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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, 1997
- --- 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
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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 18, 1998 was approximately $550 million, based upon the market price per
share of $57.91.
As of March 18, 1998, the registrant had 21,524,984 shares of Common Stock,
$0.01 par value, outstanding.
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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
- --------------------- ---------------------
1997 Definitive Proxy Statement, to be Part III, Items 10, 11, 12 and 13
filed pursuant to Regulation 14 A not
later than April 30, 1998.
An Index to Exhibits appears at pages Part IV, Item 14
19 - 20 herein
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CDW COMPUTER CENTERS, INC.
1997 FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1997
INDEX
PART I 10-K Page No.
------ -------------
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders. . . . 9
PART II
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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 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 . . . . . . . . . . . . . . . . . . 19
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
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PART I
ITEM 1. BUSINESS.
GENERAL
CDW Computer Centers, Inc. (sometimes referred to herein as "CDW") is a
leading direct marketer of over 30,000 microcomputer products, primarily to
business, government, educational, institutional and home office users in the
United States. The Company sells a broad range of name-brand microcomputer
products, including hardware and peripherals, software, networking/communication
products and accessories through knowledgeable telemarketing account executives.
Sales of products that utilize, or are compatible with, Microsoft Windows
95/Windows/Windows NT/MS-DOS operating platforms account for substantially all
of the Company's net sales. The Company offers popular brand name microcomputer
products from Apple, Compaq, Canon, Epson, Hewlett-Packard, IBM, Intel, Lotus,
Microsoft, NEC, Novell, 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 discounted prices.
The Company directs its marketing efforts toward current and prospective
customers with a particular focus on business, government, educational,
institutional and home office 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 through its 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,
1997, the Company serviced approximately 575,000 customers. 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 experienced telemarketing account managers
who are knowledgeable about a customer's needs, and by enhancing product
offerings such as networking products through targeted catalogs to such users.
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, 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 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 direct
marketing format, which promotes the sale of high quality, brand name products
at competitive prices, 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. In the hardware category, the Company competes with
traditional microcomputer retailers, computer superstores, consumer electronic
and office supply superstores, mass merchandisers, national direct marketers and
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value-added resellers. In the software and accessories categories, the Company
generally competes with these same resellers as well as specialty retailers and
resellers. Certain national computer resellers also have established or acquired
their own direct marketing operations. 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 modem
telecommunications. The Company also competes with distributors and
manufacturers that sell hardware and software directly to certain customers.
Several of the Company's current and potential competitors are larger and have
substantially greater resources than the Company. Additionally, several
competitors in the direct marketing industry have raised capital in the public
markets through initial and subsequent public offerings. The increased
visibility of these companies and their access to the capital markets may
improve their market position and their ability to compete with the Company. The
Company believes that competition may increase in the future, which could
require the Company to reduce prices, increase advertising expenditures or take
other actions which may have an adverse effect on the Company's operating
results.
Additionally, the industry has become more accepting of large-volume,
cost-efficient channels of distribution such as computer superstores, consumer
electronics and office supply superstores, national direct marketers and mass
merchants. In addition, several of the Company's competitors are attempting to
market computer products through electronic commerce, including the Internet.
While these efforts to date represent only a small percentage of industry-wide
sales, such sales may grow if end-user acceptance of electronic commerce
increases. Although the Company offers products for sale via electronic
commerce, there can be no assurance that the Company's sales via electronic
commerce will meet or exceed sales levels generated by competitors.
The current industry configuration 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. The philosophy is based upon the premise, promoted by its 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 marketer of a broad range of brand name 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 business strategy:
Breadth and Depth of Selection. The Company offers over 30,000 products,
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.
Competitive Pricing. The Company believes that its high volume,
cost-efficient direct marketing format allows it to maintain a pricing advantage
over many other microcomputer product resellers. The Company utilizes a pricing
model which allows it to efficiently pass on pricing changes as they occur and
provide its customers with the lowest possible price.
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Marketing and Advertising. The Company uses telemarketing account managers
to respond to customer inquiries generated by direct marketing in personal
computer magazines, periodic catalog mailings and Internet marketing activities.
In addition to its direct marketing efforts, the Company uses certain other
sales strategies to expand and enhance its base of active customers. The
Company's sales function is organized to support customers requiring unique
service levels or product lines.
Customer Service and Technical Support. The Company employs a trained
technical staff that is available by telephone to assist the customer should
technical problems occur in order to reduce product returns and increase
customer satisfaction. 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.
Effective Inventory Control. The Company's management information systems,
"just-in-time" purchasing system, RF-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 21 inventory turns during 1997.
High Quality Personnel. The Company strives to attract, retain and motivate
high quality personnel and provides its employees with financial incentives
designed to maximize performance and productivity. The Company and Mr. Krasny
have instituted short-term incentive programs and stock-based compensation
programs to reward and motivate all of the Company's coworkers.
MERCHANDISE
The Company offers over 30,000 microcomputer products including hardware
and peripherals, software, networking and communication products and accessories
for use with microcomputers based on a variety of operating platforms. The
Company's just-in-time purchasing system and aggressive inventory management
allows it to limit its on-hand inventory to approximately 8,500 products and
ship orders generally on a same-day basis.
The following is a listing of selected product manufacturers by product
category :
PRODUCT CATEGORIES SELECTED PRODUCT MANUFACTURERS
------------------ ------------------------------
HARDWARE AND PERIPHERALS
INCLUDING:
Notebook and Laptop Computers Admor Kingston Simple
Desktop Computers and Servers Canon Lexmark Sony
Printers Compaq Magnavox Supra
Data Storage Devices Epson Megahertz Syquest
Video Products Hayes Microtek Umax
Add-on Boards/Memory Hewlett-Packard NEC Viewsonic
Input Devices IBM Okidata Visiontek
Multi-Media Iomega Quantum
Keytronics Seagate
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SOFTWARE Adobe Microsoft
Corel Symantec
Lotus
NET/COMM PRODUCTS Bay-Netgear SMC
Cisco US Robotics
Novell 3Com
OTHER ACCESSORIES Logitech Sony
Maxell TDK
Memorex 3M
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. During 1997, the Company was successful in obtaining initial
authorization and subsequently increasing the number of products it is
authorized to sell from Hewlett-Packard. In addition, the Company expanded its
relationship and obtained authorization to purchase products directly from
Compaq.
The Company offers approximately 8,000 different software packages in the
business and personal productivity, utility and language, educational and
entertainment categories. The Company also offers a broad range of microcomputer
accessories, including computer-related items and supplies such as diskettes,
printer products, pointing devices, digital cameras and connectors.
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 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 1997, CDW purchased approximately 52 % of its merchandise from
distributors and aggregators and the balance direct from manufacturers, all of
which ship directly to the Company's distribution facility. 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/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. In addition, the
relocation of key distributors utilized in the Company's just-in-time purchasing
model could adversely impact the Company's results of operations. For the year
ended December 31, 1997, Ingram Micro/Ingram Alliance was the only vendor from
whom purchases exceeded 10.0% of total purchases. Additionally, Compaq, Toshiba
and Hewlett Packard products each comprise more than 10.0% 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 quick access to manufacturers
and same day access to its principal distributors and aggregators, including
Ingram Micro/Ingram Alliance, Tech Data, and Micro United. Although brand names
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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, 1997, the Company maintained an
investment in inventory of approximately $62 million with approximately $662,000
of inventory on hand over 90 days old. The Company turned its inventory
approximately 21 times during 1997.
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. 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.
The Company has an established Internet web site, known as www.cdw.com, in
order to capitalize on the growing interest and opportunity created by
electronic commerce. The web site includes many advanced features to attract new
customers and produce sales, including on-line ordering, product specifications,
product availability and pricing. 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 provides information and
convenience for its customers, while also serving as another source for new
customers.
SALES ACTIVITIES AND ORDER FULFILLMENT
The Company's success is due in part to the strength of its account
managers who respond to customer telephone inquiries generated by the Company's
advertising and marketing efforts, and contact 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. 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 United
Parcel Service, Fed Ex, Airborne Express, 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 order size for the years ended December 31, 1997 and 1996, respectively,
was $704.
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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 AND MARKETING
CDW currently maintains a database of over 2.3 million active and
prospective names of which approximately 575,000 were serviced by the Company in
1997. The Company believes that its customers consist principally of businesses,
government institutions and home business users, which tend to purchase
higher-end equipment. For the year ended December 31, 1997, sales to business,
government and institutional customers accounted for approximately 82% of the
Company's net sales, although consumers account for a greater proportion of the
total names on the Company's database.
