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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 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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. /X/
The aggregate market value of the 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 August 29, 1997, was approximately
$230,634,000. 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
August 29, 1997 was 10,261,721.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on October 30, 1997 are incorporated by reference in
Part III hereof.
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INSIGHT ENTERPRISES, INC.
FORM 10-K ANNUAL REPORT
YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business........................................................ 1
ITEM 2. Properties...................................................... 9
ITEM 3. Legal Proceedings............................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders............. 9
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 8. Financial Statements and Supplementary Data..................... 19
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... 19
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............. 19
ITEM 11. Executive Compensation.......................................... 19
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.. 19
ITEM 13. Certain Relationships and Related Transactions.................. 19
PART IV
ITEM 14. Exhibits and Reports on Form 8-K................................ 20
SIGNATURES................................................................ 21
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PART I
ITEM 1. BUSINESS
GENERAL
Insight is a leading direct marketer of computers, hardware and software.
The Company markets primarily to small and medium-sized enterprises ("SMEs"),
comprised of 100 to 1,000 employees, through a combination of a strong outbound
telemarketing sales force, targeted direct mail catalogs and advertising in
computer magazines and publications. The Company offers an extensive assortment
of more than 40,000 SKUs of computer hardware and software including such
popular name brands as Compaq, Hewlett-Packard, IBM, Microsoft, Seagate, Toshiba
and Western Digital. 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 a strong, long-term relationship 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 400% from 102 in
fiscal 1992 to 510 at the end of fiscal 1997, most of whom focus on outbound
telemarketing. Approximately two-thirds of the Company's orders in each of
fiscal 1997 and fiscal 1996 were placed by customers who had previously
purchased products from the Company.
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.
The Company's objective is to increase sales and generate improved
profitability by (i) increasing the penetration of its existing customer base,
(ii) leveraging its existing infrastructure, (iii) expanding its product
offerings and customer base and (iv) utilizing emerging technologies. The
Company's goal is to become the primary source of computer and related products
to its targeted SME market.
The Company's executive offices are located at 6820 South Harl Avenue,
Tempe, Arizona 85283, and its telephone number is (602) 902-1001. The Company
maintains a World Wide Web site at http://www.insight.com. The Company was
incorporated in Delaware in 1991 and is the successor to the business which
commenced operations in 1988. Unless the context otherwise requires, the
"Company" or "Insight" as used herein refers to Insight Enterprises, Inc., its
subsidiaries and predecessors.
INDUSTRY BACKGROUND
According to industry data published in May 1997, U.S. sales of computers,
hardware and software reached $77.8 billion in 1996. Such sales are projected to
reach $138.1 billion in 2000, representing a compound annual growth rate of 15%.
The Company believes that the 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 is the
fastest growing segment of the U.S. PC product markets, and is expected to
increase at a compound annual growth rate of 23% from $16.1 billion in 1996 to
$36.8 billion in 2000.
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, quality and
responsiveness for
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cost-effective circulation, 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 of 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 service,
thus creating an opportunity for growth of direct marketers of computer products
such as the Company.
OPERATING STRATEGY
The Company's objective is to become the leading direct marketer of
computer and related products to the computer literate end-user. The key
elements of the Company's strategy are as follows:
Small to Medium-Sized Enterprises Market Focus. The Company targets the SME
market, business with 100 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 selection, 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.
Targeted Marketing. The Company has continued to increase its focus on
outbound telemarketing and, to this end, has increased the number of account
executives at a compound annual rate of 38% over the last five years to 510 in
fiscal 1997. To support this effort, the Company has prioritized its database,
assigned account responsibility and enhanced sales training. In addition, the
Company is refining its circulation strategy to more efficiently target its
business customer audience and improve the profitability and return on
investment of its catalog operations. The Company continues to offer its
products through integrated direct marketing that includes outbound and inbound
telemarketing, catalogs, direct mail, print, and electronic marketing such as
the Internet, package inserts, Email blasts and fax broadcasts.
Building Customer Loyalty. The Company strives to create a strong,
long-term relationship with its 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 technical and
support staff. Most business customers are assigned a trained account executive
who handles customer 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.
Product support technicians are available to customers and account executives
during an extended workday. As a result of this effort, approximately two-thirds
of the Company's orders in each of fiscal 1997 and fiscal 1996 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 40,000 computer and computer-related products based on the Wintel
standard. The Company has received authorization from and offers brand name
products of vendors, including, among others, Compaq, Hewlett-Packard, IBM,
Microsoft, Seagate, Toshiba and Western Digital. 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 approximating 21 times for each of the past four fiscal years. 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 drop-ship programs with suppliers. 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.
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GROWTH STRATEGY
The Company's growth strategy is to increase sales and earnings by (i)
increasing penetration of its existing customer base, (ii) leveraging its
existing infrastructure, (iii) expanding its product offerings and customer base
and (iv) utilizing emerging technologies.
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, the Company's principal focus going forward will be 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 400% since 1992 to 510 at the end of fiscal 1997, 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 fiscal 1996, the Company has increased the number of its account
executives by 189, invested in system upgrades and improvements and constructed
a new sales and administrative facility. The Company believes that 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,
and economies of scale. In addition, the Company has developed strong
relationships with its suppliers and continues to reduce its overall expenses
through the receipt of supplier reimbursements. The Company intends to continue
to leverage its core operations by offering outsourcing of direct marketing
services to leading manufacturers of computer 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 technology which enables the Company to maintain a "virtual
inventory" through real-time access to supplier products via electronic data
interchange links. The Company will continue to expand its product offerings
through increased use of the electronic drop-ship programs with suppliers as
well as seeking new product authorizations as they become available to direct
channels. In addition, the Company, from time to time, analyzes 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, targeted catalog mailings, and its
other marketing 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 has begun to and 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 made approximately 3% of its sales
via the Internet in fiscal 1997 and expects this percentage to increase in the
future. The Company believes that its business customer audience is
technologically sophisticated and will be early adopters of 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, 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 SMEs respond
favorably to a one-on-one relationship with personalized, well-trained account
executives. Once established, these one-on-one relationships are maintained and
enhanced through frequent telecommunications and
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supplemented by customized marketing materials designed to meet each customer's
specific computing needs. At June 30, 1997, the Company employed 510 account
executives, an increase of 59% from 321 account executives at June 30, 1996,
most of whom are focused on outbound marketing.
Catalogs. The Company's catalogs are mailed to the Company's customers and
to potential customers. During fiscal 1997 and 1996, the Company published and
distributed 12.8 million and 12.9 million catalogs, respectively. The Company
publishes three separate catalogs: a business catalog for SMEs and the education
and government markets; a network catalog for technology managers; and a general
catalog for non-business 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.
The Company's catalog circulation strategy is supported by sophisticated
database marketing techniques which identify customer needs through the
collection, analysis and delivery of customer and prospect information. Detailed
demographic, psychographic and behavioral data collected from internal and
external sources allows the Company to create a composite picture of the best
customers and prospects.
Advertising. The Company places advertising in selected personal computer
and trade magazines, such as Computer Shopper and PC Magazine. These color
advertisements provide detailed product descriptions, manufacturers'
specifications and pricing information, and emphasize the Company's service and
support features. The Company uses "800-INSIGHT" as the phone number in its
advertising as part of its brand awareness strategy. 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(R), Lycos(R), and Net
Buyer(R).
Specialty Marketing. Specialty marketing includes direct mail, other
inbound and outbound telemarketing services, bulletin board services, "fax on
demand" services, package inserts and fax broadcasts. The Company also
communicates with customers through the emerging technology of the Internet. The
Company has developed, and continuously updates, a Web site that features
selected product offerings and specials and other useful information.
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. See "Risk
Factors-Reliance on Suppliers; Allocation of Goods." Additionally, the Insight
logo and telephone number are included in promotions by selected manufacturers
and incoming calls are handled by Insight account executives. The Company
believes that suppliers reimbursements leverages the Company's marketing reach
and builds 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 fiscal 1997 to end-users in the Company's four
major market segments were as follows: business - 73%, education institutions -
8%, government organizations - 6%, and home - 13%. The percentage of sales to
business customers has increased from 64% in fiscal 1996. No single customer
accounted for more than 1.1% of net sales during fiscal 1997.
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.
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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 this 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. The account executive is 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. If
required, a technical product engineer can be conferenced into any customer
telephone call to provide additional assistance.
The Company attributes its high inbound call volume and favorable repeat
orders in part to the strength of its account executives. During fiscal 1997 and
1996, approximately two-thirds of the Company's orders were placed by repeat
customers. The Company has established a dedicated sales division 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 20.7% from
$656 in fiscal 1996 to $792 in fiscal 1997. This increase in average order size
is primarily attributable to the increased sales of desktop computers and
high-end notebooks and was partially offset by decreasing prices on many
products offered by the Company and the lower average order size associated with
the Company's outsourcing programs, which tend to feature accessory and
peripheral products.
ARIZONA SALES
The Company has developed a local marketing force within the State of
Arizona to better serve the Arizona market. Sales to customers located within
the State of Arizona were approximately 12% of the Company's net sales during
each of fiscal 1997 and fiscal 1996. The Company's Arizona marketing strategy
features field account executives and local delivery to allow the Company to
leverage its operating efficiencies and local presence.
PRODUCTS AND MERCHANDISING
The Company offers computers, hardware, and software products. The
following chart provides information regarding selected products offered by the
Company during fiscal 1997 and 1996:
<TABLE>
<CAPTION>
PERCENTAGE OF
NET SALES
--------------
PRODUCT CATEGORIES 1997 1996 SELECTED PRODUCT MANUFACTURERS
- ------------------ ---- ---- ------------------------------
<S> <C> <C> <C> <C>
Computers: Compaq IBM
Notebooks............................... 28% 22% Hewlett-Packard Toshiba
Desktops................................ 12% 10%
Hard disk drives........................... 17% 23% Iomega Seagate
Quantum Western Digital
Memory/Processors.......................... 8% 9% Intel PNY
Kingston
Monitors/Video............................. 7% 7% Mag Innovision Princeton Graphic
Systems
NEC ViewSonic
Network/Connectivity....................... 7% 6% Hewlett-Packard 3Com
Megahertz U.S. Robotics
Printers................................... 6% 5% Canon Hewlett-Packard
Epson Okidata
Software................................... 6% 5% Corel Microsoft
Lotus Symantec
Miscellaneous.............................. 9% 13% American Power Adaptec
Conversion Creative Labs
</TABLE>
Computers are the fastest growing product category of the Company
representing 40% of net sales in fiscal 1997, up from 32% of net sales in fiscal
1996. The growth of this product category is due to the increasing acceptance of
the use of notebooks by the business customer and the Company's emphasis on the
sale of notebook and desktop computers. The Company continues to be a leading
source for hard disk drives; however, even though hard disk drive capacity and
speed continue to increase, the average order size continues to decrease, which
caused the decrease in hard disk drives from 23% of
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net sales in fiscal 1996 to 17% of net sales in fiscal 1997. During 1997, the
Company's sales of refurbished products represented 4% of sales.
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 its marketing based upon market demand, product
features, quality, sales trend, price, margins and warranties. As a result of
the Company's goal to offer the latest in technology, the Company quickly
replaces slower selling products with new products. The Company offers more than
40,000 computer and computer-related products based on the Wintel standard.
