<PAGE> 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 SEPTEMBER 30, 1997 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________
TO _____________
COMMISSION FILE NUMBER 0-21796
CDW COMPUTER CENTERS, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-3310735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 N. MILWAUKEE AVE. 60061
VERNON HILLS, ILLINOIS (Zip Code)
(Address of principal executive offices)
(847) 465-6000
(Registrant's telephone number, including area code)
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---------------- ----------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
---------------- ----------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
AS OF NOVEMBER 7, 1997, 21,524,984 COMMON SHARES WERE OUTSTANDING.
<PAGE> 2
CDW COMPUTER CENTERS, INC.
TABLE OF CONTENTS
Page No.
------------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets - 1
September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Income - 2
Three and Nine months ended September 30, 1997
and 1996
Condensed Consolidated Statement of Shareholders' 3
Equity - Nine months ended September 30, 1997
Condensed Consolidated Statements of Cash Flows - 4
Nine months ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial 5-7
Statements
ITEM 2. Management's Discussion and Analysis of 8-13
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
ii
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Current assets :
Cash and cash equivalents $ 7,059 $ 16,462
Marketable securities 58,045 58,490
Accounts receivable, net of allowance for doubtful
accounts of $1,750 and $1,100, respectively 85,089 57,396
Miscellaneous receivables 2,979 3,931
Merchandise inventory 63,413 41,462
Prepaid expenses and other assets 1,651 823
Deferred income taxes 2,374 2,258
--------- ---------
Total current assets 220,610 180,822
Property and equipment, net 25,814 3,636
Construction-in-progress 464 8,659
Deferred income taxes and other assets 5,413 5,713
--------- ---------
TOTAL ASSETS $ 252,301 $ 198,830
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 48,463 $ 36,642
Accrued expenses :
Compensation 11,776 10,750
Exit costs 3,569 3,987
Other 3,511 5,829
--------- ---------
Total current liabilities 67,319 57,208
--------- ---------
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; 21,525 shares issued and
outstanding 215 215
Paid-in capital 73,899 67,953
Retained earnings 112,477 75,417
Unearned compensation (1,609) (1,963)
--------- ---------
Total shareholders' equity 184,982 141,622
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 252,301 $ 198,830
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
1
<PAGE> 4
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 323,901 $ 240,330 $ 926,223 $ 665,722
Cost of sales 280,921 208,744 801,643 577,873
--------- --------- --------- ---------
Gross profit 42,980 31,586 124,580 87,849
Selling and administrative expenses 22,568 16,302 66,181 47,213
Exit charge - - - 4,000
--------- --------- --------- ---------
Income from operations 20,412 15,284 58,399 36,636
Interest income 1,194 896 3,183 2,573
Other income (expense), net (63) (48) (174) (146)
--------- --------- --------- ---------
Income before income taxes 21,543 16,132 61,408 39,063
Income tax provision 8,542 6,453 24,348 15,356
--------- --------- --------- ---------
Net income $ 13,001 $ 9,679 $ 37,060 $ 23,707
========= ========= ========= =========
Net income per share $ 0.60 $ 0.44 $ 1.71 $ 1.09
========= ========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding 21,761 21,832 21,703 21,763
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
2
<PAGE> 5
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Total
Common Stock Retained Unearned Shareholders'
Shares Amount Paid-in Capital Earnings Compensation Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 21,525 $ 215 $ 67,953 $ 75,417 $ (1,963) $ 141,622
MPK Restricted Stock Plan forfeitures - - (45) - 22 (23)
Amortization of unearned compensation - - - - 332 332
Tax benefit from restricted stock and - - 5,835 - - 5,835
stock option transactions
Capital contribution for legal costs assumed - - 156 - - 156
by majority shareholder
Net income - - - 37,060 - 37,060
--------------------------------------------------------------------------------------
Balance at September 30, 1997 21,525 $ 215 $ 73,899 $ 112,477 $ (1,609) $ 184,982
======================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE> 6
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 37,060 $ 23,707
Adjustments to reconcile net income to net cash provided by
operating activities:
Tax benefit from restricted stock and stock option exercise 5,835 -
Depreciation 1,804 1,733
Amortization (994) 173
Deferred taxes 190 (373)
Legal fees assumed by majority shareholder 156 51
Loss on disposal of fixed asset - 281
Changes in assets and liabilities:
Accounts receivable, net (27,693) (16,757)
Miscellaneous receivables 952 (213)
Merchandise inventory (21,951) (18,578)
Prepaid expenses and other assets (834) (946)
Accounts payable 10,741 18,496
Accrued expenses (1,300) 5,479
