1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number: 0-25092
INSIGHT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0766246
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6820 SOUTH HARL AVENUE, TEMPE, ARIZONA 85283
(Address of principal executive offices)
(602) 902-1001
(Registrant's telephone number, including Area Code)
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 the number of shares outstanding of each of issuer's class of common
stock as the latest practicable date:
CLASS: COMMON STOCK OUTSTANDING SHARES AT FEBRUARY 10, 1997: 6,738,582
- ---------------------- ----------------------------------------------------
2
INSIGHT ENTERPRISES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 1996 and December 31, 1996................................... 3
Condensed Consolidated Statements of Earnings -
Three and Six Months Ended December 31, 1995 and 1996................. 4
Condensed Consolidated Statements of Cash Flows -
Six Months ended December 31, 1995 and 1996........................... 5
Notes to Condensed Consolidated Financial Statements.................. 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 8-13
PART II - OTHER INFORMATION.............................................. 14-15
SIGNATURE................................................................ 16
2
3
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1996 1996
-------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,300 $ 21,166
Accounts receivable, net 41,798 47,772
Inventories 16,104 27,530
Prepaid expenses 1,959 2,587
Deferred income taxes 1,239 1,831
-------- --------
Total current assets 66,400 100,886
Property and equipment, net 6,660 13,466
Other assets 558 113
-------- --------
$ 73,618 $114,465
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,667 $ 27,938
Accrued expenses 1,290 1,492
Customer refunds payable 291 288
Deferred revenue 585 806
-------- --------
Total current liabilities 31,833 30,524
Line of credit -- --
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
5,396,754 at June 30, 1996 and 6,726,582 at
December 31, 1996 shares issued and outstanding 54 67
Paid-in capital 29,426 67,400
Retained earnings 12,305 16,474
-------- --------
Total stockholders' equity 41,785 83,941
-------- --------
$ 73,618 $114,465
======== ========
See accompanying notes to condensed consolidated financial statements.
3
4
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -------------------
1995 1996 1995 1996
------- --------- -------- ---------
Net sales $76,431 $ 112,931 $147,208 $ 215,314
Costs of goods sold 65,395 97,909 126,134 186,343
------- --------- -------- ---------
Gross profit 11,036 15,022 21,074 28,971
Selling, general and administrative expenses 8,942 11,482 17,081 22,401
------- --------- -------- ---------
Earnings from operations 2,094 3,540 3,993 6,570
Non-operating expense (income), net 55 (285) 134 (330)
------- --------- -------- ---------
Earnings before income taxes 2,039 3,825 3,859 6,900
Income tax expense 807 1,514 1,528 2,731
------- --------- -------- ---------
Net earnings $ 1,232 $ 2,311 $ 2,331 $ 4,169
======= ========= ======== =========
Net earnings per share $ 0.24 $ 0.35 $ 0.47 $ 0.67
======= ========= ======== =========
Shares used in net earnings per
share calculation 5,202 6,603 4,923 6,213
======= ========= ======== =========
See accompanying notes to condensed consolidated financial statements.
4
5
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
1995 1996
-------- --------
Cash flows from operating activities:
Net earnings $ 2,331 $ 4,169
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation 456 594
Tax effect of stock options -- 103
Provision for losses on accounts receivable 522 1,021
Provision for obsolete and slow-moving inventories 117 243
Deferred income tax benefit (142) (592)
Change in assets and liabilities:
Increase in accounts receivable (14,078) (6,995)
Increase in inventories (13,330) (11,669)
Decrease (increase) in prepaid expenses 344 (628)
Decrease (increase) in other assets (737) 445
Increase (decrease) in accounts payable 14,848 (1,729)
Increase (decrease) in accrued expenses (107) 202
Decrease in customer refunds payable (63) (3)
Increase in deferred revenue 24 221
-------- --------
Net cash used in operating activities (9,815) (14,618)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,904) (7,400)
-------- --------
Net cash used in investing activities (2,904) (7,400)
-------- --------
Cash flows from financing activities:
Net repayments on line of credit (6,541) --
Issuance of common stock 16,654 37,884
-------- --------
Net cash provided by financing activities 10,113 37,884
-------- --------
Increase (decrease) in cash and cash equivalents (2,606) 15,866
Cash and cash equivalents at beginning of period 7,574 5,300
-------- --------
Cash and cash equivalents at end of period $ 4,968 $ 21,166
======== ========
See accompanying notes to condensed consolidated financial statements.
