Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
_ 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., Vernon Hills, Illinois 60061
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code : (847) 465-6000
Securities registered pursuant to Section 12(b) of the Act :
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None N/A
Securities registered pursuant to Section 12 (g) of the Act :
Common Stock
------------
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
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. X .
The aggregate market value of the Common Stock held by non-affiliates as of
March 29, 2001 was approximately $2.891 billion, based upon the market price per
share of $33.0625.
As of March 29, 2001, the registrant had 85,801,789 shares of Common Stock,
$0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the parts
of this Form 10-K designated to the right of the document listed.
Incorporated Document Location in Form 10-K
Definitive Proxy Statement for Part III, Items 10, 11, 12 and 13
Annual Meeting of Shareholders to be
held on May 23, 2001, to be filed
pursuant to Regulation 14 A not
later than April 30, 2001.
An Index to Exhibits appears at pages Part IV, Item 14
19 - 21 herein
i
CDW COMPUTER CENTERS, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2000
INDEX
PART I 10-K Page No
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . 10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk. . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . .. . . . 18
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . 18
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . 19
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . 19
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ii
PART I
Item 1. Business.
General
CDW Computer Centers, Inc. and its Subsidiaries (collectively "CDW" or the
"Company") is a leading direct marketer of microcomputer products, primarily to
business, government, educational, institutional and home office users in the
United States. The Company sells a broad range of multi-brand microcomputer
products, including hardware and peripherals, software, networking/communication
products and accessories through knowledgeable sales account managers. In May
1998, the Company formed CDW Government, Inc. (CDW-G), a wholly owned
subsidiary. CDW-G sells microcomputer products and related software, peripherals
and accessories and focuses exclusively on serving government and educational
customers. In April 1999, CDW Capital Corporation, a wholly-owned subsidiary of
CDW established in 1999, and First Portland Corporation formed CDW Leasing,
L.L.C. ("CDW-L"), a 50/50 joint venture. CDW-L provides captive leasing services
to CDW customers. The Company offers popular brand name microcomputer products
from Adobe, Apple, Cisco, Compaq, Computer Associates, Epson, Hewlett-Packard,
IBM, Intel, Microsoft, NEC, Novell, Sony, Symantec, Toshiba and 3Com, among
others. The Company's high volume, cost-efficient operation, supported by its
proprietary information technology systems, enables it to offer these products
at competitive prices combined with a high level of service.
The Company directs its marketing efforts toward current and prospective
customers with a particular focus on commercial accounts, including business,
government, educational and institutional users. The Company believes that these
entities and persons have a high level of product knowledge and are most likely
to purchase sophisticated systems and products on a repetitive basis through the
Company's direct marketing format. The Company markets to prospective customers
through its catalog and other direct mailing programs, through national
advertising in computer magazines and through electronic commerce via the
Internet. During the year ended December 31, 2000, the Company serviced
approximately 309,000 commercial accounts which comprised 96% of total sales
dollars. The Company continues to focus on generating repeat sales from existing
customers while attracting sales from new customers. The Company has
consistently maintained a high annual rate of repeat purchases from current
customers by offering excellent customer service and competitive pricing on a
broad range of microcomputer products. The Company enhances repeat purchases by
offering add-on and replacement products through its relationship oriented
account managers who are knowledgeable about a customer's needs.
Additionally, the Company focuses significant efforts on developing and
expanding its E-business initiatives. The Company's strategy is to implement
E-business initiatives that are an extension of its "high tech, high touch"
relationship based business model. These initiatives include the Company's
Internet websites, www.cdw.com and www.cdwg.com, and cdw@work which provide
customized websites for commercial customers. Details of these initiatives are
included in the section titled E-business below.
The Microcomputer Products Industry Evolution
The microcomputer industry has evolved as a result of, among other things,
the development of new technologies that have been translated by manufacturers
into new products and applications. The Company has been and will continue to be
dependent on the continued development of new technologies and products by its
vendors, including but not limited to Cisco, Compaq, Hewlett Packard, IBM, Intel
and Microsoft, as well as the acceptance of such technologies and new products
by end-users. A decrease in the rate of development of new technologies and new
products by manufacturers, or the lack of acceptance of such technologies and
products by end-users, could have a material adverse effect on the Company's
growth prospects and results of operations.
The sophistication and value consciousness of the Company's customer base,
combined with the evolution of industry standards for microcomputers, has also
resulted in heightened end-user interest in, and acceptance of, microcomputers,
peripherals and software which use the Microsoft operating platform, and other
operating platforms offered by the Company, and are manufactured by high quality
manufacturers. In addition, the intense competition among manufacturers has
generally reduced prices and increased the number of microcomputers and related
products being used by businesses and sold by direct marketing organizations
such as CDW. The Company believes that its business model, which promotes the
sale of high quality, brand name products at competitive prices combined with a
high level of personal and technical service, is well suited to serve an
increasingly sophisticated and value conscious customer base.
Competition
The microcomputer products industry is highly competitive. The Company
competes with a large number and variety of resellers of microcomputer and
related products as well as manufacturers that sell direct to customers. In the
hardware category, the Company competes with traditional microcomputer
retailers, computer superstores, consumer electronic and office supply
superstores, mass merchandisers, national direct marketers, Internet retailers,
corporate resellers and value-added resellers. In the software and accessories
categories, the Company generally competes with these same resellers as well as
specialty retailers and resellers. In addition, as a result of improving
technology, certain software manufacturers have developed and may continue to
develop sales methods that allow customers to download software programs and
packages directly onto the customer's system through the use of the Internet.
The Company also competes with manufacturers that sell hardware and software
directly to certain customers. Several manufacturers that sell product to the
Company for resale have initiated or expanded their efforts to sell directly to
end users. Several of the Company's current and potential competitors are larger
and have substantially greater resources than the Company. As competition
intensifies the Company intends to improve the value-added service provided to
its customers, strengthen its customer relationships and broaden its marketing
activities. If the Company's efforts are not successful, the Company's growth
rates and operating margins could be negatively impacted.
The current industry configuration, including the proliferation of Internet
resellers, may result in increased pricing pressures. Decreasing prices of
microcomputers and related products, resulting in part from technological
changes, may require the Company to sell a greater number of products to achieve
the same level of net sales and gross profit. Such a trend could make it more
difficult for the Company to continue to increase its net sales and earnings
growth. In addition, if the growth rate of microcomputer sales were to slow
down, the Company's operating results could be adversely affected.
The CDW Philosophy
The Company adheres to a central philosophy known as the CDW CIRCLE OF
SERVICE which places the customer at the center of all of the Company's actions.
The philosophy is based upon the premise, promoted by management, that "People
Do Business With People They Like." The CDW CIRCLE OF SERVICE is a graphic
reminder to the Company and its personnel that good service leads to good
experiences and increased sales, and, alternatively, that bad experiences lead
to lost sales and job uncertainty.
Business Strategy
The Company's business strategy is to be a high volume, cost-efficient
direct solutions provider of multi-brand, competitively priced, microcomputer
products and to provide a high level of customer service. The Company believes
that the following factors are of principal importance in its ability to
implement this "high tech, high touch" business strategy:
Breadth and Depth of Selection. The Company offers a wide range of products
from many manufacturers, providing its customers with the convenience of
one-stop shopping for their microcomputer-related needs. The Company carries
brand name products and regularly reviews and modifies its mix of product
offerings.
Commercial Customer Focus. The Company focuses the majority of its sales
and marketing efforts on attracting and servicing commercial customers rather
than individual or consumer users. Commercial customers includes businesses,
government educational and institutional customers. The Company believes
commercial customers provide a higher rate of repeat sales than with consumer
sales. In 2000, sales to commercial customers comprised 96% of sales revenue, an
increase from 93% in 1999.
Competitive Pricing. The Company believes that its high volume,
cost-efficient direct marketing format allows it to provide a high level of
value added service to its customers with competitive pricing.
Marketing. The Company uses a marketing mix of direct response activities,
including its catalog formats and trade magazine advertising combined with a
multifaceted branding campaign including national television advertising. These
activities are intended to create customer response and a high level of
awareness of CDW. The Company's marketing activities are directed to commercial
users and the decision makers in commercial organizations.
Sales. The Company has adopted a relationship oriented sales approach with
a high level of technical and skill based training for its account managers. New
account managers function in a corporate development mode designed to target and
develop a steady customer base.
Customer Service - Custom Configuration and Technical Support. As of
December 31, 2000, the Company custom configures approximately 5,200 units per
week and ships the majority of its orders the day the order is placed. The
Company offers technical support by telephone for the life of the product 24
hours a day, seven days a week. The Company employs a technical staff of more
than 100 with over 225 manufacturer certifications to assist the customer with
technical questions and issues. The Company believes that its commitment to
service at the time of sale and after the purchase maximizes sales and
encourages repeat customers.
Information Technology. The Company uses proprietary, real-time information
technology systems which centralize management of key functions and generate
daily operating control reports enabling management to identify and respond
quickly to internal changes and trends in the industry and to provide high
levels of customer satisfaction. The Company integrates its real-time systems
with www.cdw.com, its Internet website, providing real-time information for its
customers.
Effective Inventory Control. The Company's management information systems,
"just-in-time" purchasing system, radio frequency based cycle counting system
and use of vendor stock balancing and price protection programs allow it to
minimize its investment in inventory, reduce inventory discrepancies and the
risk of obsolescence while meeting customer needs. These systems resulted in the
Company achieving approximately 28 inventory turns during 2000.
High Quality Personnel. The Company strives to attract, retain and motivate
high quality personnel and provides its coworkers with financial incentives
designed to maximize performance and productivity. The Company has instituted
short-term incentive programs, stock-based compensation and an on-site child
care and fitness center facility to reward and motivate all of the Company's
coworkers.
Merchandise
The Company offers microcomputer products including hardware and
peripherals, software, networking and communication products and accessories for
use with microcomputers based on a variety of operating platforms including
Microsoft, Apple, Linux, Novel, Oracle and others. The Company's just-in-time
purchasing system and aggressive inventory management allow it to limit its
on-hand inventory and ship orders generally on a same-day basis.
The following is a listing of selected hardware and peripheral and software
manufacturers:
Product Categories Selected Product Manufacturers
- ------------------ ------------------------------
Hardware and Peripherals:
3Com Fujitsu Maxell Seagate
3M Hewlett-Packard Maxtor Simple
Acer IBM Memorex SMC
Adaptec Imation Microtek Sony
APC Infocus Minolta Targus
Apple Intel NEC TDK
ATI Iomega Netgear Tectronix
Belkin Kingston Nikon Toshiba
Canon Kodak Okidata Tripp Lite
Cisco Lexmark Olympus Verbatim
Compaq Linksys Palm Viewsonic
Creative Labs Logitech Philips Visiontek
CTX Lucent Princeton Graphics Western Digital
Epson Magnavox Quantum Yamaha
Software:
Adobe Corel Macromedia Quark
Autodesk Executive Software McAfee Red Hat
Borland FileMaker Microsoft Seagate Software
Citrix Intuit Novell Symantec
The Company continually seeks to expand and improve its relationships with
manufacturers as well as increase the number of products which it is authorized
to sell.
Purchasing and Vendor Selection; Inventory Management
The Company believes that effective purchasing is a key element of its
business strategy of providing name brand products at competitive prices. The
Company's purchasing staff works to identify reliable high quality suppliers of
products, then actively negotiates to decrease the Company's cost and expand
vendor support programs, permitting the Company to improve the price
competitiveness of selling prices of its products. The Company seeks to
establish strong relationships with its vendors, and employs a policy of paying
vendors within terms stated and taking advantage of all appropriate discounts.
