<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to __________
Commission File Number: 0-25092
INSIGHT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0766246
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1912 WEST FOURTH STREET, TEMPE, ARIZONA 85281
(Address of principal executive offices)
(602) 902-1001
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of issuer's class of common
stock as the latest practicable date:
CLASS: COMMON STOCK OUTSTANDING SHARES AT MAY 10, 1996: 5,370,933
<PAGE> 2
INSIGHT ENTERPRISES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 1996 and June 30, 1995............................. 3
Condensed Consolidated Statements of Earnings -
Three and Nine Months Ended March 31, 1996 and 1995.......... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months ended March 31, 1996 and 1995.................... 5
Notes to Condensed Consolidated Financial Statements......... 6-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9-15
PART II - OTHER INFORMATION..................................... 16
SIGNATURE....................................................... 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1995
-------- -------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 4,306 $ 7,574
Accounts receivable, net................................... 38,003 17,282
Inventories................................................ 17,696 12,377
Prepaid expenses........................................... 1,448 1,179
Deferred income taxes...................................... 1,187 808
------- -------
Total current assets........................... 62,640 39,220
Property and equipment, net................................... 5,491 2,807
Other assets.................................................. 672 375
------- -------
$68,803 $42,402
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $22,511 $15,368
Accrued expenses........................................... 1,374 1,246
Customer refunds payable................................... 299 267
Deferred revenue........................................... 530 419
------- -------
Total current liabilities...................... 24,714 17,300
Line of Credit................................................ 4,455 6,541
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued............................ - -
Common stock, $.01 par value, 10,000,000 shares authorized,
5,370,433 at March 31, 1996 and 4,290,948 at
June 30, 1995 shares issued and outstanding ............ 54 43
Paid-in capital............................................ 29,065 11,933
Retained earnings.......................................... 10,515 6,585
------- -------
Total stockholders' equity..................... 39,634 18,561
------- -------
$68,803 $42,402
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales....................................... $94,655 $64,238 $241,863 $184,348
Costs of goods sold............................. 81,224 54,390 207,358 155,565
------- ------- -------- --------
Gross profit.......................... 13,431 9,848 34,505 28,783
Selling, general and administrative expenses.... 10,758 8,331 27,839 24,489
------- ------- -------- --------
Earnings from operations.............. 2,673 1,517 6,666 4,294
Non-operating expense, net...................... 24 136 158 536
------- ------- -------- --------
Earnings before income taxes.......... 2,649 1,381 6,508 3,758
Income tax expense.............................. 1,050 548 2,578 1,489
------- ------- -------- --------
Net earnings.......................... $ 1,599 $ 833 $ 3,930 $ 2,269
======= ======= ======== ========
Net earnings data (Pro forma for the nine
months ended March 31, 1995):
Earnings before income taxes.................... $ 2,649 $ 1,381 $ 6,508 $ 3,895
Income tax expense.............................. 1,050 548 2,578 1,543
------- ------- -------- --------
Net earnings.................................... $ 1,599 $ 833 $ 3,930 $ 2,352
======= ======= ======== ========
Net earnings per share.......................... $ .29 $ .20 $ .76 $ .69
======= ======= ======== ========
Shares used in net earnings per
share calculation............................ 5,585 4,123 5,144 3,435
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings............................................ $ 3,930 $ 2,269
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities:
Depreciation........................................... 713 558
Tax effect of stock options............................ 463 -
Provision for losses on accounts receivable............ 885 1,361
Provision for obsolete and slow-moving inventory....... 223 180
Deferred income tax benefit............................ (379) (331)
Change in assets and liabilities:
Increase in accounts receivable..................... (21,606) (3,151)
Increase in inventories............................. (5,542) (10,297)
Increase in prepaid expenses........................ (269) (94)
Decrease (increase) in other assets................ (297) 6
Increase in accounts payable........................ 7,143 8,718
Increase in accrued expenses........................ 128 298
