1
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: SEPTEMBER 30, 2000
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)
1305 WEST AUTO DRIVE, TEMPE, ARIZONA 85284
(Address of principal executive offices) (Zip Code)
(480) 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
--------- ---------
The number of shares outstanding of the issuer's common stock as of November 9,
2000 was 41,530,804.
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INSIGHT ENTERPRISES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999.................................... 3
Condensed Consolidated Statements of Earnings -
Three and Nine Months Ended September 30, 2000 and 1999..................... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999............................... 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 8
Item 3 - Quantitative and Qualitative Disclosures about Market Risk........... 16
PART II - OTHER INFORMATION................................................... 17
Item 2 - Changes in Securities and Use of Proceeds............................ 17
Item 6 - Exhibits and Reports on Form 8-K..................................... 17
SIGNATURES.................................................................... 18
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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 42,602 $ 66,675
Accounts receivable, net ....................................... 299,798 200,910
Inventories, net ............................................... 23,724 18,928
Prepaid expenses and other current assets ...................... 6,752 6,800
--------- ---------
Total current assets ..................................... 372,876 293,313
Property and equipment, net ....................................... 75,389 56,436
Goodwill, net ..................................................... 34,908 25,285
Other assets ...................................................... 2,483 348
--------- ---------
$ 485,656 $ 375,382
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................. $ 634 $ 638
Current portion of obligations under capital leases ............ 366 260
Accounts payable ............................................... 210,118 135,201
Accrued expenses and other current liabilities ................. 13,162 15,687
--------- ---------
Total current liabilities ................................ 224,280 151,786
Long-term debt, less current portion .............................. 13,307 13,798
Obligations under capital leases, less current portion ............ 1,177 1,034
Stockholders' equity:
Preferred stock, $.01 par value, 3,000,000 shares
authorized, no shares issued ................................. -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
41,368,767 at September 30, 2000 and 40,202,512 at
December 31, 1999 shares issued and outstanding .............. 414 402
Additional paid-in capital ..................................... 146,960 125,789
Retained earnings .............................................. 125,964 83,729
Accumulated other comprehensive income - foreign
currency translation ......................................... (4,145) (1,156)
Treasury stock, 766,545 shares at cost ......................... (22,301) --
--------- ---------
Total stockholders' equity ............................... 246,892 208,764
--------- ---------
$ 485,656 $ 375,382
========= =========
See accompanying notes to condensed consolidated financial statements.
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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net sales ...................................... $ 540,261 $ 397,074 $ 1,495,738 $ 1,100,438
Costs of goods sold ............................ 476,548 349,127 1,318,656 970,361
------------ ------------ ------------ ------------
Gross profit ............................. 63,713 47,947 177,082 130,077
Operating Expenses:
Selling, general and administrative expenses ... 36,688 31,585 105,851 88,584
Restricted stock charge ........................ -- -- 1,127 --
Amortization of goodwill ....................... 493 306 1,158 917
------------ ------------ ------------ ------------
Earnings from operations ................. 26,532 16,056 68,946 40,576
Non-operating (income) expense, net ............ (277) 218 (915) 681
------------ ------------ ------------ ------------
Earnings before income taxes ............. 26,809 15,838 69,861 39,895
Income tax expense ............................. 10,637 6,448 27,626 15,811
------------ ------------ ------------ ------------
Net earnings ............................. $ 16,172 $ 9,390 $ 42,235 $ 24,084
============ ============ ============ ============
Earnings per share*:
Basic .................................... $ 0.39 $ 0.24 $ 1.05 $ 0.63
============ ============ ============ ============
Diluted .................................. $ 0.38 $ 0.23 $ 1.00 $ 0.60
============ ============ ============ ============
Shares used in per share calculation*:
Basic .................................... 41,001,294 38,576,025 40,390,303 38,394,009
============ ============ ============ ============
Diluted .................................. 42,849,754 40,411,620 42,044,159 40,114,595
============ ============ ============ ============
* Retroactively reflects 3-for-2 stock split effected in the form of a stock
dividend paid September 18, 2000.
See accompanying notes to condensed consolidated financial statements.