During 2000, CDW purchased approximately 59% of its merchandise from
distributors and aggregators and the balance direct from manufacturers,
substantially all of which ship directly to the Company's distribution facility.
Products purchased through distributors and aggregators are a combination of
products which are only sold by the manufacturers through distribution and
products that are acquired as part of the Company's just-in-time purchasing
model. The Company is generally authorized by manufacturers to sell via direct
marketing all or selected products offered by the manufacturer. The Company's
authorization with each manufacturer provides for certain terms and conditions,
which may include one or more of the following: product return privileges, price
protection policies, purchase discounts and vendor support programs, such as
purchase or sales rebates and cooperative advertising reimbursements. The
Company's business and results of operations may be adversely affected if the
terms and conditions of the Company's authorizations were significantly modified
or if certain products become unavailable to the Company, whether such
unavailability is because the manufacturer terminates the Company's
authorization or the product is subject to allocation or otherwise. Vendor
support programs are at the discretion of the manufacturers and usually require
achieving a specified sales volume or growth rate to qualify for all, or some,
of the incentive program.
For the year ended December 31, 2000, Tech Data and Ingram Micro/Ingram
Alliance were the only vendors from whom purchases by the Company exceeded 10%
of total purchases. Additionally, in 2000 Compaq and Hewlett Packard products
each comprised more than 10% of total Company sales. The loss of any of these
vendors, or any other key vendors, could have an adverse effect on the Company.
The Company believes that the Chicago metropolitan area is an excellent
location for its business as it is centrally located for purposes of shipping
products throughout the United States and provides same day access to its
principal distributors and aggregators, including Ingram Micro/Ingram Alliance
and Tech Data. The relocation of key distributors utilized in the Company's
just-in-time purchasing model could adversely impact the Company's results of
operations. Although brand names and individual products are important to the
Company's business, the Company believes that competitive sources of supply are
available in substantially all of the merchandise categories the Company
carries.
CDW also applies its proprietary information technology systems to the task
of managing its inventory. At December 31, 2000, the Company maintained an
investment in inventory of approximately $110 million. The Company turned its
inventory approximately 28 times during 2000.
Marketing and Advertising Activities
The Company utilizes a variety of advertising and marketing media to
attract and retain customers, including national advertising in computer related
publications, catalogs and certain other direct marketing activities, as well as
electronic marketing via the Internet. In 2000, the Company continued the
national branding campaign it initiated in 1998 which includes national print
media, national television advertisements and other activities. Due to its
relationships with its product suppliers and others, a substantial portion of
its advertising and marketing expenses are reimbursed through cooperative
advertising reimbursement programs. These cooperative advertising programs are
at the discretion of the Company's vendors and are typically tied to certain
purchasing volumes and other commitments required by the Company. The Company's
approach to its marketing and advertising activities is proprietary in nature,
as is its strategy in managing its files of current, prior and prospective
customers. In order to measure the effectiveness of its marketing activities,
the Company tracks responses to its various efforts by a variety of means. This
information is used to further refine its strategy and develop more effective
programs in the future.
E-business
The Company's Internet strategy, executed through www.cdw.com, is to
utilize the web as an extension of its "high tech, high touch" business model.
The Company's objective is to make it easy for its customers to transact
business and ultimately enhance customer relationships. The web site includes
many advanced features to attract new customers and produce sales, including
more than 66,000 computer products to search and order on-line, advanced search
capabilities, product specifications on over 55,000 products, product
availability and pricing. It also offers side-by-side product comparisons, links
to product reviews, newsworthy announcements, personalized access and customized
two-way interaction that allows for checking order status at will. CDW has
expanded its successful www.cdw.com site to include cdw@work, a customized,
secure extranet site for business customers. cdw@work allows customers to track
order status, manage current assets, order configured systems, obtain purchase
history and get access to up-to-the-minute availability of their dedicated CDW
account team. In addition, the Company has, through its excellent relations with
vendors, arranged for links between vendors' web sites and the Company's. The
Company believes the website is an excellent complement to its business model,
providing information and convenience for its customers, while also serving as
another source for new customers. During 2000, the Company generated $416.3
million of direct on-line sales over its web site, of which approximately $337.7
million were generated by customers with cdw@work extranet sites. During 2000,
total sales to customers with active cdw@work extranet sites, including on-line
orders and those placed directly with account managers, totaled approximately
$1.9 billion. Many customers use www.cdw.com and cdw@work to gather product
information, pricing and availability and follow up with their account manager
to access the account manager's knowledge base regarding product compatibility
and other information. Many of these customers ultimately place their orders
with their account manager rather than using www.cdw.com.
Sales Activities and Order Fulfillment
The Company's success is due in part to the strength of its account
managers who manage customer relationships by responding to customer inquiries
and proactively calling existing and potential new customers. The Company's
account managers are trained in Company systems and philosophies, are product
knowledgeable and motivated to maximize sales and provide high levels of
customer service. All account managers are graduates of CDW University, the
Company's proprietary sales training program. The program includes four weeks of
classroom training followed by several weeks of sales experience in one of the
Company's retail showrooms, followed by one month of training on the phones. CDW
seeks to build customer relations by assigning each customer to the account
manager who first services the customer. Upon subsequent calls to CDW, the
customer is directed to their account manager for assistance. In the spirit of
teamwork, account managers are encouraged to cooperate and work together to
maximize sales and customer satisfaction.
Each catalog and advertisement distributed by the Company bears a toll-free
number to be used by customers in phoning CDW to place a product order.
Telephone calls are answered by account managers who utilize on-line computer
terminals to retrieve information regarding product characteristics, cost and
availability and to enter customer orders. Account managers enter orders on-line
into a computerized order fulfillment system which updates the Company's
customer purchase history. Computer processing of orders is performed
immediately following the placement of the order and upon receipt of credit
approval. The Company ships most credit approved orders received by 9:00 p.m.,
exclusive of orders for products not in stock or subject to allocation by the
manufacturer, on the day the order was received. Orders are shipped by Federal
Express, Airborne Express, RPS, Chicago Messenger Service, United Parcel
Service, U.S. Mail, common carrier or any other acceptable manner requested by
the customer. The Company charges customers for shipping but may offer
promotional shipping programs from time to time. The average invoice size was
$1,054 in 2000 and $918 in 1999.
CDW account managers are generally compensated pursuant to a commission
schedule based upon the gross profit generated by them. CDW account managers
have the authority to negotiate and adjust prices for products, provided that
the account manager sells the product at a price which meets established
management guidelines. The Company's account managers have the opportunity to
achieve relatively high compensation levels and have historically shown
increased productivity as training and experience levels increase.
Customers
CDW currently maintains a database of over 4.6 million active and
prospective names of which approximately 572,000 were serviced by the Company in
2000, including 309,000 commercial customers. For the year ended December 31,
2000, sales to business, government and institutional customers accounted for
approximately 96% of the Company's net sales.
CDW's customers are located principally throughout the United States. In
2000, approximately 14% of the Company's net sales were generated by sales to
customers in Illinois, approximately 31% were generated to customers in the
eastern United States, approximately 16% were generated by sales to customers in
the southern United States, approximately 25% were generated by sales to
customers in the western United States and approximately 27% were generated by
sales to residents of the Midwestern United States (other than Illinois). Less
than 1% of sales were made to customers outside the United States.
Custom Configuration and Technical Support
The Company offers custom configuration services, including installation of
accessories or expansion products, software loading, network configuration and
custom application loading. During 2000, the Company's custom configuration
center processed approximately 277,000 custom configured units. The Company
employs a technical staff that is trained and maintains the highest levels of
professional certification from manufacturers including that of "Novell
Certified Network Engineer" and "Certified Microsoft Systems Engineer". The
Company's trained technical support personnel are available by telephone 24
hours a day, seven days a week to assist the customer with technical problems or
questions in order to reduce product returns and increase customer satisfaction.
CDW has developed a proprietary customer service tracking system to ensure that
customer-initiated service requests are responded to rapidly.
Information Technology Systems
CDW has installed and operates customized information technology systems
based upon IBM AS/400, Microsoft NT, Lucent and other platforms. Collectively,
these systems allow for centralized management of key functions, including
inventory and accounts receivable management, purchasing, sales and
distribution, and the preparation of daily operating control reports which
provide concise and timely information regarding key aspects of the business.
The Company's proprietary information technology systems enable the Company to
enhance its productivity, ship customer orders on a same-day basis, respond
quickly to changes in its industry and provide high levels of customer service.
The Company's success is dependent on the accuracy and proper utilization
of its information technology systems, including its telephone systems. The
Company's ability to manage its inventory and accounts receivable collections;
to purchase, sell and ship its products efficiently and on a timely basis; and
to maintain its cost-efficient operation is dependent upon the quality and
utilization of the information generated by its information technology systems.
In that regard, the Company anticipates that it will continue to require
software and hardware upgrades for its present information technology systems.
In addition, the ability of the Company to adapt its systems to changes in the
competitive environment or to take advantage of additional automation is
dependent upon its ability to recruit and retain qualified IT professionals. If
the Company were unable to develop or purchase future enhancements to its
information technology hardware or software, or continue to hire and retain
qualified IT professionals, the Company's operating results could be adversely
affected.
The primary components of the Company's information technology system are
located at its Vernon Hills facility. The integrity of the system is vulnerable
to certain forms of disaster including, but not limited to, natural disasters
such as tornadoes. The Company has established a disaster recovery plan which
utilizes a backup system for its information technology and telephones. The
hardware for the backup system is located at an offsite location maintained by
the Company.
Personnel and Training
At December 31, 2000, the Company employed approximately 2,700 coworkers.
The Company considers its coworker relations to be excellent. The Company's
level of net sales per coworker increased approximately 10.5% to $1.6 million in
2000 as compared to $1.5 million in 1999. No coworkers are covered by collective
bargaining agreements.
CDW emphasizes the recruiting and training of high quality personnel and,
to the extent possible, promotes people to positions of increased responsibility
from within the Company. Each coworker initially receives training appropriate
for his or her position and a complete CDW orientation. This is followed by
varying levels of training in information technology. New account managers
participate in an intensive four-week long classroom training program known as
"CDW University," followed by hands-on, face-to-face showroom training during
which time they are introduced to the Company's philosophy, systems, and
products and services. Finally, the account managers receive one month of
training while working on the telephones. Training for specific product lines
and continuing education programs for all account managers are conducted on an
ongoing basis, supplemented by vendor sponsored training programs for all
account managers and technical support personnel.
The Company has a company-wide training program called L.E.A.D.
(Leadership, Excellence, Attitude, Development) which provides professional
development training to all coworkers. The program includes a series of
instructional courses taught by CDW personnel and outside professionals based on
professional development themes including areas such as communication skills and
coaching for the Company's managers. The Company also offers Internet based
online training (L.E.A.D. Online) for all its coworkers with a course library of
164 courses relating to professional development.
Incentive and Regular Compensation Arrangements
Compensation Arrangements. The Company's coworkers are generally
compensated on a basis that rewards performance and the achievement of
identified goals. For example, account managers receive compensation pursuant to
a commission schedule which is based upon aggregate gross profit dollars,
accounts receivable personnel are eligible for monthly bonuses if late balances
are held below target levels, and operations personnel are eligible for monthly
bonuses based upon such factors as prompt vendor returns and order fulfillment
rates. The Company believes that these incentives positively impact its
performance and profitability.
Coworker Incentive Stock Option, MPK Stock Option and Restricted Stock
Plans. In addition to regular compensation, the Company, and Mr. Krasny
individually, provide Company coworkers with additional long-term incentives
designed to maximize performance and productivity. To this end, the Company and
Mr. Krasny have adopted various stock-based compensation plans which enable
Company coworkers to share in the success of the Company through appreciation in
the value of the Company's stock.
