1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________
TO _____________
COMMISSION FILE NUMBER 0-21796
CDW COMPUTER CENTERS, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-3310735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 N. MILWAUKEE AVE. 60061
VERNON HILLS, ILLINOIS (Zip Code)
(Address of principal executive offices)
(847) 465-6000
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------------- --------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
-------------- --------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
AS OF MAY 15, 1998, 21,546,091 COMMON SHARES WERE OUTSTANDING.
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CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
------------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997
and Twelve months ended March 31, 1998 2
Condensed Consolidated Statement of Shareholders'
Equity - Three months ended March 31, 1998 3
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997 4
Notes to Condensed Consolidated Financial
Statements 5-8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13-14
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
March 31, December 31,
1998 1997
------------- ------------
ASSETS
Current assets :
Cash and cash equivalents $ 9,480 $ 18,233
Marketable securities 58,476 61,192
Accounts receivable, net of allowance for doubtful
accounts of $2,175 and $1,950, respectively 98,225 87,524
Miscellaneous receivables 5,432 3,960
Merchandise inventory 70,162 61,941
Prepaid expenses and other 941 759
Deferred income taxes 3,587 3,587
--------- ---------
Total current assets 246,303 237,196
Property and equipment, net 31,606 26,704
Deferred income taxes and other assets 5,745 5,741
--------- ---------
TOTAL ASSETS $ 283,654 $ 269,641
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 39,559 $ 44,451
Accrued expenses :
Income Taxes 10,963 5,504
Compensation 10,299 12,996
Exit costs 3,213 3,391
Other 4,009 3,433
--------- ---------
Total current liabilities 68,043 69,775
--------- ---------
Commitments and contingencies
Shareholders' equity :
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 75,000 shares
authorized; 21,546 and 21,525 shares issued and
outstanding, respectively 215 215
Paid-in capital 75,535 74,680
Retained earnings 141,188 126,418
Unearned compensation (1,327) (1,447)
--------- ---------
Total shareholders' equity 215,611 199,866
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 283,654 $ 269,641
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(unaudited)
Twelve Months
Three Months Ended
Ended March 31, March 31,
------------------------ -------------
1998 1997 1998
--------- --------- -----------
Net sales $ 384,591 $ 297,777 $ 1,363,743
Cost of sales 335,444 257,834 1,183,734
--------- --------- -----------
Gross profit 49,147 39,943 180,009
Selling and administrative expenses 25,792 22,027 94,080
--------- --------- -----------
Income from operations 23,355 17,916 85,929
Interest income 1,169 957 4,471
Other expense (71) (51) (261)
--------- --------- -----------
Income before income taxes 24,453 18,822 90,139
Income tax provision 9,683 7,463 35,727
--------- --------- -----------
Net income $ 14,770 $ 11,359 $ 54,412
========= ========= ===========
Earnings per share
Basic $ 0.69 $ 0.53 $ 2.53
========= ========= ===========
Diluted $ 0.68 $ 0.52 $ 2.51
========= ========= ===========
Weighted average number of
common shares outstanding
Basic 21,546 21,525 21,507
========= ========= ===========
Diluted 21,753 21,682 21,678
========= ========= ===========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Total
Common Stock Retained Unearned Shareholders'
Shares Amount Paid-in Capital Earnings Compensation Equity
--------------------------------------------------------------------------------------
Balance at December 31, 1997 21,525 $ 215 $ 74,680 $ 126,418 $ (1,447) $ 199,866
MPK Restricted Stock Plan forfeitures - - (1) - 1 -
Amortization of unearned compensation - - - - 119 119
Proceeds from exercise of stock options 21 - 440 - - 440
Tax benefit from option transactions - - 351 - - 351
Capital contribution for legal costs assumed - - 65 - - 65
by majority shareholder
Net income - - - 14,770 - 14,770
--------------------------------------------------------------------------------------
Balance at March 31, 1998 21,546 $ 215 $ 75,535 $ 141,188 $ (1,327) $ 215,611
======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
-------------------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 14,770 $ 11,359
