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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, 1998
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
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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 29, 1999 was approximately $1.360 billion, based upon the market price per
share of $63.13.
As of March 29, 1999, the registrant had 21,540,991 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
1998 Definitive Proxy Statement, to be Part III, Items 10, 11, 12 and 13
filed pursuant to Regulation 14 A not
later than April 30, 1999.
An Index to Exhibits appears at pages Part IV, Item 14
20 - 22 herein
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CDW COMPUTER CENTERS, INC.
1998 FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX
PART I 10-K Page No.
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .9
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . .11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . .12
Item 8. Financial Statements and Supplementary Data . . . . . . . . . 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . .. . . . . . . .19
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . 19
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 . . . . . . . . . . . . . . . . . . . . . . . . . .20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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PART I
Item 1. BUSINESS.
GENERAL
CDW Computer Centers, Inc. and its subsidiaries (collectively 'CDW' or the
'Company') is a leading direct marketer of microcomputer products, primarily to
business, government, educational, institutional and home office users in the
United States. The Company sells a broad range of name-brand microcomputer
products, including hardware and peripherals, software, networking/communication
products and accessories through knowledgeable telemarketing account managers.
On May 27, 1998, the Company formed CDW Government, Inc. (CDW-G), a wholly owned
subsidiary. CDW-G sells personal computers and related products and focuses
exclusively on serving government and education accounts. Sales of products that
utilize, or are compatible with, Microsoft Windows, Windows NT and 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 the Company's direct
marketing format. The Company markets to prospective customers through its
catalog and other direct mailing programs, through national advertising in
computer magazines and through electronic commerce via the Internet. During the
year ended December 31, 1998, the Company serviced approximately 634,000
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 and a high level of technical service, is well suited to
serve an increasingly sophisticated and value conscious customer base.
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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,
Internet retailers, corporate resellers and value-added resellers. In the
software and accessories categories, the Company generally competes with these
same resellers as well as specialty retailers and resellers. In addition, as a
result of improving technology, certain software manufacturers have developed
and may continue to develop sales methods that allow customers to download
software programs and packages directly onto the customer's system through the
use of 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 and Internet commerce industries 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. 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 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.
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 a wide range of
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.
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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.
Sales and Marketing. 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, including outbound calling through its Corporate Development team,
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 - Custom Configuration and Technical Support. As of
December 31, 1998, the Company custom configures approximately 3,000 units per
week and ships the majority of its orders the day the order is placed. 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 24 inventory turns during 1998.
High Quality Personnel. The Company strives to attract, retain and motivate
high quality personnel and provides its coworkers with financial incentives
designed to maximize performance and productivity. The Company and Mr. Krasny,
its majority shareholder, Chairman and CEO, have instituted short-term incentive
programs and stock-based compensation programs to reward and motivate all of the
Company's coworkers.
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MERCHANDISE
The Company offers microcomputer products including hardware and
peripherals, software, networking and communication products and accessories for
use with microcomputers based on a variety of operating platforms. The Company's
just-in-time purchasing system and aggressive inventory management allows it to
limit its on-hand inventory and ship orders generally on a same-day basis.
The following is a listing of selected product manufacturers by product
category :
<TABLE>
<CAPTION>
PRODUCT CATEGORIES SELECTED PRODUCT MANUFACTURERS
------------------ ------------------------------
<S> <C> <C> <C>
HARDWARE AND PERIPHERALS:
Notebook and Laptop Computers 3Com IBM Okidata
Desktop Computers and Servers 3M Imation Quantum
Printers Acer Infocus Seagate
Data Storage Devices Adaptec Intel Simple
Video Products APC Iomega SMC
Add-on Boards/Memory Apple Kingston Sony
Input Devices Belkin Kodak TDK
Multi-Media Canon Lexmark Tectronix
Net/Comm Products Cisco Logitech Toshiba
Other Accessories Compaq Magnavox Viewsonic
CTX Maxell Visiontek
Epson Memorex Western Digital
Fujitsu Microtek
Hewlett-Packard NEC
SOFTWARE:
Adobe Lotus Seagate
Computer Associates Microsoft Symantec
Corel Novell
</TABLE>
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.
The Company offers a wide variety of 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 1998, CDW purchased approximately 60% of its merchandise from
distributors and aggregators and the balance direct from manufacturers, all of
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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 or
sales rebates and cooperative advertising reimbursements. The Company's business
and results of operations may be adversely affected if the terms and conditions
of the Company's authorizations were significantly modified or if certain
products become unavailable to the Company, whether such unavailability is
because the manufacturer terminates the Company's authorization or the product
is subject to allocation or otherwise. Vendor support programs are at the
discretion of the manufacturers and usually require achieving a specified sales
volume or growth rate to qualify for all, or some of the incentive program.
For the year ended December 31, 1998, Ingram Micro/Ingram Alliance and
Merisel were the only vendors from whom purchases exceeded 10% of total
purchases. Additionally, in 1998 Compaq and Hewlett Packard products each
comprised more than 10% of total Company sales. The loss of any of these
vendors, or any other key vendors, could have an adverse effect on the Company.
The Company believes that the Chicago metropolitan area is an excellent
location for its business as it is centrally located for purposes of shipping
products throughout the United States and provides quick access to manufacturers
and same day access to its principal distributors and aggregators, including
Ingram Micro/Ingram Alliance, Merisel, Tech Data, and Micro United. The
relocation of key distributors utilized in the Company's just-in-time purchasing
model could adversely impact the Company's results of operations. Although brand
names and individual products are important to the Company's business, the
Company believes that competitive sources of supply are available in
substantially all of the merchandise categories the Company carries.
CDW also applies its proprietary information technology systems to the task
of managing its inventory. At December 31, 1998, the Company maintained an
investment in inventory of approximately $64 million with approximately $72,000
of inventory on hand over 90 days old. The Company turned its inventory
approximately 24 times during 1998.
MARKETING AND ADVERTISING ACTIVITIES
The Company utilizes a variety of advertising and marketing media to
attract and retain customers, including national advertising in computer related
publications, catalogs and certain other direct marketing activities, as well as
electronic marketing via the Internet. In 1998, the Company launched a new
national branding campaign which includes national print media and national
cable television advertisements. 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.
www.cdw.com
The Company has an established Internet web site, known as www.cdw.com, 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 more than 40,000 computer products to search and
order on-line, advanced search capabilities, product specifications on over
10,000 products, product availability and pricing. It also offers side-by-side
product comparisons, links to product reviews, newsworthy announcements,
personalized access and customized two-way interaction that allows for checking
order status at will. 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.
During 1998 the Company generated $60.5 million of unassisted sales over its web
site, of which $20.6 million were generated in the fourth quarter.
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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. All account managers are graduates of CDW University, the
Company's proprietary sales training program. The program includes four weeks of
classroom training followed by several weeks of sales experience in one of the
Company's retail showrooms. CDW seeks to build customer relations by assigning
each customer to the account manager who first services the customer. Upon
subsequent calls to CDW, the customer is directed to their account manager for
assistance. In the spirit of teamwork, account managers are encouraged to
cooperate and work together to maximize sales and customer satisfaction.
Each catalog and advertisement distributed by the Company bears a toll-free
number to be used by customers in phoning CDW to place a product order.
Telephone calls are answered by account managers who utilize on-line computer
terminals to retrieve information regarding product characteristics, cost and
availability and to enter customer orders. Account managers enter orders on-line
into a computerized order fulfillment system which updates the Company's
customer purchase history. Computer processing of orders is performed
immediately following the placement of the order and upon receipt of credit
approval. The Company ships most credit approved orders received by 9:00 p.m.,
exclusive of orders for products not in stock or subject to allocation by the
manufacturer, on the day the order was received. Orders are shipped by Federal
Express, Airborne Express, RPS, Chicago Messenger Service, United Parcel
Service, U.S. Mail, common carrier or any other acceptable manner requested by
the customer. The Company charges customers for shipping but may offer
promotional shipping programs from time to time. The average order size was $745
in 1998 and $704 in 1997.
CDW account managers are generally compensated pursuant to a commission
schedule based upon the gross profit generated by them. CDW account managers
have the authority to negotiate and adjust prices for products, provided that
the account manager sells the product at a price which meets established
management guidelines. The Company's account managers have the opportunity to
achieve relatively high compensation levels and have historically shown
increased productivity as training and experience levels increase.
CUSTOMERS
CDW currently maintains a database of over 3.1 million active and
prospective names of which approximately 634,000 were serviced by the Company in
1998. 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, 1998, sales to business,
government and institutional customers accounted for approximately 87% 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
1998, approximately 21% of the Company's net sales were generated by sales to
Illinois residents, approximately 29% were generated to residents of the eastern
United States, approximately 16% were generated by sales to residents of the
southern United States, approximately 18% 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.
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CUSTOM CONFIGURATION AND TECHNICAL SUPPORT
The Company offers custom configuration which permits customers to add
accessories, load software or request a custom setup of systems purchased from
the Company. During 1998, the Company's custom configuration center processed
approximately 119,000 custom configured units. The Company employs a technical
staff that is trained and maintains the highest levels of professional
certification from manufacturers including that of "Novell Certified Network
Engineer" and "Certified Microsoft 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. CDW has developed a proprietary customer service tracking
system to ensure that customer initiated service requests are responded to
rapidly.