CDW's customers are located principally throughout the United States. In
1997, approximately 21% of the Company's net sales were generated by sales to
Illinois residents, approximately 30% were generated to residents of the
eastern United States, approximately 16% were generated by sales to residents
of the southern United States, approximately 17% were generated by sales to
residents of the western United States and approximately 15 % were generated by
sales to residents of the Midwestern United States (other than Illinois). In
addition, approximately 1% were sold to customers outside the United States.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
CDW has developed a proprietary customer service tracking system to ensure
that customer initiated service requests are responded to rapidly. As an added
service to customers, the Company offers a configuration service which permits
customers to add accessories, load software or request a custom setup of systems
purchased from the Company. 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 Engineer". The Company's trained technical support
personnel are available by telephone to assist the customer with technical
problems or questions in order to reduce product returns and increase customer
satisfaction.
INFORMATION TECHNOLOGY SYSTEMS
CDW has installed and operates customized information technology systems
based upon an IBM AS/400, Novell, Microsoft NT 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, from time to time, 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 addition 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, the Company's operating results
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could be adversely affected. See Management's Discussion and Analysis for
information regarding the impact of the Year 2000 issue on the Company's
business.
PERSONNEL AND TRAINING
At December 31, 1997, the Company employed 986 persons, including 970
employed full-time and 16 employed part-time. Of these, 941 were employed at the
Company's headquarters in Vernon Hills, Illinois while 45 were employed at the
Company's retail showroom in Chicago, Illinois. The Company considers its
coworker relations to be excellent. The Company's level of net sales per
coworker increased approximately 2% to $1.49 million for the year ended December
31, 1997 vs. $1.46 million for the year ended December 31, 1996. 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. 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.
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. During 1996, the Company invested in
an expansion of the Chicago showroom which increased its size and enhanced
customer service levels. The showroom associated with the Company's main
distribution facility was expanded in conjunction with its construction and
occupancy of its Vernon Hills property. These showrooms occupy approximately
5,100 square feet each.
The Company's retail showrooms, which generated approximately 7% of the
Company's net sales for 1997, 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 telemarketing department.
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TRADEMARKS
The Company conducts its business under the trade names and service marks
"CDW" and "Computer Discount Warehouse." 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, a retail showroom and
corporate offices. The facility occupies a combined total of approximately
218,000 square feet of warehouse and office space and is located on
approximately 27 acres of land. In March 1998, the Company acquired 18 acres of
vacant land contiguous to the Vernon Hills facility. The Company now owns a
total of 45 acres of land at the Vernon Hills site, of which 32 are vacant and
available for future expansion. The Company's Chicago retail showroom and the
facility that previously served as the Company's headquarters in Buffalo Grove,
Illinois are under lease through the year 2000 and 2004, respectively. The
Buffalo Grove facility is currently vacant and the Company is attempting to
sublease the facility. See Note 8 in Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
In July 1990, the Company redeemed the shares of the Company's Common Stock
then held by Mr. John Marks, a former executive officer, director and
shareholder who has since terminated any association with the Company. The
purchase price of the redeemed shares was $506,113, of which $124,085 was paid
in cash and $382,028 was payable by a promissory note. The note bore interest at
a rate of 10% per annum, with principal and interest payable in equal quarterly
installments of $31,835, which began in July, 1991 and continued through April
1, 1994, at which time the note was paid in full.
In June 1993, Mr. Marks filed a three-count Complaint in the United States
District Court for the Northern District of Illinois, Eastern Division, alleging
violations of the federal securities laws, fraud and breach of fiduciary duty in
connection with the July, 1990 redemption of his common stock. Count I alleged
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder against the Company and Mr. Krasny. Count II
alleged a claim for fraud against the Company and Mr. Krasny. Count III alleged
a breach for fiduciary duty against Mr. Krasny. Mr. Marks sought in the
Complaint to rescind the 1990 sale and have himself restored to the ownership
position he was in prior to the sale of his shares or, alternatively, be awarded
sufficient damages to compensate him for the damages allegedly sustained,
including pre-judgment interest. In addition, in Counts II and III, Mr. Marks
sought to recover punitive damages in an unspecified amount.
In July 1993, the Company and Mr. Krasny filed a motion to dismiss the
Complaint. In their motion to dismiss, the Company and Mr. Krasny argued that
Mr. Marks' claim for the alleged violation of Section 10(b) of the Securities
Exchange Act were barred because the statute of limitations for the claim had
expired. Further, Mr. Krasny and the Company denied making any
misrepresentations or omissions and argued, in the alternative, that if any
misrepresentations or omissions of material fact occurred, they were not
material, nor the cause of Mr. Marks' purported damages. The Company and Mr.
Krasny also asserted that certain portions of Mr. Marks' Complaint did not
comply with Federal Rule of Civil Procedure 9(b), which requires that fraud
claims be plead with particularity. Finally, the Company and Mr. Krasny argued
that since the sole basis for federal jurisdiction was Count I, if it was
dismissed, Counts II and III should be dismissed for lack of subject matter
jurisdiction.
In September 1995, the District Court granted, without prejudice, the
motion to dismiss. In its Memorandum Opinion dismissing the Complaint, the Court
held Mr. Marks' allegations established that he had inquiry notice of the
purported securities law violation by July 27, 1990, the date the Company
purchased his shares. Because Mr. Marks brought his action in June 1993, beyond
the applicable statute of limitations period, and because no facts alleged in
the Complaint provided a basis to toll that period, the District Court dismissed
the federal securities law claim in Count I. The District Court then dismissed
the state law claims in Counts II and III for lack of federal jurisdiction. The
District Court provided Mr. Marks with leave to file amended complaint if he
8
12
could plead facts that enabled him to surmount the statute of limitations
obstacles to his federal securities law claim.
In October 1995, Marks filed an Amended Complaint alleging the same three
causes of action contained in his original Complaint. The factual allegations of
the Amended Complaint were essentially the same as those of the original
Complaint. The Amended Complaint, however, included allegations which endeavored
to avoid application of the statute of limitations by alleging Mr. Marks' lack
of notice of his purported federal securities law claim. The Company and Mr.
Krasny in November 1995 filed a motion to dismiss the Amended Complaint,
arguing that it contained the same deficiencies relative to the statute of
limitations and certain other defects as the original Complaint.
On June 14, 1996, the District Court granted the motion to dismiss the
Amended Complaint, with prejudice on the grounds that the securities law claim
alleged in Count I was barred by the statute of limitations and it did not have
jurisdiction over the state law claims alleged in Counts II and III. Mr. Marks
appealed the District Court decision to the United States Court of Appeals for
the Seventh Circuit. On July 28, 1997, the Court of Appeals reversed the
District Court's ruling and remanded the matter back to the District Court for
further proceedings. The Court of Appeals held, among other things, that the
District Court improperly granted the motion to dismiss the Amended Complaint
because it based its decision on inferences of fact inappropriate at this stage
of the proceedings. The case is currently proceeding in the District Court. The
Company and Mr. Krasny have answered the Amended Complaint. They denied any
wrongdoing or liability on their part and asserted a number of affirmative
defenses.
On June 10, 1997, Mr. Marks filed in the Circuit Court of the Nineteenth
Judicial Circuit, Lake County, Illinois, a lawsuit alleging essentially the same
fraud and breach of fiduciary duty claims asserted in the previously dismissed
federal lawsuit. The Company and Mr. Krasny have answered the complaint and
moved to strike a portion of the relief requested by Mr. Marks. In their answer
to the Complaint, the Company and Mr. Krasny denied any wrongdoing or liability.
The Company anticipates this action will likely be dismissed or stayed in light
of the subsequent ruling by the Court of Appeals discussed above.
The Company and Mr. Krasny believe that their actions were honest and
proper and that the suits by Mr. Marks are without merit. The Company and
Mr. Krasny are committed to vigorously defending the litigation.
Mr. Krasny has agreed that in the event that the Company is ordered to pay
damages to Mr. Marks on account of the purchase by the Company of Mr. Marks'
shares, Mr. Krasny will indemnify and reimburse the Company for all damages,
including amounts, net of tax benefits received by the Company, ordered to be
paid and legal fees and costs incurred by the Company in connection with the
defense of the litigation and any appeals. In the event the matter is settled,
Mr. Krasny has agreed to indemnify and reimburse the Company for any amount paid
to Mr. Marks in settlement of this matter, net of tax benefits received by the
Company. No agreement of settlement may be entered into by the Company without
the consent of Mr. Krasny. The Company and Mr. Krasny incurred legal expenses of
approximately $379,000, $133,000 and $140,000 for the years ended December 31,
1997, 1996 and 1995, respectively, which have been assumed, net of tax, by Mr.
Krasny. These legal expenses are recorded as a selling and administrative
expense and the reimbursement by Mr. Krasny, net of tax, is recorded as an
increase to paid-in-capital.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of 1997 to a vote
of security holders.
9
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth for the Company's Common Stock for the
periods indicated, the high and low sales prices on The Nasdaq Stock Market sm.
These quotations were obtained from Nasdaq. As of February 25, 1998, the Company
believes that there were approximately 5,900 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.
