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CDW.com • 800.800.4239
Annual Report 2003
Service
Speed
Customer
Satisfaction

Table of contents

  • Page 1
    Service Speed Customer Satisfaction CDW.com • 800.800.4239 Annual Report 2003

  • Page 2
    ... customers. Every day brings a new opportunity for us to earn our customers' trust. Behind the scenes at CDW, an intricate array of streamlined processes, systems, and people delivers the best customer service in the industry-a distinction we've been perfecting since the company was founded...

  • Page 3

  • Page 4
    ... customer experience. It provides a step-by-step overview of CDW's ability to provide superior value from the moment the customer asks for our help to the moment the order is delivered-often within a 24-hour turnaround time-and beyond. It's a demonstration of our uncompromising commitment to service...

  • Page 5
    ... selection of products and brands. At CDW, we: • Cater to each customer's unique requirements-whether it's a government agency, an educational institution, a Fortune 1000 company, or a small business deciding how best to deploy its IT budget-to ensure they get the right technology, right away...

  • Page 6
    ... our account managers are knowledgeable about our entire range of brand-name products, our specialists are experts on specific technologies and product categories, such as mobile/wireless, security, storage, networking, power, telephony, bandwidth, software licensing, and technology services. They...

  • Page 7
    ...any time, the distribution center would immediately notify the account manager, who would then advise the customer. Technology and dedication fuel our operational excellence. Meanwhile, the operations team in CDW's 450,000-square-foot distribution center is processing Chris' order. Coworkers select...

  • Page 8
    ...power cords were delivered on time and exactly as ordered, with each software program loaded and the wireless connections working perfectly. Her phone rings-it's Mark, making sure that everything has arrived as scheduled. As they chat, they make plans to discuss data storage options and a technology...

  • Page 9
    ... sales force as well as our in-person, outside sales force. We now have approximately 90 field sales representatives across the country calling on high-potential corporate and public sector customers. In addition, we revamped our entire sales training program to better prepare new account managers...

  • Page 10
    ... grow revenue profitably. John A. Edwardson Chairman and Chief Executive Officer after three years as your CEO, that no team in our industry can do it better than this team. You, our shareholders, will continue to win only if we continue to focus on our coworkers and customers first. CDW 2003 18...

  • Page 11
    ... share data) 2003 Operating Results Net sales Income from operations Net income GAAP* $4,665 $ 284 $ 175 2003 2002 2001 GAAP* $3,962 $ 268 $ 169 Non-GAAP** GAAP* N/A*** $ 306 $ 189 $ 4,265 $ 298 $ 185 Recognition • No. 381 on the FORTUNE® 500 • NASDAQ -100 Index • No. 11 - 100 Best Companies...

  • Page 12
    ... file number 0-21796 CDW Corporation (Exact name of registrant as specified in its charter) Illinois (State or other jurisdiction of incorporation or organization) 200 N. Milwaukee Ave. Vernon Hills, Illinois (Address of principal executive offices) 36-3310735 (I.R.S. Employer Identification...

  • Page 13
    .... Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Principal Accounting Fees and Services PART IV Item 15. Exhibits, Financial Statement Schedule and Reports on Form...

  • Page 14
    ... direct marketer of multi-brand computers and related technology products and services in the United States. The Company was founded in 1984 and reincorporated in 1995 in Illinois. In May 2003, our shareholders approved changing the name of the Company to CDW Corporation from CDW Computer Centers...

  • Page 15
    ... system. Customers also benefit from specialty sales support teams that have in-depth knowledge of and experience with complex technology products and applications, such as network solutions, storage applications and software licenses. Custom Configuration. We offer custom configuration services...

  • Page 16
    ... our coworkers include short-term incentive programs, stock-based compensation and an on-site childcare and fitness center facility at our Vernon Hills, Illinois headquarters. Product Offering We sell multi-brand computers and related technology products, including hardware and peripherals, software...

  • Page 17
    .... Our Web sites include many advanced features to attract new customers and produce sales, including more than 80,000 computer products to search and order online, advanced search capabilities, product specifications, and information on product availability and pricing. During 2003 and 2002...

