<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 JUNE 30, 1999 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission file number 0-21796
CDW Computer Centers, Inc.
(Exact name of registrant as specified in its charter)
Illinois 36-3310735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 N. Milwaukee Ave. 60061
Vernon Hills, Illinois (Zip Code)
(Address of principal executive offices)
(847) 465-6000
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ----------
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
---------- ----------
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 12, 1999, 43,246,672 common shares were issued and 43,146,672 were
outstanding.
<PAGE> 2
CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
-----------
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 1999 and 1998 2
Condensed Consolidated Statement of Shareholders' Equity -
Six months ended June 30, 1999 3
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17 - 18
Signatures 19
<PAGE>3
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,573 $ 4,230
Marketable securities 52,130 66,458
Accounts receivable, net of allowance for doubtful
accounts of $4,000 and $3,185, respectively 213,328 152,308
Miscellaneous receivables 8,031 5,896
Merchandise inventory 81,064 64,392
Prepaid expenses and other assets 1,014 1,423
Deferred income taxes 5,081 5,081
--------- ---------
Total current assets 386,221 299,788
Property and equipment, net 38,719 37,056
Deferred income taxes and other assets 5,575 4,977
--------- ---------
TOTAL ASSETS $ 430,515 $ 341,821
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 78,440 $ 41,358
Accrued expenses:
Compensation 19,092 16,279
Income taxes 5,063 5,146
Exit costs 2,547 2,715
Other 6,509 5,560
--------- ---------
Total current liabilities 111,651 71,058
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 75,000 shares
authorized; 43,239 and 43,142 shares issued
respectively 216 216
Paid-in capital 87,158 81,352
Retained earnings 234,258 192,259
Unearned compensation (679) (975)
--------- ---------
Total shareholders' equity 320,953 272,852
--------- ---------
Less cost of common shares in treasury, 50 shares (2,089) (2,089)
--------- ---------
Total shareholders' equity 318,864 270,763
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 430,515 $ 341,821
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
1
<PAGE> 4
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 597,554 $ 408,945 $1,136,960 $ 793,536
Cost of sales 522,807 357,238 994,307 692,682
--------- --------- ---------- ----------
Gross profit 74,747 51,707 142,653 100,854
Selling and administrative expenses 38,679 26,851 74,900 52,643
--------- --------- ---------- ----------
Income from operations 36,068 24,856 67,753 48,211
Interest income 961 1,042 2,003 2,211
Other expense (108) (91) (221) (162)
--------- --------- ---------- ----------
Income before income taxes 36,921 25,807 69,535 50,260
Income tax provision 14,620 10,219 27,536 19,902
--------- --------- ---------- ----------
Net income $ 22,301 $ 15,588 $ 41,999 $ 30,358
========= ========= ========== ==========
Earnings per share
Basic $ 0.52 $ .36 $ .97 $ .70
========= ========= ========== ==========
Diluted $ 0.51 $ .36 $ .96 $ .70
========= ========= ========== ==========
Weighted average number of
common shares outstanding
Basic 43,118 43,092 43,094 43,092
========= ========= ========== ==========
Diluted 43,925 43,364 43,904 43,436
========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
2
<PAGE> 5
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Total
Common Shares Paid in Retained Unearned Treasury Shares Shareholders'
Shares Amount Capital Earnings Compensation Shares Amount Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 43,142 $ 216 $ 81,352 $ 192,259 $ (975) 100 $(2,089) $ 270,763
MPK Restricted Stock Plan forfeitures (44) 44 -
Amortization of unearned compensation 252 252
Exercise of Stock Options 97 1,218 1,218
Tax Benefit from stock option transactions 4,632 4,632
Net income 41,999 41,999
--------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 43,239 $ 216 $ 87,158 $ 234,258 $ (679) 100 $(2,089) $ 318,864
======================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE> 6
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 41,999 $ 30,358
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 3,200 2,179
Accretion of marketable securities, net (1,382) (1,354)
Allowance for doubtful accounts 815 525
Stock-based compensation expense 252 237
Legal fees assumed by majority shareholder, net of tax - 281
Deferred income taxes 112 -
Tax benefit from stock option exercises 4,632 359
Changes in assets and liabilities:
Accounts receivable (61,835) (32,428)
Miscellaneous receivables (2,135) (1,015)
Merchandise inventory (16,672) 12,995
Prepaid expenses and other assets 403 (136)
Accounts payable 37,082 2,307
Accrued compensation 2,813 (2,193)
Accrued income taxes and other expenses 866 (3,205)
Accrued exit costs (168) (336)
-------- --------
Net cash provided by operating activities 9,982 8,574
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (51,029) (20,810)
Redemptions of available-for-sale securities 27,091 7,250
Purchases of held-to-maturity securities (8,873) (30,918)
Redemptions of held-to-maturity securities 48,431 48,455
Investments in and advances to subsidiary (704) -
Purchase of property and equipment (4,863) (7,548)
-------- --------
Net cash provided by / (used in) investing activities 10,143 (3,571)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,218 440
-------- --------
Net cash provided by financing activities 1,218 440
-------- --------
Net increase in cash 21,343 5,443
Cash and cash equivalents - beginning of period 4,230 18,233
-------- --------
Cash and cash equivalents - end of period $ 25,573 $ 23,676
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE> 7
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
CDW Computer Centers, Inc. and its subsidiaries (collectively the
"Company") are engaged in the distribution of brand name personal computers and
related products primarily through direct marketing to end users within the
United States. The Company's primary business is conducted from a combined
telemarketing, corporate office, warehouse and showroom facility located in
Vernon Hills, Illinois. The Company also operates a telemarketing facility in
Buffalo Grove, Illinois, a retail showroom in Chicago, Illinois and a government
sales office in Chantilly, Virginia.
The Company extends credit to business, government and institutional
customers under certain circumstances based upon the financial strength of the
customer. Such customers are typically granted net 30 day credit terms. The
balance of the Company's sales are made primarily through third-party credit
cards and for cash-on-delivery.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. Such principles were
applied on a basis consistent with those reflected in the 1998 Annual Report on
Form 10-K and documents incorporated therein as filed with the Securities and
Exchange Commission. The accompanying financial data should be read in
conjunction with the notes to consolidated financial statements contained in the
1998 Annual Report on Form 10-K and documents incorporated therein. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting solely of normal
recurring accruals) necessary to present fairly the financial position of the
Company as of June 30, 1999 and December 31,1998, the results of operations for
the three and six months ended June 30, 1999 and 1998, the cash flows for the
six months ended June 30, 1999 and 1998, and the changes in shareholders' equity
for the six months ended June 30, 1999. The unaudited condensed consolidated
statements of income for such interim periods are not necessarily indicative of
results for the full year.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Additionally, such estimates and assumptions affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Earnings Per Share
A reconciliation of basic and diluted earnings per-share computations in
accordance with Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128) is included in Note 6 to the financial statements.
5
<PAGE> 8
On April 20, 1999, the Board of Directors of the Company approved a
two-for-one stock split to be effected in the form of a stock dividend payable
on May 19, 1999 to all common shareholders of record at the close of business on
May 5, 1999. All per share and related amounts contained in these financial
statements and notes have been adjusted to reflect the stock split.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's investments
in marketable securities at June 30, 1999, 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 $ 26,348 $ - $ (24) $ 26,372
-------------------------------------------------
Total available-for-sale 26,348 - (24) 26,372
-------------------------------------------------
Held to maturity:
Bonds of states, municipalities, and political
subdivisions 151 - - 151
U.S. Government and Government Agency Securities 25,582 - (25) 25,607
-------------------------------------------------
Total held-to-maturity 25,733 - (25) 25,758
-------------------------------------------------
Total marketable securities $ 52,081 $ - $ (49) $ 52,130
=================================================
</TABLE>
The Company's investments in securities held-to-maturity at June 30, 1999
were all due in one year or less by contractual maturity. Estimated fair values
of marketable securities are based on quoted market prices.
