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, 1998
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) (Zip Code)
(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_____
The number of shares outstanding of the issuer's common stock as of October 30,
1998 was 16,625,073.
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INSIGHT ENTERPRISES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997.................................... 3
Condensed Consolidated Statements of Earnings -
Three and Nine Months Ended September 30, 1998 and 1997..................... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997............................... 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 9
PART II - OTHER INFORMATION................................................... 16
Item 2 - Changes in Securities................................................ 16
Item 6 - Exhibits and Reports on Form 8-K..................................... 16
SIGNATURES.................................................................... 17
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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 19,233 $ 6,982
Accounts receivable, net .................................... 117,226 80,639
Inventories ................................................. 21,121 46,100
Prepaid expenses and other current assets ................... 5,448 8,195
-------- --------
Total current assets .................................. 163,028 141,916
Property and equipment, net .................................... 27,306 20,432
Other assets ................................................... 16,608 35
-------- --------
$206,942 $162,383
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 49,359 $ 22,949
Accrued expenses and other current liabilities .............. 9,746 4,304
-------- --------
Total current liabilities ............................. 59,105 27,253
Long-term debt, less current portion ........................... 8,935 --
Line of credit ................................................. 691 32,750
Stockholders' equity:
Preferred stock, $.01 par value, 3,000,000 shares authorized,
no shares issued .......................................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized,
16,620,783 at September 30, 1998 and 15,551,613 at
December 31, 1997 shares issued and outstanding ............ 166 156
Paid-in capital ............................................. 94,353 72,564
Retained earnings ........................................... 43,692 29,660
-------- --------
Total stockholders' equity ............................ 138,211 102,380
-------- --------
$206,942 $162,383
======== ========
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)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales .................................. $ 261,207 $ 171,326 $ 705,387 $ 441,406
Costs of goods sold ........................ 231,098 150,280 620,467 385,668
------------ ------------ ------------ ------------
Gross profit ......................... 30,109 21,046 84,920 55,738
Selling, general and administrative expenses 21,669 15,090 61,291 40,503
------------ ------------ ------------ ------------
Earnings from operations ............. 8,440 5,956 23,629 15,235
Non-operating income (expense), net ........ (124) (40) (617) 215
------------ ------------ ------------ ------------
Earnings before income taxes ......... 8,316 5,916 23,012 15,450
Income tax expense ......................... 3,131 2,390 8,791 6,227
------------ ------------ ------------ ------------
Net earnings ......................... $ 5,185 $ 3,526 $ 14,221 $ 9,223
============ ============ ============ ============
Earnings per share:
Basic ................................ $ 0.32 $ 0.23 $ 0.89 $ 0.61
============ ============ ============ ============
Diluted .............................. $ 0.31 $ 0.22 $ 0.85 $ 0.58
============ ============ ============ ============
Shares used in per share calculation:
Basic ................................ 16,215,398 15,321,620 15,946,285 15,236,043
============ ============ ============ ============
Diluted .............................. 16,966,310 16,112,159 16,666,301 15,968,102
============ ============ ============ ============
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,
-------------------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net earnings ...................................................... $ 14,221 $ 9,223
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization .................................. 2,797 1,815
Tax benefit from stock options exercised ....................... 4,731 1,891
Provision for losses on accounts receivable .................... 2,924 3,199
Provision for obsolete and slow-moving inventories ............. 1,038 1,053
Deferred income tax benefit .................................... (1,812) (1,574)
Change in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable ............................. (35,628) (34,201)
Decrease (increase) in inventories .......................... 28,965 (6,304)
Decrease in prepaid expenses and other current
assets ................................................... 5,008 1,552
Decrease (increase) in other assets ......................... (263) 13
Increase in accounts payable ................................ 21,503 7,665
Increase (decrease) in accrued expenses and
other current liabilities ................................ (1,279) 613
-------- --------
Net cash provided by (used in) operating activities ...... 42,205 (15,055)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ............................... (7,134) (7,585)
Purchase of Choice Peripherals Limited and Plusnet
Technologies Limited, plus cash overdraft assumed .............. (3,534) --
Purchase of Treasure Chest Computers, Inc.,
net of cash acquired ........................................... (27) --
-------- --------
Net cash used in investing activities .................... (10,695) (7,585)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit ..................... (32,070) 3,700
Net borrowing of long term debt, less current portion ............. 8,409 --
Issuance of common stock .......................................... 4,551 1,301
-------- --------
Net cash provided by (used in) financing
activities ............................................ (19,110) 5,001
-------- --------
Effect of exchange rate on cash and cash equivalents ................. (149) (2)
-------- --------
Increase (decrease) in cash and cash equivalents ..................... 12,251 (17,641)
Cash and cash equivalents at beginning of period ..................... 6,982 21,166
-------- --------
Cash and cash equivalents at end of period ........................... $ 19,233 $ 3,525
======== ========
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. and subsidiaries ("Insight" or the "Company") is
a direct marketer of computers, hardware and software. The Company markets
primarily to small and medium-sized enterprises, through a combination of
outbound telemarketing, electronic commerce, targeted direct marketing and
advertising in computer magazines and publications. Insight has locations in the
United States, Canada and the United Kingdom. Additionally, Insight provides
direct marketing services to manufacturers seeking to outsource their direct
marketing activities. The services provided include marketing, sales,
configuration and distribution.
