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, 2000 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 10, 2000, 87,433,107 common shares were issued and 87,233,107 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, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 2000 and 1999 2
Condensed Consolidated Statement of Shareholders' Equity -
Six months ended June 30, 2000 3
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters of a Vote of Security Holders 16 - 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
ii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 40,988 $ 19,747
Marketable securities 103,679 63,228
Accounts receivable, net of allowance for doubtful
accounts of $5,000 and $4,300, respectively 304,746 230,190
Merchandise inventory 152,749 126,217
Prepaid Income Taxes 16,386 -
Miscellaneous receivables 9,808 7,589
Deferred income taxes 6,702 6,702
Prepaid expenses 2,217 1,375
--------- ---------
Total current assets 637,275 455,048
Property and equipment, net 45,508 39,429
Investment in and advances to subsidiary 12,710 6,499
Deferred income taxes and other assets 3,928 4,939
--------- ---------
TOTAL ASSETS $ 699,421 $ 505,915
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 123,091 $ 65,657
Accrued expenses:
Compensation 29,073 27,339
Exit costs 2,136 2,219
Income taxes - 11,960
Other 8,784 7,756
--------- ---------
Total current liabilities 163,084 114,931
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 500,000 shares
authorized; 87,433 and 86,678 shares issued
respectively 874 866
Paid-in capital 172,205 102,338
Retained earnings 365,684 290,344
Unearned compensation (337) (475)
--------- ---------
Subtotal shareholders' equity 538,426 393,073
--------- ---------
Less cost of common shares in treasury, 100 shares (2,089) (2,089)
--------- ---------
Total shareholders' equity 536,337 390,984
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 699,421 $ 505,915
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
1
<PAGE> 4
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 943,342 $ 597,554 $1,807,330 $1,136,960
Cost of sales 821,121 522,807 1,575,896 994,307
--------- --------- ---------- ----------
Gross profit 122,221 74,747 231,434 142,653
Selling and administrative expenses 57,907 38,679 110,272 74,900
--------- --------- ---------- ----------
Income from operations 64,314 36,068 109,844 75,367
Interest income 2,165 961 3,920 2,003
Other expense (172) (108) (347) (221)
--------- --------- ---------- ----------
Income before income taxes 66,307 36,921 124,735 69,535
Income tax provision 26,258 14,620 49,395 27,536
--------- --------- ---------- ----------
Net income $ 40,049 $ 22,301 $ 75,340 $ 41,999
========= ========= ========== ==========
Earnings per share
Basic $ 0.46 $ 0.26 $ 0.87 $ 0.49
========= ========= ========== ==========
Diluted $ 0.44 $ 0.25 $ 0.83 $ 0.48
========= ========= ========== ==========
Weighted average number of
common shares outstanding
Basic 86,951 86,236 86,763 86,188
========= ========= ========== ==========
Diluted 91,154 87,850 90,312 87,808
========= ========= ========== ==========
</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, 1999 86,678 $ 866 $ 102,338 $ 290,344 $ (475) 200 $(2,089) $ 390,984
MPK Restricted Stock Plan forfeitures (15) 15 -
Amortization of unearned compensation 123 123
Compensatory stock option grants 26 26
Exercise of stock options 755 8 6,784 6,792
Tax benefit from stock option transactions 63,072 63,072
Net income 75,340 75,340
--------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 87,433 $ 874 $ 172,205 $ 365,684 $ (337) 200 $(2,089) $ 536,337
======================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE> 6
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 75,340 $ 41,999
Adjustments to reconcile net income to net cash provided
by / (used in) operating activities:
Depreciation 4,529 3,200
Accretion of marketable securities (1,495) (1,382)
Stock-based compensation expense 149 252
Allowance for doubtful accounts 700 815
Deferred income taxes 1,020 112
Tax benefit from stock option and restricted stock transactions 63,072 4,632
Changes in assets and liabilities:
Accounts receivable (75,256) (61,835)