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation 1,059 526
Accretion of marketable securities (746) (205)
Amortization of unearned compensation expense 119 126
Legal fees assumed by majority shareholder 65 34
Deferred taxe expense - 190
Tax benefit from stock option exercise 351 5,835
Changes in assets and liabilities:
Accounts receivable, net (10,701) (6,446)
Miscellaneous receivables (1,472) 891
Merchandise inventory (8,221) (20,741)
Prepaid expenses and other assets (186) (299)
Accounts payable (4,892) 3,807
Accrued compensation (2,697) (3,679)
Accrued income taxes and other expenses 6,035 (1,216)
Accrued exit charge (178) (50)
-------- --------
Net cash used in operating activities (6,694) (9,868)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (6,000) (4,575)
Redemptions of available-for-sale securities 7,250 3,375
Purchases of held-to-maturity securities (20,843) (14,358)
Redemptions of held-to-maturity securities 23,055 19,241
Purchase of property and equipment (5,961) (3,207)
-------- --------
Net cash provided by/(used in) investing activities (2,499) 476
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 440 -
-------- --------
Net cash provided by financing activities 440 -
-------- --------
Net decrease in cash (8,753) (9,392)
Cash and cash equivalents - beginning of period 18,233 16,462
-------- --------
Cash and cash equivalents - end of period $ 9,480 $ 7,070
======== ========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS
CDW Computer Centers, Inc. (the "Company") is engaged in the distribution
of brand name personal computers and related products through direct marketing
to end users within the United States. The Company's primary business is
conducted from a combined telemarketing, corporate office and warehouse and
showroom facility located in Vernon Hills, Illinois. The Company also operates a
second retail showroom in Chicago, Illinois.
The Company extends credit to business, governmental and institutional
customers under certain circumstances based upon the financial strength of the
customer. Such customers are typically granted net 30 day credit terms. The
balance of the Company's sales are made primarily through third party credit
cards and for cash on delivery.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. Such principles were
applied on a basis consistent with those reflected in the 1997 Annual Report on
Form 10-K and documents incorporated therein as filed with the Securities and
Exchange Commission. The accompanying financial data should be read in
conjunction with the notes to consolidated financial statements contained in the
1997 Annual Report on Form 10-K and documents incorporated therein. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting solely of normal
recurring accruals) necessary to present fairly the financial position of the
Company as of March 31, 1998 and December 31, 1997, the results of operations
for the three ended March 31, 1998 and 1997 and the twelve months ended March
31, 1998, the cash flows for the three months ended March 31, 1998 and 1997, and
the changes in shareholders' equity for the three months ended March 31, 1998.
The unaudited condensed consolidated statements of income for such interim
periods are not necessarily indicative of results for the full year.
The Company has adopted Statements of Financial Accounting Standards Nos.
130 and 131 (SFAS 130, SFAS 131), "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information". For the
three months ended March 31, 1998 and 1997 the Company has no components of
Comprehensive Income, as defined by SFAS 130, which are not contained in Net
Income as reported on the accompanying Consolidated Statements of Income. The
Company has determined that its current organizational structure does not meet
the requirements for segmented reporting in accordance with SFAS 131.
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.
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Earnings Per Share
Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Accordingly, the
Company has disclosed earnings per share calculated using both the basic and
diluted methods for all periods presented. The implementation of SFAS 128 has no
impact on the Company's earnings per share amounts as diluted earnings per
share, as defined by SFAS 128, is consistent with earnings per common and common
equivalent share as presented in previous periods. A reconciliation of basic and
diluted per-share computations is included in Note 7 to the financial
statements.
