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, 1998 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)
--------------------------------------------------------------------------
(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, 1998, 21,546,441 COMMON SHARES WERE OUTSTANDING.
2
CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
------------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income -
Three and Six months ended June 30, 1998 and 1997 2
Condensed Consolidated Statement of Shareholders'
Equity - Three months ended June 30, 1998 3
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial
Statements 5-8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 16
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 6. Exhibits and Reports on Form 8-K 17
Signatures 18
3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
June 30, December 31,
1998 1997
------------- ------------
ASSETS
Current assets :
Cash and cash equivalents $ 23,676 $ 18,233
Marketable securities 58,569 61,192
Accounts receivable, net of allowance for doubtful
accounts of $2,475 and $1,950, respectively 119,427 87,524
Miscellaneous receivables 4,975 3,960
Merchandise inventory 48,946 61,941
Prepaid expenses and other 889 759
Deferred income taxes 3,587 3,587
--------- ---------
Total current assets 260,069 237,196
Property and equipment, net 32,073 26,704
Deferred income taxes and other assets 5,747 5,741
--------- ---------
TOTAL ASSETS $ 297,889 $ 269,641
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 46,758 $ 44,451
Accrued expenses :
Compensation 10,803 12,996
Exit costs 3,055 3,391
Income taxes 1,483 5,054
Other 4,249 3,433
--------- ---------
Total current liabilities 66,348 69,775
--------- ---------
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; 21,546 and 21,525 shares issued and
outstanding, respectively 215 215
Paid-in capital 75,759 74,680
Retained earnings 156,776 126,418
Unearned compensation (1,209) (1,447)
--------- ---------
Total shareholders' equity 231,541 199,866
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 297,889 $ 269,641
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
1
4
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales $ 408,945 $ 304,545 $ 793,536 $ 602,322
Cost of sales 357,238 262,888 692,682 520,722
--------- --------- --------- ---------
Gross profit 51,707 41,657 100,854 81,600
Selling and administrative expenses 26,851 21,586 52,643 43,613
--------- --------- --------- ---------
Income from operations 24,856 20,071 48,211 37,987
Interest income 1,042 1,032 2,211 1,989
Other income (expense), net (91) (60) (162) (111)
--------- --------- --------- ---------
Income before income taxes 25,807 21,043 50,260 39,865
Income tax provision 10,219 8,343 19,902 15,806
--------- --------- --------- ---------
Net income $ 15,588 $ 12,700 $ 30,358 $ 24,059
========= ========= ========= =========
Earnings per share
Basic $ 0.72 $ 0.59 $ 1.41 $ 1.12
========= ========= ========= =========
Diluted $ 0.72 $ 0.59 $ 1.40 $ 1.11
========= ========= ========= =========
Weighted average number of
common shares outstanding
Basic 21,546 21,525 21,546 21,525
========= ========= ========= =========
Diluted 21,682 21,673 21,718 21,677
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements
2
5
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
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, 1997 21,525 $ 215 $ 74,680 $ 126,418 $ (1,447) $ 199,866
MPK Restricted Stock Plan forfeitures - - (1) - 1 -
Amortization of unearned compensation - - - - 237 237
Proceeds from exercise of stock options 21 - 440 - - 440
Tax benefit from stock option exercises - - 359 - - 359
Capital contribution for legal costs assumed - - 281 - - 281
by majority shareholder
Net income - - - 30,358 - 30,358
--------------------------------------------------------------------------------------
Balance at June 30, 1998 21,546 $ 215 $ 75,759 $ 156,776 $ (1,209) $ 231,541
======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
3
6
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended June 30,
-------------------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 30,358 $ 24,059
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation 2,179 1,008
Accretion of marketable securities, net (1,354) (606)
Stock based compensation expense 237 234
Legal fees assumed by majority shareholder 281 51
Deferred taxe expense - 190
Tax benefit from stock option exercises 359 5,835
Changes in assets and liabilities:
Accounts receivable, net (31,903) (8,521)
Miscellaneous receivables (1,015) 1,942
Merchandise inventory 12,995 (5,550)
Prepaid expenses and other assets (136) (262)
Accounts payable 2,307 (8,414)
Accrued compensation (2,193) (1,181)
Accrued income taxes and other expenses (3,205) 5,345
Accrued exit charge (336) (56)
-------- --------
Net cash provided by operating activities 8,574 14,074
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (20,810) (12,575)
Redemptions of available-for-sale securities 7,250 7,575
Purchases of held-to-maturity securities (30,918) (42,058)
Redemptions of held-to-maturity securities 48,455 37,153
Purchase of property and equipment (7,548) (9,277)
-------- --------
Net cash used in investing activities (3,571) (19,182)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 440 -
-------- --------
Net cash provided by financing activities 440 -
-------- --------
Net increase (decrease) in cash 5,443 (5,108)
Cash and cash equivalents - beginning of period 18,233 16,462
-------- --------
Cash and cash equivalents - end of period $ 23,676 $ 11,354
======== ========
The accompanying notes are an integral part of the consolidated financial
statements
4
7
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 brand name personal computers and related products through direct marketing
to end users within the United States. The Company's primary business is
conducted from a combined telemarketing, corporate office and warehouse and
showroom facility located in Vernon Hills, Illinois. The Company also operates a
second retail showroom in Chicago, Illinois.