1997 1996
---------------------------- ----------------------------
Quarter Ended Low High Low High
- ----------------- ------------ ------------ ------------ ------------
March 31......... $42 7/8 $70 $22 1/2 $39 5/32
June 30.......... 39 5/8 57 3/4 32 53/64 59
September 30 .... 53 78 35 74
December 31...... 42 13/16 69 3/4 59 1/4 72 1/4
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ITEM 6. SELECTED FINANCIAL DATA
CDW Computer Centers, Inc. and Subsidiary
Selected Financial and Operating Data
(in thousands, except per share and selected operating data)
Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
INCOME STATEMENT DATA :
Net sales $ 1,276,929 $ 927,895 $ 628,721 $ 413,270 $ 270,919
Cost of sales 1,106,124 805,413 548,568 359,274 236,718
----------------------------------------------------------------------------
Gross profit 170,805 122,482 80,153 53,996 34,201
Selling and administrative expenses 90,315 64,879 49,175 34,617 21,828
Exit charge (1) - 4,000 - - -
----------------------------------------------------------------------------
Income from operations 80,490 53,603 30,978 19,379 12,373
Interest income (expense), net 4,259 3,469 1,973 392 (373)
Other income (expense), net (241) (188) 47 119 76
----------------------------------------------------------------------------
Income before income taxes 84,508 56,884 32,998 19,890 12,076
Income tax provision 33,507 22,484 12,939 7,777 3,294
Benefit from change in tax status (2) - - - - (3,807)
----------------------------------------------------------------------------
Net income $ 51,001 $ 34,400 $ 20,059 $ 12,113 $ 12,589
----------------------------------------------------------------------------
Pro Forma Income Data (Unaudited):
Income before income taxes $ 12,076
---------------
Pro forma provision for income taxes (3) 4,725
Benefit from change in tax status (2) (3,807)
---------------
Pro forma net income $ 11,158
---------------
Net income per share (Pro forma for 1993)
Basic $ 2.37 $ 1.60 $ 0.95 $ 0.61 $ 0.60
----------------------------------------------------------------------------
Diluted $ 2.35 $ 1.58 $ 0.95 $ 0.61 $ 0.60
----------------------------------------------------------------------------
Weighted average number of common
shares outstanding (Pro forma for 1993)
Basic 21,525 21,525 21,026 20,003 18,750
Diluted 21,704 21,785 21,080 20,003 18,750
SELECTED OPERATING DATA :
Average order size $ 704 $ 704 $ 630 $ 590 $ 587
Number of orders shipped (in thousands) 1,814 1,318 998 700 462
Customers serviced (in thousands) 575 462 374 274 190
Net sales per co-worker (in thousands) $ 1,490 $ 1,459 $ 1,364 $ 1,223 $ 1,188
Inventory turnover 21.4 23.4 21.7 22.2 29.7
Accounts receivable - days sales outstanding 25.0 22.6 21.8 20.7 16.9
December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
FINANCIAL POSITION:
Working capital $ 167,421 $ 123,614 $ 99,127 $ 49,217 $ 16,462
Total assets 269,641 198,830 132,929 77,860 34,159
Total debt and capitalization lease obligations - - - - 3,603
Total shareholders' equity 199,866 141,622 106,161 55,843 21,852
(1) The exit charge provides for estimated costs associated with vacating the
Company's current leased facility. See Note 8 of Notes to the Consolidated
Financial Statements.
(2) Net income and pro forma net income for the year ended December 31, 1993
includes a $3,807,000 ($0.20 per diluted share) tax benefit relating to the
Company's change in tax status from an S corporation to a C corporation on
May 25, 1993 and adoption of Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes."
(3) The Company terminated its election to be treated as an S corporation
effective May 25, 1993. The pro forma income statement data has been computed
by adjusting the Company's net income (loss), as reported to compute income
taxes for the year ended December 31, 1993 assuming an effective tax rate of
39% which would have been recorded had the Company been a C corporation.
11
15
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
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 86.6 86.8 87.3
-------- -------- --------
Gross profit 13.4 13.2 12.7
Selling and administrative expenses 7.1 7.0 7.8
Exit charge --- 0.4 ---
-------- -------- --------
Income from operations 6.3 5.8 4.9
Interest and other income 0.3 0.3 0.3
-------- -------- --------
Income before income taxes 6.6 6.1 5.2
Income tax provision 2.6 2.4 2.0
-------- -------- --------
Net income 4.0 % 3.7 % 3.2 %
-------- -------- --------
The following table represents sales by product line as a percentage of net
sales for each of the periods noted. 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.
----------------------------------------
SALES BY PRODUCT LINE
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
Notebook & Laptop Computers 25.0 % 26.3 % 21.9 %
Desktop Computers and Servers 13.2 11.9 12.3
Software 12.6 12.2 11.4
Printers 12.1 11.3 13.9
Data Storage Devices 10.4 9.7 8.5
Net/Comm Products 8.5 9.6 11.6
Video 7.8 7.6 8.0
Add-On Boards/Memory 4.8 5.7 8.5
Input Devices 3.0 2.8 N/A
Multi-Media 2.0 1.8 N/A
Other Accessories 0.6 1.1 3.9
-------- -------- --------
Total 100.0 % 100.0 % 100.0 %
-------- -------- --------
12
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Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales in 1997 increased 37.6% to a record $1.277 billion compared to
$928 million in 1996. The Company's average order size in 1997 of $704 per order
was unchanged from 1996 and orders shipped increased 37.6% to over 1.8 million.
The number of customers serviced for the year ended December 31, 1997 grew to
575,000 compared to 462,000 for the year ended December 31, 1996.
The growth in net sales is primarily attributable to growth in the number
of orders and customers resulting from the expansion of marketing efforts, new
product offerings, manufacturer price reductions, and an increase in the number
of account managers. Lower manufacturer pricing levels and expanded product
features in notebooks resulted in a shift within the notebook and laptop product
category to lower priced models. Selling prices on many models of notebook and
desktop computers decreased substantially from previous periods due to
manufacturer price reductions. As a result, desktop and notebook computer unit
volume grew 69% and 65%, respectively, from 1996 while dollar sales volume grew
52% and 31%, respectively. The downward trend in manufacturer prices for CPU
products stimulated additional unit sales and further expanded the market for
personal computers.
The impact of the lower prices for personal computers requires the Company
to sell more units of CPU products 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 CPU unit sales, the Company's sales growth
rate and operating results could be adversely affected. Sales of Compaq, IBM,
Hewlett Packard and Toshiba products comprise a substantial portion of the
Company's hardware 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 fastest growing product categories in 1997 were desktop computers at
52%, data storage devices at 48%, printers at 47%, software at 42% and notebook
computers at 31%. Video and memory products declined as a percentage of sales as
unit prices for these products declined from the previous year. The Company
believes that new product introductions in 1997, including MMX technology,
positively impacted sales of CPU's, multimedia products, input devices, software
and data storage devices. Demand for certain products offered by the Company,
and the growth of certain product categories, are driven by advances in
technology and the development of new products and applications by the industry
manufacturers, and acceptance of these new technologies and products by
end-users. Any slowdown in the rate of technological advancement and new product
development by industry manufacturers could have a material adverse effect on
the Company's future sales growth.
The Company expanded its number of account managers to 399 as of December
31, 1997 from 311 at December 31, 1996. The Company's ability to continue to
hire and retain account managers may also have a material effect on future sales
growth.
Gross profit increased as a percentage of net sales to 13.4% for the year
ended December 31, 1997, compared to 13.2% for the year ended December 31, 1996.
The increase in gross profit as a percentage of net sales is primarily due to
the expansion of selling margin on certain product lines resulting from vendor
support programs, opportunistic purchases and pricing strategies. Many of the
vendor support programs are dependent on achieving certain goals and objectives
as determined by the vendors. Accordingly, there is no certainty that such
programs will continue at their current levels or that the established goals and
objectives will be attained. In addition to changes from vendor support
programs, actual gross profit achieved may vary on a quarterly basis due to
changes in product mix, pricing strategies, market conditions and other factors.
As a result, there is no certainty that the Company will be able to sustain
gross profit as a percentage of net sales at the levels achieved in recent
quarters.
Selling and administrative expenses increased slightly to 7.1% of net
sales for the year ended December 31, 1997 from 7.0% for the year ended
December 31, 1996.
