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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, 1999 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 12, 1999, 43,246,672 common shares were issued and 43,146,672 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 -
June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 1999 and 1998 2
Condensed Consolidated Statement of Shareholders' Equity -
Six months ended June 30, 1999 3
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17 - 18
Signatures 19
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ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,573 $ 4,230
Marketable securities 52,130 66,458
Accounts receivable, net of allowance for doubtful
accounts of $4,000 and $3,185, respectively 213,328 152,308
Miscellaneous receivables 8,031 5,896
Merchandise inventory 81,064 64,392
Prepaid expenses and other assets 1,014 1,423
Deferred income taxes 5,081 5,081
--------- ---------
Total current assets 386,221 299,788
Property and equipment, net 38,719 37,056
Deferred income taxes and other assets 5,575 4,977
--------- ---------
TOTAL ASSETS $ 430,515 $ 341,821
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 78,440 $ 41,358
Accrued expenses:
Compensation 19,092 16,279
Income taxes 5,063 5,146
Exit costs 2,547 2,715
Other 6,509 5,560
--------- ---------
Total current liabilities 111,651 71,058
--------- ---------
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; 43,239 and 43,142 shares issued
respectively 216 216
Paid-in capital 87,158 81,352
Retained earnings 234,258 192,259
Unearned compensation (679) (975)
--------- ---------
Total shareholders' equity 320,953 272,852
--------- ---------
Less cost of common shares in treasury, 50 shares (2,089) (2,089)
--------- ---------
Total shareholders' equity 318,864 270,763
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 430,515 $ 341,821
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net sales $ 597,554 $ 408,945 $1,136,960 $ 793,536
Cost of sales 522,807 357,238 994,307 692,682
--------- --------- ---------- ----------
Gross profit 74,747 51,707 142,653 100,854
Selling and administrative expenses 38,679 26,851 74,900 52,643
--------- --------- ---------- ----------
Income from operations 36,068 24,856 67,753 48,211
Interest income 961 1,042 2,003 2,211
Other expense (108) (91) (221) (162)
--------- --------- ---------- ----------
Income before income taxes 36,921 25,807 69,535 50,260
Income tax provision 14,620 10,219 27,536 19,902
--------- --------- ---------- ----------
Net income $ 22,301 $ 15,588 $ 41,999 $ 30,358
========= ========= ========== ==========
Earnings per share
Basic $ 0.52 $ .36 $ .97 $ .70
========= ========= ========== ==========
Diluted $ 0.51 $ .36 $ .96 $ .70
========= ========= ========== ==========
Weighted average number of
common shares outstanding
Basic 43,118 43,092 43,094 43,092
========= ========= ========== ==========
Diluted 43,925 43,364 43,904 43,436
========= ========= ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Total
Common Shares Paid in Retained Unearned Treasury Shares Shareholders'
Shares Amount Capital Earnings Compensation Shares Amount Equity
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 43,142 $ 216 $ 81,352 $ 192,259 $ (975) 100 $(2,089) $ 270,763
MPK Restricted Stock Plan forfeitures (44) 44 -
Amortization of unearned compensation 252 252
Exercise of Stock Options 97 1,218 1,218
Tax Benefit from stock option transactions 4,632 4,632
Net income 41,999 41,999
--------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 43,239 $ 216 $ 87,158 $ 234,258 $ (679) 100 $(2,089) $ 318,864
======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
-------------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 41,999 $ 30,358
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 3,200 2,179
Accretion of marketable securities, net (1,382) (1,354)
Allowance for doubtful accounts 815 525
Stock-based compensation expense 252 237
Legal fees assumed by majority shareholder, net of tax - 281
Deferred income taxes 112 -
Tax benefit from stock option exercises 4,632 359
Changes in assets and liabilities:
Accounts receivable (61,835) (32,428)
Miscellaneous receivables (2,135) (1,015)
Merchandise inventory (16,672) 12,995
Prepaid expenses and other assets 403 (136)
Accounts payable 37,082 2,307
Accrued compensation 2,813 (2,193)
Accrued income taxes and other expenses 866 (3,205)
Accrued exit costs (168) (336)
-------- --------
Net cash provided by operating activities 9,982 8,574
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (51,029) (20,810)
Redemptions of available-for-sale securities 27,091 7,250
Purchases of held-to-maturity securities (8,873) (30,918)
Redemptions of held-to-maturity securities 48,431 48,455
Investments in and advances to subsidiary (704) -
Purchase of property and equipment (4,863) (7,548)
-------- --------
Net cash provided by / (used in) investing activities 10,143 (3,571)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,218 440
-------- --------
Net cash provided by financing activities 1,218 440
-------- --------
Net increase in cash 21,343 5,443
Cash and cash equivalents - beginning of period 4,230 18,233
-------- --------
Cash and cash equivalents - end of period $ 25,573 $ 23,676
======== ========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
CDW Computer Centers, Inc. and its subsidiaries (collectively the
"Company") are engaged in the distribution of brand name personal computers and
related products primarily through direct marketing to end users within the
United States. The Company's primary business is conducted from a combined
telemarketing, corporate office, warehouse and showroom facility located in
Vernon Hills, Illinois. The Company also operates a telemarketing facility in
Buffalo Grove, Illinois, a retail showroom in Chicago, Illinois and a government
sales office in Chantilly, Virginia.