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, consisting only of normal recurring accruals, necessary to present
fairly the financial position of Insight as of September 30, 1998, the results
of operations for the three and nine months ended September 30, 1998 and 1997,
and the cash flows for the nine months ended September 30, 1998 and 1997. The
condensed consolidated balance sheet as of December 31, 1997 was derived from
the audited consolidated financial statement 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 Insight's Annual Report on Form 10-K for the year ended
December 31, 1997.
On April 3, 1998, the Company acquired all of the outstanding stock of
Choice Peripherals Limited, a United Kingdom direct marketer of computers and
computer-related products, and 85% of the outstanding common stock of Plusnet
Technologies Limited, a United Kingdom internet service provider, for a total of
124,818 shares of the Company's common stock and $3,534,000 in cash including
acquisition costs and cash overdraft position assumed. The acquisition has been
accounted for by the purchase method of accounting and accordingly the assets
purchased and liabilities assumed have been recorded at their fair value at the
date of acquisition. The excess of the purchase price, including acquisition
costs, over the fair values of the net assets acquired has been recorded as
goodwill.
On September 13, 1998, the Company acquired all of the outstanding stock
of Treasure Chest Computers, Inc. ("Treasure Chest Computers"), a direct
marketer of computers and computer-related products for 451,338 shares of the
Company's common stock, plus acquisition costs. The acquisition has been
accounted for by the purchase method of accounting and accordingly the assets
purchased and liabilities assumed have been recorded at their fair value at the
date of acquisition. The excess of the purchase price, including acquisition
costs, over the fair values of the net assets acquired has been recorded as
goodwill.
The condensed consolidated financial statements include the accounts of
Insight Enterprises, Inc. and its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In July 1998, the Company's Board of Directors approved a 3-for-2 stock
split effected in the form of a stock dividend and payable on September 8, 1998
to the stockholders of record at the close of business on August 17, 1998. All
share amounts and earnings per share have been retroactively adjusted to reflect
this 3-for-2 stock split. All share amounts and earnings per share also reflect
the 3-for-2 stock split effected in the form of a stock dividend which was paid
on September 17, 1997.
In January 1998, Insight changed its fiscal year end to December 31
from June 30.
3. LINE OF CREDIT
Insight has a $70,000,000 credit facility with a finance company. The
agreement provides for cash advances outstanding at any one time up to a maximum
of $70,000,000 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 1.40% (6.74% at
September 30, 1998) 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,
1998, the balance of this portion of the credit facility was $15,607,000. As of
September 30, 1998, an additional $50,866,000 was available under the line of
credit.
The credit facility expires in August 2000 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
requirements that the Company maintain a specific dollar amount of tangible net
worth and restrictions on payment of cash dividends.
4. LONG-TERM DEBT
In May 1998, the Company completed a long-term financing arrangement on
its sales facility in Tempe, Arizona. The financing arrangement totals
$8,625,000 at a fixed interest rate of 7.15% and will be fully amortized over
the 15-year period. The debt is secured by the property and the improvements.
In conjunction with the Treasure Chest Computers acquisition, the Company
assumed long term debt, which had a total outstanding balance on September 30,
1998 of $549,000 and a weighted interest rate of 8.09%. The notes mature in
April, 2000 and July, 2001. The debt is secured by substantially all of the
assets of Treasure Chest Computers.