INFORMATION TECHNOLOGY SYSTEMS
CDW has installed and operates customized information technology systems
based upon 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 additional automation is
dependent upon its ability to recruit and retain qualified IT professionals. If
the Company were unable to develop or purchase future enhancements to its
information technology hardware or software, or continue to hire and retain
qualified IT professionals, the Company's operating results could be adversely
affected. See Management's Discussion and Analysis of Financial Condition and
Results of Operations for information regarding the impact of the Year 2000
issue on the Company's business.
PERSONNEL AND TRAINING
At December 31, 1998, the Company employed 1,512 coworkers. Of these, 1,302
were employed at the Company's headquarters in Vernon Hills, Illinois, 52 at the
Company's retail showroom in Chicago, Illinois, 152 at the Buffalo Grove,
Illinois telemarketing facility and 6 were employed at the government sales
office in Chantilly, Virginia. The Company considers its coworker relations to
be excellent. The Company's level of net sales per coworker decreased
approximately 6.7% to $1.39 million for the year ended December 31, 1998 as
compared to $1.49 million for the year ended December 31, 1997. 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.
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INCENTIVE AND REGULAR COMPENSATION ARRANGEMENTS
Compensation Arrangements. The Company's coworkers are generally
compensated on a basis that rewards performance and the achievement of
identified goals. For example, account managers receive compensation pursuant to
a commission schedule which is based upon aggregate gross profit dollars,
accounts receivable personnel are eligible for monthly bonuses if late balances
are held below target levels, and operations personnel are eligible for monthly
bonuses based upon such factors as prompt vendor returns and order fulfillment
rates. The Company believes that these incentives positively impact its
performance and profitability.
Coworker Incentive Stock Option, MPK Stock Option and Restricted Stock
Plans. In addition to regular compensation, the Company, and Mr. Krasny
individually, provide Company coworkers with additional long-term incentives
designed to maximize performance and productivity. To this end, the Company and
Mr. Krasny have adopted various stock-based compensation plans which enable
Company coworkers to share in the success of the Company through appreciation in
the value of the Company's stock.
RETAIL SHOWROOMS
The Company currently operates two retail showrooms allowing customers an
opportunity to examine products prior to purchase or to talk directly with CDW
sales or technical personnel. One showroom is located within the Company's main
distribution facility and headquarters in Vernon Hills, Illinois, and the other
is located in downtown Chicago, Illinois. These showrooms occupy approximately
5,100 square feet each.
The Company's retail showrooms, which generated approximately 5.4% of the
Company's net sales for 1998, 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.
TRADEMARKS
The Company conducts its business under the trade names and service marks
"CDW", "Computer Discount Warehouse" and "CDW-G." 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, telemarketing facility, a
retail showroom and corporate offices. The facility consists of a combined total
of approximately 325,000 square feet of warehouse and office space, including a
100,000 square foot warehouse expansion which was completed in September 1998,
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
approximately 18 are vacant and available for future expansion. The Company's
Chicago retail showroom is under lease through the year 2000.
The Company is obligated under a lease through 2004 for a combined 104,000
square foot office and warehouse facility in Buffalo Grove, Illinois, that
previously served as its main facility. In October 1998, the Company reopened
the office portion of the Buffalo Grove facility as a telemarketing center. The
Company is attempting to sublease the Buffalo Grove facility and plans to occupy
the office space while it finalizes future long term growth plans for its Vernon
Hills campus. See Note 7 in Notes to Consolidated Financial Statements.
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ITEM 3. LEGAL PROCEEDINGS.
In December 1998, the Company and Michael P. Krasny, its majority
shareholder, Chairman and CEO, agreed to settle the litigation brought against
them in 1993 by a former shareholder, director and executive officer of the
Company. The lawsuit was related to the Company's redemption of the common stock
held by the former shareholder in July 1990, and requested actual and punitive
damages. Although the Company and Mr. Krasny believe their actions were honest
and proper and that the allegations were without merit, they agreed to the
settlement of the suit, whereby all pending litigation was dismissed with a one
time payment by Mr. Krasny to the former shareholder of approximately $4.4
million. The amount was determined based upon the difference between the agreed
upon estimated fair market value of the Company at the time of the redemption of
the former shareholder's interest in 1990 and the amount previously paid to the
former shareholder. Pursuant to Mr. Krasny's indemnification of the Company for
all costs, damages or settlements related to the litigation, the Company
recorded the payment by Mr. Krasny to the former shareholder as a capital
contribution, with an offsetting reduction of paid-in capital for the additional
redemption price paid to the former shareholder. Thus, the settlement had no
impact on the Company's results of operations or cash flows.
Mr. Krasny also reimbursed the Company for all expenses, net of tax
benefits received by the Company, related to this action. For the years ended
December 31, 1998, 1997 and 1996, the Company and Mr. Krasny incurred legal
expenses in the aggregate of approximately $1.3 million, $379,000 and $133,000,
respectively, which have been assumed by Mr. Krasny. 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. As a result of the
settlement, the Company does not anticipate incurring any additional expenses
related to this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of 1998 to a vote
of security holders.
9
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth the high and low sales prices for the
Company's Common Stock on The Nasdaq Stock Market (R) for the periods indicated.
These quotations were obtained from Nasdaq. As of February 11, 1999, the Company
believes there were approximately 6,600 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.
1998 1997
--------------------- --------------------
QUARTER ENDED LOW HIGH LOW HIGH
- ----------------------------- --------- --------- --------- ---------
March 31............ $47 1/2 $ 70 3/4 $42 7/8 $70
June 30............. 38 1/4 61 1/2 39 5/8 57 3/4
September 30........ 36 55 53 78
December 31......... 43 1/4 103 7/8 42 13/16 69 3/4
10
<PAGE> 14
Item 6. Selected Financial Data.
CDW Computer Centers, Inc. and Subsidiaries
Selected Financial and Operating Data
(in thousands, except per share and selected operating data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA :
Net sales $ 1,733,489 $ 1,276,929 $ 927,895 $ 628,721 $ 413,270
Cost of sales 1,513,314 1,106,124 805,413 548,568 359,274
----------------------------------------------------------------------------
Gross profit 220,175 170,805 122,482 80,153 53,996
Selling and administrative expenses 115,537 90,315 64,879 49,175 34,617
Exit charge (1) - - 4,000 - -
----------------------------------------------------------------------------
Income from operations 104,638 80,490 53,603 30,978 19,379
Interest income (expense), net 4,708 4,259 3,469 1,973 392
Other income (expense), net (335) (241) (188) 47 119
----------------------------------------------------------------------------
Income before income taxes 109,011 84,508 56,884 32,998 19,890
Income tax provision 43,170 33,507 22,484 12,939 7,777
----------------------------------------------------------------------------
Net income $ 65,841 $ 51,001 $ 34,400 $ 20,059 $ 12,113
----------------------------------------------------------------------------
Net income per share
Basic $ 3.06 $ 2.37 $ 1.60 $ 0.95 $ 0.61
----------------------------------------------------------------------------
Diluted $ 3.03 $ 2.35 $ 1.58 $ 0.95 $ 0.61
----------------------------------------------------------------------------
Weighted average number of common
shares outstanding
Basic 21,531 21,525 21,525 21,026 20,003
Diluted 21,752 21,704 21,785 21,080 20,003
SELECTED OPERATING DATA :
Average order size $ 745 $ 704 $ 704 $ 630 $ 590
Number of orders shipped (in thousands) 2,327 1,814 1,318 998 700
Customers serviced (in thousands) 634 575 462 374 274
Net sales per co-worker (in thousands) $ 1,392 $ 1,490 $ 1,459 $ 1,364 $ 1,223
Inventory turnover 24.0 21.4 23.4 21.7 22.2
Accounts receivable - days sales outstanding 32.2 25.0 22.6 21.8 20.7
December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------
FINANCIAL POSITION:
Working capital $ 228,730 $ 167,421 $ 123,614 $ 99,127 $ 49,217
Total assets 341,821 269,641 198,830 132,929 77,860
Total debt and capitalization lease obligations - - - - -
Total shareholders' equity 270,763 199,866 141,622 106,161 55,843
(1) The exit charge provides for estimated costs associated with vacating the
Company's leased facility. See Note 7 of Notes to the Consolidated
Financial Statements.
</TABLE>
11
<PAGE> 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
FINANCIAL RESULTS YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996
------- ------- -------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 87.3 86.6 86.8
------- ------- -------
Gross profit 12.7 13.4 13.2
Selling and administrative expenses 6.7 7.1 7.0
Exit charge ---- ---- 0.4
------- ------- -------
Income from operations 6.0 6.3 5.8
Interest and other income 0.3 0.3 0.3
------- ------- -------
Income before income taxes 6.3 6.6 6.1
Income tax provision 2.5 2.6 2.4
------- ------- -------
Net income 3.8 % 4.0 % 3.7 %
OPERATING STATISTICS YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
Number of orders shipped 2,326,618 1,814,388 1,318,316
Average order size $745 $704 $704
Customers serviced 634,000 575,000 462,000
Number of account managers, end of period 622 399 311
Annualized inventory turns 24 21 23
12
<PAGE> 16
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.