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 1997 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
1997 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, 1998 and December 31, 1997, the results of operations for
the three and six months ended June 30, 1998 and 1997, the cash flows for the
six months ended June 30, 1998 and 1997, and the changes in shareholders' equity
for the six months ended June 30, 1998. The unaudited condensed consolidated
statements of income for such interim periods are not necessarily indicative of
results for the full year.
The Company has adopted Statements of Financial Accounting Standards Nos.
130 and 131 (SFAS 130, SFAS 131), "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information". For the
three and six months ended June 30, 1998 and 1997 the Company has no components
of Comprehensive Income, as defined by SFAS 130, which are not contained in Net
Income as reported on the accompanying Consolidated Statements of Income. The
Company has determined that it currently operates as one business segment as
defined by SFAS 131.
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.
5
8
Earnings Per Share
Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Accordingly, the
Company has disclosed earnings per share calculated using both the basic and
diluted methods for all periods presented. The implementation of SFAS 128 has no
impact on the Company's earnings per share amounts as diluted earnings per
share, as defined by SFAS 128, is consistent with earnings per common and common
equivalent share as presented in previous periods. A reconciliation of basic and
diluted per-share computations is included in Note 7 to the financial
statements.
3. MARKETABLE SECURITIES
The amortized cost and estimated fair values of the Company's investments
in marketable securities at June 30, 1998 were (in thousands):
Gross
Unrealized
Holding
Estimated ---------- Amortized
Fair Value Gains (Losses) Cost
------------ ------------ ------------ --------------
Security Type
- -------------
Available-for-sale:
U.S. Government and Government Agency Securities $ 14,864 $ 17 $ - $ 14,847
Redemptive tax-exempt preferred stocks 6,000 - - 6,000
----------------------------------------------------------------
Total available-for-sale 20,864 17 - 20,847
----------------------------------------------------------------
Held to maturity:
Bonds of states, municipalities, and political subdivisions 1,033 2 - 1,031
U.S. Government and Government Agency Securities 36,649 - (42) 36,691
----------------------------------------------------------------
Total held-to-maturity 37,682 2 (42) 37,722
----------------------------------------------------------------
Total marketable securities $ 58,546 $ 19 $ (42) $ 58,569
================================================================
Estimated fair values of marketable securities are based on quoted market
prices. The amortized cost and estimated fair value of the Company's investments
in securities held-to-maturity at June 30, 1998 (in thousands) by contractual
maturity were:
Estimated Amortized
Fair Value Cost
----------------------------
Due in one year or less $ 37,527 $ 37,567
Due in greater than one year 155 155
----------------------------
Total held-to-maturity $ 37,682 $ 37,722
============================
6
9
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. A trial date is currently set for
January 1999, in the United States District Court for the Northern District of
Illinois, Eastern Division for this matter.
