1
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 JUNE 30, 1997 OR
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 0-21796
CDW COMPUTER CENTERS, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-3310735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 N. Milwaukee Ave. 60061
Vernon Hills, Illinois (Zip Code)
(Address of principal executive offices)
(847) 465-6000
(Registrant's telephone number, including area code)
1020 E. LAKE COOK RD. BUFFALO GROVE, IL 60089
---------------------------------------------
(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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---------------- ----------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
---------------- ----------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
AS OF AUGUST 14, 1997, 21,524,984 COMMON SHARES WERE OUTSTANDING.
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CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets - 1
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Income - 2
Three and Six Months Ended June 30, 1997 and 1996
Condensed Consolidated Statement of 3
Shareholders' Equity - Six Months Ended
June 30, 1997
Condensed Consolidated Statements of Cash Flows - 4
Six Months Ended June 30, 1997 and 1996
Notes to Condensed Consolidated Financial 5-7
Statements
ITEM 2. Management's Discussion and Analysis of 8-14
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security 16
Holders
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
ii
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
June 30, December 31,
1997 1996
--------- ------------
ASSETS
Current assets :
Cash and cash equivalents $ 11,354 $ 16,462
Marketable securities 69,001 58,490
Accounts receivable, net of allowance for doubtful
accounts of $1,500 and $1,100, respectively 65,917 57,396
Miscellaneous receivables 1,989 3,931
Merchandise inventory 47,012 41,462
Prepaid expenses and other assets 1,081 823
Deferred income taxes 2,374 2,258
--------- ---------
Total current assets 198,728 180,822
Property and equipment, net 3,082 3,636
Construction-in-progress 17,483 8,659
Deferred income taxes and other assets 5,411 5,713
--------- ---------
Total assets $ 224,704 $ 198,830
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 28,228 $ 36,642
Accrued expenses :
Compensation 9,568 10,750
Income taxes 7,664 2,892
Exit costs 3,931 3,987
Other 3,511 2,937
--------- ---------
Total current liabilities 52,902 57,208
--------- ---------
Commitments and contingencies
Shareholders' equity :
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 75,000 shares
authorized; 21,525 shares issued and
outstanding 215 215
Paid-in capital 73,794 67,953
Retained earnings 99,476 75,417
Unearned compensation (1,683) (1,963)
--------- ---------
Total shareholders' equity 171,802 141,622
--------- ---------
Total liabilities and shareholders' equity $ 224,704 $ 198,830
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Six Months
Ended June 30, 1997 Ended June 30, 1997
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Net sales $ 304,545 $ 218,687 $ 602,322 $ 425,392
Cost of sales 262,888 189,071 520,722 369,129
--------- --------- --------- ---------
Gross profit 41,657 29,616 81,600 56,263
Selling and administrative expenses 21,586 16,555 43,613 30,911
Exit charge - - - 4,000
--------- --------- --------- ---------
Income from operations 20,071 13,061 37,987 21,352
Interest income 1,032 842 1,989 1,677
Other income (expense), net (60) (44) (111) (98)
--------- --------- --------- ---------
Income before income taxes 21,043 13,859 39,865 22,931
Income tax provision 8,343 5,365 15,806 8,903
--------- --------- --------- ---------
Net income $ 12,700 $ 8,494 $ 24,059 $ 14,028
========= ========= ========= =========
Net income per share $ 0.59 $ 0.39 $ 1.11 $ 0.65
========= ========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding 21,673 21,810 21,677 21,729
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Total
Common Stock Retained Unearned Shareholders'
Shares Amount Paid-in Capital Earnings Compensation Equity
--------------------------------------------------------------------------------------
Balance at December 31, 1996 21,525 $ 215 $ 67,953 $ 75,417 $ (1,963) $ 141,622
MPK Restricted Stock Plan forfeitures - - (45) - 23 (22)
Amortization of unearned compensation - - - - 257 257
Tax benefit from restricted stock and - - 5,835 - - 5,835
stock option transactions
Capital contribution for legal costs assumed - - 51 - - 51
by majority shareholder
Net income - - - 24,059 - 24,059
--------------------------------------------------------------------------------------
Balance at June 30, 1997 21,525 $ 215 $ 73,794 $ 99,476 $ (1,683) $ 171,802
======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 24,059 $ 14,028
Adjustments to reconcile net income to net cash provided by
operating activities:
Tax benefit from restricted stock and stock option exercise 5,835 -
Depreciation and amortization 636 1,316
Deferred taxes 190 (373)
Legal fees assumed by majority shareholder 51 33
Loss on disposal of fixed asset - 281
Changes in assets and liabilities:
Accounts receivable, net (8,521) (11,560)
Miscellaneous receivables 1,942 (156)
Merchandise inventory (5,550) (10,493)
