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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 3, 2001
REGISTRATION NO. 333-48776
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DAMARK INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1551116
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 CARLSON PARKWAY, SUITE 201
MINNEAPOLIS, MINNESOTA 55305
(952) 258-2000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
MARK A. COHN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
301 CARLSON PARKWAY, SUITE 201
MINNEAPOLIS, MINNESOTA
55305
(952) 258-2000
(Name, address, including zip code and telephone number, including area code,
of agent for service)
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COPY TO:
Bruce J. Parker, Esq.
Kaplan, Strangis and Kaplan, P.A.
5500 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402
Telephone: (612) 375-1138
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE
SECURITIES TO THE PUBLIC: FROM TIME TO TIME AFTER THIS
REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: / /
The registration fee was previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDERS IDENTIFIED IN THIS PROSPECTUS MAY NOT SELL THESE
SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[DAMARK INTERNATIONAL, INC. LOGO]
5,250,000 SHARES COMMON STOCK
This prospectus relates to 5,250,000 shares of our common stock which
may be sold from time to time by the selling shareholders listed under the
caption "Selling Shareholders" on page 23. All of the shares of common stock
covered by this offering are shares that may be issued upon conversion of our
outstanding series D preferred stock, upon exercise of related warrants and in
payment in lieu of cash of the mandatory redemption price for series D preferred
shares and dividends on the series D preferred shares. We will not receive any
of the proceeds from the sale of the common stock. See "Use of Proceeds."
The shares are being registered to permit the selling shareholders to
sell the shares from time to time in the public market. The selling shareholders
may determine the prices at which they will sell the common stock, which may not
be at market prices prevailing at the time of such sale or some other price. The
selling shareholders may sell the common stock through ordinary brokerage
transactions, directly to marketmakers of our shares or through any other means
described in the section "Plan of Distribution" beginning on page 23. We cannot
assure you that the selling shareholders will sell all or a portion of the
common stock offered under this prospectus.
Our common stock is quoted on the Nasdaq National Market under the
symbol "DMRK." On January 2, 2001, the last reported sale price for the common
stock on the Nasdaq National Market was $6.00 per share.
Our corporate offices are located at 301 Carlson Parkway, Suite 201,
Minneapolis, Minnesota 55305. Our telephone number at that location is (952)
258-2000.
Investing in our common stock involves certain risks. See "Risk
Factors" beginning on page 3 of this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is January __, 2001.
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TABLE OF CONTENTS
PROSPECTUS
<TABLE>
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Page
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Risk Factors............................................................... 3
Risks Related to our Series D Preferred Stock..................... 3
Risks Related to our Business..................................... 6
Recent Developments........................................................ 12
Information Regarding Forward-Looking Statements........................... 13
Damark International, Inc.................................................. 14
Use of Proceeds............................................................ 14
Description of Capital Stock............................................... 15
Selling Shareholders ...................................................... 21
Plan of Distribution....................................................... 22
Legal Matters.............................................................. 23
Experts.................................................................... 23
Where You Can Find More Information........................................ 23
</TABLE>
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW AND THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON STOCK. ADDITIONAL
RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY
AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE
AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR
SERIES D PREFERRED STOCK
THE CONVERSION OF OUR SERIES D PREFERRED SHARES, THE USE OF OUR SHARES OF COMMON
STOCK TO PAY DIVIDENDS ON OR TO REDEEM THE SERIES D PREFERRED SHARES ON THE
MANDATORY REDEMPTION DATE (SEPTEMBER 29, 2002) AND THE EXERCISE OF THE RELATED
WARRANTS COULD RESULT IN SUBSTANTIAL NUMBERS OF ADDITIONAL SHARES BEING ISSUED
IF OUR MARKET PRICE DECLINES.
On September 29, 2000, we issued 200,000 shares of our series D
preferred stock, $100 stated par value per share, and warrants to purchase
772,798 shares of class A common stock at an exercise price of $16.17 per
share, subject to anti-dilution adjustments. The series D preferred shares
convert into our common stock at a price of $12.94 per share, subject to
certain adjustments for future events, including the failure to spinoff or
dispose of ClickShip Direct, Inc. ("ClickShip") our order fulfillment and
customer care subsidiary. As a result, the lower the conversion price, the
greater the number of shares the holder will receive. For additional
information regarding the number of additional shares that may be issued as a
result of adjustments to the conversion price see "Description of Capital
Stock--Preferred Stock--Series D Convertible Preferred Stock--Conversion" on
page 18.
Quarterly dividends on the series D preferred shares are payable at
the rate of 6.5% per annum on the stated value of the series D preferred
shares. We are required to redeem all outstanding series D preferred shares
on September 29, 2002 at the stated value of $100 per share plus accrued
dividends. We have the option of paying cash for the dividends and the
mandatory redemption price or, at our option, issuing shares of our common
stock valued at 90% of the then market value in the case of dividends and in
the case of the mandatory redemption.
To the extent the series D preferred shares are converted into or
redeemed for shares of common stock, or dividends on the series D preferred
shares are paid in shares of common stock rather than cash, a significant number
of shares of common stock may be sold into the market, which could decrease the
price of our common stock and encourage short sales by selling shareholders or
others. Short sales could place further downward pressure on the price of our
common stock. In that case, we could be required to issue an increasingly
greater number of shares of our common stock if we elected to issue common stock
upon the mandatory redemption of the series D preferred shares or the payment of
dividends on the series D preferred
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shares, sales of which could further depress the price of our common stock.
Because adequate capital could not be raised for the business of
ClickShip, we have decided not to spin it off to our shareholders and instead to
exit this line of business by selling or winding down ClickShip. In the event
the disposition of ClickShip is not completed by March 31, 2001, the conversion
price of the series D preferred shares and the exercise price of the Common
Stock Purchase Warrants will be reduced to an amount equal to the lesser of (1)
the average of the closing bid prices for the twenty trading days prior to March
31, 2001, and (2) 101% of the closing bid price of the trading day immediately
preceding March 31, 2001. An equivalent adjustment will be made on each
September 30 and March 31 that the disposition of ClickShip has not been
consummated.
The conversion of and the payment of the mandatory redemption price or
dividends in shares of common stock in lieu of cash on the series D preferred
stock may result in substantial dilution to the interests of other holders of
our common stock. Even though no selling shareholder may convert its series D
preferred shares if, upon such conversion, the selling shareholder together with
its affiliates would beneficially own a number of shares of common stock that
exceed 4.99% of our then outstanding common stock, excluding for purposes of
such determination shares of common stock issuable upon conversion of series D
preferred shares which have not been converted and upon exercise of warrants
which have not been exercised, this restriction does not prevent a selling
shareholder from selling a substantial number of shares in the market. By
periodically selling shares into the market, an individual selling shareholder
could eventually sell more than 4.99% of our outstanding common stock while
never holding more than 4.99% at any specific time.
WE MAY ISSUE ADDITIONAL SHARES AND DILUTE YOUR OWNERSHIP PERCENTAGE.
Some events over which you have no control could result in the
issuance of additional shares of our common stock, which would dilute your
ownership percentage in Damark. We may issue additional shares of common
stock or preferred stock:
- to raise additional capital or finance acquisitions,
- upon the exercise or conversion of outstanding options, warrants and
shares of convertible preferred stock, or
- in lieu of cash payment of dividends on the series D preferred shares.