The Company extends credit to business, government 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 1998 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
1998 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, 1999 and December 31,1998, the results of operations for
the three and six months ended June 30, 1999 and 1998, the cash flows for the
six months ended June 30, 1999 and 1998, and the changes in shareholders' equity
for the six months ended June 30, 1999. The unaudited condensed consolidated
statements of income for such interim periods are not necessarily indicative of
results for the full year.
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
A reconciliation of basic and diluted earnings per-share computations in
accordance with Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128) is included in Note 6 to the financial statements.
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On April 20, 1999, the Board of Directors of the Company approved a
two-for-one stock split to be effected in the form of a stock dividend payable
on May 19, 1999 to all common shareholders of record at the close of business on
May 5, 1999. 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, 1999, 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 $ 26,348 $ - $ (24) $ 26,372
-------------------------------------------------
Total available-for-sale 26,348 - (24) 26,372
-------------------------------------------------
Held to maturity:
Bonds of states, municipalities, and political
subdivisions 151 - - 151
U.S. Government and Government Agency Securities 25,582 - (25) 25,607
-------------------------------------------------
Total held-to-maturity 25,733 - (25) 25,758
-------------------------------------------------
Total marketable securities $ 52,081 $ - $ (49) $ 52,130
=================================================
The Company's investments in securities held-to-maturity at June 30, 1999
were all due in one year or less by contractual maturity. Estimated fair values
of marketable securities are based on quoted market prices.
4. Facilities & Exit Accrual
In July 1997, the Company relocated to its current facility in Vernon Hills
and vacated its Buffalo Grove facility. The Company recorded a pre-tax
non-recurring charge to operating results for exit costs 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, 1999, the
Company charged approximately $168,000 against the exit accrual in cash payments
for rent, real estate taxes and maintenance of the facility. During the
comparable period in 1998, the Company charged approximately $336,000 against
the exit accrual for similar costs.
The Company reopened the office portion of the Buffalo Grove facility
during the fourth quarter of 1998 as a telemarketing facility. Accordingly, the
Company records a proportionate share of the rent and other operating costs to
selling and administrative expenses. The Company plans to occupy the Buffalo
Grove office facility while it finalizes future long term growth plans for its
Vernon Hills campus. The Company sublet the warehouse and showroom portions of
the Buffalo Grove facility to a third party for the period beginning June 15,
1999, and continuing through December 31, 2003, the end of the lease term. There
is no assurance that the remaining exit liability of $2.6 million at June 30,
1999, will be adequate to cover actual costs in the event the sublessee is
unable or unwilling to complete the lease term.
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5. Financing Arrangements
The Company has an aggregate $50 million available pursuant to two $25
million unsecured lines of credit with two financial institutions, one which
expires in June 2000, at which time the Company intends to renew the line, and
another which does not have a fixed expiration date. Borrowings under the first
credit facility 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, 1999, there were no borrowings against either of the credit facilities.
The Company has entered into security agreements with certain financial
institutions ("Flooring Companies") in order to facilitate the purchase of
inventory from various suppliers under certain terms and conditions. The
agreements allow for a maximum credit line of $63.9 million collateralized by
inventory purchases financed by the Flooring Companies. At June 30, 1999, all
amounts owed the Flooring Companies are included in trade accounts payable.