Prepaid expenses and other assets (262) (782)
Accounts payable (8,414) 6,452
Accrued expenses 4,164 2,272
Exit charge (56) 4,000
-------- --------
Net cash provided by operating activities 14,074 5,018
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (12,575) (10,600)
Redemptions of available-for-sale securities 7,575 16,100
Purchases of held-to-maturity securities (42,058) (51,154)
Redemptions of held-to-maturity securities 37,153 36,558
Payments for purchase of property and equipment,
including construction-in-progress (9,277) (7,082)
-------- --------
Net cash used in investing activities (19,182) (16,178)
-------- --------
Net decrease in cash (5,108) (11,160)
Cash and cash equivalents - beginning of period 16,462 14,216
-------- --------
Cash and cash equivalents - end of period $ 11,354 $ 3,056
======== ========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
CDW Computer Centers, Inc. (the "Company") is engaged in the distribution
of personal computers and related products through direct marketing and retail
showrooms, primarily to end users within the United States. The Company extends
credit to business, governmental and institutional customers under certain
circumstances based upon the financial strength of the customer. Such customers
are typically granted net 30-day credit terms. The balance of the Company's
sales are made primarily through third party credit cards and for cash on
delivery.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. Such principles were
applied on a basis consistent with those reflected in the 1996 Annual Report on
Form 10-K and documents incorporated therein as filed with the Securities and
Exchange Commission. The accompanying financial data should be read in
conjunction with the notes to consolidated financial statements contained in the
1996 Annual Report on Form 10-K and documents incorporated therein. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting solely of normal
recurring accruals) necessary to present fairly the financial position of the
Company as of June 30, 1997 and December 31, 1996, the results of operations for
the three and six months ended June 30, 1997 and 1996, the cash flows for the
six months ended June 30, 1997 and 1996, and the changes in shareholders' equity
for the six months ended June 30, 1997. The unaudited condensed consolidated
statements of income for such interim periods are not necessarily indicative of
results for the full year.
The Company is currently assessing the impact of the recently issued
Statements of Financial Accounting Standards numbers 130 and 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information". The Company will implement the requirements of each of the
Statements at the end of 1997.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Additionally, such estimates and assumptions affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Earnings Per Share
Net income per common and common equivalent share for the three and six
months ended June 30, 1997 and 1996 is calculated using the weighted average
number of common and common equivalent shares outstanding during each period.
Common equivalent shares of 148,000 and 152,000 for the three and six months
ended June 30, 1997, and 285,000 and 203,000 for the three and six months ended
June 30, 1996, respectively, relate to various incentive stock option plans and
are calculated using the treasury stock method.
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings Per Share" (SFAS 128), the Company will implement the requirements of
SFAS 128 at the end of 1997. The Company has calculated earnings per share using
both the basic and diluted methods, which amounts will not differ materially
from earnings per share as currently reported.
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On June 24, 1996, the Board of Directors of the Company announced a
three-for-two stock split effected in the form of a stock dividend paid on July
15, 1996 to all common shareholders of record as of July 5, 1996. All per share
and related amounts contained in these financial statements and notes have been
adjusted to reflect the stock split.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's investments
in marketable securities at June 30, 1997 were (in thousands):
Gross
Unrealized
Holding
Estimated ------- Amortized
Fair Value Gains (Losses) Cost
------------ ------------ ------------ --------------
Security Type
- -------------
Available-for-sale:
Redemptive tax-exempt preferred stocks $ 8,000 $ - $ - $ 8,000
----------------------------------------------------------------
Held to maturity:
U.S. Government and U.S. Government Agency Securities 53,961 - (45) 54,006
Bonds of states, municipalities, and political subdivisions 7,008 13 - 6,995
----------------------------------------------------------------
Total held-to-maturity 60,969 13 (45) 61,001
----------------------------------------------------------------
Total marketable securities $ 68,969 $ 13 $ (45) $ 69,001
================================================================
The Company's investments in securities held-to-maturity at June 30, 1997
were all due in one year or less by contractual maturity. Estimated fair values
of marketable securities are based on quoted market prices.