For the three and six months ended June 30, 1998 the Company and majority
shareholder have incurred legal expenses of approximately $359,000 and $468,000,
respectively, compared with $30,000 and $83,000 for the three and six months
ended June 30, 1997, which have been assumed by the majority shareholder. If the
trial date proceeds as scheduled the Company will incur increased legal fees for
the preparation and trial of the lawsuit. 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. RELOCATION & EXIT ACCRUAL
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. During the six months ended June 30, 1998 the Company charged
approximately $336,000 against the exit accrual in cash payments for rent, real
estate taxes and maintenance of the facility. The Company is attempting to
sublease the Buffalo Grove facility. There is no assurance that remaining exit
liability of $3.1 million at June 30, 1998 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.
In March 1998, the Company acquired approximately 18 acres of vacant land
contiguous to its Vernon Hills facility for $4.3 million. The Company now owns
approximately 45 total acres, of which approximately 32 are vacant and available
for future expansion. The Company has commenced construction of a 100,000 square
foot addition to its current warehouse facility which is scheduled for
completion by September 1998. The estimated cost of the expansion is
approximately $4.5 million
6. FINANCING ARRANGEMENTS
The Company has an aggregate $50 million available pursuant to unsecured
lines of credit with two financial institutions expiring in June 1999, at which
time the Company intends to renew the lines. 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, 1998, there were no borrowings against either of the credit facilities.
7
10
In December 1997, the Company established a stand-by letter of credit for
approximately $850,000 related to construction of the facility expansion. The
Company has pledged a note from the Federal National Mortgage Association,
included in investments held-to-maturity, with a face value of $1.1 million as
collateral for the letter of credit
7. EARNINGS PER SHARE
The Company has approximately 21,546,000 common shares outstanding at June
30, 1998. The Company has also granted options to purchase common shares to the
directors and coworkers of the Company under several stock option plans. These
options have a dilutive effect on the calculation of earnings per share. The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations as required by SFAS 128.
Three Months Ended Six Months Ended
June 30, Ended June 30,
1998 1997 1998 1997
----------- ---------- ----------- -----------
BASIC EARNINGS PER SHARE:
Income available to
common shareholders (numerator) $ 15,558 $ 12,700 $ 30,358 $ 24,059
=========== =========== =========== ===========
Weighted average common
shares outstanding (denominator) 21,546 21,525 21,546 21,525
=========== =========== =========== ===========
Basic earnings per share $ 0.72 $ 0.59 $ 1.41 $ 1.12
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income available to
common shareholders (numerator) $ 15,558 $ 12,700 $ 30,358 $ 24,059
=========== =========== =========== ===========
Weighted average common
shares outstanding 21,546 21,525 21,546 21,525
Effect of dilutive securities:
Options on common stock 136 193 172 152
----------- ----------- ----------- -----------
Total common shares and dilutive securities
(denominator) 21,682 21,673 21,718 21,677
=========== =========== =========== ===========
Diluted earnings per share $ 0.72 $ 0.59 $ 1.40 1.11
=========== =========== =========== ===========
8
11
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.
FINANCIAL INFORMATION Percentage of Net Sales
-----------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.4 86.3 87.3 86.5
---- ---- ---- ----
Gross profit 12.6 13.7 12.7 13.5
Selling and administrative expenses 6.5 7.1 6.6 7.1
--- --- --- ----
Income from operations 6.1 6.6 6.1 6.4
Other income, net 0.2 0.3 0.2 0.3
--- --- --- ----
Income before income taxes 6.3 6.9 6.3 6.7
Income tax provision 2.5 2.7 2.5 2.6
--- --- --- ---
Net income 3.8% 4.2% 3.8% 4.1%
=== === === ===
OPERATING STATISTICS Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Number of orders shipped 557,410 424,746 1,135,659 869,927
Average order size $ 734 $ 717 $ 699 $ 692
Customers serviced 210,000 182,000 372,000 328,000
Number of account managers, end of period 520 319 520 319
Inventory turns 24 19 25 24
9
12
The following table presents net sales by product line as a percentage of
total net sales as well as the comparative growth rates in units for each of the
periods noted. Product classifications are based upon internal product code
classifications and is retroactively adjusted for the addition of new categories
but not for changes in individual product categorization.
