<PAGE> 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, 1998 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________
TO _____________
COMMISSION FILE NUMBER 0-21796
CDW COMPUTER CENTERS, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-3310735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 N. MILWAUKEE AVE. 60061
VERNON HILLS, ILLINOIS (Zip Code)
(Address of principal executive offices)
(847) 465-6000
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------------- --------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
-------------- --------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 11, 1998, 21,546,674 common shares were issued and
21,496,674 were outstanding.
<PAGE> 2
CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
-----------
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income -
Three and Nine months ended September 30, 1998 and 1997 2
Condensed Consolidated Statement of Shareholders'
Equity - Nine months ended September 30, 1998 3
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 16
PART II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
Assets
<S> <C> <C>
Current assets :
Cash and cash equivalents $ 13,293 $ 18,233
Marketable securities 62,074 61,192
Accounts receivable, net of allowance for doubtful
accounts of $2,885 and $1,950, respectively 136,143 87,524
Miscellaneous receivables 6,071 3,960
Merchandise inventory 55,289 61,941
Prepaid expenses and other 823 759
Deferred income taxes 3,587 3,587
--------- ---------
Total current assets 277,280 237,196
Property and equipment, net 35,701 26,704
Deferred income taxes and other assets 5,603 5,741
--------- ---------
Total assets $ 318,584 $ 269,641
========= =========
Liabilities and Shareholders' Equity
Current liabilities :
Accounts payable $ 45,923 $ 44,451
Accrued expenses :
Compensation 15,226 12,996
Exit costs 2,837 3,391
Income taxes - 5,504
Other 4,574 3,433
--------- ---------
Total current liabilities 68,560 69,775
--------- ---------
Commitments and contingencies
Shareholders' equity :
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 75,000 shares
authorized; 21,547 and 21,525 shares
issued, respectively 215 215
Paid-in capital 79,073 74,680
Treasury stock, 50 and 0 shares, respectively (2,089) -
Retained earnings 173,917 126,418
Unearned compensation (1,092) (1,447)
--------- ---------
Total shareholders' equity 250,024 199,866
--------- ---------
Total liabilities and shareholders' equity $ 318,584 $ 269,641
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
<PAGE> 4
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 462,720 $ 323,901 $ 1,256,256 $ 926,223
Cost of sales 403,857 280,921 1,096,539 801,643
--------- --------- ----------- ---------
Gross profit 58,863 42,980 159,717 124,580
Selling and administrative expenses 31,057 22,398 83,233 65,928
Shareholder legal expense 650 170 1,117 253
--------- --------- ----------- ---------
Income from operations 27,156 20,412 75,367 58,399
Interest income 1,305 1,194 3,516 3,183
Other income (expense), net (77) (63) (239) (174)
--------- --------- ----------- ---------
Income before income taxes 28,384 21,543 78,644 61,408
Income tax provision 11,243 8,542 31,145 24,348
--------- --------- ----------- ---------
Net income $ 17,141 $ 13,001 $ 47,499 $ 37,060
========= ========= =========== =========
Earnings per share
Basic $ 0.80 $ 0.60 $ 2,20 $ 1.72
========= ========= =========== =========
Diluted $ 0.79 $ 0.60 $ 2,19 $ 1.71
========= ========= =========== =========
Weighted average number of
common shares outstanding
Basic 21,538 21,525 21,543 21,525
========= ========= =========== =========
Diluted 21,672 21,761 21,702 21,703
========= ========= =========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
2
<PAGE> 5
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Total
Common Stock Paid-in Treasury Stock Retained Unearned Shareholders'
Shares Amount Capital Shares Amount Earnings Compensation Equity
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 21,525 $ 215 $ 74,680 - - $ 126,418 $ (1,447) $ 199,866
MPK Restricted Stock Plan
forfeitures - - (1) - - - - (1)
Amortization of unearned
compensation - - - - - - 355 355
Exercise of stock options 22 - 453 - - - - 453
Tax benefit from stock
option transactions - - 3,268 - - - - 3,268
Capital contribution for
legal costs assumed by
majority shareholder,
net of tax - - 673 - - - - 673
Repurchase of treasury shares - - - 50 (2,089) - - (2,089)
Net income - - - - - 47,499 - 47,499
------------------------------------------------------------------------------------------------
Balance at September 30, 1998 21,547 $ 215 $ 79,073 50 $ (2,089) $ 173,917 $ (1,092) $ 250,024
================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE> 6
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 47,499 $ 37,060
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 3,429 1,804
Accretion of marketable securities, net (2,033) (1,303)
Stock based compensation expense 355 309
Legal fees assumed by majority shareholder, net of tax 673 156
Deferred tax expense 144 190
Tax benefit from stock option exercises 3,268 5,835
Changes in assets and liabilities:
Accounts receivable, net (48,619) (27,693)
Miscellaneous receivables (2,111) 952
Merchandise inventory 6,652 (21,951)
Prepaid expenses and other assets (71) (834)
Accounts payable 1,472 10,741
Accrued compensation 2,230 1,027
Other accrued expenses (4,363) (2,327)
Accrued exit charge (554) (410)
-------- --------
Net cash provided by operating activities 7,971 3,556
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (24,810) (12,575)
Redemptions of available-for-sale securities 21,250 9,575
Purchases of held-to-maturity securities (64,945) (61,919)
Redemptions of held-to-maturity securities 69,656 66,667
Purchase of property and equipment (12,426) (14,707)
-------- --------
Net cash used in investing activities (11,275) (12,959)
-------- --------
Cash flows from financing activities:
Repurchase of treasury shares (2,089) -
Proceeds from exercise of stock options 453 -
-------- --------
Net cash used in financing activities (1,636) -
-------- --------
Net decrease in cash (4,940) (9,403)
Cash and cash equivalents - beginning of period 18,233 16,462
-------- --------
Cash and cash equivalents - end of period $ 13,293 $ 7,059
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
CDW Computer Centers, Inc. and subsidiaries (the "Company") are engaged in
the distribution of brand name personal computers and related products through
direct marketing to end users within the United States. The Company's primary
business is conducted from a combined telemarketing, corporate office, warehouse
and showroom facility located in Vernon Hills, Illinois. The Company also
operates a second retail showroom in Chicago, Illinois.