Miscellaneous receivables (2,219) (2,135)
Merchandise inventory (26,532) (16,672)
Prepaid expenses (851) 403
Prepaid income taxes (16,386) - -
Accounts payable 57,434 37,082
Accrued compensation 1,734 2,813
Accrued income taxes and other expenses (10,932) 866
Accrued exit costs (83) (168)
Net cash provided by operating activities 70,224 9,982
Cash flows from investing activities:
Purchases of available-for-sale securities (26,610) (51,029)
Redemptions of available-for-sale securities 29,900 27,091
Purchases of held-to-maturity securities (91,237) (8,783)
Redemptions of held-to-maturity securities 48,991 48,431
Investment in and advances to subsidiary (6,211) (704)
Purchase of property and equipment (10,608) (4,863)
Net cash (used in) / provided by investing activities (55,775) 10,143
Cash flows from financing activities:
Proceeds from exercise of stock options 6,792 1,218
Net cash provided by financing activities 6,792 1,218
Net increase in cash 21,241 21,343
Cash and cash equivalents - beginning of period 19,747 4,230
Cash and cash equivalents - end of period $ 40,988 $ 25,573
</TABLE>
4
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
CDW Computer Centers, Inc. and its subsidiaries (collectively the
"Company") are engaged in the distribution of brand name personal computers and
related products primarily through direct marketing to end users within the
United States. The Company's primary business is conducted from a combined
sales, corporate office, warehouse and showroom facility located in Vernon
Hills, Illinois. The Company also operates sales offices in Buffalo Grove and
Chicago, Illinois, a retail showroom in Chicago, Illinois and a government sales
office in Lansdowne, Virginia.
The Company extends credit to business, government and institutional
customers under certain circumstances based upon the financial strength of the
customer. Such customers are typically granted net 30 day credit terms. The
balance of the Company's sales are made primarily through third-party credit
cards and for cash-on-delivery.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles. Such
principles were applied on a basis consistent with those reflected in the 1999
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 1999 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, 2000 and December 31,1999, the results of operations
for the three and six months ended June 30, 2000 and 1999, the cash flows for
the six months ended June 30, 2000 and 1999, and the changes in shareholders'
equity for the six months ended June 30, 2000. 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.
On April 22, 2000, the Board of Directors of the Company approved a
two-for-one stock split effected in the form of a stock dividend paid on June
21, 2000 to all common shareholders of record at the close of business on June
14, 2000. 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, 2000, were (in thousands):
<TABLE>
<CAPTION>
Gross
Unrealized
Estimated Holding Amortized
-------------------------
Fair Value Gains (Losses) Cost
-------------------------------------------------
<S> <C> <C> <C> <C>
Security
Type
Available-for-sale:
U.S. Government and Government Agency Securities $ 27,840 $ 11 $ (20) $ 27,849
-------------------------------------------------
Total available-for-sale 27,840 11 (20) 27,849
-------------------------------------------------
Held to maturity:
U.S. Government and Government Agency Securities 75,819 53 (64) 75,830
-------------------------------------------------
Total held-to-maturity 75,819 53 (64) 75,830
-------------------------------------------------
Total marketable securities $ 103,659 $ 64 $ (84) $ 103,679
=================================================
</TABLE>
The Company's investments in securities held-to-maturity at June 30, 2000
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 October 1999, the Company entered into a lease agreement for two floors
of office space totaling approximately 72,000 square feet in Chicago, Illinois.
In April 2000, the Company opened a sales office on one floor of the facility
and opened on a second floor in July 2000. The lease provides for a ten year
term, with certain expansion and renewal options.