Retail Showrooms
The Company currently operates two retail showrooms allowing customers an
opportunity to examine products prior to purchase or to talk directly with CDW
sales or technical personnel. One showroom is located within the Company's main
distribution facility and headquarters in Vernon Hills, Illinois, and the other
is located in downtown Chicago, Illinois. These showrooms occupy approximately
5,100 square feet each.
The Company's retail showrooms, which generated approximately 2.7% of the
Company's net sales for 2000, inclusive of orders placed by telephone and picked
up at the retail showroom, provide an environment in which to further train the
Company's account managers before they join its sales department.
Trademarks
The Company conducts its business under the trade names and service marks
"CDW", "Computer Discount Warehouse", "CDW-G", "CDW@work" ,"CDW-L", "Direct
Solutions Provider" and "Computing Solutions Built for Business". The Company
has taken steps to register and protect these marks and believes they have
significant value and are important factors in its marketing programs.
Item 2. Properties.
The Company's primary location and headquarters is in Vernon Hills,
Illinois, and includes its main distribution center, sales office, a retail
showroom and corporate offices. The facility consists of a combined total of
approximately 200,000 square feet of distribution center space and 125,000
square feet of office space. An additional 250,000 square feet of distribution
center space is expected to become operational in the second quarter of 2001.
The Company owns a total of 45 acres of land at the Vernon Hills site, of which
approximately 11 are vacant and available for future expansion.
The Company has executed various operating lease agreements, primarily for
office facilities, at several locations in and around Chicago, Illinois. The
lease agreements generally provide for minimum rent and a proportionate
operating expenses and property taxes, and include certain renewal and expansion
options. The table below summarizes these lease agreements and the related
financial commitment:
- ------------------------------------------------------------------------------------------------------------------
Aggregate Average
Future Annual Approximate
Square Lease Lease Minimum Lease Capital
Location Footage Commencement Term Lease Payments Expense Expenditures
- ------------------------------------------------------------------------------------------------------------------
120 S. Riverside
April 2000 and
Chicago, IL 72,000 August 2000 (1) 10 years $11.4 million $1.2 million $4.8 million
- ------------------------------------------------------------------------------------------------------------------
10 S. Riverside February 2001 and
Chicago, IL 72,000 August 2001 10 years $14.1 million $1.4 million $3 - $4 million
- ------------------------------------------------------------------------------------------------------------------
Mettawa, IL 156,000 March 2001 10 years $35.6 million $3.7 million $5 - $6 million
- ------------------------------------------------------------------------------------------------------------------
(1) Capital expenditures related to 120 S. Riverside were incurred during fiscal
year 2000. No significant future capital expenditures are anticipated for this
location.
The Company is obligated under a lease through 2003 for a combined 104,000
square foot office and warehouse facility in Buffalo Grove, Illinois, that
previously served as its main facility. In October 1998, the Company reopened
the office portion of the Buffalo Grove facility as a sales office. The Company
sublet the warehouse and showroom portions of the Buffalo Grove facility to a
third party beginning June 1999. However, the sublessee terminated the lease in
conjunction with its Chapter 11 case under the bankruptcy laws in the first
quarter of 2000 and has since vacated the premises. The Company has elected to
occupy an additional portion of the facility and is subleasing a portion of the
remaining space. The Company will continue to evaluate the future use of the
warehouse space.
Item 3. Legal Proceedings.
The Company is not currently party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of 2000 to a vote
of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The following table sets forth the high and low sales prices for the
Company's Common Stock on The Nasdaq Stock Market (R) for the periods indicated.
These quotations were obtained from Nasdaq, and have been adjusted to reflect
the two-for-one stock split paid in the form of a stock dividend on June 21,
2000 to common shareholders of record on June 14, 2000 and the two-for-one stock
split paid in the form of a stock dividend on May 19, 1999 to common
shareholders of record on May 5, 1999. The Company believes that as of March 22,
2001 there were approximately 15,555 beneficial owners of the Company's stock.
Except for distributions prior to May 25, 1993, the date of termination of the
Company's election to be taxed as an S Corporation, the Company has neither
declared nor paid any cash dividends on its Common Stock. The Company currently
intends to retain earnings for use in the operation and expansion of its
business and therefore does not anticipate paying cash dividends in the
foreseeable future.
2000 1999
---------------- ----------------
Quarter Ended Low High Low High
- -------------- ------- ------- ------- -------
March 31 $26.500 $43.335 $15.484 $30.812
June 30 $32.000 $72.156 $13.968 $25.063
September 30 $46.875 $86.125 $21.250 $28.187
December 31 $22.250 $69.062 $23.562 $40.000
Item 6. Selected Financial Data.
CDW Computer Centers, Inc. and Subsidiaries
Selected Financial and Operating Data
(in thousands, except per share and selected operating data)
Year Ended December 31,
---------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
Income Statement Data :
Net sales $ 3,842,452 $ 2,561,239 $ 1,733,489 $ 1,276,929 $ 927,895 $ 628,721 $ 413,270
Cost of sales 3,352,609 2,237,700 1,513,314 1,106,124 805,413 548,568 359,274
--------- --------- --------- --------- --------- --------- ---------
Gross profit 489,843 323,539 220,175 170,805 122,482 80,153 53,996
Selling, administrative
and net advertising expenses 230,235 165,627 115,537 90,315 64,879 49,175 34,617
Exit charge (1) - - - - 4,000 - -
--------- --------- --------- --------- --------- --------- ---------
Income from operations 259,608 157,912 104,638 80,490 53,603 30,978 19,379
Interest income, net 9,739 4,931 4,708 4,259 3,469 1,973 392
Other income (expense), net (690) (450) (335) (241) (188) 47 119
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 268,657 162,393 109,011 84,508 56,884 32,998 19,890
Income tax provision 106,388 64,308 43,170 33,507 22,484 12,939 7,777
--------- --------- --------- --------- --------- --------- ---------
Net income $ 162,269 $ 98,085 $ 65,841 $ 51,001 $ 34,400 $ 20,059 $ 12,113
--------- --------- --------- --------- --------- --------- ---------
Net income per share
Basic $ 1.87 $ 1.14 $ 0.76 $ 0.59 $ 0.40 0.24 0.15
Diluted $ 1.79 $ 1.11 $ 0.76 $ 0.59 $ 0.40 $ 0.24 $ 0.15
Weighted average number of common
shares outstanding
Basic 87,003 86,270 86,124 86,100 86,100 84,104 80,012
Diluted 90,860 88,304 87,008 86,816 87,140 84,320 80,012
--------- --------- --------- --------- --------- --------- ---------
Selected Operating Data :
Number of invoices
processed (in thousands) 3,810 2,934 2,367 1,822 1,318 998 700
Average invoice size $ 1,054 $ 918 $ 780 $ 756 $ 765 $ 685 $ 640
% of sales to commercial
customers (2) 96% 93% 88% 81% 80% 77% -
Commercial customers
serviced (in thousands) 309 285 246 209 164 142 98
Net sales per
coworker (in thousands) $ 1,616 $ 1,462 $ 1,392 $ 1,490 $ 1,459 $ 1,364 $ 1,223
Inventory turnover 28 23 24 21 23 22 22
Accounts receivable - days
sales outstanding 32 33 32 25 23 22 21
December 31,
---------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
Financial position:
Cash, cash equivalents
and marketable securities $ 202,621 $ 82,975 $ 70,688 $ 79,425 $ 74,952 $ 57,169 $ 22,564
Working capital $ 561,697 $ 340,117 $ 228,730 $ 167,421 $ 123,614 $ 99,127 $ 49,217
Total assets $ 748,437 $ 505,915 $ 341,821 $ 269,641 $ 198,830 $ 132,929 $ 77,860
Total debt and capitalization
lease obligations - - - - - - -
Total shareholders' equity $ 636,251 $ 390,984 $ 270,763 $ 199,866 $ 141,622 $ 106,161 $ 55,843
Return on shareholders' equity (3) 31.0% 30.1% 28.2% 29.8% 28.2% 26.0% 27.0%
Item 7. 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 Consolidated Financial Statements and the Notes thereto.
Results of Operations
The following table sets forth for the periods indicated information
derived from the Company's statements of income expressed as a percentage of net
sales:
- -------------------------------------------------------------------------------------------------------
Percentage of Net Sales
Financial Results Years Ended December 31,
- -------------------------------------------------------------------------------------------------------
2000 1999 1998
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 87.2 87.4 87.3
---------------------------------------------------------------
Gross profit 12.8 12.6 12.7
Net advertising expenses 0.3 0.6 0.7
Selling and administrative expenses 5.7 5.9 6.0
---------------------------------------------------------------
Income from operations 6.8 6.1 6.0
Interest and other income 0.2 0.2 0.3
---------------------------------------------------------------
Income before income taxes 7.0 6.3 6.3
Income tax provision 2.8 2.5 2.5
---------------------------------------------------------------
Net income 4.2 % 3.8 % 3.8 %
- -------------------------------------------------------------------------------------------------------
The following table sets forth for the periods indicated a summary of
certain of the Company's operating statistics:
- ---------------------------------------------------------------------------------------------------
Operating Statistics Years Ended December 31,
-----------------------------------------------
2000 1999 1998
---- ---- ----
Number of invoices processed 3,810,452 2,934,286 2,366,778
Average invoice size $1,054 $918 $780
Commercial customers serviced (1) 309,000 285,000 246,000
% of sales to commercial customers 96% 93% 88%
Number of account managers, end of period 1,188 798 622
Annualized inventory turnover 28 23 24
- ---------------------------------------------------------------------------------------------------
(1) Commercial customers includes businesses, government and institutional customers.
The following table represents sales by product category as a percentage of
net sales for each of the periods indicated. Product lines are based upon
internal product code classifications and are not retroactively adjusted for the
addition of new categories or changes in individual product categorization.
- -------------------------------------------------------------------------------------------------------
Analysis of Product Mix
Years Ended December 31,
---------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------
Notebook Computers and Accessories 19.9 % 21.6 % 19.8 %
Desktop Computers and Servers 14.6 14.1 15.7
---------------------------------------------------------------
Subtotal Computer Products 34.5 35.7 35.5
Data Storage Devices 13.0 10.8 11.0
Software 12.1 12.5 13.4
Printers 11.1 10.5 12.6
Net/Comm Products 9.8 9.2 9.3
Video 7.8 7.5 7.8
Add-On Boards/Memory 6.2 5.6 4.1
Supplies, Accessories and Other 5.5 8.2 6.3
---------------------------------------------------------------
Total 100.0 % 100.0 % 100.0 %
- -------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net sales in 2000 increased 50.0% to a record $3.842 billion compared to
$2.561 billion in 1999. The growth in net sales is primarily attributable to a
higher concentration of commercial accounts and a higher level of sales per
active commercial account. Net sales per active commercial account grew 43.0% in
2000. The Company believes that spending by customers for networking and
Internet capabilities, as well as post-Year 2000 (Y2K) projects, positively
impacted net sales in 2000. Additionally, the Company expanded its sales force
by 48.9% in 2000 to 1,188 account managers at December 31, 2000 enabling it to
increase its customer base and the level of sales per active customer.
The average selling price of desktop computers increased 2.2%, servers
increased 10.3% and notebook computers increased 6.0% from 1999. The Company
believes there may be future decreases in both prices and demand for computer
products in 2001, resulting in a lower average invoice size. Such decreases
require the Company to generate more orders and 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 effect on the Company's results
from operations. The above statements concerning future prices, sales and
results from operations are forward looking statements that involve certain
risks and uncertainties such as those stated above.