-----------------------------------------
ANALYSIS OF PRODUCT MIX
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
-------- -------- --------
Notebook & Laptop Computers 19.8 % 25.0 % 26.3 %
Desktop Computers and Servers 15.7 13.2 11.9
Software 13.4 12.6 12.2
Printers 12.6 12.1 11.3
Data Storage Devices 11.0 10.4 9.7
Net/Comm Products 9.3 8.5 9.6
Video 7.8 7.8 7.6
Add-On Boards/Memory 4.1 4.8 5.7
Input Devices 2.6 3.0 2.8
Multi-Media 1.9 2.0 1.8
Other Accessories 1.8 0.6 1.1
-------- --------- --------
Total 100.0 % 100.0 % 100.0 %
-------- --------- --------
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales in 1998 increased 35.8% to a record $1.733 billion compared to
$1.277 billion in 1997. The Company's average order size increased 5.8% in 1998
to $745 from $704 in 1997. The number of customers serviced for the year ended
December 31, 1998 grew to 634,000 compared to 575,000 for the year ended
December 31, 1997. The growth in net sales is primarily attributable to a higher
concentration of commercial accounts, a higher level of sales per active account
and an increase in the number of orders processed. Sales to commercial accounts,
including business, government, educational and institutional, increased to 87%
of net sales in 1998 from 82% in 1997. The number of active customers increased
over 10% to 634,000 in 1998 from 575,000 in 1997, while the number of active
commercial accounts increased approximately 24% in the same period. For the
twelve months ended December 31, 1998 the number of orders shipped increased
28.2% to over 2.3 million. Desktop computers and servers were the fastest
growing product category with unit volume increasing 86% and dollar volume 62%.
Notebook computers continue to represent the largest portion of the Company's
sales at 20%, with dollar volume increasing more than 7% from 1997.
The average selling price of desktop CPU's decreased 15.5% and the average
selling price of notebook CPU's declined 3.5% from 1997. The Company believes
there may be additional decreases in prices for personal computers and related
products. Such decreases require the Company to sell more units in order to
maintain or increase the level of sales. Should future manufacturer price
reductions or the Company's marketing efforts fail to increase the level of unit
sales, the Company's sales growth rate and operating results could be adversely
affected. Sales of Compaq, Hewlett Packard, IBM, Microsoft and Toshiba products
comprise a substantial portion of the Company's sales. The loss of any of these,
or any other key vendors, could have an adverse effect on the Company's results
from operations. The statement concerning future prices, sales and results from
operations are forward looking statements that involve certain risks and
uncertainties such as stated above.
The fastest growing product categories in terms of sales dollars in 1998
were desktop computers at 62%, network and communication products at 48%,
software at 45%, data storage devices at 44%, and printers at 41%. 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.
13
<PAGE> 17
Gross profit decreased as a percentage of net sales to 12.7% for the twelve
months ended December 31, 1998, compared to 13.4% in 1997. The decrease in gross
profit as a percentage of net sales is primarily the result of lower selling
margins achieved on certain product lines, lower levels of inventory price
protection from vendors and increased shipping costs. The lower levels of price
protection in 1998 were the result of changes by certain manufacturers in the
terms and conditions of their inventory price protection programs.
On a forward-looking basis, it is likely that the gross profit margin
achieved will be less than 13%, and could be less than the 12.7% achieved in
1998. The statement concerning future gross profit is a forward looking
statement that involves certain risks and uncertainties such as the continued
participation by vendors in inventory price protection and rebate programs,
product mix, market conditions and other factors which could result in a
fluctuation of gross margins below recent experience. Certain manufacturers may
make additional changes that limit the amount of price protection for which the
Company is eligible. Such changes could have a negative impact on gross margin
in future periods. Vendor rebate programs are at the discretion of the vendor
and many of these programs are dependent on achieving certain goals and
objectives. Accordingly, there is no certainty that such programs will continue
at their current levels or that the established goals and objectives will be
attained.
Selling and administrative expenses, which include net advertising expense,
other selling administrative expenses and the executive incentive bonus pool
decreased to 6.7% of net sales in 1998 versus 7.1% in 1997.
Net advertising expense decreased as a percentage of net sales to 0.7% from
1.3% for the year ended December 31, 1998 and 1997, respectively. Gross
advertising expense decreased to 3.0% of net sales in 1998 versus 3.5% in 1997.
The Company decreased catalog circulation and the number of national advertising
pages versus the prior year, while expanding its spending on branding and
electronic commerce activities. The decline in gross advertising spending was
consistent with the Company's strategy of shifting resources in 1998 to an
aggressive sales force expansion. Based upon the Company's planned marketing
initiatives, future levels of gross advertising expense as a percentage of net
sales are likely to be relatively consistent with or higher than the level
achieved in 1998. Cooperative advertising reimbursements as a percentage of net
sales were consistent with the level achieved in 1997 at 2.3% of net sales. The
cooperative advertising reimbursement rate may fluctuate in future quarters
depending on the level of vendor participation achieved and collection
experience. The statements concerning future advertising expense and cooperative
advertising reimbursements are forward looking statements that involve certain
risks and uncertainties including the ability to identify and implement cost
effective incremental advertising and marketing programs as well as the
continued participation of vendors in the cooperative advertising reimbursement
program.
Other selling and administrative costs increased to 5.7% of net sales in
1998 from 5.4% in the prior year due primarily to increases in payroll and
related costs. The increase in payroll costs as a percentage of sales is due
primarily to investment in the recruiting, training and development of new
account managers. As of December 31, 1998 there were 622 account managers, an
increase of 56% from 399 account managers as of December 31, 1997. Of the 622
account managers, approximately 73% had fewer than 24 months experience and 58%
had fewer than 12 months, as compared to 70% and 42% at the end of 1997,
respectively.
The executive incentive bonus pool decreased to $3.3 million in 1998 from
$5.3 million in 1997. Of the $2.0 million decrease in the bonus pool from the
prior year, $800,000 results from an effective increase in the pool in 1997 due
to the $4.0 million exit charge taken in 1996, $100,000 is due to a lower level
of growth in operating income and the remaining $1.1 million is due to a change
in the bonus pool rate. For 1998, the Compensation and Stock Option Committee
established the bonus pool at 15% of the increase in operating income over the
prior year, versus 20% in prior periods. For 1999, the bonus pool rate will
remain at 15% of the increase in operating income over 1998.
14
<PAGE> 18
Legal costs incurred by the majority shareholder, Chairman and CEO, Michael
P. Krasny, in connection with the lawsuit filed by a former shareholder were
$1.3 million and $379,000, in 1998 and 1997, respectively. Mr. Krasny reimbursed
the Company for these costs, which were recorded by the Company as expenses with
an offsetting increase to paid-in capital, net of tax effects. Although the
Company and Mr. Krasny believe their actions were honest and proper, they agreed
to a settlement of the suit in December 1998, whereby all pending litigation was
dismissed. Under terms of the settlement the Company and Mr. Krasny agreed to
make a one time payment to the former shareholder of approximately $4.4 million,
which amount was paid by Mr. Krasny. The Company recorded the payment by Mr.
Krasny to the former shareholder as a capital contribution, with an offsetting
reduction of paid-in capital for the additional redemption price paid to the
former shareholder. Thus, the settlement had no impact on the Company's results
of operations or cash flows.
Interest income, net of other expenses, increased to $4.4 million in 1998
compared to $4.0 million in 1997, primarily due to higher levels of available
cash.
The effective income tax rate, expressed as a percentage of income before
income taxes, was 39.6% for the year ended December 31, 1998 versus 39.7% in
1997.
Net income for the twelve months ended December 31, 1998 was $65.8 million,
a 29% increase over $51.0 million for the twelve months ended December 31, 1997.
Diluted earnings per share was $3.03 and $2.35 for the year ended December 31,
1998 and 1997, respectively, an increase of 29%.
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 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.
The Company expanded its number of account managers to 399 as of December
31, 1997 from 311 at December 31, 1996.
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.
15
<PAGE> 19
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.
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.
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.
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, net of other expenses, totaled $4.0 million for the year
ended December 31, 1997 compared to $3.3 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. 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.
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, 1998, the Company had cash,
cash equivalents and marketable securities of $70.7 million and working capital
of $228.7 million. At December 31, 1997 the Company had working capital of
$167.4 million. The increase of $61.3 million in working capital in 1998 was due
16
<PAGE> 20
primarily to certain components of the Company's cash flow from operations for
the year ended December 31, 1998 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.
MARKET RISK
The Company's investments in marketable securities as of December 31, 1998
and 1997 are all due in one year or less and are concentrated in U.S. Government
and Government Agency securities. As such, the risk of significant changes in
the value of these securities as a result of a change in market interest rates
is minimal.