4. Contingency
The Company and its majority shareholder are defendants in a lawsuit filed
by a former shareholder. The suit requests actual and punitive damages in an
amount that cannot be readily determined. The Company and its majority
shareholder believe the suit to be without merit and are vigorously defending
against this action. The majority shareholder has agreed to indemnify and
reimburse the Company for all damages and expenses, net of tax benefits received
by the Company, related to this action. For the three and six months ended June
30, 1997, the Company and majority shareholder have incurred legal expenses of
approximately $30,000 and $83,000, respectively, which have been assumed by the
majority shareholder. Although the majority shareholder has agreed to indemnify
the Company for all expenses or settlements, if any, in connection with this
suit, the Company will continue to record such expenses or settlements, if any,
as an expense with an offsetting increase to paid-in capital, net of tax
effects.
5. Exit Charge
In June 1996 the Company purchased approximately 27 acres of vacant land in
Vernon Hills, Illinois, upon which it constructed a combined telemarketing,
warehouse, showroom and corporate office facility. Construction of the Vernon
Hills facility was completed in July 1997, at which time the Company relocated
to the new facility and vacated the Buffalo Grove facility. The Company recorded
a $4.0 million pre-tax non-recurring charge to operating results for exit costs
relating to the Buffalo Grove facility in the first quarter of 1996. The exit
costs consist primarily of the estimated cost to the Company of subleasing the
vacated facility, including holding costs, the estimated costs of restoring the
building to its original condition and certain asset write-offs resulting from
the relocation. There is no assurance that the $4.0 million charge will be
adequate to cover actual costs should the Company's actual experience in
subleasing the facility differ from the assumptions used in calculating the exit
charge. As a result of the move, the Company incurred moving costs of $200,000
which were charged to operating results in the second quarter of 1997. No
further moving costs are expected to be incurred.
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As of June 30, 1997 approximately $17.5 million in construction costs,
including $6.1 million for land acquisition, have been incurred and are included
in construction-in-progress. The Company has entered into various construction
and equipment contracts, relating to the new facility, which aggregate $16.8
million, of which $11.4 million has been incurred and is included in
construction-in-progress as of June 30, 1997. Pursuant to these contracts, the
Company is committed for an additional $5.4 million. The Company currently
estimates it will incur approximately $23.0 to $24.0 million in total capital
expenditures related to purchasing the land and constructing and equipping the
facility.
6. Financing Arrangements
The Company has an aggregate $30 million available pursuant to unsecured
lines of credit with two financial institutions expiring in June, 1998.
Borrowings under one of the credit facilities bear interest at the prime rate
less 2 1/2%, LIBOR plus 1/2% or the federal funds rate plus 1/2%, as determined
by the Company. Borrowings under the second credit facility bear interest at the
prime rate less 2 1/2%, LIBOR plus .45% or the federal funds rate plus .45%, as
determined by the Company. At June 30, 1997 there were no borrowings against
either of the credit facilities.
In September, 1996 the Company established a stand-by letter of credit for
approximately $1.7 million related to construction of the new facility. The
Company has pledged a U.S. Treasury Note, included in investments
held-to-maturity, with a face value of $2.0 million as collateral for the letter
of credit.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's unaudited
condensed consolidated financial statements and the notes thereto included
elsewhere herein.
Results Of Operations
The following table sets forth financial information derived from the
Company's statements of income expressed as a percentage of net sales, and
certain operating statistics. The financial information for the six months ended
June 30, 1997 and 1996 is presented on a pro forma basis to exclude the exit
charge and related impact on the executive incentive bonus pool, net of tax
effects.
FINANCIAL INFORMATION Percentage of Net Sales
-----------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Pro Forma)
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 86.3 86.5 86.5 86.8
---- ---- ---- ----
Gross profit 13.7 13.5 13.5 13.2
Selling and administrative expenses 7.1 7.6 7.1 7.5
--- --- --- ---
Income from operations 6.6 5.9 6.4 5.7
Other income, net 0.3 0.4 0.3 0.4
--- --- --- ---
Income before income taxes 6.9 6.3 6.7 6.1
Income tax provision 2.7 2.4 2.6 2.3
--- --- --- ---
Net income 4.2 % 3.9 % 4.1 % 3.8 %
=== === === ===
Operating Statistics Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Number of orders shipped (000's) 425 302 870 602
Average order size $ 717 $ 725 $ 692 $ 707
Customers serviced (000's) 182 146 328 254
Number of account managers, end of period 319 256 319 256
Catalogs distributed (000's) 19,172 12,904 39,156 25,812
National advertising pages placed 185 159 397 309
Inventory turns 19 23 24 23
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The following table presents net sales by product line as a percentage of
total net sales for each of the periods noted. Product mix is based upon
internal product code classifications and is retroactively adjusted for the
addition of new categories but not for changes in individual product
categorization.
