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, 1996 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.)
1020 E. LAKE COOK ROAD 60089
BUFFALO GROVE, 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 12, 1996, 21,524,984 COMMON SHARES WERE OUTSTANDING.
2
CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets - 1
September 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Income - 2
Three and Nine Months Ended September 30, 1996 and 1995 and
Twelve Months Ended September 30, 1996
Condensed Consolidated Statement of Shareholders' Equity - 3
Nine Months Ended September 30, 1996
Condensed Consolidated Statements of Cash Flows - 4
Nine Months Ended September 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 5-7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
ii
3
Part I. Financial Information
Item 1. Financial Statements
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 30, December 31,
1996 1995
---------------- ---------------
Assets
Current assets :
Cash and cash equivalents $ 6,728 $ 14,216
Marketable securities 58,773 42,953
Accounts receivable, net of allowance for doubtful
accounts of $950 and $625, respectively 55,359 38,527
Miscellaneous receivables 2,575 2,362
Merchandise inventory 46,000 27,422
Prepaid expenses and other current assets 1,146 206
Deferred income taxes 1,543 1,175
---------------- ---------------
Total current assets 172,124 126,861
Property and equipment, net 3,385 3,474
Construction-in-progress 6,853 -
Deferred income taxes and other assets 3,571 3,560
---------------- ---------------
Total assets $ 185,933 $ 133,895
================ ===============
Liabilities and Shareholders' Equity
Current liabilities :
Accounts payable $ 37,932 $ 19,436
Accrued expenses :
Payroll, commissions and management
incentive compensation 9,478 4,658
Exit costs 3,987 -
Income taxes 605 992
Other 2,728 1,682
Customer deposits 1,041 966
---------------- ---------------
Total current liabilities 55,771 27,734
---------------- ---------------
Commitments and contingencies
Shareholders' equity :
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 75,000 shares
authorized; 21,525 shares issued and
outstanding 215 215
Paid-in capital 66,396 66,414
Retained earnings 64,724 41,017
Unearned compensation (1,173) (1,485)
---------------- ---------------
Total shareholders' equity 130,162 106,161
---------------- ---------------
Total liabilities and shareholders' equity $ 185,933 $ 133,895
================ ===============
The accompanying notes are an integral part of the consolidated financial
statements
1
4
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousand, except per share data)
(unaudited)
Three Months Nine Months Twelve Months
Ended September 30, Ended September 30, Ended
----------------------------- ------------------------------ September 30,
1996 1995 1996 1995 1996
---------- ----------- ----------- ---------- -----------
Net sales $ 240,330 $ 161,105 $ 665,722 $ 448,621 $ 845,822
Cost of sales 208,744 140,706 577,873 391,393 735,048
---------- ----------- ----------- ---------- -----------
Gross profit 31,586 20,399 87,849 57,228 110,774
Selling and administrative expenses 16,302 12,358 47,213 35,758 60,630
Exit charge - - 4,000 - 4,000
---------- ----------- ----------- ---------- -----------
Income from operations 15,284 8,041 36,636 21,470 46,144
Interest income 896 595 2,573 1,232 3,313
Other income (expense), net (48) 26 (146) 17 (116)
---------- ----------- ----------- ---------- -----------
Income before income taxes 16,132 8,662 39,063 22,719 49,341
Income tax provision 6,453 3,378 15,356 8,930 19,364
---------- ----------- ----------- ---------- -----------
Net income $ 9,679 $ 5,284 $ 23,707 $ 13,789 $ 29,977
========== =========== =========== ========== ===========
Net income per share $ 0.44 $ 0.25 $ 1.09 $ 0.66 $ 1.38
========== =========== =========== ========== ===========
Weighted average number of
common and common equivalent
shares outstanding 21,832 21,269 21,763 20,907 21,722
========== =========== =========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
2
5
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands)
(unaudited)
Common Stock
-------------------- Retained
Shares Amount Paid-in Capital Earnings
-------------------------------------------------------------
Balance at December 31, 1995 21,525 $ 215 $ 66,414 $ 41,017
MPK Restricted Stock Plan :
Amortization of unearned compensation
Forfeiture of restricted shares (69)
Capital contribution for legal costs assumed
by majority shareholder 51
Net income 23,707
-------------------------------------------------------------
Balance at September 30, 1996 21,525 $ 215 $ 66,396 $ 64,724
=============================================================
Total
Unearned Shareholders'
Compensation Equity
--------------------------------------
Balance at December 31, 1995 $ (1,485) $ 106,161
MPK Restricted Stock Plan :
Amortization of unearned compensation 243 243
Forfeiture of restricted shares 69 -
Capital contribution for legal costs assumed
by majority shareholder 51
Net income 23,707
---------------------------------------
Balance at September 30, 1996 $ (1,173) $ 130,162
=======================================
The accompanying notes are an integral part of the consolidated financial
statements.
