(3): Corporate expenses for the first nine months ended October 2, 1999 include a pre-tax charge of $1.3 million for the implementation of a revised vacation and sick time policy.
(4): Relates to a condemnation of land. See Note 9.

Selected balance sheet data by business segment is as follows:

		Catalog Retail			Provell Membership Services			Corporate		Consolidated
		(Amounts in thousands)
At September 30, 2000
Cash and cash equivalents		$	97		$	—		$	605	$	702
Non-cash current assets			(19,841	)		75,694			37,808		93,661
Net property, equipment and other assets			31,046			4,322			26,071		61,439

	Total assets	$	11,302		$	80,016		$	64,484	$	155,802

Non-interest bearing current liabilities		$	9,680		$	111,145		$	696	$	121,521
Short-term borrowings			9,549			—			11,763		21,312
Series D preferred stock									15,950		15,950
Investment in segment/shareholders' deficit			(7,927	)		(31,129	)		36,075		(2,981	)

	Total liabilities and deficit	$	11,302		$	80,016		$	64,484	$	155,802

At December 31, 1999
Cash and cash equivalents		$	—		$	—		$	3,927	$	3,927
Non-cash current assets			52,933			36,406			3,159		92,498
Net property, equipment and other assets			20,273			5,331			4,017		29,621

	Total assets	$	73,206		$	41,737		$	11,103	$	126,046

Non-interest bearing current liabilities		$	32,046		$	62,330		$	2,253	$	96,629
Investment in segment/shareholders' equity			41,160			(20,593	)		8,850		29,417

	Total liabilities and equity	$	73,206		$	41,737		$	11,103	$	126,046

Note 8. Financing

During third quarter 2000, the Company entered into a $15.0 million commercial credit facility which reduces to $10.0 million on January 1, 2001. The facility is available for working capital and general corporate needs and contains a $2.0 million sublimit to accommodate the issuance of standby letters of credit. Borrowings outstanding under the line of credit bear interest at the federal funds rate of interest plus 0.5%, bank prime or LIBOR plus 3.25% and are secured by all assets of the Company except for real property. The credit facility includes covenants which require the Company to satisfy certain financial tests and ratios on a monthly basis and limits the parent company investment in ClickShip to $8.0 million. The Company was in compliance with all covenants at September 30, 2000.

unpaid principal balance bears interest at a bank reference rate of interest. Accrued interest is required to be paid October 1, 2000 and on the first day of each calendar month thereafter. The outstanding principal balance plus unpaid interest is due on December 31, 2000. The outstanding balance under this agreement at September 30, 2000 was approximately $9.5 million.

Note 9. Extraordinary Gain

During the second quarter of 1999, the State of Minnesota condemned and acquired approximately 17 acres of land from the Company in conjunction with a highway expansion project. As a result, the Company recorded an extraordinary gain of $297,000, net of taxes, or $.05 per share.

Note 10. Recently Issued Accounting Pronouncement

SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities", establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 will be effective for the Company beginning January 1, 2001. Management believes the adoption of SFAS No. 133 will not have a material impact on the Company's financial position or results of operations.

DAMARK INTERNATIONAL, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 taxes, capital allocation and certain other unallocated items.

			Three months ended								Nine months ended
			Sept. 30, 2000			Oct. 2, 1999			% change		Sept. 30, 2000			Oct. 2, 1999			% change
Statement of Operations Data:
Net revenues:
	Catalog Retail(1)		$	2,120		$	56,590		(96.3	)%	$	59,234		$	218,632		(72.9	)%
	Membership Services			31,766			35,996		(11.8	)%		101,954			95,628		6.7	%

