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 SEPTEMBER 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 November 15, 1999, 43,314,278 common shares were issued and 43,214,278
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 -
September 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 1999 and 1998 2
Condensed Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 1999 3
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 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 6. Exhibits and Reports on Form 8-K 17
Signatures 18
ii
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,296 $ 4,230
Marketable securities 76,562 66,458
Accounts receivable, net of allowance for doubtful
accounts of $4,300 and $3,185, respectively 242,700 152,308
Miscellaneous receivables 6,400 5,896
Merchandise inventory 87,142 64,392
Prepaid expenses and other assets 1,223 1,423
Deferred income taxes 4,886 5,081
--------- ---------
Total current assets 435,209 299,788
Property and equipment, net 38,509 37,056
Deferred income taxes and other assets 7,125 4,977
--------- ---------
TOTAL ASSETS $ 480,843 $ 341,821
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 98,947 $ 41,358
Accrued expenses:
Compensation 20,555 16,279
Income taxes - 5,146
Exit costs 2,262 2,715
Other 6,614 5,560
--------- ---------
Total current liabilities 128,378 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; 43,266 and 43,142 shares issued
respectively 217 216
Paid-in capital 94,477 81,352
Retained earnings 260,446 192,259
Unearned compensation (586) (975)
--------- ---------
Subtotal shareholders' equity 354,554 272,852
--------- ---------
Less cost of common shares in treasury, 100 shares (2,089) (2,089)
--------- ---------
Total shareholders' equity 352,465 270,763
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 480,843 $ 341,821
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net sales $ 683,012 $ 462,720 $1,819,972 $1,256,256
Cost of sales 597,398 403,857 1,591,705 1,096,539
--------- --------- ---------- ----------
Gross profit 85,614 58,863 228,267 159,717
Selling and administrative expenses 43,523 31,707 118,423 84,350
--------- --------- ---------- ----------
Income from operations 42,091 27,156 109,844 75,367
Interest income 1,363 1,305 3,366 3,516
Other expense (96) (77) (317) (239)
--------- --------- ---------- ----------
Income before income taxes 43,358 28,384 112,893 78,644
Income tax provision 17,170 11,243 44,706 31,145
--------- --------- ---------- ----------
Net income $ 26,188 $ 17,141 $ 68,187 $ 47,499
========= ========= ========== ==========
Earnings per share
Basic $ 0.61 $ 0.40 $ 1.58 $ 1.10
========= ========= ========== ==========
Diluted $ 0.59 $ 0.39 $ 1.55 $ 1.09
========= ========= ========== ==========
Weighted average number of
common shares outstanding
Basic 43,150 43,076 43,104 43,086
========= ========= ========== ==========
Diluted 44,108 43,344 43,972 43,404
========= ========= ========== ==========
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 (101) 101 -
Amortization of unearned compensation 288 288
Exercise of stock options 124 1 1,545 1,546
Tax benefit from stock option transactions 11,681 11,681
Net income 68,187 68,187
--------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 43,266 $ 217 $ 94,477 $ 260,446 $ (586) 100 $(2,089) $ 352,465
======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 68,187 $ 47,499
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 5,143 3,429
Accretion of marketable securities, net (2,184) (2,033)
Allowance for doubtful accounts 1,115 935
Stock-based compensation expense 288 355
Legal fees assumed by majority shareholder, net of tax - 673
Deferred income taxes 698 144
Tax benefit from stock option exercises 11,681 3,268
Changes in assets and liabilities:
Accounts receivable (91,507) (49,554)
Miscellaneous receivables (504) (2,111)
Merchandise inventory (22,750) 6,652
Prepaid expenses and other assets 191 (71)
Accounts payable 57,589 1,472
Accrued compensation 4,276 2,230
Accrued income taxes and other expenses (4,092) (4,363)
Accrued exit costs (453) (554)
-------- --------
Net cash provided by operating activities 27,678 7,971
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (66,703) (24,810)
Redemptions of available-for-sale securities 44,292 21,250
Purchases of held-to-maturity securities (50,020) (64,945)
Redemptions of held-to-maturity securities 64,511 69,656
Investments in and advances to joint venture (2,642) -
Purchase of property and equipment (6,596) (12,426)
-------- --------
Net cash used in investing activities (17,158) (11,275)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,546 453
Repurchases of treasury shares - (2,089)
-------- --------
Net cash provided by / (used in) financing activities 1,546 (1,636)
-------- --------
Net increase / (decrease) in cash 12,066 (4,940)
Cash and cash equivalents - beginning of period 4,230 18,233
-------- --------
Cash and cash equivalents - end of period $ 16,296 $ 13,293
======== ========
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
sales, corporate office, warehouse and showroom facility located in Vernon
Hills, Illinois. The Company also operates a sales office 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 condensed consolidated 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 September 30, 1999 and December 31,1998, the results of
operations for the three and nine months ended September 30, 1999 and 1998, the
cash flows for the nine months ended September 30, 1999 and 1998, and the
changes in shareholders' equity for the nine months ended September 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.