3
6
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
------------------------------
1996 1995
----------- ------------
Cash flows from operating activities:
Net income $ 23,707 $ 13,789
Adjustments to reconcile net income to net cash provided by
operating activities:
Exit charge 3,987 -
Depreciation and amortization 1,906 1,591
Loss on disposal of fixed asset 281 -
Legal fees assumed by majority shareholder 51 65
Tax benefit recognized from exercise of stock options - 3,655
Changes in assets and liabilities:
Accounts receivable, net (16,832) (12,924)
Miscellaneous receivables (213) (1,942)
Merchandise inventory (18,578) (10,791)
Prepaid expenses and other assets (946) (253)
Current deferred and prepaid taxes (373) (3,016)
Accounts payable 18,496 16,973
Accrued expenses 5,479 79
Customer deposits 75 232
----------- ------------
Net cash provided by operating activities 17,040 7,458
----------- ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (19,600) (19,400)
Redemptions of available-for-sale securities 18,550 16,650
Purchases of held-to-maturity securities (68,746) (26,278)
Redemptions of held-to-maturity securities 54,046 18,287
Payments for purchase of property and equipment,
including construction-in-progress (8,778) (1,237)
----------- ------------
Net cash used in investing activities (24,528) (11,978)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 25,912
Payment of public offering expenses, net - (128)
----------- ------------
Net cash provided by financing activities - 25,784
----------- ------------
Net (decrease) increase in cash (7,488) 21,264
Cash and cash equivalents - beginning of period 14,216 2,969
----------- ------------
Cash and cash equivalents - end of period $ 6,728 $ 24,233
=========== ============
The accompanying notes are an integral part of the consolidated financial
statements
4
7
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
CDW Computer Centers, Inc. (the "Company") is engaged in the distribution
of personal computers and related products through direct marketing and retail
showrooms, primarily to end users within the United States. The Company
distributes its products to consumers for cash on delivery and on credit card
terms. The Company also extends credit to business, governmental and
institutional customers under certain circumstances based upon the financial
strength of the customer. Such customers are typically granted net 10-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 and such principles
were applied on a basis consistent with those reflected in the 1995 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 1995 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, 1996 and December 31, 1995, the results of
operations for the three and nine months ended September 30, 1996 and 1995, and
the twelve months ended September 30, 1996, cash flows for the nine months
ended September 30, 1996 and 1995 and the changes in shareholders' equity for
the nine months ended September 30, 1996. 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.
The unaudited consolidated statement of income for the twelve months ended
September 30, 1996 has been included pursuant to the Underwriting Agreement
dated July 20, 1995 for the Company's public equity offering of common stock
and Section 11(a) of the Securities Act of 1933.
Net Income Per Share
On June 24, 1996, the Board of Directors of the Company announced a
three-for-two stock split effected in the form of a stock dividend paid on July
15, 1996 to all common shareholders of record as of July 5, 1996. All per
share and related amounts contained in these financial statements and notes
have been adjusted to reflect the stock split.