		Total		33,886			92,586		(63.4	)%		161,188			314,260		(48.7	)%

Costs and expenses:
	Catalog Retail cost of products sold			488			40,001		(98.8	)%		48,986			157,131		(68.9	)%
	Catalog Retail expenses(2)			10,978			25,882		(57.6	)%		73,435			83,785		(12.4	)%
	Membership Services expenses(2)			27,129			30,512		(11.1	)%		76,318			79,167		(3.6	)%
	Corporate expenses			—			—		0.0	%		—			1,310		(100.0	)%

		Total		38,595			96,395		(60.0	)%		198,739			321,393		(38.2	)%

Operating income (loss):
	Catalog Retail			(9,346	)		(9,293	)	(0.1	)%		(63,187	)		(22,284	)	(183.6	)%
	Membership Services			4,637			5,484		(15.4	)%		25,636			16,461		55.8	%
	Corporate			—			—		0.0	%		—			(1,310	)	(100.0	)%

		Total		(4,709	)		(3,809	)	(23.7	)%		(37,551	)		(7,133	)	(426.5	)%
Interest income (expense), net				(335	)		205		(263.5	)%		(812	)		(339	)	(139.6	)%
Other expense, net				(216	)		(22	)	(881.8	)%		(375	)		(153	)	(145.1	)%

	Loss before income taxes, extraordinary gain and cumulative effect of accounting change			(5,260	)		(3,626	)	(45.1	)%		(38,738	)		(7,625	)	(408.1	)%
Income tax benefit				1,997			1,233		62.0	%		14,697			2,593		466.8	%

	Net loss before extraordinary gain and cumulative effect of accounting change			(3,263	)		(2,393	)	(36.4	)%		(24,041	)		(5,032	)	(377.8	)%
Extraordinary gain, net of taxes				—			—		0.0	%		—			297		(100.0	)%
Cumulative effect of accounting change, net of taxes				—			—		0.0	%		(14,201	)		—		N/A

	Net loss			(3,263	)		(2,393	)	(36.4	)%		(38,242	)		(4,735	)	(707.7	)%
Beneficial conversion feature				(1,989	)		—		N/A			(1,989	)		—		N/A

	Net loss available to common shareholders		$	(5,252	)	$	(2,393	)	(119.5	)%	$	(40,231	)	$	(4,735	)	(749.7	)%

Statement of Cash Flows Data:
Net cash (used for) provided by operations:
	Catalog Retail(2)		$	6,430		$	(1,155	)			$	(4,023	)	$	(59	)
	Membership Services(2)			(778	)		7,889					12,979			18,180
	Corporate			(17,427	)		4,155					(36,555	)		2,538

		Total	$	(11,775	)	$	10,889				$	(27,599	)	$	20,659

(1): Discounts provided to the Preferred Buyers Club® and Insiders® members are allocated entirely to Catalog Retail and totaled $86,000 and $2.5 million for the three months ended and $1.2 million and $8.8 million for the nine months ended September 30, 2000 and October 2, 1999, respectively.
(2): Includes inter-segment charge from Catalog Retail to Membership Services of $3,177 and $13,982 for the three and nine months ended October 2, 1999. In conjunction with the wind-down of the Catalog Retail business, these costs are no longer being incurred.

General

In January 2000, the Company announced that it would wind-down its non-member catalog marketing and merchandising activities. Going forward, catalog mailings will be limited to members of the Company's shopping clubs. The wind-down was substantially completed by the end of second quarter 2000, at which time the Company discontinued taking catalog orders from non-member customers. The Company will continue to operate its membership services business under the Provell name. The order capture, product fulfillment and customer service capabilities developed by the Company were redeployed into a subsidiary named ClickShip Direct, Inc. ("ClickShip"), that was formed in January 2000. The Company had planned to separate ClickShip as an independent company during the third or fourth quarter of 2000. However, market conditions for companies in the outsourced fulfillment and customer care segment have significantly deteriorated during 2000 and financing has not been readily available to ClickShip. Consequently, the Company is exploring all options relating to ClickShip, including raising sufficient capital to separate the companies and other alternatives. A decision on ClickShip is expected by December 31, 2000 and there is no assurance as to which alternative the Company will pursue.