On June 19, 2000 the Company entered into a lease agreement for two
additional floors of office space totaling approximately 72,000 square feet in
Chicago, Illinois. The floors are located in a building adjacent to the
Company's existing Chicago sales office. The Company plans to establish a sales
office in the facility with the lease schedule commencing for one floor in the
first quarter of 2001 and for the second floor in the third quarter of 2001. The
Company plans to expend between $2 million and $3 million for computer and
telecommunications equipment, furniture and improvements related to the
facility. The lease provides for a ten year term with certain expansion and
renewal options.
On June 20, 2000 the Company entered into a lease agreement commencing on
September 1, 2000, and ending in January 2002, for approximately 42,000 square
feet of office space in Lincolnshire, Illinois. The Company plans to establish a
sales office in the facility.
Minimum future rent payments for all the Company's lease obligations, including
the new Chicago and Lincolnshire facilities are as follows (in thousands):
Years Ended December 31, Amount
------------------------ ------
2000 $ 1,764
2001 3,238
2002 3,197
2003 3,225
2004 2,453
Thereafter 15,645
-----------------
$ 29,522
=================
In July 2000, the Company began construction of a 250,000 square foot
warehouse at its Vernon Hills, Illinois campus. The new warehouse is scheduled
for completion in the first quarter of 2001 and is estimated to cost between $12
million and $13 million for construction and equipment. Upon completion, the
Company's total warehouse capacity will be approximately 450,000 square feet.
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. The Company reopened the office
portion of the Buffalo Grove facility during the fourth quarter of 1998 as a
sales office. Accordingly, the Company records a proportionate share of the rent
and other operating costs to selling and administrative expenses. During the six
months ended June 30, 2000, the Company charged approximately $298,000 against
the exit accrual in cash payments for rent, real estate taxes and maintenance of
the facility. This amount was offset by approximately $215,000 received for
sub-lease payments and security deposits from a former sublessor of the Buffalo
Grove Facility. During the comparable period of 1999, the Company charged
approximately $168,000 against the exit accrual for similar costs.
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 the end of the lease term on December 31, 2003. However, the sublessee
terminated the lease in conjunction with its Chapter 11 case under the
bankruptcy laws in the first quarter of 2000 and has since vacated the premises.
The Company has elected to occupy an additional portion of the facility and is
subleasing a portion of the remaining space. The Company will continue to
evaluate the future use of the warehouse space and will adjust the remaining
exit liability as necessary.
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 line of
credit expires in June 2001, at which time the Company intends to renew the
line, and the other 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, 2000, there were no borrowings under 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 $83.0 million collateralized by
inventory purchases financed by the Flooring Companies. At June 30, 2000, all
amounts owed the Flooring Companies are included in trade accounts payable.
6. Earnings Per Share
At June 30, 2000 the Company had outstanding common shares totaling
approximately 87,233,000. 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,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Income available to
common shareholders (numerator) $ 40,049 $ 22,301 $ 75,340 $ 41,999
------------ ------------ ------------ ------------
Weighted average common
shares outstanding (denominator) 86,951 86,236 86,763 86,188
------------ ------------
------------ ------------
Basic earnings per share $ 0.46 $ 0.26 $ 0.87 $ 0.49
============ ============ ============ ============
Diluted earnings per share:
Income available to
common shareholders (numerator) $ 40,049 $ 22,301 $ 75,340 $ 41,999
------------ ------------ ------------ ------------
Weighted average common
shares outstanding 86,951 86,236 86,763 86,188
Effect of dilutive securities:
Options on common stock 4,203 1,614 3,549 1,620
------------ ------------ ------------ ------------
Total common shares and dilutive
securities (denominator) 91,154 87,850 90,312 87,808
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.44 $ 0.25 $ 0.83 $ 0.48
============ ============ ============ ============
</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.