Net income per common and common equivalent share for the three and nine
months ended September 30, 1996 and 1995, and for the twelve months ended
September 30, 1996, are calculated using the weighted
5
8
average number of common and common equivalent shares outstanding during each
period. Common equivalent shares of 307,354 and 238,354 for the three and nine
months ended September 30, 1996, 93,839 and 48,402 for the three and nine
months ended September 30, 1995, respectively, and 196,770 for the twelve
months ended September 30, 1996, relate primarily to the CDW Incentive Stock
Option Plan and are calculated using the treasury stock method.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's investments in
marketable securities at September 30, 1996 (in thousands) were:
Gross
Unrealized
Holding
--------------------------
Estimated Amortized
Fair Value Gains (Losses) Cost
---------- ---------- ------------ ----------
Security Type
- -------------
Available for Sale:
Redemptive tax exempt preferred stocks $ 6,550 $ - $ - $ 6,550
--------------------------------------------------------
Held to maturity:
Bonds of states, municipalities, and political subdivisions $ 13,380 $ 6 $ - $ 13,374
U.S. Government and U.S. Government Agency Securities 38,836 - (13) 38,849
--------------------------------------------------------
Total held-to-maturity 52,216 6 (13) 52,223
--------------------------------------------------------
Total marketable securities: $ 58,766 $ 6 $ (13) $ 58,773
========================================================
The amortized cost and estimated fair value of the Company's investments in
securities held-to-maturity at September 30, 1996 (in thousands) by contractual
maturity were:
Estimated Amortized
Fair Value Cost
-------------- ------------
Due in one year or less $ 58,766 $ 58,773
Due in greater than one year $ - $ -
4. Contingency
The Company and its majority shareholder are defendants in a lawsuit filed
by a former shareholder. The suit requests actual and punitive damages in an
amount that cannot be readily determined. The Company and its majority
shareholder believe the suit to be without merit and are vigorously defending
against this action. The majority shareholder has agreed to indemnify and
reimburse the Company for all damages and expenses, net of tax benefits
received by the Company, related to this action. For the three and nine months
ended September 30, 1996, the Company and majority shareholder have incurred
legal expenses of approximately $30,000 and $85,000, respectively, which have
been assumed by the majority shareholder. Although the majority shareholder
has agreed to indemnify the Company for all expenses or settlements, if any, in
connection with this suit, the Company will continue to record such expenses or
settlements, if any, as an expense with an offsetting increase to paid-in
capital, net of tax effects.
5. Exit Charge
In June, 1996, the Company purchased approximately 27 acres of vacant land
in Vernon Hills, Illinois, upon which it is constructing a combined
telemarketing, warehouse, showroom and corporate office facility. As a result
of the planned move to the new facility, the Company will vacate and endeavor
to sublease its current facility, which resulted in a $4.0 million 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
6
9
sub-leasing the vacated facility, including holding costs and the estimated
costs of restoring the building to its original condition, and certain asset
write-offs resulting from the relocation.
Construction of the new facility began in September, 1996. As of
September 30, 1996 approximately $6.8 million in costs, including $6.1 million
in land acquisition costs, have been incurred and are included in
construction-in-progress. Based on current plans, the Company estimates it will
incur approximately $23.0 to $25.0 million in capital expenditures related to
purchasing the land and constructing and equipping the facility.
Additionally, the Company will incur certain moving and other costs, not
expected to exceed $1.0 million, relating to the relocation which would be
charged to operating results in the period incurred.
6. Financing Arrangements
As of September 30, 1996 the Company has an aggregate $30.0 million
available pursuant to lines of credit with two financial institutions
expiring in June, 1997. Borrowings under the lines 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.
In September, 1996 the Company established a stand-by letter of credit
for approximately $1.7 million related to construction of the new facility.
The Company has pledged a U.S. Treasury Note with a face value of $2.0
million as collateral for the letter of credit.
7
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition,
and results of operations should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the notes thereto
included elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth financial information derived from the
Company's statements of income expressed as a percentage of net sales, and
certain operating statistics. The financial information for the nine
months ended September 30, 1996 is presented on an actual basis and pro
forma to exclude the exit charge and related impact on the executive
incentive bonus pool, net of tax effects.