CASH FLOWS
Cash provided by operating activities in 1998 was $4.5 million compared to
$19.5 million for 1997. The primary working capital factors that have
historically affected the Company's cash flows from operations are the levels of
accounts receivable, merchandise inventory and accounts payable. Accounts
receivable at December 31, 1998 increased $66.0 million from December 31, 1997.
The increase in accounts receivable resulted from increased sales volume, an
increase in the percentage of net sales generated from open credit terms with
commercial customers to 62% from 55% in 1997.
Cash used in investing activities for 1998 was $17.6 million compared to
$17.8 million in 1997. In 1998, the Company incurred approximately $15.1 million
of capital expenditures for the purchase of additional land, expansion of the
Vernon Hills warehouse, warehouse equipment, 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 1998 included the renewal of the Company's
unsecured credit facilities with two financial institutions aggregating $50.0
million. The credit facilities expire in June 1999 and contain certain financial
covenants. Borrowings under one of the lines bear interest at the prime rate
less 2.5%, LIBOR plus 0.5% or the federal funds rate plus 0.5%, as determined by
the Company. Borrowings under the second credit facility bear interest at the
prime rate less 2.5%, LIBOR plus 0.45% or the federal funds rate plus 0.45%, as
determined by the Company. At December 31, 1998 there were no borrowings against
either of the credit facilities. The Company intends to renew the credit
facilities upon expiration. In October 1998, the Company established an
unsecured stand-by letter of credit for approximately $160,000 related to
improvements to the Vernon Hills facility which expires in June 1999.
During the third quarter of 1998, the Company's Board of Directors
authorized the repurchase of up to 1 million shares of its common stock in open
market transactions. The Company repurchased a total of 50,000 shares during the
third quarter for approximately $2.1 million. The Company intends to hold the
repurchased shares in treasury for general corporate purposes, including
issuances under various employee stock option plans.
YEAR 2000 READINESS DISCLOSURE
General
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, receive or
ship products, send invoices, or engage in similar normal business activities.
17
<PAGE> 21
The Company has initiated a Y2K project and assigned a Y2K project team
designed to make all its hardware and software systems Y2K compliant prior to
December 31, 1999. The Company intends to contract an outside organization to
review its project methodology and status to ensure all aspects of the Y2K issue
have been addressed.
Project
CDW's Y2K project consists of internal and external components. The
internal section has been divided into five steps:
1. Awareness - Awareness includes evaluating industry best practices,
generating management and employee awareness, establishing
communications methods and establishing the project team.
2. Assessment - This phase includes hardware and software compliance
assessment, establishment of the size and scope of the project,
establishment of a project timeline, priorities, budgeting and
allocation of resources.
3. Renovation - Renovation consists of establishing a detailed
implementation plan, the design of new systems and system corrections,
writing of system code and software and hardware testing.
4. Validation - Validation includes testing new systems and system
corrections to ensure they will function properly in operation.
5. Implementation - Final certification of the new and corrected systems,
implementation of the systems and monitoring to ensure they continue
to function.
The Awareness, Assessment and Renovation phases of the project were
completed prior to December 1998. As a result of the Assessment phase, the
Company believes it will not be required to replace any of its hardware
components or significant portions of its software to make its systems Y2K
compliant. As of December 31, 1998 the Company believes it has completed
substantially all of the validation and implementation of internal systems
critical to continuing operations. The remaining portions of the internal
project include validation and implementation of secondary files and systems, as
well as the review of project methodology and status to be conducted by an
outside organization.
The external portion of the project focuses on assessing the Y2K readiness
of product and service vendors and its potential impact on the Company's
operations. The Company will begin communications with its vendors in the first
quarter of 1999 to assess the status of the vendors' Y2K projects. The Company
will then work through issues with its business partners to minimize potential
business interruptions. This portion of the project is expected to be completed
prior to December 31, 1999.
Costs
The Company estimates that total costs for the Y2K project, through
December 31, 1999, will range between $750,000 and $1 million. As of December
31, 1998 the Company has incurred, and recorded as operating expenses,
approximately $240,000 in costs related to the project, of which approximately
$190,000 were incurred during the year ended December 31, 1998. Essentially all
of the Company's expenditures to date are for internal payroll costs related to
the assessment and correction of internal systems. Of the estimated remaining
costs of $510,000 to $760,000, approximately one-third relate to the cost of
assessing and communicating with vendors and two-thirds relate to the correction
and testing of internal systems.
Risks
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations and financial condition. Due to the general uncertainty
inherent in the Y2K problem, resulting in part from the uncertainty of the Y2K
readiness of third-party suppliers, the Company is unable to determine at this
time whether the consequences of Y2K failures will have a material impact on the
Company's results of operations and financial condition. The Company's Y2K
project is expected to significantly reduce the Company's level of uncertainty
about the Y2K problem and, in particular, about the Y2K compliance and readiness
of its material vendors. The Company believes that, with the completion of the
project as scheduled, the possibility of significant interruptions of normal
operations should be minimized. Although the Company believes the potential
impact is not material, as a result of the Y2K issue the Company may be exposed
to lawsuits resulting from the sale of products which are not Y2K compliant.
18
<PAGE> 22
The statements concerning future impact of the Y2K issue are forward
looking statements that involve certain risks and uncertainties, such as the
inability to receive products on a timely basis from vendors, ship products to
customers and other factors, which could have a material impact on the Company's
results from operations. Certain vendors may fail to adequately prepare their
information systems or the Company's own Y2K project may not correct all Y2K
issues. Accordingly, there is no certainty that either the Company or its
vendors will complete their Y2K projects prior to December 31, 1999.
Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations concerning the Company's sales
growth, gross profit as a percentage of sales, advertising expense, cooperative
advertising reimbursements, exit charge and Y2K readiness 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 beginning on page F(i). See Index to Consolidated Financial
Statements beginning on page F(i).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no disagreements with accountants on accounting and financial
disclosure matters during the periods reported herein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required hereunder is incorporated by reference herein from
the Registrant's 1998 Definitive Proxy Statement, to be filed pursuant to
Regulation 14A not later than April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required hereunder is incorporated by reference herein from
the Registrant's 1998 Definitive Proxy Statement, to be filed pursuant to
Regulation 14A not later than April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required hereunder is incorporated by reference herein from
the Registrant's 1998 Definitive Proxy Statement, to be filed pursuant to
Regulation 14A not later than April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required hereunder is incorporated by reference herein from
the Registrant's 1998 Definitive Proxy Statement, to be filed pursuant to
Regulation 14A not later than April 30, 1999.
19
<PAGE> 23
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:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
---------- -----------------------
<S> <C>
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)
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)
20
<PAGE> 24
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, 1997 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, 1997 (iii)
10 (ii) Non-statutory Stock Option Agreement dated September 5, 1996 between
the Company and Harry J. Harczak, Jr. (iv)
10 (jj) Non-statutory Stock Option Agreement dated September 5, 1996 between
the Company and James R. Shanks (iv)
10 (kk) Form of Indemnification and Hold Harmless Agreement between the
Company and the Selling Shareholder (v)
10 (ll) CDW 1996 Incentive Stock Option Plan (v)
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, 1997 (vi)
10 (pp) CDW 1997 Officer and Manager Bonus Plan (vi)
10 (qq) Revolving Note between the Company and LaSalle National Bank dated June 28,
1998 (vii)
10 (rr) Revolving Note between the Company and The Northern Trust Company dated
June 30, 1998 (vii)
10 (ss) First Amendment to CDW Incentive Stock Option Plan
10 (tt) First Amendment to CDW 1996 Incentive Stock Option 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 filed on May 11, 1993 and the
Company's registration statement (333-60025) on
Form S-3 filed under the Securities Act of 1933
on July 28, 1998.
(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.
(iv) 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,
1997.
(v) 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.
(vi) Incorporated by reference from the exhibits filed
with the Company's annual report (0-21796) on
Form 10-K for the year ended December 31, 1997.
(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, 1998.
21
<PAGE> 25
(b) The Company did not file any reports on Form 8-K during
the last quarter of the year ended December 31, 1998.
(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.
</TABLE>
22
<PAGE> 26
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 29, 1999
By : /s/ Michael P. Krasny
Michael P. Krasny, Chairman of
the Board, Chief Executive
Officer and Secretary
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Michael P. Krasny Chairman of the Board, Chief March 29, 1999
Michael P. Krasny Executive Officer and Secretary
/s/ Gregory C. Zeman President and Director March 29, 1999
Gregory C. Zeman
/s/ Daniel B. Kass Vice President-Sales March 29, 1999
Daniel B. Kass and Director
/s/ Harry J. Harczak, Jr. Chief Financial Officer March 29, 1999
Harry J. Harczak, Jr. and Treasurer
/s/ Sandra M. Rouhselang Controller and March 29, 1999
Sandra M. Rouhselang Chief Accounting Officer
</TABLE>
23
<PAGE> 27
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, 1998 and 1997
Consolidated Statements of Income for the years ended F-3
December 31, 1998, 1997 and 1996
Consolidated Statement of Shareholders' Equity for the years ended F-4
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended F-5
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements F-6
F(i)
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
CDW Computer Centers, Inc.