- in lieu of cash payment of the mandatory redemption price of the
series D preferred shares.
As of September 29, 2000, other than the warrants issued to the holders
of series D preferred shares, there were outstanding options to acquire an
aggregate of 1,874,998 shares of common stock. If exercised, these securities
will dilute your percentage ownership of common stock. In addition, as disclosed
in the preceding risk factor, the number of shares that may be issued in lieu of
cash upon the mandatory redemption of or payment of dividends on the series D
preferred shares could increase substantially if the market price of our common
stock decreases during the period the series D preferred shares are outstanding.
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For example, the number of shares of common stock that we would be
required to issue upon mandatory redemption of all 200,000 shares of series D
preferred shares, excluding shares issued as accrued dividends, would increase
from approximately 1.57 million shares, based on 90% of the applicable market
value for our common stock of $12.71259 per share as of September 29, 2000, to
approximately:
- 2.1 million shares if the applicable market value decreased 25%;
- 3.2 million shares if the applicable market value decreased 50%; or
- 6.3 million shares if the applicable market value decreased 75%.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.
If our shareholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options and upon
conversion of and issuance of common stock dividends on the series D preferred
shares and exercise of the related warrants, the market price of our common
stock could fall. Such sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. As of September 30, 2000, we had outstanding 5,847,519 shares
of common stock and options to acquire an aggregate of 1,874,998 shares of
common stock, of which 924,415 options were vested and exercisable. As of
September 30, 2000, of the shares that are currently outstanding, 4,767,267 are
freely tradable in the public market and 1,080,250 are tradable in the public
market subject to the restrictions, if any, applicable under Rule 144 and Rule
145 of the Securities Act of 1933, as amended. All shares acquired upon exercise
of options will be freely tradable in the public market.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for at least one year would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (a) one percent of the number of shares of common stock then
outstanding (which for Damark was 5,847,519 shares as of September 30, 2000), or
(b) the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
requirements with respect to manner of sale, notice and the availability of
current public information about us. Under Rule 144(k), a person who is not
deemed to have been our affiliate at any time during the three months preceding
a sale, and who has beneficially owned the shares proposed to be sold for at
least two years, is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Sales by shareholders of a substantial amount of our common stock
could adversely affect the market price of our common stock.
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WE MAY BE REQUIRED TO PAY SUBSTANTIAL PENALTIES TO THE HOLDERS OF THE SERIES D
PREFERRED SHARES AND RELATED WARRANTS IF SPECIFIC EVENTS OCCUR.
In accordance with the terms of the documents relating to the issuance
of the series D preferred shares and the related warrants, we are required to
pay substantial penalties to a holder of the series D preferred shares under
specified circumstances, including, among others:
- nonpayment of the redemption price to holders of the series D preferred
shares in a timely manner,
- a registration statement relating to the series D preferred shares
and related warrants has not been declared effective by the SEC on
or before January 12, 2001, or after being declared effective, is
unavailable to cover the resale of the shares of common stock
underlying such securities.
- our failure to maintain the listing of the common stock on the
American Stock Exchange, the New York Stock Exchange or the Nasdaq
for a period of 10 days during any period of 12 months.
Such penalties are generally paid in interest payments, subject to any
restrictions imposed by applicable law, on the amount that a holder of series D
preferred shares was entitled to receive on the date of determination.
RISKS RELATED TO OUR BUSINESS
WINDING DOWN OF OUR NON-MEMBER CATALOG RETAIL ACTIVITIES AND RELATED
LIQUIDATIONS RESULTED IN SUBSTANTIALLY LOWER REVENUES AND IN SIGNIFICANT LOSSES
DURING THE FIRST HALF OF 2000.
Our revenues during the first half of 2000 were significantly reduced
as a result of our efforts to wind-down our non-membership catalog retail
business, including the liquidation of inventory levels. The catalog retail
segment generated revenues of $57.1 million during the first half of 2000, a
decrease of 64.8% from revenues of $162.0 million generated during the first
half of 1999. This segment also reported a net loss of $53.9 million for the
first half of 2000 as compared to a net loss of $12.5 million for the first half
of 1999. In conjunction with the restructuring of the catalog operations, our
Brooklyn Center, Minnesota telemarketing center was closed in January 2000, and
approximately 150 jobs were eliminated. As a result of these activities, we
recorded a pre-tax restructuring charge of $9.0 million during the first half of
2000. The winding down of the non-member catalog marketing and merchandising
activities was substantially completed by the end of the second quarter of 2000,
at which time we discontinued taking catalog orders from non-member customers.
Although we will continue to operate our membership services business under the
name Provell, we cannot assure you that we will generate sufficient revenue to
be profitable or that we will be able to sustain or increase profitability on a
quarterly or an annual basis in the future. If our revenue grows more slowly
than we anticipate or if our operating and marketing expenses exceed our
expectations, our business would be materially adversely affected.
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CHANGE IN ACCOUNTING RULES GOVERNING HOW REVENUES ARE RECOGNIZED HAS IMPACTED
OUR REPORTED REVENUES AND INCOME IN 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No.
101--Revenue Recognition in Financial Statements, which provides interpretive
guidance on revenue and expense recognition related to contracts with up-front
fees and customer return rights. As a result of the adoption of SAB 101 in the
first quarter of 2000, we recorded a non-cash after-tax charge of $22.9 million
($14.2 million net of taxes) in the first quarter of 2000, reflecting the
cumulative effect of this change in accounting principle. We cannot assure you,
however, that any rules adopted by the SEC in the future relating to the
recognition of revenues will not require us to further change our accounting for
revenue recognition or otherwise adversely affect our results of operations.
OUR MARKETING EFFORTS DEPEND ON CUSTOMER LISTS SUPPLIED BY OUR CLIENTS. WE
CANNOT ASSURE THAT OUR CLIENTS WILL CONTINUE TO PROVIDE US THESE LISTS.
We obtain substantially all of the information necessary to Damark's
marketing efforts from customer lists supplied by our clients. Clients provide
the lists to us for use in marketing a single, specific program which has been
pre-approved by the client. As a result, our ability to market a new program to
an existing customer base or an existing program to a new customer base is
dependent on first obtaining approval from a client. There can be no assurance
that we will continue to obtain such approvals. If our customers limit or stop
providing us with those lists, our marketing efforts would be hampered, which
would have an adverse effect on our membership services business.
OUR PROFITABILITY DEPENDS ON MEMBERSHIP RENEWALS. CANCELLATIONS WOULD IMPAIR OUR
PROFITABILITY.
We generally incur losses and negative cash flow during the initial
year of an individual membership program, as compared to renewal years, due
primarily to higher marketing costs associated with initial member procurement.
In addition, we experience a higher percentage of cancellations during the
initial membership period as compared to renewal periods. During an initial
annual membership term or renewal term, a member may cancel his or her
membership in the program, generally for a refund of the membership fee for that
period. Accordingly, the profitability of each of our programs depends on
recurring and sustained membership renewals.
OUR OPERATING RESULTS FLUCTUATE FROM QUARTER TO QUARTER.