5
8
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 September 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 $ 25,129 $ - $ (19) $ 25,148
-------------------------------------------------
Total available-for-sale 25,129 - (19) 25,148
-------------------------------------------------
Held to maturity:
U.S. Government and Government Agency Securities 51,356 - (58) 51,414
-------------------------------------------------
Total held-to-maturity 51,356 - (58) 51,414
-------------------------------------------------
Total marketable securities $ 76,485 $ - $ (77) $ 76,562
=================================================
The Company's investments in securities held-to-maturity at September 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.
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 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. The remaining portion of the rent not covered by the sublease or
the amount recorded to selling and administrative expenses continues to be
charged against the exit accrual. There is no assurance that the remaining exit
liability of $2.3 million at September 30, 1999, will be adequate to cover
actual costs in the event the sublessee is unable or unwilling to complete the
lease term.
During the nine months ended September 30, 1999, the Company charged
approximately $453,000 against the exit accrual in cash payments for rent, real
estate taxes and maintenance of the facility, net of sub-lease payments received
which totaled approximately $187,000. During the comparable period in 1998, the
Company charged approximately $554,000 against the exit accrual for similar
costs.
6
9
On October 11, 1999 the Company entered into a lease agreement for two
floors of office space totaling approximately 72,000 square feet in Chicago,
Illinois. The Company plans to establish a sales office in the facility with the
lease commencing for one floor on April 1, 2000, and for the second floor on
September 1, 2000. The lease provides a ten year term, with certain expansion
and renewal options. The Company plans to expend between $8 million and $10
million for computer and telecommunication equipment, furniture and improvements
related to the facility. Minimum future rent payments for all the Company's
lease obligations, including the new Chicago facility are as follows (in
thousands):
Years Ended December 31, Amount
------------------------ -----------------
2000 $ 1,467
2001 1,925
2002 1,926
2003 1,958
2004 1,149
Thereafter 2,402
-----------------
$ 10,827
=================
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
September 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 $64.0 million collateralized by
inventory purchases financed by the Flooring Companies. At September 30, 1999,
all amounts owed the Flooring Companies are included in trade accounts payable.
6. Earnings Per Share
The Company had approximately 43,266,000 issued and 43,166,000 shares
outstanding at September 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.
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Three Months Ended Nine months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Basic earnings per share:
Income available to
common shareholders (numerator) $ 26,188 $ 17,141 $ 68,187 $ 47,499
------------ ------------ ------------ ------------
Weighted average common
shares outstanding (denominator) 43,150 43,076 43,104 43,086
------------ ------------ ------------ ------------
Basic earnings per share $ 0.61 $ 0.40 $ 1.58 $ 1.10
============ ============ ============ ============
Diluted earnings per share:
Income available to
common shareholders (numerator) $ 26,188 $ 17,141 $ 68,187 $ 47,499
------------ ------------ ------------ ------------
Weighted average common
shares outstanding 43,150 43,076 43,104 43,086
Effect of dilutive securities:
Options on common stock 958 268 868 318
------------ ------------ ------------ ------------
Total common shares and dilutive
securities (denominator) 44,108 43,344 43,972 43,404
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.59 $ 0.39 $ 1.55 $ 1.09
============ ============ ============ ============
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
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 September 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. In addition,
the income recognized by the Company from its investment in CDW-L for the three
and nine months ended September 30, 1999 were not material to the total income
of the Company as reported on the consolidated Statements of Income.