5. INCOME TAXES
Income tax expense as provided for the three and nine months ended
September 30, 1998 and 1997 is based upon the estimated annual income tax rate
of the Company.
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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998. SFAS 130
establishes standards for the reporting and presentation of comprehensive income
and its components in financial statements. Comprehensive income encompasses net
income and "other comprehensive income," which includes all other non-owner
transactions and events that change stockholders' equity. Other comprehensive
income for the three and nine months ended September 30, 1998 and 1997 was
immaterial.
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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, management of rapid growth, need for additional financing, reliance
on suppliers, rapid change in product standards, inventory obsolescence, risk of
business interruption, changing methods of distribution, sales and income tax
uncertainty, future acquisitions, increasing marketing, postage and shipping
cost, reliance on outsourcing arrangements, year 2000 issues, and dependence on
key personnel. 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, 1997, as filed with the
Securities and Exchange Commission.
OVERVIEW
The Company commenced operations in 1988 as a direct marketer of hard disk
drives and other mass storage products. In 1990, the Company began marketing its
own Insight-brand computers and in 1991 and 1992, added hardware, software and
other name brand computers to its product line. Through 1992, the Company based
its marketing practices primarily on advertising in computer magazines and the
use of inbound toll-free telemarketing. In 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 1995, the Company began to de-emphasize the sale of
Insight-branded computers and discontinued the sale of Insight-branded computers
in the fourth quarter of 1995. Although the cost savings from this decision have
positively impacted earnings from operations, gross profit percentage has been
negatively affected. The Company expects gross margins to continue to decline in
1998 primarily due to pricing strategies and market conditions.
During 1995, the Company nearly doubled its catalog circulation to
aggressively test new lists and generate leads. In 1997, the Company did not
increase its catalog circulation because the Company used the information
generated from prior years' tests to target mailings to its best prospective
customers while increasing its focus on penetrating existing accounts. In 1997,
the Company continued to increase its focus on the business, education and
government markets, which aggregated approximately 89% of its business in
calendar 1997. The Company has hired a number of senior sales managers and
account executives, and plans to continue to actively increase its account
executive base by approximately 50 to 100, net, per quarter during 1998.
In October 1997, the Company began operations in Canada and on April 3,
1998, the Company acquired a computer direct marketing company in the United
Kingdom ("U.K."). International sales represented 7.9% of net sales, in the
quarter ended September 30, 1998. On September 14, 1998, the Company acquired
Treasure Chest Computers, a New Orleans, Louisiana-based direct marketer of
computers and computer-related products.
In order to leverage its infrastructure, the Company, in 1992, began
providing direct marketing services to third parties. Under some 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
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 net sales 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. Additionally, some of the programs may be seasonal in nature, as
their target customers can have cyclical buying patterns. Outsourcing
represented 10.0% and 8.2% of the Company's sales for the nine months ended
September 30, 1998 and 1997, respectively.
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. The continued acceptance
of electronic commerce might place additional pricing pressure on the Company.
Such price reductions 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
Net sales ......................... 100.0% 100.0% 100.0% 100.0%
Costs of goods sold ............... 88.5 87.7 88.0 87.4
------ ------ ------ ------
Gross profit ................ 11.5 12.3 12.0 12.6
Selling, general and administrative
expenses ....................... 8.3 8.8 8.7 9.1
------ ------ ------ ------
Earnings from operations .... 3.2 3.5 3.3 3.5
Non-operating income (expense), net (0.0) (0.0) (0.0) 0.0
------ ------ ------ ------
Earnings before income taxes 3.2 3.5 3.3 3.5
Income tax expense ................ 1.2 1.4 1.3 1.4
------ ------ ------ ------
Net earnings ................ 2.0% 2.1% 2.0% 2.1%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net Sales. The Company's net sales are comprised of direct marketing sales and
sales from outsourcing arrangements with manufacturers. Net sales increased
$89.9 million, or 52%, to $261.2 million for the three months ended September
30, 1998 from $171.3 million for the three months ended September 30, 1997. The
Company increased its number of orders shipped by 55% from 174,000 for the
quarter ended September 30, 1997 to 270,000 for the quarter ended September 30,
1998. International sales represented $20.5 million or 7.9% of total net sales
for the quarter ended September 30, 1998. The Company's organic growth,
excluding the sales from the recently acquired U.K. operations, and Treasure
Chest Computers was still 42%.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 (CONTINUED)
Sales derived from direct marketing increased $74.9 million, or 50%, to
$225.9 million for the three months ended September 30, 1998 from $151.0 million
for the three months ended September 30, 1997. The increase in direct marketing
sales resulted primarily from increased emphasis on outbound telemarketing,
deeper account penetration, a greater percentage of business customers, an
increase in the Company's customer base and internet enhancements that have
increased unassisted transactions from 1.8% of sales to 5.2% of sales for the
quarters ended September 30, 1997 and 1998, respectively.