4. Facilities & Exit Accrual
In July 1997, the Company relocated to its current facility in Vernon Hills
and vacated its Buffalo Grove facility. The Company recorded a pre-tax
non-recurring charge to operating results for exit costs in the first quarter of
1996. The exit costs consist primarily of the estimated cost to the Company of
subleasing the vacated facility, including holding costs, the estimated costs of
restoring the building to its original condition and certain asset write-offs
resulting from the relocation. During the six months ended June 30, 1999, the
Company charged approximately $168,000 against the exit accrual in cash payments
for rent, real estate taxes and maintenance of the facility. During the
comparable period in 1998, the Company charged approximately $336,000 against
the exit accrual for similar costs.
The Company reopened the office portion of the Buffalo Grove facility
during the fourth quarter of 1998 as a telemarketing facility. Accordingly, the
Company records a proportionate share of the rent and other operating costs to
selling and administrative expenses. The Company plans to occupy the Buffalo
Grove office facility while it finalizes future long term growth plans for its
Vernon Hills campus. The Company sublet the warehouse and showroom portions of
the Buffalo Grove facility to a third party for the period beginning June 15,
1999, and continuing through December 31, 2003, the end of the lease term. There
is no assurance that the remaining exit liability of $2.6 million at June 30,
1999, will be adequate to cover actual costs in the event the sublessee is
unable or unwilling to complete the lease term.
6
<PAGE> 9
5. Financing Arrangements
The Company has an aggregate $50 million available pursuant to two $25
million unsecured lines of credit with two financial institutions, one which
expires in June 2000, at which time the Company intends to renew the line, and
another which does not have a fixed expiration date. Borrowings under the first
credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus 1/2% or
the federal funds rate plus 1/2%, as determined by the Company. Borrowings under
the second credit facility bear interest at the prime rate less 2 1/2%, LIBOR
plus .45% or the federal funds rate plus .45%, as determined by the Company. At
June 30, 1999, there were no borrowings against either of the credit facilities.
The Company has entered into security agreements with certain financial
institutions ("Flooring Companies") in order to facilitate the purchase of
inventory from various suppliers under certain terms and conditions. The
agreements allow for a maximum credit line of $63.9 million collateralized by
inventory purchases financed by the Flooring Companies. At June 30, 1999, all
amounts owed the Flooring Companies are included in trade accounts payable.
6. Earnings Per Share
The Company had approximately 43,139,000 shares outstanding at June 30,
1999. The Company has also granted options to purchase common shares to the
directors and coworkers of the Company under several stock option plans. These
options have a dilutive effect on the calculation of earnings per share. The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations as required by SFAS 128.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Income available to
common shareholders (numerator) $ 22,301 $ 15,588 $ 41,999 $ 30,358
------------ ------------ ------------ ------------
Weighted average common
shares outstanding (denominator) 43,118 43,092 43,094 43,092
------------ ------------ ------------ ------------
Basic earnings per share $ 0.52 $ 0.36 $ 0.97 $ 0.70
============ ============ ============ ============
Diluted earnings per share:
Income available to
common shareholders (numerator) $ 22,301 $ 15,588 $ 41,999 $ 30,358
------------ ------------ ------------ ------------
Weighted average common
shares outstanding 43,118 43,092 43,094 43,092
Effect of dilutive securities:
Options on common stock 807 272 810 344
------------ ------------ ------------ ------------
Total common shares and dilutive
securities (denominator) 43,925 43,364 43,904 43,436
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.51 $ 0.36 $ 0.96 $ 0.70
============ ============ ============ ============
</TABLE>
7. Leasing Joint Venture
In April 1999, CDW Capital Corporation, a wholly-owned subsidiary of CDW,
and First Portland Corporation ("FIRSTCORP") formed CDW Leasing, L.L.C.
("CDW-L"), a 50/50 joint venture. CDW-L provides captive leasing services to CDW
customers. FIRSTCORP is a full-service leasing organization that has provided
third party leasing solutions to CDW customers for more than three years. Under
7
<PAGE> 10
the terms of an operating agreement, FIRSTCORP provides leasing management
services to CDW-L, with net earnings of the venture allocated 50% to CDW and 50%
to FIRSTCORP. CDW Capital Corporation contributed $100,000 to the capital of
CDW-L and has committed to loan up to $10 million to CDW-L on a secured basis to
fund new leases initiated by CDW-L. The investment in CDW-L is accounted for
using the equity method. The investment and loan to CDW-L at June 30, 1999 is
not material to the total assets of the Company and is included in Deferred
Income Taxes and Other Assets on the consolidated Balance Sheets.
8
<PAGE>11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the notes thereto
included elsewhere herein.
Results Of Operations
The following table sets forth financial information derived from the
Company's statements of income expressed as a percentage of net sales, and
certain operating statistics.
<TABLE>
<CAPTION>
Financial Information
Percentage of Net Sales
--------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 87.5 87.4 87.5 87.3
------------------------ ------------------------
Gross profit 12.5 12.6 12.5 12.7
Selling and administrative expenses 6.5 6.5 6.6 6.6
------------------------ ------------------------
Income from operations 6.0 6.1 5.9 6.1
Other income, net 0.2 0.2 0.2 0.2
------------------------ ------------------------
Income before income taxes 6.2 6.3 6.1 6.3
Income tax provision 2.5 2.5 2.4 2.5
------------------------ ------------------------
Net income 3.7 % 3.8 % 3.7 % 3.8 %
======================== ========================
Operating Statistics
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Number of orders shipped 616,603 557,410 1,240,755 1,135,659
Average order size $969 $734 $916 $699
Number of account managers, end of period 617 520
Customers serviced - commercial 117,000 101,000 177,000 156,000
Customers serviced - consumer 85,000 109,000 174,000 216,000
Annualized inventory turns 26 24 25 25
--------------------------------------------------------
</TABLE>
9
<PAGE> 12
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>
<CAPTION>
Three Months Ended Six Months
Analysis of Product Mix June 30, Ended
June 30,
1999 1998 1999 1998
--------------------------------------------
<S> <C> <C> <C> <C>
Notebooks & Laptops 20.0 % 19.7 % 19.6 % 20.0 %
Desktop Computers 15.2 16.3 15.5 16.0
Software 13.8 14.2 13.4 13.5
Printers 11.1 12.2 11.6 12.8
Data Storage Devices 10.3 11.4 10.2 11.3
Network & Communication Products 9.4 7.7 9.4 8.0
Monitors & Video Products 7.3 9.4 7.3 9.0
Add-On Boards & Memory 4.5 3.9 4.6 4.2
Supplies 3.6 N/A 3.6 N/A
Input Devices 2.4 2.6 2.4 2.7
Multi-Media Devices 1.2 2.0 1.4 2.0
Other Accessories 1.2 0.6 1.0 0.5
-------------------------------------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
===========================================
</TABLE>
Three months ended June 30, 1999 compared to three months ended June 30, 1998
Net sales in the second quarter of 1999 increased 46.1% to a record $597.6
million compared to $408.9 million in the second quarter of 1998. The Company's
average order size increased 32.0% to $969 from $734 in the prior year quarter.
