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, 1999 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 0-21796
CDW COMPUTER CENTERS, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-3310735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 N. MILWAUKEE AVE. 60061
VERNON HILLS, ILLINOIS (Zip Code)
(Address of principal executive offices)
(847) 465-6000
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------------- --------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
-------------- --------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
AS OF APRIL 28, 1999, 21,602,789 COMMON SHARES WERE ISSUED AND
21,552,789 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, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 2
Condensed Consolidated Statement of Shareholders'
Equity - Three months ended March 31, 1999 3
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 4
Notes to Condensed Consolidated Financial
Statements 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 14
PART II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,545 $ 4,230
Marketable securities 59,445 66,458
Accounts receivable, net of allowance for doubtful
accounts of $3,485 and $3,185, respectively 187,468 152,308
Miscellaneous receivables 6,401 5,896
Merchandise inventory 80,463 64,392
Prepaid expenses and other assets 1,357 1,423
Deferred income taxes 5,081 5,081
--------- ---------
Total current assets 348,760 299,788
Property and equipment, net 38,203 37,056
Deferred income taxes and other assets 4,869 4,977
--------- ---------
TOTAL ASSETS $ 391,832 $ 341,821
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 63,669 $ 41,358
Accrued expenses:
Compensation 14,871 16,279
Income taxes 9,816 5,146
Exit costs 2,600 2,715
Other 5,912 5,560
--------- ---------
Total current liabilities 96,868 71,058
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 75,000 shares
authorized; 21,591 and 21,571 shares issued
respectively 216 216
Paid-in capital 85,700 81,352
Retained earnings 211,957 192,259
Unearned compensation (820) (975)
--------- ---------
Total shareholders' equity 297,053 272,852
--------- ---------
Less cost of common shares in treasury, 50 shares (2,089) (2,089)
--------- ---------
Total shareholders' equity 294,964 270,763
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 391,832 $ 341,821
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31
-----------------------------
1999 1998
------------- -------------
Net sales $ 539,406 $ 384,591
Cost of sales 471,500 335,444
--------- ---------
Gross profit 67,906 49,147
Selling and administrative expenses 36,221 25,792
--------- ---------
Income from operations 31,685 23,355
Interest income 1,042 1,169
Other expense (113) (71)
--------- ---------
Income before income taxes 32,614 24,453
Income tax provision 12,916 9,683
--------- ---------
Net income $ 19,698 $ 14,770
========= =========
Earnings per share
Basic $ 0.91 $ .69
========= =========
Diluted $ 0.90 $ .68
========= =========
Weighted average number of
common shares outstanding
Basic 21,535 21,546
========= =========
Diluted 21,941 21,753
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Total
Common Stock Paid in Retained Unearned Treasury Shares Shareholders'
Shares Amount Capital Earnings Compensation Shares Amount Equity
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 21,571 $ 216 $ 81,352 $ 192,259 $ (975) 50 $(2,089) $ 270,763
MPK Restricted Stock Plan forfeitures (44) (44)
Amortization of unearned compensation 155 155
Exercise of Stock Options 20 501 501
Tax Benefit from stock option transactions 3,891 3,891
Net income 19,698 19,698
--------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 21,591 $ 216 $ 85,700 $ 211,957 $ (820) 50 $(2,089) $ 294,964
======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
-------------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 19,698 $ 14,770
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation 1,500 1,059
Accretion of marketable securities, net (762) (746)
Allowance for doubtful accounts 300 225
Stock-based compensation expense 111 119
Legal fees assumed by majority shareholder, net of tax - 65
Deferred income taxes 112 -
Tax benefit from stock option exercises 3,891 351
Changes in assets and liabilities:
Accounts receivable (35,460) (10,926)
Miscellaneous receivables (505) (1,472)
Merchandise inventory (16,071) (8,221)
Prepaid expenses and other assets 63 (186)
Accounts payable 22,311 (4,892)
Accrued compensation (1,408) (2,697)
Accrued income taxes and other expenses 5,021 6,035
Accrued exit costs (115) (178)
-------- --------
Net cash used in operating activities (1,314) (6,694)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (32,244) (6,000)
Redemptions of available-for-sale securities 13,090 7,250
Purchases of held-to-maturity securities - (20,843)
Redemptions of held-to-maturity securities 26,929 23,055
Purchase of property and equipment (2,647) (5,961)
-------- --------
Net cash provided by / (used in) investing activities 5,128 (2,499)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 501 440
-------- --------
Net cash provided by financing activities 501 440
-------- --------
Net increase / (decrease) in cash 4,315 (8,753)
Cash and cash equivalents - beginning of period 4,230 18,233
-------- --------
Cash and cash equivalents - end of period $ 8,545 $ 9,480
======== ========
The accompanying notes are an integral part of the consolidated financial
statements
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CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
CDW Computer Centers, Inc. and its subsidiaries (collectively the
"Company") are engaged in the distribution of brand name personal computers and
related products primarily through direct marketing to end users within the
United States. The Company's primary business is conducted from a combined
telemarketing, corporate office, warehouse and showroom facility located in
Vernon Hills, Illinois. The Company also operates a telemarketing facility in
Buffalo Grove, Illinois, a retail showroom in Chicago, Illinois and a government
sales office in Chantilly, Virginia.