Provell develops, markets and manages leading edge membership and customer relationship management programs. The Company's proprietary programs provide purchase price discounts and other benefits related to consumer and small business needs in the areas of shopping, travel, hospitality, entertainment, health/fitness and finance. Arrangements have been made with third parties to supply the members of the Company's shopping clubs with benefits at least equal to those formerly provided by the Company's catalog operations. A dedicated management team sources products available on a direct-from-supplier basis, avoiding the need to own, store, and fulfill inventory from a Company-owned location. Provell also outsources teleservice activities and customer service with carefully selected telemarketing providers, including ClickShip.

ClickShip provides outsourcing of order fulfillment and customer care services to retailers, e-tailers, direct marketers, and manufacturers. These services include online and offline order-capture, payment processing, inventory receipt, warehousing, merchandise shipment, after-the-sale customer service and support, and returns management.

In conjunction with the restructuring of the Company's catalog operations, the Company's Brooklyn Center, Minnesota telemarketing center was closed in January 2000. Approximately 150 jobs were eliminated as part of the restructuring, primarily in catalog marketing, merchandising and the telemarketing center. As a result of these activities, the Company recorded a pre-tax restructuring charge of $9.2 million during the first nine months of 2000. Included in the charge is approximately $1.3 million related to employee severance and termination costs, $1.9 million for future lease and other minimum commitments with no future benefit and $6.0 million for accelerated depreciation expense as a result of changes in the estimated useful lives of fixed assets that will only be used during certain transition periods. The Company does not expect to record significant additional restructuring charges during fourth quarter.

Membership Services

This segment's results reflect the adoption of SAB 101 effective January 1, 2000. Prior to the adoption of SAB 101, membership revenues with respect to clubs for which the Company had an ongoing obligation were recorded on the balance sheet, net of direct solicitation costs, and amortized into income over the membership period, generally twelve months. Revenues and related expenses on clubs for which the Company had no significant ongoing obligation were recognized immediately, net of

an accrual for future anticipated returns, once any trial period had elapsed. Effective January 1, 2000, the Company defers the recognition of revenues and direct solicitation costs on all membership programs and amortizes such revenues and costs, after the trial period has elapsed, over the membership period, generally twelve months. The Company also defers the recognition of costs and revenues associated with extended warranty service contracts until the end of the return period, generally three months. Previously, extended warranty revenues and costs were recognized immediately. The Company recorded a non-cash charge of $22.9 million ($14.2 million net of taxes) related to the adoption of SAB 101. See Note 2 to the Consolidated Financial Statements.

The Company has been able to grow its membership base by accelerating new member prospecting to replace its member acquisition leads lost due to the wind-down of its catalog retail business. Provell's expanded client roster now includes several of the nation's largest financial institutions, as well as a number of premier consumer marketing organizations. The Company enrolled a record number 955,000 new members during third quarter 2000. Its membership base has increased from 1.9 million members at the end of the third quarter of 1999 to nearly 2.6 million members at the end of the third quarter of 2000, a 36.8% increase.