Exit charge (410) 3,987
-------- --------
Net cash provided by operating activities 3,556 17,040
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (12,575) (19,600)
Redemptions of available-for-sale securities 9,575 18,550
Purchases of held-to-maturity securities (61,919) (68,746)
Redemptions of held-to-maturity securities 66,667 54,046
Payments for purchase of property and equipment,
including construction-in-progress (14,707) (8,778)
-------- --------
Net cash used in investing activities (12,959) (24,528)
-------- --------
Net decrease in cash (9,403) (7,488)
Cash and cash equivalents - beginning of period 16,462 14,216
-------- --------
Cash and cash equivalents - end of period $ 7,059 $ 6,728
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE> 7
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 1996 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
1996 Annual Report on Form 10-K and documents incorporated therein. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting solely of normal
recurring accruals) necessary to present fairly the financial position of the
Company as of September 30, 1997 and December 31, 1996, the results of
operations for the three and nine months ended September 30, 1997 and 1996, the
cash flows for the nine months ended September 30, 1997 and 1996, and the
changes in shareholders' equity for the nine months ended September 30, 1997.
The unaudited condensed consolidated statements of income for such interim
periods are not necessarily indicative of results for the full year.
The Company has assessed the impact of the recently issued Statements of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information" and believes the requirements of the Statements will have no
significant impact its financial statements for the year ended December 31,
1997.
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
Net income per common and common equivalent share for the three and nine
months ended September 30, 1997 and 1996 is calculated using the weighted
average number of common and common equivalent shares outstanding during each
period. Common equivalent shares of approximately 236,000 and 178,000 for the
three and nine months ended September 30, 1997, and 307,000 and 238,000 for the
three and nine months ended September 30, 1996, respectively, relate to various
incentive stock option plans and are calculated using the treasury stock method.
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings Per Share" (SFAS 128), the Company will implement the requirements of
SFAS 128 within its financial statements for the year ended December 31, 1997.
The Company has calculated earnings per share using both the basic and diluted
methods, which amounts will not differ materially from earnings per share as
currently reported.
5
<PAGE> 8
On June 24, 1996, the Board of Directors of the Company announced a
three-for-two stock split effected in the form of a stock dividend paid on July
15, 1996 to all common shareholders of record as of July 5, 1996. All per share
and related amounts contained in these financial statements and notes have been
adjusted to reflect the stock split.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's investments
in marketable securities at September 30, 1997 were (in thousands):
<TABLE>
<CAPTION>
Gross
Unrealized
Holding
Estimated ---------- Amortized
Fair Value Gains (Losses) Cost
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
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 51,757 - (24) 51,781
Bonds of states, municipalities, and political subdivisions 264 - - 264
----------------------------------------------------------------
Total held-to-maturity 52,021 - (24) 52,045
----------------------------------------------------------------
Total marketable securities $ 58,021 $ - $ (24) $ 58,045
================================================================
</TABLE>
The Company's investments in securities held-to-maturity at September 30,
1997 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. For the three and nine months ended
September 30, 1997, the Company and majority shareholder have incurred legal
expenses of approximately $170,000 and $253,000, respectively, which have been
assumed by the majority shareholder. 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.
5. Relocation
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. There is no assurance that the $4.0 million charge 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. As a result of the move, the Company incurred moving costs of
approximately $300,000 of which $200,000 were charged to operating results in
the second quarter and $100,000 in the third quarter of 1997.
6
<PAGE> 9
As of September 30, 1997 the Company has incurred approximately $23.9
million of total costs for the new facility, including $6.1 million for land
acquisition and $16.8 million for construction, equipment and furnishings. The
remaining balance in the construction-in-progress account includes construction
of separate internal projects at the new facility, unrelated to the initial
construction.