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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
--------- ---------
Cash flows from operating activities:
Net earnings .............................................................. $ 42,235 $ 24,084
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization .......................................... 9,371 5,551
Tax benefit from stock options exercised ............................... 7,290 1,000
Provision for losses on accounts receivable ............................ 5,730 4,103
Provision for obsolete and slow moving inventories ..................... 4,319 2,234
Deferred income tax (benefit) expense .................................. (1,858) 2,602
Change in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable ..................................... (105,894) (70,245)
(Increase) decrease in inventories .................................. (9,550) 11,287
Decrease (increase) in prepaid expenses and other current assets .... 1,822 (416)
Increase in other assets and goodwill ............................... (1,795) (873)
Increase in accounts payable ........................................ 76,214 43,595
Increase (decrease) in accrued expenses and other
current liabilities .............................................. (1,882) 5,380
--------- ---------
Net cash provided by operating activities ........................ 26,002 28,302
Cash flows from investing activities:
Purchases of property and equipment ....................................... (28,360) (15,846)
Purchase of additional interest in Plusnet Technologies, Ltd. ............. (1,809) --
--------- ---------
Net cash used in investing activities ............................ (30,169) (15,846)
--------- ---------
Cash flows from financing activities:
Net repayments of long-term debt, less current portion .................... (384) (972)
Issuance of common stock .................................................. 13,892 4,903
Purchase of treasury stock ................................................ (33,461) --
--------- ---------
Net cash (used in) provided by financing activities .............. (19,953) 3,931
--------- ---------
Effect of exchange rate on cash and cash equivalents ......................... 47 (625)
--------- ---------
(Decrease) increase in cash and cash equivalents ............................. (24,073) 15,762
Cash and cash equivalents at beginning of period ............................. 66,675 12,974
--------- ---------
Cash and cash equivalents at end of period ................................... $ 42,602 $ 28,736
========= =========
Supplemental disclosure of non-cash financing and investing activity:
Property and equipment acquired through capital lease transactions ........ -- 1,615
========= =========
Treasury stock issued as final contingent acquisition payment ............. $ 11,160 $ --
========= =========
See accompanying notes to condensed consolidated financial statements.
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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Insight Enterprises, Inc. (the "Company") is a holding company with
two operating units: Insight Direct Worldwide, Inc. ("Insight") and Direct
Alliance Corporation ("Direct Alliance").
Insight is a leading global direct marketer of computers, hardware and
software, with locations in the United States, Canada, the United Kingdom and
Germany. Insight sells products via the Internet and by a staff of
customer-dedicated account executives utilizing proactive outbound
telephone-based sales, electronic commerce and electronic marketing. Plusnet
Technologies, Ltd. ("PlusNet"), a 95% owned subsidiary of Insight, is an
Internet ("ISP") and applications ("ASP") service provider providing Internet
access and value-added Internet services within the United Kingdom to
residential, small- and medium-sized businesses and corporate customers.
Direct Alliance is a global outsourcing services provider of direct and
web marketing, sales and transactional management services for traditional and
e-commerce companies.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements and
notes have been prepared in accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosures normally required by
generally accepted accounting principles. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments necessary to present fairly the financial position of the Company as
of September 30, 2000, the results of operations for the three and nine months
ended September 30, 2000 and 1999, and the cash flows for the nine months ended
September 30, 2000 and 1999. The condensed consolidated balance sheet as of
December 31, 1999 was derived from the audited consolidated financial statements
at such date. Certain amounts in the condensed consolidated financial statements
have been reclassified to conform to the current presentation. 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 consolidated financial statements,
including the related notes thereto, in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
The condensed consolidated financial statements include the accounts of
Insight Enterprises, Inc. and its subsidiaries, which are primarily
wholly-owned. Intercompany accounts and transactions have been eliminated in
consolidation.
In August 2000, the Company's Board of Directors approved a 3-for-2 stock
split effected in the form of a stock dividend and paid on September 18, 2000 to
the stockholders of record at the close of business on August 21, 2000. All
share amounts and earnings per share have been adjusted to reflect this 3-for-2
stock split.
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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. LINE OF CREDIT
The Company has a $100,000,000 credit facility with a finance company. The
agreement provides for cash advances outstanding at any one time up to a maximum
of $100,000,000 on the line of credit, subject to limitations based upon the
Company's eligible accounts receivable and inventories. Cash advances bear
interest at the London Interbank Offered Rate (LIBOR) plus 0.80% (7.42% at
September 30, 2000) payable monthly. The credit facility can be used to
facilitate the purchases of inventories from certain suppliers and that portion
is classified on the balance sheet as accounts payable. As of September 30,
2000, the balance of this portion of the credit facility was $50,919,000. As of
September 30, 2000, an additional $49,081,000 was available under the line of
credit.