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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 Nine months Ended
September 30, September 30,
-----------------------------------------------------------
------------------------- -------------------------------
1999 1998 1999 1998
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 87.5 87.3 87.5 87.3
------------------------- ------------------------
Gross profit 12.5 12.7 12.5 12.7
Selling and administrative expenses 6.4 6.9 6.5 6.7
------------------------- ------------------------
Income from operations 6.1 5.8 6.0 6.0
Other income, net 0.2 0.3 0.2 0.3
------------------------- -------------------------
Income before income taxes 6.3 6.1 6.2 6.3
Income tax provision 2.5 2.4 2.5 2.5
------------------------- -------------------------
Net income 3.8 % 3.7 % 3.7 % 3.8 %
========================= =========================
Operating Statistics Three Months Ended Nine months Ended
September 30, September 30,
------------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
Number of invoices processed 770,356 595,015 2,127,800 1,730,674
Average invoice size $931 $828 $901 $775
Number of account managers, end of period 744 625
Customers serviced - commercial 126,000 107,000 233,000 205,000
% of sales to commercial customers 93.5% 89.0% 92.4% 87.2%
Annualized inventory turns 28 31 28 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 Nine Months Ended
Analysis of Product Mix September 30, September 30,
1999 1998 1999 1998
--------------------------------------------
Notebooks & Laptops 21.3 % 19.3 % 20.2 % 19.8 %
Desktop Computers 14.1 15.2 15.0 15.7
Software 13.0 13.7 13.3 13.6
Printers 11.1 12.7 11.4 12.7
Data Storage Devices 11.0 12.1 10.5 11.6
Network & Communication Products 9.8 9.9 9.6 9.3
Monitors & Video Products 7.1 7.6 7.2 7.9
Add-On Boards & Memory 4.7 3.7 4.6 4.0
Supplies 3.7 1.1 3.6 .4
Input Devices 1.9 2.3 2.2 2.6
Multi-Media Devices 1.1 1.9 1.3 2.0
Other Accessories 1.2 0.5 1.1 0.4
-------------------------------------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
===========================================
Three months ended September 30, 1999 compared to three months ended September
30, 1998
Net sales in the third quarter of 1999 increased 47.6% to a record $683.0
million compared to $462.7 million in the third quarter of 1998. The growth in
net sales is primarily attributable to a higher concentration of commercial
accounts, a higher level of sales per active account and increases in the
average invoice size and number of invoices processed. Sales to commercial
accounts, including business, government, educational and institutional
customers, increased to 93.5% of net sales in the third quarter of 1999 from
89.0% in the third quarter of 1998. The number of active commercial customers
increased 17.8% to 126,000 in the third quarter of 1999 from 107,000 in the
third quarter of 1998. For the three months ended September 30, 1999, the
average invoice size increased 12.4% to $931 and the number of invoices
processed increased 29.5% to over 770,000. Notebook computers continue to
represent the largest component of the Company's product mix.
The average selling price of desktop and server CPU's decreased 1.3% and
the average selling price of notebook CPU's declined 5.3% from the third 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 by
future manufacturer price reductions or if 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 third quarter of 1999 compared to the third
quarter of 1998 were:
Product Category Growth Rate
---------------- -----------
Add-On Boards & Memory 87.7%
Notebooks & Laptops 62.8%
Network and Communication Products 46.6%
Software 40.0%
Monitors & Video Products 36.8%
Demand for certain products 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 September 30, 1999, compared to 12.7% in the third 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 vendor support programs. 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 third 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
declined to 6.4% of net sales in the three months ended September 30, 1999 from
6.9% in the same period of 1998.
Net advertising expense decreased as a percentage of net sales to 0.52%
from 0.85% for the three months ended September 30, 1999 and 1998, respectively.
Gross advertising expense increased $2.6 million, while decreasing as a
percentage of net sales in the third quarter to 2.4% from 3.0% in the third
quarter of 1998. The Company decreased catalog circulation versus the prior year
while increasing the number of national advertising pages and 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 third
quarter of 1999. Cooperative advertising reimbursements decreased as a
percentage of net sales to 1.9% of net sales in the third quarter of 1999 from
2.1% in the third quarter of 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 5.5% of net sales in
the third quarter of 1999 from 5.7% in the same period of 1998. Increases in
coworker productivity offset increased payroll and associated costs related to
expansion of the sales force. As of September 30, 1999, there were 744 sales
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account managers, an increase of 19.0% from 625 sales account managers as of
September 30, 1998. Approximately 76% of the 744 sales account managers had
fewer than 24 months experience and 56% had fewer than 12 months, as compared to
72% and 56% at September 30, 1998. The Company plans to increase the number of
sales account managers to 800 by December 31, 1999 and to within the range of
1,050 to 1,150 by December 31, 2000.