Vernon Hills, Illinois
In our opinion the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of CDW Computer
Centers, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 21, 1999
F-1
<PAGE> 29
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
------------- ------------
ASSETS
<S> <C> <C>
Current assets :
Cash and cash equivalents $ 4,230 $ 18,233
Marketable securities 66,458 61,192
Accounts receivable, net of allowance for doubtful
accounts of $3,185 and $1,950, respectively 152,308 87,524
Miscellaneous receivables 5,896 3,960
Merchandise inventory 64,392 61,941
Prepaid expenses and other assets 1,423 759
Deferred income taxes 5,081 3,587
--------- ---------
Total current assets 299,788 237,196
Property and equipment, net 37,056 26,704
Deferred income taxes and other assets 4,977 5,741
--------- ---------
TOTAL ASSETS 341,821 $ 269,641
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 41,358 $ 44,451
Accrued expenses :
Payroll, Commissions and management
incentive Compensation 16,279 12,996
Income taxes 5,146 5,504
Exit costs 2,715 3,391
Other 5,560 3,433
--------- ---------
Total current liabilities 71,058 69,775
--------- ---------
Commitments and contingencies
Shareholders' equity :
Preferred shares, $1.00 par value; 5,000 shares
authorized; none issued - -
Common shares, $ .01 par value; 75,000 shares
authorized; 21,571 and 21,525 shares
issued, respectively 216 215
Paid-in capital 81,352 74,680
Retained earnings 192,259 126,418
Unearned compensation (975) (1,447)
--------- ---------
272,852 199,866
Less cost of common shares in treasury, 50 and
0 shares, respectively (2,089) -
Total shareholders' equity 270,763 199,866
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 341,821 $ 269,641
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 30
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,733,489 $ 1,276,929 $ 927,895
Cost of sales 1,513,314 1,106,124 805,413
----------- ----------- -----------
Gross profit 220,175 170,805 122,482
Selling and administrative expenses 115,537 90,315 64,879
Exit charge - - 4,000
----------- ----------- -----------
Income from operations 104,638 80,490 53,603
Interest income 4,708 4,259 3,469
Other expense (335) (241) (188)
----------- ----------- -----------
Income before income taxes 109,011 84,508 56,884
Income tax provision 43,170 33,507 22,484
----------- ----------- -----------
Net income $ 65,841 $ 51,001 $ 34,400
=========== =========== ===========
Earnings per share
Basic $ 3.06 $ 2.37 $ 1.60
=========== =========== ===========
Diluted $ 3.03 $ 2.35 $ 1.58
=========== =========== ===========
Weighted average number of
common shares outstanding
Basic 21,531 21,525 21,525
=========== =========== ===========
Diluted 21,752 21,704 21,785
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 31
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Total
Common Stock Paid in Retained Unearned Treasury Shares Shareholders'
Shares Amount Capital Earnings Compensation Shares Amount Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Compensation stock option grants 1,586 (1,586) -
Capital contribution for legal costs assumed
by majority shareholder, net of tax 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, net of tax 228 228
Net income 51,001 51,001
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 21,525 215 74,680 126,418 (1,447) - - 199,866
MPK Restricted Stock Plan forfeitures (1) (1)
Amortization of unearned compensation 472 472
Compensatory stock option grants 986 986
Exercise of Stock Options 46 1 1,140 1,141
Tax benefit from stock option transactions 3,741 3,741
Capital contribution for litigation
settlement by majority shareholder 4,365 4,365
Additional redemption price pursuant to
litigation settlement (4,365) (4,365)
Capital contibution for legal costs assumed
by majority shareholder, net of tax 806 806
Purchase of treasury shares 50 (2,089) (2,089)
Net income 65,841 65,841
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 21,571 $ 216 $ 81,352 $ 192,259 $ (975) 50 $(2,089) $ 270,763
======================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 32
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 65,841 $ 51,001 $ 34,400
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 4,758 2,672 1,975
Accretion of marketable securities (2,797) (2,014) (87)
Stock-based compensation expense 1,458 1,180 981
Allowance for Doubtful Accounts 1,235 850 475
Legal fees assumed by majority shareholder 806 228 80
Deferred tax benefit (720) (1,351) (3,228)
Loss on disposal of fixed asset - - 281
Tax benefit from stock option exercise 3,741 5,835 -
Changes in assets and liabilities:
Accounts receivable (66,019) (30,978) (20,310)
Miscellaneous receivables (1,936) (29) (1,569)
Merchandise inventory (2,451) (20,479) (14,040)
Prepaid expenses and other assets (675) 58 (625)
Accounts payable (3,093) 7,809 17,206
Accrued compensation 3,283 2,246 6,061
Accrued income taxes and other expenses 1,769 3,108 3,187
Accrued exit costs (676) (596) 3,987
-------- -------- --------
Net cash provided by operating activities 4,524 19,540 28,774
-------- -------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (26,810) (13,825) (24,701)
Redemptions of available-for-sale securities 32,250 9,575 27,300
Purchases of held-to-maturity securities (88,122) (87,330) (86,781)
Redemptions of held-to-maturity securities 80,213 90,892 68,732
Purchase of property and equipment (15,110) (17,081) (11,078)
-------- -------- --------
Net cash used in investing activities (17,579) (17,769) (26,528)
-------- -------- --------
Cash flows from financing activities:
Proceeds of treasury shares (2,089) - -
Proceeds from exercise of stock options 1,141 - -
-------- -------- --------
Net cash used in investing activities (948) - -
-------- -------- --------
Net (decrease) increase in cash (14,003) 1,771 2,246
Cash and cash equivalents - beginning of period 18,233 16,462 14,216
-------- -------- --------
Cash and cash equivalents - end of period $ 4,230 $ 18,233 $ 16,642
======== ======== ========
Supplementary disclosure of cash flow information:
Interest paid $ - $ 1 $ 14
Taxes paid $ 40,400 $ 26,197 $ 23,763
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 33
CDW COMPUTER CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
CDW Computer Centers, Inc. and its subsidiaries (collectively the
"Company") are engaged in the distribution of brand name personal
computers and related products primarily through direct marketing to
end users within the United States. The Company's primary business is
conducted from a combined telemarketing, corporate office, warehouse
and showroom facility located in Vernon Hills, Illinois. The Company
also operates a telemarketing facility in Buffalo Grove, Illinois, a
retail showroom in Chicago, Illinois and a government sales office in
Chantilly, Virginia.
The Company extends credit to business, government and institutional
customers under certain circumstances based upon the financial
strength of the customer. Such customers are typically granted net 30
day credit terms. The balance of the Company's sales are made
primarily through third party credit cards and for cash-on-delivery.
Upon assessment of Statements of Financial Accounting standards No.
131 (SFAS 131), "Disclosures about Segments of and Enterprise and
Related Information", the Company has determined that through 1998 it
operated as one business segment as defined by SFAS 131.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of CDW Computer Centers, Inc, and its wholly owned
subsidiaries, CDW Government, Inc. (CDW-G), which was formed on May
27, 1998, and Northbrook Ad Agency, Inc. (NAA). CDW-G sells personal
computers and related products and focuses exclusively on serving
government and educational accounts. NAA provides advertising
services, primarily consisting of media placements, solely to the
Company. All intercompany transactions and accounts are eliminated in
consolidation.
Basis of Presentation
The Company has adopted Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Reporting Comprehensive Income". For the years
ended December 31, 1998, 1997 and 1996 the Company has no components
of Comprehensive Income, as defined by SFAS 130, which are not
contained in net income as reported on the accompanying Consolidated
Statements of Income. Certain amounts for 1997 and 1996 were
reclassified to conform to the current year presentation.
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.
F-6
<PAGE> 34
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. A
reconciliation of basic and diluted per-share computations is included
in Note 10 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.
Cash and Cash Equivalents
Cash and cash equivalents include all deposits in banks and highly
liquid temporary cash investments purchased with original maturities
of three months or less at the time of purchase.
Marketable Securities
The Company classifies securities with a stated maturity which it has
the intent to hold to maturity, as "held-to-maturity" and records such
securities at amortized cost. Securities which do not have stated
maturities or for which the Company does not have the intent to hold
to maturity are classified as "available-for-sale" and recorded at
fair value, with unrealized holding gains or losses, if material,
recorded as a separate component of Shareholders' Equity. The Company
does not invest in trading securities. All securities are accounted
for on a specific identification basis.
The Company's marketable securities are concentrated in securities of
the U.S. Government and U.S. Government Agencies. Such investments are
supported by the financial stability and credit standing of the U. S.
Government or applicable U. S. Government Agency.
Merchandise Inventory
Inventory is valued at the lower of cost or market. Cost is determined
on the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. The Company calculates
depreciation using the straight-line method with useful lives ranging
from 2 to 25 years. Expenditures for major renewals and improvements
that extend the useful life of property and equipment are capitalized.
Expenditures for maintenance and repairs are charged to expense as
incurred.