Product Mix Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Notebooks & Laptops 26.9 % 26.6 % 25.6 % 26.3 %
Software 12.6 12.3 12.8 12.1
Desktop Computers 12.4 11.6 12.8 11.7
Printers 11.4 11.1 11.6 11.5
Data Storage Devices 10.4 9.2 10.4 8.8
Video 7.5 7.4 7.8 7.5
Add-On Boards/Memory 4.8 6.2 4.7 6.6
Communications 4.1 5.6 4.3 5.9
Network Products 4.5 4.3 4.4 4.2
Input Devices 2.9 3.3 3.0 3.1
Multi-Media 1.9 2.1 2.0 2.1
Other Accessories 0.6 0.3 0.6 0.2
----- ----- ----- -----
Total 100.0 % 100.0 % 100.0 % 100.0 %
===== ===== ===== =====
Three months ended June 30, 1997 compared with three months ended June 30, 1996
Net sales were $304.5 million for the three months ended June 30, 1997
compared with $218.7 million for the three months ended June 30, 1996, an
increase of $85.8 million or 39.2%. Average order size decreased approximately
1% to $717 from $725 in the second quarter of 1996. The growth in net sales is
primarily attributable to higher order volume resulting from the expansion of
marketing efforts, new product offerings, an increase in the number of customers
serviced and an increase in the number of account managers.
Selling prices on many models of notebook and desktop computers decreased
from previous periods, resulting in notebook and desktop computer unit volume
growth of 82% and 66%, respectively, from the second quarter of 1996. Lower
manufacturer pricing levels and expanded product features in notebook computers
resulted in a shift within the notebook and laptop product category to lower
priced models. This combination served to lower overall unit selling prices and
increase order volume in the second quarter of 1997 compared with the same
quarter of 1996. Any reduction in the quantities of notebook and desktop
computers available to the Company from the manufacturers producing these items
could have an adverse effect on future sales.
Gross profit increased as a percentage of net sales to 13.7% for the three
months ended June 30, 1997, compared with 13.5% for the three months ended June
30, 1996. The increase in gross profit as a percentage of net sales is primarily
due to the expansion of selling margin on certain product lines resulting from
vendor support programs, opportunistic purchases and pricing strategies. Many of
the vendor support programs are dependent on achieving certain goals and
objectives. Actual gross profit achieved may vary on a quarterly basis due to
changes in vendor support programs, product mix, market conditions and other
factors. As a result, there is no certainty that the Company will be able to
sustain gross profit as a percentage of net sales at the levels achieved in
recent quarters.
Selling and administrative expenses decreased to 7.1% of net sales in the
second quarter versus 7.6% in the second quarter of 1996. For the second quarter
of 1997, an increase in net advertising expense due to incremental marketing
activities and $200,000 of moving costs were offset by decreases in various
components of selling and administrative expenses. The reduction of various
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components of selling and administrative expenses resulted from improved
productivity and leveraging of fixed costs over a larger sales base.
Additionally, selling and administrative expense in the second quarter of 1996
included a $281,000 charge related to the trade-in of an internal computer
system. As a result of the move to the new facility in July 1997, selling and
administrative expenses may rise as a percentage of sales due to the increase in
occupancy costs and the inefficiencies inherent in the start-up of a new
warehouse.
Net advertising expense increased as a percentage of net sales to 1.3% from
1.1% in the three months ended June 30, 1997 and 1996, respectively. Gross
advertising expense increased to 3.5% of net sales for the three months ended
June 30, 1997 versus 3.1% for the three months ended June 30, 1996 due to
expanded catalog circulation and national advertising pages combined with new
marketing initiatives. Cooperative advertising reimbursements earned from
vendors decreased to 61% of gross advertising expense for the second quarter of
1997 from 65% in the same period of 1996. The decrease in the reimbursement rate
was due in part to the initiation of certain marketing activities that are not
covered by cooperative reimbursement. The cooperative advertising reimbursement
rate may fluctuate as a percentage of gross advertising spending in future
quarters depending on the level of vendor participation achieved and collection
experience. The Company plans to increase advertising expenditures in future
quarters, which may result in an increase in net advertising expense as a
percentage of net sales and lower operating margins than those achieved in
recent quarters. The statement concerning future advertising expense is a
forward looking statement that involves certain risks and uncertainties
including the ability to identify and implement cost effective incremental
advertising and marketing programs.
