<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 13, 2000, 87,454,771 common shares were issued and 87,254,771
were outstanding.
<PAGE>
CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
-----------
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 2000 and 1999 2
Condensed Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 2000 3
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 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 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. Other Information
Item 1. Legal Proceedings 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>
September 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets :
Cash and cash equivalents $ 20,557 $ 19,747
Marketable securities 126,576 63,228
Accounts receivable, net of allowance for doubtful
accounts of $6,000 and $4,300, respectively 348,956 230,190
Merchandise inventory 165,944 126,217
Miscellaneous receivables 16,458 7,589
Deferred income taxes 6,702 6,702
Prepaid expenses 2,186 1,375
Total current assets 687,379 455,048
Property and equipment, net 51,844 39,429
Investment in and advances to subsidiary 5,294 6,499
Deferred income taxes and other assets 3,922 4,939
TOTAL ASSETS $ 748,439 $ 505,915
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 107,972 $ 65,657
Accrued expenses :
Compensation 33,602 27,339
Exit costs 2,000 2,219
Income taxes 12,233 11,960
Other 10,372 7,756
Total current liabilities 166,179 114,931
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; 87,445 and 86,678 shares
issued, respectively 874 866
Paid-in capital 173,131 102,338
Retained earnings 410,614 290,344
Unearned compensation (270) (475)
Subtotal shareholders' equity 584,349 393,073
Less cost of common shares in treasury, 200 shares (2,089) (2,089)
Total shareholders' equity 582,260 390,984
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 748,439 $ 505,915
================== ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ----------------------------------------
2000 1999 2000 1999
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Net sales $ 1,028,051 $ 683,012 $ 2,835,381 $ 1,819,972
Cost of sales 896,917 597,398 2,472,813 1,591,705
----------------- ------------------ ----------------- ------------------
Gross profit 131,134 85,614 362,568 228,267
Selling and administrative expenses 59,358 43,523 169,630 118,423
----------------- ------------------ ----------------- ------------------
Income from operations 71,776 42,091 192,938 109,844
Interest income 2,734 1,363 6,654 3,366
Other expense, net (123) (96) (470) (317)
----------------- ------------------ ------------------ ------------------
Income before income taxes 74,387 43,358 199,122 112,893
Income tax provision 29,457 17,170 78,852 44,706
----------------- ------------------ ------------------ ------------------
Net income $ 44,930 $ 26,188 $ 120,270 $ 68,187
================= ================== ================== ==================
Earnings per share Basic $ 0.52 $ 0.30 $ 1.38 $ 0.79
================= ================== ================== ==================
Diluted $ 0.49 $ 0.30 $ 1.32 $ 0.78
================= ================== ================== ==================
Weighted average number of
common shares outstanding
Basic 87,236 86,300 86,858 86,208
================= ================== ================== ==================
Diluted 91,872 88,216 90,832 87,944
================= ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Total
Common Shares Retained Unearned Treasury Shares Shareholders'
Shares Amount Paid-in 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 190 190
Compensatory stock option grants 26 26
Exercise of stock options 767 8 6,909 6,917
Tax benefit from stock option and
restricted stock transactions 63,873 63,873
Net income 120,270 120,270
Balance at September 30, 2000 87,445 $ 874 $ 173,131 $ 410,614 $ (270) 200 $ (2,089) $ 582,260
================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
Cash flows from operating activities:
<S> <C> <C>
Net income $ 120,270 $ 68,187
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 7,316 5,143
Accretion of marketable securities (2,346) (2,184)
Stock-based compensation expense 216 288
Allowance for doubtful accounts 1,700 1,115
Deferred income taxes 1,028 698
Tax benefit from stock option and restricted stock transactions 63,873 11,681
Changes in assets and liabilities:
Accounts receivable (120,466) (91,507)
Miscellaneous receivables and other assets (8,626) (491)
Merchandise inventory (39,727) (22,750)
Prepaid expenses (822) 191
Accounts payable 42,315 57,589
Accrued compensation 6,263 4,276
Accrued income taxes and other expenses 2,889 (4,092)
Accrued exit costs (219) (453)
Net cash provided by operating activities 73,664 27,691