5
6
INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Insight Enterprises, Inc. and subsidiaries ("INSIGHT" or the "Company")
is a direct marketer of computers, hardware and software. INSIGHT markets a
comprehensive line of brand-name products to price-conscious, computer literate
end-users in the business, education, government and home markets throughout the
United States and Canada primarily through outbound telemarketing and its own
distinctive catalogs and advertisements in computer industry publications.
Additionally, Insight provides direct marketing services to manufacturers
seeking to outsource their direct marketing activities. The services provided
include marketing, sales and distribution.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The condensed consolidated financial statements include the accounts of
Insight Enterprises, Inc. and its wholly-owned subsidiaries: Insight Direct,
Inc., Direct Alliance Corporation and ITA, Inc. Intercompany accounts and
transactions have been eliminated in consolidation.
Certain amounts in the condensed consolidated financial statements have
been reclassified to conform to the current presentation.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosure normally required by
generally accepted accounting principles. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring accruals, necessary to present
fairly the financial position of INSIGHT as of June 30, 1996 and December 31,
1996, the results of operations for the three and six months ended December 31,
1995 and 1996, and the cash flows for the six months ended December 31, 1995
and 1996. The results of operations for such interim periods are not
necessarily indicative of results for the full year. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements, including the related notes thereto, in INSIGHT's Annual
Report on Form 10-K for the year ended June 30, 1996.
Advertising Expense
Costs of direct-response advertising are capitalized and amortized over
the expected revenue stream, generally three months, while other advertising
costs are expensed as incurred. All advertising costs are recorded net of
related cooperative marketing reimbursements. Direct response advertising
consists primarily of costs incurred to develop and distribute catalogs and
magazine advertisements. At June 30, 1996 net advertising costs of $143,000 were
deferred and are included in other assets. At December 31, 1996, no net
advertising costs have been deferred or included in other assets.
6
7
INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123"). SFAS 123 requires that companies can elect to
account for stock-based compensation plans using a method based upon fair value
or continue measuring compensation expense for those plans using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). Companies electing to
continue using the intrinsic value method must make pro forma disclosures for
fiscal 1997 of net earnings and earnings per share as if the fair value based
method had been applied. The Company will continue using APB 25; therefore, SFAS
123 is not expected to have an impact on the Company's results of operations or
financial position.
3. LINE OF CREDIT
INSIGHT has a $30,000,000 credit facility with a finance company. The
agreement provides for cash advances outstanding at any one time up to a maximum
of $22,500,000 on the line of credit, subject to limitations based upon the
Company's eligible accounts receivable and inventories. As of December 31, 1996,
$22,500,000 was available under the line of credit. Cash advances under the line
of credit bear interest at the London Interbank Offered Rate (LIBOR) plus 1.90%
(7.71% at December 31, 1996) payable monthly. The additional $7,500,000 of the
credit facility is used to facilitate the purchases of inventories from certain
vendors and is classified on the balance sheet as accounts payable. At December
31, 1996, the outstanding balance of this additional portion of the credit
facility was $4,730,000. The credit facility expires in June 1998. The credit
facility is secured by substantially all of the assets of INSIGHT. The credit
facility contains various covenants including the requirement that INSIGHT
maintain a specified dollar amount of tangible net worth.
4. INCOME TAXES
Income tax expense as provided for the three and six months ended
December 31, 1995 and 1996 is based upon the estimated annual income tax rate
of the Company.