Our quarterly revenues, expenses and operating results have varied
significantly in the past and are likely to vary significantly from quarter to
quarter in the future. Factors which affect our financial results include:
- the timing and cancellation of customer orders;
- our ability to introduce new programs on a timely basis;
- the introduction of programs by our competitors;
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- market acceptance of our and our clients' membership programs
generally;
- the timing of investments in program development;
- personnel changes;
- the demand for membership programs generally;
- the mix of programs we offer;
- unanticipated service interruptions;
- increased costs associated with expansion of operations;
- the availability of vendors to support offered programs;
- the rate of renewal by existing members of programs;
- the level of enthusiasm for health and fitness, travel, entertainment
and leisure activities, and other lifestyle elements underlying the
programs; and
- competitive pressures on selling prices and commissions paid to
clients for use of their lists.
Many of these factors are beyond our control. Because we determine our
expenditure levels in advance of each quarter, our ability to reduce costs
quickly in response to any revenue shortfall is limited, and thus operating
results may be adversely affected if projected revenues for a given quarter are
not achieved.
WE MAY BE UNABLE TO COMPETE WITH OTHER COMPANIES IN OUR INDUSTRY THAT HAVE
FINANCIAL OR OTHER ADVANTAGES.
We believe that the principal competitive factors in the membership
services industry include the ability to identify, develop and offer innovative
service programs, the quality and breadth of service programs offered, price and
marketing expertise. Our competitors, including other membership services
companies, large retailers, travel agencies, insurance companies and financial
service institutions, some of which have substantially larger customer bases and
greater financial and other resources than we do, offer membership programs
which provide services similar to, or which directly compete with, those
provided by us. There can be no assurance that:
- our competitors will not increase their emphasis on programs similar
to those we offer and more directly compete with us, or
- our competitors will not provide programs comparable or superior to
those we provide at lower membership prices, or
- our competitors will not adapt more quickly than us to evolving
industry trends or changing market requirements, or
- our competitors will not significantly increase commission rates paid
to clients thereby adversely affecting profitability, or
- new competitors will not enter the market, or
- other businesses will not themselves introduce competing programs.
Any increased competition may result in price reductions, reduced gross margins
and loss of market share, any of which could have a material adverse effect on
our business, financial condition and results of operations. Additionally,
because contracts between clients and program
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providers are often exclusive with respect to a particular service, potential
clients may be prohibited from contracting with us to promote a program if
the services we provide are similar to, or merely overlap with, the services
provided by an existing program of a competitor.
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OUR BUSINESS DEPENDS ON NEW PROGRAM INTRODUCTIONS. IF WE FAIL TO INTRODUCE NEW
PROGRAMS THAT ARE POPULAR, OUR BUSINESS WOULD SUFFER.
Our business is substantially dependent on our ability to develop and
successfully introduce new programs which generate consumer interest. Failure to
introduce new programs in a timely manner could result in our competitors
acquiring additional market share for a program in a particular area of consumer
interest. In addition, the introduction or announcement of new programs by us or
by others could render existing programs uncompetitive or obsolete, or result in
a delay or decrease in orders for existing programs as customers evaluate new
programs or select the new programs as an alternative to existing programs.
Therefore, the announcement or introduction of new programs by us or others, or
our failure to introduce new programs which have broad consumer appeal, could
have a material adverse effect on our business, financial condition and results
of operations.
WE DEPEND ON VENDORS AND TELEMARKETERS TO MARKET OUR PROGRAMS AND SERVICE. THESE
VENDORS AND TELEMARKETERS MAY TERMINATE THEIR RELATIONSHIP WITH US, AND WE
CANNOT CONTROL THE LEVEL AND THE QUALITY OF THE SERVICE THEY PROVIDE. ANY
SERVICE INTERRUPTION OR QUALITY PROBLEMS WOULD ADVERSELY AFFECT US.
We depend on independent vendors to provide most program products and
services to members and on telemarketers to market and service our programs to
prospective members. The vendors and telemarketers operate pursuant to
agreements with us that may be terminated by the vendor or telemarketer with
limited prior notice. There can be no assurance that, in the event a vendor or
telemarketer ceases operations, or terminates, breaches or chooses not to renew
its agreement with us, a replacement vendor or telemarketer could be retained on
a timely basis, if at all. In addition, vendors and telemarketers are
independent contractors and the level and quality of services provided is
outside our control. Any service interruptions, delays or quality problems could
result in customer dissatisfaction and membership cancellations, which could
have a material adverse effect on our business, financial condition and results
of operations.
INTRODUCING NEW PROGRAMS REQUIRES SIGNIFICANT INVESTMENTS. WE MAY NOT HAVE
ENOUGH FINANCIAL RESOURCES TO MEET ALL OF OUR NEEDS.
We typically incur high costs in the year a program is introduced.
Principal elements of these costs relate to hiring personnel, developing program
content, contracting with vendors, drafting, testing and refining telemarketing
scripts and creating membership kits for mailing to potential new program
members. We must incur costs to market programs to each potential member,
regardless of whether that individual actually becomes a paying member. Our
capital base is smaller than that of many of our competitors, and there can be
no assurance that our cash resources will be able to sustain our business,
particularly if we experience a reduction in revenues for a prolonged period or
if we face substantial unexpected capital requirements. To the extent that such
cash resources are insufficient to fund our activities, additional funds will be
required. There can be no assurance that additional financing will be available
on reasonable terms or at all. If additional capital is raised through the sale
of additional equity or convertible debt securities, dilution to our
shareholders would occur.
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WE RELY ON OUR COMPUTER AND COMMUNICATION SYSTEMS. IF SUCH SYSTEMS FAIL OR ARE
UNABLE TO KEEP PACE WITH TECHNOLOGICAL ADVANCES, OUR BUSINESS WOULD SUFFER.
Our business is highly dependent on our computer and telecommunications
systems and any temporary or permanent loss of either system, for whatever
reason, could have a material adverse effect on our business, financial
condition and results of operations. In addition, the technologies on which we
are dependent to compete effectively and meet our clients' needs are rapidly
evolving and in many instances are characterized by short product life cycles or
innovation. As a result, we are dependent on ongoing, significant investment in
advanced computer and telecommunications technology, including automated call
distributors and digital switches, and our ability to anticipate and adapt to
technological shifts. There can be no assurance that we will be successful in
anticipating or adapting to technological changes or in selecting and developing
new and enhanced technology on a timely basis.
WE DEPEND ON THE TELEPHONE SERVICES THROUGH WHICH WE MARKET OUR PRODUCTS. AN
INTERRUPTION OF, OR AN INCREASE IN THE BILLING RATE FOR, SUCH SERVICES WOULD
ADVERSELY AFFECT OUR BUSINESS.
We market and service our programs telephonically, and accordingly, our
business is highly dependent on telephone services provided by various local and
long distance telephone companies. Any significant interruption in telephone
services could adversely affect us. Additionally, limitations on the ability of
telephone companies to provide us with increased capacity that may be required
in the future, if any, could adversely affect our business, financial condition
and results of operations. Rate increases imposed by these telephone companies
will increase our operating expenses and could have a material adverse effect on
our business, financial condition and results of operations.
OUR INDUSTRY IS INCREASINGLY SUBJECT TO FEDERAL AND STATE GOVERNMENT REGULATION.
SUCH REGULATION COULD HINDER OUR OPERATIONS AND INCREASE OUR OPERATING COSTS.
The primary means which we use to market our programs is telemarketing.