The credit facility expires in February 2002 at which time the outstanding
balance is due. The line is secured by substantially all of the assets of the
Company. The line of credit contains various covenants, including the
requirement that the Company maintain a specific dollar amount of tangible net
worth and restrictions on payment of cash dividends.
4. INCOME TAXES
Income tax expense as provided for the three and nine months ended
September 30, 2000 and 1999 is based upon the estimated annual income tax rate
of the Company.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that are
inherently subject to risk and uncertainties. Forward-looking statements can be
identified by the use of forward-looking terminology such as "expects",
"should", "believes" or "anticipates", or the negative thereof or comparable
terminology, or by discussions of Company goals and strategy. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not
limited to the following: fluctuations in operating results, intense
competition, reliance on outsourcing arrangements, mix of outsourcing
arrangements, past and future acquisitions, international operations, risk of
business interruption, management of rapid growth, need for additional
financing, changing methods of distribution, reliance on suppliers, changes in
supplier reimbursement programs, rapid change in product standards, inventory
obsolescence, dependence on key personnel, sales and income tax uncertainty and
increasing marketing, postage and shipping costs. These factors are discussed in
greater detail under "Factors That May Affect Future Results and Financial
Condition" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, as filed with the Securities and Exchange Commission.
OVERVIEW
Insight Enterprises, Inc. (the "Company") is a holding company with two
operating units: Insight Direct Worldwide, Inc. ("Insight") and Direct
Alliance Corporation ("Direct Alliance").
INSIGHT
Insight commenced operations in 1988 as a direct marketer of hard disk
drives and other mass storage products. We have expanded our product line to
include name brand computers, a full line of hardware and software products. Net
sales include direct marketing sales to businesses, educational institutions,
government organizations, consumers and computer resellers. Initially, we
focused our marketing effort primarily on advertising in computer magazines and
the use of inbound toll-free telemarketing. We have shifted our marketing
strategy to the use of outbound account executives, complimented by the use of
electronic commerce and marketing, focused primarily on the business, education
and government markets. We have hired a number of account executives, and plan
to continue to actively increase our account executive base by approximately 150
to 250, net, per quarter through 2000.
In the fourth quarter of 1997, we began expanding internationally by
initiating operations in Canada. During 1998, we entered the United Kingdom
market in the second quarter and the German market in the fourth quarter, both
through acquisitions.
PlusNet, a 95% owned subsidiary of Insight, was also acquired during the
second quarter of 1998. PlusNet is an Internet ("ISP") and applications ("ASP")
service provider providing Internet access and value-added Internet services
within the United Kingdom to residential, small- and medium-sized businesses and
corporate customers.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DIRECT ALLIANCE
In 1992, we began providing direct marketing services to third-party
original equipment manufacturers to leverage our infrastructure and increase our
net earnings. Currently, we provide services for several manufacturers including
Compaq, IBM, Micron, Toshiba, Unisys and one major unnamed customer. Most of our
outsourcing arrangements are service-based, whereby we derive revenue based on a
percentage of the sales price from products sold. Revenues from service-based
sales and the direct costs that relate to the generation of those revenues are
included in the Company's net sales and cost of goods sold, respectively. Under
certain other outsourcing arrangements, we take title to the products and assume
the risk of collection of accounts receivable in addition to sales functions.
Revenue and related costs derived from the sales of such products are included
in the Company's net sales and cost of goods sold, respectively. The rate of our
net sales growth in future periods may be affected by the mix of type of
outsourcing arrangements which are in place from time to time. Additionally,
some of the programs may be seasonal in nature, as the manufacturers' target
customers can have cyclical buying patterns.