Percentage of Net Sales
---------------------------------------
Three Months Ended Nine Months Ended
FINANCIAL INFORMATION September 30, September 30,
------------------------------ ------------------------------------------------
1996 1995 1996 1995
------- -------- ----------------------- --------
Actual Pro forma
------- ----------
Net sales 100.00% 100.00% 100.00% 100.0% 100.00%
Cost of sales 86.86 87.34 86.80 86.80 87.24
------ ------ ------ ------ ------
Gross profit 13.14 12.66 13.20 13.20 12.76
Selling and administrative expenses 6.78 7.67 7.09 7.21 7.97
Exit charge 0.00 0.00 0.60 0.00 0.00
------ ------ ------ ------ ------
Income from operations 6.36 4.99 5.51 5.99 4.79
Other income, net 0.35 0.39 0.36 0.36 0.28
------ ------ ------ ------ ------
Income before income taxes 6.71 5.38 5.87 6.35 5.07
Income tax provision 2.68 2.10 2.31 2.50 2.00
------ ------ ------ ------ ------
Net income 4.03% 3.28% 3.56% 3.85% 3.07%
====== ====== ====== ====== ======
Three Months Ended Nine Months Ended
OPERATING STATISTICS September 30, September 30,
-------------------------------- --------------------------------------
1996 1995 1996 1995
--------- ---------- ----------- -----------
Number of orders shipped (000's) 342 253 944 713
Average order size $702 $636 $705 $630
Customers serviced (000's) 161 123 358 284
Number of account executives, end of period 267 184 267 184
PC catalogs distributed (000's) 10,962 6,248 33,435 18,364
Apple/Macintosh catalogs distributed (000's) 1,733 1,392 5,072 5,167
Pages of national advertising placed 173 161 482 396
Inventory turnover 20 19 21 18
8
11
The following table represents sales by product line as a percentage of
total sales for each of the periods noted. Product mix is based upon
internal product code classifications and is not retroactively adjusted for
the addition of new categories or changes in individual product
categorization.
PRODUCT MIX
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---------- --------- --------- ---------
Notebook & Laptops 27.5% 21.8% 26.7% 22.0%
Software 12.2 11.8 12.1 11.8
Desktop Computers 10.6 12.8 11.3 12.0
Printers 11.2 13.4 11.4 14.3
Data Storage Devices 10.6 8.7 9.5 8.4
Video 7.3 8.1 7.4 8.1
Add-On Boards/Memory 5.1 8.1 6.1 8.0
Communications 5.3 5.0 5.7 5.0
Network Products 4.3 6.6 4.2 6.8
Input Devices 3.4 N/A 2.6 N/A
Multi-Media 2.1 N/A 1.7 N/A
Other Accessories 0.4 3.7 1.3 3.6
--- --- --- ---
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Three months ended September 30, 1996 compared to three months ended
September 30, 1995
Net sales increased $79.2 million, or 49.2%, for the three months
ended September 30, 1996 to $240.3 million from $161.1 million for the
three months ended September 30, 1995. The Company's average order size
grew 10.4% to $702 and orders shipped grew 35.2% to 342,000 for the three
months ended September 30, 1996 as compared to the three months ended
September 30, 1995. The number of customers serviced for the trailing
twelve months ended September 30, 1996 grew to 444,000 versus 351,000 for
the trailing twelve months ended September 30, 1995.
The growth in net sales is primarily attributable to expansion of
marketing efforts, new product introductions, an increase in the number of
customers serviced and an increase in telemarketing account executives.
The increase in average order size in the third quarter of 1996 is due,
among other factors, to a shift in product mix as sales of notebook and
laptop computers grew 88.8% to 27.5% of the total product mix compared to
21.8% in the corresponding quarter of 1995. The growth in sales of
notebook and laptop computers is due primarily to increased sales of
high-end models and new product offerings. Within the notebook and laptop
computer product line, certain high-end models are subject to manufacturing
constraints and distribution allocations. Any reduction in the quantities
available to the Company from the manufacturers producing these items could
have an adverse impact on future sales. As a part of the Company's
continuing efforts to facilitate the expansion of sales, the total number
of account executives increased to 267 as of September 30, 1996 from 184
and 217 as of September 30, 1995 and December 31, 1995, respectively. Sales
within the Apple/MacIntosh division were essentially consistent with the
year ago quarter and have declined as a percentage of total sales.