On a forward looking basis, the Company's rate of sales growth in 2001 is
likely to be less than that achieved in recent years, primarily due to reduced
IT spending levels by customers and the impact of economic uncertainties.
The table below represents sales growth by product categories in terms of
net sales for each of the periods indicated. Product lines are based upon
internal product code classifications and are not retroactively adjusted for the
addition of new categories or changes in individual product categorization.
- -------------------------------------------------------------------------------------------------------
Analysis of Product Category Growth
Years Ended December 31,
---------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------
Notebook Computers and Accessories 44.6 % 54.6 % 7.2 %
Desktop Computers and Servers 45.6 42.3 61.8
---------------------------------------------------------------
Subtotal Computer Products 45.0 49.2 26.1
Data Storage Devices 81.6 44.0 43.5
Software 39.3 44.4 45.0
Printers 50.0 30.4 40.7
Net/Comm Products 56.0 50.8 47.8
Video 65.2 37.9 34.7
Add-On Boards/Memory 84.6 82.7 14.3
Supplies, Accessories and Other 5.0 72.8 57.7
---------------------------------------------------------------
Total 50.0 % 47.8 % 35.8 %
- -------------------------------------------------------------------------------------------------------
Demand for certain products and the growth of certain product categories
are driven by advances in technology and the development of new products and
applications by the industry manufacturers, and acceptance of these new
technologies and products by end-users. Any slowdown in the rate of
technological advancement and new product development by industry manufacturers
could have a material adverse effect on the Company's future sales growth.
Gross profit increased as a percentage of net sales to 12.8% in 2000,
compared to 12.6% in 1999. The increase in gross profit as a percentage of net
sales is primarily the result of higher selling margins achieved on certain
product lines and increased levels of vendor support programs.
On a forward-looking basis, the gross profit margin in future periods may
be less than the 12.8% achieved in 2000. The statement concerning future gross
profit is a forward looking statement that involves certain risks and
uncertainties such as the continued participation by vendors in inventory price
protection and rebate programs, product mix, market conditions and other factors
which could result in a fluctuation of gross margins below recent experience.
Price protection and rebate programs are at the discretion of the manufacturers,
who may make changes that limit the amount of price protection or rebates for
which the Company is eligible. Such changes could have a negative impact on
gross margin in future periods. Additionally, vendor rebate programs are
generally dependent on achieving certain goals and objectives. Accordingly,
there is no certainty that the established goals and objectives will be
attained, particularly in an uncertain economic environment.
Selling and administrative expenses decreased to 5.7% of net sales in 2000
versus 5.9% in 1999. The decline resulted from decreases in non-sales payroll
and related coworker costs, all as a percentage of net sales. Increases in
coworker productivity offset increased payroll and associated costs related to
expansion of the sales force. Approximately 77% of the 1,188 sales account
managers at December 31, 2000 had fewer than 24 months experience and 58% had
fewer than 12 months, as compared to 76% and 53% at December 31, 1999. The
Company plans to increase the number of sales account managers to approximately
1,400 by December 31, 2001.
Net advertising expense decreased as a percentage of net sales to 0.3% in
2000 from 0.6% in 1999. Gross advertising expense increased $26.1 million in
2000 while decreasing as a percentage of net sales to 2.4% versus 2.6% in 1999.
The Company decreased catalog circulation and the number of national advertising
pages from the prior year, while increasing its spending on branding, other
direct marketing and electronic commerce activities. Based upon the Company's
planned marketing initiatives, future levels of gross advertising expense as a
percentage of net sales are expected to be relatively consistent with or higher
than the level achieved in 2000. Cooperative advertising reimbursements as a
percentage of net sales increased to 2.1% in 2000 from 2.0% in 1999. Cooperative
advertising reimbursements as a percentage of net sales may fluctuate in future
periods depending on the level of vendor participation achieved and collection
experience. The statements concerning future advertising expense and cooperative
advertising reimbursements are forward looking statements that involve certain
risks and uncertainties, including the ability to identify and implement cost
effective incremental advertising and marketing programs, as well as the
continued participation of vendors in the cooperative advertising reimbursement
program.
In the first quarter of 2000, the Compensation and Stock Option Committee
approved a new format for executive incentive compensation, which was approved
by shareholders at the Annual Meeting of Shareholders on May 24, 2000. Under the
new format, the committee eliminated the executive incentive bonus pool and
created the Senior Management Incentive Plan ("SMIP") for all officers and other
senior management personnel. The SMIP provides for targeted levels of incentive
compensation based upon the percentage increase in operating income over the
prior year. Expense recognized under the new program in 2000 was lower as a
percentage of net sales than all incentive compensation for the same group in
the same period of the prior year.
The Company has leased sales office space in downtown Chicago, Illinois and
in locations near the Vernon Hills headquarters. The table below summarizes
these lease agreements and the related financial commitment (see Footnote 7 to
the consolidated financial statements):
- ------------------------------------------------------------------------------------------------------------------
Aggregate Average
Future Annual Approximate
Square Lease Lease Minimum Lease Capital
Location Footage Commencement Term Lease Payments Expense Expenditures
- ------------------------------------------------------------------------------------------------------------------
120 S. Riverside
April 2000 and
Chicago, IL 72,000 August 2000 (1) 10 years $11.4 million $1.2 million $4.8 million
- ------------------------------------------------------------------------------------------------------------------
10 S. Riverside February 2001 and
Chicago, IL 72,000 August 2001 10 years $14.1 million $1.4 million $3 - $4 million
- ------------------------------------------------------------------------------------------------------------------
Mettawa, IL 156,000 March 2001 10 years $35.6 million $3.7 million $5 - $6 million
- ------------------------------------------------------------------------------------------------------------------
(1) Capital expenditures related to 120 S. Riverside were incurred during fiscal
year 2000. No significant future capital expenditures are anticipated for this
location.
As a result of the planned expansion of the sales force, the new sales
offices and a 250,000 square foot addition to the Vernon Hills distribution
center which is expected to be operational in the second quarter of 2001, the
Company's selling and administrative costs may increase as a percentage of net
sales in future periods.
Interest income, net of other expenses, increased to $9.0 million in 2000
compared to $4.5 million in 1999, primarily due to higher levels of available
cash and higher rates of return on investments.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% in 2000 and 1999.
Net income in 2000 was $162.3 million, a 65.4% increase over $98.1 million
in 1999. Diluted earnings per share were $1.79 in 2000 and $1.11 in 1999, an
increase of 61.3%. All per share amounts have been adjusted to reflect the
two-for-one stock split effected in the form of a stock dividend paid on June
15, 2000.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales in 1999 increased 47.8% to $2.561 billion compared to $1.733
billion in 1998. The growth in net sales is primarily attributable to a higher
concentration of commercial accounts and a higher level of sales per active
commercial account. Net sales per active commercial account grew 35.5% in 1999.
The Company believes that spending by customers for networking and Internet
capabilities, as well as Year 2000 (Y2K) compliance, positively impacted net
sales in 1999. Additionally, the expansion of the sales force by 28.5% in 1999
to 798 account managers at December 31, 1999 enabled the Company to expand its
customer base and the level of sales per active customer. Notebook computers and
desktop computers and servers continue to represent the largest portion of the
Company's sales. Notebook dollar volume increased more than 55% from 1998 and
desktop computers and servers dollar volume increased more than 42% from 1998.
The average selling price of desktop CPU's decreased 5.5% and the average
selling price of notebook CPU's declined 2.4% from 1998. The fastest growing
product categories in terms of sales dollars in 1999 were add-on boards and
memory at 82.7%, notebook computers at 54.6%, network and communication products
at 50.8%, software at 44.4% and data storage devices at 44%. Sales of add-on
boards and memory were aided by increases in memory pricing during the year.
Gross profit decreased as a percentage of net sales to 12.6% in 1999,
compared to 12.7% in 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 and lower levels of inventory price protection and rebates from
vendors.
Selling and administrative expenses, which include other selling
administrative expenses and the executive incentive bonus pool, decreased to
5.9% of net sales in 1999 versus 6.0% in 1998. Increases in coworker
productivity offset increased payroll and associated costs related to expansion
of the sales force. Approximately 76% of the 798 sales account managers at
December 31, 1999 had fewer than 24 months experience and 53% had fewer than 12
months, as compared to 76% and 61% at December 31, 1998.
The by-laws of the Company provided for an executive incentive bonus pool
of a maximum of 20% of the increase in year over year income from operations.
For 1999 and 1998 the Compensation Committee of the Board of Directors
established the bonus pool with a maximum eligible amount of 15% of the year
over year increase in income from operations. The executive incentive bonus pool
increased to $8.8 million in 1999 from $3.3 million in 1998.
Net advertising expense decreased as a percentage of net sales to 0.6% from
0.7% in 1998. Gross advertising expense increased $13.4 million in 1999 while
decreasing as a percentage of net sales to 2.6% versus 3.0% in 1998. The Company
decreased catalog circulation and the number of national advertising pages from
the prior year, while expanding its spending on branding and electronic commerce
activities. Based upon the Company's planned marketing initiatives, future
levels of gross advertising expense as a percentage of net sales are likely to
be relatively consistent with or higher than the level achieved in 1999.
Cooperative advertising reimbursements increased $9.3 million in 1999 and
decreased as a percentage of net sales to 2.0% from 2.3% in 1998.
Interest income, net of other expenses, increased to $4.5 million in 1999
compared to $4.4 million in 1998, primarily due to higher levels of available
cash.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% in 1999 and 1998.
Net income in 1999 was $98.1 million, a 49.0% increase over $65.8 million
in 1998. Diluted earnings per share were $1.11 in 1999 and $0.76 in 1998, an
increase of 46.0%. All per share amounts have been adjusted to reflect the
two-for-one stock splits effected in the form of a stock dividend paid on May
19, 1999 and June 15, 2000.
Seasonality
Although the Company has historically experienced variability in the rates
of sales growth, it has not historically experienced seasonality in its
business. During the third quarter of 2000, sales to government customers
represent a larger proportion of total sales than in other quarters as the
buying patterns of government and education customers typically result in
seasonally high revenues during the third quarter of the year. If sales to these
customers continue to increase as a percentage of overall sales, the Company may
experience increased seasonality in future periods.
Liquidity and Capital Resources
Working capital
The Company has recently financed its operations and capital expenditures
primarily through cash flow from operations. At December 31, 2000, the Company
had cash, cash equivalents and marketable securities of $202.6 million and
working capital of $561.7 million, representing an increase of $119.6 million in
cash, cash equivalents and marketable securities and an increase of $221.6
million in working capital from December 31, 1999.
The Company has an aggregate $50 million available pursuant to two $25
million unsecured lines of credit with two financial institutions, one which
expires in June 2001, at which time the Company intends to renew the line, and
another which does not have a fixed expiration date. Borrowings under the first
credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus 1/2% or
the federal funds rate plus 1/2%, as determined by the Company. Borrowings under
the second credit facility bear interest at the prime rate less 2 1/2%, LIBOR
plus .45% or the federal funds rate plus .45%, as determined by the Company. At
December 31, 2000, there were no borrowings against either of the credit
facilities.
The Company's current and anticipated uses of its cash, cash equivalents
and marketable securities are to fund the growth in working capital and capital
expenditures necessary to support future growth in sales and for the stock
buyback program discussed below. The Company anticipates capital expenditures
related to facility expansions to total between $24 million and $27 million, of
which approximately $12.1 million has been incurred as of December 31, 2000.