The growth in net sales is primarily attributable to a higher concentration of
commercial accounts, a higher level of sales per active account and an increase
in the number of orders shipped. Sales to commercial accounts, including
business, government, educational and institutional customers, increased to
92.6% of net sales in the second quarter of 1999 from 87.2% in the second
quarter of 1998. The number of active commercial customers increased 15.8% to
117,000 in the second quarter of 1999 from 101,000 in the second quarter of
1998. For the three months ended June 30, 1999, the number of orders shipped
increased 10.6% to over 616,000. Notebook computers continue to represent the
largest portion of the Company's sales at 20.0%, with dollar volume increasing
more than 48% from the second quarter of 1998.
The average selling price of desktop and server CPU's increased 5.5% and
the average selling price of notebook CPU's declined 2.4% from the second
quarter of 1998. The Company believes there may be future decreases in prices
for personal computers and related products. Such decreases require the Company
to sell more units in order to maintain or increase the level of sales. The
Company's sales growth rate and operating results could be adversely affected if
future manufacturer price reductions or the Company's sales and marketing
efforts fail to increase the level of unit sales. Sales of Compaq, Hewlett
Packard, IBM, Microsoft and Toshiba products comprise a substantial portion of
the Company's sales. The loss of any of these, or any other key vendors, could
have an adverse effect on the Company's results from operations. The statement
concerning future prices, sales and results from operations are forward looking
statements that involve certain risks and uncertainties such as stated above.
10
<PAGE> 13
The fastest growing product categories in terms of sales dollars and the
respective growth rates in the second quarter of 1999 compared to the second
quarter of 1998 were:
Product Category Growth Rate
---------------- -----------
Add-On Boards & Memory 68.0%
Notebooks & Laptops 48.3%
Network and Communication Products 45.9%
Software 41.8%
Monitors & Video Products 37.8%
Demand for certain products offered by the Company, and the growth of certain
product categories, are driven by advances in technology and the development of
new products and applications by the industry manufacturers, and acceptance of
these new technologies and products by end-users. Any slowdown in the rate of
technological advancement and new product development by industry manufacturers
could have a material adverse effect on the Company's future sales growth.
Gross profit decreased as a percentage of net sales to 12.5% for the three
months ended June 30, 1999, compared to 12.6% in the second quarter of 1998. The
decrease in gross profit as a percentage of net sales is primarily the result of
lower selling margins achieved on certain product lines and lower levels of
inventory price protection from vendors partially offset by reductions in
shipping costs. On a forward-looking basis, it is likely that the gross profit
margin achieved will fluctuate from quarter to quarter and may be lower than the
12.5% achieved in the second quarter of 1999. The statement concerning future
gross profit is a forward looking statement that involves certain risks and
uncertainties such as the continued participation by vendors in inventory price
protection and rebate programs, pricing strategies, product mix, market
conditions and other factors which could result in a fluctuation of gross
margins below recent experience. Certain manufacturers may make additional
changes that limit the amount of price protection for which the Company is
eligible. Such changes could have a negative impact on gross margin in future
periods. Vendor rebate programs are at the discretion of the vendor and many of
these programs are dependent on achieving certain goals and objectives.
Accordingly, there is no certainty that such programs will continue at their
current levels or that the established goals and objectives will be attained.
Selling and administrative expenses, which include net advertising expense,
other selling administrative expenses and the executive incentive bonus pool
remained consistent at 6.5% of net sales in the three months ended June 30, 1999
and 1998.
Net advertising expense decreased as a percentage of net sales to 0.57%
from 0.65% for the three months ended June 30, 1999 and 1998, respectively.
Gross advertising expense decreased to 2.8% of net sales in the second quarter
of 1999 versus 2.9% in the second quarter of 1998. The Company decreased catalog
circulation and the number of national advertising pages versus the prior year,
while expanding its spending on its corporate branding campaign and other direct
marketing activities. Based upon the Company's planned marketing initiatives,
future levels of gross advertising expense as a percentage of net sales are
likely to be relatively consistent with or higher than the level achieved in the
second quarter of 1999. Cooperative advertising reimbursements as a percentage
of net sales remained consistent at 2.2% of net sales in the second quarter of
1999 and 1998. The cooperative advertising reimbursement rate may fluctuate in
future quarters depending on the level of vendor participation achieved, changes
in vendor programs and collection experience. The statements concerning future
advertising expense and cooperative advertising reimbursements are forward
looking statements that involve certain risks and uncertainties including the
ability to identify and implement cost effective incremental advertising and
marketing programs as well as the continued participation of vendors in the
cooperative advertising reimbursement program.
Other selling and administrative costs decreased to 5.6% of net sales in
the second quarter of 1999 from 5.8% in the same period of 1998. Increases in
coworker productivity offset increased payroll and associated costs related to
our sales force expansion. As of June 30, 1999, there were 617 account managers,
an increase of 18.7% from 520 account managers as of June 30, 1998. Of the 617
account managers, approximately 74% had fewer than 24 months experience and 52%
had fewer than 12 months, as compared to 73% and 54% at June 30, 1998.
11
<PAGE> 14
The executive incentive bonus pool increased to $1.8 million in the second
quarter of 1999 from $597,000 in the second quarter of 1998. For 1999, the
Compensation and Stock Option Committee established the bonus pool at 15% of the
increase in operating income over the prior year.
Interest income, net of other expenses, decreased to $853,000 in the second
quarter of 1999 compared to $951,000 in the second quarter of 1998, due mainly
to lower levels of available cash.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the three months ended June 30, 1999 and 1998.
Net income for the three months ended June 30, 1999, was $22.3 million, a
43.1% increase over $15.6 million for the three months ended June 30, 1998.
Diluted earnings per share was $0.51 and $0.36 for the three months ended June
30, 1999 and 1998, respectively, an increase of 41.7%. All per share amounts
have been adjusted to reflect the two-for-one stock split effected in the form
of a stock dividend paid on May 19, 1999.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Net sales in the first half of 1999 increased 43.3% to a record $1.137
billion compared to $793.5 million in the first half of 1998. The Company's
average order size increased 31.1% to $916 from $699 in the first six months of
the prior year. The growth in net sales is primarily attributable to a higher
concentration of commercial accounts, a higher level of sales per active account
and an increase in the number of orders shipped. Sales to commercial accounts,
including business, government, educational and institutional customers,
increased to 91.5% of net sales in the first half of 1999 from 85.8% in the
first half of 1998. The number of active commercial customers increased 13.5% to
177,000 in the first half of 1999 from 156,000 in the first half of 1998. For
the six months ended June 30, 1999, the number of orders shipped increased 9.3%
to over 1.2 million. Notebook computers continue to represent the largest
portion of the Company's sales at 19.6%, with dollar volume increasing more than
40% from the first half of 1998.
The average selling price of desktop and server CPU's increased 7.7% and
the average selling price of notebook CPU's declined 3.5% from the first half of
1998. The Company believes there may be future decreases in prices for personal
computers and related products. Such decreases require the Company to sell more
units in order to maintain or increase the level of sales. The Company's sales
growth rate and operating results could be adversely affected if future
manufacturer price reductions or the Company's sales and marketing efforts fail
to increase the level of unit sales. Sales of Compaq, Hewlett Packard, IBM,
Microsoft and Toshiba products comprise a substantial portion of the Company's
sales. The loss of any of these, or any other key vendors, could have an adverse
effect on the Company's results from operations. The statement concerning future
prices, sales and results from operations are forward looking statements that
involve certain risks and uncertainties such as stated above.