The Company extends credit to business, government and institutional
customers under certain circumstances based upon the financial strength of the
customer. Such customers are typically granted net 30 day credit terms. The
balance of the Company's sales are made primarily through third-party credit
cards and for cash-on-delivery.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. Such principles were
applied on a basis consistent with those reflected in the 1998 Annual Report on
Form 10-K and documents incorporated therein as filed with the Securities and
Exchange Commission. The accompanying financial data should be read in
conjunction with the notes to consolidated financial statements contained in the
1998 Annual Report on Form 10-K and documents incorporated therein. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting solely of normal
recurring accruals) necessary to present fairly the financial position of the
Company as of March 31, 1999 and December 31,1998, the results of operations for
the three months ended March 31, 1999 and 1998, the cash flows for the three
months ended March 31, 1999 and 1998, and the changes in shareholders' equity
for the three months ended March 31, 1999. The unaudited condensed consolidated
statements of income for such interim periods are not necessarily indicative of
results for the full year.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Additionally, such estimates and assumptions affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Earnings Per Share
A reconciliation of basic and diluted earnings per-share computations in
accordance with Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128) is included in Note 6 to the financial statements.
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On April 20, 1999, the Board of Directors of the Company approved a
two-for-one stock split to be effected in the form of a stock dividend payable
on May 19, 1999 to all common shareholders of record at the close of business on
May 5, 1999. Footnote 6 presents the number of basic and diluted shares
outstanding as of March 31, 1999 and 1998, and earnings per share for the three
months ended March 31, 1999 and 1998 adjusted for the impact of the stock split.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's investments
in marketable securities at March 31, 1999, 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 $ 21,279 $ - $ (25) $ 21,304
-------------------------------------------------
Total available-for-sale 21,279 - (25) 21,304
-------------------------------------------------
Held to maturity:
Bonds of states, municipalities, and political
subdivisions 457 1 - 456
U.S. Government and Government Agency Securities 37,650 1 (36) 37,685
-------------------------------------------------
Total held-to-maturity 38,107 2 (36) 38,141
-------------------------------------------------
Total marketable securities $ 59,386 $ 2 $ (61) $ 59,445
=================================================
The Company's investments in securities held-to-maturity at March 31, 1999
were all due in one year or less by contractual maturity. Estimated fair values
of marketable securities are based on quoted market prices.
4. Facilities & Exit Accrual
In July 1997, the Company relocated to its current facility in Vernon Hills
and vacated its Buffalo Grove facility. The Company recorded a pre-tax
non-recurring charge to operating results for exit costs in the first quarter of
1996. The exit costs consist primarily of the estimated cost to the Company of
subleasing the vacated facility, including holding costs, the estimated costs of
restoring the building to its original condition and certain asset write-offs
resulting from the relocation. During the three months ended March 31, 1999 and
1998 the Company charged approximately $115,000 and $178,000, respectively,
against the exit accrual in cash payments for rent, real estate taxes and
maintenance of the facility.
The Company reopened the office portion of the Buffalo Grove facility
during the fourth quarter of 1998 as a telemarketing facility. Accordingly, the
Company records a proportionate share of the rent and other operating costs to
selling and administrative expenses. The Company plans to occupy the Buffalo
Grove office facility while it finalizes future long term growth plans for its
Vernon Hills campus and is continuing its effort to sublease the warehouse
portion of the Buffalo Grove facility. There is no assurance that the remaining
exit liability of $2.6 million at March 31, 1999 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.
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5. Financing Arrangements
The Company has an aggregate $50 million available pursuant to unsecured
lines of credit with two financial institutions expiring in June 1999, 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, 1999, there were no borrowings against either of the credit facilities.