Cash flows from investing activities:
Purchases of available-for-sale securities (40,562) (66,703)
Redemptions of available-for-sale securities 45,900 44,292
Purchases of held-to-maturity securities (130,781) (50,020)
Redemptions of held-to-maturity securities 64,441 64,511
Investment in and advances to subsidiary (15,477) (3,286)
Repayment of advances from subsidiary 16,439 631
Purchase of property and equipment (19,731) (6,596)
Net cash used in investing activities (79,771) (17,171)
Cash flows from financing activities:
Proceeds from exercise of stock options 6,917 1,546
Net cash provided by financing activities 6,917 1,546
Net increase in cash 810 12,066
Cash and cash equivalents - beginning of period 19,747 4,230
Cash and cash equivalents - end of period $ 20,557 $ 16,296
================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
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,
Lincolnshire 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 accounting principles generally accepted in the
United States. 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 September 30, 2000 and December 31,1999,
the results of operations for the three and nine months ended September 30, 2000
and 1999, the cash flows for the nine months ended September 30, 2000 and 1999,
and the changes in shareholders' equity for the nine months ended September 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 September 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 $ 25,877 $ 5 $ (9) $ 25,881
-------------------------------------------------
Total available-for-sale 25,877 5 (9) 25,881
-------------------------------------------------
Held to maturity:
U.S. Government and Government Agency Securities 100,786 110 (19) 100,695
-------------------------------------------------
Total held-to-maturity 100,786 110 (19) 100,695
-------------------------------------------------
Total marketable securities $ 126,663 $ 115 $ (28) $ 126,576
=================================================
</TABLE>
Estimated fair values of marketable securities are based on quoted market
prices. The Company's investments in securities held-to-maturity at September
30, 2000 by contractual maturity were:
Estimated Amortized
Fair Value Cost
-------------- --------------
Due in one year or less $ 99,775 $ 99,684
Due in greater than one year 1,011 1,011
-------------- --------------
Total held-to-maturity $ 100,786 $ 100,695
============== ==============
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.
In June 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 $3 million and $4 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.
In June 2000, the Company entered into a short term lease agreement
commencing on September 1, 2000, and ending on January 31, 2002, for
approximately 42,000 square feet of office space in Lincolnshire, Illinois. The
Company opened a sales office in the facility in October 2000.
In October 2000, the Company entered into a ten-year lease agreement,
commencing March 1, 2001, for an office building totaling approximately 156,000
square feet in Mettawa, Illinois. The building is located within five miles of
the Company's headquarters in Vernon Hills, Illinois and will house sales,
customer service, training and sales recruiting personnel. The Company plans to
expend between $5 million and $6 million for computer and telecommunications
equipment, furniture and improvements related to the facility.
Minimum future rent payments for all the Company's lease obligations, including
the new Chicago, Lincolnshire and Mettawa facilities are as follows (in
thousands):
Years Ended December 31, Amount
2001 5,958
2002 6,535
2003 6,655
2004 5,978
Thereafter 38,722
-----------------
$ 63,848
=================
In July 2000, the Company began construction of a 250,000 square foot
warehouse addition 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 $16 million and $17 million for construction and equipment of which $4.3
million has been incurred as of September 30, 2000. 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
nine months ended September 30, 2000, the Company charged approximately $219,000
against the exit accrual. This amount included $445,000 in cash payments for
rent, real estate taxes and maintenance of the facility, offset by approximately
$226,000 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 $453,000 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.
<PAGE>
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 September 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 $77.5 million collateralized by
inventory purchases financed by the Flooring Companies. At September 30, 2000,
all amounts owed the Flooring Companies are included in trade accounts payable.