12
<PAGE> 15
The fastest growing product categories in terms of sales dollars and the
respective growth rates in the six months ended June 30, 1999 compared to the
six months ended June 30, 1998 were:
Product Category Growth Rate
---------------- -----------
Add-On Boards & Memory 56.2%
Network & Communication Products 50.4%
Software 42.4%
Notebooks & Laptops 40.1%
Desktop Computers 39.3%
Gross profit decreased as a percentage of net sales to 12.5% for the six
months ended June 30, 1999, compared to 12.7% in the first half of 1998. The
decrease in gross profit as a percentage of net sales is primarily the result of
lower selling margins achieved on certain product lines and lower levels of
inventory price protection from vendors partially offset by reductions in
shipping costs. On a forward-looking basis, it is likely that the gross profit
margin achieved will fluctuate from quarter to quarter and may be lower than the
12.5% achieved in the first half of 1999. The statement concerning future gross
profit is a forward looking statement that involves certain risks and
uncertainties such as the continued participation by vendors in inventory price
protection and rebate programs, pricing strategies, product mix, market
conditions and other factors which could result in a fluctuation of gross
margins below recent experience. Certain manufacturers may make additional
changes that limit the amount of price protection for which the Company is
eligible. Such changes could have a negative impact on gross margin in future
periods. Vendor rebate programs are at the discretion of the vendor and many of
these programs are dependent on achieving certain goals and objectives.
Accordingly, there is no certainty that such programs will continue at their
current levels or that the established goals and objectives will be attained.
Selling and administrative expenses, which include net advertising expense,
other selling administrative expenses and the executive incentive bonus pool
remained at 6.6% of net sales in the six months ended June 30, 1999 and 1998.
Net advertising expense decreased as a percentage of net sales to 0.67%
from 0.70% for the six months ended June 30, 1999 and 1998, respectively. Gross
advertising expense decreased to 2.8% of net sales in the first half of 1999
versus 3.1% in the first half of 1998. The Company decreased catalog circulation
and the number of national advertising pages versus the prior year, while
expanding its spending on its corporate branding campaign and other direct
marketing activities. Based upon the Company's planned marketing initiatives,
future levels of gross advertising expense as a percentage of net sales are
likely to be relatively consistent with or higher than the level achieved in the
first half of 1999. Cooperative advertising reimbursements as a percentage of
net sales declined to 2.1% of net sales in the first half of 1999 from 2.4% for
the six months ended June 30, 1998. The cooperative advertising reimbursement
rate may fluctuate in future quarters depending on the level of vendor
participation achieved, changes in vendor programs and collection experience.
The statements concerning future advertising expense and cooperative advertising
reimbursements are forward looking statements that involve certain risks and
uncertainties including the ability to identify and implement cost effective
incremental advertising and marketing programs as well as the continued
participation of vendors in the cooperative advertising reimbursement program.
Other selling and administrative costs decreased to 5.6% of net sales in
the first half of 1999 from 5.8% in the same period of 1998. Increases in
coworker productivity offset increased payroll and associated costs related to
our sales force expansion. As of June 30, 1999, there were 617 account managers,
an increase of 18.7% from 520 account managers as of June 30, 1998. Of the 617
account managers, approximately 74% had fewer than 24 months experience and 52%
had fewer than 12 months, as compared to 73% and 54% at June 30, 1998.
The executive incentive bonus pool increased to $3.2 million in the first
six months of 1999 from $1.1 million in the first half of 1998. For 1999, the
Compensation and Stock Option Committee established the bonus pool at 15% of the
increase in operating income over the prior year.
13
<PAGE> 16
Interest income, net of other expenses, decreased to $1.8 million in the
first half of 1999 compared to $2.0 million in the first half of 1998, due
mainly to lower levels of available cash.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the six months ended June 30, 1999 and 1998.
Net income for the six months ended June 30, 1999, was $42.0 million, a
38.4% increase over $30.4 million for the six months ended June 30, 1998.
Diluted earnings per share was $0.96 and $0.70 for the six months ended June 30,
1999 and 1998, respectively, an increase of 37.1%. All per share amounts have
been adjusted to reflect the two-for-one stock split effected in the form of a
stock dividend paid on May 19, 1999.
Liquidity and Capital Resources
Working Capital
The Company has historically financed its operations and capital
expenditures primarily through cash flow from operations, short-term borrowings
and public offerings of common stock.
At June 30, 1999, the Company had cash, cash equivalents and marketable
securities of $77.7 million and working capital of $274.6 million, representing
an increase of $7.0 million in cash, cash equivalents and marketable securities
and an increase of $45.8 million in working capital from December 31, 1998.
The Company has an aggregate $50 million available pursuant to two $25
million unsecured lines of credit with two financial institutions, one which
expires in June 2000, at which time the Company intends to renew the line, and
another which does not have a fixed expiration date. Borrowings under the first
credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus 1/2% or
the federal funds rate plus 1/2%, as determined by the Company. Borrowings under
the second credit facility bear interest at the prime rate less 2 1/2%, LIBOR
plus .45% or the federal funds rate plus .45%, as determined by the Company. At
June 30, 1999, there were no borrowings against either of the credit facilities.
The Company's current primary and anticipated use of cash is to fund the
growth in working capital and capital expenditures. The Company believes that
the funds held in cash, cash equivalents and marketable securities, and funds
available under the credit facilities will be sufficient to fund the Company's
working capital and cash requirements at least through June 30, 2000.
Cash flows for the six months ended June 30, 1999
Net cash provided by operating activities for the six months ended June 30,
1999, was slightly less than $10.0 million. The primary factors which
historically affect the Company's cash flows from operations are accounts
receivable, merchandise inventory and accounts payable. The increase in accounts
receivable resulted primarily from increased sales volume and an increase in the
percentage of net sales generated from commercial accounts with open credit
terms to 68.9% from 62.4% for the twelve months ended June 30, 1998. Inventory
increased during the period in response to increased sales growth rates.
Annualized inventory turnover remained consistent at approximately 25 times for
the six months ended June 30, 1999 and 1998. The increase in accounts payable
reflects timing of payments to vendors at the end of the respective periods as
well as the increase in inventory levels during the year.
14
<PAGE> 17
Cash provided by operating activities for the six months ended June 30,
1999, was positively impacted by a $4.6 million tax benefit recorded to
paid-in-capital, relating to the exercise of shares pursuant to the MPK Stock
Option Plan.
Net cash provided by investing activities for the six months ended June 30,
1999, was $10.1 million, net of approximately $4.9 million used for capital
expenditures. The capital expenditures made by the Company were primarily
related to the purchase of machinery and equipment for the Vernon Hills
facility.
Leasing Joint Venture
In April 1999, CDW Capital Corporation, a wholly-owned subsidiary of CDW,
and First Portland Corporation ("FIRSTCORP") formed CDW Leasing, L.L.C.