In January 2001, the Company's Board of Directors authorized the purchase
of up to 5 million shares of its common stock, slightly more than 5% of its
total outstanding shares, from time to time in both open market and private
transactions, as conditions warrant. The repurchase program is expected to
remain effective for approximately twenty-four months, unless sooner completed
or terminated by the Board of Directors. The Company intends to hold the
repurchased shares in treasury for general corporate purposes, including
issuances under various employee stock option plans. In connection with the
program, the Company purchased a total of 1,500,000 shares of its common stock
on February 2, 2001, at a total cost of $57.6 million ($38.423 per share) from
Gregory C. Zeman, Vice Chairman and Director, and Daniel B. Kass, Executive Vice
President of Sales and Director.
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 December 31, 2001.
Cash flows
Cash provided by operating activities in 2000 was $141.8 million compared
to $22.5 million in 1999. The primary working capital factors that have
historically affected the Company's cash flows from operations are the levels of
accounts receivable, merchandise inventory and accounts payable. Accounts
receivable at December 31, 2000 increased $109.9 million from December 31, 1999.
The increase in accounts receivable resulted from increased sales volume and an
increase in the percentage of net sales generated from open credit terms with
commercial customers to 76% from 70% in 1999. Cash provided by operating
activities in 2000 was positively impacted by a $71.4 million tax benefit
recorded to paid-in-capital, relating to the exercise of options pursuant to the
MPK Stock Option Plan, MPK Restricted Stock Plan and the CDW Incentive Stock
Option Plan.
Net cash used in investing activities for the year ended December 31, 2000
was $125.0 million, including $92.8 million for investments in marketable
securities and $33.0 million used for capital expenditures. The capital
expenditures made by the Company were primarily related to the purchase of
furniture, data processing and telephone equipment for the new Chicago, Illinois
sales office and construction of the addition to the Vernon Hills distribution
center. At December 31, 2000, the Company has a $5.8 million net investment in
and loan to CDW Leasing, LLC.("CDW-L"), a 50/50 joint venture between the
Company and First Portland Corporation. The Company is committed to loan up to
$10 million to CDW-L to fund new leases. During the third quarter of 2000, CDW-L
obtained a financing commitment for $25 million from a financial institution of
which $13.4 million was outstanding at December 31, 2000. In order to comply
with certain covenants related to the $25 million financing commitment, a
portion of the Company's loan is subordinated to the financial institution. The
terms of the Company's loan agreement provide for interest based on the 90 day
LIBOR rate plus 2.2% for the non-subordinated portion of the loan and the 90 day
LIBOR rate plus 5.0% for the subordinated debt.
The Company also received approximately $7.1 million as proceeds from the
exercise of stock options under the CDW Incentive Stock Option Plan in 2000.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's investments in marketable securities as of December 31,
2000 are all due in one year or less and are concentrated in U.S. Government and
Government Agency securities. As such, the risk of significant changes in the
value of these securities as a result of a change in market interest rates is
minimal.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is contained in a separate section of
this Report beginning on page F(i). See Index to Consolidated Financial
Statements beginning on page F(i).
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
There were no disagreements with accountants on accounting and financial
disclosure matters during the periods reported herein.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required hereunder is incorporated by reference herein from
the Registrant's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 23, 2001, to be filed pursuant to Regulation 14A
not later than April 30, 2001 (the "Definitive Proxy Statement").
Item 11. Executive Compensation.
The information required hereunder is incorporated by reference herein from
the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required hereunder is incorporated by reference herein from
the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required hereunder is incorporated by reference herein from
the Definitive Proxy Statement.
Information in the Definitive Proxy Statement under the headings "Report of
the Compensation and Stock Option Committee" and "Shareholder Return Performance
Presentation" is specifically not incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
---------------------------------------------------------------
(a) The following documents are filed as part of this report :
1. Financial Statements (See Index to Consolidated Financial
Statements on page F(i) of this Report);
2. Index to Financial Statement Schedule : Page
----
Report of Independent Accountants on Financial
Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
All other schedules are omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the consolidated financial statements or notes
thereto.
3. Exhibits required by Securities and Exchange Commission
Regulation S-K, Item 601:
Exhibit No. Description of Document
----------- -----------------------
3 (c) Articles of Incorporation of the Company (xiii)
3 (d) Bylaws of the Company (iii)
3 (e) Amendment to Articles of Incorporation of the
Company filed with the Illinois Secretary of
State on May 26, 2000 (iii)
10 (a) CDW Computer Centers, Inc. Employees' Defined
Contribution Retirement Plan and Trust (i) (xi)
10 (b) CDW Incentive Stock Option Plan (i) (xi)
10 (c) First Amendment to CDW Incentive Stock Option
Plan (vii) (xi)
10 (d) MPK Stock Option Plan and Agreement (i) (xi)
10 (e) MPK Restricted Stock Plan and Agreement (i) (xi)
10 (f) Employment and Non-Competition Agreement dated
as of March 15, 1993 between the Company and
Michael P. Krasny (i) (xi)
10 (g) Employment and Non-Competition Agreement dated
as of March 15, 1993 between the Company and
Greg C. Zeman (i) (xi)
10 (h) First amendment to Employment and
Non-Competition Agreement dated as of
January 28, 2001 between the Company and Gregory
C. Zeman
10 (i) Employment and Non-Competition Agreement dated as
of March 15, 1993 between the Company and Daniel
B. Kass (i) (xi)
10 (j) Tax Indemnification Agreement dated as of May 25,
1993 between the Company and Michael P. Krasny (i)
10 (k) Lease Agreement dated February 22, 1993 between
the Company, as lessee, and Chevy Chase Business
Park Limited Partnership, as lessor, relating to
the premises located in Buffalo Grove, Illinois (i)
10 (l) First Lease Amendment dated as of May 13, 1993 to
Lease Agreement dated February 22, 1993 between the
Company, as lessee, and Chevy Chase Business Park
Limited Partnership, as lessor, relating to the
premises located in Buffalo Grove, Illinois (i)
10 (m) CDW Director Stock Option Plan (i)
10 (n) Lease Agreement dated January 25, 1995 between the
Company, as lessee, and IJM Management Limited
Partnership, as agent for the owner, as lessor,
relating to the premises located in Chicago,
Illinois (ii)
10 (o) Non-statutory Stock Option Agreement dated September
5, 1996 between the Company and Harry J.
Harczak, Jr. (xvi)
10 (p) Non-statutory Stock Option Agreement dated September
5, 1996 between the Company and
James R. Shanks (xvi)
10 (q) Form of Indemnification and Hold Harmless Agreement
between the Company and the Selling Shareholder (iv)
10 (r) CDW 1996 Incentive Stock Option Plan (iv) (xi)
10 (s) First Amendment to CDW 1996 Incentive Stock
Option Plan (vii) (xi)
10 (t) CDW 1997 Officer and Manager Bonus Plan (v) (xi)
10 (u) Revolving Note between the Company and The Northern
Trust Company dated June 30, 1998 (vi)
10 (v) CDW 1998 Officer and Manager Bonus Plan (viii) (xi)
10 (w) First Amendment to 1996, 1997 and 1998 Officer and
Manager Bonus Plans (viii) (xi)
10 (x) CDW Officer and Manager Plan dated April 21, 1998(xii)
10 (y) Operating Agreement of CDW Leasing, L.L.C. (viii)
10 (z) Loan and Security Agreement Between CDW Capital
Corp. and CDW Leasing, L.L.C. (viii)
10 (aa) Lease Agreement dated October 11, 1999 between
the Company as Lessee and Solano Associates as
Lessor relating to the office space located at 120 S.
Riverside Plaza, Chicago, Illinois (x)
10 (bb) Revolving Note between the Company and LaSalle
National Bank dated June 28, 2000 (ix)
10 (cc) Lease Agreement dated June 19, 2000 between the
Company as Lessee and Solano Associates as Lessor
relating to the office space located at 10 S.
Riverside Plaza, Chicago, Illinois (ix)
10 (dd) Lease Agreement dated October 3, 2000 between
the Company as Lessee and Hamilton Partners as
Lessor relating to the office space located at
Woodland Falls I, Mettawa, Illinois (xiv)
10 (ee) CDW 2000 Incentive Stock Option Plan (xv) (xi)
10 (ff) CDW Senior Management Incentive Plan (xv) (xi)
10 (gg) Employment Agreement dated as of January 28, 2001
between the Company and John A. Edwardson
10 (hh) Transitional Compensation Agreement dated as of
January 28, 2001 between the Company and John A.
Edwardson
10 (ii) Award Notice of Stock Option Grant dated as of
January 28, 2001 between the Company and John A.
Edwardson
10 (jj) Restricted Stock Award dated as of January 28, 2001
between the Company and John A. Edwardson
10 (kk) Stock Purchase Agreement between the Company and
Gregory C. Zeman dated as of February 2, 2001
10 (ll) Registration Rights Agreement between the Company
and Gregory C. Zeman dated as of February 5, 2001
10 (mm) Stock Purchase Agreement between the Company and
Daniel B. Kass dated as of February 2, 2001
10 (nn) Registration Rights Agreement between the Company
and Daniel B. Kass dated as of February 5, 2001
21 Subsidiaries of the Registrant (i)
23 Consent of Independent Accountants
Footnotes
(i) Incorporated by reference from the exhibits filed
with the Company's registration statement
(33-59802) on Form S-1 filed under the Securities
Act of 1933 filed on May 11, 1993
(ii) Incorporated by reference from the exhibits filed
with the Company's quarterly report (0-21796) on
Form 10-Q for the quarter ended June 30, 1995.
(iii) Incorporated by reference from the exhibits filed
with the Company's Form S-8 (333-48172) filed October
18, 2000.
(iv) Incorporated by reference from the exhibits filed with
the Company's registration statement (333-20935) on
Form S-3 filed under the Securities Act of 1993 on
January 31, 1997.
(v) Incorporated by reference from the exhibits filed
with the Company's annual report (0-21796) on
Form 10-K for the year ended December 31, 1997.
(vi) Incorporated by reference from the exhibits filed
with the Company's Quarterly report (0-21796) on
Form 10-Q for the quarter ended June 30, 1998.
(vii) Incorporated by reference from the exhibits filed
with the Company's annual report (0-21796) on
Form 10-K for the year ended December 31, 1998.
(viii) Incorporated by reference from the exhibits filed
with the Company's Quarterly report (0-21796) on
Form 10-Q for the quarter ended March 31, 1999.
(ix) Incorporated by reference from the exhibits filed
with the Company's Quarterly report (0-21796) on
Form 10-Q for the quarter ended June 30, 2000.
(x) Incorporated by reference from the exhibits filed
with the Company's Quarterly report (0-21796) on
Form 10-Q for the quarter ended September 30, 1999.
(xi) Management contract or compensatory plan
or arrangement.
(xii) Incorporated by reference from the exhibits
accompanying the Company's Notice of Annual Meeting of
Shareholders and Proxy Statement filed March 26, 1999.
(xiii) Incorporated by reference from the exhibits filed
with the Company's registration statement
(33-94820) on Form S-3 filed under the Securities
Act of 1933 filed on July 21, 1995.
(xiv) Incorporated by reference from the exhibits filed
with the Company's Quarterly report (0-21796) on
Form 10-Q for the quarter ended September 30, 2000.
(xv) Incorporated by reference from the exhibits
accompanying the Company's Notice of Annual Meeting of
Shareholders and Proxy Statement filed March 31, 2000.
(xvi) Incorporated by reference from the exhibits filed
with the Company's Quarterly report (0-21796) on
Form 10-Q for the quarter ended September 30, 1996.
(b) The Company did not file any reports on Form 8-K during the last
quarter of the year ended December 31, 2000.