The telemarketing industry has become subject to an increasing amount of Federal
and state regulation as well as general public scrutiny in the past several
years. For example, the Federal Telephone Consumer Protection Act of 1991 limits
the hours during which telemarketers may call consumers and prohibits the use of
automated telephone dialing equipment to call certain telephone numbers.
Additionally, the Federal Telemarketing and Consumer Fraud and Abuse Prevention
Act of 1994 and Federal Trade Commission ("FTC") regulations promulgated under
this act, prohibit deceptive, unfair or abusive practices in telemarketing
sales. Both the FTC and state attorneys general have authority to prevent
telemarketing activities deemed by them to be "unfair or deceptive acts or
practices." Further, some states have enacted laws and others are considering
enacting laws targeted directly at regulating telemarketing practices, and there
can be no assurance that any such laws, if enacted, will not adversely affect or
limit our current or future operations. Compliance with these regulations is
generally the responsibility of us, and we could be subject to a variety of
enforcement or private actions for any failure to comply with such regulations.
Our provision of membership programs requires us to comply with certain state
regulations, changes in which could materially increase our operating costs
associated with
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complying with such regulations. The risk of noncompliance by us with any
rules and regulations enforced by a Federal or state consumer protection
authority may subject us or our management to fines or various forms of civil
or criminal prosecution, any of which could materially adversely affect our
business, financial condition and results of operations. Also, the media
often publicizes perceived noncompliance with consumer protection regulations
and violations of notions of fair dealing with consumers, and the membership
programs industry is susceptible to peremptory charges by the media of
regulatory noncompliance and unfair dealing.
CHANGED MARKET CONDITIONS AND LACK OF FINANCING SOURCES (BOTH DEBT AND EQUITY)
HAVE RESULTED IN OUR INABILITY TO COMPLETE THE SPINOFF OF OUR CLICKSHIP
SUBSIDIARY SO WE HAVE DECIDED TO SELL OR WIND-DOWN CLICKSHIP.
On December 27, 2000, we announced that we will not be able to spinoff
ClickShip Direct, our order fulfillment and customer care subsidiary, because we
were not able to obtain sufficient financing for ClickShip as an independent
company. When we announced our intent to spinoff ClickShip in early 2000,
e-fulfillment and related e-commerce businesses had attractive market valuations
and financing prospects. Market conditions have changed, valuations have
declined substantially for comparable companies in the e-fulfillment and
customer care segment and financing has not been readily available.
Consequently, we intend to exit this line of business by selling or winding down
ClickShip by March 31, 2001.
THE PROSPECTS FOR THE SALE OF CLICKSHIP ARE UNCERTAIN AND A WIND-DOWN OF
CLICKSHIP WILL HAVE ADVERSE FINANCIAL CONSEQUENCES TO US.
The same factors that adversely affected our ability to finance
ClickShip as a separate company are likely to affect our ability to sell the
business and, if we are able to arrange a sale, these factors will likely have
an adverse impact on the selling price of the business. If we are not able to
promptly sell the ClickShip business, we will have to wind-down the business.
The prices for ClickShip's assets in a wind-down situation are likely to be less
than what we might have received if we were able to sell the business in its
entirety. In the event of a wind-down of ClickShip, we currently estimate
that we could incur up to $15 million in net cash outlays related to
personnel related costs, continuing lease obligations and other costs related
to the wind-down, of which approximately 60% would be expended during the
next 90 days and the balance over several years.
WE DEPEND ON OUR KEY EXECUTIVE AND MARKETING PERSONNEL. A LOSS OF SUCH PERSONNEL
WOULD NEGATIVELY IMPACT OUR OPERATIONS.
Our performance is highly dependent on the continued services of our
executive officers and other key personnel, the loss of one or more of whom
could have a material adverse effect on our business. In addition, we need to
attract and retain other highly skilled technical and managerial personnel for
whom there is intense competition. We cannot assure you that we will be able to
attract and retain the personnel necessary for the continuing growth of our
business. Our inability to attract and retain qualified technical and managerial
personnel would have a material adverse effect on our operations.
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WE ARE UNCERTAIN ABOUT THE AVAILABILITY OF ADDITIONAL CAPITAL.
Our company will need significant additional capital to continue
operations and to take advantage of growth opportunities, including strategic
alliances and acquisitions, to respond to changing business conditions and
unanticipated competitive pressures and, if we have to wind-down ClickShip, to
fund the related wind-down costs. Additionally, funds from operations may be
less than anticipated. Should these circumstances arise, we may need to raise
additional funds either by borrowing money or issuing additional equity. We
cannot assure you that we will be able to raise such funds on favorable terms or
at all. If we are unable to obtain additional funds, we may be unable to take
advantage of new opportunities or take other actions that otherwise might be
important to our business and may not be able to continue our business.
RECENT DEVELOPMENTS
On December 27, 2000, we sold ClickShip's fulfillment center to a third
party for $22.0 million resulting in an estimated pre-tax loss of approximately
$2.5 million. ClickShip leased back approximately 471,000 square feet of the
fulfillment center for its operations on a two-year lease with one five-year
renewal option. The annual base rent under the lease is $1.9 million plus an
allocable share of the operating expenses, real estate taxes and insurance for
the facility. At the closing of the sale, we paid a rental deposit of
approximately $1.9 million to the landlord and Damark guaranteed the obligations
of ClickShip during the initial two-year term of the lease.
From the proceeds of the sale of the fulfillment center, we repaid
the construction loan of $10.3 million used to finance the recently completed
312,000 square foot expansion and paid approximately $1.9 million for the
rental deposit under ClickShip's lease. In addition, in connection with
obtaining the consent of the lender under our bank line of credit, we paid
$10.0 million of the outstanding borrowings under our bank credit line. As of
December 27, 2000, the outstanding balance under our credit line was
approximately $4.7 million after giving effect to this payment. On January 1,
2001, our line of credit will be reduced from $15 million to $10 million. In
addition, we are required to reduce our outstanding borrowings under the
credit line to zero during the month of March, 2001. Subject to complying
with the loan covenants, we should be able to make future borrowings under
the available line of credit. Based on the expected cash needs to operate the
Provell membership business, we anticipate that we will need to refinance our
bank line to increase the amount of available credit. The cash needs would be
substantially greater in the near term if we had to wind-down ClickShip. In
the event of a wind-down of ClickShip, we currently estimate that we could
incur up to $15 million in net cash outlays related to personnel related
costs, continuing lease obligations and other costs related to the wind-down,
of which approximately 60% would be expended during the next 90 days and the
balance over several years. There can be no assurance as to the availability
of an increased line of credit with our current lender or other lenders and
the terms of the new credit line, including interest rate and fees, may be
less favorable than the current bank line.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this prospectus
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, 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;
- Inability to profitably expand in the membership services market;
- 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;
- Ability to sell or wind-down ClickShip without a material adverse
financial impact on us;
- Adverse and uncertain impact on us of a liquidation of the ClickShip;
- Externally mandated changes in accounting guidelines;
- Availability of capital on acceptable terms; and
- Availability of financing on acceptable terms.
Investors and other readers are urged to consider these and other factors,
including the risk factors disclosed in this prospectus, in evaluating an
investment in the common stock being
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<PAGE>
offered by this prospectus. All forward-looking statements and reasons why
results may differ included in this prospectus are made as of the date of
this prospectus, and Damark assumes no obligation to update any such
forward-looking statement or reason why actual results might differ.