6. Earnings Per Share
At September 30, 2000 the Company had outstanding common shares totaling
approximately 87,245,000. 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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Income available to
common shareholders (numerator) $ 44,930 $ 26,188 $ 120,270 $ 68,187
------------ ------------ ------------ ------------
Weighted average common
shares outstanding (denominator) 87,236 86,300 86,858 86,208
------------ ------------ ------------ ------------
Basic earnings per share $ 0.52 $ 0.30 $ 1.38 $ 0.79
============ ============ ============ ============
Diluted earnings per share:
Income available to
common shareholders (numerator) $ 44,930 $ 26,188 $ 120,270 $ 68,187
------------ ------------ ------------ ------------
Weighted average common
shares outstanding 87,236 86,300 86,858 86,208
Effect of dilutive securities:
Options on common stock 4,636 1,916 3,974 1,736
------------ ------------ ------------ ------------
Total common shares and dilutive
securities (denominator) 91,872 88,216 90,832 87,944
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.49 $ 0.30 $ 1.32 $ 0.78
============ ============ ============ ============
</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 Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 87.2 87.5 87.2 87.5
---------- ---------- --------- ---------
Gross profit 12.8 12.5 12.8 12.5
Selling and administrative expenses 5.8 6.4 6.0 6.5
---------- ---------- --------- ---------
Income from operations 7.0 6.1 6.8 6.0
Other income, net 0.3 0.2 0.2 0.2
---------- ---------- --------- ---------
Income before income taxes 7.2 6.3 7.0 6.2
Income tax provision 2.9 2.5 2.8 2.5
---------- ---------- --------- ---------
Net income 4.4 % 3.8 % 4.2 % 3.7 %
========== ========== ========= =========
</TABLE>
The following table sets forth for the periods indicated a summary of certain of
the Company's operating statistics:
<TABLE>
<CAPTION>
Operating Statistics
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of invoices processed 981,491 770,356 2,827,047 2,127,800
Average invoice size $1,091 $931 $1,049 $901
Number of account managers, end of period 1,052 720
Commercial customers serviced 141,850 126,353 257,648 233,190
Commercial customers serviced - trailing 12 months 304,095 277,916
% of sales to commercial customers 96.3% 93.5% 95.9% 92.4%
Annualized inventory turns 23 28 23 28
Accounts receivable days sales outstanding 31 33 34 36
Direct web sales (000's) $120,455 $45,095 $291,309 $109,668
Average daily unique web site users 72,584 69,106 82,015 65,226
</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>
Analysis of Product Mix
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------
<S> <C> <C> <C> <C>
Notebook & Laptop Computers 19.3 % 21.3 % 20.4 % 20.2 %
Desktop Computers and Servers 14.5 14.1 14.9 15.0
--------- -------- -------- --------
Subtotal Computer Products 33.8 35.4 35.3 35.2
--------- -------- -------- --------
Data Storage Devices 13.5 11.0 12.6 10.5
Printers 11.8 11.1 11.0 11.4
Software 11.6 13.0 11.7 13.3
Net/Comm Products 10.1 9.8 9.9 9.6
Video 7.9 7.1 7.7 7.2
Add-On Boards/Memory 6.2 4.7 6.1 4.6
Input Devices 2.6 1.9 2.5 2.2
Supplies, Accessories and Other 2.5 6.0 3.2 6.0
--------- -------- -------- --------
Total 100.0 % 100.0 % 100.0 % 100.0 %
========= ======== ======== ========
</TABLE>
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Net sales in the third quarter of 2000 increased 50.5% to a record $1.028
billion compared to $683.0 million in the third 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 third quarter of 2000 from
93.5% in the third quarter of 1999. The number of active commercial customers
increased 12% to 141,850 in the third quarter of 2000 from 126,353 in the third
quarter of 1999. For the three months ended September 30, 2000, the average
invoice size increased 17% to $1,091 and the number of invoices processed
increased 27% to 981,491.
The Company relies primarily on its dedicated sales force to service its
customers and also believes its internet web site, www.cdw.com, is an integral
part of its business. Direct web sales are defined as those orders which are
entered directly on-line by customers after using the web site and/or talking
with a sales account manager to obtain product, pricing and other relevant
information. During the third quarter of 2000, direct web sales grew 167% to
$120.5 million from $45.1 million in the same period of 1999. The number of
average daily unique web site users grew 5% to 72,584 in the third quarter of
2000 from 69,106 in the same period of 1999.
The average selling price of desktop CPU's increased 4.1% while those of
server CPU's increased 11.4% and the average selling price of notebook CPU's
increased 9.4% from the third 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 statements 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 in the third quarter of 2000 compared to the third
quarter of 1999 were:
Product Category Growth Rate
Input Devices 111.9%
Add-On Boards & Memory 98.6%
Data Storage Devices 85.0%
Video 69.1%
Printers 60.9%
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
September 30, 2000 increased to 12.8% as compared to 12.5% in the third 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 5.8% of net sales in the
three months ended September 30, 2000 from 6.4% in the same period of 1999.
Net advertising expense decreased as a percentage of net sales to 0.2% for
the three months ended September 30, 2000 from 0.5% in the same quarter of the
prior year. Gross advertising expense increased $8.9 million to 2.4% of net
sales, consistent with the level achieved in the third 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 third quarter of 2000. Cooperative
advertising reimbursements increased as a percentage of net sales to 2.2% of net
sales in the third quarter of 2000 from 1.9% in the third quarter of 1999.
Cooperative advertising reimbursements as a percentage of net sales fluctuate
based on the level of vendor participation achieved and collection experience.