Sales derived from outsourcing arrangements increased $15.0 million, or
74%, to $35.3 million for the three months ended September 30, 1998 from $20.3
million for the three months ended September 30, 1997. Due to a seasonal
outsourcing program that was obtained last year, outsourcing sales sequentially
increased in the third quarter and became a larger percentage of total sales.
Outsourcing sales represented 13.5% and 11.9% of total sales in the quarters
ended September 30, 1998 and 1997, respectively. The increase in sales from
outsourcing services resulted from the successful addition of new programs and
the increase in the volume of the seasonal outsourcing program mentioned above.
New outsourcing programs can be seasonal in nature, as their target customers
can have cyclical buying patterns. The growth rate of the outsourcing
arrangements may also be affected by the mix of outsourcing arrangements -
service-based versus revenue-based. The Company is actively seeking other
outsourcing arrangements with major manufacturers.
Gross Profit. Gross profit increased $9.1 million, or 43%, to $30.1
million for the three months ended September 30, 1998 from $21.0 million for the
three months ended September 30, 1997. As a percentage of sales, gross profit
decreased from 12.3% for the three months ended September 30, 1997 to 11.5% for
the three months ended September 30, 1998. The decline in gross profit
percentage primarily resulted from: the seasonal outsourcing program mentioned
above that has lower gross profit percentage products; product shortages that
were prevalent during the quarter causing the Company to pay higher prices for
needed products; and increases in shipping rates. The Company expects its gross
profit percentage to increase sequentially in the fourth quarter of 1998 due to
the lessened impact of the seasonal outsourcing program, but to then decline in
1999 primarily due to pricing strategies, supplier reimbursement programs,
market conditions and shifts in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.6 million, or 44%, to $21.7 million for the
three months ended September 30, 1998 from $15.1 million for the three months
ended September 30, 1997, but decreased as a percentage of net sales to 8.3% for
the three months ended September 30, 1998 from 8.8% for the three months ended
September 30, 1997. The decline was attributable to increased economies of
scale, continued cost-cutting measures and the issuance of restricted stock to
selected employees. This decline was partially offset by the additional costs of
hiring and training new account executives, costs associated with rapid growth
and relatively higher operating expenses in the U.K. In the quarter ended
September 30, 1998, the Company added 95 account executives. This number
includes 30 account executives added with the Treasure Chest Computer
acquisition in September 1998. The Company completed its move of its main
distribution center to Indiana during the quarter ended September 30, 1998
thereby incurring on a temporary basis the overlapping expenses of two main
distribution centers in the United States.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 (CONTINUED)
Non-Operating Income (Expense), Net. Non-operating expense, net, which
consists primarily of interest expense, increased to $124,000, for the three
months ended September 30, 1998 from $40,000, for the three months ended
September 30, 1997. Interest expense primarily relates to borrowings under the
Company's line of credit and long-term debt which have been necessary to finance
the Company's growth and sales facility. Interest income was generated by the
Company through short-term investments, some of which are tax advantaged bonds.
Income Tax Expense. The Company's effective tax rate was 37.7% and 40.4%
for the quarters ended September 30, 1998 and 1997, respectively. The decrease
in the effective tax rate reflects the implementation of a tax minimization
strategy during 1998, changes to Arizona income taxes and investments made in
tax advantaged bonds, but was partially offset by an increase in the Company's
marginal Federal income tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Net Sales. The Company's net sales are comprised of direct marketing sales
and sales from outsourcing arrangements with manufacturers. Net sales increased
$264.0 million, or 60%, to $705.4 million for the nine months ended September
30, 1998 from $441.4 million for the nine months ended September 30, 1997. The
Company increased its number of orders shipped by 50% from 502,000 to 753,000
for the nine months ended September 30, 1997 and 1998, respectively. The
Company's organic growth, excluding the sales from the recently acquired U.K.
and Treasure Chest Computers operations, was still 53%.