Increase (decrease) in customer refunds payable.... 32 (270)
Increase (decrease) in deferred revenue............. 111 (536)
-------- --------
Net cash used in operating activities............ (14,465) (1,289)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment................... (3,397) (960)
-------- --------
Net cash used in investing activities............ (3,397) (960)
-------- --------
Cash flows from financing activities:
Net repayments on line of credit...................... (2,086) (7,017)
Repayment of capital lease obligations................ - (164)
Repayment of notes payable to stockholders............ - (891)
Issuance of common stock.............................. 16,680 11,870
-------- --------
Net cash provided by financing activities......... 14,594 3,798
-------- --------
Increase (decrease) in cash and cash equivalents......... (3,268) 1,549
Cash and cash equivalents at beginning of period.......... 7,574 2,525
-------- --------
Cash and cash equivalents at end of period................ $ 4,306 $ 4,074
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS
Insight Enterprises, Inc. and subsidiaries ("INSIGHT" or the "Company")
is a direct marketer of microcomputers, peripherals and software. INSIGHT
markets a comprehensive line of products to end-users in the business,
government, education and home markets throughout the United States and Canada
primarily through its own distinctive catalogs and advertisements in computer
industry publications. Additionally, Insight provides direct marketing services
to manufacturers and retailers seeking to outsource their direct marketing
activities. The services provided include marketing, sales and distribution.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The condensed consolidated financial statements include the accounts of
Insight Enterprises, Inc. and its wholly-owned subsidiaries: Insight Direct,
Inc., IA Direct, Inc., ITA, Inc. and Intech Direct Company. Intercompany
accounts and transactions have been eliminated in consolidation.
Certain amounts in the condensed consolidated financial statements have
been reclassified to confirm to the current presentation.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosure normally required by generally
accepted accounting principles. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain all adjustments,
consisting only of normal recurring accruals, necessary to present fairly the
financial position of INSIGHT as of March 31, 1996 and June 30, 1995, the
results of operations for the three and nine months ended March 31, 1996 and
1995, and the cash flows for the nine months ended March 31, 1996 and 1995. The
results of operations for such interim periods are not necessarily indicative of
results for the full year. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements,
including the related notes thereto, in INSIGHT's Annual Report on Form 10-K for
the year ended June 30, 1995.
Advertising Expense
INSIGHT adopted SOP 93-7, "Reporting on Advertising Costs", during the
fourth quarter of fiscal 1995. In accordance with SOP 93-7, costs of
direct-response advertising are capitalized and amortized over the expected
revenue stream, generally three months, while other advertising costs are
expensed as incurred. All advertising costs are recorded net of related
cooperative marketing reimbursements. Direct response advertising consists
primarily of costs incurred to develop and distribute catalogs and magazine
advertisements. At March 31, 1996 and June 30, 1995 advertising costs of
$251,000 and $214,000, respectively were deferred and are included in other
assets.
Prior to the implementation of SOP 93-7, advertising expense was
recognized as a percentage of net sales during interim periods, with any
unamortized amounts being expensed at year end. The interim allocation prior to
the implementation of SOP 93-7 was supported by the Company's tracking of
6
<PAGE> 7
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
customer responses to unique toll-free telephone numbers placed in specific
advertisements and catalogs. Pursuant to the prior interim allocation method in
the third quarter of fiscal 1995 and for the nine months ended March 31, 1995,
advertising expense was equal to the amount incurred.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123"). SFAS No. 123 is effective for transactions
entered into in fiscal years beginning after December 15, 1995. The impact of
adoption of this Statement has not yet been determined.
3. PUBLIC OFFERINGS
In January 1995, the Company completed an initial public offering of
1,500,000 shares of its common stock at $9.00 per share. Net proceeds after
underwriting discounts and other offering costs were approximately $11.9
million. Concurrent with the closing of the initial public offering, the Company
reincorporated as a Delaware corporation and the current shareholders of the
predecessor company exchanged their 10,000 shares of the then outstanding common
stock, no par value, for 2,790,698 shares of common stock, $.01 par value.