13
17
Net advertising expense as a percentage of net sales increased to 1.3% of
net sales in 1997 compared to 1.0% in 1996. Gross advertising expense increased
to 3.5% of net sales in 1997 versus 3.2% in the prior year, primarily due to
expanded catalog circulation and national advertising pages combined with new
marketing initiatives. Cooperative advertising reimbursements aggregated
approximately 2.2% of net sales in 1997 and 1996. Cooperative advertising
reimbursements may fluctuate in future quarters depending on the level of vendor
participation achieved and collection experience. Based upon the Company's
current plans, future levels of net advertising expense as a percentage of net
sales are likely to be relatively consistent with or higher than the level
achieved in 1997. The statement concerning future advertising expense is a
forward looking statement that involves certain risks and uncertainties
including the ability to identify and implement cost effective incremental
advertising and marketing programs, as well as the continued participation of
vendors in the cooperative advertising reimbursement program.
The executive incentive bonus pool was $5.3 million and $5.0 million for
the years ended December 31, 1997 and 1996, respectively, and is included within
selling and administrative expenses. Pursuant to existing plans, the amount of
the executive incentive bonus pool is set by the Compensation Committee of the
Board of Directors with a maximum eligible amount of 20% of the year over year
increase in income from operations. The exit charge recorded in 1996 caused the
executive incentive bonus pool to decrease in 1996 by $800,000 and increase by
the same amount in 1997.
Legal costs incurred by the majority shareholder for the year ended
December 31, 1997 and 1996, in connection with the lawsuit filed by a former
shareholder were $379,000 and $133,000, respectively. Although the majority
shareholder has agreed to indemnify the Company for all expenses or settlements,
if any, incurred in connection with this suit, the Company will continue to
record such expenses or settlements, if any, as an expense with an offsetting
increase to paid-in capital, net of tax effects.
Other selling and administrative costs were 5.4% of net sales in 1997
compared to 5.5% in the prior year, as increased occupancy and moving costs were
offset by improved productivity and other cost control measures.
Interest income totaled $4.3 million for the year ended December 31, 1997
compared to $3.5 million for the year ended December 31, 1996. The increase is
due to higher interest rates combined with higher levels of cash available for
investment resulting from cash generated from operations, including the tax
benefit from stock option and restricted stock transactions in the first quarter
of 1997, offset by funds utilized for construction of the Vernon Hills facility.
The effective income tax rate, expressed as a percentage of income before
income taxes, increased slightly to 39.7% for the year ended December 31, 1997
from 39.5% for the year ended December 31, 1996.
Net income for the year ended December 31, 1997 was $51.0 million, a 48.3%
increase over $34.4 million for the year ended December 31, 1996. Effective in
1997, the Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) which requires the presentation of both basic
and diluted earnings per share for all periods presented. The implementation of
SFAS 128 has no impact on the Company's earnings per share amounts as diluted
earnings per share as defined by SFAS 128 is consistent with earnings per share
as presented in previous periods. Diluted earnings per share was $2.35 and $1.58
for the year ended December 31, 1997 and 1996, respectively, an increase of
48.7%. Excluding the impact of the exit charge and its related impact on the
executive incentive bonus pool in 1997 and 1996, pro forma net income and
diluted earnings per share were $51.5 million and $2.37 in 1997, representing
increases of 41.6% and 41.9%, respectively, from 1996. All per share and related
amounts have been adjusted to reflect the three-for-two stock split effected in
the form of a stock dividend paid on July 15, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales in 1996 increased 47.6% to $927.9 million compared to $628.7
million in 1995. The Company's average order size grew 11.7% to $704 per order
and orders shipped increased 32.1% to over 1.3 million. The number of customers
14
18
serviced for the year ended December 31, 1996 grew to 462,000 versus 374,000 for
the year ended December 31, 1995.
The growth in net sales is primarily attributable to new product
introductions, expansion of marketing efforts, an increase in the number of
customers serviced and an increase in telemarketing account managers. The higher
average order size is due, among other factors, to a shift in product mix as
sales of notebook/laptop computers and desktop computers comprised 38.2% of
total sales dollars compared to 34.2% in the prior year. Sales of
notebook/laptop and desktop computers were positively impacted by the addition
of product lines from Compaq Computer Corporation, initially authorized in
November 1995 and expanded in September 1996, and Hewlett-Packard, initially
authorized in February 1996 and expanded in August 1996. In 1996, sales of
Apple-branded products declined from levels achieved in 1995 and were less than
3% of total net sales.
The fastest growing product categories in 1996 were notebook/laptop
computers at 77.6%, data storage products at 68.1%, software at 58.8% and
communications products at 54.1%. Printers and add-on boards/memory products
declined as a percentage of net sales due to declining unit prices for these
products. The Company believes that new product introductions in 1996, including
new 32-bit software which requires faster processors, more memory and additional
storage capacity, positively impacted sales of CPU's, multi-media products,
input devices, software and data storage devices. The growth in sales of
notebook/laptop computers is due primarily to increased sales of high-end models
and new product offerings.
The Company continues to recruit and train new account managers through CDW
University, with 311 account managers as of December 31, 1996, an increase of
43% from December 31, 1995.
Gross profit increased $42.3 million, or 52.8%, in 1996 as a result of the
increase in net sales, and increased as a percentage of net sales to 13.2% from
12.7% in 1995. The Company believes the increase in gross profit as a percentage
of net sales is due to, among other factors, the expansion of selling margin on
certain product lines resulting from new rebate programs with vendors,
opportunistic purchases and pricing strategies.
Selling and administrative expenses decreased as a percentage of net sales
to 7.0% for the year ended December 31, 1996 from 7.8% for the year ended
December 31, 1995. The decrease in selling and administrative expenses as a
percentage of net sales is due primarily to a decrease in net advertising
expense as a percentage of net sales, as well as improved productivity and
leveraging of certain fixed costs over a higher sales volume. In 1996, net
advertising expense as a percentage of net sales decreased to 1.0% from 1.5% in
1995, resulting from a 28.8% increase in gross advertising spending offset by a
higher rate of cooperative advertising reimbursements provided by the Company's
vendors. The increase in gross advertising spending is due to the expanded
marketing efforts discussed above, which was partially offset by reduced catalog
production costs. The higher cooperative advertising reimbursement rate was
primarily due to expanded vendor participation in the Company's advertising
programs, increased purchasing volumes and improved claim processing procedures.
Selling and administrative expenses include the executive incentive bonus
pool which was approximately $4.4 million and $2.1 million for the years ended
December 31, 1996 and 1995, respectively. Pursuant to existing plans, the amount
of the executive incentive bonus pool is set by the Compensation Committee of
the Board of Directors with a maximum eligible amount of 20% of the year over
year increase in income from operations. The executive incentive bonus pool in
1996 was effectively reduced by $800,000 as a result of the exit charge. Other
selling and administrative expenses included $133,000 and $140,000 for 1996 and
1995, respectively, in legal defense costs incurred by the majority shareholder
in connection with the lawsuit filed by a former shareholder. Although the
majority shareholder has agreed to indemnify the Company for expenses or
settlements, if any, incurred in connection with this lawsuit, the Company will
continue to record such expenses or settlements, if any, as an expense with an
offsetting increase to paid-in capital, net of tax effects.
15
19
In June 1996, the Company purchased approximately 27 acres of vacant land
in Vernon Hills, Illinois for the purpose of constructing a combined
telemarketing, warehouse, showroom and corporate office facility. In conjunction
with the move to the new facility, the Company vacated and is attempting to
sublease the Buffalo Grove facility. Accordingly, the Company recorded a $4.0
million pre-tax non-recurring charge for exit costs, which consist primarily of
the estimated cost 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.
Net interest income increased $1.5 million in 1996 as compared to 1995,
primarily as a result of the higher levels of funds available for investment.
The increase in funds available for investment is the result of the proceeds of
the Company's public equity offering in August 1995 and cash flows generated
from operations.
The effective income tax rate, expressed as a percentage of income before
income taxes, increased slightly in 1996 to 39.5% from 39.2% in 1995.
Net income for the year ended December 31, 1996 was $34.4 million, an
increase of 71.5% over the year ended December 31, 1995. Earnings per diluted
share for 1996 increased 66.3% to $1.58 per diluted share as compared to $0.95
per diluted share for 1995. Pro forma net income and earnings per diluted share
for the year ended December 31, 1996, excluding the $4.0 million impact of the
exit charge and the related $800,000 reduction in the executive incentive bonus
pool, net of tax effects, were $36.4 million and $1.67 per diluted share,
representing increases of 81% and 76%, respectively, over 1995. The growth in
earnings per diluted share was affected by the dilution resulting from the
825,000 additional common shares issued by the Company on August 3, 1995
pursuant to the Company's public equity offering. All earnings per share amounts
reflect the two-for-one and three-for-two stock splits effected in the form of
stock dividends paid on May 6, 1995 and July 15, 1996, respectively.