ANALYSIS OF PRODUCT MIX
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- ----------------------------------
COMPARATIVE UNIT COMPARATIVE UNIT
MARCH 31, 1998 PRODUCT MIX GROWTH PRODUCT MIX GROWTH
- --------------------------- -------------- ------------- -------------- -------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
Notebooks & Laptops 19.7% 26.9% 19.0% 81.8% 20.0% 25.6% 29.4% 77.0%
Desktop Computers 16.3 12.4 118.0 66.3 16.0 12.8 102.4 76.2
Software 14.2 12.6 35.4 39.2 13.5 12.8 29.7 46.1
Printers 12.2 11.4 44.7 53.1 12.8 11.6 50.0 51.4
Data Storage Devices 11.4 10.4 23.7 44.2 11.3 10.4 23.0 56.8
Network & Communications
Products 7.7 7.5 59.7 48.7 8.0 7.8 54.5 55.7
Monitors & Video Products 9.4 8.6 112.6 10.6 9.0 8.7 101.9 13.0
Add-On Boards & Memory 3.9 4.8 33.7 74.6 4.2 4.7 29.2 92.7
Input Devices 2.6 2.9 24.5 46.0 2.7 3.0 26.8 49.5
Multi-Media Devices 2.0 2.0 69.7 46.8 2.0 2.0 67.3 54.7
Other Accessories 0.6 0.5 -6.5 173.5 0.5 0.6 -1.6 170.7
---- ---- ---- ----- ---- ---- ---- -----
Total 100.0% 100.0% 37.5% 53.1% 100.0% 100.0% 36.7% 59.4%
===== ===== ==== ===== ===== ===== ==== =====
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net sales for the first quarter of 1998 increased 34.3% to a record $408.9
million compared to $304.5 million in the second quarter of 1997. The growth in
net sales is primarily attributable to the growth in the number of active
customers, average order size and sales per active customer. The Company's
average order size increased to $734 per order while orders shipped in the
quarter increased 31.2% to 557,000. The number of customers serviced for the
three months ended June 30, 1998 grew 15.4% to 210,000 from 182,000 for the
three months ended June 30, 1997 and average sales per active customer increased
16.3%.
Sales to business, government, educational and institutional accounts
increased to 87% of total sales from 80% in the second quarter of 1997. Desktop
computers remain the fastest growing product category with unit volume
increasing 118% and dollar volume 77%. Notebook computers continue to represent
the largest portion of the Company's sales at 20% while dollar volume decreased
1% from the second quarter of 1997.
The average selling price of desktop CPU's decreased 12% and the average
selling price of notebook CPU's increased 8% from the second quarter of 1997.
The Company believes there may be additional decreases in prices for personal
computers and related products. Such decreases require the Company to sell more
units in order to maintain or increase the level of sales. Should future
manufacturer price reductions or the Company's marketing efforts fail to
increase the level of unit sales, the Company's sales growth rate and operating
results could be adversely affected. Sales of Compaq, Hewlett Packard, IBM,
Microsoft and Toshiba products comprise a substantial portion of the Company's
sales. The loss of any of these, or any other key vendors, could have an adverse
affect on the Company's results from operations. The statement concerning future
sales and results from operations are forward looking statements that involve
certain risks and uncertainties such as stated above.
The fastest growing product categories in terms of sales dollars in the
second quarter of 1998 were desktop computers at 77%, software at 52%, data
storage devices at 48%, network and communication products at 47% and printers
at 44%. Demand for certain products offered by the Company, and the growth of
certain product categories, are driven by advances in technology and the
development of new products and applications by the industry manufacturers, and
acceptance of these new technologies and products by end-users. Any slowdown in
the rate of technological advancement and new product development by industry
10
13
manufacturers could have a material adverse effect on the Company's future sales
growth.
Gross profit decreased as a percentage of net sales to 12.6% for the three
months ended June 30, 1998, compared to 13.7% for the three months ended June
30, 1997. The decrease in gross profit as a percentage of net sales is primarily
the result of lower selling margins achieved on certain product lines, lower
levels of rebates from vendors and increased shipping costs. On a
forward-looking basis, it is likely that the gross profit margin achieved will
be less than 13%, and could be less than the 12.6% achieved in the most recent
quarter. The statements concerning future gross profit is a forward looking
statement that involves certain risks and uncertainties such as the continued
participation by vendors in price protection and rebate programs, product mix,
market conditions and other factors which could result in a fluctuation of gross
margins below recent experience. Vendor rebate programs are at the discretion of
the vendor and many of these programs are dependent on achieving certain goals
and objectives. Accordingly, there is no certainty that such programs will
continue at their current levels or that the established goals and objectives
will be attained.