During the third quarter of 1998 the Company announced the formation CDW
Government, Inc. (CDW-G), a wholly owned subsidiary, exclusively focused on
serving government and educational accounts. CDW-G is headquartered in Vernon
Hills, Illinois and maintains a national sales office in Chantilly, Virginia.
The Company extends credit to business, governmental and institutional
customers under certain circumstances based upon the financial strength of the
customer. Such customers are typically granted net 30 day credit terms. The
balance of the Company's sales are made primarily through third party credit
cards and for cash on delivery.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. Such principles were
applied on a basis consistent with those reflected in the 1997 Annual Report on
Form 10-K and documents incorporated therein as filed with the Securities and
Exchange Commission. The accompanying financial data should be read in
conjunction with the notes to consolidated financial statements contained in the
1997 Annual Report on Form 10-K and documents incorporated therein. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting solely of normal
recurring accruals) necessary to present fairly the financial position of the
Company as of September 30, 1998 and December 31, 1997, the results of
operations for the three and nine months ended September 30, 1998 and 1997, the
cash flows for the nine months ended September 30, 1998 and 1997, and the
changes in shareholders' equity for the nine months ended September 30, 1998.
The unaudited condensed consolidated statements of income for such interim
periods are not necessarily indicative of results for the full year.
The Company has adopted Statements of Financial Accounting Standards Nos.
130 and 131 (SFAS 130, SFAS 131), "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information". For the
three and nine months ended September 30, 1998 and 1997 the Company has no
components of Comprehensive Income, as defined by SFAS 130, which are not
contained in net income as reported on the accompanying Consolidated Statements
of Income. The Company has determined that through the third quarter of 1998 it
operated as one business segment as defined by SFAS 131. As a result of the
establishment of CDW-G the Company now operates with two business segments.
Accordingly, the Company will provide required segment information in its annual
report for the year ended December 31, 1998.
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
Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Accordingly, the
Company has disclosed earnings per share calculated using both the basic and
diluted methods for all periods presented. The implementation of SFAS 128 has no
impact on the Company's earnings per share amounts as diluted earnings per
share, as defined by SFAS 128, is consistent with earnings per common and common
equivalent share as presented in previous periods. A reconciliation of basic and
diluted per-share computations is included in Note 7 to the financial
statements.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's investments
in marketable securities at September 30, 1998 were (in thousands):
<TABLE>
<CAPTION>
Gross
Unrealized
Holding
Estimated ---------- Amortized
Fair Value Gains (Losses) Cost
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Security Type
- -------------
Available-for-sale:
U.S. Government and Government Agency Securities $ 6,975 $ 5 $ - $ 6,970
Redemptive tax-exempt preferred stocks 4,000 - - 4,000
----------------------------------------------------------------
Total available-for-sale 10,975 5 - 10,970
----------------------------------------------------------------
Held to maturity:
Bonds of states, municipalities, and political subdivisions 821 2 - 819
U.S. Government and Government Agency Securities 50,230 - (55) 50,285
----------------------------------------------------------------
Total held-to-maturity 51,052 2 (55) 51,104
----------------------------------------------------------------
Total marketable securities $ 62,027 $ 7 $ (55) $ 62,074
================================================================
</TABLE>
The Company's investments in securities held-to-maturity at September 30,
1998 were all due in one year or less by contractual maturity. Estimated fair
values of marketable securities are based on quoted market prices.