6. Earnings Per Share
The Company had approximately 43,139,000 shares outstanding at June 30,
1999. 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, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Basic earnings per share:
Income available to
common shareholders (numerator) $ 22,301 $ 15,588 $ 41,999 $ 30,358
------------ ------------ ------------ ------------
Weighted average common
shares outstanding (denominator) 43,118 43,092 43,094 43,092
------------ ------------ ------------ ------------
Basic earnings per share $ 0.52 $ 0.36 $ 0.97 $ 0.70
============ ============ ============ ============
Diluted earnings per share:
Income available to
common shareholders (numerator) $ 22,301 $ 15,588 $ 41,999 $ 30,358
------------ ------------ ------------ ------------
Weighted average common
shares outstanding 43,118 43,092 43,094 43,092
Effect of dilutive securities:
Options on common stock 807 272 810 344
------------ ------------ ------------ ------------
Total common shares and dilutive
securities (denominator) 43,925 43,364 43,904 43,436
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.51 $ 0.36 $ 0.96 $ 0.70
============ ============ ============ ============
7. Leasing Joint Venture
In April 1999, CDW Capital Corporation, a wholly-owned subsidiary of CDW,
and First Portland Corporation ("FIRSTCORP") formed CDW Leasing, L.L.C.
("CDW-L"), a 50/50 joint venture. CDW-L provides captive leasing services to CDW
customers. FIRSTCORP is a full-service leasing organization that has provided
third party leasing solutions to CDW customers for more than three years. Under
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the terms of an operating agreement, FIRSTCORP provides leasing management
services to CDW-L, with net earnings of the venture allocated 50% to CDW and 50%
to FIRSTCORP. CDW Capital Corporation contributed $100,000 to the capital of
CDW-L and has committed to loan up to $10 million to CDW-L on a secured basis to
fund new leases initiated by CDW-L. The investment in CDW-L is accounted for
using the equity method. The investment and loan to CDW-L at June 30, 1999 is
not material to the total assets of the Company and is included in Deferred
Income Taxes and Other Assets on the consolidated Balance Sheets.
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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.
Financial Information
Percentage of Net Sales
--------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 87.5 87.4 87.5 87.3
------------------------ ------------------------
Gross profit 12.5 12.6 12.5 12.7
Selling and administrative expenses 6.5 6.5 6.6 6.6
------------------------ ------------------------
Income from operations 6.0 6.1 5.9 6.1
Other income, net 0.2 0.2 0.2 0.2
------------------------ ------------------------
Income before income taxes 6.2 6.3 6.1 6.3
Income tax provision 2.5 2.5 2.4 2.5
------------------------ ------------------------
Net income 3.7 % 3.8 % 3.7 % 3.8 %
======================== ========================
Operating Statistics
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Number of orders shipped 616,603 557,410 1,240,755 1,135,659
Average order size $969 $734 $916 $699
Number of account managers, end of period 617 520
Customers serviced - commercial 117,000 101,000 177,000 156,000
Customers serviced - consumer 85,000 109,000 174,000 216,000
Annualized inventory turns 26 24 25 25
--------------------------------------------------------
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The following table presents net sales by product line as a percentage of
total net sales. Product classifications are based upon internal product code
classifications and are retroactively adjusted for the addition of new
categories but not for changes in individual product categorization.
Three Months Ended Six Months
Analysis of Product Mix June 30, Ended
June 30,
1999 1998 1999 1998
--------------------------------------------
Notebooks & Laptops 20.0 % 19.7 % 19.6 % 20.0 %
Desktop Computers 15.2 16.3 15.5 16.0
Software 13.8 14.2 13.4 13.5
Printers 11.1 12.2 11.6 12.8
Data Storage Devices 10.3 11.4 10.2 11.3
Network & Communication Products 9.4 7.7 9.4 8.0
Monitors & Video Products 7.3 9.4 7.3 9.0
Add-On Boards & Memory 4.5 3.9 4.6 4.2
Supplies 3.6 N/A 3.6 N/A
Input Devices 2.4 2.6 2.4 2.7
Multi-Media Devices 1.2 2.0 1.4 2.0
Other Accessories 1.2 0.6 1.0 0.5
-------------------------------------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
===========================================
Three months ended June 30, 1999 compared to three months ended June 30, 1998
Net sales in the second quarter of 1999 increased 46.1% to a record $597.6
million compared to $408.9 million in the second quarter of 1998. The Company's
average order size increased 32.0% to $969 from $734 in the prior year quarter.