Gross profit increased $11.2 million, or 54.8%, as a result of the
increase in net sales and increased as a percentage of net sales to 13.1%
for the three months ended September 30, 1996, compared to 12.7% for the
three months ended September 30, 1995. The increase in gross profit as a
percentage of net sales is due, among other factors, to the expansion of
selling margin on certain product lines resulting from opportunistic
purchases and pricing strategies. Rebate programs with vendors also
continue to have
9
12
a positive impact on gross profit. The Company expects gross profit as a
percentage of net sales to vary on a quarterly basis based upon product
mix, market conditions, vendor support programs, the value of the dollar
and other factors. As a result, there is no certainty that the Company
will be able to sustain gross profit as a percentage of net sales at the
levels achieved in recent quarters.
Selling and administrative expenses increased $3.9 million, or 31.9%,
but as a percentage of net sales decreased to 6.8% for the three months
ended September 30, 1996, as compared to 7.7% for the three months ended
September 30, 1995. This decrease is due primarily to a decrease in net
advertising expense as a percentage of net sales. Net advertising expense
as a percentage of net sales decreased to 0.6% for the three months ended
September 30, 1996 from 1.5% for the three months ended September 30, 1995.
The improvement in net advertising expense is due to the combined effect
of improved productivity from marketing efforts and increased cooperative
advertising reimbursements from vendors. Gross advertising expense
decreased to 2.8% of net sales for the three months ended September 30,
1996, from 3.7% in the same period prior year. Gross advertising spending
was positively impacted by reduced catalog production costs and the
reduction of magazine advertising related to Windows 95 which occurred in
the third quarter of 1995. The cooperative advertising reimbursement rate
increased to 79.6% of gross advertising spending versus 60.3% in the same
period of the prior year, which was primarily attributable to expanded
vendor participation in the Company's advertising programs, increased
purchasing volumes, market development funding and improved claim
processing procedures. The cooperative advertising reimbursement rate may
fluctuate as a percentage of gross advertising spending in future quarters
depending on the level of vendor participation achieved and collection
experience. The Company plans to increase marketing expenditures in future
quarters, which may result in an increase in net advertising expense as a
percentage of net sales and a lower operating margin than that achieved in
the third quarter of 1996. The statement concerning future advertising
expense is a forward looking statement that involves certain uncertainties
including the ability to identify and implement cost effective incremental
advertising and marketing programs.
The executive incentive bonus pool, which pursuant to existing plans
is based upon a maximum 20% of the year over year increase in income from
operations, was $1,680,000 and $521,000 for the three months ended
September 30, 1996 and 1995, respectively, and is included within selling
and administrative expenses.
Selling and administrative expenses also include $30,000 and $20,000
in legal costs incurred by the majority shareholder for the three months
ended September 30, 1996 and 1995, respectively, in connection with the
lawsuit filed by a former shareholder. Although the majority shareholder
has agreed to indemnify the Company for all expenses or settlements, if
any, incurred in connection with this suit, the Company will continue to
record such expenses or settlements, if any, as an expense with an
offsetting increase to paid-in capital, net of tax effects.
Interest income was $896,000 for the three months ended September 30,
1996 as compared to $595,000 for the three months ended September 30, 1995.
The change was primarily the result of a higher level of funds available
for investment as a result of the Company's public equity offering in
August, 1995 and funds generated from operations. The level of interest
income may decline in future periods as the Company utilizes funds in
connection with its facility expansion.
The effective income tax rate, expressed as a percentage of income
before income taxes, increased to 40.0% for the three months ended
September 30, 1996 from 39.0% for the three months ended September 30,
1995. The change is primarily due to an increase in the proportion of
taxable interest income earned by the Company.
Net income for the three months ended September 30, 1996 was
$9,679,000, an 83.2% increase over $5,284,000 for the three months ended
September 30, 1995. Net income per share of $0.44 for the three months
ended September 30, 1996 increased 76.0% from $0.25 in the same period of
1995. Net income per share reflects dilution resulting from the 825,000
additional common shares issued on August 3, 1995
10
13
pursuant to the Company's public equity offering. All per share and
related amounts have been adjusted to reflect the three-for-two stock split
effected in the form of a stock dividend paid on July 15, 1996.