Membership revenues were $31.8 million for third quarter 2000, an 11.8% decrease from third quarter 1999 revenues. Revenues for the nine months ended September 30, 2000 were $102.0 million, a 6.7% increase over the prior year comparable period. Third quarter operating income decreased 15.5% to $4.6 million in 2000 as compared to $5.5 million in 1999. Operating income for the first nine months of 2000 increased 55.8% to $25.6 million as compared to $16.5 million in 1999. On a pro forma basis, assuming SAB 101 had been adopted retroactively, third quarter 1999 membership revenues and operating income would have been $36.0 million and $11.3 million, respectively. For the first nine months of 1999, membership revenues and operating income would have been $81.1 million and $12.4 million, respectively. Operating income for 1999 reflects a charge of $3.2 million and $14.0 million for the quarter and first nine months, respectively, for commissions to the Catalog Retail segment. In conjunction with the catalog wind-down, these costs are no longer being incurred. The decrease in revenues during third quarter 2000 in comparison to third quarter 1999 was due primarily to reduced volumes from the catalog retail business and delays experienced earlier in the year in replacing the catalog retail volume with new client business. Net revenues from the record level acquisition activity in the third quarter of 2000 are deferred and will be recognized ratably over the next 12 months in accordance with SAB 101. The decrease in revenues and increased telemarketing and client commission costs incurred as the Company aggressively expands its membership acquisitions in the client marketing channel contributed to the decrease in operating income in third quarter 2000 as compared to third quarter 1999. The exclusion of the inter-segment charge in 2000, lower than anticipated operating costs, accompanied by an increase in the Company's membership base, expanded membership club offerings and club price increases each contributed to the revenue and operating income growth during the first nine months of 2000.

Costs and expenses incurred by the Company's Membership Services segment 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, and in 1999, inter-segment charges from the Catalog Retail segment.

Segment costs and expenses decreased 11.1% and 3.6% for the three and nine months ended September 30, 2000, respectively, in comparison to the same period in 1999. Costs and expenses as a percentage of net revenues were relatively consistent in third quarter 2000 and 1999 at 85.4% and 84.8%, respectively. For the first nine months, costs and expenses as a percentage of net revenues were

74.9% in 2000 as compared to 82.8% in 1999. The decrease in costs and expenses was due primarily to the inter-segment charges included in costs and expenses in 1999 (see above discussion). The Company has also benefited from improved leveraging of costs over a larger membership and revenue base.

Catalog Retail

The wind-down of the Company's non-member Catalog Retail operations is substantially complete and the Company is no longer taking non-member catalog orders. Management expects to process a nominal number of customer returns during the fourth quarter for which return reserves have been provided. The wind-down of Catalog Retail activities and related liquidations resulted in substantially lower revenues during the third quarter and first nine months of 2000 in comparison to 1999. This segment generated revenues of $2.1 million and $59.2 million during the third quarter and first nine months of 2000, respectively, a decrease of 96.3% and 72.9% from revenues of $56.6 million and $218.6 million generated during the third quarter and first nine months of 1999, respectively. Revenues generated from catalog wind-down activities totaled $0.6 million and $56.6 million for the third quarter and first nine months, respectively, while ClickShip generated $4.3 million and $22.3 million of revenues during the third quarter and first nine months, respectively. Included in ClickShip's third quarter and first nine months revenues for 2000 were approximately $1.6 million and $13.0 million, respectively, of revenues from services provided to its parent, Damark, for activities related to winding down the catalog business and $1.8 million and $4.8 million, respectively for ongoing customer care services to Provell's members. ClickShip's revenues from servicing Provell's business are eliminated in the consolidation of Catalog Retail results.

The segment reported an operating loss of $9.3 million in third quarter 2000 and $63.2 million for the first nine months of 2000 as compared to an operating loss of $9.3 million in third quarter 1999 and $22.3 million for the first nine months of 1999. Costs associated with winding down the non-member catalog business, including a lower advertising leverage as advertising costs were leveraged against significantly lower revenue levels in an effort to liquidate inventory and a $9.2 million restructuring charge, combined with start-up losses incurred by ClickShip all contributed to the operating loss in 2000. In addition, the third quarter and first nine months 1999 expenses included inter-segment transfers of costs from the Catalog Retail segment to the Membership Services segment of $3.2 million and $14.0 million, respectively.

Corporate

Corporate expenses for the nine months ended October 2, 1999 include a pre-tax charge of $1.3 million for the implementation of a revised vacation and sick time policy.