(c) The Exhibits required by Item 601 of Regulation S-K are reflected
above in Section (a) 3. of this Item.
(d) The financial statement schedule is included as reflected in
Section (a) 2. of this Item.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date : March 30, 2000
By : /s/ John A. Edwardson
------------------------------
John A. Edwardson, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Michael P. Krasny Chairman of the Board March 30, 2001
--------------------------
Michael P. Krasny
/s/ John A. Edwardson President, Chief March 30, 2001
-------------------------- Executive Officer and Director
John A. Edwardson
/s/ Gregory C. Zeman Vice Chairman and Director March 30, 2001
--------------------------
Gregory C. Zeman
/s/ Daniel B. Kass Executive Vice President-Sales March 30, 2001
-------------------------- and Director
Daniel B. Kass
/s/ Harry J. Harczak, Jr. Chief Financial Officer, March 30, 2001
-------------------------- Treasurer and Secretary
Harry J. Harczak, Jr.
/s/ Sandra M. Rouhselang Controller and March 30, 2001
-------------------------- Chief Accounting Officer
Sandra M. Rouhselang
/s/ Michelle L. Collins Director March 30, 2001
--------------------------
Michelle L. Collins
/s/ Dr. Donald Jacobs Director March 30, 2001
--------------------------
Dr. Donald Jacobs
/s/ Joseph Levy, Jr. Director March 30, 2001
--------------------------
Joseph Levy, Jr.
/s/ Brian Williams Director March 30, 2001
--------------------------
Brian Williams
ITEMS 8 AND 14(A)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Management's Responsibility for Financial Statements F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of F-3
December 31, 2000 and 1999
Consolidated Statements of Income for the years ended F-4
December 31, 2000, 1999 and 1998
Consolidated Statement of Shareholders' Equity for the years ended F-5
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended F-6
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements F-7
F(i)
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation, integrity and objectivity of the
consolidated financial statements and other financial information presented in
this report. The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles, applying certain
estimates and judgments as required.
CDW Computer Centers, Inc.'s internal controls are designed to provide
reasonable assurance as to the integrity and reliability of the financial
statements and to adequately safeguard, verify and maintain accountability of
assets. Such controls are based on established written policies and procedures,
are implemented by trained, skilled personnel with an appropriate segregation of
duties and are monitored through a comprehensive business process assurance
program. These policies and procedures prescribe that the Company and all its
employees are to maintain the highest ethical standards and that its business
practices are to be conducted in a manner which is above reproach.
PricewaterhouseCoopers LLP , independent auditors, are retained to audit CDW
Computer Centers, Inc.'s financial statements. Their accompanying report is
based on audits conducted in accordance with generally accepted auditing
standards; which include the consideration of the Company's internal controls to
establish a basis for reliance thereon in determining the nature, timing and
extent of the audit tests to be applied.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of independent
non-management Board members. The Audit Committee meets periodically with the
independent auditors and with the Company's Business Process Assurance manager,
both privately and with management present to review accounting, auditing,
internal controls and financial reporting matters.
John A. Edwardson Harry J. Harczak Jr.
President and Chief Chief Financial Officer,
Executive Officer Treasurer and Secretary
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
CDW Computer Centers, Inc.
Vernon Hills, Illinois
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of CDW Computer
Centers, Inc. and Subsidiaries (the "Company") at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 19, 2001
F-2
CDW Computer Centers, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
December 31,
2000 1999
------------------- -------------------
Assets
Current assets :
Cash and cash equivalents $ 43,664 $ 19,747
Marketable securities 158,957 63,228
Accounts receivable, net of allowance for doubtful
accounts of $7,000 and $4,300, respectively 337,424 230,190
Miscellaneous receivables 13,442 7,589
Merchandise inventory 110,202 126,217
Prepaid expenses and other assets 3,458 1,375
Deferred income taxes 6,736 6,702
------------------- -------------------
Total current assets 673,883 455,048
Property and equipment, net 61,966 39,429
Investment in and advances to joint venture 5,804 6,499
Deferred income taxes and other assets 6,784 4,939
------------------- -------------------
Total assets $ 748,437 $ 505,915
=================== ===================
Liabilities and Shareholders' Equity
Current liabilities :
Accounts payable $ 56,081 $ 65,657
Accrued expenses :
Payroll, commissions and management
incentive compensation 26,645 27,339
Income taxes 17,868 11,960
Exit costs 1,862 2,219
Other 9,730 7,756
------------------- -------------------
Total current liabilities 112,186 114,931
------------------- -------------------
Commitments and contingencies
Shareholders' equity :
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 500,000 shares
authorized; 87,465 and 86,678 shares
issued, respectively 875 866
Paid-in capital 185,054 102,338
Retained earnings 452,613 290,344
Unearned compensation (202) (475)
------------------- -------------------
638,340 393,073
Less cost of common shares in treasury, 200 shares (2,089) (2,089)
------------------- -------------------
Total shareholders' equity 636,251 390,984
------------------- -------------------
Total liabilities and sharehoders' equity $ 748,437 $ 505,915
=================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
CDW Computer Centers, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
Years Ended December 31,
----------------------------------------------------
2000 1999 1998
----------------------------------------------------
Net sales $ 3,842,452 $ 2,561,239 $ 1,733,489
Cost of sales 3,352,609 2,237,700 1,513,314
-------------- -------------- ---------------
Gross profit 489,843 323,539 220,175
Net advertising expenses 12,479 16,397 12,365
Selling and administrative expenses 217,756 149,230 103,172
-------------- -------------- ---------------
Income from operations 259,608 157,912 104,638
Interest income 9,739 4,931 4,708
Other expense, net (690) (450) (335)
-------------- -------------- ---------------
Income before income taxes 268,657 162,393 109,011
Income tax provision 106,388 64,308 43,170
-------------- -------------- ---------------
Net income $ 162,269 $ 98,085 $ 65,841
============== ============== ===============
Earnings per share
Basic $ 1.87 $ 1.14 $ 0.76
============== ============== ===============
Diluted $ 1.79 $ 1.11 $ 0.76
============== ============== ===============
Weighted average number of
common shares outstanding
Basic 87,003 86,270 86,124
============== ============== ===============
Diluted 90,860 88,304 87,008
============== ============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
F-4
CDW Computer Centers, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Equity
(in thousands)
Common Shares Treasury Shares Total
------------------- Retained Unearned ----------------- Shareholders'
Shares Amount Paid-in Capital Earnings Compensation Shares Amount Equity
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 86,100 $ 860 $ 74,035 $ 126,418 $ (1,447) - $ - $ 199,866
MPK Restricted Stock Plan
forfeitures (1) (1)
Amortization of unearned
compensation 472 472
Compensatory stock option
grants 986 986
Exercise of stock options 184 2 1,139 1,141
Tax benefit from stock
option transactions 3,741 3,741
Capital contribution for
litigation settlement assumed
by majority shareholder 4,365 4,365
Additional redemption price
pursuant to
litigation settlement (4,365) (4,365)
Capital contribution for
legal costs assumed
by majority shareholder,
net of tax 806 806
Purchase of treasury shares 200 (2,089) (2,089)
Net income 65,841 65,841
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1998 86,284 862 80,706 192,259 (975) 200 (2,089) 270,763
MPK Restricted Stock Plan
forfeitures (101) 101 -
Amortization of unearned
compensation 399 399
Compensatory stock option
grants 1,880 1,880
Exercise of stock options 394 4 2,415 2,419
Tax benefit from stock
option transactions 17,438 17,438
Net income 98,085 98,085
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1999 86,678 866 102,338 290,344 (475) 200 (2,089) 390,984
MPK Restricted Stock Plan
forfeitures (15) 15 -
Amortization of unearned
compensation 258 258
Compensatory stock option
grants 4,225 4,225
Exercise of stock options 787 9 7,116 7,125
Tax benefit from stock option
and restricted stock
transactions 71,390 71,390
Net income 162,269 162,269
-----------------------------------------------------------------------------------------------------
Balance at December 31, 2000 87,465 $ 875 $ 185,054 $ 452,613 $ (202) 200 $ (2,089) $ 636,251
=====================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
F-5
CDW Computer Centers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31,
-----------------------------------------------
2000 1999 1998
-------------- ------------- --------------
Cash flows from operating activities:
Net income $ 162,269 $ 98,085 $ 65,841
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 10,478 6,788 4,758
Accretion of marketable securities (2,930) (3,017) (2,797)
Stock-based compensation expense 4,483 2,279 1,458
Allowance for doubtful accounts 2,700 1,115 1,235
Legal fees assumed by majority shareholder, net of tax - - 806
Deferred income taxes (1,866) (1,573) (720)
Tax benefit from stock option exercises 71,390 17,438 3,741
Changes in assets and liabilities:
Accounts receivable (109,934) (78,997) (66,019)
Miscellaneous receivables and other assets (5,940) (1,673) (1,936)
Merchandise inventory 16,015 (61,825) (2,451)
Prepaid expenses (2,097) 38 (675)
Accounts payable (9,576) 24,299 (3,093)
Accrued compensation (694) 11,060 3,283
Accrued income taxes and other expenses 7,882 9,010 1,769
Accrued exit costs (357) (496) (676)
-------------- ------------- --------------
Net cash provided by operating activities 141,823 22,531 4,524
-------------- ------------- --------------
Cash flows from investing activities:
Purchases of available-for-sale securities (116,398) (81,567) (26,810)
Redemptions of available-for-sale securities 60,900 53,792 32,250
Purchases of held-to-maturity securities (130,781) (50,020) (88,122)
Redemptions of held-to-maturity securities 93,480 84,042 80,213
Investment in and advances to joint venture (21,706) (7,650) -
Repayment of advances from joint venture 22,489 1,131 -
Purchase of property and equipment (33,015) (9,161) (15,110)
-------------- ------------- --------------
Net cash used in investing activities (125,031) (9,433) (17,579)
-------------- ------------- --------------
Cash flows from financing activities:
Purchase of treasury shares - - (2,089)
Proceeds from exercise of stock options 7,125 2,419 1,141
-------------- ------------- --------------
Net cash provided by (used in) financing activities 7,125 2,419 (948)
-------------- ------------- --------------
Net increase (decrease) in cash 23,917 15,517 (14,003)
Cash and cash equivalents - beginning of year 19,747 4,230 18,233
-------------- ------------- --------------
Cash and cash equivalents - end of year $ 43,664 $ 19,747 $ 4,230
============== ============= ==============
Supplementary disclosure of cash flow information :
Taxes paid $ 28,679 $ 41,491 $ 40,400
-------------- ------------- --------------
The accompanying notes are an integral part of the consolidated financial statements.
F-6
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
CDW Computer Centers, Inc. and its subsidiaries (collectively the "Company") are
engaged in the sale of brand name personal computers and related products
primarily through direct marketing to end users within the United States. The
Company's primary business is conducted from a combined sales, corporate office,
distribution center and showroom facility located in Vernon Hills, Illinois and
through www.cdw.com, its Internet site. The Company also operates sales offices
in Buffalo Grove, Lincolnshire and Chicago, Illinois, a retail showroom in
Chicago, Illinois and a government sales office in Lansdowne, Virginia.
The Company extends credit to business, government and institutional customers
under certain circumstances based upon the financial strength of the customer.
Such customers are typically granted net 30 day credit terms. The balance of the
Company's sales are made primarily through third party credit cards and for
cash-on-delivery.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of CDW
Computer Centers, Inc, and its wholly owned subsidiaries, CDW Government, Inc.
(CDW-G) and CDW Capital Corporation. CDW-G sells personal computers and related
products and focuses exclusively on serving government and educational
customers. CDW Capital Corporation owns a 50% interest in CDW Leasing, L.L.C.