4. Contingency
The Company and its majority shareholder are defendants in a lawsuit
filed by a former shareholder. The suit requests compensatory damages in an
amount approximating 20% of the market capitalization of the Company and
punitive damages in an amount that cannot be readily determined. The Company and
its majority shareholder believe the suit to be without merit and are vigorously
defending against this action. The majority shareholder has agreed to indemnify
and reimburse the Company for all damages and expenses, net of tax benefits
received by the Company, related to this action. A trial date is currently set
for January 1999, in the United States District Court for the Northern District
of Illinois, Eastern Division for this matter.
For the three and nine months ended September 30, 1998, the Company and
majority shareholder have incurred legal expenses of approximately $651,000 and
$1,118,000, respectively, compared with $170,000 and $253,000 for the three and
nine months ended September 30, 1997, which have been assumed by the majority
shareholder. If the trial date proceeds as scheduled, the Company will incur
increased legal fees for the preparation and trial of the lawsuit. Although the
majority shareholder has agreed to indemnify the Company for all expenses or
settlements, if any, in connection with this suit, the Company will continue to
record such expenses, and may record settlements, if any, as an expense with an
offsetting increase to paid-in capital, net of tax effects.
5. Facilities & Exit Accrual
In June 1996, the Company purchased approximately 27 acres of vacant land
in Vernon Hills, Illinois, upon which it constructed a combined telemarketing,
warehouse, showroom and corporate office facility. Construction of the Vernon
Hills facility was completed in July 1997, at which time the Company relocated
to the new facility and vacated the Buffalo Grove facility. The Company recorded
a $4.0 million pre-tax non-recurring charge to operating results for exit costs
relating to the Buffalo Grove facility in the first quarter of 1996. The exit
costs consist primarily of the estimated cost to the Company of subleasing the
vacated facility, including holding costs, the estimated costs of restoring the
building to its original condition and certain asset write-offs resulting from
the relocation. During the nine months ended September 30, 1998 the Company
charged approximately $554,000 against the exit accrual in cash payments for
rent, real estate taxes and maintenance of the facility.
The Company will reopen a portion Buffalo Grove facility during the fourth
quarter of 1998 as a telemarketing facility. The Company plans to occupy the
Buffalo Grove facility while it finalizes future long term growth plans for its
Vernon Hills campus. The Company is continuing its effort to sublease all, or a
portion of, the Buffalo Grove facility. While the Company occupies the Buffalo
Grove facility a portion of the rent, real estate taxes and operating expenses
related to the facility will be recorded as operating expense and the remainder
will be charged against the exit accrual. There is no assurance that the
remaining exit liability of $2.8 million at September 30, 1998 will be adequate
to cover actual costs should the Company's actual experience in subleasing the
facility differ from the assumptions used in calculating the exit charge.
In March 1998, the Company acquired approximately 18 acres of vacant land
contiguous to its Vernon Hills facility for $4.3 million. The Company now owns
approximately 45 total acres. The Company completed construction of a 100,000
square foot addition to its current warehouse facility in September 1998,
leaving approximately 18 acres available for future expansion.
6. Financing Arrangements
The Company has an aggregate $50 million available pursuant to unsecured
lines of credit with two financial institutions expiring in June 1999, at which
time the Company intends to renew the lines. Borrowings under one of the credit
facilities bear interest at the prime rate less 2 1/2%, LIBOR plus 1/2% or the
federal funds rate plus 1/2%, as determined by the Company. Borrowings under the
second credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus
.45% or the federal funds rate plus .45%, as determined by the Company. At
September 30, 1998, there were no borrowings against either of the credit
facilities.
In December 1997, the Company established a stand-by letter of credit for
approximately $850,000 related to construction of the facility expansion. The
Company has pledged a note from the Federal National Mortgage Association,
included in investments held-to-maturity, with a face value of $1.1 million as
collateral for the letter of credit.
<PAGE>
7. Earnings Per Share
The Company has 21,546,674 common shares issued, with 21,496,674
outstanding at September 30, 1998. The Company has also granted options to
purchase common shares to the directors and coworkers of the Company under
several stock option plans. These options have a dilutive effect on the
calculation of earnings per share. The following is a reconciliation of the
numerators and denominators of the basic and diluted earnings per share
computations as required by SFAS 128.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income available to
common shareholders (numerator) $ 17,141 $ 13,001 $ 47,499 $ 37,060
=========== =========== =========== ===========
Weighted average common
shares outstanding (denominator) 21,538 21,525 21,543 21,525
=========== =========== =========== ===========
Basic earnings per share $ 0.80 $ 0.60 $ 2.20 $ 1.72
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income available to
common shareholders (numerator) $ 17,141 $ 13,001 $ 47,499 $ 37,060
=========== =========== =========== ===========
Weighted average common
shares outstanding 21,538 21,525 21,543 21,525
Effect of dilutive securities:
Options on common stock 134 236 159 178
----------- ----------- ----------- -----------
Total common shares and dilutive securities
(denominator) 21,672 21,761 21,702 21,703
=========== =========== =========== ===========
Diluted earnings per share $ 0.79 $ 0.60 $ 2.19 1.71
=========== =========== =========== ===========
</TABLE>
<PAGE>
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.