3. MARKETABLE SECURITIES
The amortized cost and estimated fair values of the Company's investments
in marketable securities at March 31, 1998 were (in thousands):
Gross
Unrealized
Holding
Estimated ---------- Amortized
Fair Value Gains (Losses) Cost
------------ ------------ ------------ --------------
Security Type
- -------------
Available-for-sale:
Redemptive tax-exempt preferred stocks $ 6,000 $ - $ - $ 6,000
----------------------------------------------------------------
Held to maturity:
U.S. Government and U.S. Government Agency Securities 51,752 - (50) 51,802
Bonds of states, municipalities, and political subdivisions 675 1 - 674
----------------------------------------------------------------
Total held-to-maturity 52,427 1 (50) 52,476
----------------------------------------------------------------
Total marketable securities $ 58,427 $ 1 $ (50) $ 58,476
================================================================
The Company's investments in securities held-to-maturity at March 31,1998
were all due in one year or less by contractual maturity. Estimated fair values
of marketable securities are based on quoted market prices.
4. CONTINGENCY
The Company and its majority shareholder are defendants in a lawsuit filed
by a former shareholder. The suit requests actual and punitive damages in an
amount that cannot be readily determined. The Company and its majority
shareholder believe the suit to be without merit and are vigorously defending
against this action. The majority shareholder has agreed to indemnify and
reimburse the Company for all damages and expenses, net of tax benefits received
by the Company, related to this action. A trial date is currently set for
November 1998, in the United States District Court for the Northern District of
Illinois, Eastern Division for this matter.
For the three months ended March 31, 1998 and 1997, the Company and
majority shareholder have incurred legal expenses of approximately $108,000 and
$53,000, respectively, which have been assumed by the majority shareholder. If
the trial date proceeds as scheduled, it is likely that the Company will incur
increased legal fees in relation to the trial. Although the majority shareholder
has agreed to indemnify the Company for all expenses or settlements, if any, in
connection with this suit, the Company will continue to record such expenses or
settlements, if any, as an expense with an offsetting increase to paid-in
capital, net of tax effects.
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5. RELOCATION & EXIT ACCRUAL
In June 1996, the Company purchased approximately 27 acres of vacant land
in Vernon Hills, Illinois, upon which it constructed a combined telemarketing,
warehouse, showroom and corporate office facility. Construction of the Vernon
Hills facility was completed in July 1997, at which time the Company relocated
to the new facility and vacated the Buffalo Grove facility. The Company recorded
a $4.0 million pre-tax non-recurring charge to operating results for exit costs
relating to the Buffalo Grove facility in the first quarter of 1996. The exit
costs consist primarily of the estimated cost to the Company of subleasing the
vacated facility, including holding costs, the estimated costs of restoring the
building to its original condition and certain asset write-offs resulting from
the relocation. During the three months ended March 31, 1998 the Company charged
approximately $178,000 against the exit accrual in cash payments for rent, real
estate taxes and maintenance of the facility. The Company is attempting to
sublease the Buffalo Grove facility. There is no assurance that remaining exit
liability of $3.2 million at March 31, 1998 will be adequate to cover actual
costs should the Company's actual experience in subleasing the facility differ
from the assumptions used in calculating the exit charge.
In March 1998, the Company acquired approximately 18 acres of vacant land
contiguous to its Vernon Hills facility for $4.3 million. The Company now owns
approximately 45 total acres, of which approximately 32 are vacant and available
for future expansion. The Company commenced construction of a 100,000 square
foot addition to its current warehouse facility. Construction is scheduled for
completion by September 1998.
6. FINANCING ARRANGEMENTS
The Company has an aggregate $30 million available pursuant to unsecured
lines of credit with two financial institutions expiring in June 1998, at which
time the Company intends to renew the lines. Borrowings under one of the credit
facilities bear interest at the prime rate less 2 1/2%, LIBOR plus 1/2% or the
federal funds rate plus 1/2%, as determined by the Company. Borrowings under the
second credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus
.45% or the federal funds rate plus .45%, as determined by the Company. At March
31, 1998, there were no borrowings against either of the credit facilities.