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
<PAGE> 35
expenditure is incurred. Advertising expense, included in selling and
administrative expenses net of cooperative reimbursements earned, was
approximately $12,400,000, $16,200,000 and $8,900,000 for the years
ended December 31, 1998, 1997 and 1996, 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 9 for disclosure of the Company's stock
based compensation plans in accordance with SFAS 123.
Fair Value of Financial Instruments
The Company estimates that the fair market value of all of its
financial instruments at December 31, 1998 and 1997 are not materially
different from the aggregate carrying value due to the short term
nature of these instruments.
Treasury Shares
During 1998, the Company's Board of Directors authorized the
repurchase of up to 1 million shares of its common stock in open
market transactions. The Company repurchased a total of 50,000 shares
during the third quarter for approximately $2.1 million. The Company
intends to hold the shares in treasury for general corporate purposes,
including issuances under various employee stock option plans. The
Company accounts for the treasury shares using the cost method.
3. Marketable Securities
The amortized cost and estimated fair values of the Company's
investments in marketable securities at December 31, 1998 and 1997 (in
thousands) were:
<TABLE>
<CAPTION>
Gross
Unrealized
Estimated Holding Amortized
Security Type Fair Value Gains Losses Cost
------------- ---------- -------------------- ---------
<S> <C> <C> <C> <C>
December 31, 1998
Available-for-sale:
U.S. Government and Government Agency $ 2,004 $ 4 $ - $ 2,000
securities
-------------------------------------------------------
Held-to-maturity:
Bonds of states, municipalities, and 512 - 510
political subdivisions 2
U.S. Government and Government Agency 63,963 45 (30) 63,948
securities
-------------------------------------------------------
Total held-to-maturity 47 (30) 64,458
64,475
-------------------------------------------------------
=======================================================
Total marketable securities: $ 66,479 $ 51 $ (30) $ 66,458
=======================================================
December 31, 1997
Available-for-sale:
Redemptive tax-exempt preferred stocks $ 7,250 $ - $ - $ 7,250
-------------------------------------------------------
Held-to-maturity:
Bonds of states, municipalities, and 263 1 - 262
political subdivisions
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
=======================================================
</TABLE>
<PAGE> 36
The Company's investments in securities held-to-maturity at December
31, 1998 and 1997 were all due in one year or less by contractual
maturity. Estimated fair values of marketable securities are based on
quoted market prices.
4. Property, Equipment and Facility Relocation
Property and equipment consists of the following (in thousands):
December 31,
------------
1998 1997
-----------------------------------
Land $ 10,367 $ 6,272
Machinery and equipment 11,001 9,316
Building 12,495 8,276
Computer and data processing
equipment 7,502 3,596
Furniture and fixtures 1,882 1,246
Computer software 1,341 1,049
Leasehold improvements 390 390
Construction in progress 728 451
--------------- ---------------
45,706 30,596
Less accumulated depreciation 8,650 3,892
--------------- ---------------
Net property and equipment $ 37,056 $ 26,704
=============== ===============
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.
In March 1998, the Company acquired approximately 18 acres of vacant
land contiguous to its Vernon Hills facility for $4.1 million. The
Company now owns approximately 45 total acres. The Company completed
construction of a 100,000 square foot addition to its current
warehouse facility in September 1998, leaving approximately 18 acres
available for future expansion.
5. Financing Arrangements
The Company has an aggregate $50 million available pursuant to
unsecured lines of credit with two financial institutions expiring in
June 1999, at which time the Company intends to renew the lines.
Borrowings under one of the lines bear interest at the prime rate less
2.5%, LIBOR rate plus 0.5% or the federal funds rate plus 0.5%, as
determined by the Company. Borrowings under the second credit facility
bear interest at the prime rate less 2.5%, LIBOR rate plus 0.45% or
the federal funds rate plus 0.45%, as determined by the Company. At
December 31, 1998 and 1997, there were no borrowings from these credit
facilities.
In October 1998 the Company established an unsecured stand-by letter
of credit for approximately $160,000 related to improvements to the
Vernon Hills facility which expires in June 1999.
6. 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
$33.9 million collateralized by inventory purchases financed by the
Flooring Companies. At December 31, 1998 and 1997, the Company owed
the Flooring Companies a total of approximately $6.7 million and $7.2
million, respectively, which is included in trade accounts payable.
<PAGE> 37
7. Operating Leases and Exit Costs
The Company is obligated under a lease agreement through December 31,
2003 for its Buffalo Grove office and warehouse facility. 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, 1998, 1997 and 1996 rent expense was
$230,000, $540,000 and $923,000, respectively. Additionally, $689,000
and $379,000 of rental payments were charged to the exit liability in
1998 and 1997, respectively. Minimum future rentals are as follows (in
thousands):
Years Ended December 31, Amount
------------------------ -----------------
1999 $ 1,028
2000 1,028
2001 931
2002 873
2003 873
Thereafter -
-----------------
$ 4,733
=================
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 1998 and 1997 the
Company charged approximately $676,000 and $974,000 against the exit
accrual, respectively. These amounts include cash payments for rent,
real estate taxes and restoration, net of sublease payments, which
totaled $676,000 in 1998 and $469,000 in 1997. During 1997 the Company
charged approximately $505,000 of asset write offs to the exit accrual
and reclassified various accruals for operating costs related to the
vacated facility, totaling $378,000, to the exit liability.
In the fourth quarter of 1998 the Company reopened a portion of the
Buffalo Grove facility as a telemarketing center. Accordingly, the
Company records a proportionate share of the rent and other operating
costs to selling and administrative expenses. The Company plans to
occupy the Buffalo Grove facility while it finalizes future long term
growth plans for its Vernon Hills campus. There is no assurance that
the remaining exit liability of $2.7 million at December 31, 1998 will
be adequate to cover actual costs should the Company's actual
experience in subleasing the facility differ from the assumptions used
in calculating the exit charge.
<PAGE> 38
8. Income Taxes
Components of the provision (benefit) for income taxes for the years
ended December 31, 1998, 1997 and 1996 consist of (in thousands):
Current: 1998 1997 1996
------------ ------------ ------------
Federal $ 35,968 $ 28,630 $ 20,978
State 7,922 6,228 4,734
------------ ------------ ------------
43,890 34,858 25,712
Deferred (720) (1,351) (3,228)
------------ ----------- ------------
Provision for income taxes $ 43,170 $ 33,507 $ 22,484
============ ============ ============
The current income tax liabilities for 1998 and 1997 were reduced by
$3.7 million and $5.8 million, respectively, for tax benefits recorded
directly to paid-in capital relating to the exercise and vesting of
shares pursuant to the CDW Stock Option Plan, the MPK Stock Option
Plan and the MPK Restricted Stock Plan.
The reconciliation between the statutory tax rate expressed as a
percentage of income before income taxes and the actual effective tax
rate for 1998, 1997 and 1996 is as follows:
1998 1997 1996
------ ------ ------
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
State taxes, net of federal benefit 4.6 4.6 4.7
Other 0.0 0.1 (0.2)
------ ------ ------
39.6 % 39.7 % 39.5 %
====== ====== ======
The tax effect of temporary differences that give rise to the net
deferred income tax asset at December 31, 1998 and 1997 are presented
below (in thousands):
1998 1997
--------- ----------
Current:
Accounts receivable $ 1,827 $ 1,385
Merchandise inventory 333 344
Accrued expenses 2,921 1,858
---------- ----------
5,081 3,587
---------- ----------
Non-current:
Employee stock plans 4,238 3,800
Exit charge 1,059 1,322
Other (441) 508
---------- ----------
4,856 5,630
---------- ----------
Net deferred tax asset $ 9,937 $ 9,217
========== ==========
<PAGE> 39
The portion of the net deferred tax asset relating to employee stock
plans results primarily from the MPK Stock Option Plan and
compensatory stock option grants under the CDW Stock Option Plans.
Compensation expense related to these plans is deductible for income
tax purposes in the year the options are exercised.
Although realization is not assured, management believes, based upon
historical taxable income, that it is more likely than not that all of
the deferred tax asset will be realized.
9. Stock-Based Compensation
CDW Stock Option Plans
The Company has established certain stock-based compensation plans for
the benefit of its directors and coworkers. Pursuant to these plans
the Company has reserved a total of 4,134,068 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, 1996, 1997 and 1998
was as follows:
<TABLE>
<CAPTION>
Weighted-Average Options
Shares Exercise Price Exercisable
---------------- -------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1996 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
--------------- -------------- --------------
Options granted 714,115 92.76
Options exercised 45,872 24.87
Options forfeited 115,035 50.50
--------------- --------------- ---------------
Balance at December 31, 1998 2,385,127 $ 60.80 113,045
=============== =============== ===============
</TABLE>
<PAGE> 40
For the years ended December 31, 1998, 1997 and 1996, the
weighted-average fair value of options granted was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Exercise price equals market price $65.99 $36.18 $42.08
Exercise price is less than market price $95.93 $52.12 $42.45
</TABLE>
The following table summarizes the status of outstanding stock options
as of December 31, 1998:
<TABLE>
<CAPTION>
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
---------------- ------------- ------------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$0.01 34,068 19.0 $ 0.01 - -
$9.33 - $13.00 12,300 16.0 11.38 1,500 12.30
$22.75 - $27.00 376,205 16.4 25.31 111,545 25.03
$40.00 - $59.31 1,278,611 18.4 54.82 - -
$64.81 - $95.94 683,943 20.0 95.48 - -
---------------- ------------- ------------------- --------------- ------------ ---------------
$0.01 - $95.94 2,385,127 18.5 $ 60.80 113,045 $ 24.86
================ ============= =================== =============== ============ ===============
</TABLE>
Had the Company elected to apply the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123) regarding recognition of compensation expense
to the extent of the calculated fair value of stock options, reported
net income and earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
(in 000's, except per share amounts)
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income, as reported $ 65,841 $ 51,001 $ 34,400
Pro forma net income $ 61,574 $ 48,573 $ 33,931
Basic earnings per share, as reported $ 3.06 $ 2.37 $ 1.60
Diluted earnings per share, as reported $ 3.03 $ 2.35 $ 1.58
Pro forma basic earnings per share $ 2.86 $ 2.26 $ 1.58
Pro forma diluted earnings per share $ 2.84 $ 2.25 $ 1.56
</TABLE>
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.
