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 MARCH 31, 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 May 1, 2000 43,646,068 common shares were issued and 43,456,068
were outstanding.
CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
-----------
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Income -
Three months ended March 31, 2000 and 1999 2
Condensed Consolidated Statement of Shareholders' Equity -
Three months ended March 31, 2000 3
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 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 - 13
PART II. Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
2000 1999
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,877 $ 19,747
Marketable securities 70,695 63,228
Accounts receivable, net of allowance for doubtful
accounts of $4,450 and $4,300, respectively 284,818 230,190
Merchandise inventory 133,932 126,217
Prepaid income taxes 23,712 -
Miscellaneous receivables 9,684 7,589
Deferred income taxes 6,702 6,702
Prepaid expenses 1,690 1,375
--------- ---------
Total current assets 545,110 455,048
Property and equipment, net 42,931 39,429
Investment in and advances to subsidiary 9,244 6,499
Deferred income taxes and other assets 4,011 4,939
--------- ---------
TOTAL ASSETS $ 601,296 $ 505,915
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 100,607 $ 65,657
Accrued expenses:
Compensation 16,514 27,339
Exit costs 2,274 2,219
Income taxes - 11,960
Other 8,963 7,756
--------- ---------
Total current liabilities 128,358 114,931
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 75,000 shares
authorized; 43,433 and 43,182 shares issued,
respectively 434 433
Paid-in capital 149,366 102,771
Retained earnings 325,635 209,344
Unearned compensation (408) (475)
--------- ---------
Subtotal shareholders' equity 475,027 393,073
--------- ---------
Less cost of common shares in treasury, 100 shares (2,089) (2,089)
--------- ---------
Total shareholders' equity 472,938 390,984
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 601,296 $ 505,915
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
1
4
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-----------------------------
2000 1999
------------- -------------
Net sales $ 863,988 $ 539,406
Cost of sales 754,775 471,500
--------- ---------
Gross profit 109,213 67,906
Selling and administrative expenses 52,365 36,221
--------- ---------
Income from operations 56,848 31,685
Interest income 1,755 1,042
Other expense, net (175) (113)
--------- ---------
Income before income taxes 58,428 32,614
Income tax provision 23,137 12,916
--------- ---------
Net income $ 35,291 $ 19,698
========= =========
Earnings per share
Basic $ 0.82 $ 0.46
========= =========
Diluted $ 0.79 $ 0.45
========= =========
Weighted average number of
common shares outstanding
Basic 43,287 43,069
========= =========
Diluted 44,726 43,882
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
2
5
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Total
Common Shares Paid in Retained Unearned Treasury Shares Shareholders'
Shares Amount Capital Earnings Compensation Shares Amount Equity
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 43,339 $ 433 $ 102,771 $ 290,344 $ (475) 100 $(2,089) $ 390,984
MPK Restricted Stock Plan forfeitures (2) 2 -
Amortization of unearned compensation 65 65
Compensatory stock option grants 25 25
Exercise of stock options 94 1 1,673 1,674
Tax benefit from stock option transactions 44,899 44,899
Net income 35,291 35,291
--------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000 43,433 $ 434 $ 149,366 $ 325,635 $ (408) 100 $(2,089) $ 472,938
======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
3
6
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
-------------------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 35,291 $ 19,698
Adjustments to reconcile net income to net cash provided by /
(used in)operating activities:
Depreciation 1,954 1,500
Accretion of marketable securities (799) (762)
Stock-based compensation expense 90 111
Allowance for doubtful accounts 150 300
Deferred income taxes 931 112
Tax benefit from stock option and restricted stock transactions 44,899 3,891
Changes in assets and liabilities:
Accounts receivable (54,778) (35,460)
Miscellaneous receivables (2,095) (505)
Merchandise inventory (7,715) (16,071)
Prepaid expenses (318) 63
Prepaid income taxes (23,712) -
Accounts payable 34,950 22,311
Accrued compensation (10,825) (1,408)
Accrued income taxes and other expenses (10,753) 5,021
Accrued exit costs 55 (115)
-------- --------
Net cash provided by / (used in)operating activities 7,325 (1,314)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (16,610) (32,244)
Redemptions of available-for-sale securities 19,900 13,090
Purchases of held-to-maturity securities (42,627) -
Redemptions of held-to-maturity securities 32,669 26,929
Investments in and advances to subsidiary (2,745) -
Purchase of property and equipment (5,456) (2,647)
-------- --------
Net cash (used in) / provided by investing activities (14,869) 5,128
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,674 501
-------- --------
Net cash provided by financing activities 1,674 501
-------- --------
Net (decrease) / increase in cash (5,870) 4,315
Cash and cash equivalents - beginning of period 19,747 4,230
-------- --------
Cash and cash equivalents - end of period $ 13,877 $ 8,545
======== ========
The accompanying notes are an integral part of the consolidated financial
statements
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 Chantilly, Virginia.