SERVICE AND SUPPORT
Insight believes it achieves high levels of customer satisfaction. The
Company's dedication to prompt, efficient customer service and technical support
are important factors in customer retention and overall satisfaction.
Technical Support. The Company provides technical support to its customers
six days each week. Product support technicians assist customers with questions
concerning compatibility, installation, determination of defects and general
questions of product use. The product support technicians authorize customers to
return defective or incompatible products to either the manufacturer or to the
Company for warranty service.
Fast Product Delivery. Utilizing the Company's proprietary information
system, customer orders are sent to the Company's distribution center 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. The Company ships most of
its orders on the day the orders are received at the distribution center. For an
extra delivery charge, the Company's customers can receive products on the same
day the customer places the order for deliveries within certain large
metropolitan areas.
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
messages. The customer receives a message via electronic mail immediately upon
shipment to confirm that the order has been shipped.
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 services
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 offers a limited
30-day money back guarantee for all 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 can not be returned to the
manufacturer for warranty processing are sold at a discount through a local
retail outlet and through 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. In addition, in connection with the
construction of the Company's new sales and administrative facility, the Company
made substantial investments in computer, telecommunication and other
technology. The Company substantially increased its redundancy in the Company's
management information systems and obtained 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 is in the process
of converting its software to handle the year 2000. The Company believes that
its investment in such 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 sent to the Company's distribution center for processing immediately
after they are received from a customer 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
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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 fiscal 1997, the Company purchased
products from approximately 400 suppliers. Approximately 50% (based on dollar
volume) of these purchases were directly from manufacturers, with the balance
from distributors. Purchases from Merisel, Inc., a distributor and the Company's
largest supplier, accounted for approximately 17% of the Company's product
purchases in fiscal 1997. The top five suppliers as a group (Merisel, Ingram
Micro D, Inc. (a distributor), Toshiba America Information Systems, Inc.,
Seagate Technology, Inc. and Western Digital Corporation) accounted for
approximately 56% of the Company's product purchases during fiscal 1997.
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.
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. 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 maintain inventory
turns of 21 times a year for each of the past four fiscal years.
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. Activities performed in the Company's approximately
122,000-square feet of distribution space in Tempe, Arizona, include receipt and
shipping of inventory, configuration of computer systems, processing of returned
products, a "will call" facility where Arizona customers can pick up orders and
a retail outlet where heavily discounted used or end of life products are
offered for sale. 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.
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 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
7
<PAGE> 10
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. During fiscal years 1997 and 1996, the
Company also provided outsourcing services to Air Taser, a manufacturer of
non-lethal self defense products. The arrangement with Air Taser is the
Company's only outsourcing arrangement involving a non-computer-related product.
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.
Fiscal 1997 was a transitional year in the outsourcing area. New programs
were added and some existing programs were phased out. The Company believes that
the new programs in place at the end of fiscal 1997 have greater sales and net
earnings potential than the programs that they replaced. However, new programs
can take a period of time to reach profitability and their full potential.
Additionally, some of the new programs may be more seasonal in nature, as their
target customer can have cyclical buying patterns.
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, 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 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 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 on sales of products shipped
to customers in the State of Arizona. Sales to customers located within the
State of Arizona were approximately 12% of the Company's net sales during fiscal
1997. Various states have sought to impose on direct marketers the burden of
collecting state sales taxes on the sales of products shipped to that state's
residents. The United States Supreme Court affirmed its position that it is
unconstitutional for a state to 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.
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 June 30, 1997, the Company employed 907 persons, 268 were in
management support services and administration; 510 were account executives; 30
were in technical support and customer service; and 99 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.
8
<PAGE> 11
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, LEAD, TEAM, and management development. Insight's Sales
Training Program is dedicated to ensuring quality sales and customer services.
Classes offered target sales management, account executives, customer service,
customer engineers and technical 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. LEAD
(Leadership Enhancement and Development) is a weekly one-hour
informational/training session for supervisors and managers designed to improve
management skills and enhance communication throughout the Company. TEAM (Train
Everyone to Achieve More) provides every account executive with weekly product,
industry, and operational training. Management Development training is a new
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.
ITEM 2. PROPERTIES
In July 1995, the Company acquired approximately 17 acres of vacant land in
Tempe, Arizona. The Company started construction in the third quarter of fiscal
1996, and consolidated its sales and administrative functions into a 103,000
square foot facility on this land during fiscal 1997 to better support the
Company expanding operations. The Company also leases approximately 157,000
square feet in 5 facilities in Tempe, Arizona which houses its distribution,
warehouse and outsourcing activities. The leases for approximately 66% of such
space expire in fiscal 1998 and the remaining 34% expire in 1999. 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.
9
<PAGE> 12
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.
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
HIGH BID LOW BID
-------- -------
<S> <C> <C>
Fiscal Year 1996
First Quarter......................................... $17 $10 9/16
Second Quarter........................................ 15 1/3 6 2/3
Third Quarter......................................... 10 1/3 7 3/4
Fourth Quarter........................................ 18 9 9/16
Fiscal Year 1997
First Quarter......................................... 25 12 13/16
Second Quarter........................................ 26 1/2 18 1/3
Third Quarter......................................... 24 1/3 16 1/2
Fourth Quarter........................................ 20 1/3 15 1/2
</TABLE>
As of August 29, 1997, there were 10,261,721 shares outstanding of the
Common Stock of the Company held by approximately 60 stockholders of record. The
Company estimates that there are approximately 2,000 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 includes restrictions on the payment of cash
dividends. 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 August 13, 1997, the Company's Board of Directors approved a 3-for-2
stock split effected in the form of a stock dividend and payable on September
17, 1997 to the stockholders of record at the close of business on August 27,
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 this 3-for-2
stock split.
10
<PAGE> 13
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" for, and as
of the end of, each of the years in the five-year period ended June 30, 1997 are
derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The consolidated financial statements
as of June 30, 1997 and 1996, and for each of the years in the three-year period
ended June 30, 1997 and the report thereon, are included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data and share amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Net sales ................................... $ 485,394 $ 342,813 $ 244,953 $ 170,400 $ 142,951
Cost of goods sold .......................... 421,731 294,292 207,104 144,186 118,194
------------ ------------ ------------ ------------ ------------
Gross profit ................................ 63,663 48,521 37,849 26,214 24,757
Selling, general and administrative expenses 47,814 38,917 31,848 23,742 22,831
------------ ------------ ------------ ------------ ------------
Earnings from operations .................... 15,849 9,604 6,001 2,472 1,926
Non-operating income (expense), net ......... 585 (136) (663) (409) (355)
------------ ------------ ------------ ------------ ------------
Earnings before income taxes ................ 16,434 9,468 5,338 2,063 1,571
Income tax expense .......................... 6,568 3,748 2,114 561 365
------------ ------------ ------------ ------------ ------------
Net earnings ................................ $ 9,866 $ 5,720 $ 3,224 $ 1,502 $ 1,206
============ ============ ============ ============ ============
Net earnings per share (1) (2) .............. $ 0.99 $ 0.72 $ 0.59 $ 0.41
============ ============ ============ ============
Shares used in per share calculations (1) (2) 9,958,230 7,934,418 5,566,640 4,637,252
============ ============ ============ ============
SELECTED OPERATING DATA:
"Insight" catalogs distributed .............. 12,829,000 12,880,000 5,740,000 2,667,000 657,000
Account executives (end of period) .......... 510 321 239 143 114
Orders filled ............................... 609,000 518,000 406,000 261,000 197,000
Average order size .......................... $ 792 $ 656 $ 598 $ 644 $ 724
Inventory turnover (3) ...................... 21x 21x 21x 21x 17x
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital ......................... $ 73,841 $ 34,567 $ 21,920 $ 1,922 $ 1,661
Total assets ............................ 122,864 73,618 42,402 27,732 18,242
Short-term debt ......................... -- -- -- 10,040 3,006
Long-term debt, excluding current portion -- -- 6,541 1,015 371
Stockholders' equity .................... 91,210 41,785 18,561 3,465 2,910
</TABLE>
- ----------
(1) Net earnings per share and shares used in per share calculation for the
years ended June 30, 1994 and 1995 are pro forma and unaudited and (i) for
fiscal 1994 and fiscal 1995, 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 (ii) for
fiscal 1994, 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 are $1,889,000 and $3,307,000 for the year ended June 30, 1994
and 1995, respectively. Shares used in 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. See Note 14 of Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the
year ended June 30, 1997.
(2) As adjusted to reflect the 3-for-2 stock split effected in the form of a
stock dividend and payable on September 17, 1997 to the stockholders of
record at the close of business on August 27, 1997. All share amounts,
share prices and earnings per share in the Annual Report on Form 10-K have
been retroactively adjusted to reflect this 3-for-2 stock split.
(3) Inventory turnover is calculated by dividing cost of goods sold for the
period by the average of the beginning and ending inventory for the period.
11
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Conditions
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Forward-looking statements can be identified by the use of
forward-looking terminology such as "expects," "should," "believes, " or
"anticipates" or the negative thereof or comparable terminology, or by
discussions of Company goals and strategy. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of many factors, set forth under "Factors That May Affect Future
Results and Financial Condition."
OVERVIEW
The Company commenced operations in 1988 as a direct marketer of hard disk
drives and other mass storage products. In fiscal 1991, the Company began
marketing its own Insight-brand computers and in fiscal 1992 and 1993 added
hardware, software and other name brand computers to its product line. Through
fiscal 1992, the Company based its marketing practices primarily on advertising
in computer magazines and the use of inbound toll-free telemarketing. In fiscal
1993, the Company shifted its marketing strategy to include the publication of
proprietary catalogs and the use of outbound account executives focused on the
business, education and government markets. During fiscal 1995, the Company
began to de-emphasize the sale of Insight-brand computers and discontinued the
sale of Insight-brand computers in the second quarter of fiscal 1996. Although
the cost savings from this decision have positively impacted earnings from
operations, gross margin has been negatively affected. The Company expects gross
margins to continue to decline in fiscal 1998 primarily due to industry-wide
pricing pressures and to a continued shift in product mix.
In fiscal 1997, Insight continued to increase its focus on the business,
education and government markets, which aggregated approximately 90% of its
business in the fourth quarter of fiscal 1997. During fiscal 1996, the Company
doubled its catalog circulation to generate leads and aggressively tested new
lists. In fiscal 1997, the Company did not increase its catalog circulation
because the Company used information generated from prior year tests, targeted
mailings to its best prospective customers and increased its focus on
penetrating existing accounts. To that end, the Company has recently hired a
number of senior sales managers and account executives, and plans to continue to
actively increase its account executive base by approximately 50, per quarter,
during fiscal 1998.
In order to leverage its infrastructure, the Company, in fiscal 1992, began
outsourcing 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 maybe more seasonal
in nature, as their target customer can have cyclical buying patterns.