The growth in net sales is primarily attributable to a higher concentration of
commercial accounts, a higher level of sales per active account and an increase
in the number of orders shipped. Sales to commercial accounts, including
business, government, educational and institutional customers, increased to
92.6% of net sales in the second quarter of 1999 from 87.2% in the second
quarter of 1998. The number of active commercial customers increased 15.8% to
117,000 in the second quarter of 1999 from 101,000 in the second quarter of
1998. For the three months ended June 30, 1999, the number of orders shipped
increased 10.6% to over 616,000. Notebook computers continue to represent the
largest portion of the Company's sales at 20.0%, with dollar volume increasing
more than 48% from the second quarter of 1998.
The average selling price of desktop and server CPU's increased 5.5% and
the average selling price of notebook CPU's declined 2.4% from the second
quarter of 1998. The Company believes there may be future 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. The
Company's sales growth rate and operating results could be adversely affected if
future manufacturer price reductions or the Company's sales and marketing
efforts fail to increase the level of unit sales. 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 effect on the Company's results from operations. The statement
concerning future prices, sales and results from operations are forward looking
statements that involve certain risks and uncertainties such as stated above.
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The fastest growing product categories in terms of sales dollars and the
respective growth rates in the second quarter of 1999 compared to the second
quarter of 1998 were:
Product Category Growth Rate
---------------- -----------
Add-On Boards & Memory 68.0%
Notebooks & Laptops 48.3%
Network and Communication Products 45.9%
Software 41.8%
Monitors & Video Products 37.8%
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 12.5% for the three
months ended June 30, 1999, compared to 12.6% in the second quarter of 1998. The
decrease in gross profit as a percentage of net sales is primarily the result of
lower selling margins achieved on certain product lines and lower levels of
inventory price protection from vendors partially offset by reductions in
shipping costs. On a forward-looking basis, it is likely that the gross profit
margin achieved will fluctuate from quarter to quarter and may be lower than the
12.5% achieved in the second quarter of 1999. The statement concerning future
gross profit is a forward looking statement that involves certain risks and
uncertainties such as the continued participation by vendors in inventory price
protection and rebate programs, pricing strategies, product mix, market
conditions and other factors which could result in a fluctuation of gross
margins below recent experience. Certain manufacturers may make additional
changes that limit the amount of price protection for which the Company is
eligible. Such changes could have a negative impact on gross margin in future
periods. 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 and the executive incentive bonus pool
remained consistent at 6.5% of net sales in the three months ended June 30, 1999
and 1998.
Net advertising expense decreased as a percentage of net sales to 0.57%
from 0.65% for the three months ended June 30, 1999 and 1998, respectively.
Gross advertising expense decreased to 2.8% of net sales in the second quarter
of 1999 versus 2.9% in the second quarter of 1998. The Company decreased catalog
circulation and the number of national advertising pages versus the prior year,
while expanding its spending on its corporate branding campaign and other direct
marketing activities. 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 1999. Cooperative advertising reimbursements as a percentage
of net sales remained consistent at 2.2% of net sales in the second quarter of
1999 and 1998. The cooperative advertising reimbursement rate may fluctuate in
future quarters depending on the level of vendor participation achieved, changes
in vendor programs 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 decreased to 5.6% of net sales in
the second quarter of 1999 from 5.8% in the same period of 1998. Increases in
coworker productivity offset increased payroll and associated costs related to
our sales force expansion. As of June 30, 1999, there were 617 account managers,
an increase of 18.7% from 520 account managers as of June 30, 1998. Of the 617
account managers, approximately 74% had fewer than 24 months experience and 52%
had fewer than 12 months, as compared to 73% and 54% at June 30, 1998.
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The executive incentive bonus pool increased to $1.8 million in the second
quarter of 1999 from $597,000 in the second quarter of 1998. For 1999, the
Compensation and Stock Option Committee established the bonus pool at 15% of the
increase in operating income over the prior year.