In October 1998, the Company established an unsecured stand-by letter of
credit for approximately $160,000 related to improvements to the Vernon Hills
facility which expires in June 1999.
6. Earnings Per Share
The Company has approximately 21,591,000 shares outstanding at March 31,
1999. The Company has also granted options to purchase common shares to the
directors and coworkers of the Company under several stock option plans. These
options have a dilutive effect on the calculation of earnings per share. The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations as required by SFAS 128.
Three Months Ended March 31,
As Presented on
Consolidated Adjusted for 2-for-1
Statements of Income Stock Split
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Basic earnings per share:
Income available to
common shareholders (numerator) $ 19,698 $ 14,770 $ 19,698 $ 14,770
------------ ------------ ------------ ------------
Weighted average common
shares outstanding (denominator) 21,535 21,546 43,070 43,092
------------ ------------ ------------ ------------
Basic earnings per share $ 0.91 $ 0.69 $ 0.46 $ 0.34
============ ============ ============ ============
Diluted earnings per share:
Income available to
common shareholders (numerator) $ 19,698 $ 14,770 $ 19,698 $ 14,770
------------ ------------ ------------ ------------
Weighted average common
shares outstanding 21,535 21,546 43,070 43,092
Effect of dilutive securities:
Options on common stock 406 207 812 414
------------ ------------ ------------ ------------
Total common shares and dilutive
securities (denominator) 21,941 21,753 43,882 43,506
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.90 $ 0.68 $ 0.45 $ 0.34
============ ============ ============ ============
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7. Leasing Joint Venture
In April 1999, CDW Capital Corporation, a wholly-owned subsidiary of CDW,
and First Portland Corporation ("FIRSTCORP") formed CDW Leasing, L.L.C.
("CDW-L"), a 50/50 joint venture. CDW-L will provide captive leasing services to
CDW customers. FIRSTCORP is a full-service leasing organization that has
provided third party leasing solutions to CDW customers for more than three
years. Under the terms of an operating agreement, FIRSTCORP will provide leasing
management services to CDW-L, with net earnings of the venture allocated 50% to
CDW and 50% to FIRSTCORP. CDW Capital Corporation has committed to loan up to
$10 million to CDW-L on a secured basis to fund new leases initiated by CDW-L.
The investment in CDW-L will be accounted for using the equity method.
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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,
------------------------------------------------
1999 1998
---- ----
Net sales 100.0% 100.0%
Cost of sales 87.4 87.2
------ ------
Gross profit 12.6 12.8
Selling and administrative expenses 6.7 6.7
------ ------
Income from operations 5.9 6.1
Other income, net 0.2 0.3
------ ------
Income before income taxes 6.1 6.4
Income tax provision 2.4 2.6
------ ------
Net income 3.7% 3.8%
====== ======
OPERATING STATISTICS Three Months Ended
March 31,
-------------------------
1999 1998
-------- --------
Number of orders shipped 624,152 578,249
Average order size $ 864 $ 665
Number of account managers, end of period 630 476
Customers serviced - commercial 117,000 100,000
Customers serviced - consumer 107,000 129,000
Annualized inventory turns 26 20
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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.
PRODUCT MIX
Three Months Ended
March 31,
1999 1998
-------- --------
Notebooks & Laptops 19.0% 20.2%
Desktop Computers & Servers 15.8 15.6
Software 13.0 12.8
Printers 12.1 13.4
Data Storage Devices 10.0 11.2
Network & Communication Products 9.4 8.5
Monitors and Video Products 7.3 8.3
Add-On Boards & Memory 4.7 4.5
Supplies 3.7 N/A
Input Devices 2.4 2.9
Multi-Media Devices 1.6 2.1
Other Accessories 1.0 0.5
-------- --------
Total 100.0% 100.0%
======== ========
Three months ended March 31, 1999 compared to three months ended March 31, 1998
Net sales in the first quarter of 1999 increased 40.3% to a record $539.4
million compared to $384.6 million in the first quarter of 1998. The Company's
average order size increased 29.9% to $864 from $665 in the prior year quarter.
The growth in net sales is primarily attributable to a higher concentration of
commercial accounts, a higher level of sales per active account and an increase
in the number of orders processed. Sales to commercial accounts, including
business, government, educational and institutional customers, increased to 90%
of net sales in the first quarter of 1999 from approximately 83% in the first
quarter of 1998. The number of active commercial customers increased 17% to
117,000 in the first quarter of 1999 from 100,000 in the first quarter of 1998.