Outsourcing represented 6.9% and 9.8% of the Company's sales in fiscal 1997 and
fiscal 1996, 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.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales ......................... 100.0% 100.0% 100.0%
Costs of goods sold ............... 86.9 85.8 84.6
------ ------ ------
Gross profit ...................... 13.1 14.2 15.4
Selling, general and administrative
expenses ..................... 9.8 11.4 13.0
------ ------ ------
Earnings from operations .......... 3.3 2.8 2.4
Non-operating income (expense), net 0.1 (0.0) (0.3)
------ ------ ------
Earnings before income taxes ...... 3.4 2.8 2.1
Income tax expense ................ 1.4 1.1 0.8
------ ------ ------
Net earnings ...................... 2.0% 1.7% 1.3%
====== ====== ======
</TABLE>
12
<PAGE> 15
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased $142.6 million, or 41.6%, to $485.4 million
in fiscal 1997 from $342.8 million in fiscal 1996. Sales derived from direct
marketing increased $142.5 million, or 46.1%, to $451.8 million in fiscal 1997
from $309.3 million in fiscal 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 remained relatively unchanged with $33.6 million in
fiscal 1997 compared to $33.5 million in fiscal 1996.
Gross Profit. Gross profit increased $15.1 million, or 31.2%, to $63.7
million in fiscal 1997 from $48.5 million in fiscal 1996. As a percentage of
sales, gross margin decreased from 14.2% in fiscal 1996 to 13.1% in fiscal 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. The Company expects gross
margin to continue to decline in fiscal 1998 primarily due to industry-wide
pricing pressures and a continued shift in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8.9 million, or 22.9%, to $47.8 million in
fiscal 1997 from $38.9 million in fiscal 1996, but decreased as a percent of
sales to 9.8% in fiscal 1997 from 11.4% in fiscal 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 suppliers 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 $136,000 of interest expense,
net in fiscal 1996 to $585,000 of interest income, net in fiscal 1997. Interest
expense primarily relates to borrowings under the Company's line of credit which
have been necessary to finance the Company's growth. Interest expense has
decreased as a result of the use of the net proceeds from Insight's public
offerings in November 1995 and November 1996. Additionally, the interest expense
associated with the Company's new sales and administrative facility 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 40.0% and 39.6%
for the fiscal year 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.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales increased $97.9 million, or 40.0%, to $342.8 million
in fiscal 1996 from $244.9 million in fiscal 1995. Sales derived from direct
marketing increased $94.3 million, or 43.9%, to $309.3 million in fiscal 1996
from $215.0 million in fiscal 1995. This increase resulted primarily from an
increase in the number of account executives from 239 to 321, increased emphasis
on outbound telemarketing, a more than doubling in "Insight" catalog circulation
from 5,740,000 to 12,880,000, 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 computers. Sales derived from outsourcing
arrangements increased $3.6 million, or 12.0%, to $33.5 million in fiscal 1996
from $29.9 million in fiscal 1995. The increase in outsourcing sales resulted
from increased sales from existing outsourcing arrangements and the addition of
new outsourcing contracts with manufacturers and retailers, offset in part by a
de-emphasis of sales to third-party marketers and the termination of outsourcing
services provided to Ambra, a subsidiary of IBM(R).
Gross Profit. Gross profit increased $10.7 million, or 28.2%, to $48.5
million in fiscal 1996 from $37.8 million in fiscal 1995. As a percentage of
sales, gross margin decreased from 15.4% in fiscal 1995 to 14.2% in fiscal 1996.
The gross margin on the Company's direct marketing sales decreased 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
vendor discounts, rebates and bulk purchasing opportunities. In addition, the
Company's decision to eliminate its private label computer line and instead
emphasize name brand computers has had a negative impact on the gross margin,
although the cost savings from this decision has positively affected operating
margins. Sales of Insight-brand computers accounted for 21% of sales in fiscal
1995 but only 3% of sales in fiscal 1996. Additionally, the Company experienced
significant growth in the notebook category
13
<PAGE> 16
which carries a lower gross margin. The gross margin on the Company's
outsourcing business also declined primarily as a result of the loss of the
Company's outsourcing business with Ambra, which had a higher gross margin than
other outsourcing arrangements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.1 million, or 22.3%, to $38.9 million in
fiscal 1996 from $31.8 million in fiscal 1995, but decreased as a percent of
sales to 11.4% in fiscal 1996 from 13.0% in fiscal 1995. This decline was
attributable to increased economies of scale, a $137,500 reduction in
compensation expense 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 cooperative marketing 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 catalog circulation, the number of account executives and losses experienced
in the initial months of new outsourcing contracts.
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), that requires the capitalization and
amortization of direct response advertising costs over their expected revenue
stream (generally three months). This adjustment resulted in deferrals of
advertising costs of $143,000 and $214,000 in fiscal 1996 and fiscal 1995,
respectively.
Non-Operating Income (Expense), net. Non-operating income (expense), net,
which consists primarily of interest expense, decreased from $633,000 in fiscal
1995 to $136,000 in fiscal 1996. Interest expense primarily relates to
borrowings under the Company's line of credit which have been necessary to
finance the Company's growth. Interest expense has decreased 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. Additionally, the interest expense associated
with the Company's new facility has been capitalized.
Income Tax Expense. The Company's effective tax rate was 39.6% in each of
fiscal 1996 and 1995.
SEASONALITY AND QUARTERLY RESULTS
The Company has historically experienced seasonal fluctuations in its net
sales, earnings from operations and net earnings. 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 and
earnings from operations and net earnings as or 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. The following table
sets forth certain quarterly information for the Company's two most recent
fiscal years:
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR 31, DEC. 31, SEPT. 30,
1997 1997 1996 1996 1996 1996 1995 1995
-------- -------- -------- --------- -------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ......................... $139,255 $130,825 $112,931 $102,383 $100,950 $ 94,655 $ 76,431 $ 70,777
Costs of goods sold ............... 121,285 114,103 97,909 88,434 86,934 81,224 65,395 60,739
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit .................... 17,970 16,722 15,022 13,949 14,016 13,431 11,036 10,038
Selling, general and administrative
expenses ......................... 13,073 12,340 11,482 10,919 11,078 10,758 8,942 8,139
-------- -------- -------- -------- -------- -------- -------- --------
Earnings from operations .......... 4,897 4,382 3,540 3,030 2,938 2,673 2,094 1,899
Non-operating income (expense), net 133 122 285 45 22 (24) (55) (79)
-------- -------- -------- -------- -------- -------- -------- --------
Earnings before income taxes ...... 5,030 4,504 3,825 3,075 2,960 2,649 2,039 1,820
Income tax expense ................ 2,079 1,758 1,514 1,217 1,170 1,050 807 721
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings ...................... $ 2,951 $ 2,746 $ 2,311 $ 1,858 $ 1,790 $ 1,599 $ 1,232 $ 1,099
======== ======== ======== ======== ======== ======== ======== ========
Net earnings per share ............ $ 0.28 $ 0.26 $ 0.23 $ 0.21 $ 0.21 $ 0.19 $ 0.16 $ 0.16
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
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 $37.4 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 for general corporate purposes,
including working capital, capital expenditures and facilities expansion. The
balance of the net proceeds are for general corporate purposes and potential
acquisitions of businesses to expand or complement its operations.
14
<PAGE> 17
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 fiscal 1997 and 1996 were $12.3 million and $4.9 million,
respectively, primarily for the purchase of 17 acres of vacant land in Tempe,
Arizona during the second quarter of fiscal 1996, and for the construction of a
sales and administration building on that site in fiscal 1997. The Company
incurred approximately $12.5 million in capital expenditures related to the
acquiring of the land and constructing and equipping the facility.
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. Accounts receivable
have increased primarily 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, education and government markets as well as
the overall Company sales increase. The Company's net cash used in operating
activities was $22.9 million for fiscal 1997 as compared to $7.7 million used in
operating activities for fiscal 1996. The negative cash flow in the current year
is primarily due to a $30.6 million increase in accounts receivable and a $9.4
million increase in inventories. These increases were primarily funded with the
proceeds from the public offering of common stock in November, 1996 of $37.4
million and operating earnings.
As of June 30, 1997, the Company had no outstanding balance under its line
of credit. As of June 30, 1997, $21.3 million was available under the line of
credit. In August 1997, the Company replaced its credit facility with a new $70
million credit facility with a finance company. The agreement provides for cash
advances outstanding at any one time up to a maximum of $70 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 1.40%. The
new 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 August 2000. 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.
The Company's future capital requirements include financing the growth of
working capital items such as accounts receivable and inventories, and the
purchases of 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 fiscal 1998.
The Company's ability to continue funding its planned growth beyond fiscal 1998
is dependent upon its ability to generate sufficient cash flow or to obtain
additional funds through equity or debt financing, or from other sources of
financing, as may be required.
INFLATION
Management does not believe that inflation has had a material effect on the
Company's sales during the past three fiscal years.
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 123 -- "Accounting for
Stock-Based Compensation" ("SFAS 123") allows companies to elect to account for
stock-based compensation plans using a method based upon fair value or
continuing to measure compensation expense for those plans using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25 --
"Accounting for Stock Issued to Employees" ("APB 25"). Companies electing to
continue using the intrinsic value method must make pro forma disclosures in
fiscal 1997 of net earnings and earnings per share as if the fair value based
method had been applied. The Company will continue using the method prescribed
by APB 25; therefore, SFAS 123 will not have an impact on the Company's results
of operations or financial position.
ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY
The Financial Accounting Standards Board ("FASB") has issued several new
pronouncements that are not yet adopted by the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
specifies the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly-held common stock. This statement
will be effective for the Company for the fiscal year ending June 30, 1998;
earlier application is not permitted. This new accounting standard will require
presentation of basic earnings per share and diluted earnings per share.
15
<PAGE> 18
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure", to consolidate existing disclosure requirements. This
new standard contains no change in disclosure requirements for the Company. It
will be effective for the Company for the fiscal year ending June 30, 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," to establish standards for reporting and display of comprehensive
income (all changes in equity during a period except those resulting from
investments by and distributions to owners) and its components in financial
statements. This new standard, which will be effective for the Company for the
fiscal year ending June 30, 1999, is not currently anticipated to have a
significant impact on the Company's consolidated financial statements based on
the current financial structure and operations of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," to establish 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.
This new standard, which will be effective for the Company for the fiscal year
ending June 30, 1999, may require the Company to report financial information on
the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments, which may result in more
detailed information in the notes to the Company's consolidated financial
statements than is currently required and provided.
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 have
varied from quarter to quarter and will continue to do so in the future. 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 or upgrades. 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 fiscal 1998
primarily due to industry-wide pricing pressures and a continued shift in
product mix.
Highly Competitive Industry. 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 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, 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, 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, consumer electronic and office supply superstores, national direct
marketers and mass merchandisers. Computer superstores and direct marketers that
compete with the Company have significantly increased their market share and
certain traditional computer and related products 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
16
<PAGE> 19
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 fiscal 1998 primarily due to industry-wide pricing
pressures and a continued shift in product mix.
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 several 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 its management system, to implement a variety
of new systems and procedures and to expand its new sales and administrative
facility. If the Company's sales do not increase in proportion to its operating
expenses, the Company's management systems do not expand to meet increasing
demands, 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, loans
from stockholders 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.
Reliance on Supplier; Allocation of Goods. The Company acquires products
for resale both directly from manufacturers and indirectly through distributors.
Purchases from Merisel, a distributor of computers and related products,
accounted for approximately 17% of the Company's aggregate purchases for fiscal
1997. No other supplier accounted for more than 14% of purchases in fiscal 1996.
However, the top five suppliers as a group accounted for approximately 56% of
the Company's product purchases during this period. The loss of Merisel or any
other supplier could cause a short-term disruption in the availability of
products. Certain of the products offered 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 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 expects to 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.
