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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/ X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 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
(STATE OR OTHER JURISDICTION OF 86-0766246
INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
6820 SOUTH HARL AVENUE
TEMPE, ARIZONA 85283
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 902-1001
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
(TITLE OF CLASS)
.........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 report(s)), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant, based upon the closing price of the
Registrant's Common Stock as reported on the Nasdaq National Market on February
26, 1999, was approximately $505,703,000. Shares of Common Stock held by each
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
for other purposes.
The number of outstanding shares of the Registrant's Common Stock on
February 26, 1999 was 25,495,482.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 13, 1999 are incorporated by reference in Part
III hereof.
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INSIGHT ENTERPRISES, INC.
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business................................................................. 1
ITEM 2. Properties............................................................... 10
ITEM 3. Legal Proceedings........................................................ 10
ITEM 4. Submission of Matters to a Vote of Security Holders...................... 10
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder
Matters............................................................... 10
ITEM 6. Selected Consolidated Financial and Operating Data....................... 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and..........
Results of Operations................................................. 12
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk............... 20
ITEM 8. Financial Statements and Supplementary Data.............................. 20
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 20
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................... 20
ITEM 11. Executive Compensation................................................... 20
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........... 21
ITEM 13. Certain Relationships and Related Transactions........................... 21
PART IV
ITEM 14. Exhibits and Reports on Form 8-K......................................... 21
SIGNATURES ......................................................................... 23
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PART I
ITEM 1. BUSINESS
GENERAL
Insight (the "Company") is a global direct marketer of brand name
computers, hardware and software. The Company markets primarily to small- and
medium-sized businesses comprised of 50 to 1,000 employees, through a
combination of a strong outbound telemarketing sales force, electronic commerce,
electronic marketing and direct mail catalogs. The Company offers an extensive
assortment of more than 80,001 SKUs of computer hardware and software, including
such popular name brands as Compaq, Hewlett-Packard, IBM, NEC, Microsoft,
Seagate, Toshiba and 3COM. Insight's knowledgeable sales force, aggressive
marketing strategies and streamlined distribution, together with its advanced
proprietary information system, have resulted in high customer loyalty and
strong, profitable growth.
The Company seeks to create strong, long-term relationships with its
customers through the use of a well-trained, dedicated outbound sales force
whose goal is to increase the depth of penetration in its existing accounts,
encourage repeat buying and ensure customer satisfaction. To that end, the
Company has increased its number of account executives by 730% over five years,
from 129 in 1993 to 1,072 at the end of 1998, most of whom focus on outbound
telemarketing.
The Company has developed a highly refined operating model to support an
efficient fulfillment and distribution infrastructure. The Company believes its
technologically advanced, proprietary real-time information systems enhance the
integration of its sales, distribution and accounting functions, allow it to
leverage operating expenses and further improve customer service. Moreover, its
efficient use of technology has resulted in an expanded product offering while
maintaining a "just-in-time" inventory system.
In 1998, the Company expanded its operations outside of North America with
the acquisition of two European computer direct marketing companies. The first,
in April 1998, was the acquisition of a full-service direct marketing
organization based in Worksop, England, along with 85% of a related internet
service provider company. In December 1998, the Company acquired a leading
direct marketer based near Frankfurt, Germany. The Company's international
subsidiaries - including the operation Insight established in Montreal, Canada
in 1997 - represented eight percent of net sales in 1998.
In September 1998, the Company increased its customer base in the United
States with the acquisition of New Orleans-based computer direct marketer
Treasure Chest Computers, Inc.
The Company's objective is to increase sales and generate improved
profitability in all areas by (i) expanding globally, (ii) increasing the
penetration of its existing customer base, (iii) leveraging its existing
infrastructure, (iv) expanding its product offerings and customer base and (v)
utilizing emerging technologies. The Company's goal is to become the primary
source of computer and related products to its targeted market.
The Company's executive offices are located at 6820 South Harl Avenue,
Tempe, Arizona 85283, and its telephone number is (602) 902-1001. Administrative
offices, the Company's outsourcing subsidiary and related distribution
facilities are also situated in Tempe, Arizona. Insight's full-service
distribution center was relocated to Indianapolis, Indiana in early 1998. The
Company maintains a World Wide Web site at www.insight.com.
Insight was incorporated in Delaware in 1991 and is the successor to the
business that commenced operations in 1988. Unless the context otherwise
requires, the "Company" or "Insight" as used herein refers to Insight
Enterprises, Inc. and its subsidiaries and predecessors.
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INDUSTRY BACKGROUND
U.S. and worldwide computer, hardware and software sales continue to
increase. The Company believes that sales of computers and related products have
increased principally as a result of the following: (i) decreases in prices of
computers, hardware and software resulting primarily from intense competition
among manufacturers, retailers and resellers; (ii) improvements in computer
hardware performance and development of new software applications; (iii)
increased use of computers by businesses, education institutions and
governments; (iv) increased user familiarity with computers; (v) rapid
technological advances and resulting short product life cycles; and (vi) the
emergence of industry standards and component commonality.
The market for computers and related products is served by a variety of
distribution channels, and intense competition for market share has forced
computer manufacturers to seek new channels through which to distribute their
products. According to industry data, the direct marketing channel, the channel
in which the Company operates, has been the fastest growing segment of the U.S.
and worldwide PC product markets.
Many businesses and individuals, increasingly familiar with computers, seem
to have become more receptive to direct marketing and now make their purchase
decisions based primarily on product selection and availability, price,
convenience and customer service. Direct marketers generally are able to offer
broader product selection, lower prices and greater purchasing convenience than
traditional retail stores.
The Company believes new entrants into the direct marketing channel must
overcome a number of significant barriers to entry, including the time and
resources required to build a customer base of sufficient size and a well
trained account executive sales base, the significant investment required to
develop the information and operating infrastructure required for a direct
marketer, the advantages enjoyed by larger established competitors in terms of
purchasing and operating efficiencies, the established relationships with
manufacturers who may be reluctant to allocate product and cooperative
advertising funds to additional participants and the difficulty of identifying
and recruiting management personnel with significant relevant experience.
The Company believes that it will continue to benefit from industry changes
as a cost-effective provider of a full range of computer and related products
through direct marketing. The Company believes that traditional distribution
channels, such as retail stores, have not satisfied the key customer purchase
criteria of product selection and availability, price, convenience and customer
service, thus creating an opportunity for growth of direct marketers of computer
products such as the Company. Additionally, the Company believes that recently
emerging internet-only computer providers, though currently offering attractive
pricing, are not able to offer the necessary support functions (e.g. dedicated
account executive, term purchases, efficient return privileges) to satisfy the
Company's targeted customer, the small and medium business.
OPERATING STRATEGY
The Company's objective is to become the global leader in the direct sales
and direct marketing of computers and related products to the computer literate
end-user. The key elements of the Company's strategy are as follows:
Small- to Medium-Sized Business Market Focus. The Company targets
businesses with 50 to 1,000 employees, which it believes is one of the most
valuable segments of the computer market. The Company's operating model
positions it to more effectively serve this business segment of the market
through its extensive product availability, high service levels, cost-effective
distribution system and technological innovation. The Company believes these
business customers represent the most attractive segment of the industry because
they demand leading, high-performance technology products, purchase frequently,
are value conscious and require less technical support.
Well Trained Account Executives Supported by Attractive Targeted Marketing.
The Company focuses its effort on outbound telemarketing and, to this end, has
increased the number of account executives at a compound annual rate of 53% over
the last five years to 1,072 in 1998. To support this effort, the Company has
prioritized its database, assigned account responsibility and enhanced sales
training. The Company offers its products through integrated direct marketing
that includes outbound and inbound telesales, electronic commerce, electronic
direct marketing, printed catalogs and advertisements in international trade
publications.
Use of E-Commerce. The Company actively promotes the use of e-commerce with
its customers. The Company believes that providing the customer with a seamless
e-commerce system supported by well trained account executives results in a
highly efficient business model with high customer satisfaction. Additionally,
through the promotion of e-commerce the Company hopes to increase account
executive production and increase the ease of doing business with the Company.
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Building Customer Loyalty. The Company strives to create a strong,
long-term relationship with its business customers to increase the productivity
of its existing accounts, encourage repeat buying and ensure customer
satisfaction. The Company believes that a key to building customer loyalty is a
team of knowledgeable and empowered account executives backed by a strong
support staff. Most business customers are assigned a trained account executive
who handles orders, notifies them of products and services that may be of
specific interest and acts as a liaison between the customer and the rest of the
Company. The Company believes these strong one-on-one relationships improve the
likelihood that the customer will consider the Company for future purchases. As
a result of this effort, approximately two-thirds of the Company's orders in
each of 1998 and 1997 were placed by customers who had previously purchased
products from the Company.
Broad Selection of Branded Products. The Company provides the convenience
of one-stop shopping by offering its customers a broad, comprehensive selection
of more than 80,001 computer and computer-related products based on the Wintel
standard. The Company offers brand name products of manufacturers, including,
among others, Compaq, Hewlett-Packard, IBM, NEC, Microsoft, Seagate, Toshiba and
3COM. The Company's breadth of product offering combined with its efficient,
high-volume and cost-effective direct marketing practices allow it to offer its
customers competitive prices. The Company has developed "direct-ship" programs
with some of its suppliers through the use of electronic data interchange links
allowing it to expand further its product offerings without increasing its
inventory and handling costs or exposure to inventory risk.
Efficient Technologically-Driven Operator. The Company has developed a
highly refined operating model to support an efficient fulfillment and
distribution infrastructure. The Company's business model has yielded inventory
turns of 26 and 17 times in 1998 and 1997, respectively. The Company also uses
technologically advanced, proprietary, real-time information systems to enhance
the integration of its sales, distribution and accounting functions, with the
goal of lowering operating expenses and further improving customer service and
satisfaction levels. To minimize its inventory exposure, the Company uses a
variety of inventory control procedures and policies, including automated
"just-in-time" management and electronic "direct-ship" programs with suppliers.
Fifty percent of the Company's orders in 1998 were shipped directly to the
customer from the supplier. In addition, the Company uses other automated
systems involving telephony, credit card processing and electronic catalog
production to further streamline operations and to continue to improve
profitability and increase customer satisfaction. The Company has leveraged
these core operating competencies by offering outsourcing of direct marketing
services to leading manufacturers and expects to continue to opportunistically
leverage these capabilities in the future.
GROWTH STRATEGY
The Company's growth strategy is to increase sales and earnings by (i)
expanding globally, (ii) increasing penetration of its existing customer base,
(iii) leveraging its existing infrastructure, (iv) expanding its product
offerings and customer base and (v) utilizing emerging technologies.
Global Expansion. The Company seeks to become a global leader in direct
marketing. To that end, the Company established operations in Canada in 1997 and
in 1998 acquired direct marketers in the United Kingdom and Germany. For the
year ended December 31, 1998, eight percent of the Company's net sales were from
international subsidiaries. The Company intends to continue expanding globally
through additional acquisitions of direct marketing companies utilizing
ultimately a similar operating strategy as that used in the United States.
Increase Penetration of Existing Customer Base. The Company seeks to become
the primary source of computer and related products to its target market. To
achieve this goal, one of the Company's principal focus areas is to increase
penetration of existing accounts by developing and increasing the number of
account executives who focus on outbound telemarketing opportunities. The
Company believes proactive account management and the assignment of individual
account executives, dedicated to developing closer relationships with active
business customers, will enable it to increase the volume, frequency and breadth
of the business. The Company has increased the number of its account executives
by 730% since 1993 to 1,072 as of December 31, 1998, most of whom focus on
outbound telemarketing. In addition, the Company has added senior level sales
managers to its management team in order to enhance sales productivity. The
Company continues to prioritize its customer database to better understand and
service its customers and to expand the long-term nature of its customer
relationships.
Leverage Existing Infrastructure. The Company has expended considerable
resources to develop its infrastructure to support its planned growth. Since the
end of 1997, the Company has increased the number of its account executives by
420, invested in its information system and Internet upgrades/improvements and
relocated its inventory to a new United States distribution center in
Indianapolis, Indiana. The Company believes that ultimately these investments
should allow the Company to increase its sales without a corresponding increase
in selling, general and administrative expenses. The Company expects to continue
to reduce its selling, general and administrative expenses as a percent of sales
to further improve profitability through increased productivity of the new
account executives, cost-effective marketing, the utilization of electronic
commerce and economies of scale. In addition, the Company has developed strong
relationships with its suppliers and continues to offset some expenses through
the receipt of supplier reimbursements. The Company intends to
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continue to leverage its core operations by offering outsourcing of direct
marketing services to leading manufacturers of computers and related products.
Expand Product Offering and Customer Base. The Company offers an extensive
assortment of products. Many of its products are offered through the use of its
proprietary software which enables the Company to maintain a "virtual inventory"
through real-time access to supplier products via electronic data interchange
links. In 1998, 50% of the Company's shipments were direct shipped from
non-Insight distribution facilities, as compared to 29% in 1997. The Company
will continue to expand its product offerings through increased use of the
electronic "direct ship" programs with suppliers as well as seeking new product
authorizations as they become available to direct channels. In addition, the
Company is analyzing domestic and international acquisition opportunities that
would further expand and enhance its existing product offerings to the business
customer. The Company seeks to acquire new accounts through its outbound
telemarketing force, electronic commerce, electronic marketing and other
strategies.
Utilize Emerging Technologies. The Company believes it has historically
been a leader in creating and capitalizing on emerging technologies within
direct marketing and it expects to continue to capitalize on such new advances.