For the three months ended March 31, 1999 the number of orders shipped increased
7.9% to over 624,000. Notebook computers continue to represent the largest
portion of the Company's sales at 19.0%, with dollar volume increasing more than
32% from the first quarter of 1998.
The average selling price of desktop and server CPU's increased 10.0% and
the average selling price of notebook CPU's declined 4.6% from the first quarter
of 1998. The Company believes there may be future decreases in prices for
personal computers and related products. Such decreases require the Company to
sell more units in order to maintain or increase the level of sales. The
Company's sales growth rate and operating results could be adversely affected if
future manufacturer price reductions or the Company's sales and marketing
efforts fail to increase the level of unit sales. Sales of Compaq, Hewlett
Packard, IBM, Microsoft and Toshiba products comprise a substantial portion of
the Company's sales. The loss of any of these, or any other key vendors, could
have an adverse effect on the Company's results from operations. The statement
concerning future prices, sales and results from operations are forward looking
statements that involve certain risks and uncertainties such as stated above.
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The fastest growing product categories in terms of sales dollars during the
first quarter of 1999 were network and communication products at 55.7%, memory
at 45.2%, software at 43.3%, desktop computers and servers at 42.5%, and
notebook computers at 31.6%. Demand for certain products offered by the Company,
and the growth of certain product categories, are driven by advances in
technology and the development of new products and applications by the industry
manufacturers, and acceptance of these new technologies and products by
end-users. Any slowdown in the rate of technological advancement and new product
development by industry manufacturers could have a material adverse effect on
the Company's future sales growth.
Gross profit decreased as a percentage of net sales to 12.6% for the three
months ended March 31, 1999, compared to 12.8% in the first quarter of 1998. The
decrease in gross profit as a percentage of net sales is primarily the result of
lower selling margins achieved on certain product lines. On a forward-looking
basis, it is likely that the gross profit margin achieved will fluctuate from
quarter to quarter and could be less than the 12.6% achieved in the first
quarter of 1999. The statement concerning future gross profit is a forward
looking statement that involves certain risks and uncertainties such as the
continued participation by vendors in inventory price protection and rebate
programs, pricing strategies, product mix, market conditions and other factors
which could result in a fluctuation of gross margins below recent experience.
Certain manufacturers may make additional changes that limit the amount of price
protection for which the Company is eligible. Such changes could have a negative
impact on gross margin in future periods. Vendor rebate programs are at the
discretion of the vendor and many of these programs are dependent on achieving
certain goals and objectives. Accordingly, there is no certainty that such
programs will continue at their current levels or that the established goals and
objectives will be attained.
Selling and administrative expenses, which include net advertising expense,
other selling administrative expenses and the executive incentive bonus pool
remained flat at 6.7% of net sales in the three months ended March 31, 1999 and
1998.
Net advertising expense increased as a percentage of net sales to 0.79%
from 0.75% for the three months ended March 31, 1999 and 1998, respectively.
Gross advertising expense decreased to 2.8% of net sales in the first quarter of
1999 versus 3.3% in the first quarter of 1998. The Company decreased catalog
circulation and the number of national advertising pages versus the prior year,
while expanding its spending on branding. 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 1999. Cooperative advertising
reimbursements as a percentage of net sales declined to 2.0% of net sales from
2.5% in the first quarter of 1998. The decline in cooperative advertising as a
percentage of sales is partially due to fixed fund market development fund
programs, as well as normal variation in programs offered by vendors. The
cooperative advertising reimbursement rate may fluctuate in future quarters
depending on the level of vendor participation achieved, changes in vendor
programs and collection experience. The statements concerning future advertising
expense and cooperative advertising reimbursements are forward looking
statements that involve certain risks and uncertainties including the ability to
identify and implement cost effective incremental advertising and marketing
programs as well as the continued participation of vendors in the cooperative
advertising reimbursement program.
Other selling and administrative costs decreased to 5.7% of net sales in
1999 from 5.8% in the prior year. Increases in coworker productivity offset
increased payroll and associated costs related to our sales force expansion. As
of March 31, 1999, there were 630 account managers, an increase of 32.4% from
476 account managers as of March 31, 1998. Of the 630 account managers,
approximately 74% had fewer than 24 months experience and 55% had fewer than 12
months, as compared to 86% and 62% at March 31, 1998.