DAMARK INTERNATIONAL, INC.
Damark, a marketing solutions provider, utilizes targeted
information-based strategies to bring a broad range of products, programs and
services to consumers through direct mail, telesales and the Internet. We
currently operate in two distinct segments--membership services and product
fulfillment/customer care services.
Our membership services business, operated under the name "Provell,"
develops, markets and manages fee-based membership programs that 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. Provell outsources its teleservices orders and
customer care service with carefully selected telemarketing providers, including
ClickShip.
Our order capture, product fulfillment and customer services business,
operated through our ClickShip subsidiary, provides clients in the "e-tailing,"
"clicks & mortar" retailing, and consumer goods manufacturing industries with
transaction management services to enable the clients to effect the sale of
their products or services. ClickShip offers a variety of support services
including web site hosting, on- and off-line order capture, payment processing,
inventory receipt, warehousing and shipment, returns processing, and
after-the-sale customer service and support.
On December 27, 2000, we announced that we will not be able to spinoff
ClickShip Direct, our order fulfillment and customer care subsidiary, because we
were not able to obtain sufficient financing for ClickShip as an independent
company. When we announced our intent to spinoff ClickShip in early 2000,
e-fulfillment and related e-commerce businesses had attractive market valuations
and financing prospects. Market conditions have changed, valuations have
declined substantially for comparable companies in the e-fulfillment and
customer care segment and financing has not readily available. Consequently, we
intend to either sell or liquidate ClickShip by March 31, 2001.
We were incorporated in Minnesota in 1986. Our principal offices are
located at 301 Carlson Parkway, Suite 201, Minneapolis, Minnesota 55305 and our
telephone number is (952) 258-2000. Our corporate website is located at
www.damark.com and is not incorporated by reference in this prospectus.
USE OF PROCEEDS
We will not receive any proceeds upon conversion of the series D
preferred shares or from the sale by the selling shareholders of the shares of
common stock issued upon such conversion. We will receive the exercise price of
any warrants relating to the series D preferred
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<PAGE>
shares that may be exercised by the selling shareholders, but they are under
no obligation to exercise. Assuming the exercise of all of the warrants, the
gross proceeds to us from the exercise of the warrants issued in connection
with the series D preferred shares would be approximately $12.5 million. If
any or all of the warrants held by the selling shareholders are exercised, we
intend to use the net proceeds for working capital and general corporate
purposes.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 22,000,000 shares of common
stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par
value $.01 per share. Of the authorized common stock, 20,000,000 shares are
designated class A common stock, 5,853,519 of which were issued and outstanding
as of November 30, 2000, and 2,000,000 shares are designated class B common
stock, none of which is issued and outstanding. Of the authorized preferred
stock, 2,400,000 shares are designated series A convertible preferred stock,
1,650,000 shares are designated series B convertible non-voting preferred stock,
400,000 shares are designated series C junior participating preferred stock, and
200,000 shares are designated 6.5% cumulative convertible preferred stock,
series D. There are no shares of preferred stock outstanding other than the
200,000 shares of series D preferred stock issued on September 29, 2000.
The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our restated
articles of incorporation and amended and restated bylaws and by the provisions
of applicable Minnesota law, particularly the certificate of designations,
preferences and rights relating to the Series D preferred shares.
COMMON STOCK
As of November 30, 2000, there were 5,853,519 shares of common stock
outstanding, held of record by approximately 484 shareholders. In addition, as
of November 30, 2000, there were 1,868,998 shares of common stock subject to
outstanding options.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by shareholders. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preference of any outstanding preferred stock. The common stock has
no preemptive or other similar rights. All outstanding shares of common stock
are fully paid and non-assessable.
PREFERRED STOCK
Our restated articles of incorporation authorize the issuance of
preferred stock in one or more series with designations, rights and preferences
determined from time to time by the board of directors, without further action
by the shareholders. The issuance of preferred stock could
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<PAGE>
have the effect of restricting dividends on the common stock, diluting the
voting power of the common stock, impairing the liquidation rights of the
common stock or delaying or preventing our change in control without further
action by the shareholders. We have no present plans to issue any additional
shares of preferred stock.
SERIES D CONVERTIBLE PREFERRED STOCK
GENERAL. On September 29, 2000, we issued 200,000 shares of our series
D preferred stock, $100 stated value per share, and warrants to purchase 772,798
shares of our common stock with a current warrant exercise price of $16.17 per
share in a private placement to select institutional investors. The net proceeds
of the offering, after expenses, were approximately $18.9 million. We would
receive an additional $12.5 million if the warrants were exercised in full.
DIVIDENDS. The series D preferred shares carry a cumulative dividend
rate of 6.5% per annum, payable quarterly in arrears on the last day of March,
June, September and December, commencing on December 31, 2000. Such dividend
accrues from day-to-day, whether or not earned or declared, beginning as of
September 29, 2000. At the option of our Board of Directors, dividends may be
paid in cash or shares of common stock. If we choose to pay dividends in shares
of our common stock, the number of shares to be issued in payment of a dividend
on the series D preferred shares will be equal to the accrued dividends divided
by 90% of the then market price of our common stock.
For purposes of this calculation, the market price of our common stock
will be equal to 90% of the average of the closing bid price of our common stock
during the ten trading days immediately preceding the dividend date. For
example, if the quarterly dividend of $325,000, assuming all 200,000 shares of
series D preferred stock are outstanding, was payable on September 29, 2000, and
we elected to pay the dividend in shares of our common stock, then 90% of the
average of the closing bid prices of our common stock during the ten consecutive
trading days ending on September 28, 2000 would have been $14.125 per share, and
we would have been required to issue 25,566 shares of common stock per share of
series D preferred stock in lieu of a cash dividend.
CONVERSION. The selling shareholders have the right to convert the
shares of Series D preferred stock at any time after the date of initial
issuance. The number of shares of common stock to be issued upon conversion of a
series D preferred share is determined by dividing the sum of $100 plus accrued
and unpaid dividends by the applicable conversion price as described below. The
current conversion price is $12.94 per share, subject to certain adjustments for
future events, including delays in the spinoff, sale or wind-down of ClickShip
Direct. The terms of the series D preferred shares also contain customary
provisions for the adjustment of the conversion price in the event a stock
dividend or stock split is declared or any recapitalization, reorganization, or
similar transaction occurs.
Had the ClickShip spinoff been completed, the conversion price of the
series D preferred shares would have been reduced by the greater of:
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<PAGE>
- the average of the closing bid prices of ClickShip's securities during
the ten trading days immediately following the date of the ClickShip
distribution;
- the value per share to our shareholders established by our board of
directors for federal income tax purposes as a result of the ClickShip
distribution; and
- the difference between (i) the average of the closing bid prices of our
common stock for the ten trading days immediately preceding the date
of the ClickShip distribution and (ii) the average of the closing bid
prices of our common stock for the ten trading days immediately
following the date of the ClickShip distribution.
If the ClickShip spinoff, sale or wind-down is not completed by March
31, 2001, the conversion price then in effect will be reduced to an amount equal
to the lesser of:
- the average of the closing bid prices for the twenty trading days
prior to March 31, 2001, and
- 101% of the closing bid price of the trading day immediately preceding
March 31, 2001.