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.
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 September 30, 1997 there were no borrowings
against either of the credit facilities.
7
<PAGE> 10
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. The financial information for the nine months
ended September 30, 1997 and 1996 is presented on a pro forma basis to exclude
the exit charge and related impact on the executive incentive bonus pool, net of
tax effects.
<TABLE>
<CAPTION>
FINANCIAL INFORMATION Percentage of Net Sales
-----------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Pro Forma)
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 86.7 86.9 86.5 86.8
---- ---- ---- ----
Gross profit 13.3 13.1 13.5 13.2
Selling and administrative expenses 7.0 6.7 7.1 7.2
--- --- --- ---
Income from operations 6.3 6.4 6.4 6.0
Other income, net 0.4 0.3 0.3 0.4
--- --- --- ---
Income before income taxes 6.7 6.7 6.7 6.4
Income tax provision 2.7 2.7 2.6 2.5
--- --- --- ---
Net income 4.0 % 4.0 % 4.1 % 3.9 %
=== === === ===
<CAPTION>
OPERATING STATISTICS Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of orders shipped (000's) 440 342 1,310 944
Average order size $ 736 $ 702 $ 707 $ 705
Customers serviced (000's) 184 161 443 358
Number of account managers, end of period 336 267 336 267
Inventory turns 20 20 20 21
</TABLE>
8
<PAGE> 11
The following table presents net sales by product line as a percentage of
total net sales for each of the periods noted. Product mix is based upon
internal product code classifications and is retroactively adjusted for the
addition of new categories but not for changes in individual product
categorization.
PRODUCT MIX Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Notebooks & Laptops 26.2 % 27.5 % 25.8 % 26.7 %
Desktop Computers 12.8 10.6 12.8 11.3
Software 12.2 12.2 12.6 12.1
Printers 12.2 11.2 11.8 11.4
Data Storage Devices 10.4 10.6 10.4 9.5
Video 7.5 7.3 7.7 7.4
Add-On Boards/Memory 4.9 5.1 4.8 6.1
Network Products 4.6 4.3 4.5 4.2
Communications 3.9 5.3 4.1 5.7
Input Devices 2.9 3.4 3.0 2.6
Multi-Media 1.9 2.1 2.0 1.7
Other Accessories 0.5 0.4 0.5 1.3
--- --- --- ---
Total 100.0 % 100.0 % 100.0 % 100.0 %
====== ====== ====== ======
Three months ended September 30, 1997 compared with three months ended September
30, 1996
Net sales were $323.9 million for the three months ended September 30, 1997
compared with $240.3 million for the three months ended September 30, 1996, an
increase of $83.6 million or 34.8%. Average order size increased approximately
5% to $736 from $702 in the third quarter of 1996. The growth in net sales is
primarily attributable to higher order volume resulting from the expansion of
marketing efforts, new product offerings, an increase in the number of customers
serviced and an increase in the number of account managers. Lower manufacturer
pricing levels and expanded product features in notebook computers resulted in a
shift within the notebook and laptop product category to lower priced models.
Selling prices on many models of notebook and desktop computers decreased from
previous periods, contributing to desktop and notebook computer unit volume
growth of 78% and 60%, respectively, from the third quarter of 1996. Any
reduction in the quantities of notebook and desktop computers available to the
Company from the manufacturers producing these items could have an adverse
effect on future sales.
Gross profit increased as a percentage of net sales to 13.3% for the three
months ended September 30, 1997, compared with 13.1% for the three months ended
September 30, 1996. The increase in gross profit as a percentage of net sales is
primarily due to the expansion of selling margin on certain product lines
resulting from vendor support programs, opportunistic purchases and pricing
strategies. Many of the vendor support programs are dependent on achieving
certain goals and objectives. Actual gross profit achieved may vary on a
quarterly basis due to changes in vendor support programs, product mix, pricing
strategies, market conditions and other factors. As a result, there is no
certainty that the Company will be able to sustain gross profit as a percentage
of net sales at the levels achieved in recent quarters.