<TABLE>
<S> <C> <C> <C> <C>
FINANCIAL INFORMATION Percentage of Net Sales
-----------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.3 86.7 87.3 86.5
---- ---- ---- ----
Gross profit 12.7 13.3 12.7 13.5
Selling and administrative expenses 6.7 6.9 6.6 7.1
Shareholder legal expense 0.1 0.1 0.1 0.0
--- --- --- ----
Income from operations 5.8 6.3 6.0 6.4
Other income, net 0.3 0.4 0.3 0.3
--- --- --- ----
Income before income taxes 6.1 6.7 6.3 6.7
Income tax provision 2.4 2.7 2.5 2.7
--- --- --- ---
Net income 3.7% 4.0% 3.8% 4.0%
=== === === ===
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
OPERATING STATISTICS Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Number of orders shipped 595,076 440,369 1,730,735 1,310,296
Average order size $ 778 $ 736 $ 726 $ 707
Customers serviced 212,000 184,000 499,000 443,000
Number of account managers, end of period 625 336 - -
Inventory turns 31 20 25 20
</TABLE>
<PAGE>
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.
<TABLE>
<S> <C> <C> <C> <C>
ANALYSIS OF PRODUCT MIX
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
September 30, September 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Notebooks & Laptops 19.3% 26.2% 19.8% 25.8%
Desktop Computers 15.2 12.8 15.7 12.8
Software 13.7 12.2 13.6 12.6
Printers 12.7 12.2 12.7 11.8
Data Storage Devices 12.1 10.4 11.6 10.4
Network & Communications
Products 9.9 8.5 9.3 8.6
Monitors & Video Products 7.6 7.5 7.9 7.7
Add-On Boards & Memory 3.7 4.9 4.0 4.8
Input Devices 2.3 2.9 2.6 3.0
Multi-Media Devices 1.9 1.9 2.0 2.0
Other Accessories 1.6 0.5 0.8 0.5
---- ---- ---- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Three months ended September 30, 1998 compared to three months ended September
30, 1997
Net sales for the third quarter of 1998 increased 42.9% to a record $462.7
million compared to $323.9 million in the third quarter of 1997. The growth in
net sales is primarily attributable to the growth in the number of orders
processed, the number of active customers and increased demand from corporate,
government and educational accounts. For the three months ended September 30,
1998, the number of orders processed grew 35.1% to 595,000, the number of active
customers rose 15.2% and sales per active customer increased 24.1%. Sales to
business, government, educational and institutional accounts increased to 89% of
total sales from 82% in the third quarter of 1997. Desktop computers remained
the fastest growing product category with unit volume increasing 86% and dollar
volume 70%. Notebook computers continue to represent the largest portion of the
Company's sales at 19%, with dollar volume increasing 6% from the third quarter
of 1997.
The average selling price of desktop CPU's decreased 8% and the average
selling price of notebook CPU's remained consistent with the third quarter of
1997. The Company believes there may be additional decreases in prices for
personal computers and related products. Such decreases require the Company to
sell more units in order to maintain or increase the level of sales. Should
future manufacturer price reductions or the Company's marketing efforts fail to
increase the level of unit sales, the Company's sales growth rate and operating
results could be adversely affected. Sales of Compaq, Hewlett Packard, IBM,
Microsoft and Toshiba products comprise a substantial portion of the Company's
sales. The loss of any of these, or any other key vendors, could have an adverse
affect on the Company's results from operations. The statement concerning future
sales and results from operations are forward looking statements that involve
certain risks and uncertainties such as stated above.
The fastest growing product categories in terms of sales dollars in the
third quarter of 1998 were desktop computers at 70%, network and communication
products at 66%, data storage devices at 66%, software at 60% and printers at
49%. Demand for certain products offered by the Company, and the growth of
certain product categories, are driven by advances in technology and the
development of new products and applications by the industry manufacturers, and
acceptance of these new technologies and products by end-users. Any slowdown in
the rate of technological advancement and new product development by industry
manufacturers could have a material adverse effect on the Company's future sales
growth.
Gross profit decreased as a percentage of net sales to 12.7% for the three
months ended September 30, 1998, compared to 13.3% for the three months ended
September 30, 1997. The decrease in gross profit as a percentage of net sales is
primarily the result of lower selling margins achieved on certain product lines,
lower levels of inventory price protection from vendors and increased shipping
costs. The lower levels of price protection in the third quarter of 1998 were
the result of changes by certain manufacturers in the terms and conditions of
their inventory price protection programs.