The executive incentive bonus pool increased to $1.4 million in the first
quarter of 1999 from $546,000 in the first quarter of 1998. For 1999, the
Compensation and Stock Option Committee established the bonus pool at 15% of the
increase in operating income over the prior year.
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Interest income, net of other expenses, decreased to $929,000 in the first
quarter of 1999 compared to $1.1 million in the first quarter of 1998, due to
both lower levels of available cash and reduced interest rates.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the three months ended March 31, 1999 and 1998.
Net income for the three months ended March 31, 1999, was $19.7 million, a
33.4% increase over $14.8 million for the three months ended March 31, 1998.
Diluted earnings per share was $0.90 and $0.68 for the three months ended March
31, 1999 and 1998, respectively, an increase of 32.4%.
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, 1999, the Company had cash, cash equivalents and marketable
securities of $68.0 million and working capital of $251.9 million, representing
a decrease of $2.7 million in cash, cash equivalents and marketable securities
and an increase of $23.2 million in working capital from December 31, 1998.
As of March 31, 1999, the Company had an aggregate $50.0 million available
pursuant to unsecured credit facilities with two financial institutions expiring
in June 1999. Borrowings under one of the lines bear interest at the prime rate
less 2.5%, LIBOR plus 0.5% or the federal funds rate plus 0.5%, as determined by
the Company. Borrowings under the second credit facility bear interest at the
prime rate less 2.5%, LIBOR plus 0.45% or the federal funds rate plus 0.45%, as
determined by the Company. At March 31, 1999, there were no borrowings against
either of the credit facilities. The Company intends to renew the credit
facilities upon expiration in June 1999. In October 1998, the Company
established an unsecured stand-by letter of credit for approximately $160,000
related to improvements to the Vernon Hills facility which expires in June 1999.
The Company's current primary and anticipated use of cash is to fund the
growth in working capital and capital expenditures. The Company believes that
the funds held in cash, cash equivalents and marketable securities, and funds
available under the credit facilities will be sufficient to fund the Company's
working capital and cash requirements at least through March 31, 2000.
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999
Net cash used in operating activities for the three months ended March 31,
1999, was $1.3 million. The primary factors which historically affect the
Company's cash flows from operations are accounts receivable, merchandise
inventory and accounts payable. The increase in accounts receivable resulted
from increased sales volume, an increase in the percentage of net sales
generated from commercial accounts with open credit terms to 67.3% and changes
in the timing of payments by certain customers. Annualized inventory turnover
increased to approximately 26 times for the three months ended March 31, 1999.
Inventory turnover in 1999 has been positively impacted by a reduction in
inventory levels resulting from the implementation of build to order programs by
the major hardware manufacturers. The increase in accounts payable reflects
timing of payments to vendors at the end of the respective periods.
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Cash provided by operating activities for the three months ended March 31,
1999, was positively impacted by a $3.9 million tax benefit recorded to
paid-in-capital, relating to the exercise of shares pursuant to the MPK Stock
Option Plan.
Net cash provided by investing activities for the three months ended March
31, 1999, was $5.1 million, including approximately $2.6 million used for
capital expenditures. The capital expenditures made by the Company were
primarily related to the purchase of machinery and equipment for the Vernon
Hills facility.
LEASING JOINT VENTURE
In April 1999, CDW Capital Corporation, a wholly-owned subsidiary of CDW,
and First Portland Corporation ("FIRSTCORP") formed CDW Leasing, L.L.C.
("CDW-L"), a 50/50 joint venture. CDW-L will provide captive leasing services to
CDW customers. FIRSTCORP is a full-service leasing organization that has
provided third party leasing solutions to CDW customers for more than three
years. Under the terms of an operating agreement, FIRSTCORP will provide leasing
management services to CDW-L, with net earnings of the venture allocated 50% to
CDW and 50% to FIRSTCORP. CDW Capital Corporation has committed to loan up to
$10 million to CDW-L on a secured basis to fund new leases initiated by CDW-L.
The investment in CDW-L will be accounted for using the equity method.
YEAR 2000 READINESS DISCLOSURE
General
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, receive or
ship products, send invoices, or engage in similar normal business activities.
The Company has established a Y2K project designed to make all its hardware
and software systems Y2K compliant by December 31, 1999. The Company intends to
contract an outside organization to review its project methodology and status to
ensure all aspects of the Y2K issue have been addressed.