Generally, pricing in the computer and related products industry is very
aggressive and average selling prices of products are declining. Therefore, to
increase sales we seek to expand our customer base, increase our penetration of
existing customers, expand into new markets and expand our product and service
offerings. We expect pricing pressures to continue, and we may be required to
reduce our prices to remain competitive. The continued acceptance of electronic
commerce might place additional pricing pressure on the Company. Such pricing
pressures could have a material adverse effect on the Company's financial
condition and results of operations. On average, we expect our future gross
profit percentage to decrease approximately 0.1% per quarter, depending on
factors such as industry-wide pricing pressures, supplier reimbursement
programs, pricing/selling strategies and our product and outsourcing program
mix.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data of the Company as a percentage of net sales:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------ ------ ------ ------
Net sales ...................................... 100.0% 100.0% 100.0% 100.0%
Costs of goods sold ............................ 88.2 87.9 88.2 88.2
------ ------ ------ ------
Gross profit ............................. 11.8 12.1 11.8 11.8
Operating Expenses:
Selling, general and administrative expenses ... 6.8 8.0 7.0 8.0
Restricted stock charge ........................ -- -- 0.1 --
Amortization of goodwill ....................... 0.1 0.1 0.1 0.1
------ ------ ------ ------
Earnings from operations ................. 4.9 4.0 4.6 3.7
Non-operating (income) expense, net ............ (0.1) 0.0 (0.1) 0.1
------ ------ ------ ------
Earnings before income taxes ............. 5.0 4.0 4.7 3.6
Income tax expense ............................. 2.0 1.6 1.9 1.4
------ ------ ------ ------
Net earnings ............................. 3.0% 2.4% 2.8% 2.2%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Net Sales. Net sales increased $143.2 million, or 36%, to $540.3 million
for the three months ended September 30, 2000 from $397.1 million for the three
months ended September 30, 1999. The Company had 1,994 and 1,389 account
executives at September 30, 2000 and 1999, respectively.
Net sales derived from Insight, the direct marketing business, increased
$139.9 million, or 39%, to $502.9 million for the three months ended September
30, 2000 from $363.0 million for the three months ended September 30, 1999. Net
sales for Insight's United States core (organically grown) direct business
increased 48% for the three months ended September 30, 2000 compared to the
three months ended September 30, 1999. The increase in net sales resulted
primarily from deeper account penetration, increased market share, an expanded
customer base, expanded product offerings and Internet enhancements that
increased unassisted transactions. Insight's average order size increased to
$1,383 for the three months ended September 30, 2000 from $997 for the three
months ended September 30, 1999. North American sales represented 94% and 90% of
Insight's net sales for the three months ended September 30, 2000 and 1999,
respectively. Average order size for our sales in North America increased from
$1,299 for the three months ended September 30, 1999 to $1,518 for the three
months ended September 30, 2000. European sales represented 6% and 10% of
Insight's net sales for the three months ended September 30, 2000 and 1999,
respectively. Average order size for our sales in Europe increased from $318 for
the three months ended September 30, 1999 to $536 for the three months ended
September 30, 2000. Sales to businesses increased from 91% of net sales for the
three months ended September 30, 1999 to 97% for the three months ended
September 30, 2000. Insight had 1,704 account
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
executives at September 30, 2000, with 1,531 in North America and 173 in Europe,
an increase from 1,153, 1,018 and 135, respectively, at September 30, 1999.
Net sales for PlusNet, whose numbers are included in Insight's numbers
increased $300,000, or 15%, to $2.3 million for the three months ended September
30, 2000 from $2.0 million for the three months ended September 30, 1999.
Net sales derived from Direct Alliance, the outsourcing business,
increased $3.3 million, or 10%, to $37.4 million for the three months ended
September 30, 2000 from $34.1 million for the three months ended September 30,
1999. Outsourcing sales represented 7% and 9% of total Company net sales in the
three months ended September 30, 2000 and 1999, respectively. The increase in
sales from outsourcing services resulted primarily from the expansion of
service-based programs offset by the shift from revenue-based programs to
service-based arrangements. The growth rate of the outsourcing arrangements may
be affected by the mix of type of outsourcing arrangements - that is,
service-based versus revenue-based outsourcing programs. As a result of Direct
Alliance's strategic emphasis on service-based programs as opposed to
revenue-based programs, 64% of Direct Alliance's net sales were from
service-based programs for the three months ended September 30, 2000 compared to
39% for the three months ended September 30, 1999. If net sales had been
recognized for all programs as if they were revenue-based programs, net sales
from Direct Alliance would have increased 229% for the three months ended
September 30, 2000 compared to the three months ended September 30, 1999. Direct
Alliance had 290 and 236 account executives at September 30, 2000 and 1999,
respectively.