  • Page 18
    ... maximize gross profit and customer satisfaction. Each catalog and advertisement distributed by the Company bears a toll-free number and Web site address to be used by customers in contacting CDW to place a product order. Telephone calls are answered by account managers who utilize on-line computer...

  • Page 19
    ... magazine as one of the "100 Best Places to Work in America" for the sixth consecutive year. For the second consecutive year, we were the highest ranked FORTUNE 500 company on this list. Our Vernon Hills facility offers an on-site childcare and fitness center, on-site dry cleaning, private rooms for...

  • Page 20
    ...customers an opportunity to examine products prior to purchase, meet face-to-face with our sales or technical coworkers and pick up products they have ordered over the phone or online. One of these centers is located at our main facility in Vernon Hills, Illinois, and the other is located in Chicago...

  • Page 21
    ... return privileges, price protection policies, purchase discounts and vendor incentive programs including purchase rebates, sales volume rebates and cooperative advertising reimbursements. From time to time, vendors may terminate our right to sell some or all of their products or change these terms...

  • Page 22
    ... technological changes that affect the market and pricing for the products we sell. We seek to minimize our inventory exposure through a variety of inventory management procedures and policies, including our rapid-turn inventory model, as well as vendor price protection and product return programs...

  • Page 23
    ...to customers. A natural disaster or other adverse occurrence at our primary facility could damage our business. We operate our business from a primary facility in Vernon Hills, Illinois. Although we have multiple sales office locations, substantially all of our corporate, warehouse and distribution...

  • Page 24
    ...supply and price of products and components and ultimately, our results of operations. Item 2. Properties. We own our primary location and headquarters in Vernon Hills, Illinois, which includes our warehouse and distribution center, a Business Technology Center and corporate offices. The facility...

  • Page 25
    ... these facilities only on a short-term basis we are evaluating our future needs and expect to move into new locations during 2004. Item 3. Legal Proceedings. The Company is not currently party to any material legal proceedings. On September 9, 2003, CDW completed the purchase of certain assets of...

  • Page 26
    ...per share. (2) Commercial customers is defined as public sector and corporate customers excluding consumers. (3) Annualized inventory turnover and accounts receivable - days sales outstanding for 2003 were impacted by the Micro Warehouse transactions in September 2003. For the fourth quarter of 2003...

  • Page 27
    ...combined corporate office and distribution center located in Vernon Hills, Illinois, and sales offices in Illinois, Virginia, Connecticut, New Jersey, and Toronto, Canada. Additionally, we market and sell products through CDW.com, CDWG.com and macwarehouse.com, our Web sites. For financial reporting...

  • Page 28
    ..., price protection and other programs. These incentives generally relate to agreements with the vendors and are recorded as adjustments to gross margin or net advertising expense, as appropriate. If market conditions were to deteriorate, vendors may change the terms of some or all of these programs...

  • Page 29
    ... Statistics Number of invoices processed Average invoice size Commercial customers served (1) % of sales to commercial customers Sales force, end of period Annualized inventory turnover (2) Accounts receivable - days sales outstanding (2) Direct web sales (000's) Years Ended December 31, 2003 2002...

  • Page 30
    ...changes in individual product categorization. Analysis of Product Mix Notebook computers and accessories Desktop computers and servers Subtotal computer products Software Data storage devices Printers NetComm products Video Add-on boards/memory Input devices Other Total Years Ended December 31, 2003...

  • Page 31
    .... Our sales force consists of account managers (including field sales representatives) as well as product category specialists who provide consultation in areas requiring technical or specialized product expertise such as networking, security, data storage, and volume software licensing. 18

  • Page 32
    ..., customer satisfaction expenses, and legal and accounting advisory fees. The remaining $5.0 million relates to a reserve established for the equipment in a Wilmington, Ohio distribution center leased by Micro Warehouse. In September 2003, in conjunction with our purchase of selected U.S. assets...

  • Page 33
    ... 13.2% in 2002, compared with 13.3% in 2001. The gross profit margin depends on various factors, including vendor inventory price protection and rebate programs, product mix, including third party services, pricing strategies, market conditions and other factors. Selling and administrative expenses...