SEASONALITY
Although the Company has historically experienced variability in the rates
of sales growth, it has not historically experienced seasonality in its
business.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
CDW has historically financed its operations and capital expenditures
primarily through cash flow from operations, short-term bank borrowings and
public offerings of common stock. At December 31, 1997, the Company had cash,
cash equivalents and marketable securities of $79.4 million and working capital
of $167.4 million. At December 31, 1996 the Company had working capital of
$123.6 million. The increase of $43.8 million in working capital in 1997 was due
primarily to the Company's cash flow from operations for the year ended December
31, 1997 offset by capital expenditures for facility expansion and other
purposes. The Company's current primary and anticipated use of cash, cash
equivalents and marketable securities balances is to fund the growth in working
capital and capital expenditures necessary to support future growth in sales.
CASH FLOWS
Cash provided by operating activities in 1997 was $19.5 million compared to
$28.8 million for 1996. 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. The increase in
accounts receivable resulted from increased sales volume, an increase in the
percentage of net sales generated from open credit terms to its business
customers and a change in the Company's credit terms during June 1997 to net 30
days from net ten days. As a result of this trend and the overall increase in
net sales, net accounts receivable at December 31, 1997 increased 52.5% from the
level at December 31, 1996.
16
20
Cash used in investing activities for 1997 was $17.8 million. In 1997, CDW
incurred approximately $17.1 million of capital expenditures for construction of
the Vernon Hills facility, the installation of automation and other equipment
therein, additional information technology investments and leasehold
improvements. The remainder of cash used in investing activities reflects
increases in the Company's marketable securities portfolio.
Financing activities in 1997 included the renewal of the Company's
unsecured credit facilities with two financial institutions aggregating $30.0
million. The credit facilities expire in June 1998 and contain certain financial
covenants. Borrowings under one of the lines bear interest at the prime rate
less 2 1/2%, LIBOR rate 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 rate plus .45% or the federal
funds rate plus .45%, as determined by the Company. At December 31, 1997 there
were no borrowings against either of the credit facilities. The Company intends
to renew the credit facilities upon expiration. In December 1997, the Company
established a stand-by letter of credit for approximately $850,000 related to
improvements to the Vernon Hills facility. The Company has pledged a U.S.
Treasury Note, included in investments held-to-maturity, with a face value of
$1.1 million as collateral for the letter of credit.
FACILITIES EXPANSION
Construction of the Company's new facility was completed in June 1997, and
subsequently, the Company relocated its headquarters and primary operations to
the new facility. The total cost of the land, building, equipment and
furnishings was approximately $23.9 million. In March 1998, the Company acquired
approximately 18 additional acres of vacant land adjacent to its current
property in Vernon Hills, Illinois for $4.3 million. The Company now owns
approximately 45 total acres, of which approximately 32 are vacant and available
for future expansion. As of December 31, 1997 the remaining exit liability,
initially recorded in 1996, was $3.4 million. There is no assurance that the
remaining exit liability will be adequate to cover actual costs should the
Company's actual experience in subleasing the facility differ from the
assumptions used in calculating the exit charge. Any additional costs would
reduce operating results at the time such costs are known.
The Company believes that the funds held in cash, cash equivalents and
marketable securities combined with funds available under the existing credit
facilities and cash flow from operations will be sufficient to fund the
Company's working capital and cash requirements, including facilities expansion,
at least through December 31, 1998. The Company does not anticipate that it will
pay any cash dividends during 1998.
Global Market Risks
A portion of the products the Company markets either are produced in or
have major components produced in the Asia Pacific region. While the Company
does not engage in business relationships with companies located in the region
directly, it does engage in U.S. dollar denominated transactions with U.S.
divisions and subsidiaries of these companies. As a result, the Company may be
indirectly affected by risks associated with international events, including
economic and labor conditions, political instability, tariffs and taxes,
availability of products and currency fluctuations in the U.S. Dollar versus the
regional currencies.
Countries in the Asia Pacific region, including Japan, have recently
experienced weaknesses in their currency, banking and equity markets. These
weaknesses could adversely affect the supply and price of products and
components and ultimately, the Company's results of operations.
17
21
Information Technology and the Year 2000
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
During a recent Year 2000 ("Y2K") assessment, the Company identified a
manageable amount of legacy software that requires modification with the
remainder already compliant. Based on this assessment, the Company has
determined that it will not be required to modify or replace significant
portions of its software to make the systems perform properly after December 31,
1999. However, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be converted timely, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram
and test software applications for Y2K compliance. The Company plans to complete
the Y2K project by December 31,1998. To date, the expenses of the Y2K project
have not had a material effect on the results of operations. Moreover, the
remaining expenses, which will be incurred through December 31, 1998, are not
expected to have a material effect on the results of operations.
The costs of the project and the date on which the Company plans to
complete the Y2K modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans, and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Additionally, material differences could be caused by the ability of third
parties that interface with the Company's systems to make all necessary
modifications for Year 2000 compliance.
Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations concerning the Company's sales
growth, gross profit as a percentage of sales, advertising expense, cooperative
advertising reimbursements and exit charge are forward-looking statements that
involve certain risks and uncertainties, as specified herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in a separate section of
this Report. 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 1997 Definitive Proxy Statement, to be filed pursuant to
Regulation 14A not later than April 30, 1998.
18
22
ITEM 11. EXECUTIVE COMPENSATION.
The information required hereunder is incorporated by reference herein from
the Registrant's 1997 Definitive Proxy Statement, to be filed pursuant to
Regulation 14A not later than April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required hereunder is incorporated by reference herein from
the Registrant's 1997 Definitive Proxy Statement, to be filed pursuant to
Regulation 14A not later than April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required hereunder is incorporated by reference herein from
the Registrant's 1997 Definitive Proxy Statement, to be filed pursuant to
Regulation 14A not later than April 30, 1998.
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 CDW Computer Centers, Inc. (an Illinois
Corporation) (iii)
3 (d) Bylaws of CDW Computer Centers, Inc. (an Illinois Corporation) (iii)
10 (a) CDW Computer Centers, Inc. Employees' Defined Contribution
Retirement Plan and Trust (i)
10 (b) CDW Incentive Stock Option Plan (i)
10 (c) MPK Stock Option Plan and Agreement (i)
10 (d) MPK Restricted Stock Plan and Agreement (i)
10 (e) Employment and Non-Competition Agreement dated as of March 15, 1993
between the Company and Michael P. Krasny (i)
10 (f) Employment and Non-Competition Agreement dated as of March 15, 1993
between the Company and Greg C. Zeman (i)
19
23
10 (g) Employment and Non-Competition Agreement dated as of March 15, 1993
between the Company and Daniel B. Kass (i)
10 (h) Employment and Non-Competition Agreement dated as of March 15, 1993
between the Company and Mary C. Gerlits (i)
10 (n) Tax Indemnification Agreement dated as of May 25, 1993 between the
Company and Michael P. Krasny (i)
10 (p) 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 (s) Indemnification Agreement between the Company and Michael P. Krasny
to be dated as of May 19, 1993 (i)
10 (t) CDW Director Stock Option Plan (i)
10 (w) Indemnification and Hold Harmless Agreement between Michael P.
Krasny and the Company dated May 14, 1993 (i)
10 (y) 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 (ee) 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 (ff) Purchase/Sale Agreement dated and effective February 12, 1996 between the Company, as
buyer, and Continental Executive Parke, L.L.C. as seller,relating to the premises
located in Vernon Hills, Illinois, made on March 14, 1996 (iii)
10 (ii) Non-statutory Stock Option Agreement dated September 5, 1996 between
the Company and Harry J. Harczak, Jr. (v)
10 (jj) Non-statutory Stock Option Agreement dated September 5, 1996 between
the Company and James R. Shanks (v)
10 (kk) Form of Indemnification and Hold Harmless Agreement between the
Company and the Selling Shareholder (vi)
10 (ll) CDW 1996 Incentive Stock Option Plan (vi)
10 (mm) Revolving Note between the Company and LaSalle National
Bank dated June 30, 1997 (vii)
10 (nn) Revolving Note between the Company and The Northern Trust
Company dated June 30, 1997 (vii)
10 (oo) Purchase/Sale Agreement dated and effective December 16, 1997 between the Company, as
buyer, and Continental Executive Parke, Vernon Hills, Illinois, made on March 2, 1998
10 (pp) CDW 1997 Officer and Manager Bonus Plan
21 Subsidiaries of the Registrant (i)
23 Consent of Independent Accountants
27 Financial Data Schedule
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.
(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 registration statement (33-94820) on Form S-3 filed
under the Securities Act of 1993.
20
24
(iv) 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, 1996.
(v) 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.
(vi) 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.
(vii) 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, 1997.
(b) The Company did not file any reports on Form 8-K during the
last quarter of the year ended December 31, 1997.
(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.