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,
17
<PAGE> 20
inventory and distribution systems. Although the Company has redundant systems,
with full data backup, a substantial interruption in these systems 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.
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.
State Sales or Use Tax Collection. The Company presently collects sales tax
only on sales of products to shipped to customers in the State of Arizona. Sales
to customers located within the State of Arizona were approximately 12% of the
Company's net sales during fiscal 1997. Various states have sought to impose on
direct marketers the burden of collecting state sales taxes on the sales of
products shipped to that state's residents. The United States Supreme Court
affirmed its position that it is unconstitutional for a state to 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.
Risks Associated with Future Acquisitions. The Company may seek to acquire
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 issuances 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.
Risk of Increasing Marketing, Postage and Shipping Costs. The Company mails
catalogs through the United States Postal Service, 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.
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.
18
<PAGE> 21
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in this Report beginning
at page 23.
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 biographical information relating to the Company's directors included
under the captions "Information Concerning Directors, Nominees and Executive
Officers," "Meetings of the Board and its Committees" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy
Statement for its Annual Meeting of Stockholders to be held October 30, 1997
(the "Proxy Statement") is incorporated herein by reference. The Company
anticipates filing the Proxy Statement within 120 days after June 30, 1997. 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.
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
The information under the heading "Certain Transactions and Relationships"
in the Proxy Statement is incorporated herein by reference.
19
<PAGE> 22
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 23.
2. Exhibits.
(a) Exhibits (unless otherwise noted, exhibits are filed herewith)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
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 -- Amended and Restated Certificate of Incorporation of Registrant
3.2 (1) -- Bylaws of the Registrant
4.1 (1) -- Specimen Common Stock Certificate
10.1 (1) -- Form of Indemnification Agreement (2)
10.2 (1) -- 1994 Stock Option Plan of the Registrant (3)
10.3 (1) -- Predecessor Stock Option Plan (3)
10.4 (4) -- 1995 Employee Stock Purchase Plan of the Registrant (3)
10.5 (5) -- Amendment to 1994 Stock Option Plan of the Registrant (3)
10.6 (6) -- 1998 Long-Term Incentive Plan (3)
11 -- Computation of Net Earnings per Common Share
21 -- Subsidiaries of the Registrant
23 -- Consent of KPMG Peat Marwick LLP
27 -- Financial Data Schedule
</TABLE>
----------
(1) Incorporated by reference from 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.
(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) Being submitted for stockholder approval at the Annual Meeting to be
held on October 30, 1997.
(b) No current Reports on Form 8-K were filed by the Company during the
fourth quarter of the fiscal year ended June 30, 1997.
20
<PAGE> 23
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Eric J. Crown Chairman of the Board of September 17, 1997
- ----------------------- Directors and Chief Executive Officer
Eric J. Crown (Principal Executive Officer)
/s/ Timothy A. Crown Director and President September 17, 1997
- -----------------------
Timothy A. Crown
/s/ Stanley Laybourne Chief Financial Officer, September 17, 1997
- ----------------------- Secretary, Treasurer and
Stanley Laybourne Director (Principal Financial and
Accounting Officer)
/s/ Larry A. Gunning Director September 17, 1997
- -----------------------
Larry A. Gunning
/s/ Robertson C. Jones Director September 17, 1997
- -----------------------
Robertson C. Jones
</TABLE>
21
<PAGE> 24
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report........................................... 23
Consolidated Balance Sheets -- June 30, 1997 and 1996................. 24
Consolidated Statements of Earnings - For each of the years in the
three-year period ended June 30, 1997................................ 25
Consolidated Statements of Stockholders' Equity - For each of the years
in the three-year period ended June 30, 1997......................... 25
Consolidated Statements of Cash Flows - For each of the years in the
three-year period ended June 30, 1997................................ 26
Notes to Consolidated Financial Statements............................. 27
22
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Insight Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Insight
Enterprises, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1997. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 June 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 20, 1997
23
<PAGE> 26
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS JUNE 30,
1997 1996
----- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................................... $ 8,582 $ 5,300
Accounts receivable, net (Notes 2 and 13) ..................................................... 68,743 41,798
Inventories (Note 13) ........................................................................ 24,596 16,104
Prepaid expenses ............................................................................. 1,350 1,959
Deferred income taxes (Note 6) ............................................................... 2,224 1,239
-------- -------
Total current assets .............................................................. 105,495 66,400
Property and equipment, net (Note 3) ................................................................. 17,139 6,660
Other assets ......................................................................................... 230 558
-------- -------
$122,864 $73,618
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................................. $ 28,630 $29,667
Accrued expenses ............................................................................. 1,798 1,290
Customer refunds payable ..................................................................... 150 291
Deferred revenue ............................................................................. 1,076 585
-------- -------
Total current liabilities ......................................................... 31,654 31,833
Commitments and subsequent events (Notes 3, 5 and 15)
Stockholders' equity (Notes 7, 9, 10 and 15):
Preferred stock, $.01 par value, 3,000,000 and 1,000,000 shares authorized in 1997 and 1996,
respectively, no shares issued ............................................................. -- --
Common stock, $.01 par value, 30,000,000 and 10,000,000 shares authorized in 1997 and 1996,
respectively; 10,159,134 in 1997 and 8,095,131 in 1996 shares issued and outstanding........ 102 81
Additional paid-in capital ................................................................... 68,937 29,399
Retained earnings ............................................................................ 22,171 12,305
-------- -------
Total stockholders' equity ........................................................ 91,210 41,785
-------- -------
$122,864 $73,618
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales ......................................................... $ 485,394 $ 342,813 $ 244,953
Costs of goods sold ............................................... 421,731 294,292 207,104
---------- ----------- -----------
Gross profit ............................................. 63,663 48,521 37,849
Selling, general and administrative expenses ...................... 47,814 38,917 31,848
---------- ----------- -----------
Earnings from operations ................................. 15,849 9,604 6,001
Non-operating income (expense), net (Note 11) ..................... 585 (136) (663)
---------- ----------- -----------
Earnings before income taxes ............................. 16,434 9,468 5,338
Income tax expense (Note 6) ....................................... 6,568 3,748 2,114
---------- ----------- -----------
Net earnings ............................................. $ 9,866 $ 5,720 $ 3,224
========== =========== ===========
Net earnings per share (Notes 14 and 15) .......................... $ 0.99 $ 0.72 $ 0.59
========== =========== ===========
Shares used in net earnings per share calculation (Notes 14 and 15) 9,958,230 7,934,418 5,566,640
========== =========== ===========
</TABLE>
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
----- ------- -------- ------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 ................................................... $ 30 $ 74 $ 3,361 $ 3,465
Issuance of common stock (Note 7) ...................................... 35 11,837 -- 11,872
Net earnings ........................................................... -- -- 3,224 3,224
---- ------- ------- -------
Balances at June 30, 1995 ................................................... 65 11,911 6,585 18,561
Issuance of common stock (Note 7) ...................................... 16 16,894 -- 16,910
Tax benefit recognized on stock options exercised (Note 9) ............. -- 594 -- 594
Net earnings ........................................................... -- -- 5,720 5,720
---- ------- ------- -------
Balances at June 30, 1996 ................................................... 81 29,399 12,305 41,785
Issuance of Common Stock (Note 7) ...................................... 21 38,425 -- 38,446
Tax benefit recognized on stock options exercised (Note 9) ............. -- 1,113 -- 1,113
Net earnings ........................................................... -- -- 9,866 9,866
---- ------- ------- -------
Balances at June 30, 1997 ................................................... $102 $68,937 $22,171 $91,210
==== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings .................................................................. $ 9,866 $ 5,720 $ 3,224
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation ................................................................ 1,760 1,066 766
Tax benefit from stock options exercised .................................... 1,113 594 --
Provision for losses on accounts receivable ................................. 3,627 1,302 1,262
Provision for obsolete and slow moving inventories .......................... 930 788 344
Deferred income taxes ....................................................... (985) (431) (69)
Loss on disposition of property and equipment ............................... 11 -- --
Change in assets and liabilities:
Increase in accounts receivable ........................................... (30,572) (25,818) (4,218)
Increase in inventories ................................................... (9,422) (4,515) (5,794)
Decrease (increase) in prepaid expenses ................................... 609 (780) (452)
Decrease (increase) in other assets ....................................... 328 (183) (209)
Increase (decrease) in accounts payable .................................. (1,037) 14,299 1,920
Increase in accrued expenses .............................................. 508 44 45
Increase (decrease) in customer refunds payable ........................... (141) 24 (169)
Increase (decrease) in deferred revenue ................................... 491 166 (691)
-------- -------- --------
Net cash used in operating activities ................................... (22,914) (7,724) (4,041)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ........................................... (12,250) (4,919) (1,251)
-------- -------- --------
Net cash used in investing activities ................................... (12,250) (4,919) (1,251)
-------- -------- --------
Cash flows from financing activities:
Net repayments on lines of credit ............................................. -- (6,541) (476)
Repayment of capital lease obligations ........................................ -- -- (164)
Repayment of notes payable to stockholders .................................... -- -- (891)
Issuance of common stock ...................................................... 38,446 16,910 11,872
-------- -------- --------
Net cash provided by financing activities ............................... 38,446 10,369 10,341
-------- -------- --------
Increase (decrease) in cash and cash equivalents .................................. 3,282 (2,274) 5,049
Cash and cash equivalents at beginning of year .................................... 5,300 7,574 2,525
-------- -------- --------
Cash and cash equivalents at end of year .......................................... $ 8,582 $ 5,300 $ 7,574
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ........................................ $ 60 $ 138 $ 680
======== ======== ========
Cash paid during the year for income taxes .................................... $ 7,900 $ 3,513 $ 1,986
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
(1) Operations and Summary of Significant Accounting Policies
Description of Business
Insight Enterprises, Inc. and subsidiaries (INSIGHT) is a direct marketer
of computers, hardware, and software. INSIGHT markets primarily to small and
medium-sized enterprises, through a combination of outbound telemarketing,
targeted direct mail catalogs and advertising in computer magazine and
publications. Additionally, Insight provides direct marketing services to
manufacturers seeking to outsource their direct marketing activities. The
services provided include marketing, sales 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 November 7, 1994, the Company was reincorporated as a Delaware
corporation and the stockholders of the predecessor company received 4,186,047
shares of common stock for the 15,000 shares of the Company's common stock
previously outstanding. All share data has been restated to reflect this
exchange as well as a 3-for-2 stock split as described in Note 15.
Cash Equivalents
INSIGHT considers all highly liquid investments with original maturities at
the date of purchase of three months or less to be cash and cash equivalents.
Inventories
Inventories, principally purchased computers, hardware and software, are
stated at the lower of weighted average cost or market. Provisions are made
currently for obsolete, slow moving and nonsalable inventory.
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 twenty-nine years.
Leasehold improvements are amortized over the shorter of the underlying lease
term or asset life.
Deferred Revenue
Deferred revenue represents cash received as advance payments for products
and deferred revenue on extended warranty and service contracts.
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.
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 supplier
reimbursements. Direct response advertising consists primarily of costs incurred
to develop and distribute catalogs and magazine advertisements. Prior to the
implementation of SOP 93-7, advertising costs were expensed as incurred, net of
supplier reimbursements.