In the event we issue or sell any additional shares of our common
stock, or any stock or other securities convertible into or exchangeable for
additional shares of our common stock without consideration or for a
consideration that is less than the conversion price of the series D preferred
shares in effect immediately prior to such event, then the conversion price of
the series D preferred shares will be reduced to a price equal to the price paid
upon such issuance or sale. The conversion price of the series D preferred
shares will not be adjusted for issuances of common stock occurring as a result
of:
- the conversion of the series D preferred shares;
- the exercise of the related warrants;
- any adjustments required under the anti-dilution provisions of the
series D preferred shares and the warrants;
- the exercise of stock options to be granted under our stock plans to
purchase up to an aggregate of 1,500,000 shares of common stock;
- the payment of dividends on the series D preferred shares in shares
of our common stock rather than in cash;
- the exercise of outstanding stock options to purchase up to 1,874,998
shares of common stock; or
- strategic financings.
Under the terms of the series D preferred shares, a strategic financing
means the issuance of additional shares of our common stock for consideration
other than cash or its equivalent to any person or entity for the purpose of
establishing or furthering a material business, technology or commercial
relationship, provided that our board of directors has determined that the
strategic financing is likely to result in or further such a relationship. An
aggregate of up to 750,000 shares may be issued in strategic financings.
The terms of the series D preferred stock and the related warrants
provide that the
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preferred stock is convertible and the warrants are exercisable by any holder
only to the extent that the number of shares of common stock issuable at that
time, together with the number of shares of common stock beneficially owned
by that holder and its affiliates as determined in accordance with Section
13(d) of the Securities Exchange Act, would not exceed 4.99% of our then
outstanding common stock. Any holder may, however, elect to waive this
restriction by giving us written notice at least sixty-one days prior to the
date on which the series D shares are to be converted or the warrants
exercised in an amount that would exceed the 4.99% limitation.
MANDATORY REDEMPTION. The series D preferred shares mature on September
29, 2002, at which time the series D preferred shares must be redeemed or
converted at our option. If we elect to redeem any series D preferred shares
outstanding on September 29, 2002, the amount required to be paid will be equal
to the liquidation preference of the series D preferred shares, which equals the
price originally paid for such shares plus accrued and unpaid dividends. If we
elect to convert any series D preferred shares outstanding on September 29,
2002, we will be required to issue shares in an amount equal to the price paid
for the series D preferred shares plus accrued and unpaid dividends divided by
the mandatory redemption price. The mandatory redemption price will be equal to
90% of the average of the closing bid price of our common stock during the ten
trading days immediately preceding the redemption date.
RIGHT TO REQUIRE REDEMPTION UPON TRIGGERING EVENT. If a triggering
event occurs, the holders of the series D preferred shares will have the right
to require us to redeem all or a portion of any outstanding series D preferred
shares for cash. The redemption price in such a case is the greater of:
- 125% of the price paid for the series D preferred shares plus accrued
dividends; or
- the product of the number of shares of common stock into which the
series D preferred stock is convertible multiplied by the closing sale
price of our common stock on the trading day immediately before the
triggering event occurs.
A "triggering event" is deemed to have occurred if:
- while the registration statement is required to be maintained
effective, the effectiveness of the registration statement lapses
for any reason, including, without limitation, the issuance of a
stop order, or is unavailable to a holder of the series D preferred
shares for sale of all of the shares being registered by the
registration statement, in accordance with the terms of the related
registration rights agreement and such lapse or unavailability
continues for a period of 10 consecutive trading days or for more
than an aggregate of 20 trading days in any 180-day period;
- our common stock is suspended or delisted from trading on the Nasdaq
National Market, the American Stock Exchange or the New York Stock
Exchange for a period of ten days during any period of 12 months; or
- we give notice to any holder of series D preferred shares of our
intent not to comply with a request for conversion tendered in
accordance with the terms of the certificate of designations
relating to the series D preferred shares.
REDEMPTION UPON CONSUMMATION OF A MAJOR TRANSACTION. On the date a
major transaction
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is completed, we, or our successor, must redeem for cash all of the selling
shareholders, series D preferred shares outstanding on that date at a price
per share equal to 125% of the price paid for the series D preferred shares
plus all accrued and unpaid dividends. A "major transaction" means the
occurrence of any of the following events:
- the consummation of a consolidation, merger or reorganization of us
with or into another person;
- the consummation of a sale, transfer, lease, disposal or abandonment
of all or substantially all of our assets, but that the distribution
or disposition of ClickShip is not considered such a transaction;
- the consummation of a purchase, tender or exchange offer for more
than 50% of our outstanding shares of common stock or other voting
securities is made and accepted by the holders of such securities.
Within five days after we enter into an agreement to effect a major transaction,
we are required to deliver a written notice of the major transaction to each
holder of series D preferred stock.
OPTIONAL REDEMPTION. We also have the right, provided specified
conditions are satisfied, to redeem all of the outstanding series D preferred
shares for cash equal to the price paid for each preferred share plus accrued
but unpaid dividends, at any time after September 29, 2001. The conditions to
our right to redeem series D preferred shares include:
- a registration statement relating to the series D preferred shares to
be redeemed is effective;
- the closing bid price for our common stock is equal to not less than
twice the conversion price on each of no less than twenty consecutive
trading days; and
- we deliver an irrevocable notice of our election to redeem within two
business days of the applicable twenty-day determination period.
LIQUIDATION PREFERENCE. In the event of our liquidation, the holders of
the series D preferred shares will be entitled to a liquidation preference,
after payment to holders of indebtedness which is senior in rank to the series D
preferred stock but before any amounts are paid to the holders of our common
stock. The liquidation preference is equal to 125% of the amount originally paid
for the series D preferred shares, or $100 per share, plus accrued and unpaid
dividends on any outstanding series D preferred shares.
VOTING RIGHTS. Other than as required by law, the holders of the series
D preferred shares have no voting rights except that the consent of holders of
at least two-thirds of the outstanding series D preferred shares will be
required to effect any change in either our restated articles of incorporation
or certificate of designations that would change any of the rights of the series
D preferred shares.
WARRANTS
Warrants to purchase 772,798 shares of our common stock were issued in
connection
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with the sale of the series D preferred shares as of September 29, 2000 at an
exercise price of $16.17 per share, subject to anti-dilution adjustments.
These warrants are presently exercisable and will expire in 2003. The
exercise price is subject to adjustments if we declare a stock split or
dividend of our common stock and will be reduced if we issue shares of our
common stock at a price that is below the average of the closing bid prices
of the common stock for the ten trading shares immediately preceding such
issuance.
If the liquidation or sale of ClickShip is not completed by March 31,
2001, the exercise price of the warrants will be reduced, but not increased, to
an amount equal to the lesser of:
- the average of the closing bid prices for the 20 twenty trading days
prior to March 31, 2001; and
- 101% of the closing bid price of the trading day immediately preceding
March 31, 2001.
We intend to use the proceeds if the warrants are exercised primarily
for working capital and general corporate purposes. As of September 29, 2000,
other than the warrants issued to the holders of the series D preferred shares,
there were no warrants outstanding.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement between us and the holders
of the series D preferred shares, we agreed to file a registration statement of
which this prospectus constitutes a part, covering the resales by the selling
shareholders of:
- common stock issuable upon conversion of the series D preferred stock,
including voluntary conversion,
- common stock issuable upon exercise of the related warrants,
- common stock issuable in payment of dividends on the series D preferred
shares,
- common stock issuable in payment of the mandatory redemption price for
the series D preferred shares; and
- common stock issuable with respect to such securities as a result of
any stock split, stock dividend, recapitalization, exchange or similar
event.