In November 1995, the Company completed a second public offering. The
Company sold 1,000,000 newly issued shares of its common stock at $17.75 per
share. Net proceeds, to the Company, after underwriting discounts and other
offering costs were $16.6 million.
4. LINE OF CREDIT
INSIGHT has a $30,000,000 credit facility with a finance company. The
agreement provides for cash advances outstanding at any one time up to a maximum
of $22,500,000 on the line of credit, subject to limitations based upon the
Company's eligible accounts receivable and inventories. As of March 31, 1996,
$18,045,000 was available under the line of credit. Cash advances under the line
of credit bear interest at the London Interbank Offered Rate (LIBOR) plus 1.90%
(7.31% at March 31, 1996) payable monthly. The additional $7,500,000 of the
credit facility is used to facilitate the purchases of inventories from certain
vendors and is classified on the balance sheet as accounts payable. At March 31,
1996, the outstanding balance of this additional portion of the credit facility
was $2,837,000. The credit facility expires in June 1998. The credit facility is
secured by substantially all of the assets of INSIGHT. The credit facility
contains various covenants including the requirement that INSIGHT maintain a
specified dollar amount of tangible net worth.
5. INCOME TAXES
Income tax expense as provided for the three months and nine months
ended March 31, 1996 and 1995 is based upon the estimated annual income tax rate
of the Company.
7
<PAGE> 8
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(unaudited)
6. PRO FORMA INFORMATION
The financial results for the nine months ended March 31, 1995 reflect
pro forma adjustments, including the elimination of executive compensation
expense which was paid in excess of current employment agreements and the
interim allocation of advertising expenses as a percentage of net sales.
7. EARNINGS PER SHARE
Shares used in net earnings per share calculation 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 pursuant to which the stockholders of the predecessor company received
2,790,698 shares for the 10,000 shares of the Company's common stock previously
outstanding. Net earnings per share for the three months ended March 31, 1995,
is based on 4,122,710 shares, which includes 3,919,543 weighted shares
outstanding, 203,167 common stock equivalents. Net earnings per share for the
nine months ended March 31, 1995 is based upon 3,435,237 shares, which includes
3,166,980 weighted shares outstanding and 268,257 of common stock equivalents.
Net earnings per share for the three months ended March 31, 1996 is based upon
5,584,893 shares, which includes 5,367,927 weighted shares outstanding and
216,966 of common stock equivalents. Net earnings per share for the nine months
ended March 31, 1996 is based upon 5,143,836 shares, which included 4,857,793
weighted shares outstanding and 286,043 of common stock equivalents.
8
<PAGE> 9
ITEM 2.
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Insight is a direct marketer of microcomputers, peripherals and
software. The Company markets a comprehensive line of brand name products to
price-conscious, computer literate end-users in the business, government,
education and home markets throughout the United States and Canada. The Company
uses aggressive targeted marketing, a knowledgeable sales force and streamlined
distribution together with its advanced proprietary information system to
achieve volume sales and strong customer loyalty.
The Company commenced operations in 1988 as a direct marketer of hard
disk drives and other mass storage products under the name Hard Drives
International. In fiscal 1991, the Company began to market its own
Insight-branded microcomputers. In fiscal 1992 and 1993, the Company added
peripherals, software and other branded microcomputers to its product line.
Through fiscal 1992, the Company based its marketing approach primarily on
advertising in computer magazines and the use of inbound toll-free telephone
lines to receive customer orders. In fiscal 1993, the Company changed its
marketing mix to include the publication of catalogs and the use of outbound
telephone account executives focusing on the business, government and education
markets. During fiscal 1995, the Company began to de-emphasize the sale of
Insight-branded computers and discontinued the sale of Insight-branded computers
in the second quarter of fiscal 1996.