<TABLE>
<CAPTION>
Financial Information Percentage of Net Sales
--------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 87.0 87.5 87.2 87.5
------------------------- --------------------------
Gross profit 13.0 12.5 12.8 12.5
Selling and administrative expenses 6.2 6.5 6.1 6.6
------------------------- --------------------------
Income from operations 6.8 6.0 6.7 5.9
Other income, net 0.2 0.2 0.2 0.2
------------------------- --------------------------
Income before income taxes 7.0 6.2 6.9 6.1
Income tax provision 2.8 2.5 2.7 2.4
------------------------- --------------------------
Net income 4.2 % 3.7 % 4.2 % 3.7 %
========================= ==========================
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth for the periods indicated a summary of certain of
the Company's operating statistics:
Operating Statistics Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of invoices processed 925,474 679,791 1,845,557 1,357,444
Average invoice size $1,065 $928 $1,026 $884
Number of account managers, end of period 853 617
Commercial customers serviced 135,309 117,546 203,260 178,111
Commercial customers serviced - trailing 12 months 300,226 276,311
% of sales to commercial customers 96% 93% 96% 92%
Annualized inventory turns 23 26 23 27
Accounts receivable days sales outstanding 29 33 31 34
</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>
<CAPTION>
Three Months Ended Six Months Ended
Analysis of Product Mix June 30, June 30,
2000 1999 2000 1999
--------------------------------------------
<S> <C> <C> <C> <C>
Notebook & Laptop Computers 19.6 % 20.1 % 21.0 % 19.6 %
Desktop Computers and Servers 15.3 15.2 15.1 15.5
Subtotal Computer Products 34.9 35.3 36.1 35.1
Data Storage Devices 13.2 10.3 12.0 10.2
Software 12.2 13.8 11.8 13.4
Printers 11.2 11.1 10.5 11.6
Net/Comm Products 10.0 9.4 9.8 9.4
Video 7.7 7.3 7.7 7.3
Add-On Boards/Memory 6.3 4.5 6.1 4.6
Supplies, Accessories and Other 4.5 8.3 6.0 8.4
--------------------------------------------
Total 100.0 % 100.0 % 100.0 % 100.0 %
============================================
</TABLE>
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Net sales in the second quarter of 2000 increased 57.9% to a record $943.3
million compared to $597.6 million in the second quarter of 1999. The growth in
net sales is primarily attributable to a higher concentration of commercial
accounts, a higher level of sales per active account and increases in the
average invoice size and number of invoices processed. Sales to commercial
accounts, including business, government, educational and institutional
customers, increased to 96.3% of net sales in the second quarter of 2000 from
93.0% in the second quarter of 1999. The number of active commercial customers
increased 15.1% to 135,000 in the second quarter of 2000 from 117,000 in the
second quarter of 1999. For the three months ended June 30, 2000, the average
invoice size increased 14.7% to $1,065 and the number of invoices processed
increased 36.1% to 925,000.
The average selling price of desktop and server CPU's increased 8.8% and
the average selling price of notebook CPU's increased 4.7% from the second
quarter of 1999. The Company believes there may be future decreases in prices
for personal computers and related products. Such decreases require the Company
to sell more units in order to maintain or increase the level of sales. The
Company's sales growth rate and operating results could be adversely affected by
future manufacturer price reductions or if the Company's sales and marketing
efforts fail to increase the level of unit sales. Sales of Compaq, Hewlett
Packard, IBM, Microsoft and Toshiba products comprise a substantial portion of
the Company's sales. The loss of any of these, or any other key vendors, could
have an adverse effect on the Company's results from operations. The statement
concerning future prices, sales and results from operations are forward looking
statements that involve certain risks and uncertainties such as stated above.
<PAGE>
The fastest growing product categories in terms of sales dollars and the
respective growth rates in the second quarter of 2000 compared to the second
quarter of 1999 were:
Product Category Growth Rate
---------------- -----------
Add-On Boards & Memory 122.3%
Data Storage Devices 104.0%
Network and Communication Products 67.8%
Video 66.3%
Input Devices 64.3%
Demand for certain products and the growth of certain product categories
are driven by advances in technology and the development of new products and
applications by the industry manufacturers, and acceptance of these new
technologies and products by end-users. Any slowdown in the rate of
technological advancement and new product development by industry manufacturers
could have a material adverse effect on the Company's future sales growth.