The Company expects to continue to utilize emerging marketing and distribution
channels such as the Internet and on-line computer services to generate sales,
distribute product information, provide product support and obtain additional
customer leads. The Company experienced a 375% increase in unassisted Internet
sales, approximately 5.2% and 1.8% of its sales in 1998 and 1997, respectively.
The Company believes that its business customer audience is technologically
sophisticated and will adopt such services. These new distribution channels
continue to increase the scope of the Company's marketing efforts, and
management believes that they will lead to increased sales and profitability. In
particular, the Company believes that its direct marketing capabilities will
provide it a competitive advantage in the rapidly expanding Internet commerce
channel. The Company expects to further utilize its direct marketing expertise
in order fulfillment and distribution to take advantage of these new direct
marketing channels as they continue to develop.
MARKETING
The Company sells its products through the direct marketing channel. The
Company's marketing programs are designed to attract new customers and to
stimulate additional purchases from existing customers. Through its marketing
programs, the Company emphasizes its broad product offering, competitive
pricing, fast delivery, customer support and multiple payment options. The
Company uses a number of marketing techniques to reach existing and prospective
customers including outbound telemarketing, electronic marketing and
communications, catalogs, advertising and specialty marketing programs.
Outbound Telemarketing. The Company maintains a core group of outbound
telemarketing account executives who contact specified customers on a systematic
basis to generate additional sales. In addition, when time permits, these
account executives utilize various prospecting techniques in order to increase
the size of their customer base. The Company believes that small- and
medium-sized businesses respond favorably to a one-on-one relationship with
personalized service from well-trained account executives. Once established,
these one-on-one relationships are maintained and enhanced through frequent
telecommunications and supplemented by customized marketing materials designed
to meet each customer's specific computing needs. At December 31, 1998, the
Company employed 1,072 account executives, an increase of 64% from 652 account
executives at December 31, 1997, most of whom are focused on outbound marketing.
Electronic Marketing and Communications. The Company maintains a global Web
site, www.insight.com, which features the Company's current product offerings,
special promotions, technical product specifications and other useful
information. Customers may place orders while at the site using a credit card or
electronic purchase order. Unassisted Web orders - those transacted without the
assistance of an Insight account executive - represented 5.2% of the Company's
net sales in 1998. The Company believes this percentage will increase going
forward as the popularity of the Internet grows and as businesses and electronic
customers increase their use of the Web to procure computing products.
The Company's outbound telesales account executives encourage their
customers to utilize the Internet for placing orders at www.insight.com and
offer selected businesses customized web sites that are designed by Insight's
electronic marketing team. These customized web areas allow businesses to
procure computing products from Insight at specially negotiated discounted
prices. The Company also creates awareness and sales of its products to an
audience of electronically savvy customers and prospects through graphically
rich electronic catalogs, electronic postcards and other branded sales messages
transmitted via E-mail.
Catalogs. The Company's catalogs are mailed to the Company's customers and
on a selective basis to potential customers. Active customers receive a catalog
several times a year depending on their purchasing history. Each catalog
provides detailed product descriptions, manufacturers' specifications, pricing
and the Company's service and support features. As part of its outsourcing
services, the Company also produces catalogs for certain manufacturers. These
catalogs are circulated periodically, and for select manufacturers the catalog
is inserted into the manufacturer's product packaging.
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Advertising. The Company places advertisements in selected personal
computer and trade magazines in the United Kingdom and Germany. These color
advertisements provide detailed product descriptions, manufacturers'
specifications and pricing information and emphasize the Company's service and
support features. Additionally, the Insight logo and telephone number are
included in promotions by selected manufacturers.
The Company also advertises its sales-oriented World Wide Web site through
independent content providers on commercial on-line services such as C|Net(R),
ZDNET and Net Buyer(R).
Specialty Marketing. The Company continues to increase its national
exposure, promote local interest and increase traffic on its Web site through
its sponsorship of the "Insight.com Bowl", a post-season intercollegiate
football game. The Company announced its multi-year sponsorship on November 6,
1997.
During the 1998 Insight.com Bowl, which was telecast live by ESPN on
December 26, 1998, and also during the national championship Fiesta Bowl which
was telecast live by ABC on January 4, 1999, the Company aired television
commercials showcasing the Company and its products. These 15-second spots were
designed to introduce the Insight brand to prospective customers and encourage
high-technology business buyers to visit Insight's Web site at www.insight.com.
Supplier Reimbursements. The Company obtains supplier reimbursements from
product manufacturers. In certain cases, the Company places advertisements in
catalogs and personal computer and trade magazines that feature the
manufacturer's product. The manufacturer may provide a mailing list and
generally reimburses the Company through discounts, advertising allowances,
price protections and rebates. In other cases, the Company receives
reimbursements from suppliers based upon the volume of purchases or sales of the
suppliers' product. No assurance can be given that the Company will continue to
receive such reimbursements or that it will be able to collect outstanding
amounts relating to these reimbursements in a timely manner or at all. A
reduction in or discontinuance of, a significant delay in receiving, or the
inability to collect such reimbursements could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company believes that supplier reimbursements leverage the Company's marketing
reach and build relationships with leading manufacturers.
Customers. The Company currently maintains an extensive database of
customers and potential customers. Based on dollar volume, approximate
percentages of net sales for 1998 to end-users in the Company's four major
market segments were as follows: business - 80%, education institutions - 7%,
government organizations - 3%, and home - 10%. The percentage of sales to
business customers has increased from 76% in 1997. No single customer accounted
for more than two percent of net sales during 1998.
SALES
Insight believes that its ability to establish and maintain long term
relationships and to encourage repeat purchases is dependent, in part, on the
strength of its account executives. Because its customers' primary contact with
the Company is through its account executives, the Company is committed to
maintaining a qualified and knowledgeable sales staff.
The Company emphasizes recruiting and training high-quality personnel. New
account executives are required to participate in an extensive training program
to develop proficiency and knowledge of the Company's products. This program
consists of class work focusing on technical product information, sales and
customer service and inbound and outbound sales experience. Additionally, the
Company, in conjunction with product manufacturers and distributors, sponsors
weekly training sessions introducing new products and emphasizing fast-selling
products. The Company also has a training program which seeks to refine sales
skills and introduce new policies and procedures. The Company's main sales
division is open 365 days a year, 24 hours a day.
Each account executive is responsible for building a customer base. Most
first time callers are assigned to an account executive. All subsequent incoming
calls from that customer are then directed to their account executive. The
Company's information system allows on-line retrieval of relevant customer
information, including the customer's history and product information, including
list price, cost and availability, as well as upselling and cross-selling
opportunities. Account executives are empowered to negotiate sales prices, and
part of their compensation is based upon the gross profit dollars generated.
Most account executives also make outbound sales calls to customers.
The Company attributes its high outbound call volume and favorable repeat
orders in part to the strength of its account executives. The Company has
established dedicated sales divisions focusing on business, education and
government accounts. These account executives have demonstrated the experience
needed to interact with sophisticated purchasing agents and the management
information staffs of larger organizations.
The Company has experienced an increase in average order size of two
percent from $896 in 1997 to $915 in 1998. This increase in average order size
is attributable to the increased sales to business customers and was partially
offset by decreasing prices on many products offered by the Company.
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PRODUCTS AND MERCHANDISING
The Company offers computers, hardware and software products. The following
chart provides information regarding selected products offered by the Company
during 1998 and 1997:
PERCENTAGE OF
PRODUCT SALES
--------------
PRODUCT CATEGORIES 1998 1997 SELECTED PRODUCT MANUFACTURERS
- ------------------ ---- ---- ------------------------------
Computers: Compaq IBM
Hewlett-Packard Toshiba
Notebooks............................... 22% 29%
Desktops................................ 18% 13%
Hard disk drives........................... 8% 13% Iomega Seagate
Quantum Western Digital
Memory/Processors.......................... 5% 7% Intel PNY
Kingston Viking
Monitors/Video............................. 6% 7% Mag Innovision Princeton Graphic
Systems
NEC ViewSonic
Network/Connectivity....................... 8% 7% Bay Networks Hewlett-Packard
Cisco Systems 3Com
Printers................................... 9% 6% Epson Lexmark
Hewlett-Packard Okidata
Software................................... 10% 8% Adobe Novell
Microsoft Symantec
Miscellaneous.............................. 14% 10% American Power Adaptec
Conversion Creative Labs
Computers are the largest product category of the Company, representing 40%
of product sales in 1998, down from 42% of product sales in 1997. The Company
continues to be a leading source for hard disk drives; however, although hard
disk drive capacities and speed continue to increase, prices have decreased,
causing the average order size to decrease. This has resulted in a decrease in
percent of product sales of hard disk drives from 13% in 1997 to eight percent
in 1998.
The Company selects its products based upon existing and proven technology.
The Company does not introduce a new product until it believes that a sufficient
market has developed for such product. The Company's product managers and buyers
evaluate new products and the effectiveness of existing products and select
products for inclusion in the Company's marketing based upon market demand,
product features, quality, sales trend, price, margins and warranties. As a
result of its goal to offer the latest in technology, the Company quickly
replaces slower selling products with new products. The Company offers more than
80,001 computer and computer-related products based on the Wintel standard.
Historically, the Company has made purchases/sales from/to other resellers in
order to offer its customers favorable pricing or to balance its inventory to
minimize inventory exposure risk.
SERVICE AND SUPPORT
Insight believes it achieves high levels of customer satisfaction. The
Company's dedication to prompt, efficient customer service are important factors
in customer retention and overall satisfaction.
Fast Product Delivery. Utilizing the Company's proprietary information
system, customer orders are sent to the Company's distribution center or to one
of the Company's "direct ship" suppliers for processing immediately after they
are credit approved. Federal Express has set up its own packing facility within
the Company's distribution facility, and the Company has integrated Federal
Express' labeling and tracking system into the Insight information system to
ensure prompt delivery. Additionally, the Company has integrated its information
system with its "direct ship" suppliers; as a result, the shipments from those
suppliers are transparent to Insight's customers. The Company ships most of its
orders on the day the orders are received and credit approved.
Specialty Communications. Company employees use the Internet network to
enhance customer support and inter-business correspondence. The network access
provides a convenient communication device enabling customers to contact their
sales, customer service and technical support representatives via text-based
E-mail messages. The customer may elect to receive a message via electronic mail
immediately upon shipment to confirm that the order has been shipped.
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Warranties and Product Returns. Most of the products marketed by the
Company are warranted by the manufacturer. The Company usually requests that
customers return their defective products directly to the manufacturer for
warranty service. On selected products and for selected customer service
reasons, the Company accepts returns directly from the customer and then either
credits the customer or ships the customer a similar but usually previously
repaired product from the Company's inventory. The Company generally offers a
limited 30-day money back guarantee for unopened products and selected opened
products, and selected products are subject to restocking fees. The returned
products are quickly processed and returned to the manufacturer for repair,
replacement or credit to the Company. Products that cannot be returned to the
manufacturer for warranty processing, but are in working condition, are sold
through the auction section of the Company's Web site, which helps to minimize
losses to the Company from returned products.
TECHNOLOGY BASED OPERATIONS
The Company believes its implementation of advanced technological systems
provides competitive advantages by increasing the productivity of its account
executives, delivering more efficient customer service and reducing order
processing and inventory costs. The Company's account executives can access the
information system to obtain (i) a customer history, (ii) the cost and
availability of the current order, (iii) the compatibility of products ordered
and (iv) cross-selling and up-selling opportunities based upon products ordered.
The Company believes that the information available to the Company's account
executives empowers them to make better decisions, provide superior customer
service and increase overall profitability. The Company has incorporated
redundancy in the Company's management information systems as well as back-up
systems and generators that will help to minimize the impact of any interruption
in the Company's management information systems or telecommunication systems.
The Company believes that its investment in information technology will continue
to improve its efficiency.
The Company has integrated its sales, accounting, inventory and
distribution systems. Utilizing the Company's proprietary information system,
orders are electronically sent to either the Insight distribution center or to a
"direct ship" supplier for processing immediately after credit approval. All
products received in the Company's distribution center have a UPC code,
manufacturer bar code or supplier bar code, or are issued an Insight bar code.
The Company's proprietary superscan process checks orders to ensure accurate
fulfillment prior to shipping and tracks the reduction in inventory. Currently,
the Company has implemented a re-ordering system that calculates lead times and,
in some instances, automatically re-orders from certain suppliers. The Company
has developed a sophisticated re-ordering system that accepts price quotes from
several competing suppliers and automatically re-orders from the supplier with
the most competitive price. The Company has integrated its order processing,
labeling and tracking systems with Federal Express to ensure overnight delivery
to the correct location. Additionally, the Company has implemented an on-line,
real time credit card address verification and approval system through a
third-party provider with Visa(R), MasterCard(R), American Express(R) and
Discover(R) to instantaneously match the address provided by the customer with
the specific credit card billing address and obtain transaction approval.
The Company's telephone system can automatically route calls, depending on
their originating data, to specific sales groups or the best-selling account
executives. The telephone system also uses menu systems that permit the
customers to route themselves to the appropriate service or sales area, or to
their assigned account executives.