<PAGE> 41
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 f 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:
1998 1997 1996
------ ------ ------
Risk-free interest rate 5.4 % 5.5 % 6.6 %
Dividend yield 0.0 % 0.0 % 0.0 %
Option life (years) 9.9 9.9 10.3
Stock price volatility 52.6 % 51.7 % 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 were exercised and the resulting shares were
sold pursuant to secondary offerings in 1995 and 1997, and open market
transactions in 1998, as follows:
Transaction Date Number of Options
---------------- -----------------
1995 338,000
1997 136,000
1998 165,000
Subsequent to December 31, 1998, one of the plan participants, who
holds 244,755 options, terminated employment with the Company.
Pursuant to the terms of the MPK Stock Option Plan, the participant
has 180 days to exercise all remaining options. Additionally, the
Company's majority shareholder has 90 days from the date of exercise
to elect to acquire the shares at market value with a note payable
with interest over ten years. Options for 892,710 shares for the two
remaining participants are exercisable as of December 31, 1998 and the
remaining 1,904,998 options are exercisable at the rate of 571,501 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.
<PAGE> 42
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 subsidiaries through January 1, 2000, the
Company recorded a capital contribution and offsetting deferred charge
of approximately $2.8 million for unearned compensation equal to the
number of shares granted, times $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, 1998,
126,516 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, 1998, 26,517 shares remain outstanding under the
original terms and vest on January 1, 2000 and 383,507 shares remain
outstanding under the modified terms and vest 25% each year beginning
on January 1, 2000.
MPK Stock Plans, Tax Benefits
The exercise and vesting of shares pursuant to the MPK Stock Option
Plan and MPK Restricted Stock Plan resulted in the realization by the
Company of tax benefits of $3.1 million in 1998 and $6.2 million in
1997, of which $144,000 and $334,000, respectively, were previously
recorded in deferred taxes. The incremental tax benefits of $2.9
million in 1998 and $5.8 million in 1997 were recorded to paid-in
capital.
<PAGE> 43
10. Earnings Per Share
The Company has outstanding at December 31, 1998 common shares
totaling approximately 21,521,000. The Company has also granted
options to purchase common shares to the coworkers of the Company as
discussed in Note 9. These options have a dilutive effect on the
calculation of earnings per share. The following is a reconciliation
of the numerators and denominators of the basic and diluted earnings
per share computations as required by SFAS 128.
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Income available to
Common shareholders (numerator) $ 65,841 $ 51,001 $ 34,400
=========== =========== ============
Weighted average common
Shares outstanding (denominator) 21,531 21,525 21,525
=========== =========== ============
Basic earnings per share $ 3.06 $ 2.37 $ 1.60
=========== =========== ============
Diluted earnings per share:
Income available to
common shareholders (numerator) $ 65,841 $ 51,001 $ 34,400
=========== =========== ============
Weighted average common
shares outstanding 21,531 21,525 21,525
Effect of dilutive securities:
Options on common stock 221 179 260
----------- ----------- ------------
Total common shares and dilutive securities 21,752 21,704 21,785
(denominator)
=========== =========== ============
Diluted earnings per share $ 3.03 $ 2.35 $ 1.58
=========== =========== ============
</TABLE>
11. Profit Sharing and 401(k) Plan
The Company has a profit sharing plan which includes a salary
reduction feature established under the Internal Revenue Code Section
401(k) covering substantially all employees. Contributions by the
Company to the profit sharing plan are determined at the discretion of
the Board of Directors. For the years ended December 31, 1998, 1997
and 1996, the Company's profit sharing expense was approximately
$1,860,000, $1,066,000 and $662,000, respectively.
12. Contingencies
In December 1998, the Company and Michael P. Krasny, its majority
shareholder, Chairman and CEO, agreed to settle the litigation brought
against them in 1993 by a former shareholder, director and executive
officer of the Company. The lawsuit was related to the Company's
redemption of the common stock held by the former shareholder in July
1990, and requested actual and punitive damages. Although the Company
and Mr. Krasny believe their actions were honest and proper and that
the allegations were without merit, they agreed to the settlement of
the suit, whereby all pending litigation was dismissed with a one time
payment by Mr. Krasny to the former shareholder of approximately $4.4
million. The amount was determined based upon the difference between
the agreed upon estimated fair market value of the Company at the time
of the redemption of the former shareholder's interest in 1990 and the
amount previously paid to the former shareholder. Pursuant to Mr.
Krasny's indemnification of the Company for all costs, damages or
settlements related to the litigation, the Company recorded the
payment by Mr. Krasny to the former shareholder as a capital
contribution, with an offsetting reduction of paid-in capital for the
additional redemption price paid to the former shareholder. Thus, the
settlement had no impact on the Company's results of operations or
cash flows.
The majority shareholder also reimbursed the Company for all expenses,
net of tax benefits received by the Company, related to this action.
For the years ended December 31, 1998, 1997 and 1996, the Company and
majority shareholder incurred legal expenses of approximately $1.3
million, $379,000 and $133,000, 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. As a result of the
settlement the Company does not anticipate incurring any additional
expenses related to this lawsuit.
<PAGE> 44
13. Selected Quarterly Financial Data (Unaudited)
The following information is for the years ended December 31, 1998 and
1997 (in thousands, except per share data):
` First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
December 31, 1998
Net sales $ 384,591 $ 408,945 $462,720 $477,233
Gross profit 49,147 51,707 58,863 60,458
Income before income taxes 24,453 25,807 28,384 30,367
Net income 14,770 15,588 17,141 18,342
Earnings per Share:
Basic $ 0.69 $ 0.72 $ 0.80 $ 0.85
Diluted $ 0.68 $ 0.72 $ 0.79 $ 0.84
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
<PAGE> 45
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 Subsidiaries 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 20 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.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 21, 1999
S-1
<PAGE> 46
CDW COMPUTER CENTERS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
years ended December 31, 1998, 1997 and 199
(in thousands)
<TABLE>
<CAPTION>
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
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Deducted in the balance sheet
from the asset to which it applies:
Allowance for doubtful accounts $ 1,950 $ 2,129 $ - $ 894 (a) $ 3,185
---------- ---------- ---------- ---------- ----------
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
---------- ---------- ---------- ---------- ----------
</TABLE>
Note:
(a) Uncollectible items written off, less recoveries of items previously written
off.
S-2
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
DATED MARCH 29, 1999
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of CDW Computer Centers, Inc. on Form S-8 (File No. 333-43925) and Form S-3
(File No. 333-60025) of our reports dated January 21, 1999, on our audits of the
consolidated financial statements and financial statement schedule of CDW
Computer Centers, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
for the years ended December 31, 1998, 1997, and 1996, which reports are
included in the Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 29, 1999
<PAGE> 1
EXHIBIT 10 (ss)
FIRST AMENDMENT TO CDW INCENTIVE STOCK OPTION PLAN
DATED JULY 23, 1998
<PAGE> 2
FIRST AMENDMENT
TO
CDW INCENTIVE STOCK OPTION PLAN
This First Amendment to the CDW Incentive Stock Option Plan (this
"Amendment") is made as of this 23rd day of July, 1998.
W I T N E S S E T H:
WHEREAS, on the 18th day of May, 1993, CDW Computer Centers, Inc., an
Illinois corporation (the "Company"), adopted the CDW Incentive Stock Option
Plan pursuant to which the Company is authorized to grant stock options to the
Company's directors, officers, employees and consultants (the "Plan");
WHEREAS, the Compensation and Stock Option Committee of the Company (the
"Committee") deems it to be in the best interests of the Company that the Plan
be amended so as to permit accelerated vesting of options upon the retirement of
an employee with unvested options under the Plan; and
WHEREAS, the Committee is vested with the ability to amend the Plan
pursuant to Section 12 thereof.