Gross Profit. Gross profit increased $15.8 million, or 33%, to $63.7
million for the three months ended September 30, 2000 from $47.9 million for the
three months ended September 30, 1999. As a percentage of net sales, gross
profit decreased from 12.1% for the three months ended September 30, 1999 to
11.8% for the three months ended September 30, 2000. Insight's gross profit, as
a percentage of net sales, decreased from 11.8% for the three months ended
September 30, 1999 to 11.5% for the three months ended September 30, 2000.
Direct Alliance's gross profit, as a percentage of net sales, increased from
15.1% for the three months ended September 30, 1999 to 15.3% for the three
months ended September 30, 2000. The fluctuations in gross profit percentage
primarily resulted from increased gross profit provided by service-related
outsourcing programs and the direct operation's decreased product margin amidst
pricing strategies and pressures while other components of costs of goods sold,
such as supplier reimbursements, freight and discounts, remained constant as a
percentage of net sales. On average, we expect our future gross profit
percentage to decrease approximately 0.1% per quarter, depending on factors such
as industry-wide pricing pressures, supplier reimbursement programs,
pricing/selling strategies and our product and outsourcing program mix.
Operating Expenses. Operating expenses increased $5.2 million, or 16%, to
$37.2 million for the three months ended September 30, 2000 from $32.0 million
for the three months ended September 30, 1999, but decreased as a percentage of
net sales to 6.9% for the three months ended September 30, 2000 from 8.1% for
the three months ended September 30, 1999. Included, as a reduction of selling,
general and administrative expenses for the three months ended September 30,
2000 is $750,000 of proceeds from an insurance claim related to aborted
acquisition costs incurred in the fourth quarter of 1999. As previously
disclosed, the Company recorded in the fourth quarter of 1999 a nonrecurring
pretax charge of $2.1 million related to an aborted merger. These proceeds are
not included in the operating expense percentage of the operating units, Insight
and Direct Alliance, as discussed herein. Operating expenses as a percentage of
net sales for Insight were 7.0% for the three months ended
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
September 30, 2000 and 8.2% for the three months ended September 30, 1999. The
decline in the operating expense percentage at Insight was attributable to the
efficiency of Insight's sales and marketing approach to generate sales dollars
along with increasing economies of scale. This decline was partially offset by
costs associated with the increase in the number of account executives and costs
associated with international growth. Operating expenses as a percentage of net
sales for Direct Alliance remained constant at 6.8% for the three months ended
September 30, 1999 and September 30, 2000.
We increased our overall unassisted web sales to 11.1% of net sales for
the three months ended September 30, 2000 from 9.1% from the three months ended
September 30, 1999. We also increased the percentage of shipments made using our
electronic "direct ship" programs with our suppliers to 66.3% for the three
months ended September 30, 2000 from 55.2% from the three months ended September
30, 1999. Annualized inventory turnover for the Company for the three months
ended September 30, 2000 was 68 times compared to 65 times for the three months
ended September 30, 1999.
Non-Operating (Income) Expense, Net. Non-operating (income) expense, net,
which consists primarily of interest expense and interest income, increased to
($277,000) of income for the three months ended September 30, 2000 from $218,000
of expense for the three months ended September 30, 1999. Interest expense
primarily relates to borrowings associated with the financing of facility
acquisitions and the financing of inventory purchases under the Company's line
of credit. Interest income is generated by the Company through short-term
investments, some of which are investment grade tax-advantaged bonds. Interest
income is improving due to our increasingly strong cash position.
Income Tax Expense. The Company's effective tax rate was 39.7% and 40.7%
for the quarters ended September 30, 2000 and 1999, respectively. The decrease
in the effective rate reflects the reduced effect of nonrecognition of tax
benefits on foreign operating losses.
Net Earnings. Net earnings increased $6.8 million, or 72%, to $16.2
million for the three months ended September 30, 2000 from $9.4 million for the
three months ended September 30, 1999. Diluted earnings per share increased 65%
to $0.38 for the three months ended September 30, 2000 from $0.23 for the three
months ended September 30, 1999. Net earnings for Insight increased 78% to $13.7
million for the three months ended September 30, 2000 from $7.7 million for the
three months ended September 30, 1999. PlusNet net (loss) earnings, included in
the numbers for Insight, decreased 133% to a net loss of $(190,000) for the
three months ended September 30, 2000 from net earnings of $576,000 for the
three months ended September 30, 1999. Net earnings for Direct Alliance
increased 19% to $2.0 million for the three months ended September 30, 2000 from
$1.7 million for the three months ended September 30, 1999.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net Sales. Net sales increased $395.3 million, or 36%, to $1,495.7 million
for the nine months ended September 30, 2000 from $1,100.4 million for the nine
months ended September 30, 1999.