Selling and administrative expenses, which include net advertising expense,
other selling administrative expenses, the executive incentive bonus pool and
shareholder legal expense decreased to 6.5% of net sales in the second quarter
of 1998 versus 7.1% in the second quarter of 1997.
Net advertising expense decreased as a percentage of net sales to 0.6% from
1.3% for the three months ended June 30, 1998 and 1997, respectively. Gross
advertising expense decreased to 2.9% of net sales for the three months ended
June 30, 1998 versus 3.5% for the three months ended June 30, 1997 due to slight
decreases in catalog circulation and print advertising in national trade
magazines. Based upon the Company's planned marketing initiatives, future levels
of gross advertising expense as a percentage of net sales are likely to be
relatively consistent with or higher than the level achieved in the second
quarter of 1998. Cooperative advertising reimbursements as a percentage of net
sales increased to 2.3% of net sales in the second quarter of 1998 from 2.2% in
the second quarter of 1997, due to a combination of factors including changes to
billing rates, increased participation by vendors and new and expanded catalog
formats. The cooperative advertising reimbursement rate may fluctuate in future
quarters depending on the level of vendor participation achieved and collection
experience. The statements concerning future advertising expense and cooperative
advertising reimbursements are forward looking statements that involve certain
risks and uncertainties including the ability to identify and implement cost
effective incremental advertising and marketing programs as well as the
continued participation of vendors in the cooperative advertising reimbursement
program.
Other selling and administrative costs increased to 5.8% of net sales in
the three months ended June 30, 1998 from 5.3% in the prior year period due
primarily to increases in payroll and related costs to support the growth in
sales. The increase in payroll costs is due, in part, to increased investment in
the recruiting and training of new account managers. The Company continues to
recruit and train new account managers through CDW University. As of June 30,
1998 there were 520 account managers, an increase of 30% from 399 account
managers as of December 31, 1997. In addition, there were approximately 107
account managers in various phases of training in CDW University at the end of
the quarter.
The executive incentive bonus pool decreased to $597,000 for the three
months ended June 30, 1998 from $1.4 million for the three months ended June 30,
1997. For the current year the Compensation and Stock Option Committee has
established the bonus pool at 15% of the increase in operating income over the
prior year, versus 20% in prior periods. Of the $805 million decrease in the
bonus pool from the prior year, $606,000 is due to a lower level of growth in
operating income and the remaining $199,000 is due to the change in the bonus
pool rate.
Legal costs incurred by the majority shareholder for the three months ended
June 30, 1998 and 1997, in connection with the lawsuit filed by a former
shareholder were $359,000 and $30,000, respectively. A trial date has been set
for January 1999 for this case. If the trial date proceeds as scheduled, legal
costs incurred by the Company regarding this matter will increase as the trial
date approaches. 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
11
14
expense with an offsetting increase to paid-in capital, net of tax effects.
Although the Company and Mr. Krasny believe that their actions were honest and
proper and that the suit by the former shareholder is without merit, should a
negative result occur in this action, Mr. Krasny could be required to transfer
certain of his shares of Common Stock to such former shareholder or determine to
sell certain of his shares to finance any assessed damages or settlements. Such
a transfer or sale by Mr. Krasny could adversely impact the market price of the
Common Stock
Interest income totaled $1.0 million for the three months ended June 30,
1998 compared to $1.0 million for the three months ended June 30, 1997
The effective income tax rate, expressed as a percentage of income before
income taxes, decreased to 39.6% for the three months ended June 30, 1998 from
39.7% for the three months ended June 30, 1997.
Net income for the three months ended June 30, 1998 was $15.6 million, a
23% increase over $12.7 million for the three months ended June 30, 1997.