("CDW-L"), a 50/50 joint venture. CDW-L provides captive leasing services to CDW
customers. FIRSTCORP is a full-service leasing organization that has provided
third party leasing solutions to CDW customers for more than three years. Under
the terms of an operating agreement, FIRSTCORP provides leasing management
services to CDW-L, with net earnings of the venture allocated 50% to CDW and 50%
to FIRSTCORP. CDW Capital Corporation contributed $100,000 to the capital of
CDW-L and has committed to loan up to $10 million to CDW-L on a secured basis to
fund new leases initiated by CDW-L. The investment in CDW-L is accounted for
using the equity method. The investment and loan to CDW-L at June 30, 1999 is
not material to the total assets of the Company and is included in Deferred
Income Taxes and Other Assets on the consolidated Balance Sheets.
Year 2000 Readiness Disclosure
General
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, receive or
ship products, send invoices, or engage in similar normal business activities.
The Company has established a Y2K project designed to make all its hardware
and software systems Y2K compliant by December 31, 1999. The Company intends to
contract an outside organization to review its project methodology and status of
all aspects of the Y2K issue.
Project
CDW's Y2K project consists of two components, internal and external. The
internal section has been divided into five steps which are currently being
completed by the Y2K Team:
1. Awareness - Awareness includes evaluating industry best practices,
generating management and employee awareness, establishing communications
methods and establishing the project team.
2. Assessment - This phase includes hardware and software compliance
assessment, establishment of the size and scope of the project,
establishment of a project timeline, priorities, budgeting and allocation
of resources.
3. Renovation - Renovation consists of establishing a detailed implementation
plan, the design of new systems and system corrections, writing of system
code and software and hardware testing.
4. Validation - Validation includes testing new systems and system corrections
to ensure they will function properly in operation.
5. Implementation - Final certification of the new and corrected systems,
implementation of the systems and monitoring to ensure they continue to
function.
15
<PAGE> 18
All phases of the project as they relate to internal systems were completed
as of March 31, 1999. The Company plans to focus the majority of its efforts for
the remainder of 1999 on the external portion of the project while continuing to
validate and test its internal systems to ensure those systems are properly
converted.
The external portion of the project focuses on assessing the Y2K readiness
of product and service vendors and its potential impact on the Company's
operations. The Company will work through issues with its business partners
during the remainder of 1999 to minimize potential business interruptions. This
portion of the project is expected to be completed prior to December 31, 1999.
Costs
The Company estimates that total costs for the Y2K project, through
December 31, 1999, will range between $750,000 and $1 million. As of June 30,
1999 the Company has incurred, and recorded as operating expenses, approximately
$370,000 in costs related to the project, of which approximately $130,000 were
incurred during the six months ended June 30, 1999. Essentially all of the
Company's expenditures to date are for internal payroll costs related to the
assessment and correction of internal systems. Of the estimated remaining costs
of $380,000 to $630,000, approximately 75% relate to the cost of assessing and
communicating with vendors and 25% relate to the correction of internal systems.
Risks
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations and financial condition. Due to the general uncertainty
inherent in the Y2K problem, resulting in part from the uncertainty of the Y2K
readiness of third-party suppliers, the Company is unable to determine at this
time whether the consequences of Y2K failures will have a material impact on the
Company's results of operations and financial condition. The Company's Y2K
project is expected to significantly reduce the Company's level of uncertainty
about the Y2K problem and, in particular, about the Y2K compliance and readiness
of its material vendors. The Company believes that, with the completion of the
project as scheduled, the possibility of significant interruptions of normal
operations should be minimized.
The statements concerning future impact of the Y2K issue are forward looking
statements that involve certain risks and uncertainties, such as the inability
to receive products on a timely basis from vendors, ship products to customers,
receive payments from customers and other factors which could have a material
impact on the Company's results from operations. Certain vendors may fail to
adequately prepare their information systems or the Company's own Y2K project
may not correct all Y2K issues. Accordingly, there is no certainty that either
the Company or its vendors will complete their Y2K projects prior to December
31, 1999.
Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations concerning the Company's sales
growth, gross profit as a percentage of sales, advertising expense, cooperative
advertising reimbursements and the potential impact on operations of the Y2K
issue are forward-looking statements that involve certain risks and
uncertainties, as specified herein.
16
<PAGE> 19
Part II Other Information
Item 1. Legal Proceedings
The Company is currently not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held an annual meeting of Shareholders on May 18, 1999.
(b) The names of all Directors of the Company are set forth in (c) below.
(c) Three matters were voted upon and approved by the Shareholders. The
presentation below briefly describes the matter voted upon and results
of Shareholders' votes.
1. Election of Directors
Votes For Votes Against Abstentions
---------- ------------- -----------
By Nominee
- Michael P. Krasny 41,534,944 - 33,519
- Gregory C. Zeman 41,534,944 - 33,519
- Daniel B. Kass 41,534,944 - 33,519
- Joseph Levy, Jr. 41,534,944 - 33,519
- Michelle L. Collins 41,534,944 - 33,519
2. Ratification of Auditors
The selection of PricewaterhouseCoopers LLP, independent public
accountants, as auditors of the Company for the year ended
December 31, 1999.
Votes For Votes Against Abstentions
---------- ------------- -----------
41,549,202 24,600 28,180
3. CDW Officer and Manager Bonus Plan
The approval of an amendment to the CDW Officer and Manager Bonus
Plan.
Votes For Votes Against Abstentions
---------- ------------- -----------
31,829,540 9,715,904 57,348
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
17
<PAGE> 20
10 (yy) Revolving Note between the Company and LaSalle National Bank
dated June 28, 1999
27 (a) Financial Data Schedule(for the three months ended June 30,
1999)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
June 30, 1999.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CDW Computer Centers, Inc.
(Registrant)
Date August 6, 1999 /s/ Harry J. Harczak, Jr.
--------------------- ----------------------------
Harry J. Harczak, Jr.
Chief Financial Officer &
Treasurer
Date August 6, 1999 /s/ Sandra M. Rouhselang
--------------------- ----------------------------
Sandra M. Rouhselang
Controller
19
<PAGE> 22
Index to Exhibits
10 (yy) Revolving Note between the Company and LaSalle National Bank dated June
28, 1999
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10 (yy)
REVOLVING NOTE BETWEEN THE COMPANY
AND LASALLE NATIONAL BANK
DATED JUNE 28, 1999
REPLACEMENT REVOLVING NOTE
$25,000,000 Dated as of June 28, 1999
Due: June 28, 2000
On or before June 28, 2000, CDW COMPUTER CENTERS, INC. (the
"Undersigned"), for value received, promises to pay to the order of LASALLE BANK
NATIONAL ASSOCIATION, formerly known as LaSalle National Bank, a national
banking association (hereinafter, together with any holder thereof, called
"Bank"), whose address is 135 S. LaSalle Street, Chicago, Illinois 60603, the
principal sum of Twenty Five Million and 00/100 Dollars ($25,000,000) or if
less, the aggregate unpaid principal amount of all loans made by the Bank to the
Undersigned hereunder (this "Note"). The unpaid principal amount hereof shall
bear interest at the Undersigned's option of the following:
(i) a fixed rate equal to the greater of (A) the "Prime Rate"
(hereinafter defined) minus two and one-half percent (- 2 1/2%) per annum, or
(B) the "Federal Funds Rate" (hereinafter defined) plus one-half of one percent
(+ 1/2%) per annum, for borrowings not to exceed thirty (30) days, such rate to
be fixed at the beginning of the term of such borrowing (the "Fixed Prime
Rate"); or
(ii) a floating rate equal to the greater of (A) the Prime Rate minus
two and one-half percent (-2 1/2%) per annum, or (B) the Federal Funds Rate plus
one-half of one percent (+ 1/2%) per annum, for borrowings in excess of thirty
(30) days (the "Floating Prime Rate"); the Floating Prime Rate and the Fixed
Prime Rate are referred to herein collectively as the "Prime Rate"); or
(iii) "Adjusted LIBOR" (hereinafter defined).