5. NET EARNINGS PER SHARE
Net earnings per share for the three months ended December 31, 1995 and
1996 are calculated using 4,914,249 and 6,163,512, respectively, of weighted
average shares of common stock and 287,765 and 439,059, respectively, of common
stock equivalents outstanding during the period. Net earnings per share for the
six months ended December 31, 1995 and 1996 are calculated using 4,602,726 and
5,783,848, respectively, of weighted average shares of common stock and 320,582
and 428,871, respectively, of common stock equivalents outstanding during the
period. The common stock equivalent shares relate to the Company's stock options
and warrants and are calculated using the treasury stock method.
7
8
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Conditions and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including those set forth under "Certain Factors
Affecting the Company's Operations" in the Company's Annual Report on Form 10-K
for the year ended June 30, 1996 and under "Risk Factors" in the Company's
Prospectus filed on November 1, 1996 with the Securities and Exchanges
Commission. These factors include the following: changes in the personal
computer industry, especially competitive pressures changing price margins, and
inventory risks due to technological developments or shifts in market demand;
the Company's possible inability to obtain new outsourcing agreements and the
effect on the Company's rate of net sales growth caused by the changing mix of
type of outsourcing agreements (as herein after described); and the changes in
costs, especially paper prices, of the Company catalogs and advertising.
OVERVIEW
The Company commenced operations in 1988 as a direct marketer of hard
disk drives and other mass storage products. In fiscal 1991, the Company began
marketing its own Insight-brand microcomputers and in fiscal 1992 and 1993 added
peripherals, software and other name brand computers to its product line.
Through fiscal 1992, the Company based its marketing practices primarily on
advertising in computer magazines and the use of inbound toll-free
telemarketing. In fiscal 1993, the Company shifted its marketing strategy to
include the publication of proprietary catalogs and the use of outbound account
executives focused on the business, education and government markets. During
fiscal 1995, the Company began to de-emphasize the sale of Insight-branded
computers and discontinued the sale of Insight-branded computers in the second
quarter of fiscal 1996. Although the cost savings from this decision have
positively impacted earnings from operations, gross margin has been negatively
affected.
In fiscal 1996, Insight increased its focus on the business, education
and government markets, which aggregated approximately 80% of its business in
the fourth quarter of fiscal 1996. During fiscal 1996, the Company doubled its
catalog circulation to generate leads and aggressively test new lists. The
Company expects the rate of growth in catalog circulation to decrease in the
future as the Company, using information generated from such testing, targets
mailings to its best prospective customers and increases its focus on
penetrating existing accounts. To that end, the Company has recently hired a
number of senior sales managers and account executives, and plans to continue to
actively increase its account executive base for the foreseeable future.
In order to leverage its infrastructure, the Company, in fiscal 1992,
began outsourcing direct marketing services to third parties, including the
distribution of catalogs and mailings featuring name brand or Insight-brand
products. The Company initiated its turnkey direct marketing outsourcing program
for leading manufacturers in fiscal 1993. Under most of the Company's
outsourcing arrangements, the Company takes title to inventories of products and
assumes the risk of collection of accounts receivable in addition to its sales
functions. Revenues derived from the sales of such products are included in the
Company's net sales. Certain other outsourcing arrangements are primarily
service-based, and the Company generally derives net sales from these types of
arrangements based on a percentage of the revenue generated from products sold.
Accordingly, the rate of the Company's net sales growth in future periods may be
affected by the mix of outsourcing arrangements which are in place from time to
time. Outsourcing represented 12.2% and 9.8% of the Company's sales in fiscal
1995 and fiscal 1996, respectively.