On a forward-looking basis, it is likely that the gross profit margin
achieved will be less than 13%, and could be less than the 12.7% achieved in the
most recent quarter. The statements concerning future gross profit is a forward
looking statement that involves certain risks and uncertainties such as the
continued participation by vendors in inventory price protection and rebate
programs, 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
decreased to 6.7% of net sales in the third quarter of 1998 versus 6.9% in the
third quarter of 1997.
Net advertising expense decreased as a percentage of net sales to 0.9% from
1.3% for the three months ended September 30, 1998 and 1997, respectively. Gross
advertising expense decreased to 3.0% of net sales for the three months ended
September 30, 1998 versus 3.5% for the three months ended September 30, 1997.
The Company slightly decreased catalog circulation and the number of national
advertising pages versus the prior year, while expanding its spending on
branding and electronic commerce 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 1998. Cooperative advertising
reimbursements as a percentage of net sales decreased slightly to 2.1% of net
sales in the third quarter of 1998 from 2.2% in the third quarter of 1997. The
cooperative advertising reimbursement rate may fluctuate in future quarters
depending on the level of vendor participation achieved and collection
experience. The statements concerning future advertising expense and cooperative
advertising reimbursements are forward looking statements that involve certain
risks and uncertainties including the ability to identify and implement cost
effective incremental advertising and marketing programs as well as the
continued participation of vendors in the cooperative advertising reimbursement
program.
Other selling and administrative costs increased to 5.6% of net sales in
the three months ended September 30, 1998 from 5.4% in the prior year period due
primarily to increases in payroll and related costs. The increase in payroll
costs as a percentage of sales is due primarily to investment in the recruiting,
training and development of new account managers. As of September 30, 1998 there
were 625 account managers, an increase of 57% from 399 account managers as of
December 31, 1997. Of the 625 account managers at September 30, 1998,
approximately 72% had fewer than 24 months experience, with 56% with less than
12 months.
The executive incentive bonus pool increased to $1.0 million for the three
months ended September 30, 1998 from $862,000 for the three months ended
September 30, 1997. For the current year the Compensation and Stock Option
Committee has established the bonus pool at 15% of the increase in operating
income over the prior year, versus 20% in prior periods.
Legal costs incurred by the majority shareholder for the three months ended
September 30, 1998 and 1997, in connection with the lawsuit filed by a former
shareholder were $651,000 and $170,000, respectively. A trial date has been set
for January 1999 for this case. If the trial date proceeds as scheduled, legal
costs incurred by the Company regarding this matter will increase as the trial
date approaches. Although the majority shareholder has agreed to indemnify the
Company for all expenses or settlements, if any, incurred in connection with
this suit, the Company will continue to record such expenses, and may record
settlements, if any, as an expense with an offsetting increase to paid-in
capital, net of tax effects. Although the Company and Mr. Krasny believe that
their actions were honest and proper and that the suit by the former shareholder
is without merit, should a negative result occur in this action, Mr. Krasny
could be required to transfer certain of his shares of Common Stock to such
former shareholder or determine to sell certain of his shares to finance any
assessed damages or settlements. Such a transfer or sale by Mr. Krasny could
adversely impact the market price of the Common Stock.
Net interest income totaled $1.2 million for the three months ended September
30, 1998 compared to $1.1 million for the three months ended September 30, 1997.
The effective income tax rate, expressed as a percentage of income before
income taxes, decreased to 39.6% for the three months ended September 30, 1998
from 39.7% for the three months ended September 30, 1997.
Net income for the three months ended September 30, 1998 was $17.1 million,
a 32% increase over $13.0 million for the three months ended September 30, 1997.
Diluted earnings per share was $0.79 and $0.60 for the three months ended
September 30, 1998 and 1997, respectively, an increase of 32%.
Nine months ended September 30, 1998 compared with the nine months ended
September 30, 1997
Net sales for the nine months ended September 30, 1998 increased 35.6% to a
record $1.256 billion compared to $926 million in the same period of 1997. The
growth in net sales is primarily attributable to the growth in the number of
orders processed, active customers and increased demand from corporate,
government and educational accounts. For the nine months ended September 30,
1998, the number of orders processed increased 32.1% to 1,731,000, the number of
customers serviced grew 12.7% to 499,000 and average sales per active customer
increased 20.4%. Sales to business, government, educational and institutional
accounts increased to 86% of total sales from 81% in the nine months ended
September 30, 1997. Desktop computers remain the fastest growing product
category with unit volume increasing 96% and dollar volume 66%.