PURCHASING AND DISTRIBUTION
Purchasing/Inventory Management. During 1998, the Company purchased
products from approximately 300 suppliers. Approximately 35% (based on dollar
volume) of these purchases were directly from manufacturers, with the balance
from distributors. Purchases from Ingram Micro, Inc., a distributor and the
Company's largest supplier, accounted for approximately 25% of the Company's
product purchases in 1998. The top five suppliers as a group (Ingram Micro;
Merisel, Inc. (a distributor); Toshiba America Information Systems, Inc.; Tech
Data Corporation (a distributor) and Hewlett-Packard Co) accounted for
approximately 70% of the Company's product purchases during 1998. The Company
believes it has excellent relationships with its suppliers, which have resulted
in favorable return and price protection policies, as well as promotional and
marketing allowances. Although brand names and individual products are important
to the Company's business, the Company believes that competitive sources of
supply are available in substantially all of its product categories and
therefore it is not dependent on any single supplier.
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Inventory Management. "Just-in-time" inventory management is utilized by
the Company as a way of reducing inventory costs. The Company's order
fulfillment and inventory controls allow the Company to forecast and order
products "just-in-time" for shipping. The Company promotes the use of electronic
data interchange with its suppliers, which helps to reduce overhead and the use
of paper in the ordering process. Additionally, some distributors will "direct
ship" products directly to the customer, which reduces physical handling by the
Company. Fifty percent of the Company's orders were direct shipped from
non-Insight distribution facilities in 1998. Such direct shipments are not
apparent to the customer. These inventory management techniques have allowed the
Company to offer a greater range of products without increased inventory
requirements and to have inventory turns of 26 and 17 times for 1998 and 1997,
respectively.
The industry in which the Company operates is characterized by rapid
technological change and the frequent introduction of new products and product
enhancement, and, while the Company attempts to anticipate and react to new
product introductions and to mitigate its exposure to losses from inventory
obsolescence, there can be no assurance that such efforts will be successful or
that unexpected new product introductions will not have a material adverse
effect on the demand for the Company's inventory.
Distribution Center. The majority of the Company's U.S. distribution
operations are conducted at the Company's 178,000-square foot state-of-the-art
shipping facility in Indianapolis, Indiana. Inventories were relocated to this
facility from the Company's Tempe, Arizona distribution center in 1998 to
benefit from distance-based freight rates and to allow for faster delivery of
product to the majority of its customers. Activities performed in this
distribution center include receipt and shipping of inventory. Orders are
transmitted electronically from the account executive to the distribution center
after credit approval, where a packing slip is printed automatically for order
fulfillment. All inventory items are bar coded and placed in designated bin
locations that are marked with both readable and bar coded identifiers. Product
movement is computer directed and radio frequency scanned for verification.
Radio frequency technology also is used to perform daily inventory cycle counts
to ensure inventory accuracy. A proprietary superscan process also is used to
ensure accurate order fulfillment. The Company has a separate building where all
return product and technical services are performed. The distribution facility
serving the Company's outsourcing operations remains in Tempe, Arizona and
includes computer system configuration. The Company also has distribution
facilities in Louisiana, Canada, the United Kingdom and Germany.
OUTSOURCING
The Company seeks to leverage its core competencies in direct marketing by
providing turnkey direct marketing services to leading manufacturers. The
Company believes that outsourcing provides the manufacturers the ability to
reduce operational overhead, stimulate demand for their products through other
marketing channels, increase sales and enhance customer satisfaction.
The Company currently provides direct marketing services to certain
manufacturers. These services generally include publishing and circulating
catalogs, placing advertisements under the manufacturer's name, providing
account executives dedicated solely to the manufacturer's product line,
configuration capabilities and fulfilling and/or shipping orders. The account
executives interface with customers as representatives of the applicable
manufacturers. In most cases, the Company is responsible for the granting of
credit and for the collection of accounts generated by these product sales, but
the manufacturer typically retains responsibility for warranty, service and
technical support of its products. In some cases, the 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. While the Company's predominant market focus will remain on
computer-related products, the Company intends to evaluate opportunities to
leverage its sales, marketing and distribution capabilities in areas involving
selected non-computer products from time to time.
COMPETITION
The computer and related products industry is highly competitive. The
Company expects competition to increase as retailers and direct marketers who
have not traditionally sold computer and related products enter the industry and
if the industry's rate of growth in the United States slows. The Company
competes with a large number and wide variety of marketers and resellers of
computers and related products, including traditional computer and related
products retailers, computer superstores, internet-only computer providers,
consumer electronics and office supply superstores, mass merchandisers and
national direct marketers (including value-added resellers and specialty
retailers, aggregators, distributors, franchisers, manufacturers and national
computer retailers some of which have commenced their own direct marketing
operations).
Certain of the Company's competitors have longer operating histories and
greater financial, technical, marketing and other resources than the Company. In
addition, many of these competitors offer a wider range of products and services
than the Company and may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Many current and
potential competitors also have greater name recognition and more extensive
promotional activities, offer more attractive terms to customers and adopt more
aggressive pricing policies than the Company. There can
8
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be no assurance that the Company will be able to compete effectively with
current or future competitors or that the competitive pressures faced by the
Company will not have a material adverse effect on the Company's business,
results of operations and financial condition.
SALES OR USE TAX
The Company presently collects sales tax only in states in which the entity
shipping the products has a presence. These states include Arizona, Louisiana
and Indiana. Various states have sought to impose on direct marketers the burden
of collecting state sales or use taxes on the sales of products shipped to that
state's residents. The United States Supreme Court has affirmed its position
that under the Commerce Clause of the United States Constitution, a state cannot
constitutionally impose sales or use tax collection obligations on an
out-of-state mail order company whose only contacts with the state are the
distribution of catalogs and other advertising materials through the mail and
the subsequent delivery of purchased goods by United States mail or by
interstate common carrier. If the Supreme Court changes its position or if
legislation is passed to overturn the United States Supreme Court's decision,
the imposition of a sales or use tax collection obligation on the Company in
states to which it ships products would result in additional administrative
expenses to the Company, could result in price increases to the customer or
otherwise have a material adverse effect on the Company. From time to time,
legislation to overturn this decision of the Supreme Court has been introduced,
although to date, no such legislation has been passed. The Company also collects
a valued added tax in Canada, the United Kingdom and Germany.
PATENTS, TRADEMARKS AND LICENSES
The Company does not maintain a traditional research and development group,
but works closely with computer product manufacturers and other technology
developers to stay abreast of the latest developments in computer technology.
Where necessary, the Company has obtained licenses for certain technology. The
Company conducts its business under the trademark and service mark "Insight" and
its related logo. The Company intends to use and protect these and its other
marks as it deems necessary. The Company believes its trademarks and service
marks have significant value and are an important factor in the marketing of its
products.
PERSONNEL AND TRAINING
As of December 31, 1998, the Company employed 2,066 persons; 628 were in
management support services and administration, 1,072 were account executives
and 366 were in warehouse/distribution. The Company's employees are not
represented by any labor union, and the Company has experienced no work
stoppages. The Company believes its employee relations are good.
Insight has invested in its employees' future and the Company's future,
through Insight University, an ongoing program of internal and external
training. The training programs include: a sales training program, a new hire
training program, general industry and computer education and employee and
management development. Insight's Sales Training Program is dedicated to
ensuring quality sales and customer services. Classes offered target the
positions of sales management, account executives and sales support by providing
new skills through the entire sales process. The Company's sales training
program encompasses a two-week extensive product, system and procedural training
program. Insight has contracted with Learning International, Inc., a training
company, to assist in focusing training in the areas of account penetration and
development. Management Development training is a focus for Insight and provides
each manager with individual development plans through classes relevant to
his/her needs.
REGULATORY AND LEGAL MATTERS
The direct response business as conducted by the Company is subject to the
Merchandise Mail Order Rule and related regulations promulgated by the Federal
Trade Commission, the Arizona Attorney General and various regulatory
authorities in other states from which the customers purchase products. The
Company believes it is in compliance with such regulations and has implemented
programs and systems to assure its ongoing compliance with such regulations.
There are no material legal proceedings pending against the Company.
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ITEM 2. PROPERTIES
The Company constructed a 103,000 square foot facility on 17 acres of land
in Tempe, Arizona which houses part of the Company's sales force and the
executive offices. The Company also leases approximately 190,000 square feet in
five facilities in Tempe, Arizona which houses its administrative, support and
outsourcing activities. In 1998, the Company leased a distribution center of
approximately 178,000 square feet in Indianapolis, Indiana. The Company also
leases another 18,000 square feet in Canada, 23,000 square feet in Louisiana,
42,000 square feet in the United Kingdom and 26,000 square feet in Germany. A
portion of the space in Canada is being used to house account executives
managing U.S. business accounts. The leases for approximately 39% of such space
expire in 1999, two percent expire in 2000, ten percent expire in 2001, two
percent expire in 2002, four percent expire in 2003, 38% expire in 2004 and the
remaining five percent expire between 2005 and 2012. The Company may require
more space in the future. The amount and timing of future space needs will
depend upon the extent of the Company's growth. The Company believes that
suitable facilities will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "NSIT." The bid price information included herein is derived from the
Nasdaq Monthly Statistical Report, represents quotations by dealers, may not
reflect applicable markups, markdowns or commissions and does not necessarily
represent actual transactions.
COMMON STOCK
--------------------------------
HIGH PRICE LOW PRICE
---------- ---------
Year 1997
First Quarter......................................... $ 10.815 $ 7.333
Second Quarter........................................ 9.037 6.889
Third Quarter......................................... 16.722 8.815
Fourth Quarter........................................ 20.111 13.722
Year 1998
First Quarter......................................... 19.084 14.778
Second Quarter........................................ 19.500 13.000
Third Quarter......................................... 25.333 17.111
Fourth Quarter........................................ 36.833 12.000
As of February 26, 1999, there were 25,495,482 shares outstanding of the
Common Stock of the Company held by approximately 115 stockholders of record.
The Company estimates that there are approximately 5,400 beneficial holders of
the Company's Common Stock.
Dividends. The Company has never paid a cash dividend on its Common Stock,
and the Company's credit facility prohibits the payment of cash dividends
without the lender's consent. The Board of Directors currently anticipates that
all of the Company's earnings will be retained for use in its business and does
not intend to pay any cash dividends in the foreseeable future.
On January 6, 1999, the Company's Board of Directors approved a 3-for-2
stock split effected in the form of a stock dividend and payable on February 18,
1999 to the stockholders of record at the close of business on January 25, 1999.
Additionally, 3-for-2 stock splits were effected in the form of stock dividends
on September 8, 1998 and September 17, 1997. All share amounts, share prices and
net earnings per share in this Annual Report on Form 10-K have been
retroactively adjusted to reflect these 3-for-2 stock splits.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto, and Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere herein. The selected
consolidated financial data presented below under the captions "Consolidated
Statements of Earnings Data" and " Consolidated Balance Sheet Data" as of and
for each of the years in the four-year period ended December 31, 1998 are
derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by KPMG LLP, independent
certified public accountants. The consolidated financial statements as of
December 31, 1998 and 1997, and for each of the years in the three-year period
ended December 31, 1998 and the independent auditors' report thereon, are
included elsewhere herein.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995
------------ ------------ ----------- ------------
(in thousands, except per share data and share amounts)
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Net sales ................................... $ 1,002,784 $ 627,735 $ 410,919 $ 272,051
Cost of goods sold .......................... 881,910 548,612 354,501 232,063
------------ ------------ ----------- ------------
Gross profit ................................ 120,874 79,123 56,418 39,988
Selling, general and administrative expenses 86,989 56,895 44,237 32,771
------------ ------------ ----------- ------------
Earnings from operations .................... 33,885 22,228 12,181 7,217
Non-operating income (expense), net ......... (713) (73) 328 (397)
------------ ------------ ----------- ------------
Earnings before income taxes ................ 33,172 22,155 12,509 6,820
Income tax expense .......................... 12,722 8,937 4,951 2,701
------------ ------------ ----------- ------------
Net earnings ................................ $ 20,450 $ 13,218 $ 7,558 $ 4,119
============ ============ =========== ============
Earnings per share(1)(2)
Basic ................................. $ 0.84 $ 0.58 $ 0.40 $ 0.28
============ ============ =========== ============
Diluted ................................. $ 0.81 $ 0.55 $ 0.38 $ 0.26
============ ============ =========== ============
Shares used in per share calculations(1)(2)
Basic ................................... 24,234,358 22,944,695 18,826,460 14,670,305
============ ============ =========== ============
Diluted ................................. 25,327,032 24,094,740 20,028,323 15,616,114
============ ============ =========== ============
SELECTED OPERATING DATA:
Account executives (end of period) .......... 1,072 652 374 236
Inventory turnover(3) ....................... 26x 17x 17x 13x
------------
1994
------------
(unaudited)
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Net sales ................................... $ 216,699
Cost of goods sold .......................... 183,366
------------
Gross profit ................................ 33,333
Selling, general and administrative expenses 29,248
------------
Earnings from operations .................... 4,085
Non-operating income (expense), net ......... (638)
------------
Earnings before income taxes ................ 3,447
Income tax expense .......................... 1,181
------------
Net earnings ................................ $ 2,266
============
Earnings per share(1)(2)
Basic ................................. $ 0.26
============
Diluted ................................. $ 0.24
============
Shares used in per share calculations(1)(2)
Basic ................................... 9,418,607
============
Diluted ................................. 10,433,817
============
SELECTED OPERATING DATA:
Account executives (end of period) .......... 194
Inventory turnover(3) ....................... 18x
DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(unaudited)
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Working capital ................................... $101,875 $114,663 $ 70,362 $31,179 $ 3,202
Total assets ...................................... 251,398 162,383 110,790 69,548 38,192
Short-term debt ................................... -- -- -- -- 12,846
Long-term debt and line of credit, excluding
current portion .................................. 8,268 32,750 -- -- 971
Stockholders' equity .............................. 151,108 102,380 83,941 37,546 4,901
- ------------
(1) Net earnings per share and shares used in per share calculations for the
year ended December 31, 1994 are pro forma and unaudited and for 1994,
reflect the elimination of executive compensation expense in excess of the
amounts due under employment contracts with two officers effective as of
October 1, 1994 and reflect the additional income taxes on S corporation
earnings assuming an effective tax rate of 39.6%. Certain subsidiaries of
the Company were S corporations prior to June 30, 1994 and were not subject
to federal and state income taxes. As a result of these adjustments, pro
forma net earnings is $2,487,000 for the year ended December 31, 1994.