1. For purposes hereof the following terms shall have the following
definitions:
"Prime Rate" shall mean the rate in effect from time to time as set by the Bank
and called its Prime Rate. The effective date of any change in said Prime Rate
shall for purposes hereof be the date the rate is changed by the Bank. The Bank
shall not be obligated to give notice of any change in the Prime Rate.
"Federal Funds Rate" shall mean, for any day, the daily effective Federal Funds
rate for such day as published in the Federal Reserve Statistical Release
H.15("H.15") (or, if such Release is not published, the successor thereto or
closest approximation thereto, as determined by the Bank) for such day; provided
that, the Federal Funds Rate for any day on which the Federal Reserve Bank of
New York, (the "New York Fed") is not open for business shall be the Federal
Funds Rate for the next preceding day on which the New York Fed was open for
business; and provided, further, that if the Bank determines, in good faith,
that it is unable to determine the Federal Funds Rate on the basis of H.15, then
the Bank shall determine the Federal Funds Rate based on the quotations of three
(3) dealers in Federal Funds in New York City, as reasonably selected by the
Bank, and the Bank's determination of such rate shall be binding and conclusive
absent manifest error.
<PAGE> 2
"Adjusted LIBOR" means a rate of interest equal to one-half of one percent
(1/2%) per annum in excess of the per annum rate of interest at which U.S.
dollar deposits in an amount comparable to the amount of the relevant "LIBOR
Loan" (hereinafter defined) and for a period equal to the relevant "Interest
Period" (hereinafter defined) are offered generally to the Bank (rounded upward,
if necessary, to the nearest 1/16 of 1.00%) in the London Interbank Eurodollar
market at 11:00 a.m. (London time) two (2) banking days prior to the
commencement of each Interest Period, such rate to remain fixed for such
Interest Period.
"Interest Period" shall mean successive one, two or three-month periods as
selected from time to time by the Undersigned by notice given to the Bank not
less than three (3) business days prior to the first day of each respective
Interest Period; provided that: (i) each such one, two or three-month period
occurring after such initial period shall commence on the day on which the next
preceding period expires; (ii) the final Interest Period shall be such that its
expiration occurs on or before the stated maturity date of the Note; and (iii)
if for any reason the Undersigned shall fail to select timely a period, then it
shall be deemed to have selected a LIBOR Loan with a one(1) month Interest
Period; provided that, at any time any Interest Period expires less than one (1)
month before the maturity of the Note, then, for the period commencing on such
expiration date and ending on the maturity date such LIBOR Loan shall convert to
a loan bearing interest at the Floating Prime Rate.
2. Interest on that portion of the outstanding principal amount hereof
bearing interest at the Prime Rate shall be payable from the date hereof on such
aggregate unpaid principal amount on the last day of each month, commencing on
July 31, 1999, and at maturity hereof. Interest on LIBOR borrowings shall be
payable at the end of each respective Interest Period. Interest after maturity
(whether by reason of acceleration or otherwise) shall be paid on the unpaid
balance at the rate of the Floating Prime Rate plus two percent (2%) per annum
(the "Default Rate"). Interest shall be computed on the basis of a year
consisting of 360 days and shall be paid for the actual number of days elapsed,
unless otherwise specified herein.
3. Each LIBOR borrowing hereunder (each, a "LIBOR Loan") must equal
$100,000 or an integral multiple thereof. Interest on each LIBOR Loan shall be
payable on the last banking day of each Interest Period with respect thereto,
commencing on the first such date to occur after the date hereof, at maturity,
after maturity on demand, and on the date of any payment hereon on the amount
paid. The Undersigned hereby further promises to pay to the order of the Bank,
on demand, interest on the unpaid principal amount hereof after maturity
(whether by acceleration or otherwise) at the Default Rate.
4. Provisions applicable to LIBOR Loans: (a) The Bank's determination
of Adjusted LIBOR as provided above shall be conclusive, absent manifest error.
Furthermore, if the Bank determines, in good faith (which determination shall be
conclusive, absent manifest error), prior to the commencement of any Interest
Period that (a) U.S. dollar deposits of sufficient amount and maturity for
funding any LIBOR Loan are not available to the Bank in the London Interbank
Eurodollar market in the ordinary course of business, or (b) by reason of
<PAGE> 3
circumstances affecting the London Interbank Eurodollar market, adequate and
fair means do not exist for ascertaining the rate of interest to be applicable
to the relevant LIBOR Loan, the Bank shall promptly notify the Undersigned and
such LIBOR Loan shall automatically convert on the last day of its then-current
Interest Period to a loan bearing interest at the Floating Prime Rate.
(b) If, after the date hereof, the introduction of, or any change in any
applicable law, treaty, rule, regulation or guideline or in the interpretation
or administration thereof by any governmental authority or any central bank or
other fiscal, monetary or other authority having jurisdiction over the Bank or
its lending office (a "Regulatory Change"), shall, in the opinion of counsel to
the Bank, makes it unlawful for the Bank to make or maintain any LIBOR Loan
evidenced hereby, then the Bank shall promptly notify the Undersigned and such
LIBOR Loan shall automatically convert on the last day of its then-current
Interest Period to a loan bearing interest at the Floating Prime Rate.
(c) If, for any reason, any LIBOR Loan is paid prior to the last business day of
its then-current Interest Period, the Undersigned agrees to indemnify the Bank
against any loss (including any loss on redeployment of the funds repaid), cost
or expense incurred by the Bank as a result of such prepayment.
(d) If any Regulatory Change (whether or not having the force of law) shall (a)
impose, modify or deem applicable any assessment, reserve, special deposit or
similar requirement against assets held by, or deposits in or for the account of
or loans by, or any other acquisition of funds or disbursements by, the Bank;
(b) subject the Bank or any LIBOR Loan to any tax, duty, charge, stamp tax or
fee or change the basis of taxation of payments to the Bank of principal or
interest due from the Undersigned to the Bank hereunder (other than a change in
taxation of the overall net income of the Bank); or (c) impose on the Bank any
other condition regarding such LIBOR Loan or the Bank's funding thereof, and the
Bank shall determine (which determination shall be conclusive, absent manifest
error) that the result of the foregoing is to increase the cost to the Bank of
making or maintaining such LIBOR Loan or to reduce the amount of principal or
interest received by the Bank hereunder, then the Undersigned shall pay to the
Bank, on demand and presentation of satisfactory documentation therefor, such
additional amounts as the Bank shall, from time to time, determine are
sufficient to compensate and indemnify the Bank for such increased cost or
reduced amount.
5. The Undersigned hereby authorizes the Bank to charge any account of
the Undersigned for all sums due hereunder. Principal payments submitted in
funds not available until collected shall continue to bear interest until
collected. If payment hereunder becomes due and payable on a Saturday, Sunday or
legal holiday under the laws of the United States or the State of Illinois, the
due date thereof shall be extended to the next succeeding business day, and
interest shall be payable thereon at the rate specified during such extension.