Project
CDW's Y2K project consists of two components, internal and external. The
internal section has been divided into five steps which are currently being
completed by the Y2K Team:
1. Awareness - Awareness includes evaluating industry best practices,
generating management and employee awareness, establishing communications
methods and establishing the project team.
2. Assessment - This phase includes hardware and software compliance
assessment, establishment of the size and scope of the project,
establishment of a project timeline, priorities, budgeting and allocation
of resources.
3. Renovation - Renovation consists of establishing a detailed implementation
plan, the design of new systems and system corrections, writing of system
code and software and hardware testing.
4. Validation - Validation includes testing new systems and system corrections
to ensure they will function properly in operation.
5. Implementation - Final certification of the new and corrected systems,
implementation of the systems and monitoring to ensure they continue to
function.
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All phases of the project as they relate to internal systems were completed
as of March 31, 1999. The Company plans to focus the majority of its efforts for
the remainder of 1999 on the external portion of the project while continuing to
validate and test its internal systems to ensure those systems are properly
converted.
The external portion of the project focuses on assessing the Y2K readiness
of product and service vendors and its potential impact on the Company's
operations. The Company began communications with its vendors in the first
quarter of 1999 to assess the status of the vendors' Y2K projects. The Company
will work through issues with its business partners to minimize potential
business interruptions during the remainder of 1999. This portion of the project
is expected to be completed prior to December 31, 1999.
Costs
The Company estimates that total costs for the Y2K project, through
December 31, 1999, will range between $750,000 and $1 million. As of March 31,
1999 the Company has incurred, and recorded as operating expenses, approximately
$370,000 in costs related to the project, of which approximately $130,000 were
incurred during the three months ended March 31, 1999. Essentially all of the
Company's expenditures to date are for internal payroll costs related to the
assessment and correction of internal systems. Of the estimated remaining costs
of $380,000 to $630,000, approximately 75% relate to the cost of assessing and
communicating with vendors and 25% relate to the correction of internal systems.
Risks The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations and financial condition. Due to the general uncertainty
inherent in the Y2K problem, resulting in part from the uncertainty of the Y2K
readiness of third-party suppliers, the Company is unable to determine at this
time whether the consequences of Y2K failures will have a material impact on the
Company's results of operations and financial condition. The Company's Y2K
project is expected to significantly reduce the Company's level of uncertainty
about the Y2K problem and, in particular, about the Y2K compliance and readiness
of its material vendors. The Company believes that, with the completion of the
project as scheduled, the possibility of significant interruptions of normal
operations should be minimized.
The statements concerning future impact of the Y2K issue are forward
looking statements that involve certain risks and uncertainties, such as the
inability to receive products on a timely basis from vendors, ship products to
customers,receive payments from customers and other factors which could have a
material impact on the Company's results from operations. Certain vendors may
fail to adequately prepare their information systems or the Company's own Y2K
project may not correct all Y2K issues. Accordingly, there is no certainty that
either the Company or its vendors will complete their Y2K projects prior to
December 31, 1999.
Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations concerning the Company's sales
growth, gross profit as a percentage of sales, advertising expense, cooperative
advertising reimbursements and the potential impact on operations of the Y2K
issue are forward-looking statements that involve certain risks and
uncertainties, as specified herein.
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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 (uu) CDW 1998 Officer and Manager Bonus Plan
10 (vv) Operating agreement of CDW Leasing, L.L.C.
10 (ww) Loan and Security Agreement Between CDW Capital Corp.
and CDW Leasing, L.L.C.
10 (xx) First Amendment to CDW 1996, 1997 and 1998 Officer
Manager Bonus Plans
21 Subsidiaries of the Registrant
27 (a) Financial Data Schedule (for the three months ended March
31, 1999)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
March 31, 1999.
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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.
(Registrant)
Date April 30, 1999 /s/ Harry J. Harczak, Jr.
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Harry J. Harczak, Jr.
Chief Financial Officer
Date April 30, 1999 /s/ Sandra M. Rouhselang
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Sandra M. Rouhselang
Controller
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Index to Exhibits
10 (uu) CDW 1998 Officer and Manager Bonus Plan
10 (vv) Operating Agreement of CDW Leasing, L.L.C.
10 (ww) Loan and Security Agreement Between CDW Capital Corp. and CDW Leasing,
L.L.C.
10 (xx) First Amendment to 1996, 1997 and 1998 Officer Manager Bonus Plan
21 Subsidiaries of the Registrant
27 Financial Data Schedule
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