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7. EARNINGS PER SHARE
The Company has outstanding at March 31, 1998 common shares totaling
approximately 21,546,000. 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 Twelve Months
March 31, Ended March 31,
1998 1997 1998
----------- ---------- ---------------
BASIC EARNINGS PER SHARE:
Income available to
common shareholders (numerator) $ 14,770 $ 11,359 $ 54,412
=========== =========== ===========
Weighted average common
shares outstanding (denominator) 21,546 21,525 21,507
=========== =========== ===========
Basic earnings per share $ 0.69 $ 0.53 $ 2.53
=========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income available to
common shareholders (numerator) $ 14,770 $ 11,359 $ 54,412
=========== =========== ===========
Weighted average common
shares outstanding 21,546 21,525 21,507
Effect of dilutive securities:
Options on common stock 207 157 171
----------- ----------- -----------
Total common shares and dilutive securities
(denominator) 21,753 21,682 21,678
=========== =========== ===========
Diluted earnings per share $ 0.68 $ 0.52 $ 2.51
=========== =========== ===========
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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,
----------------------------
1998 1997
-------- --------
Net sales 100.0 % 100.0 %
Cost of sales 87.2 86.6
---- ----
Gross profit 12.8 13.4
Selling and administrative expenses 6.7 7.4
--- ---
Income from operations 6.1 6.0
Other income, net 0.3 0.3
--- ---
Income before income taxes 6.4 6.3
Income tax provision 2.6 2.5
--- ---
Net income 3.8 % 3.8 %
=== ===
OPERATING STATISTICS Three Months Ended
March 31,
------------------------
1998 1997
-------- --------
Number of orders shipped 578,249 445,181
Average order size $ 665 $ 669
Customers serviced 229,000 200,000
Number of account managers, end of period 476 329
Inventory turns 20 20
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The following table presents net sales by product line as a percentage of
total net sales as well as the comparative growth rates in both units and
dollars for each of the periods noted. Product classifications are based upon
internal product code classifications and is retroactively adjusted for the
addition of new categories but not for changes in individual product
categorization.
THREE MONTHS ENDED COMPARATIVE UNIT
MARCH 31, 1998 PRODUCT MIX GROWTH
- --------------------------- ---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
Notebooks & Laptops 20.2 % 24.2 % 16.7 % 52.9 %
Desktop Computers 15.6 13.2 88.2 86.3
Printers 13.4 11.9 55.7 49.6
Software 12.8 12.9 24.1 53.9
Data Storage Devices 11.2 10.5 22.3 72.3
Network & Communications
Products 8.5 8.8 91.1 15.6
Monitors & Video Products 8.3 8.1 49.4 63.2
Add-On Boards & Memory 4.5 4.6 25.2 113.1
Input Devices 2.9 3.0 29.0 53.2
Multi-Media Devices 2.1 2.1 64.7 63.8
Other Accessories 0.5 0.7 3.7 167.6
---- ---- ---- ----
Total 100.0 % 100.0 % 35.8 % 100.0 %
===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net sales for the first quarter of 1998 increased 29.2% to a record $384.6
million compared to $297.8 million in the first quarter of 1997. The Company's
average order size remained relatively unchanged at $665 per order while orders
shipped in the quarter increased 29.9% to 578,000. The number of customers
serviced for the three months ended March 31, 1998 grew 14.4% to 229,000 from
200,000 for the three months ended March 31, 1997 and average sales per customer
increased 12.9%.
The growth in net sales is primarily attributable to the growth in the
number of active customers, manufacturer price reductions, the expansion of
marketing efforts, new product offerings and an increase in the number of
account managers. New pricing initiatives by several large desktop CPU
manufacturers, directed towards the small to medium sized business market,
drove desktop computer growth of 88% in unit volume and 53% in sales volume for
the three months ended March 31, 1998 compared to the three months ended
March 31, 1997. Notebook computers remained the largest selling product
category at 20% of net sales and grew 3% in dollar sales volume over the prior
year, while unit volume grew 17%.