Advertising costs of $179,000 and $143,000 were deferred and are included
in other assets as of June 30, 1997 and 1996, respectively. This policy is
supported by the Company's tracking of customer responses to specific
advertisements in catalogs and selected personal computer and trade magazines.
27
<PAGE> 30
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
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
income 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.
Net Earnings Per Share
Net earnings per share for the years ended June 30, 1997 and 1996 are
calculated using the weighted average number of common stock of 9,402,305 and
7,481,474, respectively and common stock equivalents outstanding of 555,925 and
452,944, respectively, during the periods. The common stock equivalent shares
relate to the Company's stock options and warrants and are calculated using the
treasury stock method.
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 generally 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). See Note 9.
Use of Estimates
The preparation of 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 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.
(2) Accounts Receivable
<TABLE>
<CAPTION>
Accounts receivable consists of the following: JUNE 30,
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Trade accounts................................................................. $63,954 $37,523
Merchandise receivable from vendors............................................ 7,696 6,749
------- -------
71,650 44,272
Allowance for doubtful accounts................................................ (2,907) (2,474)
------- -------
Accounts receivable, net....................................................... $68,743 $41,798
======= =======
</TABLE>
Merchandise receivable from vendors consists of inventories returned to
vendors for credit or for replacement product.
(3) Property and Equipment
<TABLE>
<CAPTION>
Property and equipment consist of the following: JUNE 30,
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Building....................................................................... $ 9,315 $ -
Land........................................................................... 2,160 2,160
Equipment...................................................................... 4,281 2,973
Furniture and fixtures......................................................... 5,336 2,067
Leasehold improvements......................................................... 995 1,220
Construction in progress....................................................... - 1,441
------- -------
22,087 9,861
Accumulated depreciation and amortization...................................... (4,948) (3,201)
------- -------
Property and equipment, net.................................................... $17,139 $ 6,660
======= =======
</TABLE>
28
<PAGE> 31
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
The Company constructed a new corporate facility to consolidate its sales
and administrative functions. The Company incurred approximately $12.5 million
in capital expenditures related to acquiring land and constructing and equipping
the facility.
(4) Line of Credit
INSIGHT had a $30,000,000 credit facility with a finance company. The
agreement provided 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 June 30, 1997,
$21,297,000 was available under the line of credit. Cash advances bore interest
at the London Interbank Offered Rate (LIBOR) plus 1.90% (7.59% at June 30, 1997)
payable monthly. The additional $7,500,000 of the credit facility was used to
facilitate the purchases of inventories from certain suppliers and was
classified on the balance sheet as accounts payable. The credit facility allowed
the Company to exceed the $7,500,000 for inventory purchases, if there was
availability on the credit line portion. At June 30, 1997 and 1996, the balance
of this additional portion of the credit facility was $8,703,000 and $4,239,000
respectively. In August 1997, the Company replaced its existing credit facility
with a new $70,000,000 credit facility, as described in Note 15.
(5) Lease Commitments
The Company has several non-cancelable operating leases, primarily for
office and distribution center space and certain office equipment. Rental
expense for operating leases was $1,056,000, $607,000 and $536,000, for the
years ended June 30, 1997, 1996 and 1995, respectively.
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) as of June 30, 1997 are
as follows:
<TABLE>
<CAPTION>
Years ending June 30,: (in thousands)
---------------------- --------------
<S> <C> <C>
1998 $ 667
1999 391
2000 36
------
$1,094
======
</TABLE>
(6) Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1997 1996 1995
---------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................................ $ 5,972 $ 3,304 $ 1,714
State.................................................................. 1,581 875 469
---------- --------- ---------
7,553 4,179 2,183
---------- --------- ---------
Deferred:
Federal................................................................ (779) (341) (54)
State.................................................................. (206) (90) (15)
---------- --------- ---------
(985) (431) (69)
---------- --------- ---------
$ 6,568 $ 3,748 $ 2,114
========== ========= =========
</TABLE>
29
<PAGE> 32
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
Income tax expense amounted to $6,568,000, $3,748,000 and $2,114,000 for
the years ended June 30, 1997, 1996 and 1995, respectively (an effective rate of
40.0%, 39.6% and 39.6% for the years ended June 30, 1997, 1996 and 1995,
respectively). The actual expense differs from the "expected" tax expense
(computed by applying the U.S. federal corporate income tax rate of 34%) as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1997 1996 1995
---------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense............................................ $ 5,588 $ 3,219 $ 1,815
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit 908 516 299
Other, net............................................................. 72 13 -
---------- --------- ---------
$ 6,568 $ 3,748 $ 2,114
========== ========= =========
</TABLE>
Sources of deferred income taxes and their tax effects are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1997 1996 1995
-------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred revenue........................................................... $ (17) $ 44 $ (269)
Prepaid expenses........................................................... (45) (72) (199)
Allowances for doubtful accounts and returns .............................. (226) (392) 127
Inventory allowances....................................................... (170) (143) 99
Accrued self-insurance..................................................... 74 77 110
Accrued vacation and other payroll liabilities ............................ (133) (253) -
Other, net................................................................. (468) 308 63
-------- --------- ---------
$ (985) $ (431) $ (69)
======== ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are presented below:
<TABLE>
<CAPTION>
JUNE 30,
1997 1996
--------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred revenue............................................................. $ 45 $ 28
Allowance for doubtful accounts and returns.................................. 1,160 934
Accrued warranty costs....................................................... - 7
Inventory allowances......................................................... 553 383
Accrued self-insurance....................................................... - 74
Accrued vacation and other payroll liabilities .............................. 386 253
Other........................................................................ 380 -
--------- ---------
Total gross deferred tax assets......................................... 2,524 1,679
--------- ---------
Deferred tax liabilities:
Prepaid expenses............................................................. (300) (345)
Other........................................................................ - (95)
--------- ---------
Total gross deferred tax liabilities.................................... (300) (440)
--------- ---------
Net deferred tax asset.................................................. $ 2,224 $ 1,239
========= =========
</TABLE>
Due to INSIGHT's profitable operations, management believes that
realization of the deferred tax asset is more likely than not; therefore there
is no valuation allowance as of June 30, 1997 and 1996. Reversal of INSIGHT's
temporary differences is expected to occur in the near future due to their
short-term nature.
(7) Public Offerings
In January 1995, the Company completed an initial public offering of
2,250,000 shares of its common stock at $6.00 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 15,000 shares of the then outstanding common
stock, no par value, for 4,186,047 shares of common stock, $0.1 par value.
30
<PAGE> 33
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
In November 1995 and November 1996, the Company completed public
offerings of common stock. The Company sold 1,500,000 shares of its common stock
at each of the offerings at $11 13/16 and $22 1/3, respectively, per share. Net
proceeds to the Company, after underwriting discounts and other offering costs,
were $16.6 million and $37.4 million, respectively.
(8) Benefit Plan
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 (prior to January 1, 1995, it
was one year of service). The Plan allows for INSIGHT to match up to 25% of the
employees' contributions up to a maximum 6% of total compensation (prior to
January 1, 1995, it was a 10% match). Contribution expense was $175,000,
$126,000, and $14,000 for the years ended June 30, 1997, 1996 and 1995,
respectively.
(9) Stock Option Plan
In September 1992, INSIGHT adopted a Stock Option Plan (the 1992 Plan),
which provides for the issuance of both incentive and nonqualified stock options
to acquire up to 627,906 shares of INSIGHT's Common Stock. These options are
available for grant under the 1992 Plan to the officers, directors and key
employees of INSIGHT. Under the terms of the 1992 Plan, participants may be
granted options to purchase Common Stock in such amounts and for such prices as
may be established by the Board of Directors, provided, however, that in the
case of incentive stock options, the exercise price must be at least equal to
the fair market value of the Common Stock on the date of the grant. If not
exercised, the options terminate upon the earlier of August 30, 1998 or 90 days
after such employee ceases to be employed by the Company. No further options
will be granted under this plan.
In November 1994, INSIGHT established a 1994 Stock Option Plan (the 1994
Plan). Options exercisable for a total of 750,000 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 525,000. The total 1,275,000 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. At June 30,
1997, 251,565 stock options under the 1994 Plan were available for 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 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 generally grant stock options at fair market value at the date of grant,
so no compensation expense is recognized. As permitted, the Company has elected
to adopt the disclosure provisions only of SFAS No. 123.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings and net
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net earnings As Reported $ 9,866 $ 5,720
======== ========
Pro forma $ 9,214 $ 5,546
======== ========
Net earnings per share As Reported $ 0.99 $ 0.72
======== ========
Pro forma $ 0.93 $ 0.70
======== ========
</TABLE>
31
<PAGE> 34
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
Pro forma net earnings reflect only options granted in fiscal 1997 and
1996. 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 July 1995 are
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 fiscal 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 50% 50%
Risk free interest rate 6.0% 6.1%
Expected lives 2.0 years 2.4 years
</TABLE>
Activity related to the stock option plans is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1996
Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Balance at the beginning of year ..... 851,782 $ 6.18 643,203 $3.48
Granted .............................. 497,574 18.12 397,875 9.14
Exercised ............................ (181,571) 4.66 (155,265) 2.26
Expired .............................. (167,609) 16.01 (34,031) 8.10
---------- ---------
Balance at the end of year .......... 1,000,176 10.83 851,782 6.18
========== =========
Exercisable at the end of year ....... 335,628 4.83 333,782 2.88
========== =========
Weighted-average fair value of options
granted during the year .............. $ 4.50 $ 2.67
========== =========
</TABLE>
The following table summarizes the status of outstanding stock options as of
June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------------------
Weighted Weighted
Range of Number of Average Average Weighted
Exercise Options Remaining Exercise Number of Average
Prices Outstanding Contractual Life Price Options Exercise Price
Exercisable
- ------------------------------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.48 - $6.00 223,188 6.15 years $2.62 190,938 $2.05
6.33 - 7.75 72,000 7.81 6.88 42,689 6.89
8.67 - 8.67 272,025 8.51 8.67 89,763 8.67
8.83 - 17.17 237,740 9.09 15.71 12,238 12.73
17.33 - 23.00 195,223 9.63 18.72 - -
--------- -------
0.48 - 23.00 1,000,176 8.29 10.83 335,628 4.83
========= =======
</TABLE>
(10) Employee Stock Purchase Plan
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 150,000 shares of common stock. The
purchase price per share is 85% of the lower of the market value per share of
common stock determined as of the beginning of the quarterly purchase period
specified in the Purchase Plan.
32
<PAGE> 35
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
(11) Non-Operating Income (Expenses), net
Non-operating income (expense), net, which consists primarily of interest
changed from $136,000 and $663,000 of interest expense, net, in fiscal 1996 and
1995, respectively, to $585,000 of interest income, net, in fiscal 1997.
Interest expense primarily relates to borrowings under the Company's line of
credit which have been necessary to finance the Company's growth. Interest
expense has been decreased as a result of the use of the net proceeds from the
Company's public offerings. Additionally, the interest expense of $164,000
associated with the Company's new sales and administrative facility was
capitalized.
(12) Fair Value of Financial Instruments
Statement of Financial Accounting Standards 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 amount.
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, 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 at June 30, 1997, the amounts that will
actually be realized or paid in settlement of the instrument could be
significantly different.
The carrying amount 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, accrued
expenses and customer refunds payable approximate fair value because of the
short maturity of these instruments.