The Company ships a substantial quantity of its products to customers via
the United Parcel Service ("UPS"). As a result of the strike by UPS workers from
August 4 through August 22, 1997, the Company was not able to use UPS for
shipments to its customers. Additionally, catalog mailings were delayed due to
the capacity constraints placed on the postal service during the period of the
UPS strike. In an attempt to mitigate the disruption to customer service, the
Company absorbed all direct incremental shipping costs resulting from utilizing
alternate shipping carriers during the strike. Although the precise impact is
not determinable, the Company estimates that the strike resulted in
approximately $3.0 million to $5.0 million in lost sales and approximately
$300,000 in direct incremental costs. The Company estimates the impact of the
UPS strike to be a reduction in earnings per share of approximately $0.01 to
$0.02.
9
<PAGE> 12
Selling and administrative expenses, which include net advertising expense,
the executive incentive bonus pool, shareholder legal and other selling
administrative expenses, increased to 7.0% of net sales in the third quarter
versus 6.8% in the third quarter of 1996.
Net advertising expense increased as a percentage of net sales to 1.3% from
0.6% for the three months ended September 30, 1997 and 1996, respectively. Gross
advertising expense increased to 3.5% of net sales for the three months ended
September 30, 1997 versus 2.8% for the three months ended September 30, 1996 due
to expanded catalog circulation and national advertising pages combined with new
marketing initiatives. Although cooperative advertising reimbursements increased
33% over the prior year, the recovery rate as a percentage of gross advertising
expenses decreased to 63% from 80% in the same period of 1996. The decrease in
the reimbursement rate was primarily due to the implementation of certain
marketing activities which are not eligible for cooperative reimbursement. The
cooperative advertising reimbursement rate may fluctuate as a percentage of
gross advertising spending 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 third quarter of 1997. 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, which pursuant to existing plans is
based upon 20% of the year over year increase in income from operations,
decreased to $862,000 and 0.27% as a percentage of net sales for the three
months ended September 30, 1997 from $1.7 million and 0.70% of sales in 1996.
Legal costs incurred by the majority shareholder for the three months ended
September 30, 1997 and 1996, in connection with the lawsuit filed by a former
shareholder were $170,000 and $30,000, respectively. Although the majority
shareholder has 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 decreased to 5.4% of net sales in
the three months ended September 30, 1997 from 5.5% in the prior year period as
increased occupancy costs were offset by improved productivity and other cost
control measures.
Interest income totaled $1.2 million for the three months ended September
30, 1997 compared with $895,000 for the three months ended September 30, 1996.
The increase is due to higher interest rates combined with higher levels of cash
available for investment resulting from cash generated from operations,
including the tax benefit from stock option and restricted stock transactions in
the first quarter of 1997, offset by funds utilized for construction of the
Vernon Hills facility.
The effective income tax rate, expressed as a percentage of income before
income taxes, decreased to 39.7% for the three months ended September 30, 1997
from 40.0% for the three months ended September 30, 1996. The effective income
tax rate for the third quarter of 1997 is consistent with the effective tax rate
of 39.5% for the full year 1996.
Net income for the three months ended September 30, 1997 was $13.0 million,
a 34.3% increase over $9.7 million for the three months ended September 30,
1996. Net income per share of $0.60 for the three months ended September 30,
1997 increased 36.4% from $0.44 in the same period of 1996. All per share and
related amounts have been adjusted to reflect the three-for-two stock split
effected in the form of a stock dividend paid on July 15, 1996.
Nine months ended September 30, 1997 compared with the nine months ended
September 30, 1996
Net sales were $926.2 million for the nine months ended September 30, 1997
compared with $665.7 million for the nine months ended September 30, 1996, an
increase of $260.5 million or 39.1%. Average order size for the first nine
months remained relatively flat at $707 in 1997 compared with $705 for the
10
<PAGE> 13
corresponding period of the previous year. The growth in net sales is primarily
attributable to higher sales volume resulting from the expansion of marketing
efforts, new product offerings, an increase in the number of customers serviced
and an increase in the number of account managers. Lower manufacturer pricing
levels and expanded product features in notebook resulted in a shift within the
notebook and laptop product category to lower priced models. Selling prices on
many models of notebook and desktop computers decreased from previous periods,
contributing to desktop and notebook computer unit volume growth of 80% and 66%,
respectively, from the first nine months of 1996. Any reduction in the
quantities of notebook and desktop computers available to the Company from the
manufacturers producing these items could have an adverse effect on future
sales.