Gross profit as a percentage of net sales for the three months ended June
30, 2000 increased to 13.0% as compared to 12.5% in the second quarter of 1999.
On a forward-looking basis, future gross profit margins may decline from recent
levels. 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. Price protection and
rebate programs are at the discretion of the manufacturers, who may make changes
that limit the amount of price protection or rebates for which the Company is
eligible. Such changes could have a negative impact on gross margin in future
periods. Additionally, vendor rebate programs are generally dependent on
achieving certain goals and objectives and there is no certainty that the
established goals and objectives will be attained.
Selling and administrative expenses, which include net advertising expense
and other selling administrative expenses declined to 6.2% of net sales in the
three months ended June 30, 2000 from 6.5% in the same period of 1999.
Net advertising expense decreased as a percentage of net sales to 0.47% for
the three months ended June 30, 2000 from 0.57% in the same quarter of the prior
year. Gross advertising expense increased $6.0 million, while decreasing as a
percentage of net sales to 2.4% from 2.8% in the second quarter of 1999. 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 2000. Cooperative
advertising reimbursements decreased as a percentage of net sales to 1.9% of net
sales in the second quarter of 2000 from 2.2% in the second quarter of 1999.
Cooperative advertising reimbursements as a percentage of net sales may
fluctuate in future periods 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 decreased to 5.7% of net sales in
the second quarter of 2000 from 5.9% in the same period of 1999. The decline
resulted from decreases in non-sales payroll and related coworker costs, all as
a percentage of net sales. As of June 30, 2000, there were 853 sales account
managers, an increase of 38.3% from 617 sales account managers as of June 30,
1999. Approximately 75% of the 853 sales account managers had less than 24
months experience and 55% had fewer than 12 months, as compared to 74% and 52%
at June 30, 1999. The Company plans to increase the number of sales account
managers to approximately 1,100 by December 31, 2000. As a result of the planned
expansion of the sales force, the new sales offices and the new warehouse, the
Company's selling and administrative costs may increase as a percentage of net
sales in future periods.
The Company has recently entered into lease agreements for sales office
space, primarily in downtown Chicago, Illinois. The following table summarizes
these lease agreements and the anticipated financial impact (see Footnote 4 to
the financial statements for further discussion):
<TABLE>
<CAPTION>
Planned Aggregate Future Anticipated
Square Lease Lease Minimum Capital
Location Footage Commencement Term Lease Payments Expenditures
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
120 S. Riverside
Chicago, IL 72,000 2nd Quarter, 2000 10 years $12.1 million $8 - $10 million
10 S. Riverside
1st and
Chicago, IL 72,000 2nd Quarter, 2001 10 years $14.1 million $2 - $3 million
Lincolnshire, IL 42,000 3rd Quarter, 2000 17 months $710,000 Not significant
</TABLE>
In the first quarter of 2000, the Compensation and Stock Option Committee
approved a new format for executive incentive compensation, which was approved
by shareholders at the Annual Meeting of Shareholders on May 24, 2000. Under the
new format, the committee eliminated the executive incentive bonus pool and
created the Senior Management Incentive Plan ("SMIP") for all officers and other
senior management personnel. The SMIP provides for targeted levels of incentive
compensation based upon the percentage increase in operating income over the
prior year. Although operating income increased in the second quarter of 2000,
expense recognized under the new program was lower as a percentage of net sales
than all incentive compensation for the same group in the prior year.
Interest income, net of other expenses, increased to $2.0 million in the
second quarter of 2000 compared to $853,000 in the second quarter of 1999.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the three months ended June 30, 2000 and 1999.
Net income for the three months ended June 30, 2000, was $40.0 million, a
79.6% increase over $22.3 million for the three months ended June 30, 1999.