Net sales derived from Insight, the direct marketing business, increased
$394.9 million, or 39%, to $1,413.2 million for the nine months ended September
30, 2000 from $1,018.3 million for the nine months ended September 30, 1999. Net
sales for Insight's United States core (organically grown) direct business
increased 48% for the nine months ended September 30, 2000 compared to the nine
months ended September 30, 1999. The increase in net sales resulted primarily
from deeper account penetration, increased market share, an expanded customer
base (both domestic and international), expanded product offerings and Internet
enhancements that increased unassisted transactions. North American sales
represented 93% and 89% of Insight's net sales for the nine months ended
September 30, 2000 and 1999, respectively. European sales represented 7% and 11%
of Insight's net sales for the nine months ended September 30, 2000 and 1999,
respectively.
Net sales for PlusNet, whose numbers are included in Insight's numbers,
increased $1.4 million, or 26%, to $6.8 million for the nine months ended
September 30, 2000 from $5.4 million for the nine months ended September 30,
1999.
Net sales derived from Direct Alliance, the outsourcing business,
increased $300,000, or 0.4%, to $82.5 million for the nine months ended
September 30, 2000 from $82.2 million for the nine months ended September 30,
1999. Outsourcing sales represented 6% and 8% of total Company net sales in the
nine months ended September 30, 2000 and 1999, respectively. The comparable
year-over-year sales from outsourcing services was expected as Direct Alliance
continued to shift to more service-based arrangements from revenue-based
arrangements. The growth rate of the outsourcing arrangements may be affected by
the mix of type of outsourcing arrangements - that is, service-based versus
revenue-based outsourcing programs. As a result of Direct Alliance's strategic
emphasis on service-based programs as opposed to revenue-based programs, 67% of
Direct Alliance's net sales were from service-based programs for the nine months
ended September 30, 2000 compared to 37% for the nine months ended September 30,
1999. If net sales had been recognized for all programs as if they were
revenue-based programs, net sales from Direct Alliance would have increased 200%
for the nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999.
Gross Profit. Gross profit increased $47.0 million, or 36%, to $177.1
million for the nine months ended September 30, 2000 from $130.1 million for the
nine months ended September 30, 1999. As a percentage of net sales, gross profit
remained constant at 11.8% for the nine months ended September 30, 1999 and
September 30, 2000. Insight's gross profit, as a percentage of net sales,
decreased from 11.6% for the nine months ended September 30, 1999 to 11.5% for
the nine months ended September 30, 2000. Direct Alliance's gross profit, as a
percentage of net sales, increased from 14.9% for the nine months ended
September 30, 1999 to 16.9% for the nine months ended September 30, 2000. The
fluctuations in gross profit percentage primarily resulted from the direct
operation's decreased product margin amidst pricing strategies and pressures,
increased gross profit provided by service-related outsourcing programs and
increased supplier reimbursements, payment discounts, rebates and purchasing
opportunities as a result of our increasing size of operations. On average, we
expect our future gross profit percentage to decrease approximately 0.1% per
quarter, depending on
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
factors such as industry-wide pricing pressures, supplier reimbursement
programs, pricing/selling strategies and our product and outsourcing program
mix.
Operating Expenses. Operating expenses, before the effect of a $1.1
million pretax restricted common stock charge described below, increased $17.5
million, or 19.6%, to $107.0 million for the nine months ended September 30,
2000 from $89.5 million for the nine months ended September 30, 1999, but
decreased as a percentage of net sales to 7.1% for the nine months ended
September 30, 2000 from 8.1% for the nine months ended September 30, 1999.
Included, as a reduction of selling, general and administrative expenses for the
nine months ended September 30, 2000 is $750,000 of proceeds from an insurance
claim related to aborted acquisition costs incurred in the fourth quarter of
1999. As previously disclosed, the Company recorded in the fourth quarter of
1999 a nonrecurring pretax charge of $2.1 million related to an aborted merger.
These proceeds are not included in the operating expense percentage of the
operating units, Insight and Direct Alliance, as discussed herein. Operating
expenses as a percentage of net sales for Insight were 7.2% for the nine months
ended September 30, 2000 and 8.2% for the nine months ended September 30, 1999.