In October 1999, the Company agreed to lease approximately 72,000 square
feet of office space in Chicago, Illinois as an additional sales office (see
Working Capital and Footnote 4 to the financial statements). Average annual
future minimum lease expense for the new sales office is approximately $1.1
million per year. As a result of the expansion of the sales force and the new
sales office the Company's selling and administrative costs may increase as a
percentage of net sales in future periods.
The executive incentive bonus pool increased to $2.5 million in the third
quarter of 1999 from $1.0 million in the third 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, increased slightly to $1.3 million
in the third quarter of 1999 compared to $1.2 million in the third quarter of
1998.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the three months ended September 30, 1999 and 1998.
Net income for the three months ended September 30, 1999, was $26.2
million, a 52.8% increase over $17.1 million for the three months ended
September 30, 1998. Diluted earnings per share was $0.59 for the three months
ended September 30, 1999 and $0.39 in the same period of 1998, an increase of
51.3%. 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.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Net sales in the first nine months of 1999 increased 44.9% to a record
$1.820 billion compared to $1.256 billion in the first nine months of 1998. The
growth in net sales is primarily attributable to a higher concentration of
commercial accounts, a higher level of sales per active account and increases in
the average invoice size and number of invoices processed. Sales to commercial
accounts, including business, government, educational and institutional
customers, increased to 92.4% of net sales in the first nine months of 1999 from
87.2% in the first nine months of 1998. The number of active commercial
customers increased 13.7% to 233,000 in the first nine months of 1999 from
205,000 in the first nine months of 1998. For the nine months ended September
30, 1999, the average invoice size increased 16.3% to $901 and the number of
invoices processed increased 23.0% to over 2.1 million. Notebook computers
continue to represent the largest component of the Company's product mix.
The average selling price of desktop and server CPU's increased 4.4% and
the average selling price of notebook CPU's declined 4.1% from the first nine
months 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 by
future manufacturer price reductions or if 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 nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998 were:
Product Category Growth Rate
---------------- -----------
Add-On Boards & Memory 66.9%
Network & Communication Products 48.9%
Notebooks & Laptops 48.3%
Software 41.5%
Desktop Computers 38.3%
Demand for certain products 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 nine
months ended September 30, 1999, compared to 12.7% in the first nine months 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 vendor support programs. 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 nine months 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
declined to 6.5% of net sales in the nine months ended September 30, 1999 from
6.7% for the same period of 1998.
Net advertising expense decreased as a percentage of net sales to 0.62%
from 0.75% for the nine months ended September 30, 1999 and 1998, respectively.
Gross advertising expense increased $9.6 million while decreasing as a
percentage of net sales in the first nine months to 2.6% from 3.1% in the same
period 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 nine months of
1999. Cooperative advertising reimbursements as a percentage of net sales
declined to 2.0% of net sales in the first nine months of 1999 from 2.3% for the
nine months ended September 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 nine months of 1999 from 5.7% in the same period of 1998. Increases in
coworker productivity offset increased payroll and associated costs related to
expansion of the sales force.
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In October 1999, the Company agreed to lease approximately 72,000 square
feet of office space in Chicago, Illinois as an additional sales office (see
Working Capital and Footnote 4 to the financial statements). Average annual
future minimum lease expense for the new sales office is approximately $1.1
million per year. As a result of the expansion of the sales force and the new
sales office the Company's selling and administrative costs may increase as a
percentage of net sales in future periods.
The executive incentive bonus pool increased to $5.7 million in the first
nine months of 1999 from $2.2 million in the first nine months 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 $3.0 million in the
first nine months of 1999 compared to $3.3 million in the first nine months of
1998.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the nine months ended September 30, 1999 and 1998.
Net income for the nine months ended September 30, 1999, was $68.2 million,
a 43.6% increase over $47.5 million for the nine months ended September 30,
1998. Diluted earnings per share was $1.55 for the nine months ended September
30, 1999, and $1.09 for the same period of 1998, an increase of 42.2%. 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 September 30, 1999, the Company had cash, cash equivalents and
marketable securities of $92.8 million and working capital of $306.8 million,
representing an increase of $22.2 million in cash, cash equivalents and
marketable securities and an increase of $78.1 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
September 30, 1999, there were no borrowings against either of the credit
facilities.
The Company plans to expend between $8 million and $10 million during the
next twelve months for computer and telecommunication equipment, furniture and
improvements related to the new sales office in Chicago, Illinois.