The executive incentive bonus pool, which pursuant to existing plans is
based upon a maximum 20% of the year over year increase in income from
operations, was $1.4 million for the three months ended June 30, 1997 and 1996,
and is included within selling and administrative expenses.
Selling and administrative expenses also include $30,000 and $8,000 in
legal costs incurred by the majority shareholder for the three months ended June
30, 1997 and 1996, respectively, in connection with the lawsuit filed by a
former shareholder. Although the majority shareholder has agreed to indemnify
the Company for all expenses or settlements, if any, incurred in connection with
this suit, the Company will continue to record such expenses or settlements, if
any, as an expense with an offsetting increase to paid-in capital, net of tax
effects.
Interest income totaled $1.0 million for the three months ended June 30,
1997 compared with $842,000 for the three months ended June 30, 1996. The
increase is due to higher interest rates combined with higher levels of cash
available for investment resulting from cash generated from operations,
including the tax benefit from stock option and restricted stock transactions in
the first quarter of 1997, offset by funds utilized for construction of the
Vernon Hills facility.
The effective income tax rate, expressed as a percentage of income before
income taxes, increased to 39.6% for the three months ended June 30, 1997 from
38.7% for the three months ended June 30, 1996. The effective income tax rate
for the second quarter of 1997 is consistent with the effective tax rate of
39.5% for the full year 1996.
Net income for the three months ended June 30, 1997 was $12.7 million, a
49.4% increase over $8.5 million for the three months ended June 30, 1996. Net
income per share of $0.59 for the three months ended June 30, 1997 increased
51.3% from $0.39 in the same period of 1996. All per share and related amounts
have been adjusted to reflect the three-for-two stock split effected in the form
of a stock dividend paid on July 15, 1996.
Six months ended June 30, 1997 compared with the six months ended June 30, 1996
Net sales were $602.3 million for the six months ended June 30, 1997
compared with $425.4 million for the six months ended June 30, 1996, an increase
of $176.9 million or 41.6%. Average order size for the first six months
decreased approximately 2% to $692 from $707 for the corresponding period of the
previous year. The growth in net sales is primarily attributable to higher sales
10
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volume resulting from the expansion of marketing efforts, new product offerings,
an increase in the number of customers serviced and an increase in the number of
account manager.
Selling prices on many models of notebook and desktop computers decreased
from previous periods, resulting in notebook and desktop computer unit volume
growth of 77% and 76%, respectively, from the first six months of 1996. Lower
manufacturer pricing levels and expanded product features in notebook computers
and the reduced pricing resulted in a shift within the notebook and laptop
product category to lower priced models. This combination served to lower
overall unit selling prices and increase order volume in the six months ended
June 30, 1997 compared with the six months ended June 30, 1996. Any reduction in
the quantities of notebook and desktop computers available to the Company from
the manufacturers producing these items could have an adverse effect on future
sales.
Gross profit increased as a percentage of net sales to 13.5% for the six
months ended June 30, 1997, compared with 13.2% for the six months ended June
30, 1996. The increase in gross profit as a percentage of net sales is primarily
due to the expansion of selling margin on certain product lines resulting from
vendor support programs, opportunistic purchases and pricing strategies. Many of
the vendor support programs are dependent on achieving certain goals and
objectives. Actual gross profit achieved may vary on a quarterly basis due to
changes in vendor support programs, product mix, market conditions and other
factors. As a result, there is no certainty that the Company will be able to
sustain gross profit as a percentage of net sales at the levels achieved in
recent quarters.
Selling and administrative expenses, excluding the impact of the exit
charge and its related impact on the executive incentive bonus pool, decreased
to 7.1% of net sales for the six months ended June 30, 1997 from 7.5% for the
six months ended June 30, 1996. The decrease is mainly the result of decreases
in various components of selling and administrative expenses through improved
productivity and leveraging of fixed costs over a larger sales base in the six
months ended June 30, 1997. As a result of the move to the new facility, selling
and administrative expenses may rise as a percentage of sales due to the
increase in occupancy costs and the inefficiencies inherent in the start-up of a
new warehouse.