  • Page 34
    ... other quarters due to the buying patterns of federal government and education customers. If sales to public sector customers continue to increase as a percentage of overall sales, the Company as a whole may experience increased seasonality in future periods. Liquidity and Capital Resources Working...

  • Page 35
    ...of record on September 12, 2003. In future years, we plan to announce any dividend following the annual shareholders meeting, typically held in May. We currently have one distribution center, located with our corporate headquarters, in Vernon Hills, Illinois. The capacity of this distribution center...

  • Page 36
    ... with the Employee Stock Purchase Plan, and $37.0 million of book overdrafts at December 31, 2003. In May 2003, Gregory C. Zeman, former director and vice chairman of the Company, and Daniel B. Kass, former director and executive vice president of the Company, sold a total of 1,108,864 shares of...

  • Page 37
    ... of cost of sales during the year ended December 31, 2003. Adopting EITF 02-16 had no impact on our operating profit, as the $62.7 million of vendor consideration recorded as a reduction of cost of sales would previously have been recorded as a reduction of advertising expense ($60.9 million...

  • Page 38
    ... Risk. The Company's investments in marketable securities as of December 31, 2003 all mature before December 31, 2005 and are concentrated in U.S. Government and Government agency securities, municipal bonds and corporate fixed income securities. As such, the risk of significant changes in the...

  • Page 39
    ...and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Management's Responsibility for Financial Statements Report of Independent Auditors Consolidated Balance Sheets as of December 31, 2003 and 2002 Consolidated Statements of Income for the years ended December 31, 2003, 2002 and...

  • Page 40
    ...'s Business Process Assurance director, both privately and with management present, to review accounting, auditing, internal control and financial reporting matters. /s/ John A. Edwardson John A. Edwardson Chairman and Chief Executive Officer /s/ Barbara A. Klein Barbara A. Klein Senior Vice...

  • Page 41
    ...the financial position of CDW Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of...

  • Page 42
    CDW CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) December 31, 2003 Assets Current assets: Cash and cash equivalents Marketable securities Accounts receivable, net of allowance for doubtful accounts of $10,057 and $10,500, respectively Merchandise inventory Miscellaneous ...

  • Page 43
    CDW CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) 2003 Net sales Cost of sales Gross profit Selling and administrative expenses Net advertising expense Income from operations Interest income Other expense, net Income before income taxes Income ...

  • Page 44
    CDW CORPORATION AND SUBSIDIARIES ...compensation Exercise of stock options Issuance of common stock in connection with Employee Stock Purchase Plan Tax benefit from stock option and restricted stock transactions Purchase of treasury shares Cash dividends Net income Net unrealized (losses) on marketable...

  • Page 45
    ... operations of Micro Warehouse Consolidation of joint venture Net cash used in investing activities Cash flows from financing activities: Purchase of treasury shares Proceeds from exercise of stock options Issuance of common stock in connection with Employee Stock Purchase Plan Dividends paid Change...

  • Page 46
    ..."CDW" or the "Company") is a leading direct marketer of multi-brand computers and related technology products and services in the United States. Our primary business is conducted from a combined corporate office and distribution center located in Vernon Hills, Illinois, and sales offices in Illinois...

  • Page 47
    ..., price protection and other programs. These incentives generally relate to agreements with the vendors and are recorded as adjustments to gross margin or net advertising expense, as appropriate. If market conditions were to deteriorate, vendors may change the terms of some or all of these programs...

  • Page 48
    ... and equipment Building and leasehold improvements Computer and data processing equipment Computer software Furniture and fixtures Revenue Recognition We record revenues from sales transactions when both risk of loss and title to products sold pass to the customer. Our shipping terms dictate...

  • Page 49
    ...") Issue No. 02-16, "Accounting for Consideration Received from a Vendor by a Customer (Including a Reseller of the Vendor's Products)" ("EITF 02-16") on January 1, 2003. Stock-Based Compensation At December 31, 2003, we had several stock-based employee compensation plans, which are described more...