The average selling price of desktop computers decreased 15.3% and the
average selling price of notebook CPU's decreased 0.8% from the first nine
months of 1997. The Company believes there may be additional decreases in prices
for personal computers and related products. Such decreases require the Company
to sell more units in order to maintain or increase the level of sales. Should
future manufacturer price reductions or the Company's marketing efforts fail to
increase the level of unit sales, the Company's sales growth rate and operating
results could be adversely affected. Sales of Compaq, Hewlett Packard, IBM,
Microsoft and Toshiba products comprise a substantial portion of the Company's
sales. The loss of any of these, or any other key vendors, could have an adverse
affect on the Company's results from operations. The statement concerning future
sales and results from operations are forward looking statements that involve
certain risks and uncertainties such as stated above.
The fastest growing product categories in terms of sales dollars in the
first nine months of 1998 were desktop computers at 66%, data storage devices at
51%, software at 46%, printers at 46%, and video products at 39%. Demand for
certain products offered by the Company, and the growth of certain product
categories, are driven by advances in technology and the development of new
products and applications by the industry manufacturers, and acceptance of these
new technologies and products by end-users. Any slowdown in the rate of
technological advancement and new product development by industry manufacturers
could have a material adverse effect on the Company's future sales growth.
Gross profit decreased as a percentage of net sales to 12.7% for the nine
months ended September 30, 1998, compared to 13.5% for the nine months ended
September 30, 1997. The decrease in gross profit as a percentage of net sales is
primarily the result of lower selling margins achieved on certain product lines,
lower levels of inventory price protection from vendors and increased shipping
costs. The lower levels of price protection in the third quarter of 1998 were
the result of changes by certain manufacturers in the terms and conditions of
their inventory price protection programs.
On a forward-looking basis, it is likely that the gross profit margin
achieved will be less than 13%, and could be less than the 12.7% achieved in the
most recent nine months. 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, 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, the executive incentive bonus pool
decreased to 6.6% of net sales in the first nine months of 1998 versus 7.1% in
the nine months ended September 30, 1997.
Net advertising expense decreased as a percentage of net sales to 0.8% from
1.3% for the nine months ended September 30, 1998 and 1997, respectively. Gross
advertising expense decreased to 3.1% of net sales for the nine months ended
September 30, 1998 versus 3.5% for the nine months ended September 30, 1997. The
Company slightly decreased catalog circulation and the number of national
advertising pages versus the prior year, while expanding its spending on
branding and electronic commerce 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 nine months ended September 30, 1998. Cooperative
advertising reimbursements as a percentage of net sales increased to 2.3% of net
sales for the nine months ended September 30, 1998 from 2.2% for the nine months
ended September 30, 1997, due to a combination of factors including changes to
vendor billing rates, increased participation by vendors and new and expanded
catalog formats. The cooperative advertising reimbursement rate may fluctuate in
future quarters depending on the level of vendor participation achieved and
collection experience. The statements concerning future advertising expense and
cooperative advertising reimbursement are forward looking statements that
involve certain risks and uncertainties including the ability to identify and
implement cost effective incremental advertising and marketing programs as well
as the continued participation of vendors in the cooperative advertising
reimbursement program.
Other selling and administrative costs increased to 5.7% of net sales in
the nine months ended September 30, 1998 from 5.3% in the prior year period due
primarily to increases in payroll and related costs. The increase in payroll
costs as a percentage of sales is due primarily to the increased investment in
the recruiting, training and development of new account managers. As of
September 30, 1998 there were 625 account managers, an increase of 57% from 399
account managers as of December 31, 1997. Of the 625 account managers at
September 30, 1998, approximately 72% had fewer than 24 months experience, with
56% with less than 12 months.
The executive incentive bonus pool decreased to $2.2 million for the nine
months ended September 30, 1998 from $4.6 million for the nine months ended
September 30, 1997. Of the $2.4 million decrease in the bonus pool from the
prior year $800,000 results from an effective increase in the pool in the first
nine months of 1997 due to the $4.0 million exit charge taken in 1996, $901,000
is due to a lower level of growth in operating income and the remaining $727,000
is due to the change in the bonus pool rate. For the current year the
Compensation and Stock Option Committee has established the bonus pool at 15% of
the increase in operating income over the prior year, versus 20% in prior
periods.
Legal costs incurred by the majority shareholder for the nine months ended
September 30, 1998 and 1997, in connection with the lawsuit filed by a former
shareholder were $1.1 million and $253,000, respectively. A trial date has been
set for January 1999 for this case. If the trial date proceeds as scheduled,
legal costs incurred by the Company regarding this matter will increase as the
trial date approaches. Although the majority shareholder has agreed to indemnify
the Company for all expenses, and may record settlements, if any, incurred in
connection with this suit, the Company will continue to record such expenses or
settlements, if any, as an expense with an offsetting increase to paid-in
capital, net of tax effects. Although the Company and Mr. Krasny believe that
their actions were honest and proper and that the suit by the former shareholder
is without merit, should a negative result occur in this action, Mr. Krasny
could be required to transfer certain of his shares of Common Stock to such
former shareholder or determine to sell certain of his shares to finance any
assessed damages or settlements. Such a transfer or sale by Mr. Krasny could
adversely impact the market price of the Common Stock.