Shares used in per share calculations are calculated using the treasury
stock method. Earnings per share calculations reflect the reincorporation
of the Company as a Delaware corporation and the related share exchange.
(2) As adjusted to reflect the 3-for-2 stock splits effected in the form of
stock dividends and payable on February 18, 1999 to the stockholders of
record at the close of business on January 25, 1999 and additional 3-for-2
stock splits paid on September 8, 1998 and September 17, 1997. All share
amounts, share prices and earnings per share in the Annual Report on Form
10-K have been retroactively adjusted to reflect these 3-for-2 stock
splits.
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(3) Inventory turnover is calculated by dividing cost of goods sold for the
year by the average of the beginning and ending inventory for the year and
inventory at quarter ends within that year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Item and elsewhere in this report may
be "forward-looking statements" within the meaning of The Private Securities
Litigation Reform Act of 1995. These forward-looking statements may include
projections of matters that may affect sales or net earnings; projections of
capital expenditures; projections of growth; hiring plans; plans for future
operations; financing needs or plans; plans relating to the Company's products;
and assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified. Future events and actual results could differ materially from
those set forth in, contemplated by, or underlying the forward-looking
information. Some of the important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
made by the Company include, but are not limited to, the following: fluctuations
in operating results, intense competition, management of rapid growth, need for
additional financing, past and future acquisitions and international operations,
risk of business interruption, year 2000 issues, reliance on outsourcing
arrangements, changing methods of distribution, reliance on suppliers, rapid
change in product standards, sales and use tax uncertainty, increasing
marketing, postage and shipping costs, inventory obsolescence and dependence on
key personnel. The section in this Item entitled "Factors That May Affect Future
Results and Financial Condition" discusses these important factors in greater
detail. The Company undertakes no obligations to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
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 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-brand computers and discontinued the sale of Insight-brand computers in
the fourth quarter of 1995. Although the cost savings from this decision have
positively impacted earnings from operations, gross margin has been negatively
affected. The Company expects gross margins to continue to decline in 1999
primarily due to industry-wide pricing pressures and pricing strategies.
During 1995, the Company nearly doubled its catalog circulation to generate
leads and aggressively tested new lists. In 1997, the Company decreased its
catalog circulation because the Company used information generated from prior
year tests to target mailings to its best customers and increased its focus on
penetrating existing accounts by aggressively increasing its outbound sales
force. To that end, 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 75, per quarter, during 1999. In 1998,
Insight introduced its graphically rich electronic catalogs and continued to
focus on the business, education and government markets, which aggregated
approximately 90% of its business in 1998.
In order to leverage its infrastructure, the Company, in 1992, began
providing direct marketing services to third parties. 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. Additionally, some of the programs may be more seasonal
in nature, as their target customers can have cyclical buying patterns.
Outsourcing represented 9.2% and 7.8% of the Company's net sales in 1998 and
1997, respectively.
In the fourth quarter of 1997, the Company expanded into Canada. During
1998, the Company entered the United Kingdom and Germany markets through
acquisitions. Sales in these international markets accounted for 7.8% and 0.2%
of the Company's net sales in 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. Such a reduction could
have a material adverse effect on the Company's financial condition and results
of operations.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial data
as a percentage of net sales:
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
------ ------ ------
Net sales ......................... 100.0% 100.0% 100.0%
Costs of goods sold ............... 87.9 87.4 86.3
------ ------ ------
Gross profit ...................... 12.1 12.6 13.7
Selling, general and administrative
expenses ..................... 8.7 9.1 10.7
------ ------ ------
Earnings from operations .......... 3.4 3.5 3.0
Non-operating income (expense), net (0.0) (0.0) (0.0)
------ ------ ------
Earnings before income taxes ...... 3.3 3.5 3.0
Income tax expense ................ 1.3 1.4 1.2
====== ====== ======
Net earnings ...................... 2.0% 2.1% 1.8%
====== ====== ======
1998 COMPARED TO 1997
Net Sales. Net sales increased $375.1 million, or 59.8%, to $1,002.8
million in 1998 from $627.7 million in 1997. Sales derived from direct marketing
increased $332.2 million, or 57.4%, to $910.7 million in 1998 from $578.5
million in 1997. This increase resulted primarily from deeper account
penetration, increased market share, expanded customer base both domestic and
international, expanded product offering, acquisitions of direct marketing
companies accounted for by the purchase method of accounting and internet
enhancements that increased unassisted transactions to 5.2% of sales for 1998
from 1.8% of sales for 1997. Sales derived from outsourcing arrangements
increased $42.9 million, or 87.2%, to $92.1 million in 1998 from $49.2 million
in 1997. This increase resulted from expansion of existing programs as well as
addition of new programs. Sales from international markets accounted for 7.8%
and 0.2% of the Company's net sales in 1998 and 1997, respectively. This
increase primarily resulted from the acquisition in 1998 of two foreign based
companies.
Gross Profit. Gross profit increased $41.8 million, or 52.8%, to $120.9
million in 1998 from $79.1 million in 1997. As a percentage of sales, gross
margin decreased from 12.6% in 1997 to 12.1% in 1998. The gross margin on the
Company's sales decreased due to industry pricing pressures, a shift in product
mix and pricing strategies. These decreases were partially offset by the
Company's ability, as a result of its increased volume and financial position,
to take advantage of supplier payment discounts, supplier reimbursements,
rebates and purchasing opportunities. The Company expects gross margin to
continue to decline in 1999 primarily due to industry-wide pricing pressures and
pricing strategies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $30.1 million, or 52.9%, to $87.0 million in
1998 from $56.9 million in 1997, but decreased as a percent of sales to 8.7% in
1998 from 9.1% in 1997. This decline was attributable to increased economies of
scale and the utilization of emerging technologies. The Company has increased
its unassisted web sales to 5.2% of sales for 1998 from 1.8% of sales for 1997.
The Company has also significantly increased the percentage of shipments made
using their electronic "direct ship" programs with its suppliers to 50% in 1998
from 29% in 1997. These enhancements were partially offset by additional costs
associated with an increase in the number of account executives, the
infrastructure necessary to build up the Company's international operations and
higher costs incurred in the initial months of new acquisitions to fully
integrate operations.
Non-Operating Income (Expense), Net. Non-operating income (expense), net,
which consists primarily of interest, increased from $73,000 of interest
expense, net in 1997 to $713,000 of interest expense, net in 1998. Interest
expense primarily relates to borrowings under the Company's line of credit which
have been necessary to finance the Company's growth and interest expense
associated with the financing of the sales facility in Tempe, Arizona. Interest
expense was offset by interest income which is generated by the Company through
short-term investments, some of which are investment grade tax advantaged bonds.
Income Tax Expense. The Company's effective tax rate was 38.4% and 40.3%
for the years 1998 and 1997, respectively. The decrease in the effective tax
rate reflects the implementation of a tax minimization strategy during 1998,
changes to the Arizona income tax laws and investments made in tax advantaged
bonds, but was partially offset by an increase in the Company's marginal federal
income tax rate.
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1997 COMPARED TO 1996
Net Sales. Net sales increased $216.8 million, or 52.8%, to $627.7 million
in 1997 from $410.9 million in 1996. Sales derived from direct marketing
increased $203.5 million, or 54.3%, to $578.5 million in 1997 from $375.0
million in 1996. This increase resulted primarily from deeper account
penetration, a greater percentage of business customers, increased emphasis on
outbound telemarketing, increased account executive productivity, more effective
sales management and an increase in the Company's customer base and average
order size. A significant factor in the average order size increase was an
increase in sales of notebook and desktop computers. Sales derived from
outsourcing arrangements increased $13.3 million, or 37.0%, to $49.2 million in
1997 from $35.9 million in 1996.
Gross Profit. Gross profit increased $22.7 million, or 40.2%, to $79.1
million in 1997 from $56.4 million in 1996. As a percentage of sales, gross
margin decreased from 13.7% in 1996 to 12.6% in 1997. The gross margin on the
Company's direct marketing sales decreased due to a shift in product mix and due
to industry pricing pressures but was partially offset by the Company's ability,
as a result of its increased volume and financial position, to take advantage of
supplier payment discounts, supplier reimbursements, rebates and bulk purchasing
opportunities. The Company experienced significant growth in the notebook and
desktop computer category which carries a lower gross margin and a significant
decline in hard disk drives as a percentage of sales which carries a higher
gross margin. The gross margin on the Company's outsourcing business increased
as a result of higher gross margin obtained with its revenue-based arrangements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $12.7 million, or 28.6%, to $56.9 million in
1997 from $44.2 million in 1996, but decreased as a percent of sales to 9.1% in
1997 from 10.7% in 1996. This decline was attributable to increased economies of
scale and the Company's continued shift in its marketing strategy, including the
reduction in advertising costs as a percent of sales due to the increase in
supplier reimbursements from manufacturers and a reduction of more expensive
advertising in computer publications. These decreases were partially offset by
additional costs associated with an increase in the number of account executives
and losses experienced in the initial months of new outsourcing contracts.
Non-Operating Income (Expense), Net. Non-operating income (expense), net,
which consists primarily of interest, changed from $328,000 of interest income,
net in 1996 to $73,000 of interest expense, net in 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 increased
as the net proceeds from Insight's public offerings in November 1995 and
November 1996 have been utilized by operating activities. Additionally, the
interest expense associated with the Company's new sales and administrative
facility was capitalized up to the date of occupancy. Interest income is
generated by the Company through short-term investments, some of which are
investment grade tax advantaged bonds.
Income Tax Expense. The Company's effective tax rate was 40.3% and 39.6%
for the years 1997 and 1996, respectively. The increase in the effective tax
rate reflects an increase in the Company's marginal tax rate, which was
partially offset by investments made in tax advantaged bonds.
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SEASONALITY AND QUARTERLY RESULTS
The Company has historically experienced seasonal fluctuations in its
growth of net sales, earnings from operations and net earnings. However, as the
Company has increased its percentage of sales from 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.
For example, the Company obtained a revenue-based outsourcing program in 1997
which offers high dollar but low margin products primarily sold in the third
quarter which increases sales for the quarter but negatively impacts gross
margin. The following table sets forth certain quarterly information for the
Company's two most recent years:
QUARTERS ENDED
-----------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31,
1998 1998 1998 1998 1997
--------- --------- --------- --------- ---------
Net sales ......................... $ 297,397 $ 261,207 $ 237,384 $ 206,796 $ 186,329
Costs of goods sold ............... 261,443 231,098 207,915 181,454 162,944
--------- --------- --------- --------- ---------
Gross profit ...................... 35,954 30,109 29,469 25,342 23,385
Selling, general and
administrative expenses .......... 25,698 21,669 21,747 17,875 16,392
--------- --------- --------- --------- ---------
Earnings from operations .......... 10,256 8,440 7,722 7,467 6,993
Non-operating income (expense), net (96) (124) (116) (377) (288)
--------- --------- --------- --------- ---------
Earnings before income taxes ...... 10,160 8,316 7,606 7,090 6,705
Income tax expense ................ 3,931 3,131 2,903 2,757 2,710
--------- --------- --------- --------- ---------
Net earnings ...................... $ 6,229 $ 5,185 $ 4,703 $ 4,333 $ 3,995
========= ========= ========= ========= =========
Net earnings per share:
Basic ........................ $ 0.25 $ 0.21 $ 0.20 $ 0.18 $ 0.17
========= ========= ========= ========= =========
Diluted ...................... $ 0.24 $ 0.20 $ 0.19 $ 0.18 $ 0.16
========= ========= ========= ========= =========
----------------------------------------
SEPT. 30, JUNE 30, MAR 31,
1997 1997 1997
--------- -------- --------
Net sales ......................... $ 171,326 $139,255 $130,825
Costs of goods sold ............... 150,280 121,285 114,103
--------- -------- --------
Gross profit ...................... 21,046 17,970 16,722
Selling, general and
administrative expenses .......... 15,090 13,073 12,340
--------- -------- --------
Earnings from operations .......... 5,956 4,897 4,382
Non-operating income (expense), net (40) 133 122
--------- -------- --------
Earnings before income taxes ...... 5,916 5,030 4,504
Income tax expense ................ 2,390 2,079 1,758
--------- -------- --------
Net earnings ...................... $ 3,526 $ 2,951 $ 2,746
========= ======== ========
Net earnings per share:
Basic ........................ $ 0.15 $ 0.13 $ 0.12
========= ======== ========
Diluted ...................... $ 0.15 $ 0.12 $ 0.11
========= ======== ========
LIQUIDITY AND CAPITAL RESOURCES
In November 1995 and November 1996, the Company completed public offerings
of common stock. The Company received $16.6 million and $37.5 million,
respectively, 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 and the remainder for general corporate
purposes, including working capital, capital expenditures and facilities
expansion.