The average selling price of desktop and notebook CPU's decreased 20.3% and
11.5%, respectively, from the first quarter of 1997. The Company believes there
may be additional decreases in prices for personal computers and related
products. Such decreases require the Company to sell more units in order to
maintain or increase the level of sales. Should future manufacturer price
reductions or the Company's marketing efforts fail to increase the level of unit
sales, the Company's sales growth rate and operating results could be adversely
affected. Sales of Compaq, Hewlett Packard, IBM, Microsoft and Toshiba products
comprise a substantial portion of the Company's sales. The loss of any of these,
or any other key vendors, could have an adverse affect on the Company's results
from operations. The statement concerning future sales and results from
operations are forward looking statements that involve certain risks and
uncertainties such as stated above.
The fastest growing product categories in terms of sales dollars in the
first quarter of 1998 were desktop computers at 53%, printers at 46%, data
storage devices at 38%, monitors and video products at 32% and multi-media
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devices at 29%. Demand for certain products offered by the Company, and the
growth of certain product categories, are driven by advances in technology and
the development of new products and applications by the industry manufacturers,
and acceptance of these new technologies and products by end-users. Any slowdown
in the rate of technological advancement and new product development by industry
manufacturers, including delays, if any, in the introduction of Windows '98 by
Microsoft, could have a material adverse effect on the Company's future sales
growth.
Gross profit decreased as a percentage of net sales to 12.8% for the three
months ended March 31, 1998, compared to 13.4% for the three months ended March
31, 1997. The decrease in gross profit as a percentage of net sales is primarily
the result of lower selling margins achieved on certain product lines, lower
levels of rebates from vendors and increased shipping costs. On a
forward-looking basis, it is likely that the gross profit margin achieved will
be less than 13%, and could be less than the 12.8% achieved in the most recent
quarter.
The statements concerning future sales and gross profit are forward looking
statements that involve certain risks and uncertainties such as the continued
participation by vendors in price protection and rebate programs, product mix,
market conditions and other factors which could result in a fluctuation of gross
margins below recent experience. Vendor support programs, are at the discretion
of the vendor and many of these programs are dependent on achieving certain
goals and objectives. Accordingly, there is no certainty that such programs will
continue at their current levels or that the established goals and objectives
will be attained.
Selling and administrative expenses, which include net advertising expense,
the executive incentive bonus pool, shareholder legal and other selling
administrative expenses, decreased to 6.7% of net sales in the first quarter of
1998 versus 7.4% in the first quarter of 1997.
Net advertising expense decreased as a percentage of net sales to 0.8% from
1.3% for the three months ended March 31, 1998 and 1997, respectively. Gross
advertising expense decreased to 3.3% of net sales for the three months ended
March 31, 1998 versus 3.5% for the three months ended March 31, 1997 due to
modest increases in catalog circulation and a decrease in print advertising in
national trade magazines. Cooperative advertising reimbursements as a percentage
of net sales increased to 2.5% of net sales due to a combination of factors
including changes to billing rates, increased participation by vendors and new
and expanded catalog formats. The cooperative advertising reimbursement rate may
fluctuate in future quarters depending on the level of vendor participation
achieved and collection experience. Based upon the Company's current plans,
future levels of net 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 1998. The statement concerning future advertising expense is a
forward looking statement that involves 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.