  • Page 50
    ... from a Vendor by a Customer (Including a Reseller of the Vendor's Products)" ("EITF 02-16") became effective for the Company on January 1, 2003. EITF 02-16 requires that consideration received from vendors, such as advertising support funds, be accounted for as a reduction to cost of sales when...

  • Page 51
    ... and 2002 were (in thousands): Gross Unrealized Holding Gains Losses Security Type December 31, 2003 Available-for-sale: Municipal bonds Total available-for-sale Held-to-maturity: U.S. Government and Government agency securities Municipal securities Corporate fixed income securities Total held-to...

  • Page 52
    ...): December 31, Land Machinery and equipment Building and leasehold improvements Computer and data processing equipment Computer software Furniture and fixtures Construction in progress Total property and equipment Less accumulated depreciation Net property and equipment $ 2003 10,367 35,395 31,836...

  • Page 53
    ... obligated under various operating lease agreements, for sales office facilities that generally provide for minimum rent payments and a proportionate share of operating expenses and property taxes and include certain renewal and expansion options. For the years ended December 31, 2003, 2002 and 2001...

  • Page 54
    ..., $69.5 million and $58.1 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...

  • Page 55
    ... tax asset relating to employee stock plans results primarily from the 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. The net operating loss in Canada of $77...

  • Page 56
    ...206 For the years ended December 31, 2003, 2002 and 2001, the weighted-average fair value of options granted was as follows: 2003 23.74 11.75 2002 30.82 2001 20.51 53.70 Exercise price equals market price at time of grant Exercise price is less than market price at time of grant $ $ $ $ $ $ 43

  • Page 57
    ... value of stock options, reported net income and earnings per share would have been reduced as follows (in thousands, except per share amounts): 2003 $ 175,186 2002 $ 185,249 2001 $ 168,686 Net income, as reported Add stock-based employee compensation expense included in reported net income, net...

  • Page 58
    ... Option Plan pursuant to which he granted non-forfeitable options to certain officers to purchase 16,573,500 shares of common stock owned by him at an exercise price of $.004175 per share. Options were exercised as follows: Transaction Year 1994 1995 1997 1998 1999 2000 2001 2002 2003 Total Number...

  • Page 59
    ... first day of the quarterly offering period for each calendar year) or 325 shares per quarter. No compensation expense is recorded in connection with the plan. The total number of shares issuable under the ESPP is 500,000. Under the ESPP, we issued 78,318 and 20,300 shares to coworkers in 2003 and...

  • Page 60
    ...number of options (in 000's) Weighted-average exercise price 13. Profit Sharing and 401(k) Plan We have a profit sharing plan that includes a salary reduction feature established under the Internal Revenue Code Section 401(k) covering substantially all employees. Company contributions to the profit...

  • Page 61
    ... of the equipment to CDW. 17. Segment Information We are engaged in the sale of multi-brand computers and related technology products and services, primarily through direct marketing activities. We have two operating segments: corporate, which is primarily comprised of business customers, but also...

  • Page 62
    ...of our segments based on both sales and operating income. Our corporate segment provides purchasing, merchandising, financial, information technology, marketing, distribution and fulfillment services to the public sector segment. Certain elements of gross margin and operating expenses are subject to...

  • Page 63
    .... No single customer accounted for more than 1% of net sales in fiscal years 2003, 2002 or 2001. Approximately 1% of our revenues are comprised of sales to customers outside of the continental United States. Sales and operating expenses relating to our investment in CDW-L, accounted for under the...

  • Page 64
    ..., then an executive vice president and a director of the Company, sold a total of 10,562,500 shares of common stock through a secondary public offering at a price of $40.00 per share. We did not receive any proceeds from the sale of their shares and the number of outstanding common shares was not...

  • Page 65
    20. Selected Quarterly Financial Data (Unaudited) The following information is for the years ended December 31, 2003 and 2002 (in thousands, except per share data): First Quarter December 31, 2003 Net sales Gross profit Income before income taxes Net income Earnings per share: Basic Diluted December...