21
25
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 18, 1998
By : /s/ Michael P. Krasny
---------------------
Michael P. Krasny, Chairman of
the Board, Chief Executive
Officer, Secretary and Treasurer
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, Chief March 18, 1998
-------------------------- Executive Officer, Secretary and
Michael P. Krasny Treasurer
/s/ Gregory C. Zeman President and Director March 18, 1998
--------------------------
Gregory C. Zeman
/s/ Daniel B. Kass Vice President-Sales March 18, 1998
-------------------------- and Director
Daniel B. Kass
/s/ Harry J. Harczak, Jr. Chief Financial Officer March 18, 1998
--------------------------
Harry J. Harczak, Jr.
/s/ Daniel F. Callen Vice President-Finance and March 18, 1998
-------------------------- Chief Accounting Officer
Daniel F. Callen
22
26
ITEMS 8 AND 14(A)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
-------
Report of Independent Accountants F-1
Consolidated Balance Sheets as of F-2
December 31, 1997 and 1996
Consolidated Statements of Income for the years ended F-3
December 31, 1997, 1996 and 1995
Consolidated Statement of Shareholders' Equity for the years ended F-4
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended F-5
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-6
F(i)
27
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
CDW Computer Centers, Inc.
Vernon Hills, Illinois
We have audited the accompanying consolidated balance sheets of CDW Computer
Centers, Inc. and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CDW Computer
Centers, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
January 22, 1998
F-1
28
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
December 31,
------------
1997 1996
------------- ------------
ASSETS
Current assets :
Cash and cash equivalents $ 18,233 $ 16,462
Marketable securities 61,192 58,490
Accounts receivable, net of allowance for doubtful
accounts of $1,950 and $1,100, respectively 87,524 57,396
Miscellaneous receivables 3,960 3,931
Merchandise inventory 61,941 41,462
Prepaid expenses and other assets 759 823
Deferred income taxes 3,587 2,258
--------- ---------
Total current assets 237,196 180,822
Property and equipment, net 26,253 3,636
Construction-in-progress 451 8,659
Deferred income taxes and other assets 5,741 5,713
--------- ---------
TOTAL ASSETS $ 269,641 $ 198,830
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 44,451 $ 36,642
Accrued expenses :
Compensation 12,996 10,750
Income taxes 5,504 2,892
Exit costs 3,391 3,987
Other 3,433 2,937
--------- ---------
Total current liabilities 69,775 57,208
--------- ---------
Commitments and contingencies
Shareholders' equity :
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 75,000 shares
authorized; 21,525 shares issued and
outstanding 215 215
Paid-in capital 74,680 67,953
Retained earnings 126,418 75,417
Unearned compensation (1,447) (1,963)
--------- ---------
Total shareholders' equity 199,866 141,622
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 269,641 $ 198,830
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
29
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
Years Ended December 31,
---------------------------------------------
1997 1996 1995
---------------------------------------------
Net sales $ 1,276,929 $ 927,895 $ 628,721
Cost of sales 1,106,124 805,413 548,568
----------- ----------- -----------
Gross profit 170,805 122,482 80,153
Selling and administrative expenses 90,315 64,879 49,175
Exit charge - 4,000 -
----------- ----------- -----------
Income from operations 80,490 53,603 30,978
Interest income 4,259 3,469 1,973
Other income (expense), net (241) (188) 47
----------- ----------- -----------
Income before income taxes 84,508 56,884 32,998
Income tax provision 33,507 22,484 12,939
----------- ----------- -----------
Net income $ 51,001 $ 34,400 $ 20,059
=========== =========== ===========
Earnings per share
Basic $ 2.37 $ 1.60 $ 0.95
=========== =========== ===========
Diluted $ 2.35 $ 1.58 $ 0.95
=========== =========== ===========
Weighted average number of
common shares outstanding
Basic 21,525 21,525 21,026
=========== =========== ===========
Diluted 21,704 21,785 21,080
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
30
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
Total
Common Stock Retained Unearned Shareholders'
Shares Amount Paid-in Capital Earnings Compensation Equity
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 20,700 $ 207 $ 36,575 $ 20,958 $ (1,897) $ 55,843
Issuance of common stock, net 825 8 25,782 - - 25,790
Tax benefit recognized on stock options
exercised - - 4,027 - - 4,027
MPK Restricted Stock Plan forfeitures - - (54) - 54 -
Amortization of unearned compensation - - - - 358 358
Capital contribution for legal costs assumed
by majority shareholder - - 84 - - 84
Net income - - - 20,059 - 20,059
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 21,525 $ 215 $ 66,414 $ 41,017 $ (1,485) $ 106,161
MPK Restricted Stock Plan forfeitures - - (127) - 127 -
Amortization of unearned compensation - - - - 981 981
Compensatory stock option grants - - 1,586 - (1,586) -
Capital contribution for legal costs assumed
by majority shareholder - - 80 - - 80
Net income - - - 34,400 - 34,400
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 21,525 $ 215 $ 67,953 $ 75,417 $ (1,963) $ 141,622
MPK Restricted Stock Plan forfeitures - - (35) - 35 -
Amortization of unearned compensation - - - - 481 481
Compensatory stock option grants,
net of forfeitures - - 699 - - 699
Tax benefit from restricted stock and
stock option transactions - - 5,835 - - 5,835
Capital contribution for legal costs assumed
by majority shareholder - - 228 - - 228
Net income - - - 51,001 - 51,001
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 21,525 $ 215 $ 74,680 $ 126,418 $ (1,447) $ 199,866
======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
31
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Years Ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income $ 51,001 $ 34,400 $ 20,059
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 2,672 1,975 1,496
Amortization/(Accretion) of marketable securities (2,014) (87) 349
Stock-based compensation expense 1,180 981 358
Loss on disposal of fixed asset - 281 -
Legal fees assumed by majority shareholder 228 80 84
Deferred tax benefit (1,351) (3,228) (462)
Tax benefit from stock option exercise 5,835 - 4,027
Changes in assets and liabilities:
Accounts receivable, net (30,128) (19,835) (14,171)
Miscellaneous receivables (29) (1,569) (1,062)
Merchandise inventory (20,479) (14,040) (4,258)
Prepaid expenses and other assets 58 (625) (31)
Accounts payable 7,809 17,206 3,199
Accrued compensation 2,246 6,061 1,070
Accrued income taxes and other expenses 3,108 3,187 572
Accrued exit charge (596) 3,987 -
-------- -------- --------
Net cash provided by operating activities 19,540 28,774 11,230
-------- -------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (13,825) (24,701) (19,400)
Redemptions of available-for-sale securities 9,575 27,300 16,900
Purchases of held-to-maturity securities (87,330) (86,781) (43,708)
Redemptions of held-to-maturity securities 90,892 68,732 22,501
Purchase of property and equipment (17,081) (11,078) (2,066)
-------- -------- --------
Net cash used in investing activities (17,769) (26,528) (25,773)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock - - 25,911
Payment of public offering expenses - - (121)
-------- -------- --------
Net cash provided by financing activities - - 25,790
-------- -------- --------
Net increase in cash 1,771 2,246 11,247
Cash and cash equivalents - beginning of period 16,462 14,216 2,969
-------- -------- --------
Cash and cash equivalents - end of period $ 18,233 $ 16,642 $ 14,216
======== ======== ========
Supplementary disclosure of cash flow information:
Interest paid $ 1 $ 14 $ -
Taxes paid 26,197 23,763 9,251
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
32
CDW COMPUTER CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
CDW Computer Centers, Inc. (the "Company") is engaged in the
distribution of brand name personal computers and related products
primarily through direct marketing to end users within the United
States. The Company's primary business is conducted from a combined
telemarketing, corporate office and warehouse and showroom facility
located in Vernon Hills, Illinois. The Company also operates a second
retail showroom in Chicago, Illinois.
The Company extends credit to business, 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 the Company and Northbrook Ad Agency, Inc. ("NAA") for all periods
presented. NAA provides advertising services, primarily consisting of
media placements, solely to the Company.
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
Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128).
Accordingly, the Company has disclosed earnings per share calculated
using both the basic and diluted methods for all periods presented. The
implementation of SFAS 128 has no impact on the Company's earnings per
share amounts as diluted earnings per share, as defined by SFAS 128, is
consistent with earnings per common and common equivalent share as
presented in previous periods. A reconciliation of basic and diluted
per-share computations is included in Note 11 to the financial
statements.
On June 24, 1996, the Board of Directors of the Company announced a
three-for-two stock split effected in the form of a stock dividend paid
on July 15, 1996 to all common shareholders of record as of July 5,
1996. All per share and related amounts contained in these financial
statements and notes have been adjusted to reflect this stock split.
F-6
33
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 3 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.
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. Advertising expense, included in selling and
administrative expenses net of cooperative reimbursements earned, was
approximately $16,200,000, $8,900,000 and $9,500,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
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 10 for disclosure of the Company's stock
based compensation plans in accordance with SFAS 123.