The Company incurred net interest expense of $335,000 during the third quarter of 2000 as compared to $205,000 of net interest income earned in the comparable 1999 period. Net interest expense of $812,000 and $339,000 was incurred during the first nine months of 2000 and 1999, respectively. Lower borrowing needs resulting from declines in installment receivable and inventory balances in 2000 as compared to 1999 were offset by the need for increased borrowings to fund the wind-down of the Company's non-member catalog operations, ClickShip start up costs and the expansion of Provell's business.

The Company's effective tax rate was 38% and 34% for the three and nine months ended September 30, 2000 and October 2, 1999, respectively. The increase in the effective tax rate is the result of additional state income taxes associated with the restructuring of the Company's operations. Despite incurring net losses in recent quarters, the Company has not recorded a deferred tax valuation

allowance since management believes that its operating and tax planning strategies will allow the Company to generate sufficient income in early future years in order to realize this asset. Should the Company's operating and tax planning strategies fail to produce sufficient taxable income in early future years, the Company will record a valuation allowance for all or a portion of its net deferred tax asset as required by generally accepted accounting principles.

Extraordinary Gain

The State of Minnesota condemned and acquired approximately 17 acres of land from the Company in conjunction with a highway expansion project. As a result, the Company recorded an extraordinary gain of $297,000, net of taxes, or $.05 per share during the second quarter of 1999.

Liquidity and Capital Resources

Cash Flow

Net cash used for operations totaled $27.6 million for the first nine months of 2000 as compared to net cash provided by operations of $20.7 million for the same period in 1999. The increase in cash used for operations in 2000 was the result of losses from the wind-down of the Company's non-member catalog operations, ClickShip start up costs and the expansion of Provell's membership roster. Cash generated by working capital changes was $1.2 million in 2000 as compared to $22.4 million in 1999. The 1999 period benefited from continued declines in the installment receivable balances while membership receivables were higher in 2000 as a result of the record level acquisition activity in the third quarter. Declines in inventory from the catalog wind-down in 2000 were largely off-set by declines in current liability balances and an increase in current assets.

Capital Expenditures

During the first nine months of 2000, the Company's capital expenditures were $19.9 million compared to $2.6 million during the comparable 1999 period. During the third quarter, ClickShip completed the expansion of its distribution center which added 320,000 square feet of warehouse space at an approximate cost of $12.0 million. ClickShip has also invested an additional $5.3 million during the year in software and equipment. Provell has invested $2.6 million during the first nine months of 2000, primarily for leasehold improvements, furniture and fixtures and software. Management estimates that an additional $3 to $5 million in infrastructure enhancements will be invested during the fourth quarter of 2000.

Financing

During third quarter 2000, the Company replaced its previous revolving line of credit with a new $15.0 million commercial credit facility. The facility is available for working capital and general corporate needs and contains a $2.0 million sublimit to accommodate the issuance of standby letters of credit. Borrowings outstanding under the line of credit bear interest at the federal funds rate of interest plus 0.5%, bank prime or LIBOR plus 3.25% and are secured by all assets of the Company except real property. The credit facility reduces to $10.0 million on January 1, 2001 and contains a clean down provision for 30 days beginning March 1, 2001 at which time borrowings must equal zero. The credit facility includes covenants which require the Company to satisfy certain financial tests and ratios on a monthly basis and limits the downstreaming of funds to ClickShip to $8.0 million. The Company was in compliance with all covenants at September 30, 2000.

DAMARK INTERNATIONAL, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

During third quarter 2000, ClickShip entered into a $10.0 million promissory note agreement with Ryan Companies US, Inc. Advances on the note are made to ClickShip for the sole purpose of paying amounts for construction costs incurred in conjunction with the expansion of the ClickShip distribution center. The unpaid principal balance bears interest at a bank reference rate of interest. Accrued interest is required to be paid October 1, 2000 and on the first day of each calendar month thereafter. The outstanding principal balance plus unpaid interest is due on December 31, 2000. The outstanding balance under this agreement at September 30, 2000 was approximately $9.5 million.