The decline in the operating expense percentage at Insight was attributable to
the efficiency of Insight's sales and marketing approach to generate sales
dollars along with increasing economies of scale, the utilization of emerging
technologies and continued cost-cutting measures. This decline was partially
offset by costs associated with the increase in the number of account
executives, the write-off of impaired assets, the scheduled amortization of
restricted stock previously issued to employees and costs associated with rapid
and international growth. Operating expenses as a percentage of net sales for
Direct Alliance were 6.7% for the nine months ended September 30, 2000 and 7.2%
for the nine months ended September 30, 1999. This decrease was due to the shift
from revenue-based to service-based outsourcing programs offset by Direct
Alliance's planned investment to enhance scalability through its breadth and
depth of management and technical staff.
Restricted Stock Charge. As previously disclosed, the Company issues
shares of restricted common stock as incentives to certain officers and
employees. The restricted common shares are valued at the date of grant,
amortized over the three-year vesting period and the majority contain an
acceleration clause which causes the shares to automatically vest if the
Company's stock closed above a certain price of either $29 or $44 per share. On
May 15, 2000, the Company's stock closed above $29 causing 114,396 restricted
common shares to automatically vest. The Company has recorded a pre-tax charge
of $1.1 million related to the early vesting of this restricted common stock.
This charge represents the unamortized portion of the restricted stock in excess
of the scheduled amortization. At September 30, 2000, there were 117,164 shares
of restricted common stock outstanding, which represents $2,330,524 of
unamortized deferred compensation. 60,468 of these restricted common shares will
automatically vest if the Company's stock closes above $44 per share. The
remaining 56,696 have no such acceleration clause. Share amounts and price per
share figures reflect the 3-for-2 stock split, effected in the form of a stock
dividend paid on September 18, 2000.
Non-Operating (Income) Expense, Net. Non-operating (income) expense, net,
which consists primarily of interest expense and interest income, increased to
($915,000) of income for the nine months ended September 30, 2000 from $681,000
of expense for the nine months ended September 30, 1999. Interest expense
primarily relates to borrowings associated with the financing of facility
acquisitions and the financing of inventory purchases under the Company's line
of credit. Interest income is generated by the Company through short-term
investments, some of which are investment grade tax-advantaged bonds. Interest
income is improving due to our increasingly strong cash position.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Income Tax Expense. The Company's effective tax rate was 39.5% and 39.6%
for the nine months ended September 30, 2000 and 1999, respectively.
Net Earnings. Net earnings, before the effect of a $685,000, net of tax,
restricted common stock charge, increased $18.8 million, or 78%, to $42.9
million for the nine months ended September 30, 2000 from $24.1 million for the
nine months ended September 30, 1999. Diluted earnings per share, before the
effect of a restricted common stock charge, increased 70% to $1.02 for the nine
months ended September 30, 2000 from $0.60 for the nine months ended September
30, 1999. Net earnings for Insight increased 83% to $37.0 million for the nine
months ended September 30, 2000 from $20.3 million for the nine months ended
September 30, 1999. PlusNet net earnings, included in the numbers for Insight,
decreased 287% to $342,000 for the nine months ended September 30, 2000 from
$1,322,000 for the nine months ended September 30, 1999. Net earnings for Direct
Alliance increased 41% to $5.4 million for the nine months ended September 30,
2000 from $3.8 million for the nine months ended September 30, 1999.
SEASONALITY
We have historically experienced seasonal fluctuations in our growth of
net sales, earnings from operations and net earnings. However, as we increase
our percentage of sales from business, education and government markets, our
quarterly net sales, earnings from operations and net earnings have been less
impacted by seasonality. Our net sales growth rate, earnings from operations and
net earnings as a percentage of net sales could be affected by the mix of types
of outsourcing arrangements, which are in place from time to time. Additionally,
some of the outsourcing programs can be seasonal in nature because the
manufacturers' target customers can have cyclical buying patterns.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital needs have been to fund the working capital
requirements and capital expenditures necessitated by our sales growth.
Until the last two fiscal years, cash flows from operations generally have
been negative due primarily to increases in accounts receivable and inventories
necessitated by sales growth and the continued shift from sales to the home
market to sales to the business, education and government markets. This trend
has been changing as the Company decreased its inventory levels and increased
the percentage of inventory shipments made directly by suppliers to the
Company's customers.