Gross profit increased as a percentage of net sales to 13.5% for the nine
months ended September 30, 1997, compared with 13.2% for the nine months ended
September 30, 1996. The increase in gross profit as a percentage of net sales is
primarily due to the expansion of selling margin on certain product lines
resulting from vendor support programs, opportunistic purchases and pricing
strategies. Many of the vendor support programs are dependent on achieving
certain goals and objectives. Actual gross profit achieved may vary on a
quarterly basis due to changes in vendor support programs, product mix, pricing
strategies, market conditions and other factors. As a result, there is no
certainty that the Company will be able to sustain gross profit as a percentage
of net sales at the levels achieved in recent quarters.
Selling and administrative expenses, excluding the impact of the exit
charge and its related impact on the executive incentive bonus pool, decreased
to 7.1% of net sales for the nine months ended September 30, 1997 from 7.2% for
the nine months ended September 30, 1996.
Net advertising expense as a percentage of net sales increased from the
prior year to 1.3% of net sales in the nine months ended September 30, 1997
compared with 1.0% in 1996. Gross advertising expense increased to 3.5% of net
sales for the nine months ended September 30, 1997 versus 3.1% for the nine
months ended September 30, 1996 due to expanded catalog circulation and national
advertising pages combined with new marketing initiatives. Although total
cooperative advertising reimbursements increased 44% over the prior year, the
recovery rate as a percentage of gross advertising expenses decreased to 62% of
gross advertising expenditures in the first nine months of 1997 from 68% in the
same period of 1996. The decrease in the reimbursement rate was primarily due to
the implementation of certain marketing activities which are not eligible for
cooperative reimbursement. The cooperative advertising reimbursement rate may
fluctuate as a percentage of gross advertising spending 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 nine months of
1997. 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, which pursuant to existing plans is
based upon 20% of the year over year increase in income from operations, was
$4.6 million and $3.3 million for the nine months ended September 30, 1997 and
1996, respectively, and is included within selling and administrative expenses.
The impact of the $4.0 million exit charge was to reduce the executive incentive
bonus pool by $800,000 in the first quarter of 1996 and effectively increase it
by $800,000 in the first quarter of 1997. Thus, the executive incentive bonus
pool, on a pro forma basis to exclude the impact of the exit charge in both
periods, was $3.8 million and $4.1 million for the nine months ended September
30, 1997 and 1996, respectively.
Legal costs incurred by the majority shareholder for the nine months ended
September 30, 1997 and 1996, in connection with the lawsuit filed by a former
shareholder were $253,000 and $85,000, respectively. Although the majority
shareholder has 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 decreased to 5.3% of net sales in
the nine months ended September 30, 1997 from 5.6% in the prior year period as
increased occupancy costs and moving costs were offset by improved productivity
and other cost control measures.
11
<PAGE> 14
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.
Interest income totaled $3.2 million for the nine months ended September
30, 1997 compared with $2.6 million for the nine months ended September 30,
1996. The increase is due to higher interest rates combined with higher levels
of cash available for investment resulting from cash generated from operations,
including the tax benefit from stock option and restricted stock transactions in
the first quarter of 1997, offset by funds utilized for construction of the
Vernon Hills facility.
The effective income tax rate, expressed as a percentage of income before
income taxes, increased to 39.7% for the nine months ended September 30, 1997
from 39.3% for the nine months ended September 30, 1996. The effective income
tax rate for the first nine months is consistent with the effective tax rate of
39.5% for the full year 1996.
Net income for the nine months ended September 30, 1997 was $37.1 million,
a 56.3% increase over $23.7 million for the nine months ended September 30,
1996. Net income per share of $1.71 for the nine months ended September 30, 1997
increased 56.9% from $1.09 in the same period of 1996. Pro forma net income and
net income per share, excluding the impact of the exit charge and its related
impact on the executive incentive bonus pool, were $37.5 million and $1.73,
representing an increase of 46.4% and 46.6%, respectively, over the first nine
months of 1996. All per share and related amounts have been adjusted to reflect
the three-for-two stock split effected in the form of a stock dividend paid on
July 15, 1996.