Interest income, net of other expenses, decreased to $853,000 in the second
quarter of 1999 compared to $951,000 in the second quarter of 1998, due mainly
to lower levels of available cash.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the three months ended June 30, 1999 and 1998.
Net income for the three months ended June 30, 1999, was $22.3 million, a
43.1% increase over $15.6 million for the three months ended June 30, 1998.
Diluted earnings per share was $0.51 and $0.36 for the three months ended June
30, 1999 and 1998, respectively, an increase of 41.7%. All per share amounts
have been adjusted to reflect the two-for-one stock split effected in the form
of a stock dividend paid on May 19, 1999.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Net sales in the first half of 1999 increased 43.3% to a record $1.137
billion compared to $793.5 million in the first half of 1998. The Company's
average order size increased 31.1% to $916 from $699 in the first six months of
the prior year. The growth in net sales is primarily attributable to a higher
concentration of commercial accounts, a higher level of sales per active account
and an increase in the number of orders shipped. Sales to commercial accounts,
including business, government, educational and institutional customers,
increased to 91.5% of net sales in the first half of 1999 from 85.8% in the
first half of 1998. The number of active commercial customers increased 13.5% to
177,000 in the first half of 1999 from 156,000 in the first half of 1998. For
the six months ended June 30, 1999, the number of orders shipped increased 9.3%
to over 1.2 million. Notebook computers continue to represent the largest
portion of the Company's sales at 19.6%, with dollar volume increasing more than
40% from the first half of 1998.
The average selling price of desktop and server CPU's increased 7.7% and
the average selling price of notebook CPU's declined 3.5% from the first half of
1998. The Company believes there may be future 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. The Company's sales
growth rate and operating results could be adversely affected if future
manufacturer price reductions or the Company's sales and marketing efforts fail
to increase the level of unit sales. 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
effect on the Company's results from operations. The statement concerning future
prices, sales and results from operations are forward looking statements that
involve certain risks and uncertainties such as stated above.
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The fastest growing product categories in terms of sales dollars and the
respective growth rates in the six months ended June 30, 1999 compared to the
six months ended June 30, 1998 were:
Product Category Growth Rate
---------------- -----------
Add-On Boards & Memory 56.2%
Network & Communication Products 50.4%
Software 42.4%
Notebooks & Laptops 40.1%
Desktop Computers 39.3%
Gross profit decreased as a percentage of net sales to 12.5% for the six
months ended June 30, 1999, compared to 12.7% in the first half of 1998. The
decrease in gross profit as a percentage of net sales is primarily the result of
lower selling margins achieved on certain product lines and lower levels of
inventory price protection from vendors partially offset by reductions in
shipping costs. On a forward-looking basis, it is likely that the gross profit
margin achieved will fluctuate from quarter to quarter and may be lower than the
12.5% achieved in the first half of 1999. The statement concerning future gross
profit is a forward looking statement that involves certain risks and
uncertainties such as the continued participation by vendors in inventory price
protection and rebate programs, pricing strategies, product mix, market
conditions and other factors which could result in a fluctuation of gross
margins below recent experience. Certain manufacturers may make additional
changes that limit the amount of price protection for which the Company is
eligible. Such changes could have a negative impact on gross margin in future
periods. 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 and the executive incentive bonus pool
remained at 6.6% of net sales in the six months ended June 30, 1999 and 1998.
Net advertising expense decreased as a percentage of net sales to 0.67%
from 0.70% for the six months ended June 30, 1999 and 1998, respectively. Gross
advertising expense decreased to 2.8% of net sales in the first half of 1999
versus 3.1% in the first half of 1998. The Company decreased catalog circulation
and the number of national advertising pages versus the prior year, while
expanding its spending on its corporate branding campaign and other direct
marketing activities. 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
first half of 1999. Cooperative advertising reimbursements as a percentage of
net sales declined to 2.1% of net sales in the first half of 1999 from 2.4% for
the six months ended June 30, 1998. The cooperative advertising reimbursement
rate may fluctuate in future quarters depending on the level of vendor
participation achieved, changes in vendor programs 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 decreased to 5.6% of net sales in
the first half of 1999 from 5.8% in the same period of 1998. Increases in
coworker productivity offset increased payroll and associated costs related to
our sales force expansion. As of June 30, 1999, there were 617 account managers,
an increase of 18.7% from 520 account managers as of June 30, 1998. Of the 617
account managers, approximately 74% had fewer than 24 months experience and 52%
had fewer than 12 months, as compared to 73% and 54% at June 30, 1998.