(13) Supplemental Financial Information
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended June 30, 1997, 1996 and
1995 follows:
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
------ --------- ---------- -------------
<S> <C> <C> <C> <C>
Allowances for doubtful accounts:
Year ended June 30, 1997.................... $ 2,474 $ 3,627 $ (3,194) $ 2,907
========= ========= ========= =========
Year ended June 30, 1996.................... $ 1,440 $ 1,302 $ (268) $ 2,474
========= ========= ========= =========
Year ended June 30, 1995.................... $ 1,115 $ 1,262 $ (937) $ 1,440
========= ========= ========= =========
Allowances for obsolescence of inventories:
Year ended June 30, 1997.................... $ 899 $ 930 $ (334) $ 1,495
========= ========= ========= =========
Year ended June 30, 1996.................... $ 314 $ 788 $ (203) $ 899
========= ========= ========= =========
Year ended June 30, 1995.................... $ 157 $ 344 $ (187) $ 314
========= ========= ========= =========
</TABLE>
33
<PAGE> 36
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
(14) Pro forma Information (Unaudited)
Net earnings per share and shares used in the per share calculations for
fiscal 1995 are pro forma and unaudited. Net earnings per share reflect the
elimination of executive compensation expense which was paid in excess of
current employment agreements. Two officers who at the time were the sole
stockholders of INSIGHT entered into employment agreements effective October 1,
1994 which provide for annual compensation of $225,000 each. The agreement
provides for a salary of $225,000 in fiscal 1995, 1996 and 1997 and further
provides no bonus will be paid during the period through fiscal 1997. As result
of the adjustment and its tax effect, pro forma net earnings were $3,307,000 for
the year ended June 30, 1995.
Shares used in pro forma 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
4,186,047 shares for the 15,000 shares of the Company's common stock previously
outstanding.
Pro forma net earnings per share for the year ended June 30, 1995 is based
upon 5,566,640 shares, which includes 5,161,115 of weighted shares outstanding
and 405,525 of common stock equivalents.
(15) Subsequent Events
On August 13, 1997, the Company's Board of Directors approved a 3-for-2
stock split effected in the form of a stock dividend and payable on September
17, 1997 to the stockholders of record at the close of business on August 27,
1997. All share amounts, share prices and net earnings per share have been
retroactively adjusted to reflect this 3-for-2 stock split.
On August 20, 1997, the Company replaced its credit facility with a new $70
million credit facility with a finance company. The agreement provides for cash
advances outstanding at any one time up to a maximum of $70 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 1.40%. 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 August 2000. 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.
34
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INSIGHT ENTERPRISES, INC.
(AS AMENDED THROUGH DECEMBER 12, 1996)
1. Name. The name of the Corporation is Insight Enterprises, Inc.
2. Registered Office and Agent. The name and address of the
registered office and registered agent of the Corporation is The Corporation
Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, Delaware.
3. Purpose. The purpose for which this Corporation is organized
is the transaction of any or all lawful activity for which corporations may be
organized under the General Corporation Law of Delaware, as it may be amended
from time to time ("GCL").
4. Authorized Capital. The total number of shares of stock which
the Corporation shall have authority to issue is 33,000,000 shares, consisting
of 30,000,000 shares of common stock having a par value of $.01 per share (the
"Common Stock") and 3,000,000 shares of preferred stock having a par value of
$.01 per share (the "Preferred Stock").
The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of this Article 4, to provide for the issuance of the
shares of Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include,
but not be limited to, determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series;
(b) The dividend rate on the shares of that series,
whether dividends shall be cumulative, and, if so, from which date or dates, and
the relative rights of priority, if any, of payment of dividends on shares of
that series;
(c) Whether that series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of such
voting rights;
(d) Whether that series shall have conversion privileges,
and, if so, the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors shall
determine;
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<PAGE> 2
(e) Whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund;
(g) The rights of the shares of that series in the event
of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series; and
(h) Any other relative rights, preferences and
limitations of that series.
5. Classification and Terms of Directors. The business and
affairs of the Corporation shall be managed by or under the direction of the
Board of Directors consisting of not less than three directors nor more than
nine directors, the exact number of directors to be determined from time to time
by resolution adopted by the Board of Directors. The directors shall be divided
into three classes, designated Class I, Class II and Class III. Each class shall
consist, as nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. The terms of the initial
Class I directors shall terminate on the date of the 1995 annual meeting of
stockholders; the terms of the initial Class II directors shall terminate on the
date of the 1996 annual meeting of stockholders; and the terms of the initial
Class III directors shall terminate on the date of the 1997 annual meeting of
stockholders. At each annual meeting of stockholders beginning in 1995,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, and
any additional directors of any class elected to fill a vacancy resulting from
an increase in such class shall hold office for a term that shall coincide with
the remaining terms of that class, but in no case will a decrease in the number
of directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and until
his successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office. Any
vacancy on the Board of Directors that results from an increase in the number of
directors may be filled by a majority of the whole Board of Directors, and any
other vacancy may be filled by a majority of the directors then in office, even
if less than a quorum, or by a sole remaining director. Any director elected to
fill a vacancy shall hold office for a term that shall coincide with the term of
the class to which such director shall have been elected.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation or the resolution or resolutions
adopted by the Board of Directors pursuant to Article 4 applicable thereto, and
such directors so elected shall not be divided into classes pursuant to this
Article 5 unless expressly provided by such terms.
2
<PAGE> 3
6. Removal of Directors. Subject to the rights, if any, of the
holders of shares of Preferred Stock then outstanding, any or all of the
directors of the Corporation may be removed from office at any time, but only
for cause and only by the affirmative vote of the holders of a majority of the
outstanding shares of the Corporation then entitled to vote generally in the
election of directors, considered for purposes of this Article 6 as one class.
7. Election of Directors. Elections of directors at an annual or
special meeting of stockholders shall be by written ballot unless the Bylaws of
the Corporation shall otherwise provide. Advance notice of stockholder
nominations for the election of directors shall be given in the manner provided
in the Bylaws of the Corporation.
8. Special Meetings. Special meetings of the stockholders of the
Corporation for any purpose or purposes may be called at any time only by the
Chairman of the Board, the Chief Executive Officer, or the Board of Directors
pursuant to a resolution approved by a majority of the whole Board of Directors,
or at the request in writing of stockholders owning twenty-five percent (25%) or
more in amount of the capital stock issued and outstanding and entitled to vote.
Special meetings of the stockholders may not be called by any other person or
persons. Business transacted at any special meeting of the stockholders shall be
limited to the purposes stated in the notice of such meeting.
9. Special Voting Requirements.
(a) Except as set forth in Section B of this Article 9,
the affirmative vote of the holders of two-thirds of the outstanding stock of
the Corporation entitled to vote shall be required for:
(l) any merger or consolidation to which the
Corporation, or any of its subsidiaries, and an Interested Person (as
hereinafter defined) are parties;
(2) any sale or other disposition by the
Corporation, or any of its subsidiaries, of all or substantially all of its
assets to an Interested Person;
(3) any purchase or other acquisition by the
Corporation, or any of its subsidiaries, of all or substantially all of the
assets or stock of an Interested Person; and
(4) any other transaction with an Interested
Person which requires the approval of the stockholders of the Corporation under
the GCL, as in effect from time to time.
(b) The provisions of Section (a) of this Article 9 shall
not be applicable to any transaction described therein if such transaction is
approved by resolution of the Corporation's Board of Directors, provided that a
majority of the members of the Board of Directors voting for the approval of
such transaction are Continuing Directors. The term "Continuing Director" shall
mean any member of the Board of Directors of the Corporation who is not the
Interested Person, and not an affiliate, associate, representative or nominee of
the Interested Person or of such an affiliate or associate, that is involved in
the relevant transaction, and (A) was a member of the Board of Directors on
November 9, 1994 or (B) was a member of the Board of Directors prior to the date
that the person, firm or corporation, or
3
<PAGE> 4
any group thereof, with whom such transaction is proposed, became an Interested
Person, or (C) whose initial election as a director of the Corporation succeeds
a Continuing Director or is a newly created directorship, and in either case was
recommended by a majority vote of the Continuing Directors then in office.
(c) As used in this Article 9, the term "Interested
Person" shall mean any person, firm or corporation, or any group thereof, acting
or intending to act in concert, including any person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such person, firm or corporation or group, which owns of record or beneficially,
directly or indirectly, five percent (5%) or more of any class of voting
securities of the Corporation; except that the term "Interested Person" shall
not mean or apply to a person, firm or corporation which owned of record or
beneficially twenty-five percent (25%) or more of any class of voting securities
of the Corporation at the effective time of the merger of Insight Enterprises,
Inc., an Arizona corporation, into the Corporation.
10. Limitation of Liability. No director of the Corporation shall
be personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty by such a director as a director.
Notwithstanding the foregoing sentence, a director shall be liable to the extent
provided by applicable law (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the GCL, or (iv) for any transaction from which
such director derived an improper personal benefit. No amendment to or repeal of
this Article 10 shall apply to or have an effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
11. Bylaws. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized by majority
vote of the whole Board of Directors to adopt, repeal, alter, amend or rescind
the Bylaws of the Corporation. In addition, the Bylaws of the Corporation may be
adopted, repealed, altered, amended, or rescinded by the affirmative vote of
two-thirds of the outstanding stock of the Corporation entitled to vote thereon;
provided, if the Continuing Directors, as defined in Article 9, shall by a
two-thirds favorable vote of such Continuing Directors have adopted a resolution
approving the amendment or repeal proposal and have determined to recommend it
for approval by the holders of stock entitled to vote thereon, then the vote
required shall be the affirmative vote of the holders of at least a majority of
the outstanding shares entitled to vote thereon.
12. Action by Consent of Stockholders. Any action required or
permitted to be taken by the stockholders must be effected at a duly called and
noticed annual or special meeting of such stockholders and may not be effected
by any consent in writing by such stockholders.
13. Certificate. The Corporation specifically elects not to be
governed by Section 203 of the GCL. The Corporation reserves the right to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation in the manner now or hereafter prescribed by statute and the
Certificate of Incorporation, and all rights conferred on stockholders herein
are granted subject to the reservations in this Article 13; provided, however,
the affirmative vote of the holders of at least two-thirds of the voting power
of the outstanding stock of the Corporation entitled to vote thereon shall be
required to alter, amend,
4
<PAGE> 5
or adopt any provision inconsistent with or repeal Articles 5, 6, 7, 8, 9, 10,
11, 12 and this Article 13; provided, if the Continuing Directors, as defined in
Article 9, shall by a two-thirds favorable vote of such Continuing Directors
have adopted a resolution approving the amendment or repeal proposal and have
determined to recommend it for approval by the holders of stock entitled to vote
thereon, then the vote required shall be the affirmative vote of the holders of
at least a majority of the outstanding shares entitled to vote thereon.
14. Incorporator. The name and address of the sole incorporator is as
follows:
Eric J. Crown
6820 S. Harl Avenue
Tempe, AZ 85283
5
<PAGE> 1
EXHIBIT 10.6
INSIGHT ENTERPRISES, INC.