Nine months ended September 30, 1996 compared to nine months ended
September 30, 1995
Net sales increased $217.1 million, or 48.4%, for the nine months
ended September 30, 1996 to $665.7 million from $448.6 million for the nine
months ended September 30, 1995. The Company's average order size grew
11.9% to $705 and orders shipped grew 32.4% to 944,000 for the nine months
ended September 30, 1996 as compared to the nine months ended September 30,
1995. The growth in net sales is primarily attributable to expansion of
marketing efforts, new product introductions and an increase in
telemarketing account executives. The increase in average order size in
the first nine months of 1996 is due, among other factors, to a shift in
product mix as sales of notebook and laptop computers grew 79.9% to 26.7%
of the total product mix compared to 22.0% in the corresponding nine month
period of 1995. The growth in sales of notebook and laptop computers is
due primarily to increased sales of high-end models and new product
offerings.
Gross profit increased $30.6 million, or 53.5%, as a result of the
increase in net sales and increased as a percentage of net sales to 13.2%
from 12.8% for the nine months ended September 30, 1996, compared to the
nine months ended September 30, 1995. The increase in gross profit as a
percentage of net sales is due, among other factors, to the expansion of
selling margin on certain product lines resulting from opportunistic
purchases and pricing strategies. Rebate programs with vendors also
continue to have a positive impact on gross profit. The Company expects a
certain level of variability in its gross profit as a percentage of net
sales on a quarterly basis based upon product mix, market conditions,
vendor support programs, the value of the dollar and other factors.
Selling and administrative expenses, excluding the impact on the
executive incentive bonus pool related to the non-recurring exit charge,
increased $12.3 million, or 34.3%, but as a percentage of net sales
decreased to 7.2% for the nine months ended September 30, 1996, as compared
to 8.0% for the nine months ended September 30, 1995. This decrease was
primarily the result of decreased net advertising costs and re-negotiated
telephone rates which were retroactive to December 1, 1995. Net advertising
expense as a percentage of net sales decreased to 1.0% for the nine months
ended September 30, 1996 from 1.6% for the nine months ended September 30,
1995. The improvement in net advertising expense is due to the combined effect
of improved productivity from marketing efforts and increased cooperative
advertising reimbursements from vendors. Gross advertising spending decreased
to 3.1% of net sales for the nine months ended September 30, 1996 from 3.6% in
the same period prior year. Gross advertising spending was positively impacted
by reduced catalog production costs and the reduction of magazine advertising
related to Windows 95 which occurred in the third quarter of 1995. The
increase in the cooperative advertising reimbursement rate to 67.5% of gross
advertising spending versus 57.2% in the same period of the prior year was
primarily attributable to expanded vendor participation in the Company's
advertising programs, including two significant vendors from whom the Company
previously had not received reimbursements, and a higher than normal recovery
rate in the first quarter due to collections of past due amounts which had been
reserved in previous periods. The cooperative advertising reimbursement rate
may fluctuate as a percentage of gross advertising spending in future periods
depending on the level of vendor participation achieved and collection
experience.
Selling and administrative expenses were increased in the first nine
months of 1996 by $660,000 for a co-worker incentive program and $281,000
for a loss on the trade-in of certain internal computer equipment. The
co-worker incentive program provides for the grant of a maximum of $1
million of common stock to qualifying employees if certain annual financial
performance goals are achieved (See footnote 10 of Annual Report). The
loss on the computer equipment is the result of the Company's decision, in
the second quarter of 1996, to purchase an upgrade to its computer hardware
system for the purpose of increasing speed and capacity. The new hardware
was installed in the third quarter of 1996.