Diluted earnings per share was $0.44 for the three months ended June 30, 2000
and $0.25 in the same period of 1999, an increase of 76.0%. 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 June 21, 2000.
Six months ended June 30, 2000 compared to Six months ended June 30, 1999
Net sales for the first six months of 2000 increased 59.0% to a record $1.8
billion compared to $1.1 billion in the same period of 1999. The growth in net
sales is primarily attributable to a higher concentration of commercial
accounts, a higher level of sales per active account and increases in the
average invoice size and number of invoices processed. Sales to commercial
accounts, including business, government, educational and institutional
customers, increased to 95.5% of net sales for the first six months of 2000 from
91.9% in the same period of 1999. The number of active commercial customers
increased 14.1% to 203,000 in the first half of 2000 from 178,000 in the same
period of 1999. For the six months ended June 30, 2000, the average invoice size
increased 16.0% to $1,026 and the number of invoices processed increased 36.0%
to 1,846,000. Notebook computers continue to represent the largest component of
the Company's product mix.
The average selling price of desktop and server CPU's increased 8.4% and
the average selling price of notebook CPU's increased 7.3% from the first half
of 1999. The Company believes there may be future decreases in prices for
personal computers and related products. Such decreases require the Company to
sell more units in order to maintain or increase the level of sales. The
Company's sales growth rate and operating results could be adversely affected by
future manufacturer price reductions or if the Company's sales and marketing
efforts fail to increase the level of unit sales. Sales of Compaq, Hewlett
Packard, IBM, Microsoft and Toshiba products comprise a substantial portion of
the Company's sales. The loss of any of these, or any other key vendors, could
have an adverse effect on the Company's results from operations. The statement
concerning future prices, sales and results from operations are forward looking
statements that involve certain risks and uncertainties such as stated above.
The fastest growing product categories in terms of sales dollars and the
respective growth rates for the six months ended June 30, 2000, compared to the
first half of 1999 were:
Product Category Growth Rate
---------------- -----------
Add-On Boards & Memory 114.4%
Data Storage Devices 90.1%
Notebook and Laptop Computers 72.1%
Video 68.3%
Network and Communication Products 66.0%
Demand for certain products and the growth of certain product categories
are driven by advances in technology and the development of new products and
applications by the industry manufacturers, and acceptance of these new
technologies and products by end-users. Any slowdown in the rate of
technological advancement and new product development by industry manufacturers
could have a material adverse effect on the Company's future sales growth.
Gross profit as a percentage of net sales for the six months ended June 30,
2000 increased to 12.8% as compared to 12.5% same period in 1999. On a
forward-looking basis, future gross profit margins may decline from recent
levels. 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. Price protection and
rebate programs are at the discretion of the manufacturers, who may make changes
that limit the amount of price protection or rebates for which the Company is
eligible. Such changes could have a negative impact on gross margin in future
periods. Additionally, vendor rebate programs are generally dependent on
achieving certain goals and objectives and there is no certainty that the
established goals and objectives will be attained.
Selling and administrative expenses, which include net advertising expense
and other selling administrative expenses declined to 6.1% of net sales in the
six months ended June 30, 2000 from 6.6% in the same period of 1999.
Net advertising expense decreased as a percentage of net sales to 0.48% for
the six months ended June 30, 2000 from 0.67% in the same period of the prior
year. Gross advertising expense increased $11.7 million, while decreasing as a
percentage of net sales to 2.4% from 2.8% for the six months ended of 1999. 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 for the six months ended June 30, 2000.
Cooperative advertising reimbursements decreased as a percentage of net sales to
1.9% of net sales for the first six months of 2000 from 2.1% in the same period
of 1999. Cooperative advertising reimbursements as a percentage of net sales may
fluctuate in future periods 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 decreased to 5.6% of net sales for
the first six months of 2000 from 5.9% in the same period of 1999. The decline
resulted from decreases in non-sales payroll, related coworker costs and
occupancy costs, all as a percentage of net sales. As of June 30, 2000, there
were 853 sales account managers, an increase of 38.3% from 617 sales account
managers as of June 30, 1999. Approximately 75% of the 853 sales account
managers had less than 24 months experience and 55% had fewer than 12 months, as
compared to 74% and 52% at June 30, 1999. The Company plans to increase the
number of sales account managers to approximately 1,100 by December 31, 2000.