Net advertising expense as a percentage of net sales remained consistent
with the prior year at 1.3% of net sales in the six months ended June 30, 1997
and 1996. Gross advertising expense increased to 3.5% of net sales for the six
months ended June 30, 1997 versus 3.3% for the six months ended June 30, 1996
due to expanded catalog circulation and national advertising pages combined with
new marketing initiatives. The increase in gross advertising expense was offset
by a corresponding increase in cooperative advertising reimbursements earned
from vendors to 62.0% of gross advertising expenditures in the first six months
of 1997 from 61.6% in the same period of 1996. The cooperative advertising
reimbursement rate may fluctuate as a percentage of gross advertising spending
in future quarters depending on the level of vendor participation achieved and
collection experience. The Company plans to increase advertising expenditures in
future quarters, which may result in an increase in net advertising expense as a
percentage of net sales and lower operating margins than those achieved in
recent quarters. The statement concerning future advertising expense is a
forward looking statement that involves certain risks and uncertainties
including the ability to identify and implement cost effective incremental
advertising and marketing programs.
Construction of the Vernon Hills facility was completed in July 1997, at
which time the Company relocated to the new facility and vacated the Buffalo
Grove facility. The Company recorded a $4.0 million pre-tax non-recurring charge
to operating results for exit costs relating to the Buffalo Grove facility in
the first quarter of 1996. The exit costs consist primarily of the estimated
cost to the Company of subleasing the vacated facility, including holding costs,
the estimated costs of restoring the building to its original condition and
certain asset write-offs resulting from the relocation.
The executive incentive bonus pool, which pursuant to existing plans is
based upon a maximum 20% of the year over year increase in income from
operations, was $3.7 million and $1.7 million for the six months ended June 30,
1997 and 1996, respectively, and is included within selling and administrative
expenses. The impact of the $4.0 million exit charge was to reduce the executive
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incentive bonus pool by $800,000 in the first quarter of 1996 and effectively
increase it by $800,000 in the first quarter of 1997. Thus, the executive
incentive bonus pool, on a pro forma basis to exclude the impact of the exit
charge in both periods, is $2.9 million and $2.5 million for the six months
ended June 30, 1997 and 1996, respectively.
Selling and administrative expenses also include $83,000 and $54,000 in
legal costs incurred by the majority shareholder for the six months ended June
30, 1997 and 1996, respectively, in connection with the lawsuit filed by a
former shareholder. Although the majority shareholder has agreed to indemnify
the Company for all expenses or settlements, if any, incurred in connection with
this suit, the Company will continue to record such expenses or settlements, if
any, as an expense with an offsetting increase to paid-in capital, net of tax
effects.
Interest income totaled $2.0 million for the six months ended June 30, 1997
compared with $1.7 million for the six months ended June 30, 1996. The increase
is due to higher interest rates combined with higher levels of cash available
for investment resulting from cash generated from operations, including the tax
benefit from stock option and restricted stock transactions in the first quarter
of 1997, offset by funds utilized for construction of the Vernon Hills facility.
The effective income tax rate, expressed as a percentage of income before
income taxes, increased to 39.6% for the six months ended June 30, 1997 from
38.8% for the six months ended June 30, 1996. The effective income tax rate for
the first six months is consistent with the effective tax rate of 39.5% for the
full year 1996.
Net income for the six months ended June 30, 1997 was $24.1 million, a
72.1% increase over $14.0 million for the six months ended June 30, 1996. Net
income per share of $1.11 for the six months ended June 30, 1997 increased 70.8%
from $0.65 in the same period of 1996. Pro forma net income and net income per
share, excluding the impact of the exit charge and its related impact on the
executive incentive bonus pool, were $24.5 million and $1.13, representing an
increase of 53.6% and 52.7%, respectively, over the first six months of 1996.
All per share and related amounts have been adjusted to reflect the
three-for-two stock split effected in the form of a stock dividend paid on July
15, 1996.
Liquidity and Capital Resources
Working Capital
The Company has historically financed its operations and capital
expenditures primarily through cash flow from operations, short-term borrowings
and public offerings of common stock.
At June 30, 1997, the Company had cash, cash equivalents and marketable
securities of $80.4 million and working capital of $145.8 million, representing
an increase of $5.1 million in cash, cash equivalents and marketable securities
and an increase of $22.2 million in working capital from December 31, 1996.