The executive incentive bonus pool decreased $1.8 million to $546,000 and
0.14% as a percentage of net sales for the three months ended March 31, 1998
from $2.3 million and 0.79% of net sales in 1997. Of the $1.8 million decrease
in the bonus pool from the prior year, $800,000 is due to the $4.0 million exit
charge recorded in the first quarter of 1996, which effectively increased the
pool by $800,000 in the first quarter of 1997, $818,000 is due to a lower level
of growth in operating income and the remaining $182,000 is due to the change in
the bonus pool rate. For the current year the Compensation and Stock Option
Committee has established the bonus pool at 15% of the increase in operating
income over the prior year, versus 20% in prior periods.
Legal costs incurred by the majority shareholder for the three months ended
March 31, 1998 and 1997, in connection with the lawsuit filed by a former
shareholder were $108,000 and $53,000, respectively. A trial date has been set
for November 1998 for this case. If the trial date proceeds as scheduled it is
likely that legal costs incurred by the Company regarding this matter will
increase as the trial date approaches. Although the majority shareholder has
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agreed to indemnify the Company for all expenses or settlements, if any,
incurred in connection with this suit, the Company will continue to record such
expenses or settlements, if any, as an expense with an offsetting increase to
paid-in capital, net of tax effects.
Other selling and administrative costs increased to 5.8% of net sales in
the three months ended March 31, 1998 from 5.3% in the prior year period due
primarily to increases in payroll and occupancy. The increase in payroll costs
is due, in part, to increased investment in the recruiting and training of new
account managers. The Company continues to recruit and train new account
managers through CDW University. As of March 31, 1998 there were 476 account
managers, an increase of 45% from 329 account managers as of March 31, 1997. In
addition, there were approximately 70 account managers in various phases of
training in CDW University at the end of the quarter.
Interest income totaled $1.2 million for the three months ended March 31,
1998 compared to $957,000 for the three months ended March 31, 1997. The
increase is due primarily to a combination of slightly higher levels of
marketable securities and higher interest rates during the period.
The effective income tax rate, expressed as a percentage of income before
income taxes, decreased to 39.6% for the three months ended March 31, 1998 from
39.7% for the three months ended March 31, 1997.
Net income for the three months ended March 31, 1998 was $14.8 million, a
30.0% increase over $11.4 million for the three months ended March 31, 1997.
Diluted earnings per share was $0.68 and $0.52 for the three months ended March
31, 1998 and 1997, respectively, an increase of 30.8%.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
The Company has historically financed its operations and capital
expenditures primarily through cash flow from operations, short-term borrowings
and public offerings of common stock.
At March 31, 1998, the Company had cash, cash equivalents and marketable
securities of $68.0 million and working capital of $178.3 million, representing
a decrease of $11.5 million in cash, cash equivalents and marketable securities
and an increase of $10.9 million in working capital from December 31, 1997.
As of March 31, 1998 the Company had an aggregate $30.0 million available
pursuant to unsecured credit facilities with two financial institutions expiring
in June, 1998. Borrowings under one of the credit facilities bear interest at
the prime rate less 2 1/2%, LIBOR plus 1/2% or the federal funds rate plus 1/2%,
as determined by the Company. Borrowings under the second credit facility bear
interest at the prime rate less 2 1/2%, LIBOR plus .45% or the federal funds
rate plus .45%, as determined by the Company. At March 31, 1998 there were no
borrowings against either of the credit facilities. The Company plans to renew
each of the credit facilities in the second quarter of 1998.
The Company's current primary and anticipated use of cash is to fund the
growth in working capital and capital expenditures, including facilities
expansion. 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, 1999.
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998
Net cash used in operating activities for the three months ended March 31,
1998 was $6.7 million. The primary factors which historically affect the
Company's cash flows from operations are accounts receivable, merchandise
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inventory and accounts payable. The increase in accounts receivable resulted
from increased sales volume, an increase in the percentage of net sales
generated from open credit terms to business customers and a change in the
Company's credit terms during June 1997 to net 30 days from net 10 days.