The executive incentive bonus pool increased to $3.2 million in the first
six months of 1999 from $1.1 million in the first half of 1998. For 1999, the
Compensation and Stock Option Committee established the bonus pool at 15% of the
increase in operating income over the prior year.
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Interest income, net of other expenses, decreased to $1.8 million in the
first half of 1999 compared to $2.0 million in the first half of 1998, due
mainly to lower levels of available cash.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the six months ended June 30, 1999 and 1998.
Net income for the six months ended June 30, 1999, was $42.0 million, a
38.4% increase over $30.4 million for the six months ended June 30, 1998.
Diluted earnings per share was $0.96 and $0.70 for the six months ended June 30,
1999 and 1998, respectively, an increase of 37.1%. All per share amounts have
been adjusted to reflect the two-for-one stock split effected in the form of a
stock dividend paid on May 19, 1999.
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, 1999, the Company had cash, cash equivalents and marketable
securities of $77.7 million and working capital of $274.6 million, representing
an increase of $7.0 million in cash, cash equivalents and marketable securities
and an increase of $45.8 million in working capital from December 31, 1998.
The Company has an aggregate $50 million available pursuant to two $25
million unsecured lines of credit with two financial institutions, one which
expires in June 2000, at which time the Company intends to renew the line, and
another which does not have a fixed expiration date. Borrowings under the first
credit facility 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, 1999, 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. 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, 2000.
Cash flows for the six months ended June 30, 1999
Net cash provided by operating activities for the six months ended June 30,
1999, was slightly less than $10.0 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 primarily from increased sales volume and an increase in the
percentage of net sales generated from commercial accounts with open credit
terms to 68.9% from 62.4% for the twelve months ended June 30, 1998. Inventory
increased during the period in response to increased sales growth rates.
Annualized inventory turnover remained consistent at approximately 25 times for
the six months ended June 30, 1999 and 1998. The increase in accounts payable
reflects timing of payments to vendors at the end of the respective periods as
well as the increase in inventory levels during the year.
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Cash provided by operating activities for the six months ended June 30,
1999, was positively impacted by a $4.6 million tax benefit recorded to
paid-in-capital, relating to the exercise of shares pursuant to the MPK Stock
Option Plan.
Net cash provided by investing activities for the six months ended June 30,
1999, was $10.1 million, net of approximately $4.9 million used for capital
expenditures. The capital expenditures made by the Company were primarily
related to the purchase of machinery and equipment for the Vernon Hills
facility.
Leasing Joint Venture
In April 1999, CDW Capital Corporation, a wholly-owned subsidiary of CDW,
and First Portland Corporation ("FIRSTCORP") formed CDW Leasing, L.L.C.
("CDW-L"), a 50/50 joint venture. CDW-L provides captive leasing services to CDW
customers. FIRSTCORP is a full-service leasing organization that has provided
third party leasing solutions to CDW customers for more than three years. Under
the terms of an operating agreement, FIRSTCORP provides leasing management
services to CDW-L, with net earnings of the venture allocated 50% to CDW and 50%
to FIRSTCORP. CDW Capital Corporation contributed $100,000 to the capital of
CDW-L and has committed to loan up to $10 million to CDW-L on a secured basis to
fund new leases initiated by CDW-L. The investment in CDW-L is accounted for
using the equity method. The investment and loan to CDW-L at June 30, 1999 is
not material to the total assets of the Company and is included in Deferred
Income Taxes and Other Assets on the consolidated Balance Sheets.
Year 2000 Readiness Disclosure
General
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, receive or
ship products, send invoices, or engage in similar normal business activities.
The Company has established a Y2K project designed to make all its hardware
and software systems Y2K compliant by December 31, 1999. The Company intends to
contract an outside organization to review its project methodology and status of
all aspects of the Y2K issue.
Project
CDW's Y2K project consists of two components, internal and external. The
internal section has been divided into five steps which are currently being
completed by the Y2K Team:
1. Awareness - Awareness includes evaluating industry best practices,
generating management and employee awareness, establishing communications
methods and establishing the project team.
2. Assessment - This phase includes hardware and software compliance
assessment, establishment of the size and scope of the project,
establishment of a project timeline, priorities, budgeting and allocation
of resources.