(Note 12 ). The investment in CDW Leasing, L.L.C. is accounted for by the equity
method. All inter-Company transactions and accounts are eliminated in
consolidation.
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
The Company calculates earnings per share in accordance with 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. A reconciliation of
basic and diluted per-share computations is included in Note 10.
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. On April 22, 2000, the Board of Directors of the Company approved a
two-for-one stock split effected in the form of a stock dividend paid on June
21, 2000 to all common shareholders of record at the close of business on June
14, 2000. All per share and related amounts contained in these financial
statements and notes have been adjusted to reflect the stock splits.
Cash and Cash Equivalents
Cash and cash equivalents include all deposits in banks and highly liquid
temporary cash investments purchased with original maturities of three months or
less at the time of purchase.
Marketable Securities
The Company classifies securities with a stated maturity, which it has the
intent to hold to maturity, as "held-to-maturity", and records such securities
at amortized cost. Securities which do not have stated maturities or for which
the Company does not have the intent to hold to maturity are classified as
"available-for-sale" and recorded at fair value, with unrealized holding gains
or losses, if material, recorded as a separate component of Shareholders'
Equity. The Company does not invest in trading securities. All securities are
accounted for on a specific identification basis.
The Company's marketable securities are concentrated in securities of the U.S.
Government and U.S. Government Agencies. Such investments are supported by the
financial stability and credit standing of the U. S. Government or applicable U.
S. Government Agency.
Merchandise Inventory
Inventory is valued at the lower of cost or market. Cost is determined on the
first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. The Company calculates depreciation
using the straight-line method with useful lives ranging from 2 to 25 years.
Expenditures for major renewals and improvements that extend the useful life of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Revenue Recognition
The Company records revenues from sales transactions when title to products sold
passes to the customer. The Company's shipping terms dictate that the passage of
title occurs upon receipt of products by the customer.
Advertising
Advertising costs are charged to expense in the period incurred. Cooperative
reimbursements from vendors, which are earned and available, are recorded in the
period the related advertising expenditure is incurred. The following table
summarizes advertising costs and cooperative reimbursements for the years ended
December 31, 2000, 1999 and 1998, respectively (in thousands):
2000 1999 1998
---- ---- ----
Gross advertising expenses $91,296 $65,217 $51,840
Less: cooperative reimbursements (78,817) (48,820) (39,475)
---------------- --------------- ----------------
---------------- --------------- ----------------
Net advertising expenses $12,479 $16,397 $12,365
================ =============== ================
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), the Company accounts for
its stock-based compensation programs according to the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense is recognized to the extent of employee or
director services rendered based on the intrinsic value of compensatory options
or shares granted under the plans. See Note 9 for disclosure of the Company's
stock-based compensation plans in accordance with SFAS 123.
Fair Value of Financial Instruments
The Company estimates that the fair market value of all of its financial
instruments at December 31, 2000 and 1999 are not materially different from the
aggregate carrying value due to the short term nature of these instruments.
Treasury Shares
The Company intends to hold the shares in treasury for general corporate
purposes, including issuances under various employee stock option plans. The
Company accounts for the treasury shares using the cost method.
Financial Statement Presentation
The Company has reclassified certain balance sheet and income statement amounts
reported in prior years to conform with the 2000 presentation.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's investments in
marketable securities at December 31, 2000 and 1999 (in thousands) were:
Gross
Unrealized
Estimated Holding Amortized
Security Type Fair Value Gains Losses Cost
------------- ----------- ------ ------ ----
December 31, 2000
Available-for-sale:
U.S. Government and Government Agency $ 86,904 $ 73 $ - $ 86,831
securities
-------------------------------------------------------
Held-to-maturity:
U.S. Government and Government Agency 72,223 97 - 72,126
securities
-------------------------------------------------------
-------------------------------------------------------
Total marketable securities: $ 170 $ - $ 158,957
$159,127
=======================================================
December 31, 1999
Available-for-sale:
U.S. Government and Government Agency $ 30,757 $ - $ (20) $ 30,777
securities
-------------------------------------------------------
Held-to-maturity:
U.S. Government and Government Agency 32,458 7 - 32,451
securities
-------------------------------------------------------
-------------------------------------------------------
Total marketable securities: $ 63,215 $ 7 $ (20) $ 63,228
=======================================================
The Company's investments in marketable securities at December 31, 2000 and 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. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
2000 1999
---- ----
Land $ 10,367 $ 10,367
Machinery and equipment 17,803 15,117
Building and leasehold improvements 14,735 13,455
Computer and data processing equipment 19,621 10,168
Computer software 6,985 2,482
Furniture and fixtures 3,753 2,193
Construction in progress 13,544 1,057
----------------- -----------------
86,808 54,839
Less accumulated depreciation 24,842 15,410
----------------- -----------------
Net property and equipment $ 61,966 $ 39,429
================= =================
The Company owns approximately 45 acres of land, of which approximately 11 acres
are vacant and available for future expansion.
In July 2000, the Company began construction of a 250,000 square foot addition
to its distribution center in Vernon Hills, Illinois. The new distribution
center is scheduled to be operational in the second quarter of 2001 and is
estimated to cost between $16 million and $17 million for construction and
equipment of which $11.6 million has been incurred as of December 31, 2000. Upon
completion, the Company's total distribution center capacity will be
approximately 450,000 square feet
5. Financing Arrangements
The Company has an aggregate $50 million available pursuant to two $25 million
unsecured lines of credit with two financial institutions. One line of credit
expires in June 2001, at which time the Company intends to renew the line, and
the other does not have a fixed expiration date. Borrowings under the first
credit facility bear interest at the prime rate less 2 1/2%, LIBOR plus 1/2% or
the federal funds rate plus 1/2%, as determined by the Company. Borrowings under
the second credit facility bear interest at the prime rate less 2 1/2%, LIBOR
plus .45% or the federal funds rate plus .45%, as determined by the Company. At
December 31, 2000, there were no borrowings under either of the credit
facilities.
6. Trade Financing Agreements
The Company has entered into security agreements with certain financial
institutions ("Flooring Companies") in order to facilitate the purchase of
inventory from various suppliers under certain terms and conditions. The
agreements allow for a maximum credit line of $77.5 million collateralized by
inventory purchases financed by the Flooring Companies. At December 31, 2000 and
1999, the Company owed the Flooring Companies approximately $18.6 million and
$13.8 million, respectively, which is included in trade accounts payable.
7. Operating Leases and Exit Costs
The Company is obligated under various operating lease agreements, primarily for
office facilities, in the Chicago metropolitan area. The lease agreements
generally provide for minimum rent payments and a proportionate share of
operating expenses and property taxes, and include certain renewal and expansion
options. For the years ended December 31, 2000, 1999 and 1998, rent expense was
$2.0 million, $432,000 and $230,000, respectively. Additionally, $571,000,
$573,000 and $689,000 of rental payments were charged to the exit liability in
2000, 1999 and 1998 respectively. Future minimum lease payments are as follows:
Years Ended December 31, Amount
------------------------ ------
2001 $ 4,598
2002 6,535
2003 6,655
2004 5,978
2005 6,148
Thereafter 32,770
-----------------
Total future minimum lease payments $ 62,684
=================
The Company recorded a $4.0 million pre-tax non-recurring charge to operating
results for exit costs relating to its leased 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 2000, 1999 and 1998, the
Company charged approximately $357,000, $496,000 and $676,000 against the exit
accrual, respectively. These amounts include cash payments for rent, real estate
taxes and restoration, net of sublease payments.
The Company sublet the warehouse and showroom portions of the Buffalo Grove
facility to a third party in 1999. However, the sublessee terminated the lease
in conjunction with its Chapter 11 case under the bankruptcy laws in the first
quarter of 2000 and has since vacated the premises. The Company has elected to
occupy an additional portion of the facility and is subleasing a portion of the
remaining space. The Company will continue to evaluate the future use of the
warehouse space and will adjust the remaining exit liability as necessary.
8. Income Taxes
Components of the provision (benefit) for income taxes for the years ended
December 31, 2000, 1999 and 1998 consist of (in thousands):
2000 1999 1998
Current: ----------------- ---------------- -----------------
Federal $ 89,520 $ 54,135 $ 35,968
State 18,734 11,746 7,922
----------------- ---------------- -----------------
108,254 65,881 43,890
Deferred (1,866) (1,573) (720)
----------------- ---------------- -----------------
Provision for
income taxes $ 106,388 $ 64,308 $ 43,170
================= ================ =================
The current income tax liabilities for 2000, 1999 and 1998 were reduced by $71.4
million, $17.4 million and $3.7 million, respectively, for tax benefits recorded
directly to paid-in capital relating to the exercise and vesting of shares
pursuant to the CDW Stock Option Plan, the MPK Stock Option Plan and the MPK
Restricted Stock Plan.
The reconciliation between the statutory tax rate expressed as a percentage of
income before income taxes and the actual effective tax rate for 2000, 1999 and
1998 is as follows:
2000 1999 1998
-------- -------- --------
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
State taxes, net of federal benefit 4.5 4.6 4.6
Other 0.1 0.0 0.0
-------- -------- --------
Total 39.6 % 39.6 % 39.6 %
======== ======== ========
The tax effect of temporary differences that give rise to the net deferred
income tax asset at December 31, 2000 and 1999 are presented below (in
thousands):
2000 1999
---- ----
Current:
Accounts receivable $ 3,364 $ 2,233
Payroll and benefits 2,621 3,805
Merchandise inventory 438 462
Accrued expenses 314 202
-------------- ---------------
Subtotal Current 6,737 6,702
-------------- ---------------
Non-current:
Employee stock plans 5,514 4,742
Exit charge 745 865
Property and equipment 199 (752)
Other 181 (47)
-------------- ---------------
Subtotal Non-current 6,639 4,808
-------------- ---------------
Net deferred tax asset $ 13,376 $ 11,510
============== ===============
The portion of the net deferred tax asset relating to employee stock plans
results primarily from the MPK Stock Option Plan and compensatory stock option
grants under the CDW Stock Option Plans. Compensation expense related to these
plans is deductible for income tax purposes in the year the options are
exercised.
Although realization is not assured, management believes, based upon historical
taxable income, that it is more likely than not that all of the deferred tax
asset will be realized.
9. Stock-Based Compensation
CDW Stock Option Plans
The Company has established certain stock-based compensation plans for the
benefit of its directors and coworkers. Pursuant to these plans the Company has
reserved a total of 7,075,896 common shares for stock option grants. The plans
generally include vesting requirements from 3 to 10 years and option lives of up
to 20 years. Options may be granted at exercise prices ranging from $0.01 to the
market price of the common stock at the date of grant.