In fiscal 1992, the Company began outsourcing direct marketing services
to third parties. Under this approach, catalogs and other mailings produced and
distributed by third parties featured brand name or Insight-branded products
sold under the name of such marketers. In fiscal 1993, the Company initiated its
turnkey direct marketing outsourcing program for computer equipment
manufacturers. In fiscal 1994, Insight significantly expanded its production and
distribution of catalogs and continued to emphasize the acquisition of
additional outsourcing arrangements. In fiscal 1995, the Company began its phase
out of sales to third-party marketers. In January 1995, the Company completed
its initial public offering of Common Stock, receiving net proceeds of
approximately $11.9 million. In November 1995, the Company completed a second
public offering of Common Stock, receiving net proceeds of $16.6 million.
The following discussion and analysis of financial condition and
results of operations of the Company should be read in conjunction with the
Condensed Consolidated Financial Statements of the Company, including the
related notes thereto, appearing elsewhere in this filing and with the
consolidated financial statements and related notes appearing in the Company's
Annual Report on Form 10-K for the year ended June 30, 1995.
Any statement in this document that relates to future plans,
expectations, events, or performances are deemed to be forward looking
statements. Such forward looking statements are subject to the following
important factors, among others, that could cause actual results to differ
materially from the forward looking statement: the "Risk Factors" set forth in
the Company's Prospectus dated November 3, 1995; changes in the personal
computer industry, especially competitive pressures, changing price margins, and
inventory risks due to technological developments or shifts in market demand;
the Company's possible inability to obtain new outsourcing agreements and the
effect on the Company's rate of net sales growth caused by the changing mix of
9
<PAGE> 10
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OVERVIEW (CONTINUED)
type of outsourcing agreement (as hereinafter described); changes in costs,
especially paper prices, of Company catalogs and advertising; and the impact of
the transition from Insight-branded computer to other branded sales.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 100.0%
Costs of goods sold.................... 85.8 84.7 85.7 84.4
----- ----- ----- -----
Gross profit........................... 14.2 15.3 14.3 15.6
Selling, general and administrative
expenses............................ 11.4 12.9 11.5 13.3
----- ----- ----- -----
Earnings from operations............... 2.8 2.4 2.8 2.3
Non-operating expense, net............. 0.0 0.2 0.1 0.3
----- ----- ----- -----
Earnings before income taxes........... 2.8 2.2 2.7 2.0
Income tax expense..................... 1.1 0.9 1.1 0.8
----- ----- ----- -----
Net earnings........................... 1.7% 1.3% 1.6% 1.2%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
Net Sales. The Company's net sales were $94.6 million in the third
quarter of fiscal 1996 and $64.2 million in the third quarter of fiscal 1995,
representing an increase of $30.4 million, or 47.3% over the third quarter of
fiscal 1995. Direct marketing sales increased $28.0 million or 48.5% from $57.7
million to $85.7 million in the third quarter of fiscal 1995 and 1996,
respectively. Sales from outsourcing services to manufacturers, retailers and
third party marketers increased $2.4 million, or 37.2%, from $6.5 million to
$8.9 million in the third quarter of fiscal 1995 and 1996, respectively.
The increase in direct marketing sales resulted primarily from
increased catalog circulation, an increase in the average order size and the
continued building of the Company's customer base. The Company nearly tripled
its "Insight" catalog circulation from 1,106,000 to 3,191,000 in the third
quarter of fiscal 1995 and 1996, respectively. The average order size increased
14% from $551 to $630 for the three months ended March 31, 1995 and 1996,
respectively. The increase in outsourcing sales resulted despite completely
eliminating sales to third-party marketers such as American Express and
Fingerhut. Net sales to third-party marketers were $2.6 million in the third
quarter of fiscal 1995. This overall increase in outsourcing sales resulted from
increased sales from existing outsourcing arrangements and the addition of
several new outsourcing arrangements since the third quarter of fiscal 1995.