1998 LONG-TERM INCENTIVE PLAN
ARTICLE 1 PURPOSE
1.1 GENERAL. The purpose of the Insight Enterprises, Inc. 1998
Long-Term Incentive Plan (the "Plan") is to promote the success, and enhance the
value, of Insight Enterprises, Inc. (the "Company") by linking the personal
interests of its officers, employees, directors, and consultants or independent
contractors to those of Company stockholders and by providing its officers,
employees, directors, and consultants or independent contractors with an
incentive for outstanding performance. The Plan is further intended to provide
flexibility to the Company in its ability to motivate, attract, and retain the
services of officers, employees, directors, and consultants or independent
contractors upon whose judgment, interest, and special effort the successful
conduct of the Company's operation is largely dependent. Accordingly, the Plan
permits the grant of incentive awards from time to time to officers, employees,
directors, and consultants or independent contractors.
ARTICLE 2 EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan is effective as of October 30, 1997 (the
"Effective Date").
ARTICLE 3 DEFINITIONS AND CONSTRUCTION.
3.1 DEFINITIONS. When a word or phrase appears in this Plan with the
initial letter capitalized, and the word or phrase does not commence a sentence,
the word or phrase shall generally be given the meaning ascribed to it in this
Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required
by the context. The following words and phrases shall have the following
meanings:
(a) "Award" means any Option, Stock Appreciation Right,
Restricted Stock Award, Performance Share Award, or Performance-Based
Award granted to a Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract,
or other instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Change of Control" means and includes each of the
following:
<PAGE> 2
(1) When the individuals who, at the beginning of any
period of two years or less, constituted the Board of Directors of the
Company cease, for any reason, to constitute at least a majority
thereof, unless the election or nomination for election of each new
director was approved by the vote of at least two-thirds of the
directors then still in office who were directors at the beginning of
such period;
(2) A change of control of the Company through a
transaction or series of transactions, such that any person (as that
term is used in Section 13 and 14(d)(2) of the 1934 Act), excluding
affiliates of the Company as of the Effective Date, is or becomes the
beneficial owner (as that term is used in Section 13(d) of the 1934
Act) directly or indirectly of securities of the Company representing
30% or more of the combined voting power of the Company's then
outstanding securities;
(3) Any consolidation or liquidation of the Company
in which the Company is not the continuing or surviving corporation or
pursuant to which Stock would be converted into cash, securities or
other property, other than a merger of the Company in which the holders
of the shares of Stock immediately before the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger;
(4) The stockholders of the Company approve any plan
or proposal for the liquidation or dissolution of the Company; or
(5) Substantially all of the assets of the Company
are sold or otherwise transferred to parties that are not within a
"controlled group of corporations" (as defined in Section 1563 of the
Code) of which the Company is a member.
(e) "Code" means the Internal Revenue Code of 1986, as
amended.
(f) "Committee" means the committee of the Board described in
Article 4.
(g) "Covered Employee" means an Employee who is a "covered
employee" within the meaning of Section 162(m) of the Code.
(h) "Disability" shall mean any illness or other physical or
mental condition of a Participant which renders the Participant
incapable of performing his customary and usual duties for the Company,
or any medically determinable illness or other physical or mental
condition resulting from a bodily injury, disease or mental disorder
which in the judgment of the Committee is permanent and continuous in
2
<PAGE> 3
nature. The Committee may require such medical or other evidence as it
deems necessary to judge the nature and permanency of the Participant's
condition.
(i) "Fair Market Value" means, as of any given date, the fair
market value of Stock or other property on a particular date determined
by such methods or procedures as may be established from time to time
by the Committee. Unless otherwise determined by the Committee, the
Fair Market Value of Stock as of any date shall be the closing price
for the Stock as reported on the NASDAQ National Market System (or on
any national securities exchange on which the Stock is then listed) for
that date or, if no closing price is so reported for that date, the
closing price on the next preceding date for which a closing price was
reported.
(j) "Incentive Stock Option" means an Option that is intended
to meet the requirements of Section 422 of the Code or any successor
provision thereto.
(k) "Non-Employee Director" means a member of the Board who
qualifies as a "Non-Employee Director" as defined in Rule 16b-3(b)(3)
of the Exchange Act, or any successor definition adopted by the Board.
(l) "Non-Qualified Stock Option" means an Option that is not
intended to be an Incentive Stock Option.
(m) "Option" means a right granted to a Participant under
Article 7 of the Plan to purchase Stock at a specified price during
specified time periods. An Option may be either an Incentive Stock
Option or a Non-Qualified Stock Option.
(n) "Participant" means a person who, as an officer, employee,
director, and consultant or independent contractor of the Company or
any Subsidiary, has been granted an Award under the Plan.
(o) "Performance-Based Awards" means the Performance Share
Awards and Restricted Stock Awards granted to selected Covered
Employees pursuant to Articles 9 and 10, but which are subject to the
terms and conditions set forth in Article 11. All Performance-Based
Awards are intended to qualify as "performance-based compensation"
under Section 162(m) of the Code.
(p) "Performance Criteria" means the criteria that the
Committee selects for purposes of establishing the Performance Goal or
Performance Goals for a Participant for a Performance Period. The
Performance Criteria that will be used to establish Performance Goals
are limited to the following: pre- or after-tax net earnings, sales
growth, operating earnings, operating cash flow, return on net assets,
return on stockholders' equity, return on assets, return on capital,
Stock price growth, stockholder returns, gross or net profit margin,
earnings per share, price per share of Stock, and market share, any of
which may be measured either
3
<PAGE> 4
in absolute terms or as compared to any incremental increase or as
compared to results of a peer group. The Committee shall, within the
time prescribed by Section 162(m) of the Code, define in an objective
fashion the manner of calculating the Performance Criteria it selects
to use for such Performance Period for such Participant.
(q) "Performance Goals" means, for a Performance Period, the
goals established in writing by the Committee for the Performance
Period based upon the Performance Criteria. Depending on the
Performance Criteria used to establish such Performance Goals, the
Performance Goals may be expressed in terms of overall Company
performance or the performance of a division, business unit or an
individual. The Committee, in its discretion, may, within the time
prescribed by Section 162(m) of the Code, adjust or modify the
calculation of Performance Goals for such Performance Period in order
to prevent the dilution or enlargement of the rights of Participants,
(i) in the event of, or in anticipation of, any unusual or
extraordinary corporate item, transaction, event, or development; or
(ii) in recognition of, or in anticipation of, any other unusual or
nonrecurring events affecting the Company, or the financial statements
of the Company, or in response to, or in anticipation of, changes in
applicable laws, regulations, accounting principles, or business
conditions.
(r) "Performance Period" means the one or more periods of
time, which may be of varying and overlapping durations, as the
Committee may select, over which the attainment of one or more
Performance Goals will be measured for the purpose of determining a
Participant's right to, and the payment of, a Performance-Based Award.
(s) "Performance Share" means a right granted to a Participant
under Article 9, to receive cash, Stock, or other Awards, the payment
of which is contingent upon achieving certain performance goals
established by the Committee.
(t) "Plan" means the Insight Enterprises, Inc. 1998 Long-Term
Incentive Plan, as amended from time to time.
(u) "Restricted Stock Award" means Stock granted to a
Participant under Article 10 that is subject to certain restrictions
and to risk of forfeiture.
(v) "Retirement" means a Participant's termination of
employment with the Company after attaining any normal or early
retirement age specified in any pension, profit sharing or other
retirement program sponsored by the Company.
(w) "Stock" means the common stock of the Company and such
other securities of the Company that may be substituted for Stock
pursuant to Article 12.
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<PAGE> 5
(x) "Stock Appreciation Right" or "SAR" means a right granted
to a Participant under Article 8 to receive a payment equal to the
difference between the Fair Market Value of a share of Stock as of the
date of exercise of the SAR over the grant price of the SAR, all as
determined pursuant to Article 8.
(y) "Subsidiary" means any corporation of which a majority of
the outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Company.
ARTICLE 4 ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by a Committee that is
appointed by, and shall serve at the discretion of, the Board. The Committee
shall consist of at least two individuals, each of whom qualifies as (i) a
Non-Employee Director, and (ii) an "outside director" under Code Section 162(m)
and the regulations issued thereunder; provided, however that the Chief
Executive Officer of the Company shall have the authority to grant Awards to
individuals who are not subject to Section 16 of the Securities Exchange Act of
1934 and to those individuals who are subject to Section 16 (other than the
three highest ranking executives of the Company), provided that any grant to a
Section 16 insider shall not become exercisable for at least six months from the
date of grant. When the Chief Executive Officer is acting to grant Awards under
this Plan, solely for purposes of this Plan, the Chief Executive Officer shall
be deemed to be acting as the Committee.
4.2 ACTION BY THE COMMITTEE. A majority of the Committee shall
constitute a quorum. The acts of a majority of the members present at any
meeting at which a quorum is present and acts approved in writing by a majority
of the Committee in lieu of a meeting shall be deemed the acts of the Committee.
Each member of the Committee is entitled to, in good faith, rely or act upon any
report or other information furnished to that member by any officer or other
employee of the Company or any Subsidiary, the Company's independent certified
public accountants, or any executive compensation consultant or other
professional retained by the Company to assist in the administration of the
Plan.
4.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power,
authority and discretion to:
(a) Designate Participants to receive Awards;
(b) Determine the type or types of Awards to be granted to
each Participant;
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<PAGE> 6
(c) Determine the number of Awards to be granted and the
number of shares of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted
under the Plan including but not limited to, the exercise price, grant
price, or purchase price, any restrictions or limitations on the Award,
any schedule for lapse of forfeiture restrictions or restrictions on
the exercisability of an Award, and accelerations or waivers thereof,
based in each case on such considerations as the Committee in its sole
discretion determines; provided, however, that the Committee shall not
have the authority to accelerate the vesting, or waive the forfeiture,
of any Performance-Based Awards;
(e) Determine whether, to what extent, and under what
circumstances an Award may be settled in, or the exercise price of an
Award may be paid in, cash, Stock, other Awards, or other property, or
an Award may be canceled, forfeited, or surrendered;
(f) Prescribe the form of each Award Agreement, which need not
be identical for each Participant;
(g) Decide all other matters that must be determined in
connection with an Award;
(h) Establish, adopt or revise any rules and regulations as it
may deem necessary or advisable to administer the Plan; and
(i) Make all other decisions and determinations that may be
required under the Plan or as the Committee deems necessary or
advisable to administer the Plan.
4.4 DECISIONS BINDING. The Committee's interpretation of the Plan, any
Awards granted under the Plan, any Award Agreement and all decisions and
determinations by the Committee with respect to the Plan are final, binding, and
conclusive on all parties.
ARTICLE 5 SHARES SUBJECT TO THE PLAN
5.1 NUMBER OF SHARES. Subject to adjustment provided in Section 13.1,
the aggregate number of shares of Stock reserved and available for grant under
the Plan shall initially be 525,000 (which number takes into account the stock
split effective in September, 1997). In addition, for each fiscal year beginning
July 1, 1998 and ending June 30, 2007, an additional one to four percent of the
outstanding shares of Stock of the Company (in the Board's discretion) shall be
reserved for issuance under the Plan
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on a cumulative basis, with the calculation of such additional shares to be made
on the first day of each quarter of the applicable fiscal year; provided, each
such calculation of additional shares shall be limited to an amount of
additional shares such that the number of shares of Stock remaining available
for grant under the Plan (and any other option plan sponsored by the Company)
plus the number of shares of Stock granted but not yet exercised (under the Plan
and any other option plan sponsored by the Company) shall not exceed twenty
percent (20%) of the outstanding shares of Stock of the Company at the time of
calculation of such additional shares. Notwithstanding the above, the maximum
number of shares of Stock that may be issued under the plan as ISOs shall be
750,000.