Net interest income totaled $3.3 million for the nine months ended
September 30, 1998 compared to $3.0 million for the nine months ended
September 30, 1997.
The effective income tax rate, expressed as a percentage of income before
income taxes, decreased to 39.6% for the nine months ended September 30, 1998
from 39.7% for the nine months ended September 30, 1997.
Net income for the nine months ended September 30, 1998 was $47.5 million,
a 28% increase over $37.1 million for the nine months ended September 30, 1997.
Diluted earnings per share was $2.19 and $1.71 for the nine months ended
September 30, 1998 and 1997, respectively, an increase of 28%.
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, 1998, the Company had cash, cash equivalents and
marketable securities of $75.4 million and working capital of $208.7 million,
representing a decrease of $4.1 million in cash, cash equivalents and marketable
securities and an increase of $41.3 million in working capital from December 31,
1997.
As of September 30, 1998 the Company had an aggregate $50.0 million
available pursuant to unsecured credit facilities with two financial
institutions expiring in September 1999. Borrowings under one of the credit
facilities bear interest at the prime rate less 2 1/2%, LIBOR plus 1/2% or the
federal funds rate plus 1/2%, as determined by the Company. Borrowings under the
second credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus
.45% or the federal funds rate plus .45%, as determined by the Company. At
September 30, 1998 there were no borrowings against either of the credit
facilities.
The Company's current primary and anticipated use of cash is to fund the
growth in working capital and capital expenditures. 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, 1999.
During the third quarter of 1998 the Company announced that its Board of
Directors authorized the repurchase of up to 1 million shares of its common
stock, slightly under 5% of its total outstanding shares, in open market
transactions. The Company repurchased a total of 50,000 shares during the
quarter for approximately $2.1 million. The Company intends to hold the
repurchased shares in treasury for general corporate purposes, including
issuances under various employee stock option plans.
Cash flows for the nine months ended September 30, 1998
Net cash provided by operating activities for the nine months ended
September 30, 1998 was $8.0 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 the percentage of net
sales generated from commercial accounts with open credit terms to 62% for the
nine months ended September 30, 1998 from 54% in 1997. Annualized inventory
turnover increased to approximately 25 times for the nine months ended September
30, 1998. Inventory turnover in 1998 has been positively impacted by a reduction
in inventory levels resulting from the implementation of build to order programs
by the major hardware manufacturers. The increase in accounts payable reflects
timing of payments to vendors at the end of the respective periods.
Cash provided by operating activities for the nine months ended September
30, 1998 was positively impacted by a $3.3 million tax benefit recorded to
paid-in-capital, relating to the exercise of shares pursuant to the MPK Stock
Option Plan in August 1998.
Net cash used in investing activities for the nine months ended September
30, 1998 was $11.3 million, including approximately $12.4 million used for
capital expenditures. The capital expenditures made by the Company were
primarily related to the purchase of additional land, the expansion of the
Vernon Hills facility and machinery and equipment for the Vernon Hills facility.
Year 2000 Readiness Disclosure
General
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, receive or
ship products, send invoices, or engage in similar normal business activities.
The Company has established a Y2K project designed to make all its hardware
and software systems Y2K compliant by December 31, 1999. The Company intends to
contract an outside organization to review its project methodology and status to
ensure all aspects of the Y2K issue have been addressed.
Project
CDW's Y2K project consists of two components, internal and external. The
internal section has been divided into five steps which are currently being
completed by the Y2K Team:
1. Awareness - Awareness includes evaluating industry best practices,
generating management and employee awareness, establishing
communications methods and establishing the project team.
2. Assessment - This phase includes hardware and software compliance
assessment, establishment of the size and scope of the project,
establishment of a project timeline, priorities, budgeting and
allocation of resources.
3. Renovation - Renovation consists of establishing a detailed
implementation plan, the design of new systems and system corrections,
writing of system code and software and hardware testing.
4. Validation - Validation includes testing new systems and system
corrections to ensure they will function properly in operation.
5. Implementation - Final certification of the new and corrected systems,
implementation of the systems and monitoring to ensure they continue to
function.
The Awareness, Assessment and Renovation phases of the project were
completed prior to September 1998. As a result of the Assessment phase the
Company believes it will not be required to replace any of its hardware
components or significant portions of its software to make its systems Y2K
compliant. The Company plans to complete substantially all of the internal
portion of its Y2K project prior to December 31, 1998 and will then focus its
efforts on the external portion.
The external portion of the project focuses on assessing the Y2K readiness
of product and service vendors and its potential impact on the Company's
operations. The Company will begin communications with its vendors in the first
quarter of 1999 to assess the status of the vendors' Y2K projects. The Company
will then work through issues with its business partners to minimize potential
business interruptions. This portion of the project is expected to be completed
prior to December 31, 1999.