11
14
The executive incentive bonus pool, which pursuant to existing plans
is based upon a maximum 20% of the year over year increase in income from
operations, was $3,326,000 and $1,860,000 for the nine months ended
September 30, 1996 and 1995, respectively, and is included within selling
and administrative expenses. The exit charge effectively reduced the
amount of the executive incentive bonus pool for the nine months ended
September 30, 1996 to $3,326,000 from $4,126,000 which would have been
incurred on a pro-forma basis excluding the exit charge.
Selling and administrative expenses also include $85,000 and $108,000
in legal costs incurred by the majority shareholder for the nine months
ended September 30, 1996 and 1995, respectively, in connection with the
lawsuit filed by a former shareholder. Although the majority shareholder
has agreed to indemnify the Company for all expenses or settlements, if
any, incurred in connection with this suit, the Company will continue to
record such expenses or settlements, if any, as an expense with an
offsetting increase to paid-in capital, net of tax effects.
In September, 1996, the Company purchased approximately 27 acres of
vacant land in Vernon Hills, Illinois upon which it is constructing a
combined telemarketing, warehouse, showroom and corporate office facility.
In conjunction with the move to the new facility, the Company will vacate
and endeavor to sublease its current facility. Accordingly, in the first
quarter of 1996 the Company recorded a $4,000,000 pre-tax non-recurring
charge to operating results for exit costs which consist primarily of the
estimated cost of sub-leasing the vacated facility, including holding costs
and the estimated costs of restoring the building to its original
condition, and certain asset write-offs resulting from the relocation.
Interest income was $2,573,000 for the nine months ended September 30,
1996 as compared to $1,232,000 for the nine months ended September 30,
1995. The increase was primarily the result of a higher level of funds
available for investment as a result of the Company's public equity
offering in August, 1995 and funds generated from operations. The level of
interest income may decline in future periods as the Company utilizes funds
in connection with its facility expansion.
Net income for the nine months ended September 30, 1996 was
$23,707,000, a 71.9% increase over $13,789,000 for the nine months ended
September 30, 1995. Net income per share of $1.09 for the nine months
ended September 30, 1996 increased 65.2% from $0.66 in the same period of
1995. Pro forma net income and net income per share, excluding the impact
of the exit charge and related reduction of the executive incentive bonus
pool, were $25,659,000 and $1.18, representing an increase of 86.1% and
78.8%, respectively, over the first nine months of 1995. Net income per
share reflects dilution resulting from the 825,000 additional common shares
issued on August 3, 1995 pursuant to the Company's public equity offering.
All per share and related amounts have been adjusted to reflect the
three-for-two stock split effected in the form of a stock dividend paid on
July 15, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The Company has historically financed its operations and capital
expenditures primarily through cash flow from operations, short-term
borrowings and public offerings of common stock.
At September 30, 1996, the Company had cash, cash equivalents and
marketable securities of $65.5 million and working capital of $116.4
million, representing an increase of $8.3 million in cash, cash equivalents
and marketable securities and an increase of $17.2 million in working
capital from December 31, 1995.
12
15
As of September 30, 1996, the Company had an aggregate $30.0 million
available pursuant to unsecured credit facilities with two financial
institutions expiring in June, 1997. Borrowings under the credit
facilities bear interest at the prime rate less 2 1/2%, LIBOR plus 1/2% or
the federal funds rate plus 1/2%, as determined by the Company. At
September 30, 1996 there were no borrowings against either of the credit
facilities.
The Company's current primary and anticipated use of cash is to fund
the growth in working capital and capital expenditures, including
facilities expansion. The Company believes that the funds held in cash,
cash equivalents and marketable securities, and funds available under the
credit facilities will be sufficient to fund the Company's working capital
and cash requirements at least through September 30, 1997.
Cash flows for the nine months ended September 30, 1996
Net cash provided by operating activities for the nine months ended
September 30, 1996 was $17.0 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 from increased sales volume and an increase in
days sales outstanding to 21.2 as of September 30, 1996 from 19.7 as of
December 31, 1995. The increase in days sales outstanding is due, in part,
to an increase in sales to customers on credit terms to 51.5% for the three
months ended September 30, 1996 compared to 48.0% for the three months
ended December 31, 1995. Inventory turns increased to 21 annualized turns
for the nine months ended September 30, 1996 from 18 annualized turns for
the nine months ended September 30, 1995. The increase in accounts payable
reflects timing of payments to vendors at the end of the respective periods
and increased purchase volume. Prepaid expenses and other current assets
increased $940,000 to approximately $1.1 million as of September 30, 1996
and are primarily comprised of paper purchased for future catalogs and a
prepaid insurance premium.
