CDW 2003 Annual Report Download - page 28

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Sales returns and pricing disputes. At the time of sale, we record an estimate for sales returns and pricing
disputes based on historical experience. If actual sales returns and pricing disputes are greater than estimated by
management, additional expense may be incurred.
Net realizable value of inventories. Inventory is valued at the lower of cost or market value. We decrease
the value of inventory for estimated obsolescence equal to the difference between the cost of inventory and the
estimated market value, based upon an aging analysis of the inventory on hand, specifically known inventory-
related risks, and assumptions about future demand and market conditions. If future demand or actual market
conditions are less favorable than those projected by management, additional inventory write-downs may be
required.
Vendor transactions. We receive incentives from vendors related to cooperative advertising allowances,
rebates, 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.
Loss contingencies. We accrue for contingent obligations when a loss is probable and the amount can be
reasonably estimated. As facts concerning contingencies become known, we reassess our position and make
appropriate adjustments to the financial statements.
Intangible assets. We purchased intangible assets, such as customer lists, in connection with the Micro
Warehouse transactions described below. These intangible assets have finite lives, and are amortized using the
straight-line method over the estimated economic lives, generally seven years.
During September 2003, we purchased selected U.S. assets and the Canadian operations of Micro
Warehouse, a reseller of computers, software and peripheral products. The U.S. transaction, completed on
September 9, 2003, was accounted for as a purchase of assets, with the $20.0 million purchase price allocated to
the assets purchased, including inventory, fixed assets, and customer lists, based upon their fair values at the
date of purchase. Subsequent to the completion of the U.S. transaction, sales made by former members of the
Micro Warehouse U.S. sales force who joined CDW in conjunction with this transaction, along with the associated
costs, are included in the accompanying consolidated financial statements. The Canadian transaction, completed
on September 23, 2003, was accounted for as the purchase of a business and, accordingly, the results of
operations of the acquired business subsequent to the date of purchase are included in the accompanying
consolidated financial statements, and the assumed assets and liabilities were recorded based upon their fair
values at the date of purchase. The Canadian operations were purchased for $2.7 million.
Total recorded transaction and integration expenses associated with these transactions were $22.3 million, with
$8.0 million recorded in the third quarter of 2003 and $14.3 million recorded in the fourth quarter of 2003. These
expenses are primarily comprised of severance and outplacement costs, payroll expenses for former Micro
Warehouse employees performing transition services, customer satisfaction expenses, customer communications
and advertising expenses, legal and accounting advisory fees and a reserve established for the equipment in a
Wilmington, Ohio distribution center leased by Micro Warehouse. These expenses are included in cost of sales
($0.3 million), selling and administrative expenses ($20.2 million), net advertising expenses ($1.5 million) and
other expense ($0.3 million) in the Consolidated Statements of Income.