These reimbursements are likely to be lower in future periods than the level
achieved in the third quarter. 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 5.3% of net sales in
the third quarter of 2000 from 5.5% 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 September 30, 2000, there were 1,052 sales
account managers, an increase of 46.1% from 720 sales account managers as of
September 30, 1999. Approximately 77% of the 1,052 sales account managers had
less than 24 months experience and 56% had fewer than 12 months, as compared to
76% and 56% at September 30, 1999. The Company plans to increase the number of
sales account managers to approximately 1,100 by December 31, 2000 and more than
1,400 as of December 31, 2001. 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 in downtown Chicago, Illinois and in locations near the Vernon Hills
headquarters. The following table summarizes these lease agreements and the
related financial commitment (see Footnote 4 to the financial statements for
further discussion):
<TABLE>
<CAPTION>
Aggregate
Future Approximate
Square Lease Lease Minimum Capital
Location Footage Commencement Term Lease Payments Expenditures
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
120 S. Riverside 2nd and
Chicago, IL 72,000 3rd Quarter, 2000 10 years $12.1 million $6 million
---------------------------------------------------------------------------------------------------------------
Lincolnshire, IL 42,000 3rd Quarter, 2000 17 months $710,000 Not significant
---------------------------------------------------------------------------------------------------------------
10 S. Riverside 1st and
Chicago, IL 72,000 2nd Quarter, 2001 10 years $14.1 million $3 - $4 million
---------------------------------------------------------------------------------------------------------------
Mettawa, IL 156,000 1st Quarter, 2001 10 years $41.3 million $5 - $6 million
---------------------------------------------------------------------------------------------------------------
</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. Expense recognized under the new program in the third quarter of
2000 was lower as a percentage of net sales than all incentive compensation for
the same group in the same period of the prior year.
Interest income, net of other expenses, increased to $2.6 million in the
third quarter of 2000 compared to $1.3 million in the third quarter of 1999 due
to higher levels of cash available for investment and an increase in the rate of
interest being earned.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the three months ended September 30, 2000 and 1999.
Net income for the three months ended September 30, 2000, was $44.9
million, a 71.6% increase over $26.2 million for the three months ended
September 30, 1999. Diluted earnings per share was $0.49 for the three months
ended September 30, 2000 and $0.30 in the same period of 1999, an increase of
63.3%. All per share amounts have been adjusted to reflect the two-for-one stock
split effected in the form of a stock dividend paid on June 21, 2000.
Nine months ended September 30, 2000 compared to Nine months ended September 30,
1999
Net sales for the first nine months of 2000 increased 55.8% to a record
$2.8 billion compared to $1.8 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 95.9% of net sales for the first nine months of 2000
from 92.4% in the same period of 1999. The number of active commercial customers
increased 10.5% to 257,648 in the first three quarters of 2000 from 233,190 in
the same period of 1999. For the nine months ended September 30, 2000, the
average invoice size increased 16.4% to $1,049 and the number of invoices
processed increased 32.9% to 2,827,047.
The Company relies primarily on its dedicated sales force to service its
customers and also believes its internet web site, www.cdw.com, is an integral
part of its business. Direct web sales are defined as those orders which are
entered directly on-line by customers after using the web site and/or talking
with a sales account manager to obtain product, pricing and other relevant
information. During the first nine months of 2000, direct web sales grew 166% to
$291.3 million from $109.7 million in the same period of 1999. The number of
average daily unique web site users grew 26% to 82,015 in the first nine months
of 2000 from 65,226 in the same period of 1999.
The average selling price of desktop CPU's increased 1.2% while those of
server CPU's increased 14.8% and the average selling price of notebook CPU's
increased 8.0% from the first three quarters 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 statements 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 nine months ended September 30, 2000, compared
to the first three quarters of 1999 were:
Product Category Growth Rate
Add-On Boards & Memory 108.4%
Data Storage Devices 88.1%
Input Devices 78.2%
Video 68.6%
Network and Communication Products 61.9%
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 nine months ended
September 30, 2000 increased to 12.8% as compared to 12.5% for the 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 6.0% of net sales in the
nine months ended September 30, 2000 from 6.5% in the same period of 1999.
Net advertising expense decreased as a percentage of net sales to 0.4% for
the nine months ended September 30, 2000 from 0.6% in the same period of the
prior year. Gross advertising expense increased $20.6 million, while decreasing
as a percentage of net sales to 2.4% from 2.6% for the nine 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 nine months ended September 30, 2000.