8
9
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Generally, pricing in the computer and related products industry is
very aggressive. The Company expects pricing pressures to continue and that it
will be required to reduce its prices to remain competitive. Such a reduction
could have a material adverse effect on the Company's financial condition and
results of operations.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated certain
financial data as a percentage of net sales:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1995 1996 1995 1996
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Costs of goods sold 85.6 86.7 85.7 86.5
------ ------ ------ ------
Gross profit 14.4 13.3 14.3 13.5
Selling, general and administrative
expenses 11.7 10.2 11.6 10.4
------ ------ ------ ------
Earnings from operations 2.7 3.1 2.7 3.1
Non-operating expense (income), net 0.1 (0.3) 0.1 (0.1)
------ ------ ------ ------
Earnings before income taxes 2.6 3.4 2.6 3.2
Income tax expense 1.0 1.4 1.0 1.3
------ ------ ------ ------
Net earnings 1.6% 2.0% 1.6% 1.9%
====== ====== ====== ======
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1995
Net Sales. Net sales increased $36.5 million, or 47.8%, to $112.9
million in the second quarter of fiscal 1997 from $76.4 million in the second
quarter of fiscal 1996. The Company's net sales are comprised of two components:
direct marketing sales and sales from outsourcing arrangements with
manufacturers. Sales derived from direct marketing increased $35.7 million, or
51.7%, to $104.7 million in the second quarter of fiscal 1997 from $69.0 million
in the second quarter of fiscal 1996. The increase in direct marketing sales
resulted primarily from increased demand for notebook computers, the continued
shift to business customers (including education and government entities) and
the corresponding increase in average order size of 25.4 % to $888 in the second
quarter of fiscal 1997 compared to $708 in the second quarter of fiscal 1996 as
well as the continued building of the Company's customer base. The sales
increase occurred despite a decrease in the "Insight" catalog circulation from
3.6 million in the second quarter of fiscal 1996 to 3.2 million in the second
quarter of fiscal 1997. The Company is refining its circulation strategy with
the goal of more efficiently targeting its business customer audience and
improving the profitability and return on investment of its marketing
activities. Sales derived from outsourcing arrangements increased $0.8 million,
or 11.3%, to $8.2 million in the second quarter of fiscal 1997 from $7.4 million
in the second quarter of fiscal 1996. The increase in sales from outsourcing
services resulted from the addition of outsourcing contracts, from a year ago,
with manufacturers and despite a decrease in sales from outsourcing arrangements
that were operational a year ago.
9
10
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 (CONTINUED)
Gross Profit. Gross profit increased $4.0 million, or 36.1%, to $15.0
million in the second quarter of fiscal 1997 from $11.0 million in the second
quarter of fiscal 1996. As a percentage of net sales, gross margin on the
Company's direct marketing sales decreased due to industry pricing pressure, but
was partially offset by the Company's ability, as a result of its increased
volume and financial position, to take advantage of vendor discount, rebates and
bulk purchasing opportunities. Additionally, the Company has experienced
significant growth in the name brand computer category which carries a lower
gross profit percentage. The Company anticipates continued pressure on gross
margins in fiscal 1997 primarily due to the continued shift in product mix and
to industry-wide pricing pressures. The gross profit margin on the Company's
outsourcing business increased primarily as a result of a change in product mix
within the revenue-based portion of its outsourcing business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.5 million, or 28.4%, to $11.5 million in
the second quarter of fiscal 1997 from $8.9 million in the second quarter of
fiscal 1996, and decreased as a percentage of net sales to 10.2% in the second
quarter of fiscal 1997 from 11.7% in the second quarter of fiscal 1996. The
decline was primarily attributable to the Company's continued shift in marketing
strategy of targeting the business customer and increased economies of scale as
general and administrative expenses were allocated over a greater net sales
base. In addition, the Company decreased circulation of catalogs, reduced more
expensive advertising in computer publications and received greater co-operative
marketing reimbursements from manufacturers. Direct response advertising costs
are capitalized and amortized over their expected revenue stream, generally
three months. The accounting treatment resulted in a net deferral of $366,000
and zero of advertising costs for the three months ended December 31, 1995 and
1996, respectively.
Non-Operating Expense (Income), Net. Non-operating expense (income),
net, which consists primarily of interest, changed from $55,000 of expense, net
in the second quarter of fiscal 1996 to $285,000 of interest income, net in the
second quarter of fiscal 1997. Interest expense primarily relates to borrowings
under the Company's line of credit which have been necessary to finance the
Company's growth. Interest expense has decreased as a result of the use of the
net proceeds from Insight's public offerings in November 1995 and November 1996.
Additionally, the interest expense associated with the Company's new sales and
administrative facility has been capitalized. Interest income is generated by
the Company through overnight investments in government repurchases agreements
with a Financial institution acting as the principal and by Auction Rate
Preferred Bonds.