6. This Note evidences a revolving line of credit under which the
Undersigned is indebted to the Bank and evidences the aggregate unpaid principal
<PAGE> 4
amount of all advances made or to be made by the Bank to the Undersigned under
the Note. All advances and repayments hereunder shall be evidenced by entries on
the books and records of the Bank which shall be presumptive evidence of the
principal amount and interest owing and unpaid on this Note, or any renewal or
extension hereof. The failure to so record any such amount or any error so
recording any such amount shall not, however, limit or otherwise affect the
obligations of the Undersigned hereunder or under any not to repay the principal
amount of the liabilities together with all interest accruing thereon. This Note
may be used for direct advances or letters of credit. Each letter of credit
requested by the Undersigned shall be subject to the terms and conditions of the
Bank's standard letter of credit application, which application is incorporated
herein by this reference. The amount available to the Undersigned under this
Note shall be reduced by the face amount of all letters of credit issued and
outstanding hereunder. All letters of credit issued hereunder shall have an
expiry date no later than June 28, 2001. The Undersigned and the Bank agree that
each draw under any letter of credit shall constitute, and shall be repaid by, a
direct advance under this Note on the date of such draw. Each letter of credit
requested by the Undersigned hereunder shall be issued by the Bank only after
the Bank has received a fully executed letter of credit application on the
Bank's standard form and the Bank's customary fees for issuance of letters of
credit.
7. Advances under this Note may be made by the Bank upon the written
request of any two (2) authorized officers of the Undersigned whose authority to
so act has not been revoked by the Undersigned in writing theretofore received
by the Bank at its main office. Any such advances shall be conclusively presumed
to have been made by the Bank to or for the benefit of the Undersigned. The
Undersigned does hereby irrevocably confirm, ratify and approve all such
advances by the Bank and does hereby indemnify the Bank against loss and
reasonable expenses (including court costs, attorneys' and paralegals' fees) and
shall hold the Bank harmless with respect thereto.
8. The Undersigned shall be in default hereunder if: (a) any amount
payable on this and any and all other liabilities or obligations of the
Undersigned to the Bank, howsoever created, arising or evidenced, whether now
existing or hereafter arising, whether now due or to become due, whether direct,
indirect, absolute, contingent, joint, several or joint and several (all such
liabilities and obligations, including this Note, are hereinafter referred to as
the "Obligations") or on the obligations of any obligor hereunder, it not paid
within five (5) days of when due; or (b) the Undersigned shall otherwise fail to
perform any of the promises to be performed by the Undersigned hereunder or
under any other security agreement or other agreement with the Bank and the same
is not cured within thirty (30) days of notice thereof by the Bank; or (c) the
Undersigned, or any other party liable with respect to the Obligations, or any
guarantor or accommodation endorser or third party pledgor, shall make any
assignment for the benefit of creditors, or there shall be commenced any
bankruptcy, receivership, insolvency, reorganization, dissolution or liquidation
proceedings by or against, or the entry of any judgment, levy, attachment,
garnishment or other process, or the filing of any lien against the Undersigned
or any guarantor, or any other party liable with respect to the Obligations, or
accommodation endorser or third party pledgor for any of the Obligations which
has a material adverse effect on such party; or (d) the determination by the
Bank that a material adverse change has occurred in the financial condition of
<PAGE> 5
the Undersigned from the condition set forth in the most recent financial
statement of the Undersigned furnished to the Bank, or from the financial
condition of the Undersigned most recently disclosed to the Bank in any manner
and the same is not cured within thirty (30) days of notice thereof by the Bank;
or (e) any oral or written warranty, representation, certificate or statement of
the Undersigned to the Bank is untrue in any material respect; or (f) failure of
the Undersigned, within thirty (30) days after a request by the Bank, to furnish
financial information or to permit inspection by the Bank of the Undersigned's
books and records; or (g) the occurrence of any material adverse event which
causes a change in the financial condition of the Undersigned, or which would
have a material adverse effect on the business of the Undersigned and the same
is not cured within thirty (30) days notice thereof by the Bank; or (h) the
Undersigned fails to have, at the end of each of its fiscal quarters (1) a
Tangible Net Worth of at least $100,000,000, or (2) a ratio of Liabilities to
Tangible Net Worth of no greater than 2.0:1.0 and a default of either (1) or (2)
shall not be cured by the Undersigned within thirty (30) days.
9. For purposes hereof, "Tangible Net Worth" shall mean the sum of
shareholders' equity plus debt subordinated to the Undersigned's liabilities to
the Bank, minus intangibles, including, but not limited to, goodwill, customer
lists, prepaid items, deferred charges, debts owed by officers and other
affiliates and such "Other Assets" as set forth on the financial statements of
the Undersigned. "Liabilities" shall mean all liabilities of the Undersigned
that would be shown on a balance sheet of the Undersigned prepared in accordance
with generally accepted accounting principles consistently applied.
10. Whenever the Undersigned shall be in default as aforesaid, without
demand or notice of any kind except as set forth herein, the entire unpaid
amount of all Obligations shall become immediately due and payable, and the Bank
may exercise, from time to time, any and all rights and remedies available to it
under the Uniform Commercial Code of Illinois, or otherwise, including those
available under any written instrument (in addition to this Note) relating to
any of the Obligations and may, without demand or notice of any kind,
appropriate and apply toward the payment of such of the Obligations, whether
matured or unmatured, including reasonable costs of collection and reasonable
attorneys' and paralegals' fees, and in such order of application as the Bank
may, from time to time, elect, any balances, credits, deposits, accounts or
monies of the Undersigned in possession, control or custody of, or in transit to
the Bank.
11. THE UNDERSIGNED WAIVES THE BENEFIT OF ANY LAW THAT WOULD OTHERWISE
RESTRICT OR LIMIT THE BANK IN THE EXERCISE OF ITS RIGHTS, WHICH IS HEREBY
ACKNOWLEDGED, TO APPROPRIATE WITHOUT NOTICE, AT ANY TIME FOLLOWING DEFAULT
(AFTER GIVING EFFECT TO APPLICABLE GRACE OR CURE PERIODS, IF ANY), ANY
INDEBTEDNESS MATURED OR UNMATURED, OWING FROM THE BANK TO THE UNDERSIGNED. THE
BANK MAY, FROM TIME TO TIME, WITHOUT DEMAND OR NOTICE OF ANY KIND, APPROPRIATE
AND APPLY TOWARD THE PAYMENT OF SUCH OF THE OBLIGATIONS, AND IN SUCH ORDER OF
APPLICATION, AS THE BANK MAY, FROM TIME TO TIME, ELECT ANY AND ALL SUCH
BALANCES, CREDITS, DEPOSITS, ACCOUNTS, MONIES, CASH EQUIVALENTS AND OTHER ASSETS
OF OR IN THE NAME OF THE UNDERSIGNED, THEN OR THEREAFTER WITH THE BANK.
<PAGE> 6
12. THE UNDERSIGNED WAIVES EVERY DEFENSE, CAUSE OF ACTION, COUNTERCLAIM
OR SET OFF WHICH THE UNDERSIGNED MAY NOT HAVE OR HEREAFTER MAY HAVE TO ANY
ACTION BY BANK IN ENFORCING THIS NOTE OR ANY OF THE OTHER OBLIGATIONS, RATIFIES
AND CONFIRMS WHATEVER THE BANK MAY DO PURSUANT TO THE TERMS HEREOF AND AGREES
THAT BANK SHALL NOT BE LIABLE FOR ANY ERROR OF JUDGMENT OR MISTAKES OF FACT OR
LAW EXCEPT FOR THOSE ERRORS OR MISTAKES WHICH RESULT FROM THE BANK'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. THE BANK AND THE UNDERSIGNED, KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY THE RIGHT EITHER MAY HAVE TO
TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING BASED HEREON, OR ARISING OUT
OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY OF THE OTHER OBLIGATIONS, OR
ANY AGREEMENT, EXECUTED OR CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH
OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE BANK AND THE
UNDERSIGNED ARE ADVERSE PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE
BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE UNDERSIGNED.