Net cash used in investing activities for the nine months ended
September 30, 1996 was $24.5 million, including approximately $8.8 million
for capital expenditures. The capital expenditures made by the Company
were primarily related to land for the Vernon Hills facility, new computer
hardware and leasehold improvements. The net increase in marketable
securities reflects purchases, net of redemptions, of approximately $15.8
million of securities classified as held-to-maturity or available-for-sale.
Facilities Expansion
In June, 1996, the Company purchased approximately 27 acres of vacant
land in Vernon Hills, Illinois for the purpose of constructing a combined
telemarketing, warehouse, showroom and corporate office facility. The
initial phase of construction is planned to include approximately 118,000
square feet of warehouse space and approximately 100,000 square feet of
office space, effectively more than a 100% increase over the current
facility. Construction of the new facility began in September, 1996. As
of September 30, 1996 approximately $6.8 million in costs have been
incurred, which are included in construction-in-progress. Based on current
plans, the Company estimates it will incur approximately $23.0 to $25.0
million in capital expenditures related to purchasing the land and
constructing and equipping the facility. Additionally, the Company will
incur certain moving and other costs, not expected to exceed $1.0 million,
relating to relocation which would be charged to operating results in the
period incurred.
If the Company is unable to generate increased sales and gross margins
sufficient to absorb increased overhead and other costs created by the new
facility, the Company would likely experience lower pre-tax profits.
13
16
PART II Other Information
ITEM 1. Legal Proceedings
As previously reported, the Company is a defendant in a lawsuit filed
in the United States District Court for the Northern District of Illinois,
Eastern Division, in which suit a former shareholder, executive officer and
director of the Company (the "Plaintiff") alleges violations of the federal
securities laws, fraud and breach of fiduciary duty in connection with the
Company's redemption of his stock in July 1990. (Reference is made to Item
3 the Company's 1995 Annual Report on Form 10-K for a detailed discussion
of the lawsuit).
On June 14, 1996, the District Court granted the defendants' motion to
dismiss the Amended Complaint, with prejudice, on the grounds that the
federal cause of action was barred by the statute of limitations and the
District Court did not have jurisdiction on the pendant counts. The
Plaintiff has filed an appeal of the District Court decision to the United
States Court of Appeals for the Seventh Circuit. The Company believes that
it is likely that the Plaintiff will re-file the claims asserted in Counts
II and III, and possibly other claims, in Illinois State Court. The
Company and Mr. Krasny believe that their actions were honest and proper
and that the suit by the former shareholder is without merit. The Company
and Mr. Krasny are committed to vigorously defending the litigation.
As previously reported, Michael P. Krasny, the Company's majority
shareholder, has agreed to indemnify the Company for any and all costs,
fees and expenses incurred in connection with this litigation, including
any expenses incurred in judgment or settlement of the suit.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION OF DOCUMENT
10 (ii) Non-statutory Stock Option Agreement dated September 5,
1996 between the Company and Harry J. Harczak Jr.
10 (jj) Non-statutory Stock Option Agreement dated September 5,
1996 between the Company and James R. Shanks.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the nine months
ended September 30, 1996.
14
17
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 12, 1996 /s/ Harry J. Harczak, Jr.
----------------------------- -------------------------
Harry J. Harczak, Jr.
Chief Financial Officer
Date November 12, 1996 /s/ Daniel F. Callen
----------------------------- -------------------------
Daniel F. Callen
Chief Accounting Officer
15
18
INDEX TO EXHIBITS
10 (ii) Non-statutory Stock Option Agreement dated September 5, 1996 between
the Company and Harry J. Harczak Jr.
10 (jj) Non-statutory Stock Option Agreement dated September 5, 1996 between
the Company and James R. Shanks.