The Company's primary capital needs have been to fund the working capital
requirements and capital expenditures necessitated by its sales growth. Capital
expenditures for 1998 and 1997 were $9.7 million and $9.4 million, respectively,
primarily for the continued upgrade of the Company's equipment, systems,
software and facilities.
In previous years, 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. However,
the Company's net cash provided by operating activities was $41.4 million for
1998 as compared to $39.9 million used in operating activities for 1997. The
positive cash flow in 1998 is primarily generated by a $50.6 million increase in
accounts payable, $20.5 million in net earnings and a decrease of $15.9 million
in inventories. These funds were used to fund a $58.6 million increase in
accounts receivables.
At the year-end, the Company had a $70 million credit facility with a
finance company. As of December 31, 1998, the Company had no long-term
outstanding balance, and $48.4 million was available under the line of credit.
In February 1999, the Company replaced its credit facility with a new $100
million credit facility with a finance company. The agreement provides for cash
advances outstanding at any one time up to a maximum of $100 million on the line
of credit, subject to limitations based upon the Company's eligible accounts
receivable and inventories. Cash advances bear interest at LIBOR plus .80%. The
credit facility can be used to facilitate the purchases of inventories from
certain suppliers and that portion will be classified on the balance sheet as
accounts payable. The credit facility expires in February 2002. 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
specified dollar amount of tangible net worth and restrictions on the payment of
cash dividends.
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The Company's future capital requirements include financing the growth of
working capital items such as accounts receivable and inventories and the
purchases of software enhancements, equipment, furniture and fixtures to
accomplish 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 1999. The Company's ability to continue funding its planned
growth beyond 1999 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.
INFLATION
Management does not believe that inflation has had a material effect on the
Company's sales during the past three years.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), effective January 1,
1998. SFAS No. 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 stockholder's equity.
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), effective January 1, 1998.
SFAS No. 131 establishes standards for reporting information about operating
segments in annual financial statements, selected information about operating
segments in interim financial reports and disclosures about products and
services, geographic areas and major customers. Insight only has one business
segment, direct marketing.
ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY
There are no new applicable accounting standards that have not been adopted
by the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company's future results and financial condition are dependent on the
Company's ability to continue to successfully market, sell and distribute
computers, hardware and software. Inherent in this process are a number of
factors that the Company must successfully manage in order to achieve favorable
operating results and financial condition. Potential risks and uncertainties
that could affect the Company's future operating results and financial condition
include, without limitation, the factors discussed below.
Fluctuations in Operating Results. The Company's results of operations are
influenced by a variety of factors, including general economic conditions, the
condition of the computer and related products industry, shifts in demand for or
availability of computer and related products and industry announcements of new
products, upgrades or methods of distribution. Sales can be dependent on
specific product categories, and any change in demand for or supply of such
products could have a material adverse effect on the rate of growth of the
Company's sales. The Company's operating results are also highly dependent upon
its level of gross profit as a percentage of net sales which fluctuates due to
numerous factors including opportunities to increase market share, the
availability of opportunistic purchases, changes in prices from suppliers,
reductions in the amount of supplier reimbursements that are made available,
general competitive conditions and the relative mix of products sold during the
period. The Company expects gross margins to continue to decline in 1999
primarily due to industry-wide pricing pressures and pricing strategies. In
addition, the Company's expense levels are based, in part, on anticipated sales.
Therefore, the Company may not be able to control spending in a timely manner to
compensate for any unexpected sales shortfall. As a result, quarterly
period-to-period comparisons of the Company's financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
Highly Competitive Industry. The computer and related products industry is
highly competitive. Competition is based primarily on product availability,
price, speed of delivery, credit availability, ability to tailor specific
solutions to customer needs, quality and breadth of product lines. The Company
expects competition to increase as retailers and direct marketers who have not
traditionally sold computers and related products enter the industry and if the
industry's rate of growth in the United States slows. The Company competes with
a large number and wide variety of marketers and resellers of computers and
related products, including traditional computer and related products retailers,
computer superstores, internet-only computer providers, consumer electronics and
office supply superstores, mass merchandisers and national direct marketers
(including value-added resellers and specialty retailers, aggregators,
distributors, franchisers, manufacturers and national computer retailers some of
which have commenced their own direct marketing operations). Certain of the
Company's
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competitors have longer operating histories and greater financial, technical,
marketing and other resources than the Company. In addition, many of these
competitors offer a wider range of products and services than the Company and
may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Many current and potential competitors
also have greater name recognition, engage in more extensive promotional
activities and adopt more aggressive pricing policies than the Company. There
can be no assurance that the Company will be able to compete effectively with
current or future competitors or that the competitive pressures faced by the
Company will not have a material adverse effect on the Company's business,
results of operations and financial condition.
The computer and related products industry is undergoing significant
change. The Company believes that consumers have become more accepting of
large-volume, cost-effective channels of distribution such as computer
superstores, internet-only computer providers, consumer electronic and office
supply superstores, national direct marketers and mass merchandisers. Product
resellers and direct marketers are combining operations or acquiring or merging
with other resellers and direct marketers to increase efficiency. Moreover,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to enhance their products
and services. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and acquire significant market share. Generally,
pricing is very aggressive in the industry and the Company expects pricing
pressures to continue. There can be no assurance that the Company will be able
to offset the effects of price reductions with an increase in the number of
customers, higher sales, cost reductions or otherwise. Such pricing pressures
could result in an erosion of the Company's market share, reduced sales and
reduced operating margins, any of which could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company expects gross margins to continue to decline in 1999 primarily due to
industry-wide pricing pressures and pricing strategies.
Managing Rapid Growth; No Assurance of Additional Financing. Since its
inception, the Company has experienced substantial changes in and expansion of
its business and operations. The Company's past expansion has placed, and any
future expansion would place, significant demands on the Company's
administrative, operational, financial and other resources. The Company's
operating expenses and staffing levels have increased and are expected to
increase substantially in the future. In particular, the Company has hired a
significant number of additional personnel, including internationally focused
personnel, senior sales managers, account executives and other persons with
experience in both the computer and direct marketing industries, and there can
be no assurance that such persons will perform to the Company's expectations.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to continue to attract, assimilate and retain
additional highly qualified persons in the future. In addition, the Company
expects that any future expansion will continue to challenge the Company's
ability to hire, train, motivate and manage its employees. The Company also
expects over time to expend considerable resources to expand/convert its
information system and to implement a variety of new systems and procedures. If
the Company's sales do not increase in proportion to its operating expenses, the
Company's information systems do not expand to meet increasing demands, or the
Company fails to attract, assimilate and retain qualified personnel or otherwise
fails to manage its expansion effectively, there would be a material adverse
effect on the Company's business, results of operations and financial condition.
There can be no assurance that the Company will achieve its growth strategy.
Historically, cash flow from operations has been insufficient to finance
the Company's growth, and the Company has relied upon a line of credit and
proceeds from its public offerings to finance working capital requirements.
There can be no assurance that the Company's operations will generate sufficient
cash flow or that adequate financing will be available to finance continued
growth.
Risks Associated with Past and Future Acquisitions; International
Operations. The Company has completed three acquisitions during 1998.
Additionally, the Company will seek to acquire additional businesses to expand
or complement its operations. The magnitude, timing and nature of any future
acquisitions will depend on a number of factors, including suitable acquisition
candidates, the negotiation of acceptable terms, the Company's financial
capabilities and general economic and business conditions. There is no assurance
that the Company will identify acquisition candidates that would result in
successful combinations or that any such acquisitions will be consummated on
acceptable terms. Any future acquisitions by the Company may result in
potentially dilutive issuance of equity securities, the incurrence of additional
debt and amortization of expenses related to goodwill and intangible assets, all
of which could adversely affect the Company's profitability. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of operations of the acquired company, the diversion of management's attention
from other business concerns, risks of entering markets in which the Company has
had no or only limited direct experience and the potential loss of key employees
of the acquired company, all of which in turn could have a material adverse
effect on the Company's business, results of operations and financial condition.
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In addition, the Company recently opened an operation in Canada and
completed acquisitions in Europe as part of its effort to penetrate
international markets. In implementing this strategy, the Company faces barriers
to entry and the risk of competition from local and other companies that already
have established global businesses as well as the risks generally associated
with conducting business internationally, including exposure to currency
fluctuations, limitations on foreign investment and the additional expense and
risks inherent in operating in geographically and culturally diverse locations.
Because the Company may continue to develop its international business through
acquisitions, the Company may also be subject to risks associated with such
acquisitions, including those relating to the marriage of different corporate
cultures and shared decision-making. There can be no assurance that the Company
will succeed in increasing its international business, if at all, in a
profitable manner.
Business Interruption; Reliance on Management Information Systems. The
Company believes that its success to date has been, and future results of
operations will be, dependent in large part upon its ability to provide prompt
and efficient service to customers. In addition, the Company's success is
largely dependent on the accuracy, quality and utilization of the information
generated by its management information systems, which affect its ability to
manage its sales, accounting, inventory and distribution systems. The Company
began in 1998 a major information system upgrade to replace its core-business
function applications which will continue in 1999 and beyond. Although the
Company has redundant systems, with full data backup, a substantial interruption
in the information system or in the Company's telephone communication systems
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Risks Associated with Year 2000 Problem. 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 at the beginning
of the second quarter of 1999. The Company's Year 2000 plan also includes
remediation, testing and contingency planning phases.
During the middle of 1999, the Company plans to complete all testing and
remediation and put "into production" all modifications to achieve Year 2000
compliance. The Company's Year 2000 plan also includes contingency planning to
be completed during the third and fourth quarters of 1999.
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
services and delivery.
Additionally, 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. Certain of these applications
are scheduled to be installed during the second quarter of 1999 at which point
the Company will proceed to the testing phase.
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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Possible Nonrenewal or Cancellation of Outsourcing Arrangements. The
Company performs outsourcing services for certain manufacturers pursuant to
various arrangements. These parties may cancel such arrangements on relatively
short notice or fail to renew them upon expiration. There is no assurance that
the Company will be able to replace any manufacturers that terminate or fail to
renew their relationships with the Company. The failure to maintain such
arrangements or the inability to enter into new ones could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Changing Methods of Distribution. The manner in which computers and related
products are distributed and sold is changing, and new methods of distribution
and sale, such as on-line shopping services via the internet, have emerged.
Hardware and software manufacturers have sold, and may intensify their efforts
to sell, their products directly to end-users. From time to time, certain
manufacturers have instituted programs for the direct sales of large order
quantities of hardware and software to certain major corporate accounts. These
types of programs may continue to be developed and used by various
manufacturers. In addition, manufacturers may attempt to increase the volume of
software products distributed electronically to end-users. An increase in the
volume of products sold through or used by consumers of any of these competitive
programs or distributed electronically to end-users could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Reliance on Suppliers; Allocation of Goods. The Company acquires products
for resale both directly from manufacturers and indirectly through distributors.
Purchases from Ingram Micro, Inc., a distributor of computers and related
products, accounted for approximately 25% of the Company's aggregate purchases
for 1998. No other supplier accounted for more than 16% of purchases in 1998.
However, the top five suppliers as a group accounted for approximately 70% of
the Company's product purchases during 1998. The loss of Ingram Micro, Inc. or
any other supplier could cause a short-term disruption in the availability of
products. Certain of the products offered from time to time by the Company are
subject to manufacturer allocation which limits the number of units of such
products available to resellers, including the Company. The inability of the
Company to obtain a sufficient quantity of products, in particular, high demand
products such as desktops and notebooks, or an allocation of products from a
manufacturer in a way which favors one of the Company's competitors relative to
the Company could cause the Company to be unable to fill customers' orders in a
timely manner, or at all, which could have a material adverse effect on the
Company's business, results of operations and financial condition. Certain
suppliers provide the Company with substantial incentives in the form of payment
discounts, supplier reimbursements, price protections and rebates. Supplier
funds are used to offset, among other things, cost of goods sold, marketing
costs and other operating expenses. The Company competes with other market
competitors for these funds. No assurance can be given that the Company will
continue to receive such incentives or that it will be able to collect
outstanding amounts relating to these incentives in a timely manner or at all. A
reduction in or discontinuance of, a significant delay in receiving or the
inability to collect such incentives could have a material adverse effect on the
Company's business, results of operations and financial condition.
Rapid Changes in Product Standards and Risk of Inventory Obsolescence. The
computer and related products industry is characterized by rapid technological
change and the frequent introduction of new products and product enhancements
which can decrease demand for current products or render them obsolete. In
addition, in order to satisfy customer demand and to obtain greater purchasing
discounts, the Company may carry increased inventory levels of certain products
in the future. The Company can have limited or no return privileges with respect
to certain of its products. There can be no assurance that the Company will be
able to avoid losses related to inventory obsolescence.
State Sales or Use Tax Collection. The Company presently collects sales tax
only in states that the entity shipping the products has a presence. The states
include Arizona, Louisiana and Indiana. Various states have sought to impose on
direct marketers the burden of collecting state sales or use taxes on the sales
of products shipped to that state's residents. The United States Supreme Court
has affirmed its position that under the Commerce Clause of the United States
Constitution, a state cannot constitutionally impose sales or use tax collection
obligations on an out-of-state mail order company whose only contacts with the
state are the distribution of catalogs and other advertising materials through
the mail and the subsequent delivery of purchased goods by United States mail or
by interstate common carrier. If the Supreme Court changes its position or if
legislation is passed to overturn the Supreme Court's decision, the imposition
of a sales or use tax collection obligation on the Company in states to which it
ships products would result in additional administrative expenses to the
Company, could result in price increases to the customer or could otherwise have
a material adverse effect on the Company's business, results of operations and
financial condition. From time to time, legislation to overturn this decision of
the Supreme Court has been introduced, although to date no such legislation has
been passed. The Company also collects a value added tax in Canada, the United
Kingdom and Germany.