Annualized inventory turnover was approximately 20 times for the first quarter
of 1998, consistent with the first quarter of 1997. The decrease in accounts
payable reflects timing of payments to vendors at the end of the respective
periods. Prepaid expenses and other current assets increased $182,000 to
approximately $941,000 as of March 31, 1998 and are primarily composed of paper
purchased for future catalogs, prepaid income taxes and prepaid insurance
premiums.
Net cash used in investing activities for the three months ended March 31,
1998 was $2.5 million, including approximately $6.0 million used for capital
expenditures. The capital expenditures made by the Company were primarily
related to the purchase of additional land and machinery and equipment for the
Vernon Hills facility.
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.
PART II Other Information
ITEM 1. Legal Proceedings
As previously reported, the Company and Michael P. Krasny, the Company's
majority shareholder, were defendants in a lawsuit filed in the United States
District Court for the Northern District of Illinois, Eastern Division, in which
suit a former shareholder, executive officer and director of the Company (the
"Plaintiff") alleged violations of the federal securities laws, fraud and breach
of fiduciary duty in connection with the Company's redemption of his stock in
July 1990. (Reference is made to Item 3 of the Company's 1997 Annual Report on
Form 10-K for a detailed discussion of the lawsuit.)
On June 14, 1996, the District Court granted the motion to dismiss the
Amended Complaint, with prejudice on the grounds that the securities law claim
alleged in Count I was barred by the statute of limitations and it did not have
jurisdiction over the state law claims alleged in Counts II and III. Mr. Marks
appealed the District Court decision to the United States Court of Appeals for
the Seventh Circuit. On July 28, 1997, the Court of Appeals reversed the
District Court's ruling and remanded the matter back to the District Court for
further proceedings. The Court of Appeals held, among other things, that the
District Court improperly granted the motion to dismiss the Amended Complaint
because it based its decision on inferences of fact inappropriate at this stage
of the proceedings. The case is currently proceeding in the District Court. The
Company and Mr. Krasny have answered the Amended Complaint. They denied any
wrongdoing or liability on their part and asserted a number of affirmative
defenses. The District Court recently ordered the parties to complete all
outstanding discovery by August 1, 1998, and to file the necessary pretrial
documents by August 21, 1998. The District Court has established a trial date in
November 1998 for this matter.
On June 10, 1997, Mr. Marks filed in the Circuit Court of the Nineteenth
Judicial Circuit, Lake County, Illinois, a lawsuit alleging essentially the same
fraud and breach of fiduciary duty claims asserted in the previously dismissed
federal lawsuit. The Company and Mr. Krasny have answered the complaint and
moved to strike a portion of the relief requested by Mr. Marks. In their answer
to the Complaint, the Company and Mr. Krasny denied any wrongdoing or liability.
This action was dismissed after the ruling by the Court of Appeals discussed
above.
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The Company and Mr. Krasny believe that their actions were honest and
proper and that the suit by the former shareholder is without merit. The Company
and Mr. Krasny are committed to vigorously defending the litigation.
As previously reported, Mr. Krasny has agreed to indemnify the Company for
any and all costs, fees and expenses incurred in connection with this
litigation, including any expenses incurred in judgment or settlement of the
suit.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 (a) Financial Data Schedule (for the three months ended March 31, 1998)
27 (b) Financial Data Schedule (for the twelve months ended December 31, 1996)
27 (c) Financial Data Schedule (for the three months ended September 30, 1997)
27 (d) Financial Data Schedule (for the three months ended June 30, 1997)
27 (e) Financial Data Schedule (for the three months ended March 31, 1997)
27 (f) Financial Data Schedule (for the three months ended September 30, 1996)
27 (g) Financial Data Schedule (for the three months ended June 30, 1996)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
March 31, 1998.
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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.
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(Registrant)
Date May 15, 1998 /s/ Harry J. Harczak, Jr.
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Harry J. Harczak, Jr.
Chief Financial Officer
Date May 15, 1998 /s/ Daniel F. Callen
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Daniel F. Callen
Chief Accounting Officer
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