Income Tax Expense. The Company's effective tax rate is 39.6% in each
of the quarters ended December 31, 1996 and 1995.
10
11
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
Net Sales. Net sales increased $68.1 million, or 46.3% to $215.3
million in the first six months of fiscal 1997 from $147.2 million in the first
six months of fiscal 1996. The Company's net sales are comprised of two
components: direct marketing sales and sales from outsourcing arrangements with
manufacturers. Sales derived from direct marketing increased $65.7 million, or
49.8%, to $197.5 million in the first six months of fiscal 1997 from $131.8
million in the first six months of fiscal 1996. The increase in direct marketing
sales resulted primarily from increased demand for notebook computers, the
continued shift to business customers (including education and government
entities) and the corresponding increase in average order size of 21.1% to $867
in the first six months of fiscal 1997 compared to $716 in the first six months
of fiscal 1996 as well as the continued building of the Company's customer base.
The sales increase occurred despite a decrease in the "Insight" catalog
circulation from 7.0 million in the first six months of fiscal 1996 to 6.3
million in the first six months of fiscal 1997. The Company is refining its
circulation strategy with the goal of more efficiently targeting its business
customer audience and improving the profitability and return on investment of
its marketing activities. Sales derived from outsourcing arrangements increased
$2.4 million, or 15.6%, to $17.8 million in the first six months of fiscal 1997
from $15.4 million in the first six months of fiscal 1996. The increase in sales
from outsourcing services resulted from the addition of outsourcing contracts
with manufacturers and increased sales from outsourcing arrangements that were
operational a year ago.
Gross Profit. Gross profit increased $7.9 million, or 37.5%, to $29.0
million in the first six months of fiscal 1997 from $21.1 million in the first
six months of fiscal 1996. As a percentage of sales, gross margin on the
Company's direct marketing sales decreased due to industry pricing pressure, but
was partially offset by the Company's ability, as a result of its increased
volume and financial position, to take advantage of vendor discount, rebates and
bulk purchasing opportunities. Additionally, the Company has experienced
significant growth in the name brand computer category which carries a lower
gross profit percentage. The Company anticipates continued pressure on gross
margins in fiscal 1997 primarily due to the continued shift in product mix and
to industry-wide pricing pressures. The gross profit margin on the Company's
outsourcing business decreased primarily as a result of a decrease in the mix of
the service-based outsourcing business. Service-based outsourcing arrangements
tend to have significantly higher gross margin percentages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.3 million, or 31.5%, to $22.4 million in
the first six months of fiscal 1997 from $17.0 million in the first six months
of fiscal 1996, and decreased as a percentage of net sales to 10.4% in the first
six months of fiscal 1997 from 11.6% in the first six months of fiscal 1996. The
decline was primarily attributable to the Company's continued shift in marketing
strategy of targeting the business customer and increased economies of scale as
general and administrative expenses were allocated over a greater net sales
base. In addition, the Company decreased circulation of catalogs, reduced more
expensive advertising in computer publications and received greater co-operative
marketing reimbursements from manufacturers.
11
12
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 (CONTINUED)
Direct response advertising costs are capitalized and amortized over their
expected revenue stream, generally three months. The accounting treatment
resulted in a net increase in advertising costs of $143,000 and a net deferral
of $451,000 in advertising costs for the six months ended December 31, 1996 and
1995, respectively.
Non-Operating Expense (Income), Net. Non-operating expense (income),
net, which consists primarily of interest, changed from $134,000 of expense, net
in the first six months of fiscal 1996 to $330,000 of interest income, net in
the first six months of fiscal 1997. Interest expense primarily relates to
borrowings under the Company's line of credit which have been necessary to
finance the Company's growth. Interest expense has decreased as a result of the
use of the net proceeds from Insight's public offerings in November 1995 and
November 1996. Additionally, the interest expense associated with the Company's
new sales and administrative facility has been capitalized. Interest income is
generated by the Company through overnight investments in government repurchases
agreements with a Financial institution acting as the principal and by Auction
Rate Preferred Bonds.