34
Fair Value of Financial Instruments
The Company estimates that the fair market value of all of its
financial instruments at December 31, 1997 and 1996 are not materially
different from the aggregate carrying value due to the short term
nature of these instruments.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's
investments in marketable securities at December 31, 1997 and 1996
(in thousands) were:
Gross
Unrealized
Holding
----------
Estimated Amortized
Fair Value Gains Losses Cost
------------ ---------- ---------- -----------
Security Type
- -------------
DECEMBER 31, 1997
Available-for-sale:
Redemptive tax-exempt preferred stocks $ 7,250 $ --- $ --- $ 7,250
----------------------------------------------------------
Held-to-maturity:
Bonds of states, municipalities, and political subdivisions 263 1 --- 262
U.S. Government and Government Agency securities 53,614 --- (66) 53,680
----------------------------------------------------------
Total held-to-maturity 53,877 1 (66) 53,942
----------------------------------------------------------
Total marketable securities: $ 61,127 $ 1 $ (66) $ 61,192
==========================================================
DECEMBER 31, 1996
Available-for-sale:
Redemptive tax-exempt preferred stocks $ 2,940 $ --- $ --- $ 2,940
----------------------------------------------------------
Held-to-maturity:
Bonds of states, municipalities, and political subdividions 13,216 18 --- 13,198
U.S. Government and Government Agency securities 42,302 --- (50) 42,352
----------------------------------------------------------
Total held-to-maturity 55,518 18 (50) 55,550
----------------------------------------------------------
Total marketable securities: $ 58,458 $ 18 $ (50) $ 58,490
==========================================================
The Company's investments in securities held-to-maturity at December
31, 1997 were all due in one year or less by contractual maturity.
Estimated fair values of marketable securities are based on quoted
market prices.
35
4. Property, Equipment and Facility Relocation
Property and equipment consists of the following (in thousands):
December 31,
------------
1997 1996
--------- ---------
Land $ 6,272 $ -
Machinery and equipment 9,316 2,228
Building 8,276 -
Computer and data processing equipment 3,596 2,523
Furniture and fixtures 1,246 803
Computer software 1,049 1,017
Leasehold improvements 390 935
--------- ---------
30,145 7,506
Less accumulated depreciation 3,892 3,870
--------- ---------
Net property and equipment $ 26,253 $ 3,636
========= =========
In June 1996 the Company purchased approximately 27 acres of vacant
land in Vernon Hills, Illinois, upon which it constructed a combined
telemarketing, warehouse, showroom and corporate office facility.
Construction of the Vernon Hills facility was completed in July 1997,
at which time the Company relocated to the new facility and vacated the
Buffalo Grove facility.
As of December 31, 1997 the Company has incurred approximately $23.9
million of total costs for the new facility, including $6.1 million for
land acquisition and $17.8 million for construction, equipment and
furnishings. The remaining balance in the construction-in-progress
account includes construction of separate internal projects at the new
facility, unrelated to the initial construction.
In March 1998 the Company acquired approximately 18 acres of vacant
land contiguous to its Vernon Hills facility for $4.3 million. The
Company now owns approximately 45 total acres, of which approximately
32 are vacant and available for future expansion.
5. Financing Arrangements
The Company has an aggregate $30 million available pursuant to
unsecured lines of credit with two financial institutions expiring in
June 1998. Borrowings under one of the lines bear interest at the prime
rate less 2 1/2%, LIBOR rate 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 rate plus
.45% or the federal funds rate plus .45%, as determined by the Company.
At December 31, 1997, there were no borrowings from these credit
facilities.
In December 1997 the Company established a stand-by letter of credit
for approximately $850,000 related to improvements to the Vernon Hills
facility. The Company has pledged a U.S. Treasury Note, included in
investments held-to-maturity, with a face value of $1.1 million as
collateral for the letter of credit.
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 $24.0 million
collateralized by inventory purchases financed by the Flooring
Companies. At December 31, 1997 and 1996, the Company owed the Flooring
Companies a total of approximately $7.2 million and $7.4 million,
respectively, which is included in trade accounts payable.
36
7. Stock Option Exercise and Public Offerings of Common Stock
The Company filed a Registration Statement on Form S-3, which was
effective on February 21, 1997, pursuant to which certain Company
employees sold an aggregate of 632,064 shares of the Company's common
stock. The shares sold included 136,437 shares received by participants
upon exercise of options under the MPK Stock Option Plan and 132,064
shares received by participants of the MPK Restricted Stock Plan
pursuant to the vesting modification discussed in Note 10. The exercise
and vesting of the shares pursuant to the MPK Stock Option Plan and MPK
Restricted Stock Plan resulted in the realization by the Company of a
tax benefit of $6.2 million in 1997, of which $334,000 was previously
recorded in deferred taxes. The incremental tax benefit of $5.8 million
was recorded to paid-in capital.
On August 3, 1995, the Company sold 825,000 shares of its newly issued
common stock at $32.83 per share in an underwritten public offering.
Net proceeds to the Company after underwriting discount and other
offering expenses were approximately $25.8 million. Concurrent with the
sale of shares by the Company, 1,237,500 shares, of common stock were
sold by certain selling shareholders in the offering, including
approximately 900,000 shares sold by the majority shareholder and
approximately 337,500 shares sold by certain officers. The shares sold
by certain officers were obtained through the exercise of options
pursuant to the MPK Stock Option Plan (Note 10). The exercise of such
options by the certain officers resulted in the realization by the
Company of a tax benefit of $4,323,000 in 1995, of which $296,000 was
previously recorded in deferred taxes. The incremental tax benefit of
$4.0 million was recorded to paid-in capital.
8. Operating Leases and Exit Accrual
The Company is obligated under a lease agreement through December 31,
2003 for its vacated Buffalo Grove distribution center and office
facility. The Company recorded a $4.0 million pre-tax non-recurring
charge to operating results for exit costs relating to the Buffalo
Grove facility in the first quarter of 1996. The exit costs consist
primarily of the estimated cost to the Company of subleasing the
vacated facility, including holding costs, the estimated costs of
restoring the building to its original condition and certain asset
write-offs resulting from the relocation. During 1997 the Company
charged approximately $974,000 against the exit accrual, including
$505,000 of assets written off and $469,000 in cash payments for rent,
real estate taxes and restoration of the Buffalo Grove facility. In
addition, various accruals for operating costs related to the vacated
facility totaling $378,000 were reclassified to the exit liability
during 1997. The Company has vacated and is attempting to sublease the
Buffalo Grove facility. There is no assurance that the remaining exit
liability of $3.4 million at December 31, 1997 will be adequate to
cover actual costs should the Company's actual experience in subleasing
the facility differ from the assumptions used in calculating the exit
charge.
37
The Company is also obligated under a lease agreement for its Chicago
showroom which expires on June 30, 2001. In addition to the Chicago
showroom rental costs, the Company is subject to a proportionate share
of any increase in real estate taxes and operating costs over a certain
amount per square foot.
For the years ended December 31, 1997, 1996 and 1995 rent expense
was $540,000, $923,000 and $993,000, respectively. Additionally,
in 1997 $379,000 of rental payments were charged to the exit liability.
Minimum future rentals are as follows (in thousands):
Years Ended December 31, Amount
------------------------ ----------
1998 $ 955
1999 1,028
2000 1,028
2001 931
2002 873
Thereafter 873
----------
$ 5,688
==========
9. Income Taxes
Components of the provision (benefit) for income taxes for the years
ended December 31, 1997, 1996 and 1995 consist of (in thousands):
Current: 1997 1996 1995
-------- -------- --------
Federal $ 28,630 $ 20,978 $ 10,906
State 6,228 4,734 2,495
-------- -------- --------
34,858 25,712 13,401
Deferred (1,351) (3,228) (462)
-------- -------- --------
Provision for income taxes $ 33,507 $ 22,484 $ 12,939
======== ======== ========
The current income tax liabilities for 1997 and 1995 were reduced by
$5,835,000 and $4,027,000, respectively, for tax benefits recorded
directly to paid-in capital relating to the exercise and vesting of
shares pursuant to the MPK Stock Option Plan and 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 1997, 1996 and 1995 is as follows:
1997 1996 1995
------ ------ ------
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
State taxes, net of federal benefit 4.6 4.7 4.7
Other 0.1 (0.2) (0.5)
------ ------ ------
39.7 % 39.5 % 39.2 %
====== ====== ======
38
The tax effect of temporary differences that give rise to the net
deferred income tax asset at December 31, 1997 and 1996 are presented
below (in thousands):
1997 1996
------------ ------------
Current:
Accounts receivable $ 1,385 $ 993
Merchandise inventory 344 181
Accrued expenses 1,858 1,084
------------ ------------
3,587 2,258
------------ ------------
Non-current:
Employee benefit plans 3,800 3,682
Exit charge 1,322 1,555
Other 508 371
------------ ------------
5,630 5,608
------------ ------------
$ 9,217 $ 7,866
============ ============
The portion of the net deferred tax asset relating to employee benefit
plans results primarily from the MPK Stock Option Plan, which is
deductible for income tax purposes based upon the fair market value of
the stock at the date 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.