Cooperative advertising reimbursements as a percentage of net sales were
consistent with the first nine months of 1999 at 2.0%. 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 5.2% of net sales for
the first nine months of 2000 from 5.6% 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 September 30, 2000,
there were 1,052 sales account managers, an increase of 46.1% from 720 sales
account managers as of September 30, 1999. Approximately 77% of the 1,052 sales
account managers had less than 24 months experience and 56% had fewer than 12
months, as compared to 76% and 56% at September 30, 1999. The Company plans to
increase the number of sales account managers to approximately 1,100 by December
31, 2000 and more than 1,400 as of December 31, 2001.
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. Expense recognized under the new program in the first nine months of
2000 was lower as a percentage of net sales than all incentive compensation for
the same group in the same period of the prior year.
Interest income, net of other expenses, increased to $6.2 million in the
first nine months of 2000 compared to $3.0 million in the same period of 1999
due to higher levels of cash available for investment and an increase in the
rate of interest being earned.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the nine months ended September 30, 2000 and 1999.
Net income for the nine months ended September 30, 2000, was $120.3
million, a 76.4% increase over $68.2 million for the nine months ended September
30, 1999. Diluted earnings per share was $1.32 for the nine months ended
September 30, 2000 and $0.78 in the same period of 1999, an increase of 69.2%.
All per share amounts have been adjusted to reflect the two-for-one stock split
effected in the form of a stock dividend paid on 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. During the third quarter of 2000, sales to government customers
increased at a higher rate than sales to other customer types as the buying
patterns of government customers typically result in seasonally high revenues
during the third quarter of the year. If sales to these customers continue to
increase as a percentage of overall sales, the Company may experience increased
seasonality in future periods.
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 September 30, 2000, the Company had cash, cash equivalents and
marketable securities of $147.1 million and working capital of $521.2 million,
representing an increase of $64.2 million in cash, cash equivalents and
marketable securities and an increase of $181.1 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
September 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 plans to
significantly expand its facilities in 2000 and 2001 as discussed in Footnote 4
to the financial statements. The Company anticipates expenditures related to
these expansions to total between $24 million and $27 million, of which
approximately $4.3 million has been incurred as of September 30, 2000. The
Company believes that the funds held in cash, cash equivalents and marketable
securities, and funds available under the credit facilities will be sufficient
to fund the Company's working capital and cash requirements at least through
September 30, 2001.
Cash flows for the nine months ended September 30, 2000
Net cash provided by operating activities for the nine months ended
September 30, 2000, was $73.7 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 nine
months of 2000 the Company recorded a tax benefit of $63.9 million as a result
of the exercise of stock options and vesting of restricted stock by coworkers
during the period. Accounts receivable increased due to sales volume and an
increase to 75.8% in the percentage of net sales generated from commercial
accounts with open credit terms for the nine months ended September 30, 2000 as
compared with 69.5% for the same period of 1999. Days sales outstanding at
September 30, 2000 was 34 as compared to 29 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 nine months ended September 30, 2000 from 28 for
the nine months ended September 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 nine months ended September
30, 2000 was $79.8 million, including $61.0 million for investments in
marketable securities, $19.7 million used for capital expenditures. 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 and construction of the new Vernon Hills warehouse. The Company
advanced $15.5 million to CDW Leasing L.L.C. (CDW-L), a 50/50 joint venture
between CDW and First Portland, during the nine months ended September 30, 2000.
During the third quarter, CDW-L obtained a financing commitment for $25 million
from a financial institution and repaid $16.4 million of advances from CDW. CDW
is committed to loan up to $10 million to CDW-L to fund new leases initiated by
CDW-L. The terms of the loan provide for monthly interest payments to the
Company based on the 90 day LIBOR rate plus 2.2%. The investment in and loan to
CDW-L at September 30, 2000 was $5.3 million.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10 (ddd) Lease Agreement dated June October 3, 2000
between the Company as Lessee and Hamilton
Partners as Lessor relating to the office space
located at Woodland Falls I, Mettawa, Illinois
10 (eee) Amendment to Articles of Incorporation,
incorporated by reference from the exhibits filed
with the Company's Form S-8 filed October 18, 2000
10 (fff) Amended By-laws, incorporated by reference
from the exhibits filed with the Company's Form
S-8 filed October 18, 2000
27 (a) Financial Data Schedule (for the three months
ended September 30, 2000)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
September 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 November 13, 2000 /s/ Harry J. Harczak, Jr.
------------------- ---------------------------
Harry J. Harczak, Jr.
Chief Financial Officer, Treasurer & Secretary
Date November 13, 2000 /s/ Sandra M. Rouhselang
------------------- ---------------------------
Sandra M. Rouhselang
Controller