In the first quarter of 2000 the Compensation and Stock Option Committee
approved a new format for executive incentive compensation, which was approved
by shareholders at the Annual Meeting of Shareholders on May 24, 2000. Under the
new format, the committee eliminated the executive incentive bonus pool and
created the Senior Management Incentive Plan ("SMIP") for all officers and other
senior management personnel. The SMIP provides for targeted levels of incentive
compensation based upon the percentage increase in operating income over the
prior year. Although operating income increased in the first six months of 2000,
expense recognized under the new program was lower as a percentage of net sales
than all incentive compensation for the same group in the prior year.
Interest income, net of other expenses, increased to $3.6 million in the
first six months of 2000 compared to $1.8 million in the same period of 1999.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the six months ended June 30, 2000 and 1999.
Net income for the six months ended June 30, 2000, was $75.3 million, a
79.4% increase over $42.0 million for the six months ended June 30, 1999.
Diluted earnings per share was $0.83 for the six months ended June 30, 2000 and
$0.48 in the same period of 1999, an increase of 72.9%. 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 June 21, 2000.
Seasonality
Although the Company has historically experienced variability in the rates
of sales growth, it has not historically experienced seasonality in its
business. However, the buying patterns of government customers typically result
in seasonally high revenues during the third quarter of the year. If sales to
these customers increase as a percentage of overall sales, the Company may
experience some seasonality.
Liquidity and Capital Resources
Working Capital
The Company has historically financed its operations and capital
expenditures primarily through cash flow from operations and public offerings of
common stock. At June 30, 2000, the Company had cash, cash equivalents and
marketable securities of $144.7 million and working capital of $474.2 million,
representing an increase of $61.7 million in cash, cash equivalents and
marketable securities and an increase of $134.1 million in working capital from
December 31, 1999.
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 2001, 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, 2000, there were no borrowings against either of the credit facilities.
The Company's current and anticipated uses of its cash, cash equivalents
and marketable securities are to fund the growth in working capital and capital
expenditures necessary to support future growth in sales. The Company believes
that the funds held in cash, cash equivalents and marketable securities, and
funds available under the credit facilities will be sufficiento fund the
Company's working capital and cash requirements at least through June 30, 2001.
Cash flows for the six months ended June 30, 2000
Net cash provided by operating activities for the six months ended June 30,
2000, was $70.2 million. The primary factors that historically affect the
Company's cash flows from operations are accounts receivable, merchandise
inventory and accounts payable. In addition, in the first six months of 2000 the
Company recorded a tax benefit of $63.1 million as a result of the exercise of
stock options and vesting of restricted stock by coworkers during the period
which resulted in a prepaid income tax balance as of June 30, 2000 of $16.4
million. The increase in accounts receivable increased due to sales volume and
an increase to 75.3% in the percentage of net sales generated from commercial
accounts with open credit terms for the six months ended June 30, 2000 from
68.9% for the same period of 1999. Days sales outstanding at June 30, 2000 was
30.7 as compared to 28.6 at December 31, 1999. Inventory increased during the
period in response to increased sales volume and higher levels of inventory
in-transit. Annualized inventory turnover decreased to approximately 23 times
for the six months ended June 30, 2000 from 27 for the six months ended June 30,
1999. The increase in accounts payable reflects the increase in inventory levels
as well as the timing of payments to vendors at the end of the respective
periods.