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Risk of Increasing Marketing, Postage and Shipping Costs. The Company mails
catalogs through the United States Postal Service and international services,
generates sales leads through marketing and ships products to customers by
commercial delivery services. Shipping, postage and paper costs are significant
expenses in the operation of the Company's business. Historically, the Company
has experienced increases in postage and paper costs. There can be no assurance
that any such increases can be recouped through an increase in vendor supported
advertising rates or that the Company will be able to offset future increased
costs. The inability to pass on these increased costs could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Company ships primarily through Federal Express(R),
and labor disputes or other service interruptions with Federal Express, the U.S.
Postal Service or other commercial carriers could have an adverse effect on the
Company's operating costs and ability to deliver products on a timely basis.
Dependence on Key Personnel. The Company's future success will be largely
dependent on the efforts of key management personnel, including Eric J. Crown,
Chief Executive Officer, Timothy A. Crown, President, and other key employees.
The loss of one or more of these key employees could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, the Company believes that its future success will be largely
dependent on its continued ability to attract and retain highly qualified
management, sales and technical personnel, and there can be no assurance that
the Company will be able to attract and retain such personnel. Further, the
Company makes a significant investment in the training of its sales account
executives. The inability of the Company to retain such personnel or to train
them rapidly enough to meet its expanding needs could cause a decrease in the
overall quality and efficiency of its sales staff, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has interest rate exposure arising from the Company's line of
credit which has a variable interest rate. This variable interest rate is
impacted by changes in short-term interest rates. The Company manages interest
rate exposure through its conservative debt ratio target and its mix of fixed
and variable rate debt. At December 31, 1998, the fair value of the Company's
long-term debt approximated carrying value.
The Company also has foreign currency translation exposure arising from the
Company's purchase and operating of foreign entities. The Company monitors its
foreign currency exposure and may from time to time enter into hedging
transactions to manage this exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in this Report beginning
at page 25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial
disclosure matters during the periods reported herein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the captions "Information Concerning
Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
its Annual Meeting of Stockholders to be held May 13, 1999 (the "Proxy
Statement") is incorporated herein by reference. The Company anticipates filing
the Proxy Statement within 120 days after December 31, 1998. With the exception
of the foregoing information and other information specifically incorporated by
reference into this Form 10-K, the Proxy Statement is not being filed as a part
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" in the Proxy
Statement is incorporated herein by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements.
The consolidated financial statements of Insight Enterprises, Inc. and
subsidiaries and the Independent Auditors' Report are filed herein beginning on
page 25.
2. Exhibits.
Exhibits (unless otherwise noted, exhibits are filed herewith)
EXHIBIT NO. DESCRIPTION
----------- -----------
2 (1) -- Form of Articles of Merger and Certificate of Merger between Insight Enterprises, Inc., an
Arizona corporation, and Insight Enterprises, Inc., a Delaware corporation (the
"Registrant")
3.1 (6) -- Amended and Restated Certificate of Incorporation of Registrant
3.2 (1) -- Bylaws of the Registrant
4.1 (1) -- Specimen Common Stock Certificate
4.2 (11) -- Form of Certificate of Designation of Preferred Shares
10.1 (1)(2) -- Form of Indemnification Agreement
10.2 (1)(3) -- 1994 Stock Option Plan of the Registrant
10.3 (1)(3) -- Predecessor Stock Option Plan
10.4 (3)(4) -- 1995 Employee Stock Purchase Plan of the Registrant
10.5 (3)(5) -- Amendment to 1994 Stock Option Plan of the Registrant
10.6 (3)(7) -- 1998 Long-Term Incentive Plan
10.7 (3)(8) -- Form of Restricted Stock Agreement
10.8 (3)(9) -- Employment Agreement between Insight Enterprises, Inc. and Eric J. Crown dated as of
March 31, 1998.
10.9 (3)(9) -- Employment Agreement between Insight Enterprises, Inc. and Timothy A. Crown dated as of
March 31, 1998.
10.10 (3)(9) -- Employment Agreement between Insight Enterprises, Inc. and Stanley Laybourne dated as of
March 31, 1998.
10.11 (3)(10) -- 1998 Employee Restricted Stock Plan
10.12 (3)(10) -- 1998 Officer Restricted Stock Plan
10.13 (12) -- Shareholder's Rights Agreement
11 -- Computation of Net Earnings per Common Share
21 -- Subsidiaries of the Registrant
23 -- Consent of KPMG LLP
27.1 -- Financial Data Schedule as of and for the year ended December 31, 1998
27.2 -- Restated Financial Data Schedule as of and for the year ended December 31, 1997
27.3 -- Restated Financial Data Schedule as of and for the year ended December 31, 1996
----------
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (No. 33-86142) declared effective January 24, 1995.
(2) The Company has entered into a separate indemnification agreement with
each of its current directors and executive officers that differ only
in party names and dates. Pursuant to the instructions accompanying
Item 601 of Regulation S-K, the Registrant is filing the form of such
indemnification agreement.
(3) Management contract or compensatory plan or arrangement.
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(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997.
(7) Incorporated by reference to the Company's Notice of 1997 Annual
Meeting of Stockholders.
(8) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1998.
(9) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended March 31, 1998.
(10) Incorporated by reference to the Company's Form S-8 filed on December
17, 1998.
(11) Incorporated by reference to the Company's current report on Form 8-K
filed on March 17, 1999.
(12) Incorporated by reference to the Company's Form 8-A filed on March 17,
1999.
(b) On December 30, 1998 the Company filed a report on form 8-K to disclose
the issuance of 82,116 shares of Common Stock pursuant to the
exemptions provided by Section 4 (2) of the Securities Act of 1933, as
amended and/or by Regulation S.
22
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INSIGHT ENTERPRISES, INC.
By /s/ Eric J. Crown
----------------------------
Eric J. Crown
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Eric J. Crown Chairman of the Board of March 25, 1999
- ----------------------------------------------- Directors and Chief Executive Officer
Eric J. Crown (Principal Executive Officer)
/s/ Timothy A. Crown Director and President March 25, 1999
- -----------------------------------------------
Timothy A. Crown
/s/ Stanley Laybourne Chief Financial Officer, March 25, 1999
- ----------------------------------------------- Secretary, Treasurer and
Stanley Laybourne Director (Principal Financial and
Accounting Officer)
/s/ Larry A. Gunning Director March 25, 1999
- -----------------------------------------------
Larry A. Gunning
/s/ Robertson C. Jones Director March 25, 1999
- -----------------------------------------------
Robertson C. Jones
23
26
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................................ 25
Consolidated Balance Sheets - December 31, 1998 and 1997............................... 26
Consolidated Statements of Earnings - For each of the years in the
three-year period ended December 31, 1998............................................. 27
Consolidated Statements of Stockholders' Equity and Comprehensive Income
- For each of the years in the three-year period ended December 31, 1998.............. 27
Consolidated Statements of Cash Flows - For each of the years in the
three-year period ended December 31, 1998............................................. 28
Notes to Consolidated Financial Statements.............................................. 29
24
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Insight Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Insight
Enterprises, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Insight
Enterprises, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP
Phoenix, Arizona
January 29, 1999
25
28
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS DECEMBER 31,
-----------------------
1998 1997
--------- ---------
Current assets:
Cash and cash equivalents ....................................................... $ 12,974 $ 6,982
Accounts receivable, net of allowances for doubtful accounts of
$7,128 and $3,274, respectively ............................................ 139,305 80,639
Inventories, net ................................................................ 34,449 46,100
Prepaid expenses and other current assets ....................................... 7,169 8,195
--------- ---------
Total current assets ........................................................ 193,897 141,916
Property and equipment, net ............................................................ 28,948 20,432
Goodwill, net of amortization of $418 .................................................. 24,020 --
Other assets ........................................................................... 4,533 35
--------- ---------
$ 251,398 $ 162,383
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 80,259 $ 22,949
Accrued expenses and other current liabilities .................................. 11,763 4,304
--------- ---------
Total current liabilities .................................................... 92,022 27,253
Long-term debt, less current portion ................................................... 8,268 --
Line of credit ......................................................................... -- 32,750
Commitments
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; 25,432,642 and
23,327,420 shares issued and outstanding in 1998 and 1997, respectively .. 254 233
Additional paid-in capital ...................................................... 100,923 72,487
Retained earnings ............................................................... 50,142 29,692
Accumulated other comprehensive income - foreign currency translation adjustment (211) (32)
--------- ---------
Total stockholders' equity .................................................. 151,108 102,380
--------- ---------
$ 251,398 $ 162,383
========= =========
See accompanying notes to consolidated financial statements.
26
29
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
------------ ------------ -----------
Net sales .................................. $ 1,002,784 $ 627,735 $ 410,919
Costs of goods sold ........................ 881,910 548,612 354,501
------------ ------------ -----------
Gross profit ...................... 120,874 79,123 56,418
Selling, general and administrative expenses 86,989 56,895 44,237
------------ ------------ -----------
Earnings from operations .......... 33,885 22,228 12,181
Non-operating income (expense), net ........ (713) (73) 328
------------ ------------ -----------
Earnings before income taxes ...... 33,172 22,155 12,509
Income tax expense ......................... 12,722 8,937 4,951
------------ ------------ -----------
Net earnings ...................... $ 20,450 $ 13,218 $ 7,558
============ ============ ===========
Earnings per share:
Basic ............................. $ 0.84 $ 0.58 $ 0.40
============ ============ ===========
Diluted ........................... $ 0.81 $ 0.55 $ 0.38
============ ============ ===========
Shares used in per share calculation:
Basic ............................. 24,234,358 22,944,695 18,826,460
============ ============ ===========
Diluted ........................... 25,327,032 24,094,740 20,028,323
============ ============ ===========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME EQUITY
------- ---------- -------- ------------- ------------
Balances at December 31, 1995 ......................... $ 181 $ 28,449 $ 8,916 $- $ 37,546
Issuance of common stock in secondary offering, net.. 42 37,453 -- -- 37,495
Issuance of common stock under stock option plans
and employee stock purchase plan .................... 4 641 -- -- 645
Tax benefit recognized on stock options exercised ... -- 697 -- -- 697
Net earnings ........................................ -- -- 7,558 -- 7,558
------- -------- ------- -------- ---------
Balances at December 31,1996 .......................... 227 67,240 16,474 -- 83,941
Issuance of common stock under stock option plans ... 6 2,415 -- -- 2,421
and employee stock purchase plan
Tax benefit recognized on stock options exercised ... -- 2,832 -- -- 2,832
Comprehensive income
Foreign currency translation adjustment,
net of tax ..................................... -- -- -- (32) (32)
Net earnings ..................................... -- -- 13,218 -- 13,218
---------
Total comprehensive income .......................... 13,186
------- -------- ------- -------- ---------
Balances at December 31, 1997 ......................... 233 72,487 29,692 (32) 102,380
Issuance of common stock for acquisitions ........... 7 14,321 -- -- 14,328
Issuance of common stock under stock option plans
and employee stock purchase plan .................... 14 7,734 -- -- 7,748
Tax benefit recognized on stock options exercised ... -- 6,381 -- -- 6,381
Comprehensive income
Foreign currency translation adjustment,
net of tax ..................................... -- -- -- (179) (179)
Net earnings ..................................... -- -- 20,450 -- 20,450
---------
Total comprehensive income .......................... 20,271
------- -------- ------- -------- ---------
Balances at December 31, 1998 ......................... $ 254 $100,923 $50,142 $ (211) $ 151,108
======= ======== ======= ======== =========
See accompanying notes to consolidated financial statements.
27
30
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net earnings .................................................................. $ 20,450 $ 13,218 $ 7,558
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization ............................................... 4,303 2,461 1,204
Tax benefit from stock options exercised .................................... 6,381 2,832 697
Provision for losses on accounts receivable ................................. 5,366 4,164 1,801
Provision for obsolete and slow moving inventories .......................... 1,802 1,080 914
Deferred income taxes ....................................................... (2,553) 291 (881)
Change in assets and liabilities, net of acquisitions:
Increase in accounts receivable ........................................... (58,573) (37,031) (18,735)
Decrease (increase) in inventories ........................................ 15,879 (19,650) (2,854)
Decrease (increase) in prepaid expenses and other current assets .......... 4,018 (4,068) (1,752)
Decrease (increase) in other assets ....................................... (4,954) 78 999
Increase (decrease) in accounts payable ................................... 50,597 (4,989) (2,278)
Increase (decrease) in accrued expenses and other current liabilities ..... (1,364) 1,718 800
-------- -------- --------
Net cash provided by (used in) operating activities ..................... 41,352 (39,896) (12,527)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ........................................... (9,712) (9,427) (9,415)
Purchase of LC Design Werbeagentur GmbH and Computerprofis
Computersyteme and Burokommunikation, net of cash acquired .................. (4,521) -- --
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 ................................... (17,794) (9,427) (9,415)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit ................................. (32,750) 32,750 --
Net borrowings of long-term debt, less current portion ........................ 7,747 -- --
Issuance of common stock ...................................................... 7,748 2,421 38,140
-------- -------- --------
Net cash provided by financing activities ............................... (17,255) 35,171 38,140
-------- -------- --------
Effect of exchange rate on cash and cash equivalents .............................. (311) (32) --
-------- -------- --------
Increase (decrease) in cash and cash equivalents .................................. 5,992 (14,184) 16,198
Cash and cash equivalents at beginning of year .................................... 6,982 21,166 4,968
-------- -------- --------
Cash and cash equivalents at end of year .......................................... $ 12,974 $ 6,982 $ 21,166
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ........................................ $ 912 $ 261 $ 111
======== ======== ========
Cash paid during the year for income taxes .................................... $ 4,705 $ 10,504 $ 5,205
======== ======== ========
See accompanying notes to consolidated financial statements.