The Company's current primary and anticipated use of cash is to fund future
growth in working capital and capital expenditures. The Company believes that
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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 September 30, 2000.
Cash flows for the nine months ended September 30, 1999
Net cash provided by operating activities for the nine months ended
September 30, 1999, was $27.7 million. The primary factors that 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 to 69.5% for the
nine months ended September 30, 1999 from 61.9% for the same period of 1998. The
accounts receivable days sales outstanding at September 30, 1999 was 32.7 as
compared with 29.0 at December 31, 1998. Inventory increased during the period
in response to increased sales volume. Annualized inventory turnover increased
to approximately 28 times for the nine months ended September 30, 1999 from 25
for the nine months ended September 30, 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.
Cash provided by operating activities for the nine months ended September
30, 1999, was positively impacted by a $11.7 million tax benefit recorded to
paid-in-capital, relating to the exercise of shares pursuant to the MPK Stock
Option Plan and the CDW Incentive Stock Option Plan.
Net cash used in investing activities for the nine months ended September
30, 1999, was $17.2 million, including approximately $7.0 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.
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.
Project
CDW's Y2K project consists of two components,internal and external. The internal
section has been divided into five steps:
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.
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5. Implementation - Final certification of the new and corrected systems,
implementation of the systems and monitoring to ensure they continue to
function.
Substantially 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.
The Company will also test all its internal systems a second time 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 distributed questionnaires to these vendors for this
purpose. To date the Company has received responses from over 30% of the vendors
contacted, each indicating they were not anticipating business disruption due to
Y2K. The Company is working to obtain responses from all significant vendors and
work to resolve identifiable issues, if any, to minimize potential business
interruptions. This portion of the project is expected to be completed prior to
December 31, 1999.
Costs
The Company originally estimated that total costs for the Y2K project,
through December 31, 1999, would range between $750,000 and $1 million. Actual
costs incurred to date for the Y2K project have been lower than originally
estimated. As such, the Company now estimates that total costs for the project
will range between $500,000 and $650,000. As of September 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 was incurred
during the nine months ended September 30, 1999. The Company's expenditures to
date consist primarily of internal payroll costs related to the assessment and
correction of internal systems. Of the estimated remaining costs of $130,000 to
$280,000, 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
the Company's vendors will complete their Y2K projects prior to December 31,
1999, which if not completed could affect the operations of the Company as noted
above.
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 5. Other information
On November 2, 1999 pursuant to unanimous consent of the Company's Board of
Directors, the Company expanded its Board of Directors to seven members
from five, and elected Casey Cowell and Donald P. Jacobs to fill the newly
created positions, effective immediately. Each new member's term will run
until the 2000 annual meeting at which time all directors' terms expire.
Mr. Cowell co-founded U.S. Robotics, one of the world's leading suppliers
of data communications products and systems. He served as Chairman and CEO
of U.S. Robotics from inception until its acquisition by 3Com in June 1997.
Mr. Cowell is chairman and principal owner of Durandal, Inc., a holding
company for several diversified private companies, and serves on the board
of directors of 3Com. A graduate of the University of Chicago, Mr. Cowell
is a member of the board of trustees for the University of Chicago and the
Illinois Institute of Technology.
Dr. Donald P. Jacobs is the dean of the J.L. Kellogg Graduate School of
Management and has been a member of the Kellogg faculty since joining the
school in 1957. Dr. Jacobs serves as chairman of the public review board
of Arthur Andersen and serves on the board of directors of several
corporations, including Commonwealth Edison, Hartmarx and Terex. Dr. Jacobs
received his Bachelor of Arts degree from Roosevelt University, Master of
Arts degree and Doctorate in economics from Columbia University and
numerous honorary degrees from prestigious national and international
universities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10 (zz) Lease Agreement Dated October 11, 1999 between the Company as
Lessee and Solano Associates as Lessor
27 (a) Financial Data Schedule (for the three months ended September 30,
1999)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
September 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 November 15, 1999 /s/ Harry J. Harczak, Jr.
--------------------- --------------------------
Harry J. Harczak, Jr.
Chief Financial Officer &
Treasurer
Date November 15, 1999 /s/ Sandra M. Rouhselang
--------------------- --------------------------
Sandra M. Rouhselang
Controller
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Index to Exhibits
10 (zz) Lease Agreement Dated October 11, 1999 between the Company as Lessee
and Solano Associates as Lessor
27 Financial Data Schedule