On September 29, 2000, the Company completed a $20.0 million private placement of Series D Preferred Stock with four institutional investors. The Company issued 200,000 shares of Series D Preferred Stock with a par value of $0.01 per share and a stated value of $100 per share. The net proceeds were used to supplement working capital needs. The Series D Preferred Stock is convertible at any time at the option of the holder into the Company's Class A Common Stock at $12.94 per share, subject to certain adjustments for future events, including the spinoff of ClickShip or any delay therein. The Series D Preferred Stock has a dividend rate of 6.5% per annum payable quarterly in cash or shares of the Company's Class A Common Stock valued at 90% of its then current market price. Unless previously converted to Class A Common Stock, the Series D Preferred Stock will be redeemed on September 29, 2002 at the stated value of the shares in cash or, at the Company's option, for shares of the Company's Class A Common Stock valued at 90% of its then current market price. The Company may also be required to redeem the Series D Preferred Stock for cash at any time following a consolidation or merger with another company or the occurrence of other triggering events as detailed in the Certificate of Designations, Preferences and Rights of the Series D Preferred Stock.

ClickShip is actively working to procure real estate financing, a working capital line of credit and equity financing to repay its construction bridge loan and fund both operations as well as future capital expenditures. The financings are also necessary in order for the Company to complete its spinoff of ClickShip as an independent company. During 2000, market conditions for companies in the outsourced fulfillment and customer care segment have significantly deteriorated and financing has not been readily available to ClickShip. Consequently, the Company is exploring all options relating to ClickShip including raising sufficient capital to separate the companies and other alternatives. A decision on ClickShip is expected by December 31, 2000, and there is no assurance as to which alternative the Company will choose. Provell also continues to explore financing options to fund its rapid business growth.

Additional financing in the areas mentioned above is required to support the current and future cash needs of the Company as it grows these businesses. If additional financing is not available, the Company's growth plans may be curtailed.

Stock Repurchases

During the nine months ended October 2, 1999, the Company repurchased 567,000 shares of its common stock in open market transactions at an aggregate cost of $4.8 million. During the fourth quarter of 1999, the Board authorized a one million share open market repurchase program. Through September 30, 2000, no shares have been repurchased under this program.

Seasonality

Similar to most retailing businesses, the Company's Catalog Retail segment was subject to significant seasonal variations in consumer demand. Historically, the Company's net retail revenues were the highest during the fourth quarter and a significant portion of its earnings were realized during that period. The Company's annual operating results were affected by holiday spending patterns, as well as the timing and effectiveness of catalog mailings and general economic and other conditions. Because the wind-down of the non-member catalog operation is complete, management expects the seasonal variations in consumer demand to have a less significant impact on the Company's membership business going forward while fourth quarter consumer demand will continue to have a significant impact on ClickShip's business.

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.

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:

•: Availability of capital on acceptable terms;
•: The economic outlook and its effects on credit availability, interest rates, and consumer spending patterns;
•: Adverse changes in relationships with vendors and partners who provide club benefits;
•: Inability to develop replacement shopping club programs;
•: Lower than expected membership renewal rates;
•: Higher than expected membership cancellation and return rates;
•: Excessive new member acquisition costs;
•: Inability to retain existing clients and attract new clients in the membership services market;

•: Inability to develop new membership programs;
•: Inability to attract clients in the fulfillment market;
•: Reliance on fees generated by potentially volatile transaction volume or product sales of its fulfillment clients;
•: Effects of possible system failures and rapid changes in technology;
•: Inability of the Company's systems or infrastructure to accommodate significant growth in its fulfillment business;
•: Changes in the trend toward outsourcing;
•: Externally mandated changes in accounting guidelines; and
•: Trends in government regulation.

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.