13. The Undersigned, and any other party liable with respect to the
Obligations, including any guarantors, and any and all endorsers and
accommodation parties, and each one of them, waive any and all presentment,
demand, notice of dishonor, protest, and all other notices and demands in
connection with the enforcement of the Bank's right hereunder, and hereby
consent to, and waive notice of release, with or without consideration, of the
Undersigned. No default shall be waived by the Bank except in writing. No delay
on the part of the Bank in the exercise of any right or remedy shall operate as
a waiver thereof, and no single or partial exercise by the Bank of any right or
remedy shall preclude other or further exercise thereof, or the exercise of any
other right or remedy. This Note: (I) is valid, binding and enforceable in
accordance with its provisions, and no conditions exist to the legal
effectiveness of this Note; (ii) contains the entire agreement between the
Undersigned and the Bank; (iii) is the final expression of the intentions of the
Undersigned and the Bank; and (iv) supersedes all negotiations, representations,
warranties, commitments, offers, contracts (of any kind or nature, whether or al
or written) prior to or contemporaneous with the execution hereof. No prior or
contemporaneous representation, warranties, understandings, offers or agreements
of any kind or nature, whether oral or written, have been made by the Bank or
relied upon by the Undersigned in connection with the execution hereof. No
modification, discharge, termination or waiver of any of the provisions hereof
shall be binding upon the Bank, except as expressly set forth in a writing duly
signed and delivered on behalf of the Bank.
14. The Undersigned agrees to pay all reasonable costs, reasonable
legal expenses, reasonable attorneys fees and paralegals' fees of every kind,
paid or incurred by the Bank in enforcing its rights hereunder, including, but
<PAGE> 7
not limited to, litigation or proceedings initiated under the United States
Bankruptcy Code, or in respect to any other of the Obligations, or in defending
against any defense, cause of action, counterclaim, set off or crossclaim based
on any act of commission or omission by the Bank with respect to this Note or
any other of the Obligations, promptly on demand of the Bank or other person
paying or incurring the same.
15. TO INDUCE THE BANK TO MAKE THE LOAN EVIDENCED BY THIS NOTE, THE
UNDERSIGNED IRREVOCABLY AGREES THAT ALL ACTIONS ARISING DIRECTLY OR INDIRECTLY
AS A RESULT OR IN CONSEQUENCE OF THIS NOTE OR ANY OTHER AGREEMENT WITH THE BANK
SHALL BE INSTITUTED AND LITIGATED ONLY IN COURTS HAVING SITUS IN THE CITY OF
CHICAGO, ILLINOIS, AND THE UNDERSIGNED HEREBY CONSENTS TO THE EXCLUSIVE
JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT LOCATED AND HAVING ITS
SITUS IN SAID CITY, AND WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS. THE
UNDERSIGNED HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS, AND CONSENTS
THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, DIRECTED TO THE UNDERSIGNED AT THE ADDRESS INDICATED IN THE BANK'S
RECORDS IN THE MANNER PROVIDED BY APPLICABLE STATUTE, LAW, RULE OF COURT OF
OTHERWISE.
16. The loan evidenced hereby has been made and this Note has been
delivered at the Bank's main office. This Note shall be governed and construed
in accordance with the laws of the State of Illinois, in which state it shall be
performed, and shall be binding upon the Undersigned and its successors and
assigns. If this Note contains any blanks when executed by the Undersigned, the
Bank is hereby authorized, without notice to the Undersigned, to complete any
such blanks according to the terms upon which the loan or loans were granted.
Wherever possible, each provision of this Note shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Note shall be prohibited by or be invalid under such law, such provision
shall be severable, and be deemed ineffective to the extent of such prohibition
or invalidity without invalidating the remaining provisions of this Note. If
more than one party shall execute this Note, the term "Undersigned" as used
herein shall mean all parties signing this Note and their respective successors
and assigns, and such parties shall, as the case may be, be jointly and
severally obligated hereunder.
<PAGE> 8
17. The Undersigned represents and warrants to the Bank that the
execution and delivery of this Note has been duly authorized by resolutions
heretofore adopted by its Board of Directors and in accordance with law and its
bylaws, that said resolutions have not been amended or rescinded, are in full
force and effect and that the officer or officers executing and delivering this
Note for and on behalf of the Undersigned are duly authorized so to act. The
Bank, in extending financial accommodations to the Undersigned, is expressly
acting and relying upon the aforesaid representations and warranties.
18. The Undersigned acknowledges and agrees that the lending
relationship hereby created with the Bank is and has been conducted on an open
and arm's length basis in which no fiduciary relationship exits and that the
Undersigned has not relied and is not relying on any such fiduciary relationship
in consummating the loan evidenced by this Note.
19. As used herein, all provisions shall include the masculine,
feminine, neuter, singular and plural thereof, wherever the context and facts
require such construction and in particular the word "Undersigned" shall be so
construed.
20. The Undersigned has reviewed the areas within its business and
operations which could be adversely affected by, and has developed or is
developing a program to address on a timely basis, the "Year 2000 Problem" (that
is, the risk that computer applications used by the Undersigned may be unable to
recognize and perform properly date-sensitive functions involving certain dates
prior to and any date after December 31, 1999), and has made related appropriate
inquiry of material suppliers and vendors. Based on such review and program, the
Undersigned believes that the Year 2000 Problem will not have a material adverse
effect on the Undersigned. Upon the request of the Bank from time to time, the
Undersigned shall provide the Bank with such updated information or
documentation as the Bank may request indicating the status of its efforts to
resolve the Year 2000 Problem.
21. This Note is in replacement and substitution for, but not a
repayment of, that certain $25,000,000 Revolving Note dated as of June 28, 1998
of the Undersigned payable to the order of the Bank and does not and shall not
be deemed to constitute a novation therefor.
IN WITNESS WHEREOF, the Undersigned has executed this Note on the date
above set forth.
CDW COMPUTER CENTERS, INC.
By: /s/ Michael P. Krasny
-------------------------------
Name: Michael P. Krasny
Title: Chairman & Chief Executive
Officer
By: /s/ Harry J. Harczak, Jr.
-------------------------------
Name: Harry J. Harczak, Jr.
Title: Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
dated June 30, 1999 and is qualified in its entirety by reference to such
financial statements
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 25,573
<SECURITIES> 52,130
<RECEIVABLES> 213,328
<ALLOWANCES> 4,000
<INVENTORY> 81,064
<CURRENT-ASSETS> 386,221
<PP&E> 50,540
<DEPRECIATION> 11,821
<TOTAL-ASSETS> 430,515
<CURRENT-LIABILITIES> 111,651
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 318,648
<TOTAL-LIABILITY-AND-EQUITY> 430,515
<SALES> 597,554
<TOTAL-REVENUES> 597,554
<CGS> 522,807
<TOTAL-COSTS> 522,807
<OTHER-EXPENSES> 38,679
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 36,921
<INCOME-TAX> 14,620
<INCOME-CONTINUING> 22,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,301
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.51
</TABLE>