The Company extends credit to business, government and institutional
customers under certain circumstances based upon the financial strength of the
customer. Such customers are typically granted net 30 day credit terms. The
balance of the Company's sales are made primarily through third-party credit
cards and for cash-on-delivery.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited 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 March 31, 2000 and December 31,1999, the results of operations
for the three months ended March 31, 2000 and 1999, the cash flows for the three
months ended March 31, 2000 and 1999, and the changes in shareholders' equity
for the three months ended March 31, 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.
5
3. Marketable Securities
The amortized cost and estimated fair values of the Company's investments
in marketable securities at March 31, 2000, were (in thousands):
Gross
Unrealized
Holding
Estimated ------------------------- Amortized
Fair Value Gains (Losses) Cost
-------------------------------------------------
Security
Type
Available-for-sale:
U.S. Government and Government Agency Securities $ 27,671 $ - $ (14) $ 27,685
-------------------------------------------------
Total available-for-sale 27,671 - (14) 27,685
-------------------------------------------------
Held to maturity:
U.S. Government and Government Agency Securities 42,920 14 (104) 43,010
-------------------------------------------------
Total held-to-maturity 42,920 14 (104) 43,010
-------------------------------------------------
Total marketable securities $ 70,591 $ 14 $ (118) $ 70,695
=================================================
The Company's investments in securities held-to-maturity at March 31, 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
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
three months ended March 31, 2000, the Company charged approximately $148,000
against the exit accrual in cash payments for rent, real estate taxes and
maintenance of the facility. This amount was offset by approximately $203,000
received for sub-lease payments and security deposits from the former sublessor
of the Buffalo Grove Facility. During the comparable period of 1999, the
Company charged approximately $115,000 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, during the
first quarter of 2000, the sublessee terminated the lease in conjunction with
its Chapter 11 case under the bankruptcy laws 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.
On October 11, 1999 the Company entered into a lease agreement for two
floors of office space totaling approximately 72,000 square feet in Chicago,
Illinois. On April 1, 2000 the Company opened a sales office on one floor of the
facility and plans to open a sales office on the second floor on July 1, 2000.
The lease provides
6
a ten year term, with certain expansion and renewal options. The Company plans
to expend between $8 million and $10 million for computer and telecommunication
equipment, furniture and improvements related to the facility. Minimum future
rent payments for all the Company's lease obligations, including the new Chicago
facility are as follows (in thousands):
Years Ended December 31, Amount
------------------------ ------
2000 $ 1,597
2001 1,933
2002 1,934
2003 1,966
2004 1,158
Thereafter 7,012
-----------------
$ 15,600
=================
The Company plans to construct a second warehouse on approximately 6 to 8
acres of its Vernon Hills, Illinois campus by the end of 2000. The new warehouse
will provide approximately 250,000 square feet of additional capacity 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.
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 2000, 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 March 31, 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 $70.0 million collateralized by
inventory purchases financed by the Flooring Companies. At March 31, 2000, all
amounts owed the Flooring Companies are included in trade accounts payable.
7
6. Earnings Per Share
At March 31, 2000 the Company had outstanding common shares totaling
approximately 43,333,000. 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.
Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
Basic earnings per share:
Income available to
common shareholders (numerator) $ 35,291 $ 19,698
------------ ------------
Weighted average common
shares outstanding (denominator) 43,287 43,069
------------ ------------
Basic earnings per share $ 0.82 $ 0.46
============ ============
Diluted earnings per share:
Income available to
common shareholders (numerator) $ 35,291 $ 19,698
------------ ------------
Weighted average common
shares outstanding 43,287 43,069
Effect of dilutive securities:
Options on common stock 1,439 813
------------ ------------
Total common shares and dilutive
securities (denominator) 44,726 43,882
------------ ------------
Diluted earnings per share $ 0.79 $ 0.45
============ ============
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and the notes thereto
included elsewhere herein.
Results Of Operations
The following table sets forth financial information derived from the
Company's statements of income expressed as a percentage of net sales, and
certain operating statistics.
Financial Information Percentage of Net Sales
- --------------------- -----------------------
Three Months Ended
March 31,
-----------------------
2000 1999
Net sales 100.0 % 100.0 %
Cost of sales 87.4 87.4
-------------------------
Gross profit 12.6 12.6
Selling and administrative expenses 6.0 6.7
-------------------------
Income from operations 6.6 5.9
Other income, net 0.2 0.2
-------------------------
Income before income taxes 6.8 6.1
Income tax provision 2.7 2.4
-------------------------
Net income 4.1 % 3.7 %
=========================
The following table sets forth for the periods indicated a summary of certain of
the Company's operating statistics:
Operating Statistics Three Months Ended
March 31,
-------------------------
2000 1999
Number of invoices processed 920,082 677,653
Average invoice size $987 $840
Number of account managers, end of period 820 630
Commercial customers serviced 140,869 116,884
Commercial customers serviced - Trailing 12 Months 294,861 269,449
% of sales to commercial customers 95% 91%
Annualized inventory turns 23 26
Accounts receivable days sales outstanding 30 31
9
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.
Analysis of Product Mix Three Months Ended
March 31,
-------------------
2000 1999
Notebooks & Laptops 22.5 % 19.0 %
Desktop Computers & Servers 14.8 15.8
Software 11.4 13.0
Data Storage Devices 10.7 10.0
Printers 9.8 12.1
Network & Communication Products 9.5 9.4
Monitors & Video Products 7.7 7.3
Add-On Boards & Memory 5.9 4.7
Supplies 3.7 3.7
Input Devices 2.3 2.4
Multi-Media Devices .3 1.6
Other Accessories 1.4 1.0
Total 100.0 % 100.0 %
======================
Three months ended March 31, 2000 compared to three months ended March 31, 1999
Net sales in the first quarter of 2000 increased 60.2% to a record $864.0
million compared to $539.4 million in the first 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 94.5% of net sales in the first quarter of 2000 from
90.7% in the first quarter of 1999. The number of active commercial customers
increased 19.7% to 141,000 in the first quarter of 2000 from 117,000 in the
first quarter of 1999. For the three months ended March 31, 2000, the average
invoice size increased 17.5% to $987 and the number of invoices processed
increased 35.8% to over 920,000. 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 7.8% and
the average selling price of notebook CPU's declined 1.1% from the first 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.
10
The fastest growing product categories in terms of sales dollars and the
respective growth rates in the first quarter of 2000 compared to the first
quarter of 1999 were:
Product Category Growth Rate
---------------- -----------
Add-On Boards & Memory 106.0%
Notebooks & Laptops 92.7%
Data Storage Devices 74.4%
Monitors & Video Products 70.4%
Network and Communication Products 64.1%
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 March
31, 2000 was consistent with the first quarter of 1999 at 12.6%. 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. Although the Company
believes it provides a higher level of value and added services, pricing and
gross profit could be negatively impacted by the activities of Internet only
resellers. 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
three months ended March 31, 2000 from 6.7% in the same period of 1999.