We are also required to provide the selling shareholders with a current
prospectus upon request for such selling shareholders to use in the resale of
the common stock.
Under the terms of such agreement, we are required to register at least
200% of the number of shares of common stock issuable upon conversion of and in
lieu of cash dividends on the series D preferred shares and exercise of the
related warrants. We are also required to maintain the effectiveness of the
registration statement covering such shares of common stock until the earlier
of:
- six months after the date as of which the holders of the series D
preferred shares and warrants may sell all of the shares of common
stock covered by such registration
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statement under Rule 144(k) of the Securities Act, and
- the date on which none of the series D preferred shares and related
warrants are outstanding.
We will bear all registration expenses, other than underwriting discounts and
commissions, with respect to the registration statement relating to the series D
preferred shares and the related warrants.
SELLING SHAREHOLDERS
The following table presents information known to us with respect to
beneficial ownership of our common stock by the selling shareholders as of
November 30, 2000 based upon 8,853,519 shares of our common stock outstanding on
such date. The number of shares in the table represents an estimate of the
number of shares of common stock to be offered by the selling shareholders, if
the holders were to fully convert the series D preferred shares as of September
29, 2000, fully exercise the warrants, and offer all the resulting shares of
common stock for sale.
The actual number of shares of common stock issuable upon conversion of
the series D preferred stock and exercise of the related warrants is
indeterminate, and could be materially more than the amount estimated due to the
conversion and exercise price adjustments explained in the section of this
prospectus entitled "Description of Capital Stock--Series D Convertible
Preferred Stock" and "--Warrants" on pages 18 and 22, respectively.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially
Prior to Offering(1) Owned After Offering
------------------------------------------------- --------------------
Shares Offered Upon
Conversion of Shares Offered Upon
Selling Shareholders Preferred Stock (2) Exercise of Warrants (2) Number of Shares
-------------------- ------------------- ------------------------ ----------------
<S> <C> <C> <C>
BayStar Capital, L.P. 463,678 231,839 0
(Delaware)
BayStar International, Ltd. 154,559 77,281 0
(British Virgin Islands)
Stark International 463,678 231,839 0
(Bermuda)
Shepherd Investments 463,678 231,839 0
International, Ltd.
(British Virgin Islands)
</TABLE>
------------------
(1) The selling shareholders shall not be entitled to exercise their respective
warrants, nor will we recognize such exercise, such that upon giving effect
to such exercise, the aggregate number of shares of our common stock then
beneficially owned (as defined in Section 13(d) of the Exchange Act of
1934) by such selling shareholder and its "affiliates" (as defined in Rule
144 of the Securities Act of 1933) would exceed 4.99% of the total
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<PAGE>
issued and outstanding shares of our common stock following such exercise.
(2) Assumes a conversion price of $12.94 for the series D preferred stock and a
warrant exercise price of $16.17 per share as of September 29, 2000.
Except for the shares registered hereby, the selling shareholders do
not own any other of our securities and have not had any material relationship
with us within the past three years. The selling shareholders may sell all, some
or none of their shares in this offering. See "Plan of Distribution."
The terms of the series D preferred shares and the related warrants
limit the percentage of our common stock beneficially owned by the selling
shareholders. See "Description of Capital Stock--Series D Convertible Preferred
Stock--Conversion." In addition, as a result of limitations imposed by Nasdaq
and the terms of the preferred stock, we may not issue shares representing more
than 19.99% of our outstanding stock unless we obtain shareholder approval or a
waiver of the limitations by Nasdaq.
PLAN OF DISTRIBUTION
The shares being offered through this prospectus will be offered and
sold by the selling shareholders upon conversion of the series D preferred
shares, exercise of the related warrants or receipt of shares in payment of
dividends on the series D preferred stock. The selling shareholders, as used in
this prospectus, includes, donees, pledges, transferees or other successors in
interest who may receive shares from the selling shareholders after the date of
this prospectus. We have agreed to bear the expenses of the registration of the
shares, including legal and accounting fees, and to pay the legal fees of
selling shareholders for separate legal counsel they obtain to review the
registration statement. We will not be responsible for paying any discounts or
commissions with respect to sales of the shares.
The selling shareholders may offer their shares of our common stock at
various times in one or more of the following transactions (as well as other
methods of sale):
- in ordinary broker's transactions on Nasdaq or any national securities
exchange on which our common stock may be listed at the time of sale;
- in the over-the-counter market;
- in negotiated transactions;
- by pledge to secure debts and other obligations;
- in connection with the writing of non-traded and exchange-traded call
options; or
- in a combination of any of the above transactions.
The selling shareholders may sell their shares at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices or at fixed prices. The selling shareholders may
use broker-dealers to sell their shares. If this happens, broker-dealers will
either receive discounts or commissions from the selling shareholders or they
will receive commissions from purchasers of shares for whom they acted as
agents.
The selling shareholders also may resell all or a portion of their
shares in open market
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transactions in reliance upon Rule 144 under the Securities Act. The
shareholder must meet the criteria and conform to the requirements of that
rule
The selling shareholders have not advised us of any specific plans for
the distribution of the shares covered by this prospectus.
We have agreed to pay all costs relating to the registration of the
shares. Any commissions or other fees payable to broker-dealers in connection
with any sale of the shares will be paid by the selling shareholders or other
party selling the shares. We will indemnify the selling shareholders against
liabilities, including some liabilities under the Securities Act, in accordance
with the registration rights agreement or the selling shareholder will be
entitled to contribution. We will be indemnified by the selling shareholders
against civil liabilities, including liabilities under the Securities Act, that
may arise from any written information furnished to us by the selling
shareholders for use in this prospectus, in accordance with the related
registration rights agreement or will be entitled to contribution.
Once sold under the shelf registration statement, of which this
prospectus forms a part, the shares of common stock will be freely tradable in
the hands of persons other than our affiliates.
LEGAL MATTERS
The validity of the shares of common stock offered was passed upon for
us by Kaplan, Strangis and Kaplan, P.A. Ralph Strangis, one of our directors, is
also a member of the law firm of Kaplan, Strangis and Kaplan, which provided
legal services to us in 2000. Members of Kaplan, Strangis and Kaplan own
100,502.95 shares of our common stock, including 5,000 shares, options to
purchase 90,000 shares and 4,502.95 common stock equivalents under the Company's
Non-Employee Director Deferred Compensation Plan held by Mr. Strangis.
EXPERTS
The December 31, 1999 financial statements and schedule incorporated by
reference in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports and other information
with the SEC. You may read and copy any document we file at the SEC's public
reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices in New York, New York
and Chicago, Illinois. Copies of such material also may be obtained at
prescribed rates from the Public Reference Branch of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549-1004. Please call the SEC at 1-800-SEC-0330
for further information on the operation of its public reference rooms. Our SEC
filings and registration statements can also be reviewed by accessing the SEC's
Internet site at http://www.sec.gov. Our
24
<PAGE>
common stock is listed on The Nasdaq Stock Market's National Market System
and such reports and other information concerning Damark may be inspected at
the offices of The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C.
20006-1506.