  • Page 66
    ... over financial reporting that occurred during the Company's fiscal quarter ended December 31, 2003 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. (b) PART III Item 10. Directors and Executive Officers of the...

  • Page 67
    ..., incorporated by reference from the exhibits filed with the Company's Quarterly Report (000-21796) on Form 10-Q for the quarter ended June 30, 2003. Specimen of common stock certificate. CDW Computer Centers, Inc. Employees' Defined Contribution Retirement Plan and Trust, incorporated by reference...

  • Page 68
    ...IJM Management Limited Partnership, as agent for the owner, as lessor, relating to the premises located in Chicago, Illinois, incorporated by reference from the exhibits filed with the Company's Quarterly Report (000-21796) on Form 10-Q for the quarter ended June 30, 1995. Non-statutory Stock Option...

  • Page 69
    ... 10-Q for the quarter ended September 30, 2001. CDW Compensation Protection Plan adopted as of December 10, 2002, applicable to the Company's executive officers, incorporated by reference from the exhibits filed with the Company's Annual Report (000-21796) on Form 10-K for the year ended December 31...

  • Page 70
    ... of Chief Financial Officer Pursuant to 18 U.S.C. 1350 * Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: (i) We filed a Current Report on Form 8-K on October 22, 2003 furnishing a Press Release announcing our third quarter 2003 earnings under item...

  • Page 71
    .... Signature /s/ John A. Edwardson John A. Edwardson /s/ Barbara A. Klein Barbara A. Klein Title Chairman of the Board and Chief Executive Officer Senior Vice President and Chief Financial Officer (principal financial officer) Vice-President and Controller (principal accounting officer) Director Date...

  • Page 72
    ... statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chicago, Illinois January 16, 2004, except for Note 15, as to...

  • Page 73
    CDW CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2003, 2002 and 2001 (in thousands) Column A Column B Balance at Beginning of Period Column C Charged to Costs and Expenses Charged to Other Accounts Column D Column E Balance at End of Period Description ...

  • Page 74
    ... CDW Canada, Inc. CDW Capital Corporation CDW Corporation CDW Direct, LLC CDW Government, Inc. CDW ISFC, LLC CDW Logistics, Inc. CDW SAC, Inc. CDW Select, Inc. CDW Technology Services, Inc. Jurisdiction of Incorporation New Brunswick Illinois Delaware Illinois Illinois Delaware Illinois Illinois...

  • Page 75
    ... of CDW Corporation of our reports dated January 16, 2004, except for Note 15, as to which the date is February 12, 2004 relating to the financial statements and financial statement schedule, which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chicago, Illinois...

  • Page 76
    ... financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b. /s/ John A. Edwardson John A. Edwardson Chairman and Chief Executive Officer CDW Corporation...

  • Page 77
    ... information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b. /s/ Barbara A. Klein Barbara A. Klein Senior Vice President and Chief Financial Officer CDW Corporation...

  • Page 78
    ... 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, John A. Edwardson, the chief executive officer of CDW Corporation ("CDW"), certify that (i) the Annual Report on Form 10-K for the year ended December 31, 2003 (the "10-K") of CDW fully complies with the requirements of Section 13(a) or 15...

  • Page 79
    ...1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, Barbara A. Klein, the chief financial officer of CDW Corporation, ("CDW"), certify that (i) the Annual Report on Form 10-K for the year ended December 31, 2003 (the "10-K") of CDW fully complies with the requirements of Section 13(a) or 15...

  • Page 80
    ... and Chief Executive Officer Element 79 Partners Oren J. Hartman Vice President - National Sales and Services General Manager, CDW Canada Inc. (1) Member of the Audit Committee (2) Member of the Compensation and Stock Option Committee (3) Member of the Corporate Governance Committee (4) Member of...

  • Page 81
    ...Office 200 North Milwaukee Avenue Vernon Hills, Illinois 60061 (847) 465-6000 Independent Accountants PricewaterhouseCoopers LLP Chicago, Illinois Transfer Agent and Registrar American Stock Transfer & Trust Company 59 Maiden Lane New York, New York 10038 (800) 937-5449 (212) 936-5100 Annual Meeting...