Diluted earnings per share was $0.72 and $0.59 for the three months ended June
30, 1998 and 1997, respectively, an increase of 22%.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1997
Net sales for the six months ended June 30, 1998 increased 31.7% to a
record $793.5 million compared to $602.3 million in the same period of 1997. The
growth in net sales is primarily attributable to the growth in the number of
active customers, average order size and sales per active customer. The
Company's average order size increased to $699 per order while orders shipped
increased 30.5% to 1,136,000. The number of customers serviced for the six
months ended June 30, 1998 grew 13.4% to 372,000 from 328,000 for the six months
ended June 30, 1997 and average sales per active customer increased 16.0%.
Sales to business, government, educational and institutional accounts
increased to 86% of total sales from 79% in the six months ended June 30, 1997.
Desktop computers remain the fastest growing product category with unit volume
increasing 97% and dollar volume 53%.
The average selling price of desktop CPU's decreased 20.3% and the average
selling price of notebook CPU's decreased 1.2% from the first six months of
1997. The Company believes there may be additional decreases in prices for
personal computers and related products. Such decreases require the Company to
sell more units in order to maintain or increase the level of sales. Should
future manufacturer price reductions or the Company's marketing efforts fail to
increase the level of unit sales, the Company's sales growth rate and operating
results could be adversely affected. Sales of Compaq, Hewlett Packard, IBM,
Microsoft and Toshiba products comprise a substantial portion of the Company's
sales. The loss of any of these, or any other key vendors, could have an adverse
affect on the Company's results from operations. The statement concerning future
sales and results from operations are forward looking statements that involve
certain risks and uncertainties such as stated above.
The fastest growing product categories in terms of sales dollars in the
first six months of 1998 were desktop computers at 53%, printers at 46%, data
storage devices at 38%, software at 32% and network and communication products
at 29%. Demand for certain products offered by the Company, and the growth of
certain product categories, are driven by advances in technology and the
development of new products and applications by the industry manufacturers, and
acceptance of these new technologies and products by end-users. Any slowdown in
the rate of technological advancement and new product development by industry
manufacturers could have a material adverse effect on the Company's future sales
growth
Gross profit decreased as a percentage of net sales to 12.7% for the six
months ended June 30, 1998, compared to 13.5% for the six months ended June 30,
1997. The decrease in gross profit as a percentage of net sales is primarily the
result of lower selling margins achieved on certain product lines, lower levels
of rebates from vendors and increased shipping costs. On a forward-looking
basis, it is likely that the gross profit margin achieved will be less than 13%,
and could be less than the 12.7% achieved in the most recent
12
15
six months. The statements concerning future gross profit is a forward
looking statement that involves certain risks and uncertainties such as the
continued participation by vendors in price protection and rebate programs,
product mix, market conditions and other factors which could result in a
fluctuation of gross margins below recent experience. Vendor rebate programs are
at the discretion of the vendor and many of these programs are dependent on
achieving certain goals and objectives. Accordingly, there is no certainty that
such programs will continue at their current levels or that the established
goals and objectives will be attained.
Selling and administrative expenses, which include net advertising expense,
other selling administrative expenses, the executive incentive bonus pool and
shareholder legal decreased to 6.6% of net sales in the first six months of 1998
versus 7.1% in the six months ended June 30, 1997
Net advertising expense decreased as a percentage of net sales to 0.7% from
1.3% for the six months ended June 30, 1998 and 1997, respectively. Gross
advertising expense decreased to 3.1% of net sales for the six months ended June
30, 1998 versus 3.5% for the six months ended June 30, 1997 due to slight
decreases in catalog circulation and print advertising in national trade
magazines. Based upon the Company's planned marketing initiatives, future levels
of gross advertising expense as a percentage of net sales are likely to be
relatively consistent with or higher than the level achieved in the six months
ended June 30, 1998. Cooperative advertising reimbursements as a percentage of
net sales increased to 2.4% of net sales for the six months ended June 30, 1998
from 2.2% for the six months ended June 30, 1997, due to a combination of
factors including changes to billing rates, increased participation by vendors
and new and expanded catalog formats. The cooperative advertising reimbursement
rate may fluctuate in future quarters depending on the level of vendor
participation achieved and collection experience. The statements concerning
future advertising expense and cooperative advertising reimbursement are forward
looking statements that involve certain risks and uncertainties including the
ability to identify and implement cost effective incremental advertising and
marketing programs as well as the continued participation of vendors in the
cooperative advertising reimbursement program.