Sales derived from direct marketing increased $229.6 million, or 57%, to
$634.9 million for the nine months ended September 30, 1998 from $405.3 million
for the nine months ended September 30, 1997. The increase in direct marketing
sales resulted primarily from increased emphasis on outbound telemarketing,
deeper account penetration, a greater percentage of business customers, an
increase in the Company's customer base and internet enhancements that have
increased unassisted transactions.
Sales derived from outsourcing arrangements increased $34.4 million, or
95%, to $70.5 million for the nine months ended September 30, 1998 from $36.1
million for the nine months ended September 30, 1997. The increase in sales from
outsourcing services resulted from the successful addition of new programs. Some
of these new outsourcing programs can be seasonal in nature, as their target
customers can have cyclical buying patterns. The growth rate of the outsourcing
arrangements may be affected by the mix of outsourcing arrangements -
service-based versus revenue-based. The Company is actively seeking other
outsourcing arrangements with major manufacturers.
Gross Profit. Gross profit increased $29.2 million, or 52%, to $84.9
million for the nine months ended September 30, 1998 from $55.7 million for the
nine months ended September 30, 1997. As a percentage of sales, gross profit
decreased from 12.6% for the nine months ended September 30, 1997 to 12.0% for
the nine months ended September 30, 1998. As a percentage of net sales, gross
margin on the Company's sales decreased due to a continued shift in product mix,
pricing strategies, market conditions and a change in product mix within the
revenue-based portion of its outsourcing business.
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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, 1998 AND SEPTEMBER 30, 1997 (CONTINUED)
Also, the addition of new outsourcing programs, over the last 12 months has had
a negative impact on the overall gross profit percentage.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $20.8 million, or 51%, to $61.3 million for
the nine months ended September 30, 1998 from $40.5 million for the nine months
ended September 30, 1997, but decreased as a percentage of net sales to 8.7% for
the nine months ended September 30, 1998 from 9.1% for the nine months ended
September 30, 1997. The decline was attributable to increased economies of
scale, an increase in the average order size, continued cost-cutting measures
and more effective marketing which were partially offset by the additional costs
of hiring and training new account executives, costs associated with rapid
growth and relatively higher operating expenses in the U.K.
Non-Operating Income (Expense), Net. Non-operating income (expense), net,
which consists primarily of interest, decreased to ($617,000) for the nine
months ended September 30, 1998 from $215,000 for the nine months ended
September 30, 1997. Interest expense primarily relates to borrowings under the
Company's line of credit and long-term debt which have been necessary to finance
the Company's growth and finance the sales facility. Interest income was
generated by the Company through short term investments, some of which are tax
advantaged bonds.
Income Tax Expense. The Company's effective tax rate was 38.2% and 40.3%
for the nine months ended September 30, 1998 and 1997, respectively. The
decrease in the effective tax rate reflects the implementation of a tax
minimization strategy during 1998 and changes to Arizona income taxes, but was
partially offset by an increase in the Company's marginal Federal income tax
rate. The effective tax rate in both years includes the benefits of investments
made in tax-advantaged bonds.
SEASONALITY
The Company has historically experienced seasonal fluctuations in its
growth of net sales, earnings from operations and net earnings. As the Company
has increased its percentage of sales from the business, education and
government markets, the Company's quarterly net sales, earnings from operations
and net earnings have been less impacted by seasonality. The Company's net sales
growth rate, earnings from operations and net earnings as a percentage of net
sales could be affected by the mix of outsourcing arrangements which are in
place from time to time. Additionally, some of the outsourcing programs can be
seasonal in nature, as their target customers can have cyclical buying patterns.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
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 historically 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 in the business,
education and government markets. However, the Company's net cash provided by
operating activities was $42.2 million for the nine months ended September 30,
1998, as compared to $15.1 used in operating activities for the nine months
ended September 30, 1997. The positive cash flow in the current year was
primarily generated from a $21.5 million increase in accounts payable, a $29.0
million decrease in inventory and net earnings of $14.2 million. These funds
were primarily used to fund a $35.6 million increase in accounts receivable and
net repayments of $32.1 million of debt.