28
31
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, and 1996
(1) Operations and Summary of Significant Accounting Policies
Description of Business
Insight Enterprises, Inc and subsidiaries (collectively, "INSIGHT" or the
"Company") is a direct marketer of computers, hardware, and software with
locations in the United States, Canada, the United Kingdom and Germany. INSIGHT
markets primarily to small and medium-sized enterprises, through a combination
of outbound telemarketing, electronic commerce, electronic marketing, targeted
direct mail catalogs and advertising in computer magazine and publications.
Additionally, INSIGHT provides direct marketing services to original equipment
manufacturers in the computer industry seeking to outsource their direct
marketing activities. The services provided include marketing, sales,
configuration and distribution.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Insight
Enterprises, Inc. and its wholly-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
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
187,227 shares of the Company's Common Stock (valued at $2,516,000), $3,534,000
in cash, including acquisition costs and a cash overdraft position that was
assumed, with further consideration payable in the future, contingent on
profitability.
On September 13, 1998, the Company acquired all of the outstanding stock of
Treasure Chest Computers, Inc., a United States direct marketer of computers and
computer-related products, for 451,338 shares of the Company's Common Stock
(valued at $10,000,000) plus $27,000 of acquisition costs, net of cash acquired,
with further consideration payable in the future, contingent on profitability.
On December 16, 1998, the Company acquired all of the outstanding stock of
LC-Design Werbeagentur GmbH, a German holding company, and Computerprofis
Computersysteme and Burokommunikation, a German direct marketer of computers and
computer-related products, for a total of 82,116 shares of the Company's Common
Stock (valued at $1,810,000) and $4,521,000 in cash including acquisition costs
and net of cash acquired, with further consideration payable in the future,
contingent on profitability.
All three acquisitions have been accounted for by the purchase method of
accounting, and accordingly the acquired companies' assets and liabilities have
been recorded at their fair values at the date of acquisition. The excess of the
purchase price, including acquisition costs, over the fair value of the net
assets acquired has been recorded as goodwill. See Note 15 for pro forma
financial information.
In January 1999, the Company's Board of Directors approved a 3-for-2 stock
split effected in the form of a stock dividend and payable on February 18, 1999
to stockholders of record at the close of business on January 25, 1999.
Additionally, 3-for-2 stock splits were effected in the form of stock dividends
on September 8, 1998 and September 17, 1997. All share amounts, share prices and
earnings per share have been retroactively adjusted to reflect these 3-for-2
stock splits.
Cash Equivalents
INSIGHT considers all highly liquid investments with original maturities at
the date of purchase of three months or less to be cash equivalents.
Inventories
Inventories, principally purchased computers, hardware and software, are
stated at the lower of weighted average cost (which approximates cost under the
first-in first-out method) or market. Provisions are made currently for
obsolete, slow moving and nonsalable inventory.
29
32
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, and 1996
Property and Equipment
Property and equipment are stated at cost. Major improvements and
betterments are capitalized; maintenance, repairs and minor replacements are
expensed as incurred Depreciation is provided using the straight-line method
over the economic lives of the assets ranging from three to 29 years. Leasehold
improvements are amortized over the shorter of the underlying lease term or
asset life. The cost of computer software developed or obtained for internal
use, including internal costs incurred for upgrades and enhancements that result
in additional functionality, is capitalized and amortized over its estimated
useful life of three to ten years.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight line basis over the expected
periods to be benefited, generally 20 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Sales Recognition
Sales are recognized upon shipment to the customer. Provisions are made
currently for estimated product returns expected to occur under INSIGHT's return
policy.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
earnings in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that includes the
enactment date.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated into United States dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No 52, "Foreign Currency Translation." Assets and
liabilities of the subsidiaries are translated into United States dollars at
current exchange rates. Income and expense items are translated at the average
exchange rate for each month within the year. The resulting translation
adjustments are recorded directly as a separate component of stockholders'
equity. All transaction gains or losses are recorded in the statement of
earnings.
Earnings Per Share
Basic earnings per share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
during each year. Diluted earnings per share includes the impact of stock
options assumed to be exercised using the treasury stock method. The denominator
for diluted earnings per share is greater than the denominator used in basic
earnings per share by 1,092,674 shares in 1998, 1,150,045 shares in 1997 and
1,201,863 shares in 1996. The numerator is the same for both basic and diluted
earnings per share.
30
33
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
Stock-Based Compensation
In accordance with the provisions of Accounting Principals Board Opinion
No. 25, "Accounting for Stock Issued to Employees," the Company measures
stock-based compensation expense as the excess of the market price at the grant
date over the amount the employee must pay for the stock. The Company's policy
is to grant stock options at fair market value at the date of grant;
accordingly, no compensation expense is recognized. As permitted, the Company
has elected to adopt the pro forma disclosure provisions only of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
The Company is recognizing the compensation expense associated with the
issuance of restricted stock over the vesting period. The total compensation
expense associated with restricted stock represents the value based upon the
number of shares awarded multiplied by the closing price on the date of grant.
Recipients of restricted stock are entitled to receive any dividends declared on
the Company's Common Stock and have voting rights, regardless of whether such
shares have vested. Unvested shares of restricted stock are forfeited if the
recipient is no longer an employee of the Company.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. Additionally, such estimates and assumptions affect the
reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
Segment Reporting
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprises and Related Information" ("SFAS No. 131"). SFAS No.
131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about products and services, geographical areas, and major customers.
The adoption of SFAS No. 131 does not affect results of operations or financial
position. The Company only has one segment, direct marketing. See Note 14.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), effective January 1, 1998. SFAS No. 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.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
31
34
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(2) Property and Equipment
Property and equipment consist of the following: DECEMBER 31,
------------------------
1998 1997
-------- --------
(IN THOUSANDS)
Land .................................... $ 2,160 $ 2,160
Building ................................ 10,486 9,875
Equipment ............................... 9,530 5,998
Furniture and fixtures .................. 10,066 6,544
Leasehold improvements .................. 2,487 1,145
Software ................................ 2,581 952
-------- --------
37,310 26,674
Accumulated depreciation and amortization (8,362) (6,242)
-------- --------
Property and equipment, net ............. $ 28,948 $ 20,432
======== ========
(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. As of December 31, 1998,
$48,399,000 was available under the line of credit. Cash advances bear interest
at the London Interbank Offered Rate ("LIBOR") plus 1.40% (resulting in an
interest rate of 6.66% at December 31, 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 December 31, 1998 and 1997, the balance of this portion of the
credit facility was $21,601,000 and $6,950,000, respectively. As of December 31,
1997, the outstanding draws on the line of credit were $32,750,000.
Subsequent to year-end and after the date of the auditors' report, the
Company replaced its credit facility with a new $100 million credit facility
with a finance company. The new agreement provides for cash advances outstanding
at any one time up to a maximum of $100 million on the line of credit, subject
to limitations based upon the Company's eligible accounts receivable and
inventories. Cash advances bear interest at LIBOR plus 0.80%. The new credit
facility can be used to facilitate the purchases of inventories from certain
vendors, and that portion will be classified on the balance sheet as accounts
payable. The credit facility expires in February 2002. 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
specified 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 includes principal
of $8,625,000 with a fixed interest rate of 7.15% and is payable over a 15-year
period. The debt is secured by the land, building and improvements to which it
relates.
The current portion of long-term debt of $347,000 as of December 31, 1998
is included in accounts payable on the balance sheet.
The aggregate annual maturities of long-term debt as of December 31, 1998
are as follows:
Years ending December 31,: (in thousands)
------------------------- -------------
1999 $ 347
2000 373
2001 400
2002 430
2003 462
Thereafter 6,256
--------
$ 8,268
========
32
35
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(5) Lease Commitments
The Company has several non-cancelable operating leases, primarily for
office and distribution center space. Rental expense for operating leases was
$2,550,000, $1,209,000 and $721,000, for the years ended December 31, 1998, 1997
and 1996, respectively.
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1998
are as follows:
Years ending December 31,: (in thousands)
------------------------- --------------
1999 2,102
2000 1,594
2001 1,285
2004 882
2005 802
Thereafter 1,659
------
$8,324
======
(6) Income Taxes
Income tax expense (benefit) consists of the following:
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
Current:
Federal ... $ 13,193 $ 6,842 $ 4,647
State ..... 2,061 1,759 1,224
-------- ------- -------
15,254 8,601 5,871
-------- ------- -------
Deferred:
Federal ... (2,227) 261 (710)
State ..... (305) 75 (210)
-------- ------- -------
(2,532) 336 (920)
-------- ------- -------
$ 12,722 $ 8,937 $ 4,951
======== ======= =======
The effective income tax rates for the years ended December 31, 1998, 1997
and 1996, were 38.4%, 40.3% and 39.6%, respectively. The actual expense differs
from the "expected" tax expense (computed by applying the U.S. federal corporate
income tax rate of 35% in 1998 and 1997 and 34% in 1996) as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- ------ ------
(IN THOUSANDS)
Computed "expected" tax expense ......................... $ 11,806 $7,533 $4,253
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit 1,141 1,210 669
Other, net .......................................... (225) 194 29
-------- ------ ------
$ 12,722 $8,937 $4,951
======== ====== ======
Sources of deferred income taxes and their tax effects are as follows:
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- --------- ---------
(IN THOUSANDS)
Deferred revenue ............................. $ -- $ 30 $(228)
Prepaid expenses ............................. 61 42 154
Allowances for doubtful accounts and returns . (1,287) 1,082 (472)
Inventory allowances ......................... 202 (12) (259)
Miscellaneous accruals ....................... (1,386) (657) 51
Accrued vacation and other payroll liabilities 26 (140) (166)
Other, net ................................... (148) (9) 0
------- ------- -----
$(2,532) $ 336 $(920)
======= ======= =====
33
36
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are presented below:
DECEMBER 31,
----------------------
1998 1997
------- -------
(IN THOUSANDS)
Deferred tax assets:
Deferred revenue .............................................. $ (14) $ (14)
Allowance for doubtful accounts and returns ................... 1,553 266
Accrued warranty costs ........................................ 144 --
Inventory allowances .......................................... 271 473
Miscellaneous accruals ........................................ 2,073 687
Accrued vacation and other payroll liabilities ................ 508 534
Other ......................................................... 13 9
------- -------
Total gross deferred tax assets .......................... 4,548 1,955
------- -------
Deferred tax liabilities:
Prepaid expenses .............................................. (477) (416)
------- -------
Total gross deferred tax liabilities ..................... (477) (416)
------- -------
Net deferred tax asset ................................... $ 4,071 $ 1,539
======= =======
Due to INSIGHT's profitable operations, management believes that
realization of the deferred tax assets is more likely than not; therefore there
is no valuation allowance as of December 31, 1998 and 1997. Reversal of
INSIGHT's temporary differences is expected to occur in the near future due to
their short-term nature. The net deferred tax asset at December 31, 1998 and
1997 are included in prepaid expenses and other current assets on the balance
sheet.
(7) Public Offering
In November 1996, the Company completed a public offering of common stock.
The Company sold 3,868,915 shares of its Common Stock at $9.93 per share. Net
proceeds to the Company (including proceeds received from the exercise of
warrants previously issued to underwriters, and after underwriting discounts and
other offering costs) were $37.5 million.
(8) Benefit Plans
INSIGHT has adopted a defined contribution benefit plan which complies with
section 401(k) of the Internal Revenue Code. Employees who complete six months
of service are eligible to participate in the Plan. The Plan allows for INSIGHT
to match up to 25% of the employees' contributions up to a maximum six percent
of total compensation. Contribution expense was $410,000, $339,000 and $165,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
In August 1995, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). Under the terms of the Purchase Plan, employees other than
officers may purchase a total of up to 337,500 shares of Common Stock. The
purchase price per share is 85% of the market value per share of Common Stock
determined as of the beginning of the quarterly purchase period as specified in
the Purchase Plan.
(9) Stock Option Plans
In November 1994, INSIGHT established a 1994 Stock Option Plan (the "1994
Plan"). Options exercisable for a total of 1,687,500 shares of Common Stock are
issuable under the 1994 Plan. During fiscal 1996 Insight amended the 1994 Plan,
increasing the number of issuable shares by 1,181,250. A total of 2,868,750
shares of Common Stock have been reserved for issuance upon the exercise of
options under the 1994 Plan. The 1994 Plan provides for the grant to employees
of either "incentive stock options", within the meaning of Section 422 of the
Code, or nonqualified stock options. Under the 1994 Plan, only employees
(including officers) of the Company are eligible to receive incentive stock
options. The 1994 Plan is administered by the Board of Directors of the Company
(or a committee of the Board) which determines the terms of options granted
under the 1994 Plan, including the exercise price and the number of shares
subject to the option. The 1994 Plan provides the Board of Directors with the
discretion to determine when options granted thereunder shall become
exercisable. As of December 31, 1998, 97,182 stock options under the 1994 Plan
were available for grant.