Net advertising expense decreased as a percentage of net sales to 0.49% for
the three months ended March 31, 2000 from 0.79% in the same quarter of the
prior year. Gross advertising expense increased $5.7 million, while decreasing
as a percentage of net sales to 2.4% from 2.8% in the first 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 first quarter of 2000. Cooperative
advertising reimbursements decreased as a percentage of net sales to 1.9% of net
sales in the first quarter of 2000 from 2.0% in the first 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 5.6% of net sales in
the first quarter 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 expenses, all as a percentage of net sales. As of March 31, 2000,
there were 820 sales account managers, an increase of 30.2% from 630 sales
account managers as of March 31, 1999. Approximately 75% of the 820 sales
account managers had fewer than 24 months experience and 55% had fewer than 12
months, as compared to 74% and 55% at March 31, 1999. The Company plans to
increase the
11
number of sales account managers to approximately 1,100 by December 31, 2000.
In April 2000, the Company commenced occupancy of approximately 36,000
square feet of office space in Chicago, Illinois as an additional sales office
(see Footnote 4 to the financial statements). In addition, the Company will
commence occupancy of another 36,000 square feet in the same building commencing
in July 2000. Average annual future minimum lease expense for the new sales
office is approximately $1.1 million per year. Additionally, the Company will
incur depreciation expense related to approximately $8 million to $10 million in
capital expenditures for computer and telecommunication equipment, furniture and
improvements related to the facility. As a result of the planned expansion of
the sales force and the new sales office, the Company's selling and
administrative costs may increase as a percentage of net sales in future
periods.
In the first quarter of 2000 the Compensation and Stock Option Committee
approved a new format for executive incentive compensation, subject to
shareholder approval 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. As a result of the increase in operating income in the
first quarter of 2000, expense recognized under the new program was slightly
higher 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 $1.6 million in the
first quarter of 2000 compared to $929,000 in the first 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 March 31, 2000 and 1999.
Net income for the three months ended March 31, 2000, was $35.3 million, a
79.2% increase over $19.7 million for the three months ended March 31, 1999.
Diluted earnings per share was $0.79 for the three months ended March 31, 2000
and $0.45 in the same period of 1999, an increase of 75.6%. All per share
amounts have been adjusted to reflect the two-for-one stock split effected in
the form of a stock dividend paid on May 19, 1999.
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, 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 March 31, 2000, the Company had cash, cash equivalents and
marketable securities of $84.6 million and working capital of $416.8 million,
representing an increase of $1.6 million in cash, cash equivalents and
marketable securities and an increase of $76.6 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 2000, at which time the Company intends to renew the
12
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 March 31, 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 sufficient to fund the
Company's working capital and cash requirements at least through March 31, 2001.
Cash flows for the three months ended March 31, 2000
Net cash provided by operating activities for the three months ended March
31, 2000, was $7.3 million. The primary factors that historically affect the
Company's cash flows from operations are accounts receivable, merchandise
inventory and accounts payable. In addition, during the first quarter the
Company recorded a tax benefit of $44.9 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 March 31, 2000 of $23.7
million. These transactions resulted in an increase in cash of $21.2 million
which offset decreases in cash resulting from increases in merchandise inventory
and accounts receivable during the period. The increase in accounts receivable
resulted from increased sales volume and an increase to 73.4% in the percentage
of net sales generated from commercial accounts with open credit terms for the
three months ended March 31, 2000 from 67.3% for the same period of 1999. The
accounts receivable days sales outstanding at March 31, 2000 was 30.0 as
compared with 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 three
months ended March 31, 2000 from 26 for the three months ended March 31, 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 three months ended March 31,
2000, was $14.9 million, including approximately $5.5 million used for capital
expenditures and $2.7 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 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 per 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.
13
Part II Other Information
Item 1. Legal Proceedings
The Company is currently not a party to any material legal
proceedings.
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:
27 (a) Financial Data Schedule (for the three months ended March 31, 2000)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
March 31, 2000.
14
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 May 1, 2000 /s/ Harry J. Harczak, Jr.
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Harry J. Harczak, Jr.
Chief Financial Officer,
Treasurer & Secretary
Date May 1, 2000 /s/ Sandra M. Rouhselang
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Sandra M. Rouhselang
Controller
15