We have filed a registration statement on Form S-3 with the SEC with
respect to the common stock offered by this prospectus. This prospectus, which
constitutes part of the registration statement, does not contain all of the
information included in the registration statement. You should refer to the
exhibits attached to the registration statement and its exhibits. The references
to any contract or other document are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. You may obtain a copy of the registration statement
from the SEC's principal office in Washington, D.C. upon payment of the
prescribed fees, or you may examine the registration statement without charge at
the SEC's public reference rooms or via the SEC website as described above.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be a part of this prospectus, and information that we later file
with the SEC will automatically update and supersede the information in this
prospectus. We incorporate by reference the documents listed below and any
future filing we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 until the selling shareholders sell all of
the shares offered by this prospectus:
- Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
- Quarterly Report on Form 10-Q for the period ended April 1, 2000.
- Quarterly Report on Form 10-Q for the period ended July 1, 2000.
- Quarterly Report on Form 10-Q for the period ended September 30, 2000.
- Current Report on Form 8-K filed on October 2, 2000.
- Current Report on Form 8-K filed on December 29, 2000.
- The description of our capital stock contained in our registration
statement on Form S-1, (SEC File No. 33-45056), including any
amendments or reports filed for the purpose of updating such
description.
You may request a copy of these filings at no cost by calling us at
(952) 258-2000 or writing to us at the following address:
Damark International, Inc.
Attention: Kim Mageau, Chief Financial Officer
25
<PAGE>
301 Carlson Parkway, Suite 201
Minneapolis, Minnesota 55305
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. The selling shareholders
will not make an offer of the shares of our common stock in any state where the
offer is not permitted. You should not assume that the information in this
prospectus or any prospectus supplement is accurate as of any date other than
the date on the front of those documents.
26
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by Damark
in connection with the sale of common stock being registered. All of the amounts
shown are estimates, except the SEC registration fee and the Nasdaq National
Market filing fee.
<TABLE>
<S> <C>
SEC registration fee..................................... $ 15,072.75
Nasdaq listing fee....................................... $ 17,500.00
Printing expenses........................................ $ 20,000.00
Legal fees and expenses.................................. $ 25,000.00
Accounting fees and expenses............................. $ 10,000.00
Miscellaneous fees and expenses.......................... $ 12,427.25
Total........................................... $100,000.00
----------
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Article IX of our restated articles of incorporation and Article V of
our amended and restated bylaws provide for indemnification of our directors,
officers, employees and other agents to the extent required under Minnesota law.
Minnesota Statutes, Section 302A.521 requires the Registrant to
indemnify a person made or threatened to be made a party to a proceeding, by
reason of the former or present official capacity of the person with respect to
the Registrant, against judgments, penalties, fines, including without
limitation, excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys' fees
and disbursements, if, with respect to the acts or omissions of the person
complained of in the proceeding, such person (1) has not been indemnified by
another organization or employee benefit plan for the same judgments, penalties,
fines, including without limitation, excise taxes assessed against the person
with respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding with respect to the same acts or omissions; (2)
acted in good faith; (3) received no improper personal benefit, and statutory
procedure has been followed in the case of any conflict of interest by a
director; (4) in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and (5) in the case of acts or omissions
occurred in the person's performance in the official capacity of director or,
for a person not a director, in the official capacity of officer, committee
member, employee or agent, reasonably believed that the conduct was in the best
interests of the Registrant, or in the case of performance by a director,
officer, employee or agent of the Registrant as a director, officer, partner,
trustee, employee or agent of another organization or employee benefit plan,
reasonably believed that the conduct was not opposed to the best interests of
the Registrant.
<PAGE>
In addition, Section 302A.521, subd. 3, requires payment by the
Registrant upon written request, of reasonable expenses in advance of final
disposition in certain instances. A decision as to required indemnification is
made by a majority of the disinterested Board of Directors present at the
meeting at which a disinterested quorum is present, or by a designated committee
of disinterested directors, by special legal counsel, by the disinterested
shareholders, or by a court.
The Registrant also maintains a director and officer insurance policy
to cover the Registrant, its directors and its officers against certain
liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed herewith or incorporated herein by
reference.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
4.1 Certificate of Designations, Preferences and Rights for
Series D Preferred Stock (incorporated herein by reference to
Exhibit 3.1 of the Registrant's Current Report on Form 8-K
filed on October 2, 2000)
5.1 Opinion of Kaplan, Strangis and Kaplan, P.A. regarding the
legality of the securities being registered (previously
filed).
10.1 Securities Purchase Agreement dated as of September 29, 2000
(incorporated herein by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed on October 2,
2000)
10.2 Form of Common Stock Purchase Warrant (incorporated herein by
reference to Exhibit 10.2 of the Registrant's Current Report
on Form 8-K filed on October 2, 2000)
10.3 Registration Rights Agreement (incorporated herein by
reference to Exhibit 10.3 of the Registrant's Current Report
on Form 8-K filed on October 2, 2000)
23.1 Consent of Kaplan, Strangis and Kaplan, P.A. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (previously filed)
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made of the securities registered hereby, a post-effective
amendment to this registration statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this
registration statement (or the most recent
post-effective
2
<PAGE>
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in this registration
statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities
offered (if the total dollar value of securities
offered would not exceed that which was registered)
and any deviation from the low or high end the
estimated maximum offering range may be reflected
in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than
a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed
in this registration statement or any material
change to such information in this registration
statement;
provided, however, that the undertakings set forth in
paragraphs (i) and (ii) above do not apply if the information
required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered hereby which
remain unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the Registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered herein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the SEC such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling
3
<PAGE>
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act of
1933 and will be governed by the final adjudication of such issue.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this amendment to registration statement on Form
S-3 and has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Minneapolis, State
of Minnesota, on January 3, 2001.
DAMARK INTERNATIONAL, INC.
By: /s/
----------------------------------
Mark A. Cohn, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman, Chief Executive Officer and January 3, 2001
-------------------------------------------- Director (Principal Executive Officer)
Mark A. Cohn
* Senior Vice President and Chief January 3, 2001
-------------------------------------------- Financial Officer (Principal Financial
Kim M. Mageau and Accounting Officer)
* Director January 3, 2001
--------------------------------------------
Ralph Strangis
* President, Chief Operating Officer and January 3, 2001
-------------------------------------------- Director
George S. Richards
* Director January 3, 2001
--------------------------------------------
Stephen J. Hemsley
</TABLE>
* Signed by Mark A. Cohn on January 3, 2001 pursuant to a previously
filed power of attorney
5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
4.1 Certificate of Designations, Preferences and Rights for Series D Preferred Stock
(incorporated herein by reference to Exhibit 3.1 of the Registrant's Current Report
on Form 8-K filed on October 2, 2000)
5.1 Opinion of Kaplan, Strangis and Kaplan, P.A. regarding the legality of the securities
being registered (previously filed).
10.4 Securities Purchase Agreement dated as of September 29, 2000 (incorporated herein by
reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on
October 2, 2000)
10.5 Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 10.2
of the Registrant's Current Report on Form 8-K filed on October 2, 2000)
10.6 Registration Rights Agreement (incorporated herein by reference to Exhibit 10.3 of the
Registrant's Current Report on Form 8-K filed on October 2, 2000)
23.1 Consent of Kaplan, Strangis and Kaplan, P.A. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
</TABLE>