As of June 30, 1997 the Company had an aggregate $30.0 million available
pursuant to unsecured credit facilities with two financial institutions expiring
in June, 1998. Borrowings under one of the credit facilities bear interest at
the prime rate less 2 1/2%, LIBOR plus 1/2% or the federal funds rate plus 1/2%,
as determined by the Company. Borrowings under the second credit facility bear
interest at the prime rate less 2 1/2%, LIBOR plus .45% or the federal funds
rate plus .45%, as determined by the Company. At June 30, 1997 there were no
borrowings against either of the credit facilities.
The Company's current primary and anticipated use of cash is to fund the
growth in working capital and capital expenditures, including facilities
expansion. The Company believes that the funds held in cash, cash equivalents
and marketable securities, and funds available under the credit facilities will
be sufficient to fund the Company's working capital and cash requirements at
least through June 30, 1998.
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Cash flows for the six months ended June 30, 1997
Net cash provided by operating activities for the six months ended June 30,
1997 was $14.1 million. The primary factors which historically affect the
Company's cash flows from operations are accounts receivable, merchandise
inventory and accounts payable. The increase in accounts receivable resulted
from increased sales volume and an increase in the percentage of net sales
generated from open credit terms to business customers, offset by a decrease in
days sales outstanding to 19.8 as of June 30, 1997 from 20.1 as of December 31,
1996. The Company changed its credit terms during June 1997 to net 30 days from
net 10 days, which may result in a future increase in days sales outstanding.
Inventory turns increased to 24 annualized turns for the six months ended June
30, 1997 from 23 annualized turns for the six months ended June 30, 1996. The
decrease in accounts payable reflects timing of payments to vendors at the end
of the respective periods. Prepaid expenses and other current assets increased
$262,000 to approximately $1.1 million as of June 30, 1997 and are primarily
composed of paper purchased for future catalogs and prepaid insurance premiums.
Cash provided by operating activities for the first six months of 1997 was
positively impacted by a $5.8 million tax benefit recorded to paid-in capital,
relating to the exercise and vesting of shares pursuant to the MPK Stock Option
Plan and the MPK Restricted Stock Plan in February 1997.
Net cash used in investing activities for the six months ended June 30,
1997 was $19.2, including approximately $9.3 million used for capital
expenditures. The capital expenditures made by the Company were primarily
related to progress payments for construction and equipment related to the new
facility.
The Company ships a substantial quantity of its products to customers via
the United Parcel Service ("UPS"). As a result of the strike by UPS workers on
August 4, 1997, the Company is no longer able to use UPS for shipments to its
customers. In an attempt to service its customers, the Company has increased
shipping capacity with its other existing carriers and is also using alternative
carriers. However, due to carrier capacity constraints, the Company is not able
to ship all orders on a same day basis as was its prior practice. Additionally,
the Company is absorbing all incremental shipping costs incurred through the use
of these alternative carriers. As a result of the carrier capacity constraints
and absorbed incremental shipping costs, the Company's sales and operating
results may be negatively impacted. The magnitude of the impact is dependent
upon the duration and ultimate resolution of the UPS strike, as well as the
Company's ability to continue to find and utilize alternative shipping carriers.
Facilities Expansion
In June 1996, the Company purchased approximately 27 acres of vacant land
in Vernon Hills, Illinois for the purpose of constructing a combined
telemarketing, warehouse, showroom and corporate office facility. The initial
phase of construction includes approximately 100,000 square feet of warehouse
space and approximately 100,000 square feet of office space, approximately a
100% increase over the former facility in Buffalo Grove. Construction of the
Vernon Hills facility was completed in July 1997, at which time the Company
relocated to the new facility and vacated the Buffalo Grove facility.
As of June 30, 1997 approximately $17.5 million in construction costs,
including $6.1 million for land acquisition, have been incurred and are included
in construction-in-progress. The Company has entered into various construction
and equipment contracts, relating to the new facility, which aggregate $16.8
million, of which $11.4 million has been incurred and is included in
construction-in-progress as of June 30, 1997. Pursuant to these contracts, the
Company is committed for an additional $5.4 million as construction or
installation is completed. The Company estimates it will incur approximately
$23.0 to $24.0 million in total capital expenditures related to purchasing the
land and constructing and equipping the facility.
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If the Company is unable to generate increased sales and gross margins
sufficient to absorb increased overhead and other costs created by the new
facility, the Company would likely experience lower pre-tax profits.