10
<PAGE> 11
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995 (CONTINUED)
The Company believes that it is not practicable to analyze changes in
net sales resulting from factors such as new product introductions, product
discontinuance, volume changes and price changes because the Company offers a
changing mix of products at prices which vary extensively over the course of any
given period.
Under certain 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 upon 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.
Gross Profit. Gross profit decreased to 14.2% from 15.3% of net sales.
The gross profit percentage on the Company's direct marketing sales decreased in
part due to increased industry pricing pressures. The Company's transition from
Insight-branded computers to other branded computers also had a negative impact
upon gross margins (although eliminating the sales of Insight-branded computers
has resulted in a net positive effect due to the reduction of general and
administrative expense, such as telephone and technical support costs associated
with the Insight-branded product line). Sales of Insight-branded computers
accounted for 22% of net sales in the third quarter of fiscal 1995. This
decrease of the gross profit percentage was partially offset by the Company's
ability to take advantage of vendor payment discounts and increased bulk
purchasing opportunities, as well as an increase in price protection and rebates
received from vendors. The gross profit percentage on the Company's outsourcing
business also declined. This decrease reflects a change in the mix of products
provided as a result of adding additional programs since the third quarter of
fiscal 1995. Gross profit may be affected in future periods by the number and
mix of outsourcing arrangements which are in place from time to time. The
Company anticipates continued pressure on gross margins in fiscal 1996 primarily
due to industry-wide pricing decreases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $10.7 million in the third quarter of fiscal 1996
and $8.3 million in the third quarter of fiscal 1995. Selling, general and
administrative expenses decreased as a percentage of net sales from 12.9% to
11.4%. The decline was primarily attributable to the Company's continued shift
in marketing strategy, the elimination of higher general and administrative
expenses associated with the Insight-branded computer and increased economies of
scale as general and administrative expenses were allocated over a greater net
sales base. The Company increased circulation of catalogs, reduced more
expensive advertising in computer publications and received greater co-operative
marketing reimbursements from manufacturers. During the fourth quarter of fiscal
1995, the Company adopted the American Institute of Certified Public Accountants
Statement of Position 93-7, Reporting on Advertising Costs ("SOP 93-7"). SOP
93-7 requires the capitalization and amortization of direct response advertising
costs over their expected revenue stream, generally three months. The
application of SOP 93-7 resulted in a net increase of $414,000 of advertising
costs for the three months ended March 31, 1996. Pursuant to the
11
<PAGE> 12
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995 (CONTINUED)
prior interim allocation method, for the three months ended March 31, 1995,
advertising expense was equal to the amount incurred.
Non-Operating Expenses, Net. Non-operating expense, net, which consists
primarily of interest expense, decreased from $136,000 to $24,000. The interest
expense primarily relates to borrowings under the Company's line of credit which
have been necessary to finance the Company's growth. The interest expense has
decreased because of Insight's initial and second public offerings in January
1995 and November 1995 and a more favorable interest rate available to the
Company under its new credit facility entered in June 1995.
Income Tax Expense. The Company's effective tax rate is 39.6%.
NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
Net Sales. The Company's net sales were $241.8 million in the first
nine months of fiscal 1996 and $184.3 million in the first nine months of fiscal
1995 representing an increase of $57.5 million, or 31.2% over the nine months
ended March 31, 1995. Direct marketing sales increased $57.2 million or 35.7%
from $160.3 million to $217.5 million for the nine months ended March 31, 1995
and 1996, respectively. Sales from outsourcing services to manufacturers,
retailers and third-party marketers increased $0.3 million, or 1.3% from $24.0
million to $24.3 million for the nine months ended March 31, 1995 and 1996,
respectively.
The increase in direct marketing sales resulted primarily from
increased catalog circulation, an increase in the average order size and the
continued building of the Company's customer base. The Company increased its
"Insight" catalog circulation by 126% from 4,500,000 to 10,156,000 for the nine
months ended March 31, 1995 and 1996, respectively. The average order size
increased 5% from $593 to $625 for the nine months ended March 31, 1995 and
1996, respectively. The increase in outsourcing services occurred despite the
phasing out of sales to third-party marketers and the termination of outsourcing
services provided to Ambra Computer Corporation, a subsidiary of IBM ("Ambra").