10. Stock-Based Compensation
CDW Stock Option Plans
The Company has established certain stock-based compensation plans for
the benefit of its directors and employees. Pursuant to these plans the
Company has reserved a total of 4,109,377 common shares for stock
option grants. The plans generally include vesting requirements from 3
to 10 years and option lives of 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, 1995, 1996 and 1997
was as follows:
Weighted-Average Options
Shares Exercise Price Exercisable
------------ ---------------- -----------
Balance at January 1, 1995 240,282 $ 21.80 -
Options granted 331,841 26.81
Options exercised - -
Options forfeited 34,313 23.02
------------ ---------------- -----------
Balance at December 31, 1995 537,810 24.81 -
------------ ---------------- -----------
Options granted 590,685 56.10
Options exercised - -
Options forfeited 74,151 24.93
------------ ---------------- -----------
Balance at December 31, 1996 1,054,344 42.33 -
------------ ---------------- -----------
Options granted 859,759 52.33
Options exercised - -
Options forfeited 82,184 47.51
------------ ---------------- -----------
Balance at December 31, 1997 1,831,919 $ 46.79 44,737
============ ================ ===========
39
For the years ended December 31, 1997, 1996 and 1995, the
weighted-average fair value of options granted with an exercise price
equal to market price was $36.18, $41.99 and $13.44, respectively, and
the weighted-average fair value of options granted with an exercise
price below market price was $52.12, $42.40 and none, respectively.
The following table summarizes the status of outstanding stock options
as of December 31, 1997:
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
----------------- ----------- ---------------- -------------- ----------- --------------
$0.01 23,794 19.6 $ 0.01 - -
$9.33 - $13.00 16,500 17.0 11.38 3,000 9.33
$22.75 - $27.00 430,154 18.0 25.31 41,737 22.75
$40.00 - $59.31 1,361,471 19.5 54.82 - -
----------------- ----------- ---------------- -------------- ----------- --------------
$0.01 - $59.31 1,831,919 19.1 $ 46.79 44,737 21.85
================= =========== ================ ============== =========== ==============
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 granted in
1997, 1996 and 1995, reported net income and earnings per share would
have been reduced as follows:
(in 000's, except per share amounts)
1997 1996 1995
-------------- -------------- --------------
Net income, as reported $ 51,001 $ 34,400 $ 20,059
Pro forma net income $ 48,573 $ 33,931 $ 20,050
Basic earnings per share, as reported $ 2.37 $ 1.60 $ 0.95
Diluted earnings per share, as reported $ 2.35 $ 1.58 $ 0.95
Pro forma basic earnings per share $ 2.26 $ 1.58 $ 0.93
Pro forma diluted earnings per share $ 2.25 $ 1.56 $ 0.95
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 proforma calculations exclude stock options granted
before 1995.
40
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:
1997 1996 1995
------ ------ ------
Risk-free interest rate 5.5 % 6.6 % 6.4 %
Dividend yield 0.0 % 0.0 % 0.0 %
Option life (years) 9.9 10.3 4.9
Stock price volatility 51.7 % 48.2 % 48.2 %
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 4,143,375
shares of common stock owned by him at an exercise price of $.017 per
share. Options for approximately 462,000, 338,000 and 337,500 shares
were exercised and the resulting shares were sold pursuant to secondary
offerings in June 1994, August 1995 and February 1997, respectively.
Options for 514,207 shares are exercisable as of December 31, 1997 and
the remaining 2,693,194 options are exercisable at the rate of 621,506
on each December 31 hereafter until all options are exercisable. The
options have a 20 year life. 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 668,604
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 subsidiary 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 $4.17 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, 1997,
126,237 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 $59.00 per share, the market
price of the stock on the acceleration date. Participants elected
accelerated vesting under this modification for 132,064 shares.
As of December 31, 1997, 26,535 shares remain outstanding under the
original terms and vest on January 1, 2000 and 383,768 shares remain
outstanding under the modified terms and vest 25% each year beginning
on January 1, 2000.
41
11. Earnings Per Share
The Company has outstanding at December 31, 1997 common shares totaling
approximately 21,525,000. The Company has also granted options to
purchase common shares to the coworkers of the Company as discussed in
Note 10. These options have a dilutive effect on the calculation of
earnings per share. The following is a reconciliation of the numerators
and denominators of the basic and diluted earnings per share
computations as required by SFAS 128.
Years ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
BASIC EARNINGS PER SHARE:
Income available to
common shareholders (numerator) $ 51,001 $ 34,400 $ 20,059
========== ========== ==========
Weighted average common
shares outstanding (denominator) 21,525 21,525 21,026
========== ========== ==========
Basic earnings per share $ 2.37 1.60 0.95
========== ========== ==========
DILUTED EARNINGS PER SHARE:
Income available to
common shareholders (numerator) $ 51,001 34,400 20,059
========== ========== ==========
Weighted average common
shares outstanding 21,525 21,525 21,026
Effect of dilutive securities:
Options on common stock 179 260 54
---------- ---------- ----------
Total common shares and dilutive securities (denominator) 21,704 21,785 21,080
========== ========== ==========
Diluted earnings per share $ 2.35 1.58 0.95
========== ========== ==========
42
12. 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, 1997, 1996 and 1995, the
Company's profit sharing expense was approximately $1,066,000, $662,000
and $560,000, respectively.
13. Contingencies
The Company and its majority shareholder are defendants in a lawsuit
filed by a former shareholder. The suit requests actual and punitive
damages of which the amount cannot be readily determined. The Company
and its majority shareholder believe the suit to be without merit and
are vigorously defending against this action. The lawsuit is currently
pending in the Federal District Court for the Northern District of
Illinois, after the remand on Plaintiff's appeal of the case's
dismissal by the trial court for being filed untimely and the Court's
lack of jurisdiction. The outcome of the appeal and the case cannot be
readily ascertained at this time. The majority shareholder has agreed
to indemnify and reimburse the Company for all damages and expenses,
net of tax benefits received by the Company, related to this action.
For the years ended December 31, 1997, 1996 and 1995, the Company and
majority shareholder have incurred legal expenses of approximately
$379,000, $133,000 and $140,000, respectively, which have been assumed
by the majority shareholder. These legal expenses are recorded as a
selling and administrative expense and the reimbursement, net of tax,
is recorded as an increase to paid-in capital. Although the majority
shareholder has agreed to indemnify the Company for all expenses or
settlements, if any, in connection with the suit, the Company will
continue to record such expenses or settlements, if any, as an expense
with an offsetting increase to paid-in capital, net of tax effects.
43
14. Selected Quarterly Financial Data (Unaudited)
The following information is for the years ended December 31, 1997 and
1996 (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
DECEMBER 31, 1997
Net sales $ 297,777 $ 304,545 $ 323,901 $ 350,706
Gross profit 39,943 41,657 42,980 46,225
Income before income taxes 18,822 21,043 21,543 23,100
Net income 11,359 12,700 13,001 13,941
Earnings per Share:
Basic $ 0.53 $ 0.59 $ 0.60 $ 0.65
Diluted $ 0.52 $ 0.59 $ 0.60 $ 0.64
DECEMBER 31, 1996
Net sales $ 206,705 $ 218,687 $ 240,330 $ 262,173
Gross profit 26,647 29,616 31,586 34,633
Income before income taxes 9,072 13,859 16,132 17,821
Net income 5,534 8,494 9,679 10,693
Earnings per Share:
Basic $ 0.26 $ 0.39 $ 0.45 $ 0.50
Diluted $ 0.26 $ 0.39 $ 0.44 $ 0.49
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
CDW Computer Centers, Inc.
Our report on the consolidated financial statements of CDW Computer Centers,
Inc. and Subsidiary is included on page F-1 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 19 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Chicago, Illinois
January 22, 1998
S-1
45
CDW COMPUTER CENTERS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
years ended December 31, 1997, 1996 and 1995
(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, 1997
Deducted in the balance sheet from
the asset to which it applies:
Allowance for doubtful accounts $ 1,100 $ 1,166 $ - $ 316 (a) $ 1,950
---------- ---------- ---------- ---------- ----------
Year ended December 31, 1996
Deducted in the balance sheet from the
asset to which it applies:
Allowance for doubtful accounts $ 625 $ 517 $ - $ 42 (a) $ 1,100
---------- ---------- ---------- ---------- ----------
Year ended December 31, 1995
Deducted in the balance sheet
from the asset to which it applies:
Allowance for doubtful accounts $ 400 $ 238 $ - $ 13 (a) $ 625
---------- ---------- ---------- ---------- ----------
Note:
(a) Uncollectible items written off, less recoveries of items previously written
off.
S-2