Other selling and administrative costs increased to 5.8% of net sales in
the six months ended June 30, 1998 from 5.3% in the prior year period due
primarily to increases in payroll and related costs to support the growth in
sales. The increase in payroll costs is due, in part, to increased investment in
the recruiting and training of new account managers. The Company continues to
recruit and train new account managers through CDW University. As of June 30,
1998 there were 520 account managers, an increase of 30% from 399 account
managers as of December 31, 1997. In addition, there were approximately 107
account managers in various phases of training in CDW University at the end of
the quarter.
The executive incentive bonus pool decreased to $1.1 million for the six
months ended June 30, 1998 from $3.7 million for the six months ended June 30,
1997. Of the $2.6 million decrease in the bonus pool from the prior year
$800,000 results from an effective increase in the pool in the first six months
of 1997 due to the $4.0 million exit charge taken in 1996, $1.4 million is due
to a lower level of growth in operating income and the remaining $381,000 is due
to the change in the bonus pool rate. For the current year the Compensation and
Stock Option Committee has established the bonus pool at 15% of the increase in
operating income over the prior year, versus 20% in prior periods.
Legal costs incurred by the majority shareholder for the six months ended
June 30, 1998 and 1997, in connection with the lawsuit filed by a former
shareholder were $468,000 and $83,000, respectively. A trial date has been set
for January 1999 for this case. If the trial date proceeds as scheduled, legal
costs incurred by the Company regarding this matter will increase as the trial
date approaches. 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. Although the Company and Mr. Krasny believe that their actions were
honest and proper and that the suit by the former shareholder is without merit,
should a negative result occur in this action, Mr. Krasny could be required to
transfer certain of his shares of Common Stock to such former shareholder or
determine to sell certain of his shares to finance any assessed damages or
settlements. Such a transfer or sale by Mr. Krasny could adversely impact the
market
13
16
price of the Common Stock.
Interest income totaled $2.2 million for the six months ended June 30, 1998
compared to $2.0 million for the six months ended June 30, 1997.
The effective income tax rate, expressed as a percentage of income before
income taxes, decreased to 39.6% for the six months ended June 30, 1998 from
39.7% for the six months ended June 30, 1997.
Net income for the six months ended June 30, 1998 was $30.4 million, a 26%
increase over $24.1 million for the six months ended June 30, 1997. Diluted
earnings per share was $1.40 and $1.11 for the six months ended June 30, 1998
and 1997, respectively, an increase of 26%.
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, 1998, the Company had cash, cash equivalents and marketable
securities of $82.2 million and working capital of $193.7 million, representing
an increase of $2.8 million in cash, cash equivalents and marketable securities
and an increase of $26.3 million in working capital from December 31, 1997.
As of June 30, 1998 the Company had an aggregate $50.0 million available
pursuant to unsecured credit facilities with two financial institutions expiring
in June 1999. 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, 1998 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, 1999.
CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998
Net cash provided by operating activities for the six months ended June 30,
1998 was $8.6 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 commercial accounts with open credit terms. Annualized inventory
turnover was approximately 25 times for the six months ended June 30, 1998.
Inventory turnover in 1998 has been positively impacted by a reduction in
inventory levels resulting from the implementation of build to order programs by
the major hardware manufacturers. The increase in accounts payable reflects
timing of payments to vendors at the end of the respective periods. Prepaid
expenses and other current assets increased $130,000 to approximately $889,000
as of June 30, 1998 and are primarily comprised of paper purchased for future
catalogs and prepaid insurance premiums.
Net cash used in investing activities for the six months ended June 30,
1998 was $3.6 million, including approximately $7.5 million used for capital
expenditures. The capital expenditures made by the Company were primarily
related to the purchase of additional land, the expansion of the Vernon Hills
facility and machinery and equipment for the Vernon Hills facility.