Capital expenditures for the nine months ended September 30, 1998 and 1997
were $7.1 million and $7.6 million, respectively. Capital expenditures for the
nine months ended September 30, 1998 primarily relate to equipment for the
Company's new distribution center in Indiana and furniture and equipment for
additional office space in Tempe, Arizona. Capital expenditures for the nine
months ended September 30, 1997 primarily relate to the continued upgrade of the
Company's equipment, systems and the Company's Sales 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 to accommodate future growth. The
Company anticipates that cash flow from operations together with the funds
available under its credit facility should be adequate to support the Company's
presently anticipated cash and working capital requirements through 1998. The
Company's ability to continue funding its planned growth beyond 1998 is
dependent upon its 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 $70 million credit
facility.
YEAR 2000 COMPLIANCE
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to business disruptions. The potential costs and
uncertainties associated with this issue will depend on a number of factors,
including software, hardware and the nature of the industry in which a company
operates. Additionally, companies must coordinate with other entities with which
they electronically interact, such as customers, vendors and lenders.
The Company has commenced, but not completed, an assessment of its Year
2000 issues with respect to both information technology ("IT") systems and
non-IT systems. The Company expects to complete its assessment in the first
quarter of 1999. The Company's Year 2000 plan also includes remediation,
testing, and contingency planning phases.
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 COMPLIANCE (CONTINUED)
The Company is in the process of replacing its core-business function
applications in order to accommodate its expanding business needs. These
applications are believed to be Year 2000 compliant software, purchased with
such certification from the source vendor. These applications are scheduled to
be installed during the first quarter of 1999 at which point the Company will
proceed to the testing phase. Additionally, as a contingency measure, the
Company is modifying its existing core-business functions applications to be
Year 2000 compliant. The Company presently believes that with modifications to
existing software, the cost of which is not expected to be material, the Year
2000 problem will not pose significant operational problems for the Company's
internal operations. To date, the Company's assessment of non-IT systems, such
as its buildings and equipment, has not revealed any material Year 2000 issues,
assuming no disruption in telephone, electric and delivery services.
As part of the Company's Year 2000 assessment, it is continuing to verify
the Year 2000 readiness of third parties (vendors, customers and lenders) with
whom the Company has material relationships. At present, the Company is not able
to determine the effect on the Company's results of operations, liquidity, and
financial condition in the event the Company's material vendors, customers and
lenders are not Year 2000 compliant. In a worst case scenario, possible
consequences include loss of communications links, loss of electric power, and
inability to process transactions or engage in similar normal business
activities resulting in the inability to sell and deliver products to customers.
In addition, since not all customer situations can be anticipated, the Company
may experience sales returns of merchandise, although such returns should not
materially affect the Company's financial condition. The Company will continue
to monitor the progress of its material vendors, customers and lenders and
formulate a contingency plan at that point in time when the Company does not
believe a material vendor, customer or lender will be compliant. The Company's
internal contingency planning is not yet complete and will be reviewed regularly
until Year 2000 actually begins.
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INSIGHT ENTERPRISES, INC.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On September 13, 1998, the Company acquired all of the outstanding
capital stock of Treasure Chest Computers Inc., a Louisiana corporation.
Treasure Chest Computers is based in Louisiana and is engaged in the business of
direct marketing of computers, motherboards, hard drives, video cards and
monitors. In connection with the acquisition, the Company issued an aggregate of
451,338 shares of its Common Stock to the four stockholders of Treasure Chest
Computers (Gary Oreman, Darin Oreman, Eleanor Oreman, and Jay Oreman). Exemption
from registration for the issuances 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Form of Restricted Stock Agreement
21 Subsidiaries of the Registrant
27.1 Financial Data Schedule for the nine months ended September
30, 1998.
27.2 Financial Data Schedule for the nine months ended September
30, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which the
report is filed.
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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 12, 1998 INSIGHT ENTERPRISES, INC.
BY: /S/ ERIC CROWN
ERIC J. CROWN
CHIEF EXECUTIVE OFFICER
BY: /S/ STANLEY LAYBOURNE
STANLEY LAYBOURNE
CHIEF FINANCIAL OFFICER, SECRETARY
AND TREASURER
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EXHIBITS
10 Form of Restricted Stock Agreement
21 Subsidiaries of the Registrant
27.1 Financial Data Schedule for the nine months ended September
30, 1998.
27.2 Financial Data Schedule for the nine months ended September
30, 1997.