Net sales to third-party marketers were $12.4 million and $.4 million for the
nine months ended March 31, 1995 and 1996 respectively. In July 1994, IBM
announced the discontinuance of the Ambra product line, and therefore, the
Company began reducing services to Ambra, and subsequently the agreement was
terminated effective December 31, 1994. The Ambra contract accounted for $2.7
million in net sales for the nine months ended March 31, 1995. This overall
increase in outsourcing sales resulted from increased sales from existing
outsourcing arrangements and the addition of several new outsourcing
arrangements since the third quarter of fiscal 1995.
The Company believes that it is not practicable to analyze changes in
net sales resulting from factors such as new product introductions, product
discontinuance, volume changes and price changes because the Company offers a
changing mix of products at prices which vary extensively over the course of any
given period.
12
<PAGE> 13
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995 (CONTINUED)
Under certain 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 upon 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.
Gross Profit. Gross profit decreased to 14.3% from 15.6% of net sales.
The gross profit percentage on the Company's direct marketing sales decreased in
part due to increased industry pricing pressures. Additionally, the Company's
transition from Insight-branded computers to other branded computers also had a
negative impact upon gross margins (although eliminating the sales of
Insight-branded computers has resulted in a net positive effect due to the
reduction of general and administrative expense, such as telephone and technical
support costs associated with the Insight-branded product line). Sales of
Insight branded computers accounted for 22% and 4% of net sales for the nine
months ended March 31, 1995 and 1996, respectively. This decrease of the gross
profit percentage was partially offset by the Company's ability to take
advantage of vendor payment discounts and increased bulk purchasing
opportunities, as well as an increase in price protection and rebates received
from vendors. The gross profit percentage on the Company's outsourcing business
also declined. This decrease was primarily related to the loss of the gross
profit margins in the Company's outsourcing business with Ambra, which were
higher than those in its other outsourcing arrangements. Unlike its other
outsourcing arrangements, under the Ambra contract the Company provided limited
services, did not maintain inventory and did not ship products. The gross profit
margins in most of the Company's outsourcing arrangements other than Ambra
approximated those in its direct marketing sales. Gross profit may be affected
in future periods by the number and mix of outsourcing arrangements which are in
place from time to time. The Company anticipates continued pressure on gross
margins in fiscal 1996 primarily due to industry-wide pricing decreases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $27.8 million in the first nine months of fiscal
1996 and $24.5 million in the first nine months of fiscal 1995. Selling, general
and administrative expenses decreased as a percentage of net sales to 11.5% from
13.3%. The decline was primarily attributable to the Company's continued shift
in marketing strategy, a reduction of higher general and administrative expenses
associated with the Insight-branded computer, increased economies of scale as
general and administrative expenses were allocated over a greater net sales base
and a $137,000 reduction in compensation to the major stockholders/officers. The
Company increased circulation of catalogs, reduced more expensive advertising in
computer publications and received greater co-operative marketing reimbursements
from manufacturers. During the fourth quarter of fiscal 1995, the Company
adopted the American Institute of Certified Public Accountants Statement of
13
<PAGE> 14
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995 (CONTINUED)
Position 93-7, Reporting on Advertising Costs ("SOP 93-7"). SOP 93-7 requires
the capitalization and amortization of direct response advertising costs over
their expected revenue stream, generally three months. The application of SOP
93-7 resulted in a net deferral of $37,000 of advertising costs for the nine
months ended March 31, 1996. Pursuant to the prior interim allocation method,
for the nine months ended March 31, 1995, advertising expense was equal to the
amount incurred.