14
17
Information Technology and the Year 2000
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
During a recent Year 2000 assessment, the Company identified a manageable
amount of legacy software that requires modification with the remainder already
compliant. Based on this assessment, the Company has determined that it will not
be required to modify or replace significant portions of its software to make
the systems perform properly after December 31, 1999. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted timely, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram
and test software applications for Y2K compliance. The Company plans to complete
the Y2K project by December 31,1998. To date, the expenses of the Y2K project
have not had a material effect on the results of operations. Moreover, the
remaining expenses, which will be incurred through December 31, 1998, are not
expected to have a material effect on the results of operations.
The costs of the project and the date on which the Company plans to
complete the Y2K modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans, and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Additionally, material differences could be caused by the ability of third
parties that interface with the Company's systems to make all necessary
modifications for Year 2000 compliance.
CERTAIN STATEMENTS INCLUDED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONCERNING THE COMPANY'S SALES
GROWTH, GROSS PROFIT AS A PERCENTAGE OF SALES, ADVERTISING EXPENSE AND
COOPERATIVE ADVERTISING REIMBURSEMENTS ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES, AS SPECIFIED HEREIN.
15
18
PART II Other Information
ITEM 1. Legal Proceedings
As previously reported, the Company and Michael P. Krasny, the Company's
majority shareholder, are 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 1997 Annual Report on
Form 10-K for a detailed discussion of the lawsuit.)
On June 14, 1996, the District Court granted the motion to dismiss the
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 former shareholder filed an
appeal of the District Court decision to the United States Court of Appeals for
the Seventh Circuit. 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 Complaint because it
based its decision on inferences of fact inappropriate at this stage of the
proceedings. The case is currently proceeding in the District Court. The Company
and Mr. Krasny have answered the Complaint. They denied any wrongdoing or
liability on their part and asserted a number of affirmative defenses. The
District Court has established a trial date in January 1999 for this matter.
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.
Mr. Krasny 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. The applicable accounting rules provide that certain amounts
assumed by Mr. Krasny on behalf of the Company be recorded by the Company for
financial reporting purposes as an expense and a related increase to paid-in
capital, net of tax effects. Accordingly, while having no impact on the
Company's cash flow, any such expenses incurred by Mr. Krasny on behalf of the
Company, including litigation, settlement or judgement costs, would negatively
impact the Company's results of operations in the period incurred. Legal
expenses attributable to the case are expected to increase significantly as the
case is prepared for trial, which, although reimbursed by Mr. Krasny, will
result in a decrease in the Company's reported results of operations. Although
the Company and Mr. Krasny believe that their actions were honest and proper and
that the suit by the former shareholder is without merit, should a negative
result occur in this action, Mr. Krasny could be required to transfer certain of
his shares of Common Stock to such former shareholder or determine to sell
certain of his shares to finance any assessed damages or settlements. Such a
transfer or sale by Mr. Krasny could adversely impact the market price of the
Common Stock.
16
19
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held an annual meeting of Shareholders on May 19, 1998.
(b) The names of all Directors of the Company are set forth in (c) below.
(c) Two 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 21,133,883 7,673 -
-Gregory C. Zeman 21,133,883 7,673 -
-Daniel B. Kass 21,133,883 7,673 -
-Joseph Levy, Jr. 21,133,883 7,673 -
-Michelle L. Collins 21,133,883 7,673 -
2. Ratification of Auditors
The selection of PricewaterhouseCoopers LLP, independent public
accountants, as auditors of the Company for the year ended
December 31, 1998.
Votes For Votes Against Abstentions
----------- ------------- -----------
21,130,665 10,891 -
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 (a) Financial Data Schedule (for the three months ended
June 30, 1998)
10 (qq) Revolving Note between the Company and LaSalle National
Bank dated June 28, 1998
10 (rr) Revolving Note between the Company and The Northern
Trust Company dated June 30, 1998
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the six months ended June
30, 1998.
17
20
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, 1998 /s/ Harry J. Harczak, Jr.
---------------- ----------------------------
Harry J. Harczak, Jr.
Chief Financial Officer
Date August 14, 1998 /s/ Daniel F. Callen
---------------- -----------------------------
Daniel F. Callen
Chief Accounting Officer
18
21
INDEX TO EXHIBITS
10 (qq) Revolving Note between the Company and LaSalle National Bank dated
June 28, 1998
10 (rr) Revolving Note between the Company and The Northern Trust Company
dated June 30, 1998