34
37
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
In October 1997, the shareholders approved the establishment of the 1998
Long-Term Incentive Plan (the "1998 LTIP") for officers, directors and
consultants or independent contractors. The 1998 LTIP authorizes grants of
incentive stock options, non-qualified stock options, stock appreciation rights,
performance shares, restricted stock and performance-based awards. The total
number of shares of Common Stock initially available for awards under the 1998
LTIP is 1,181,250. Additionally, for each 12-month period beginning July 1, 1998
and ending June 30, 2007, an additional one percent to four percent, at the
determination of the Board of Directors, of the outstanding shares of Common
Stock shall be reserved for issuance under the Plan on a cumulative basis with a
calculation of such additional shares to be made on the first day of each
quarter of the applicable calendar year; provided, each such calculation of
additional shares shall be limited to an amount of additional shares such that
the number of shares of Common Stock remaining for grant under the Plan and any
of the Company's other option plans, plus the number of shares of Common Stock
granted but not yet exercised under the Plan and any of the Company's other
option plans, shall not exceed 20% of the outstanding shares of Common Stock of
the Company at the time of calculation of the additional shares.
The 1998 LTIP is administered by the Compensation Committee of the Board of
Directors. Except as provided below, the Compensation Committee has the
exclusive authority to administer the 1998 LTIP, including the power to
determine eligibility, the types of awards to be granted, the price and the
timing of awards. The 1998 LTIP does, however, provide that the Company's CEO
has the authority to grant awards to any individual (other than the three
highest-ranking executives of the Company) and provides further that any grant
to an individual who is subject to Section 16 of the Security Exchange Act of
1934 may not be exercisable for at least six months from the date of grant. As
of December 31, 1998, 47,444 shares of Common Stock available for awards under
the 1998 LTIP were available to grant.
Generally, options granted expire in ten years, are exercisable during the
optionee's lifetime only by the recipient and are non-transferable. Unexercised
options generally terminate on the date an individual ceases to be an employee
of INSIGHT.
In September 1998, INSIGHT established the 1998 Employee Restricted Stock
Plan (the "1998 Employee RSP") for the employees of the Company. The total
number of Restricted Stock shares initially available for grant under the 1998
Employee RSP is 375,000. The 1998 Employee RSP is administered by a committee,
that is appointed by the Board of Directors. Except as provided below, the
committee has the exclusive authority to administer the 1998 Employee RSP,
including the power to determine the participants, number of shares granted and
the terms and conditions of the grant, if any. The 1998 Employee RSP does,
however, provide that the Company's CEO has the authority to grant awards to
employees (other than the three highest-ranking executives of the Company) and
provides further that any grant to an employee who is subject to Section 16 of
the Securities Exchange Act of 1934 shall remain subject to restriction on
transferability and other restrictions for at least six months from the date of
grant. As of December 31, 1998, 302,625 shares of restricted stock were
available for grant under the 1998 Employee RSP.
In December 1998, INSIGHT established the 1998 Officer Restricted Stock
Plan (the "1998 Officer RSP") for the officers of the Company. The total number
of Restricted Stock shares initially available for grant under the 1998 Officer
RSP is 37,500. The 1998 Officer RSP is administered by a committee that is
appointed by the Board of Directors. Except as provided below, the committee has
the exclusive authority to administer the 1998 Officer RSP, including the power
to determine the participants, numbers of shares granted and the terms and
conditions of the grant, if any. The 1998 Officer RSP does, however, provide
that the Company's CEO has the authority to grant awards to officers (other than
the three highest-ranking executives of the Company) and provides further that
any grant to an officer who is subject to Section 16 of the Securities Exchange
Act of 1934 shall remain subject to restriction on transferability and other
restrictions for at least six months from the date of grant. As of December 31,
1998, 37,500 shares of restricted stock were available for grant under the 1998
Officer RSP.
35
38
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Net earnings As reported $ 20,450 $ 13,218 $ 7,558
======== ======== ========
Pro forma $ 16,986 $ 12,154 $ 6,966
======== ======== ========
Basic earnings per share As reported $ 0.84 $ 0.58 $ 0.40
======== ======== ========
Pro forma $ 0.70 $ 0.53 $ 0.37
======== ======== ========
Diluted earnings per share As reported $ 0.81 $ 0.55 $ 0.38
======== ======== ========
Pro forma $ 0.67 $ 0.50 $ 0.35
======== ======== ========
Pro forma net earnings reflect only options granted in 1998, 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to January 1995
is not considered under SFAS No. 123.
For purposes of the SFAS No. 123 pro forma net earnings and net earnings
per share calculation, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996:
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- --------- ----------
Dividend yield 0% 0% 0%
Expected volatility 50% 50% 50%
Risk-free interest rate 4.5% 5.6% 6.0%
Expected lives 2.1 years 1.9 years 2.4 years
Activity related to the stock option plans is summarized below:
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------- ----------------------- -----------------------
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- ---------- -------------- --------- --------------
Balance at the beginning of year 2,937,285 $ 8.37 2,263,757 $ 4.45 1,177,677 $ 1.90
Granted ........................ 2,169,558 16.62 1,782,378 11.55 1,514,192 5.81
Exercised ...................... (1,230,159) 5.83 (607,599) 3.63 (350,865) 1.77
Expired ........................ (777,612) 15.43 (501,251) 7.77 (77,247) 4.11
--------- --------- ---------
Balance at the end of year .... 3,099,072 13.38 2,937,285 8.37 2,263,757 4.45
========= ========= =========
Exercisable at the end of year.. 371,694 10.07 455,967 2.35 486,014 1.25
========= ========= =========
Weighted-average fair value of
options granted during the year $ 4.64 $ 2.83 $ 1.74
========= ========= =========
36
39
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
The following table summarizes the status of outstanding stock options as of
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------------------
Weighted Weighted
Number of Average Average Number of Options Weighted
Range of Options Remaining Exercise Exercisable Average
Exercise Prices Outstanding Contractual Life Price Exercise Price
- --------------------- --------------- ------------------- ----------- ------------------ -------------------
$ 2.67 - 8.07 627,231 7.42 years $ 5.69 122,039 $ 4.20
8.15 -13.33 1,000,187 7.86 11.23 193,706 11.86
13.39 -17.78 412,074 9.10 16.66 54,375 16.64
17.81 -17.81 743,208 9.50 17.81 1,574 17.81
17.89 -34.83 316,372 9.55 20.73 -- --
--------- -------
3,099,072 8.50 13.88 371,694 10.07
========= =======
(10) Shareholder Rights Plan
On December 14, 1998, each stockholder of record received one Preferred
Share Purchase Right ("Right") on each outstanding share of Common Stock owned.
Each Right entitles stockholders to buy one three-hundredth of a share of Series
A Preferred Stock of the Company at an exercise price of $200. The Rights will
be exercisable if a person or group acquires 15% or more of the Common Stock of
the Company or announces a tender offer for 15% or more of the Common Stock.
Should this occur, the Right will entitle its holder to purchase, at the Right's
exercise price, a number of shares of Common Stock having a market value at the
time of twice the Right's exercise price. Rights held by the 15% holder will
become void and will not be exercisable to purchase shares at the bargain
purchase price. If the Company is acquired in a merger or other business
combination transaction after a person acquires 15% or more of the Company's
Common Stock, each Right will entitle its holder to purchase at the Right's then
current exercise price a number of the acquiring company's common shares having
a market value at the time of twice the Right's exercise price.
(11) Non-Operating Income (Expense), net
Non-operating income (expense), net, has fluctuated year to year from
$713,000 and $73,000 of interest expense, net, in 1998 and 1997, respectively,
to $328,000 of interest income, net, in 1996. Interest expense primarily relates
to borrowings under the Company's line of credit which have been necessary to
finance the Company's growth.
(12) Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. The following summary presents a description of the methodologies
and assumptions used to determine such amounts.
Fair value estimates are made at a point in time and are based on relevant
market information and information about the financial instruments; they are
subjective in nature and involve uncertainties and matters of judgment and,
therefore, can not be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at any time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
Since the fair value is estimated as of December 31, 1998, the amounts that
will actually be realized or paid in settlement of the instrument could be
significantly different.
The carrying amounts for cash and cash equivalents are assumed to be the
fair value because of the liquidity of these instruments.
The carrying amounts for accounts receivable, accounts payable and accrued
expenses and other current liabilities approximate fair value because of the
short maturity of these instruments.
37
40
INSIGHT ENTERPRISES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(13) Supplemental Financial Information
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended December 31, 1998, 1997
and 1996 follows:
BALANCE AT
BEGINNING OF BALANCE AT
PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
------------ --------- ---------- -------------
Allowances for doubtful accounts receivable:
Year ended December 31, 1998................ $ 3,274 $ 5,366 $ (1,512) $ 7,128
========= ========= ========== =========
Year ended December 31, 1997.................... $ 3,214 $ 4,164 $ (4,104) $ 3,274
========= ========= ========= =========
Year ended December 31, 1996.................... $ 2,179 $ 1,801 $ (766) $ 3,214
========= ========= ========= =========
Allowances for obsolescence of inventories:
Year ended December 31, 1998................ $ 1,397 $ 1,802 $ (1,432) $ 1,761
========= ========= ========= =========
Year ended December 31, 1997................ $ 1,142 $ 1,080 $ (825) $ 1,397
========= ========= ========= =========
Year ended December 31, 1996................ $ 435 $ 914 $ (207) $ 1,142
========= ========= ========= =========
(14) Segment Information
The Company operates in one industry segment; direct marketing. The
Company's principal markets are in North America and Europe.
None of the Company's customers exceeded ten percent of net sales.
The following is a summary of the Company's geographic operations:
North
America Europe Total
------- ------ -----
1998
- ----
Net sales $947,277 $55,507 $1,002,784
Total long-lived assets $ 39,412 $18,089 $ 57,501
1997
- ----
Net sales $627,735 $ -- $627,735
Total long-lived assets $ 20,467 $ -- $ 20,467
Although the Company could be impacted by the international economic
climate, management does not believe significant credit risk existed at December
31, 1998. The Company monitors its customers' financial conditions and does not
require collateral. Historically, the Company has not experienced significant
losses related to receivables from any individual or groups of customers.
(15) Pro Forma Financial Information
The following summary, prepared on a pro forma basis, presents the results
of operations as if the three 1998 acquisitions, described in Note 1, had
occurred on January 1, 1997:
Years ended December 31,
------------------------
1998 1997
---- ----
Net sales .............................. $1,118,600 $780,349
Net earnings ........................... $ 20,407 $ 12,265
Basic earnings per share ............... $ 0.83 $ 0.52
Diluted earnings per share ............. $ 0.79 $ 0.49
The pro forma results are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisitions had been
effective at the beginning of 1997 and are not a projection of future results.
41
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2 (1) - Form of Articles of Merger and Certificate of Merger
between Insight Enterprises, Inc., an Arizona
corporation, and Insight Enterprises, Inc., a Delaware
corporation (the "Registrant")
3.1 (6) - Amended and Restated Certificate of Incorporation of
Registrant
3.2 (1) - Bylaws of the Registrant
4.1 (1) - Specimen Common Stock Certificate
4.2 (11) - Form of Certificate of Designation of Preferred Shares
10.1 (1)(2) - Form of Indemnification Agreement
10.2 (1)(3) - 1994 Stock Option Plan of the Registrant
10.3 (1)(3) - Predecessor Stock Option Plan
10.4 (3)(4) - 1995 Employee Stock Purchase Plan of the Registrant
10.5 (3)(5) - Amendment to 1994 Stock Option Plan of the Registrant
10.6 (3)(7) - 1998 Long-Term Incentive Plan
10.7 (3)(8) - Form of Restricted Stock Agreement
10.8 (3)(9) - Employment Agreement between Insight Enterprises, Inc.
and Eric J. Crown dated as of March 31, 1998.
10.9 (3)(9) - Employment Agreement between Insight Enterprises, Inc.
and Timothy A. Crown dated as of March 31, 1998.
10.10 (3)(9) - Employment Agreement between Insight Enterprises, Inc.
and Stanley Laybourne dated as of March 31, 1998.
10.11 (3)(10) - 1998 Employee Restricted Stock Plan
10.12 (3)(10) - 1998 Officer Restricted Stock Plan
10.13 (12) - Shareholder's Rights Agreement
11 - Computation of Net Earnings per Common Share
21 - Subsidiaries of the Registrant
23 - Consent of KPMG LLP
27.1 - Financial Data Schedule as of and for the year ended
December 31, 1998
27.2 - Restated Financial Data Schedule as of and for the
year ended December 31, 1997
27.3 - Restated Financial Data Schedule as of and for the
year ended December 31, 1996
- --------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 33-86142) declared effective January 24, 1995.
(2) The Company has entered into a separate indemnification agreement with each
of its current directors and executive officers that differ only in party
names and dates. Pursuant to the instructions accompanying Item 601 of
Regulation S-K, the Registrant is filing the form of such indemnification
agreement.
(3) Management contract or compensatory plan or arrangement.
42
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997.
(7) Incorporated by reference to the Company's Notice of 1997 Annual Meeting
of Stockholders.
(8) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1998.
(9) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 1998.
(10) Incorporated by reference to the Company's Form S-8 filed on December 17,
1998.
(11) Incorporated by reference to the Company's current report on Form 8-K
filed on March 17, 1999.
(12) Incorporated by reference to the Company's Form 8-A filed on March 17,
1999.