The Company's net cash provided by operating activities was $26.0 million
for the nine months ended September 30, 2000 compared to $28.3 million provided
by operating activities for the nine months ended September 30, 1999. The
positive cash flow in the current period was primarily due to a $76.2 million
increase in accounts payable and $42.2 million in net earnings. These funds were
used to fund a $105.9 million increase in accounts receivable and a $9.6 million
increase in inventories as a result of increased sales and opportunistic
inventory purchases.
Capital expenditures for the nine months ended September 30, 2000 and 1999
were $28.4 million and $15.8 million, respectively. Capital expenditures for the
nine months ended September 30, 2000 primarily relate to the acquisition of an
additional Direct Alliance facility in Tempe, Arizona, an
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
additional Insight facility in Montreal, Canada, computer hardware for PlusNet
and new software applications. Capital expenditures for the nine months ended
September 30, 1999 primarily relate to new software applications.
Our future capital requirements include financing the growth of working
capital items such as accounts receivable and inventories, the purchase of
software enhancements, the purchase of equipment, furniture and fixtures to
accommodate future growth and funds needed for future organic growth and/or
acquisitions. We anticipate that cash flow from operations together with the
funds available under our credit facility should be adequate to support the
Company's presently anticipated cash and working capital requirements through
2000. Our ability to continue funding planned growth beyond 2000 is dependent
upon our ability to generate sufficient cash flow or to obtain additional funds
through equity or debt financing, or from other sources of financing, as may be
required. See Note 3 of Notes to Condensed Consolidated Financial Statements for
a description of the Company's $100 million credit facility.
RECENT ACCOUNTING PRONOUNCEMENTS
During December 1999, the SEC released Staff Accounting Bulletin No. 101
(SAB No. 101), "Revenue Recognition in Financial Statements". SAB 101 summarizes
the SEC staff's view in applying generally accepted accounting principles to
revenue recognition in financial statements. In March 2000, the SEC staff issued
SAB 101A to delay certain transition provisions of SAB 101. SAB 101A deferred
the effective date for registrants with a fiscal year beginning between December
16, 1999 and March 15, 2000. Those registrants may report a change in accounting
principle no later than their second fiscal quarter of the fiscal year beginning
after December 15, 1999. In periods subsequent to transition, registrants should
disclose the amount of revenue (if material to income before income taxes)
recognized in those periods that was included in the cumulative effect
adjustment. The adoption of SAB 101 did not have a material impact on our
revenues or revenue recognition policies.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), which
established accounting and reporting standards for all derivative
instruments and hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities in the balance sheet
and measurement of those instruments at fair value. This new standard, as
amended by SFAS No. 137 and No. 138, will be effective for all fiscal
years beginning after June 15, 2000. The Company will adopt SFAS No. 133
in 2001. SFAS No. 133 is not expected to have a material impact on the
Company's result of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
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INSIGHT ENTERPRISES, INC.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On April 3, 1998, the Company acquired eight-five percent (85%) of the
outstanding capital stock of Plusnet Technologies Limited, a Company
incorporated in England and Wales ("Plusnet"). In connection with the
acquisition, the Company agreed to make a contingent payment of Company common
stock based on the post-closing financial performance of Plusnet. Pursuant to
such agreement, on June 23, 2000 the Company issued an aggregate of 391,787
shares of its common stock to two former stockholders of Plusnet (Paul Cusack
and Patricia Dolman). Exemption from registration for the issuance of the
common stock in this transaction is claimed pursuant to Section 4(2) of the
Securities Act of 1933, as amended, regarding transactions by an issuer not
involving any public offering and/or pursuant to Regulation S.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule for the nine months ended
September 30, 2000.
Exhibit 27.2 - Restated Financial Data Schedule for the nine months
ended September 30, 1999
(b) Reports on Form 8-K
No reports on Form 8-K were filed during a quarter for which the
report is filed.
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INSIGHT ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements 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.
DATE: NOVEMBER 13, 2000 INSIGHT ENTERPRISES, INC.
BY: /S/ ERIC CROWN
ERIC J. CROWN
CO - CHIEF EXECUTIVE OFFICER
BY: /S/ STANLEY LAYBOURNE
STANLEY LAYBOURNE
CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
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INSIGHT ENTERPRISES, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
Exhibit 27.1 Financial Data Schedule for the nine months ended
September 30, 2000.
Exhibit 27.2 Restated Financial Data Schedule for the nine
months ended September 30, 1999.