Income Tax Expense. The Company's effective tax rate is 39.6% in the
six months ended December 31, 1996 and 1995.
SEASONALITY
The Company has historically experienced, and expects to continue to
experience, seasonal fluctuations in its net sales, earnings from operations and
net earnings. As the Company continues to increase its percentage of revenue
from the business, education and government markets, management believes that
the Company's quarterly net sales will be less impacted by seasonality.
LIQUIDITY AND CAPITAL RESOURCES
In November 1995, the Company completed a public offering of common
stock. The Company received $16.6 million, net of underwriting discounts,
commissions and offering expenses. The Company used a substantial portion of the
net proceeds to repay amounts outstanding under the line of credit. The balance
of the net proceeds from this offering has been used for general corporate
purposes.
12
13
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In November 1996, the Company completed another public offering of
Common Stock. The Company received $37.4 million, net of underwriting discounts,
commissions and offering expenses. The Company is using the proceeds from the
offering for general corporate purposes, including working capital, capital
expenditures, facilities expansion, and potential acquisitions of businesses to
expand or complement its operations.
The Company's primary capital needs have been to fund the working
capital requirements and capital expenditures necessitated by its sales growth.
Cash flows from operations generally have been negative due primarily
to increases in accounts receivable and inventories necessitated by the sales
growth of the Company and the continued shift from sales to the home market to
sales in the business, education and government markets. The Company's net cash
used in operating activities was $14.6 million for the six months ended December
31, 1996 as compared to $9.8 million used in operating activities for the six
months ended December 31, 1995. The negative cash flow in the current year is
primarily due to a $11.7 million increase in inventories and a $7.0 million
increase in accounts receivable. These increases were primarily funded with the
proceeds from the public offering of common stock in November, 1996 and net
earnings of $4.2 million.
Capital expenditures for the first six months of fiscal 1997 and 1996
were $7,400,000 and $2,904,000, respectively, primarily for the purchase of 17
acres of vacant land in Tempe, Arizona during the second quarter of fiscal 1996,
and for the construction of a sales and administration building, on that site,
in fiscal 1997. The Company estimates that it will incur approximately $12.5
million in capital expenditures related to the acquisition of the land,
constructing and equipping the facility.
The Company's future capital requirements include financing the growth
of working capital items such as accounts receivable and inventories, and the
purchase of equipment, furniture and fixtures. The Company anticipates that cash
flow from operations together with the unused proceeds from the recent public
offering of stock and the funds available under its credit facility should be
adequate to support the Company's presently anticipated cash and working capital
requirements through fiscal 1997. The Company's ability to continue funding its
planned growth beyond fiscal 1997 is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, or to obtain
additional funds through equity or debt financing, or from other sources of
financing, as may be required.
13
14
INSIGHT ENTERPRISES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Shareholder's Meeting was held on December 12,
1996.
(b) At the Annual Shareholders' Meeting, proposals were considered for,
(i) the election of Larry A. Gunning and Robertson C. Jones as a Class
II directors to serve until the annual meeting of shareholders' in
1999 (ii) the approval amendments to the Company's Amended Articles of
Incorporation to increase the authorized number of shares.
The director-nominees were elected and the Company's Amended Articles
of Incorporation were approved with the voting results as follows:
Proposal Voted for Voted Against Abstained Not-Voted
- -------- --------- ------------- --------- ---------
Election of 4,903,571 4,900 - 507,815
Larry A. Gunning and
Roberston C. Jones
as a Class II directors
Approval of the 3,282,759 804,454 7,710 1,321,363
Company's Amended
Articles of Incorporation
to increase the authorized
number of shares.
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INSIGHT ENTERPRISES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INSIGHT ENTERPRISES, INC.
BY: /S/ ERIC J. CROWN
--------------------------------------
ERIC J. CROWN
CHIEF EXECUTIVE OFFICER
DATE: FEBRUARY 10, 1997 BY: /S/ STANLEY LAYBOURNE
--------------------------------------
STANLEY LAYBOURNE
CHIEF FINANCIAL OFFICER, SECRETARY
AND TREASURER
16