NOW, THEREFORE, in accordance with the powers vested in the Committee under
the Plan, the Plan shall be amended as follows:
1. The first sentence of Section 5(f)(i) shall be restated in its entirety
as follows: "In the event that an Employee shall cease to be employed by the
Company for any reason other than death, Disability (as defined below),
Retirement (as defined below) or for cause (as defined below), the Employee or
personal representative shall have the right, subject to the provisions of
Section 5(b), 5(j) and 6 hereof, to exercise his or her Options at any time
within three (3) months after such cessation of employment but only as to such
number of Shares as to which his or her Options were vested and exercisable at
the date of such cessation of employment."
2. Section 5(f)(i) shall be amended by adding the following as new
subsection (D):
"(D) if cessation of employment occurs by reason of the Retirement (as
hereinafter defined) of the Employee, the Options granted to such Employee
shall continue to vest in accordance with their original vesting schedule
and Employee shall be entitled to exercise said Options as if the Employee
were still employed by the Company."
3. Section 5(f)(ii) shall be amended by replacing the term "Agreement"
throughout said section with the term "Plan".
4. Section 5(f) shall be amended by adding the following as a new
subsection 5(f)(iii):
""Retirement" for purposes of this Plan shall be defined as the voluntary
termination of employment by the Employee at any time after attaining age
62 and provided that said Employee has been continuously employed by the
Company for a period of not less than ten (10) years at the time of the
Employee's voluntary termination."
1
<PAGE> 3
5. A new Section 5(j) shall be added as follows:
(j) Non-Competition. In the event that an Employee is employed by,
receives compensation from or otherwise is associated with or has agreed in
principle to be employed by or to receive compensation from or otherwise be
associated as an officer, agent, director, employee, shareholder,
consultant, or otherwise with a Competitor (as hereinafter defined) of the
Company at any time prior to the expiration of the Options: (i) all
unexercised Options shall be forfeited and (ii) any Option Proceeds (as
hereinafter defined) shall be immediately due and payable by the Employee
to the Company. For purposes of this Section, "Competitor" shall be any
entity or person which engages for any portion of its business in the sale
of personal computer products to residents of the United States. For
purposes of this Section, "Option Proceeds" shall mean (i) the difference
between (A) the per share closing price of the Company's Common Stock as
reported on the Nasdaq Stock Market or such other reported value of the
Common Stock as shall be specified by the Committee at the date of exercise
and (B) the per share exercise price of the Option, multiplied by (ii) the
number of shares acquired pursuant to any exercise of Options issued under
this Plan which occurs after the date 24 months prior to the date of
termination of employment with the Company. The remedy provided by this
Section shall be in addition to and not in lieu of any rights or remedies
which Company may have against the Employee in respect of a breach by the
Employee of any duty or obligation to the Company.
6. The Amendment shall become effective as of the date set forth above.
IN WITNESS WHEREOF, the undersigned have executed this First Amendment
to the CDW Incentive Stock Option Plan as of this 23rd day of July, 1998, in
Vernon Hills, State of Illinois.
Signature Title
--------- -----
/s/ Michelle L. Collins Director and Member of Compensation
Michelle L. Collins and Stock Option Committee
/s/ Joseph Levy, Jr. Director and Member of Compensation
Joseph Levy, Jr. and Stock Option Committee
2
<PAGE> 1
EXHIBIT 10 (tt)
FIRST AMENDMENT TO 1996 INCENTIVE STOCK OPTION PLAN
DATED JULY 23, 1998
<PAGE> 2
FIRST AMENDMENT
TO
CDW 1996 INCENTIVE STOCK OPTION PLAN
This First Amendment to the CDW 1996 Incentive Stock Option Plan (this
"Amendment") is made as of this 23rd day of July, 1998.
W I T N E S S E T H:
WHEREAS, on the 14th day of November, 1996, CDW Computer Centers, Inc., an
Illinois corporation (the "Company"), adopted the CDW 1996 Incentive Stock
Option Plan pursuant to which the Company is authorized to grant stock options
to the Company's directors, officers, employees and consultants (the "Plan");
WHEREAS, the Compensation and Stock Option Committee of the Company (the
"Committee") deems it to be in the best interests of the Company that the Plan
be amended so as to clarify that the Plan may be used to grant stock options to
directors, officers, employees and consultants of the Company's subsidiaries and
affiliates and such other changes as reflected herein; and
WHEREAS, the Committee is vested with the ability to amend the Plan
pursuant to Section 12 thereof.
NOW, THEREFORE, in accordance with the powers vested in the Committee under
the Plan, the Plan shall be amended as follows:
7. Section 1(a) of the Plan shall be restated in its entirety as follows:
"The purpose of the CDW 1996 Incentive Stock Option Plan (the "Plan") as
hereinafter set forth, is to enable CDW Computer Centers, Inc., an Illinois
corporation (the "Company"), and its subsidiaries and affiliates, to attract,
retain and reward all directors, officers, employees and consultants by offering
them an opportunity to have a greater proprietary interest in and closer
identity with the Company and with its financial success and thereby encourage
such individuals to remain in the employ or service of the Company or to attract
to the Company people of exceptional experience and ability."
8. The first sentence of Section 3(a) of the Plan shall be restated in its
entirety as follows: "Options may be granted under this Plan to all directors,
officers, employees and consultants of the Company, its subsidiaries and/or its
affiliates (collectively, "Employees")."
9. The first sentence of Section 5(f)(i) shall be restated in its entirety
as follows: "In the event that an Employee shall cease to be employed by the
Company for any reason other than death, Disability (as defined below),
Retirement (as defined below) or for cause (as defined below), the Employee or
personal representative shall have the right, subject to the provisions of
Section 5(b), 5(j) and 6 hereof, to exercise his or her Options at any time
within three (3) months after such cessation of employment but only as to such
number of Shares as to which his or her Options were vested and exercisable at
the date of such cessation of employment."
1
<PAGE> 3
10. Section 5(f)(i) shall be amended by adding the following as new
subsection (D):
"(D) if cessation of employment occurs by reason of the Retirement (as
hereinafter defined) of the Employee, the Options granted to such Employee
shall continue to vest in accordance with their original vesting schedule
and Employee shall be entitled to exercise said Options as if the Employee
were still employed by the Company."
11. Section 5(f)(ii) shall be amended by replacing the term "Agreement"
throughout said section with the term "Plan".
12. Section 5(f) shall be amended by adding the following as a new
subsection 5(f)(iii):
""Retirement" for purposes of this Plan shall be defined as the voluntary
termination of employment by the Employee at any time after attaining age
62 and provided that said Employee has been continuously employed by the
Company for a period of not less than ten (10) years at the time of the
Employee's voluntary termination."
13. A new Section 5(j) shall be added as follows:
(j) Non-Competition. In the event that an Employee is employed by,
receives compensation from or otherwise is associated with or has agreed in
principle to be employed by or to receive compensation from or otherwise be
associated as an officer, agent, director, employee, shareholder,
consultant, or otherwise with a Competitor (as hereinafter defined) of the
Company at any time prior to the expiration of the Options: (i) all
unexercised Options shall be forfeited and (ii) any Option Proceeds (as
hereinafter defined) shall be immediately due and payable by the Employee
to the Company. For purposes of this Section, "Competitor" shall be any
entity or person which engages for any portion of its business in the sale
of personal computer products to residents of the United States. For
purposes of this Section, "Option Proceeds" shall mean (i) the difference
between (A) the per share closing price of the Company's Common Stock as
reported on the Nasdaq Stock Market or such other reported value of the
Common Stock as shall be specified by the Committee at the date of exercise
and (B) the per share exercise price of the Option, multiplied by (ii) the
number of shares acquired pursuant to any exercise of Options issued under
this Plan which occurs after the date 24 months prior to the date of
termination of employment with the Company. The remedy provided by this
Section shall be in addition to and not in lieu of any rights or remedies
which Company may have against the Employee in respect of a breach by the
Employee of any duty or obligation to the Company.
14. The Amendment shall become effective as of the date set forth above.
IN WITNESS WHEREOF, the undersigned have executed this First Amendment to
the CDW 1996 Incentive Stock Option Plan as of this 23rd day of July, 1998, in
Vernon Hills, State of Illinois.
Signature Title
--------- -----
/s/ Michelle L. Collins Director and Member of Compensation
Michelle L. Collins and Stock Option Committee
/s/ Joseph Levy, Jr. Director and Member of Compensation
Joseph Levy, Jr. and Stock Option Committee
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
dated December 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,230
<SECURITIES> 66,458
<RECEIVABLES> 152,308
<ALLOWANCES> 3,185
<INVENTORY> 64,392
<CURRENT-ASSETS> 299,788
<PP&E> 44,978
<DEPRECIATION> 8,650
<TOTAL-ASSETS> 341,821
<CURRENT-LIABILITIES> 71,085
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 270,547
<TOTAL-LIABILITY-AND-EQUITY> 341,821
<SALES> 1,733,489
<TOTAL-REVENUES> 1,733,489
<CGS> 1,513,314
<TOTAL-COSTS> 1,513,314
<OTHER-EXPENSES> 115,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 109,011
<INCOME-TAX> 43,170
<INCOME-CONTINUING> 65,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,841
<EPS-PRIMARY> 3.06
<EPS-DILUTED> 3.03
</TABLE>