Part II. Other Information

Item 1. Legal Proceedings

On October 25, 1996, a current Preferred Buyers' Club® 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's customers, each of which are members of the Company's Preferred Buyers' Club®. The plaintiff alleged that he and the other members of the proposed class have not received their full anticipated benefits as Preferred Buyers' Club® members. During the third quarter of 2000, the case was successfully defended and a unanimous jury verdict was awarded in favor of the Company.

On August 29, 2000, the Company was served with a complaint styled as a class action in Minnesota State Court. The complaint is similar to complaints previously settled by the Company with the Minnesota Attorney General on December 3, 1999, but also contends that certain of the Company's business practices violate other Minnesota consumer protection laws. The Company intends to vigorously defend the allegations both on the merits and in regard to class status. Management believes that the resolution of this action will not have a material adverse effect on the financial condition or results of operations of the Company.

Item 2. Change in Securities and Use of Proceeds

On September 29, 2000, the Company issued 200,000 shares of a newly created Series D Preferred Stock, stated value of $100 per share, in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, to four institutional investors. The shares of Series D Preferred Stock are convertible into the Company's Class A Common Stock at $12.94 per share subject to certain adjustments for future events, including the spinoff of ClickShip Direct or any delay therein. The Series D Preferred Stock has a dividend rate of 6.5% per annum payable quarterly in cash or, at the option of the Company, shares of the Company's Class A Common Stock valued at 90% of then current market price. Unless converted to Class A Common Stock, the Series D Preferred Stock will be redeemed on September 29, 2002 at the stated value of the shares in cash or, at the option of the Company, for shares of the Company's Class A Common Stock valued at 90% of then current market price. In addition, the Company issued Common Stock Purchase Warrants to the purchasers of the Series D Preferred Stock for an aggregate 772,798 shares of Class A Common Stock at an exercise price of $16.17 per share, subject to adjustments similar to the Series D Preferred Stock. The Company also entered into a registration rights agreement with the purchasers of the Series D Preferred Stock pursuant to which the Company agreed to register the resale of the shares of its Class A Common Stock that are issued upon conversion or redemption of the Series D Preferred Stock, upon exercise of the Common Stock Purchase Warrants or as dividends in kind in lieu of cash in respect to the Series D Preferred Stock. The Company has filed a Form S-3 registration statement with the Securities and Exchange Commission for the resale of those shares of its Class A Common Stock. In the event that the registration statement is not effective by January 12, 2001, the Company will pay the holders of the Series D Preferred Stock a cash payment equal to 1% of the stated value of the shares of Series D Preferred Stock that the holder owns for each 30 day period after January 12, 2001 that the registration statement has not been declared effective.

The net cash proceeds from the issuance of the Series D Preferred Stock were approximately $18.95 million and will be used to supplement working capital.

Item 6. Exhibits and Reports on Form 8-K

(a): Exhibits

Exhibit No.		Description of Exhibit
3.1		Certificate of Designations, Preferences and Rights for Series D Preferred Stock (incorporated by reference to Exhibit 3.1 to Form 8-K Report dated September 29, 2000)
10.1		Securities Purchase Agreement dated September 29, 2000 (incorporated by reference to Exhibit 10.1 to Form 8-K Report dated September 29, 2000)
10.2		Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.2 to Form 8-K Report dated September 29, 2000)
10.3		Registration Rights Agreement dated September 29, 2000 (incorporated by reference to Exhibit 10.3 to Form 8-K Report dated September 29, 2000)
27		Financial Data Schedule

(b): Reports of Form 8-K

The Company filed a Report on Form 8-K dated September 29, 2000 (date of the event) to report the issuance of the Series D Preferred Stock and Common Stock Purchase Warrants in the transaction described in Item 2(c) of this Part II above and the delay in and complications with the planned spinoff of the Company's subsidiary, ClickShip Direct, Inc.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		DAMARK INTERNATIONAL, INC.
Date: November 14, 2000		By:	/s/ KIM M. MAGEAU Kim M. Mageau Senior Vice President— Chief Financial Officer

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