Net cash used in investing activities for the six months ended June 30,
2000 was $55.8 million, including $39.0 million for investments in marketable
securities, $10.6 million used for capital expenditures and $6.2 million used
for loans to CDW Leasing, L.L.C. (CDW-L). The capital expenditures made by the
Company were primarily related to the purchase of furniture, data processing and
telephone equipment for the new Chicago, Illinois sales office. The funds
advanced to CDW-L relate primarily to funds loaned to the subsidiary pursuant to
a secured loan agreement to fund new leases initiated by CDW-L.
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 and
cooperative advertising reimbursements are forward-looking statements that
involve certain risks and uncertainties, as specified herein.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change from the information provided in
Item 7a of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
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 24, 2000.
(b) The names of all Directors of the Company are set forth in (c) below.
(c) Five 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 32,724,933 25,715 -
- Gregory C. Zeman 32,724,933 25,715 -
- Daniel B. Kass 32,724,933 25,715 -
- Joseph Levy, Jr. 32,724,933 25,715 -
- Michelle L. Collins 32,724,933 25,715 -
- Casey G. Cowell 32,724,933 25,715 -
- Donald P. Jacobs 32,724,933 25,715 -
- Brian E. Williams 32,724,933 25,715 -
2. Ratification of Selection of Independent Accountants
The selection of PricewaterhouseCoopers LLP, independent public
accountants, as auditors of the Company for the year ended
December 31, 2000.
Votes For Votes Against Abstentions
32,674,659 9,316 66,673
<PAGE>
3. Proposal to Increase Authorized Number of Shares of Common Stock
The approval of an amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of
common stock from 75,000,000 to 500,000,000.
Votes For Votes Against Abstentions
28,019,287 4,663,862 67,499
4. Proposal to Approve the CDW 2000 Incentive Stock Option Plan
The approval of the CDW Incentive Stock Option Plan for 2000.
Votes For Votes Against Abstentions Unvoted
24,796,804 4,397,637 82,120 3,474,087
5. Proposal to Approve the CDW Senior Management Incentive Plan
The approval of the new CDW Senior Management Incentive Plan.
Votes For Votes Against Abstentions Unvoted
28,602,032 590,206 84,323 3,474,087
Item 5. Other information
The Company announced during the first quarter of 2000 that
Michael P. Krasny, the Company's Chairman and CEO, and Gregory P.
Zeman, the Company's President and a member of the Board of
Directors, decided, with the full support of the Board of
Directors, to expand the depth of the Company's management team
and have commenced a search to hire a new Chief Executive Officer.
Upon hiring and after transitioning the new CEO, Mr. Krasny will
retain his role as Chairman of the Board and concentrate his
activities on future vision and corporate culture. Mr. Zeman will
become Vice Chairman after the transition and focus on managing
strategic vendor relationships. CDW has retained the Chicago
office of Russell Reynolds Associates to conduct the search.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10 (bbb) Revolving Note between the Company and LaSalle National
Bank dated June 28, 2000
10 (ccc) Lease Agreement dated June 19, 2000 between the Company
as Lessee and Solano Associates as Lessor relating to the
office space located at 120 S. Riverside Plaza, Chicago,
Illinois
27 (a) Financial Data Schedule (for the three months ended
June 30, 2000)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
June 30, 2000.
<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 August 10, 2000 /s/ Harry J. Harczak, Jr.
--------------------- --------------------------
Harry J. Harczak, Jr.
Chief Financial Officer &
Treasurer
Date August 10, 2000 /s/ Sandra M. Rouhselang
--------------------- --------------------------
Sandra M. Rouhselang
Controller
18
<PAGE>
Index to Exhibits
10 (bbb) REVOLVING NOTE BETWEEN THE COMPANY AND LASALLE NATIONAL BANK
DATED JUNE 28, 2000
10 (ccc) LEASE AGREEMENT DATED JUNE 19, 2000 BETWEEN THE COMPANY AS LESSEE
AND SOLANO ASSOCIATES AS LESSOR
27 Financial Data Schedule