Non-Operating Expenses, Net. Non-operating expense, net, which consists
primarily of interest expense, decreased from $536,000 to $158,000. The interest
expense primarily relates to borrowings under the Company's line of credit which
have been necessary to finance the Company's growth. The interest expense has
decreased because of Insight's initial and second public offering in January
1995 and November 1995 and a more favorable interest rate available to the
Company under its new credit facility entered in June 1995.
Income Tax Expense. The Company's effective tax rate is 39.6%.
SEASONALITY
The Company's business in the past has been seasonal. The second and
third fiscal quarters have been generally the strongest, while the fourth fiscal
quarter generally has been the weakest. As the Company continues to increase its
percentage of revenue from the business, government and education markets,
management believes that the Company's quarterly net sales will be less impacted
by seasonality.
LIQUIDITY AND CAPITAL RESOURCES
In January 1995, the Company completed its initial public offering of
common stock. The Company received $11.9 million, net of underwriting discounts,
commission and offering expenses. The Company primarily used the proceeds to
repay indebtedness under its then-existing line of credit and to repay certain
stockholder loans.
In November 1995, the Company completed a second pubic offering of
common stock. The Company received $16.6 million, net of underwriting discounts,
commission and offering expenses. The Company used a substantial portion of the
net proceeds to repay amounts outstanding under the line of credit. The balance
of the net proceeds from this offering has been used for general corporate
purposes.
The Company's primary capital needs have been to fund the working
capital requirements and capital expenditures necessitated by its sales growth.
Cash flows from operations generally have been negative due primarily
to increases in accounts receivable and inventories necessitated by the sales
growth of the Company and the continued shift from sales to the home market to
sales in the business, government and education markets. The Company's net cash
14
<PAGE> 15
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
used in operating activities was $14.9 million for the nine months ended
March 31, 1996 as compared to $1.3 million for the nine months ended
March 31, 1995. The negative cash flow in the current year is primarily due to
a $21.6 million increase in accounts receivable and a $5.5 million increase in
inventory. These increases were primarily funded with the proceeds from public
offerings of common stock and an increase of trade accounts payable of $7.1
million. Accounts receivable have increased due to an increase in open account
purchases by commercial customers due to the Company's continued efforts to
increase its sales to end users in the business, government and education
markets as well as the overall Company sales increase.
Capital expenditures for the first nine months of fiscal 1996 and 1995
were $3,397,000 and $960,000, respectively, primarily for the purchase of 17
acres of vacant land in Tempe, Arizona during the first quarter of fiscal 1996,
for a future sales and administration building, and for computer systems and
distribution equipment during each period.
The Company's future capital requirements include financing the growth
of working capital items such as accounts receivable and inventories, and the
purchase of equipment, furniture and fixtures. Additionally, the Company started
construction in the third quarter of fiscal 1996 and will be consolidating its
executive, sales, and administrative functions into one facility during fiscal
1997 to better support the rapid growth in sales. The Company is evaluating
sale-lease back and other financing alternatives for the building.
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
fiscal 1997. The Company's ability to continue funding its planned growth beyond
fiscal 1997 is dependent upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis, or to obtain additional funds through
equity or debt financings, or from other sources of financing, as may be
required.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ( SFAS No. 123"). SFAS No. 123 is effective for transactions
entered into in fiscal years beginning after December 15, 1995. The impact of
adoption of this Statement has not yet been determined.
15
<PAGE> 16
INSIGHT ENTERPRISES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27-Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INSIGHT ENTERPRISES, INC.
BY: /s/ ERIC J. CROWN
----------------------------------
ERIC J. CROWN
CHIEF EXECUTIVE OFFICER
DATE: MAY 10, 1996 BY: /s/ STANLEY LAYBOURNE
----------------------------------
STANLEY LAYBOURNE
CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES AS OF
MARCH 31, 1996 AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE
MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-Q FILING FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996.
</LEGEND>
<CIK> 0000932696
<NAME> INSIGHT ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 4,306
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<RECEIVABLES> 40,235
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0
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<SALES> 241,863
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