Option activity for the years ended December 31, 1998, 1999 and 2000 was as
follows:
Weighted-Average Options
Shares Exercise Price Exercisable
---------------- --------------------- ---------------
Balance at January 1, 1998 7,327,676 $ 11.70 178,948
---------------- --------------------- ---------------
Options granted 2,856,460 23.19
Options exercised (183,488) 6.22
Options forfeited (460,140) 12.62
---------------- --------------------- ---------------
Balance at December 31, 1998 9,540,508 15.20 452,180
---------------- --------------------- ---------------
Options granted 3,700,390 31.10
Options exercised (394,404) 6.13
Options forfeited (649,060) 17.21
---------------- --------------------- ---------------
Balance at December 31, 1999 12,197,434 20.21 819,910
================ ===================== ===============
Options granted 985,250 25.84
Options exercised (787,028) 9.02
Options forfeited (355,893) 25.78
---------------- --------------------- ---------------
Balance at December 31, 2000 12,039,763 $ 21.24 1,202,352
================ ===================== ===============
For the years ended December 31, 2000, 1999 and 1998, the weighted-average fair
value of options granted was as follows:
2000 1999 1998
---- ---- ----
Exercise price equals market price $21.25 $22.88 $16.39
Exercise price is less than market price $27.87 $39.31 $23.98
The following table summarizes the status of outstanding stock options as of
December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------- ---------------------------
Weighted-Average
Number of Remaining Weighted- Number of Weighted-
Range of Options Contractual Life Average Options Average
Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
--------------------- ------------- ------------------- --------------- ------------ ----------------
$0.003 - $0.01 337,733 18.7 $ 0.01 - $ -
$2.33 - $3.25 21,600 14.0 $ 2.96 - $ -
$5.69 - $6.75 579,679 14.9 $ 6.61 579,679 $ 6.61
$10.00 - $14.83 4,370,232 16.4 $ 13.65 618,853 $ 13.91
$16.20 - $23.98 2,375,856 18.0 $ 23.85 2,172 $ 23.98
$24.32 - $34.52 2,753,059 18.9 $ 25.90 - $ -
$39.31 - $44.00 1,551,604 19.0 $ 39.32 1,648 $ 39.31
$63.375 50,000 20.0 $ 63.38 - $ -
--------------------- ------------- ------------------- --------------- ------------ ----------------
$0.003 - $63.375 12,039,763 17.6 $ 21.24 1,202,352 $ 10.45
===================== ============= =================== =============== ============ ================
Had the Company elected to apply the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123) regarding recognition of compensation expense to the extent of the
calculated fair value of stock options, reported net income and earnings per
share would have been reduced as follows:
(in 000's, except per share amounts)
2000 1999 1998
------------- ------------- -------------
Net income, as reported $ 162,269 $ 98,085 $ 65,841
Pro forma net income $ 149,211 $ 90,525 $ 61,574
Basic earnings per share, as reported $ 1.87 $ 1.14 $ 0.76
Diluted earnings per share, as reported $ 1.79 $ 1.11 $ 0.76
Pro forma basic earnings per share $ 1.72 $ 1.05 $ 0.72
Pro forma diluted earnings per share $ 1.67 $ 1.03 $ 0.71
The effects of applying SFAS 123 in the above pro forma disclosure are not
likely to be representative of the effects disclosed in future years because the
pro forma calculations exclude stock options granted before 1995.
For purposes of the SFAS 123 pro forma net income and earnings per share
calculation, the fair value of each option grant is estimated as of the date of
grant using the Black-Scholes option-pricing model. The weighted-average
assumptions used in determining fair value as disclosed for SFAS 123 are shown
in the following table:
2000 1999 1998
---- ---- ----
Risk-free interest rate 5.0 % 6.1 % 5.4 %
Dividend yield 0.0 % 0.0 % 0.0 %
Option life (years) 8.7 9.8 9.9
Stock price volatility 57.6 % 54.6 % 52.6 %
MPK Stock Option Plan
Effective December 31, 1992, the Company's current majority shareholder
established the MPK Stock Option Plan pursuant to which he granted
non-forfeitable options to certain officers to purchase 16,573,500 shares of
common stock owned by him at an exercise price of $.004175 per share. Options
were exercised as follows:
Transaction Year Number of Options Exercised
---------------- ---------------------------
1995 1,352,000
1997 544,000
1998 660,000
1999 1,744,000
2000 4,180,888
Options for 3,196,972 shares for the two remaining participants are exercisable
as of December 31, 2000 and the remaining 3,048,000 options are exercisable as
follows: 2,286,000 on December 31, 2001 and 762,000 on December 31, 2002. The
number of options exercisable increase proportionately to shares, if any, sold
by the majority shareholder.
MPK Restricted Stock Plan
Effective upon the closing of the initial public offering, the current majority
shareholder established the MPK Restricted Stock Plan. Pursuant to this plan,
the majority shareholder allocated 2,674,416 shares of his common stock to be
held in escrow for the benefit of those persons employed by the Company as of
December 31, 1992. The number of shares allocated to each employee was dependent
upon the employee's years of service and salary history. As a result of these
grants, which provided for vesting based upon continuous employment with the
Company or its subsidiaries through January 1, 2000, the Company recorded a
capital contribution and offsetting deferred charge of approximately $2.8
million for unearned compensation equal to the number of shares granted, times
$1.0425 per share. The deferred charge is classified in the equity section of
the consolidated balance sheet of the Company as unearned compensation and is
being amortized on a straight-line basis over the vesting period. As of December
31, 2000, 703,378 shares have been forfeited for which the Company has recorded
a reduction of both unearned compensation and paid-in capital, in addition to
reducing the amortization of unearned compensation accordingly.
The Company filed a Registration Statement on Form S-3, which was effective on
February 7, 1997, to modify the terms of the MPK Restricted Stock Plan and
provide participants the option to accelerate the vesting on 25% of their shares
in exchange for the extension of the vesting period on their remaining shares
through 2003. Under the terms of this modification, participants who elected the
acceleration were granted options by the Company equal to the number of shares
which became vested with an exercise price of $14.75 per share, the market price
of the stock on the acceleration date.
As of December 31, 2000, 996,198 shares remain outstanding under the modified
terms and vest evenly over the next three years beginning on January 1, 2001.
Tax Benefits
The exercise and vesting of shares pursuant to the MPK Stock Option Plan, MPK
Restricted Stock Plan and the CDW Incentive Stock Option Plan resulted in the
realization by the Company of tax benefits of $72.5 million in 2000, $17.8
million in 1999 and $3.9 million in 1998, of which $1.1 million, $381,000 and
$144,000, respectively, were previously recorded in deferred taxes. The
incremental tax benefits of $71.4 million in 2000, $17.4 million in 1999 and
$3.7 million in 1998 were recorded to paid-in capital.
10. Earnings Per Share
At December 31, 2000, the Company had outstanding common shares totaling
87,265,000. The Company has also granted options to purchase common shares to
the coworkers of the Company as discussed in Note 9. These options have a
dilutive effect on the calculation of earnings per share. The following table is
a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations as required by SFAS 128.
Years ended December 31,
(in 000's except per share data)
--------------------------------
2000 1999 1998
---- ---- ----
Basic earnings per share:
Income available to
common shareholders (numerator) $162,269 $ 98,085 $ 65,841
============ =========== ============
Weighted average common
shares outstanding (denominator) 87,003 86,270 86,124
============ =========== ============
Basic earnings per share $ 1.87 $ 1.14 $ 0.76
============ =========== ============
Diluted earnings per share:
Income available to
common shareholders (numerator) $162,269 $ 98,085 $ 65,841
============ =========== ============
Weighted average common
shares outstanding 87,003 86,270 86,124
Effect of dilutive securities:
Options on common stock 3,857 2,034 884
------------ ----------- ------------
Total common shares and dilutive securities
(denominator) 90,860 88,304 87,008
============ =========== ============
Diluted earnings per share $ 1.79 $ 1.11 $ 0.76
============ =========== ============
Options to purchase 50,000 shares of common stock at $63.38 per share were
outstanding during 2000 but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price of
the common shares. The options were still outstanding at December 31, 2000.
11. Profit Sharing and 401(k) Plan
The Company has a profit sharing plan which includes a salary reduction feature
established under the Internal Revenue Code Section 401(k) covering
substantially all employees. Contributions by the Company to the profit sharing
plan are determined at the discretion of the Board of Directors. For the years
ended December 31, 2000, 1999 and 1998, the Company's profit sharing expense was
$3,600,000 $2,639,000 and $1,860,000, respectively.
12. Leasing Joint Venture
In April 1999, CDW Capital Corporation, a wholly-owned subsidiary of the
Company, and First Portland Corporation ("FIRSTCORP") formed CDW Leasing, L.L.C.
("CDW-L"), a 50/50 joint venture. CDW-L provides captive leasing services to the
Company's customers. Under the terms of an operating agreement, FIRSTCORP
provides leasing management services to CDW-L, with net earnings of the venture
allocated 50% to the Company and 50% to FIRSTCORP. CDW Capital Corporation and
FIRSTCORP each contributed $600,000 to the capital of CDW-L, maintain equal
operating authority over CDW-L and have an equal number of seats on the Board of
Managers of the joint venture.
At December 31, 2000, the Company has a $5.8 million net investment in and loan
to CDW-L. The Company is committed to loan up to $10 million to CDW-L to fund
new leases. During the third quarter of 2000, CDW-L obtained a financing
commitment for $25 million from a financial institution of which $13.4 million
was outstanding at December 31, 2000. In order to comply with certain covenants
related to the $25 million financing commitment, a portion of the Company's loan
is subordinated to the financial institution. The terms of the Company's loan
agreement provide for interest based on the 90 day LIBOR rate plus 2.2% for the
non-subordinated portion of the loan and the 90 day LIBOR rate plus 5.0% for the
subordinated debt.
13. Contingencies and Subsequent Events
As of December 31, 2000, the Company was not a party to any material legal
proceedings.
In January 2001, the Company's Board of Directors authorized the purchase of up
to 5 million shares of its common stock, slightly more than 5% of its total
outstanding shares, from time to time in both open market and private
transactions, as conditions warrant. The repurchase program is expected to
remain effective for approximately twenty-four months, unless sooner completed
or terminated by the Board of Directors. The Company intends to hold the
repurchased shares in treasury for general corporate purposes, including
issuances under various employee stock option plans.
14. Selected Quarterly Financial Data (Unaudited)
The following information is for the years ended December 31, 2000 and 1999 (in
thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
December 31, 2000
Net sales $ 863,988 $ 943,342 $ 1,028,051 $ 1,007,071
Gross profit 109,213 122,221 131,134 127,275
Income before income taxes 58,428 66,307 74,387 69,535
Net income 35,291 40,049 44,930 41,999
Earnings per share:
Basic $ 0.41 $ 0.46 $ 0.52 $ 0.48
Diluted $ 0.39 $ 0.44 $ 0.49 $ 0.46
December 31, 1999
Net sales $ 539,406 $ 597,554 $ 683,012 $ 741,267
Gross profit 67,906 74,747 85,614 95,272
Income before income taxes 32,614 36,921 43,358 49,500
Net income 19,698 22,301 26,188 29,898
Earnings per share:
Basic $ 0.23 $ 0.26 $ 0.30 $ 0.35
Diluted $ 0.22 $ 0.25 $ 0.30 $ 0.33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
CDW Computer Centers, Inc.
Our audits of the consolidated financial statements of CDW Computer Centers,
Inc. and Subsidiaries referred to in our report dated January 19, 2001 appearing
on page F-2 of this Form 10-K also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers
Chicago, Illinois
January 19, 2001
S-1
CDW COMPUTER CENTERS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
years ended December 31, 2000, 1999 and 1998
(in thousands)
Column A Column B Column C Column D Column E
-------- ---------- ----------------------- ----------- ----------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
Year ended December 31, 2000
Deducted in the balance sheet
from the asset to which it applies:
Allowance for doubtful accounts $4,300 $6,817 $ - $ 4,117 (a) $7,000
------- ------- --- ------- ------
Year ended December 31, 1999
Deducted in the balance sheet
from the asset to which it applies:
Allowance for doubtful accounts $3,185 $2,291 $ - $ 1,176 (a) $4,300
------- ------- --- ------- ------
Year ended December 31, 1998
Deducted in the balance sheet
from the asset to which it applies:
Allowance for doubtful accounts $1,950 $2,129 $ - $894 (a) $3,185
------- ------- --- ---- ------
Note:
(a) Uncollectible items written off, less recoveries of items previously written off.
S-2