3. Renovation - Renovation consists of establishing a detailed implementation
plan, the design of new systems and system corrections, writing of system
code and software and hardware testing.
4. Validation - Validation includes testing new systems and system corrections
to ensure they will function properly in operation.
5. Implementation - Final certification of the new and corrected systems,
implementation of the systems and monitoring to ensure they continue to
function.
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All phases of the project as they relate to internal systems were completed
as of March 31, 1999. The Company plans to focus the majority of its efforts for
the remainder of 1999 on the external portion of the project while continuing to
validate and test its internal systems to ensure those systems are properly
converted.
The external portion of the project focuses on assessing the Y2K readiness
of product and service vendors and its potential impact on the Company's
operations. The Company will work through issues with its business partners
during the remainder of 1999 to minimize potential business interruptions. This
portion of the project is expected to be completed prior to December 31, 1999.
Costs
The Company estimates that total costs for the Y2K project, through
December 31, 1999, will range between $750,000 and $1 million. As of June 30,
1999 the Company has incurred, and recorded as operating expenses, approximately
$370,000 in costs related to the project, of which approximately $130,000 were
incurred during the six months ended June 30, 1999. Essentially all of the
Company's expenditures to date are for internal payroll costs related to the
assessment and correction of internal systems. Of the estimated remaining costs
of $380,000 to $630,000, approximately 75% relate to the cost of assessing and
communicating with vendors and 25% relate to the correction of internal systems.
Risks
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations and financial condition. Due to the general uncertainty
inherent in the Y2K problem, resulting in part from the uncertainty of the Y2K
readiness of third-party suppliers, the Company is unable to determine at this
time whether the consequences of Y2K failures will have a material impact on the
Company's results of operations and financial condition. The Company's Y2K
project is expected to significantly reduce the Company's level of uncertainty
about the Y2K problem and, in particular, about the Y2K compliance and readiness
of its material vendors. The Company believes that, with the completion of the
project as scheduled, the possibility of significant interruptions of normal
operations should be minimized.
The statements concerning future impact of the Y2K issue are forward looking
statements that involve certain risks and uncertainties, such as the inability
to receive products on a timely basis from vendors, ship products to customers,
receive payments from customers and other factors which could have a material
impact on the Company's results from operations. Certain vendors may fail to
adequately prepare their information systems or the Company's own Y2K project
may not correct all Y2K issues. Accordingly, there is no certainty that either
the Company or its vendors will complete their Y2K projects prior to December
31, 1999.
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, cooperative
advertising reimbursements and the potential impact on operations of the Y2K
issue are forward-looking statements that involve certain risks and
uncertainties, as specified herein.
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Part II Other Information
Item 1. Legal Proceedings
The Company is currently not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held an annual meeting of Shareholders on May 18, 1999.
(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 41,534,944 - 33,519
- Gregory C. Zeman 41,534,944 - 33,519
- Daniel B. Kass 41,534,944 - 33,519
- Joseph Levy, Jr. 41,534,944 - 33,519
- Michelle L. Collins 41,534,944 - 33,519
2. Ratification of Auditors
The selection of PricewaterhouseCoopers LLP, independent public
accountants, as auditors of the Company for the year ended
December 31, 1999.
Votes For Votes Against Abstentions
---------- ------------- -----------
41,549,202 24,600 28,180
3. CDW Officer and Manager Bonus Plan
The approval of an amendment to the CDW Officer and Manager Bonus
Plan.
Votes For Votes Against Abstentions
---------- ------------- -----------
31,829,540 9,715,904 57,348
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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10 (yy) Revolving Note between the Company and LaSalle National Bank
dated June 28, 1999
27 (a) Financial Data Schedule(for the three months ended June 30,
1999)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
June 30, 1999.
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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 6, 1999 /s/ Harry J. Harczak, Jr.
--------------------- ----------------------------
Harry J. Harczak, Jr.
Chief Financial Officer &
Treasurer
Date August 6, 1999 /s/ Sandra M. Rouhselang
--------------------- ----------------------------
Sandra M. Rouhselang
Controller
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Index to Exhibits
10 (yy) Revolving Note between the Company and LaSalle National Bank dated June
28, 1999
27 Financial Data Schedule