Costs
The Company estimates that total costs for the Y2K project, through December 31,
1999, will range between $750,000 and $1 million. As of September 30, 1998 the
Company has incurred, and recorded as operating expenses, approximately $200,000
in costs related to the project, of which approximately $150,000 were incurred
during the nine months ended September 30, 1998. Essentially all of the
Company's expenditures to date are for internal payroll costs related to the
assessment and correction of internal systems. Of the estimated remaining costs
of $550,000 to $800,000, approximately one-third relate to the cost of assessing
and communicating with vendors and two-thirds 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 and other factors, which could have a material impact on the Company's
results from operations. Certain vendors may fail to adequately prepare their
information systems or the Company's own Y2K project may not correct all Y2K
issues. Accordingly, there is no certainty that either the Company or its
vendors will complete their Y2K projects prior to December 31, 1999.
Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations concerning the Company's sales
growth, gross profit as a percentage of sales, advertising expense, cooperative
advertising reimbursements and the potential impact on operations of the Y2K
issue are forward-looking statements that involve certain risks and
uncertainties, as specified herein.
Part II Other Information
Item 1. Legal Proceedings
As previously reported, the Company and Michael P. Krasny, the Company's
majority shareholder, are defendants in a lawsuit filed in the United States
District Court for the Northern District of Illinois, Eastern Division, in which
suit a former shareholder, executive officer and director of the Company (the
"Plaintiff") alleged violations of the federal securities laws, fraud and breach
of fiduciary duty in connection with the Company's redemption of his stock in
July 1990. (Reference is made to Item 3 of the Company's 1997 Annual Report on
Form 10-K for a detailed discussion of the lawsuit.)
On September 14, 1996, the District Court granted the motion to dismiss the
Complaint, with prejudice on the grounds that the federal cause of action was
barred by the statute of limitations and the district court did not have
jurisdiction over the pendant state law claims. The former shareholder filed an
appeal of the District Court decision to the United States Court of Appeals for
the Seventh Circuit. On July 28, 1997, the Court of Appeals reversed the
District Court's ruling and remanded the matter back to the District Court for
further proceedings. The Court of Appeals held, among other things, that the
District Court improperly granted the motion to dismiss the Complaint because it
based its decision on inferences of fact inappropriate at this stage of the
proceedings. The case is currently proceeding in the District Court. The Company
and Mr. Krasny have answered the Complaint. They denied any wrongdoing or
liability on their part and asserted a number of affirmative defenses. The
District Court has established a trial date in January 1999 for this matter.
The Company and Mr. Krasny believe that their actions were honest and
proper and that the suit by the former shareholder is without merit. The Company
and Mr. Krasny are committed to vigorously defending the litigation.
Mr. Krasny has agreed to indemnify and reimburse the Company for all
damages and expenses, net of tax benefits received by the Company, related to
this action. The applicable accounting rules provide that certain amounts
assumed by Mr. Krasny on behalf of the Company be recorded by the Company for
financial reporting purposes as an expense and a related increase to paid-in
capital, net of tax effects. Accordingly, while having no impact on the
Company's cash flow, any such expenses incurred by Mr. Krasny on behalf of the
Company, including litigation, settlement or judgement costs, would negatively
impact the Company's results of operations in the period incurred. Legal
expenses attributable to the case are expected to increase significantly as the
case is prepared for trial, which, although reimbursed by Mr. Krasny, will
result in a decrease in the Company's reported results of operations. Although
the Company and Mr. Krasny believe that their actions were honest and proper and
that the suit by the former shareholder is without merit, should a negative
result occur in this action, Mr. Krasny could be required to transfer certain of
his shares of Common Stock to such former shareholder or determine to sell
certain of his shares to finance any assessed damages or settlements. Such a
transfer or sale by Mr. Krasny could adversely impact the market price of the
Common Stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27(a) Financial Data Schedule (for the three months ended
September 30, 1998)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the nine months ended
September 30, 1998.
<PAGE>
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 11, 1998 /s/ Harry J. Harczak, Jr.
--------------------- --------------------------
Harry J. Harczak, Jr.
Chief Financial Officer
Date November 11, 1998 /s/ Sandra M. Rouhselang
--------------------- --------------------------
Sandra M. Rouhselang
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
dated September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
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<CASH> 13,293
<SECURITIES> 62,074
<RECEIVABLES> 136,143
<ALLOWANCES> 2,885
<INVENTORY> 55,289
<CURRENT-ASSETS> 277,280
<PP&E> 35,701
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<TOTAL-ASSETS> 318,584
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0
0
<COMMON> 215
<OTHER-SE> 249,809
<TOTAL-LIABILITY-AND-EQUITY> 318,584
<SALES> 462,720
<TOTAL-REVENUES> 462,720
<CGS> 403,857
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<OTHER-EXPENSES> 31,707
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