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 September 30, 1997, the Company had cash, cash equivalents and
marketable securities of $65.1 million and working capital of $153.3 million,
representing a decrease of $9.8 million in cash, cash equivalents and marketable
securities and an increase of $29.7 million in working capital from December 31,
1996.
As of September 30, 1997 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
September 30, 1997 there were no borrowings against either of the credit
facilities.
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 September 30, 1998.
Cash flows for the nine months ended September 30, 1997
Net cash provided by operating activities for the nine months ended
September 30, 1997 was $3.6 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 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.
Inventory turns decreased to 20.4 annualized turns for the nine months ended
September 30, 1997 from 21.0 annualized turns for the nine months ended
September 30, 1996. The increase in accounts payable reflects timing of payments
12
<PAGE> 15
to vendors at the end of the respective periods. Prepaid expenses and other
current assets increased $834,000 to approximately $1.7 million as of September
30, 1997 and are primarily composed of paper purchased for future catalogs,
prepaid income taxes and prepaid insurance premiums.
Cash provided by operating activities for the first nine months of 1997 was
positively impacted by a $5.8 million tax benefit recorded to paid-in capital,
relating to the exercise and vesting of shares pursuant to the MPK Stock Option
Plan and the MPK Restricted Stock Plan in February 1997.
Net cash used in investing activities for the nine months ended September
30, 1997 was $13.0, including approximately $14.7 million used for capital
expenditures. The capital expenditures made by the Company were primarily
related to the new facility.
13
<PAGE> 16
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 1996 Annual Report on
Form 10-K for a detailed discussion of the lawsuit.)
On June 14, 1996, the District Court granted the defendant's motion to
dismiss the Amended Complaint, with prejudice, on the grounds that the federal
cause of action was barred by the statute of limitations and the District Court
did not have jurisdiction over the pendant state law claims. The Plaintiff filed
an appeal of the District Court decision to the United States Court of Appeals
for the Seventh Circuit. On May 14, 1997, the Court of Appeals heard oral
argument on Plaintiff's appeal. 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 parties are currently awaiting the assignment of the
case to a District Court Judge. The Company anticipates the case will be
assigned during the last quarter of 1997.
On June 10, 1997, the Plaintiff 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 his
dismissed federal lawsuit. The Company and Mr. Krasny have answered the
Complaint and moved to strike a portion of the relief requested by the
Plaintiff. In their answer to the Complaint, the Company and Mr. Krasny deny any
wrongdoing or liability. The Company anticipates this action will likely be
dismissed or stayed in light of the subsequent ruling by the Court of Appeals
discussed above.
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.
14
<PAGE> 17
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
There were no exhibits for the three months ended September 30,
1997.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the nine months ended
September 30, 1997.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CDW Computer Centers, Inc.
--------------------------
(Registrant)
Date November 7, 1997 /s/ Harry J. Harczak, Jr.
----------------- ----------------------------
Harry J. Harczak, Jr.
Chief Financial Officer
Date November 7, 1997 /s/ Daniel F. Callen
----------------- -----------------------------
Daniel F. Callen
Chief Accounting Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
dated September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 7,059
<SECURITIES> 58,045
<RECEIVABLES> 85,089
<ALLOWANCES> 1,750
<INVENTORY> 63,413
<CURRENT-ASSETS> 220,610
<PP&E> 29,302
<DEPRECIATION> 3,024
<TOTAL-ASSETS> 252,301
<CURRENT-LIABILITIES> 67,319
<BONDS> 0
0
0
<COMMON> 215
<OTHER-SE> 184,767
<TOTAL-LIABILITY-AND-EQUITY> 252,301
<SALES> 323,901
<TOTAL-REVENUES> 323,901
<CGS> 280,921
<TOTAL-COSTS> 280,921
<OTHER-EXPENSES> 22,568
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 21,543
<INCOME-TAX> 8,542
<INCOME-CONTINUING> 13,001
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,001
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0
</TABLE>