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Part II Other Information
Item 1. Legal Proceedings
As previously reported, the Company and Michael P. Krasny, the Company's
majority shareholder, were defendants in a lawsuit filed in the United States
District Court for the Northern District of Illinois, Eastern Division, in which
suit a former shareholder, executive officer and director of the Company (the
"Plaintiff") alleged violations of the federal securities laws, fraud and breach
of fiduciary duty in connection with the Company's redemption of his stock in
July 1990. (Reference is made to Item 3 of the Company's 1996 Annual Report on
Form 10-K for a detailed discussion of the lawsuit.)
On June 14, 1996, the District Court granted the defendant's motion to
dismiss the Amended Complaint, with prejudice, on the grounds that the federal
cause of action was barred by the statute of limitations and the District Court
did not have jurisdiction over the pendant state law claims. The Plaintiff filed
an appeal of the District Court decision to the United States Court of Appeals
for the Seventh Circuit. On May 14, 1997, the Court of Appeals heard oral
argument on Plaintiff's appeal. On July 28, 1997, the Court of Appeals reversed
the District Court's ruling and remanded the matter back to the District Court
for further proceedings. The Court of Appeals held, among other things, that the
District Court improperly granted the motion to dismiss the Amended Complaint
because it based its decision on inferences of fact inappropriate at this stage
of the proceedings.
On June 10, 1997, the Plaintiff filed in the Circuit Court of the
Nineteenth Judicial Circuit, Lake County, Illinois, a lawsuit alleging
essentially the same fraud and breach of fiduciary duty claims asserted in his
dismissed federal lawsuit. The Company and Mr. Krasny have answered the
Complaint and moved to strike a portion of the relief requested by the
Plaintiff. In their answer to the Complaint, the Company and Mr. Krasny deny any
wrongdoing or liability. The Company anticipates this action will likely be
dismissed or stayed in light of the subsequent ruling by the Court of Appeals
discussed above.
The Company and Mr. Krasny believe that their actions were honest and
proper and that the suit by the former shareholder is without merit. The Company
and Mr. Krasny are committed to vigorously defending the litigation.
As previously reported, Mr. Krasny has agreed to indemnify the Company for
any and all costs, fees and expenses incurred in connection with this
litigation, including any expenses incurred in judgment or settlement of the
suit.
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Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held an annual meeting of Shareholders on May 7, 1997.
(b) The names of all Directors of the Company are set forth in (c)
below.
(c) Three matters were voted upon and approved by the
Shareholders. The presentation below briefly describes the
matter voted upon and results of Shareholders' votes.
1. Election of Directors
Votes For Votes Against Abstentions
--------- ------------- -----------
By Nominee
----------
- Michael P. Krasny 20,215,583 41,639 -
- Gregory C. Zeman 20,215,583 41,639 -
- Daniel B. Kass 20,215,583 41,639 -
- Joseph Levy, Jr. 20,215,583 41,639 -
- Michelle L. Collins 20,215,583 41,639 -
2. Approval of Employee Incentive Bonus Pool
The establishment of a performance-based bonus pool to be paid to
qualifying officers of the Company for the year ended December 31,
1997.
Votes For Votes Against Abstentions Unvoted
--------- ------------- ----------- -------
19,831,114 208,718 16,243 201,147
3. Ratification of Auditors
The selection of Coopers & Lybrand, LLP, independent public
accountants, as auditors of the Company for the year ended
December 31, 1997.
Votes For Votes Against Abstentions
--------- ------------- -----------
20,244,068 4,912 8,242
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
10 (mm) Revolving Note between the Company and LaSalle
National Bank dated June 29, 1997.
10 (nn) Revolving Note between the Company and
The Northern Trust Company dated June 30, 1997.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the six months ended
June 30, 1997.
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SIGNATURES
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.
CDW Computer Centers, Inc.
--------------------------
(Registrant)
Date August 14, 1997 /s/ Harry J. Harczak, Jr.
----------------- ----------------------------
Harry J. Harczak, Jr.
Chief Financial Officer
Date August 14, 1997 /s/ Daniel F. Callen
----------------- -----------------------------
Daniel F. Callen
Chief Accounting Officer
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INDEX TO EXHIBITS
10 (mm) Revolving Note between the Company and LaSalle National Bank dated June
29, 1997.
10 (nn) Revolving Note between the Company and The Northern Trust Company
dated June 30, 1997.
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