5.2 LAPSED AWARDS. To the extent that an Award terminates, expires or
lapses for any reason, any shares of Stock subject to the Award will again be
available for the grant of an Award under the Plan and shares subject to SARs or
other Awards settled in cash will be available for the grant of an Award under
the Plan.
5.3 STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock
or Stock purchased on the open market.
5.4 LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS. Notwithstanding
any provision in the Plan to the contrary, and subject to the adjustment in
Section 13.1, the maximum number of shares of Stock with respect to one or more
Awards that may be granted to any one Participant during the Company's fiscal
year shall be 100,000.
ARTICLE 6 ELIGIBILITY AND PARTICIPATION
6.1 ELIGIBILITY. Persons eligible to participate in this Plan include
all officers, employees, directors, and consultants or independent contractors
of the Company or a Subsidiary, as determined by the Committee, including
employees who are also members of the Board.
6.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from among all eligible individuals,
those to whom Awards shall be granted and shall determine the nature and amount
of each Award. No individual shall have any right to be granted an Award under
this Plan.
7
<PAGE> 8
ARTICLE 7 STOCK OPTIONS
7.1 GENERAL. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock
under an Option shall be determined by the Committee and set forth in the Award
Agreement. It is the intention under the Plan that the exercise price for any
Option shall not be less than the Fair Market Value as of the date of grant;
provided, however that the Committee may, in its discretion, grant Options
(other than Incentive Stock Options) with an exercise price of less than Fair
Market Value on the date of grant.
(b) TIME AND CONDITIONS OF EXERCISE. The Committee shall
determine the time or times at which an Option may be exercised in whole or in
part. The Committee also shall determine the performance or other conditions, if
any, that must be satisfied before all or part of an Option may be exercised.
(c) PAYMENT. The Committee shall determine the methods by
which the exercise price of an Option may be paid, the form of payment,
including, without limitation, cash, shares of Stock, or other property
(including broker-assisted "cashless exercise" arrangements), and the methods by
which shares of Stock shall be delivered or deemed to be delivered to
Participants.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by a
written Award Agreement between the Company and the Participant. The Award
Agreement shall include such provisions as may be specified by the Committee.
7.2 INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be granted
only to employees and the terms of any Incentive Stock Options granted under the
Plan must comply with the following additional rules:
(a) EXERCISE PRICE. The exercise price per share of Stock
shall be set by the Committee, provided that the exercise price for any
Incentive Stock Option may not be less than the Fair Market Value as of the date
of the grant.
(b) EXERCISE. In no event, may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
8
<PAGE> 9
(c) LAPSE OF OPTION. An Incentive Stock Option shall lapse
under the following circumstances:
(1) The Incentive Stock Option shall lapse ten years
from the date it is granted, unless an earlier time is set in the Award
Agreement.
(2) The Incentive Stock Option shall lapse three
months after the Participant's termination of employment, if the
termination of employment was attributable to (i) Disability, (ii)
Retirement, or (iii) for any other reason, provided that the Committee
has approved, in writing, the continuation of any Incentive Stock
Option outstanding on the date of the Participant's termination of
employment.
(3) If the Participant separates from employment
other than as provided in paragraph (2), the Incentive Stock Option
shall lapse seven (7) days following the Participant's termination of
employment.
(4) If the Participant dies before the Option lapses
pursuant to paragraph (1), (2) or (3), above, the Incentive Stock
Option shall lapse, unless it is previously exercised, on the earlier
of (i) the date on which the Option would have lapsed had the
Participant lived and had his employment status (i.e., whether the
Participant was employed by the Company on the date of his death or had
previously terminated employment) remained unchanged; or (ii) 12 months
after the date of the Participant's death. Upon the Participant's
death, any Incentive Stock Options exercisable at the Participant's
death may be exercised by the Participant's legal representative or
representatives, by the person or persons entitled to do so under the
Participant's last will and testament, or, if the Participant shall
fail to make testamentary disposition of such Incentive Stock Option or
shall die intestate, by the person or persons entitled to receive said
Incentive Stock Option under the applicable laws of descent and
distribution.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market
Value (determined as of the time an Award is made) of all shares of
Stock with respect to which Incentive Stock Options are first
exercisable by a Participant in any calendar year may not exceed
$100,000.00 or such other limitation as imposed by Section 422(d) of
the Code, or any successor provision. To the extent that Incentive
Stock Options are first exercisable by a Participant in excess of such
limitation, the excess shall be considered Non-Qualified Stock Options.
9
<PAGE> 10
(e) TEN PERCENT OWNERS. An Incentive Stock Option shall be
granted to any individual who, at the date of grant, owns stock
possessing more than ten percent of the total combined voting power of
all classes of Stock of the Company only if such Option is granted at a
price that is not less than 110% of Fair Market Value on the date of
grant and the Option is exercisable for no more than five years from
the date of grant.
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an
Incentive Stock Option may be made pursuant to this Plan after the
tenth anniversary of the Effective Date.
(g) RIGHT TO EXERCISE. During a Participant's lifetime, an
Incentive Stock Option may be exercised only by the Participant.
ARTICLE 8 STOCK APPRECIATION RIGHTS
8.1 GRANT OF SARs. The Committee is authorized to grant SARs to
Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT. Upon the exercise of a Stock
Appreciation Right, the Participant to whom it is granted has the right
to receive the excess, if any, of:
(1) The Fair Market Value of a share of Stock on the
date of exercise; over
(2) The grant price of the Stock Appreciation Right
as determined by the Committee, which shall not be less than the Fair
Market Value of a share of Stock on the date of grant in the case of
any SAR related to any Incentive Stock Option.
(b) OTHER TERMS. All awards of Stock Appreciation Rights shall
be evidenced by an Award Agreement. The terms, methods of exercise,
methods of settlement, form of consideration payable in settlement, and
any other terms and conditions of any Stock Appreciation Right shall be
determined by the Committee at the time of the grant of the Award and
shall be reflected in the Award Agreement.
10
<PAGE> 11
ARTICLE 9 PERFORMANCE SHARES
9.1 GRANT OF PERFORMANCE SHARES. The Committee is authorized to grant
Performance Shares to Participants on such terms and conditions as may be
selected by the Committee. The Committee shall have the complete discretion to
determine the number of Performance Shares granted to each Participant. All
Awards of Performance Shares shall be evidenced by an Award Agreement.
9.2 RIGHT TO PAYMENT. A grant of Performance Shares gives the
Participant rights, valued as determined by the Committee, and payable to, or
exercisable by, the Participant to whom the Performance Shares are granted, in
whole or in part, as the Committee shall establish at grant or thereafter. The
Committee shall set performance goals and other terms or conditions to payment
of the Performance Shares in its discretion which, depending on the extent to
which they are met, will determine the number and value of Performance Shares
that will be paid to the Participant, provided that the time period during which
the performance goals must be met shall, in all cases, exceed six months.
9.3 OTHER TERMS. Performance Shares may be payable in cash, Stock, or
other property, and have such other terms and conditions as determined by the
Committee and reflected in the Award Agreement.
ARTICLE 10 RESTRICTED STOCK AWARDS
10.1 GRANT OF RESTRICTED STOCK. The Committee is authorized to make
Awards of Restricted Stock to Participants in such amounts and subject to such
terms and conditions as may be selected by the Committee. All Awards of
Restricted Stock shall be evidenced by a Restricted Stock Award Agreement.
10.2 ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions as the Committee may
impose (including, without limitation, limitations on the right to vote
Restricted Stock or the right to receive dividends on the Restricted Stock).
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, or otherwise, as the Committee
determines at the time of the grant of the Award or thereafter.
10.3 FORFEITURE. Except as otherwise determined by the Committee at the
time of the grant of the Award or thereafter, upon termination of employment
during the applicable restriction period, Restricted Stock that is at that time
subject to restrictions shall be forfeited and reacquired by the Company,
provided, however, that the Committee may provide in any Award Agreement that
restrictions or forfeiture conditions relating to Restricted Stock will be
waived in whole or in part in the event of terminations resulting from specified
causes, and the Committee may in other cases waive in whole or in part
restrictions or forfeiture conditions relating to Restricted Stock.
11
<PAGE> 12
10.4 CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing shares of Restricted Stock are registered in the name
of the Participant, certificates must bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock, and
the Company shall retain physical possession of the certificate until such time
as all applicable restrictions lapse.
ARTICLE 11 PERFORMANCE-BASED AWARDS
11.1 PURPOSE. The purpose of this Article 11 is to provide the
Committee the ability to qualify the Restricted Stock Awards under Article 10
and the Performance Share Awards under Article 9 as "performance-based
compensation" under Section 162(m) of the Code. If the Committee, in its
discretion, decides to grant a Performance-Based Award to a Covered Employee,
the provisions of this Article 11 shall control over any contrary provision
contained in Articles 9 or 10.
11.2 APPLICABILITY. This Article 11 shall apply only to those Covered
Employees selected by the Committee to receive Performance-Based Awards. The
Committee may, in its discretion, grant Restricted Stock Awards or Performance
Share Awards to Covered Employees that do not satisfy the requirements of this
Article 11. The designation of a Covered Employee as a Participant for a
Performance Period shall not in any manner entitle the Participant to receive an
Award for the period. Moreover, designation of a Covered Employee as a
Participant for a particular Performance Period shall not require designation of
such Covered Employee as a Participant in any subsequent Performance Period and
designation of one Covered Employee as a Participant shall not require
designation of any other Covered Employees as a Participant in such period or in
any other period.
11.3 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE AWARDS. With
regard to a particular Performance Period, the Committee shall have full
discretion to select the length of such Performance Period, the type of
Performance-Based Awards to be issued, the kind and/or level of the Performance
Goal, and whether the Performance Goal is to apply to the Company, a Subsidiary
or any division or business unit thereof.
11.4 PAYMENT OF PERFORMANCE AWARDS. Unless otherwise provided in the
relevant Award Agreement, a Participant must be employed by the Company or a
Subsidiary on the last day of the Performance Period to be eligible for a
Performance Award for such Performance Period. Furthermore, a Participant shall
be eligible to receive payment under a Performance-Based Award for a Performance
Period only if the Performance Goals for such period are achieved.
12
<PAGE> 13
In determining the actual size of an individual Performance-Based
Award, the Committee may reduce or eliminate the amount of the Performance-Based
Award earned for the Performance Period, if in its sole and absolute discretion,
such reduction or elimination is appropriate.
11.5 MAXIMUM AWARD PAYABLE. Notwithstanding any provision contained in
the Plan to the contrary, the maximum Performance-Based Award payable to any one
Participant under the Plan for a Performance Period is 100,000 shares of Stock,
or in the event the Performance-Based Award is paid in cash, such maximum
Performance-Based Award shall be determined by multiplying 100,000 by the Fair
Market Value of one share of Stock as of the date of grant of the
Performance-Based Award.
ARTICLE 12 PROVISIONS APPLICABLE TO AWARDS
12.1 STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under
the Plan may, in the discretion of the Committee, be granted either alone or in
addition to, in tandem with, or in substitution for, any other Award granted
under the Plan. If an Award is granted in substitution for another Award, the
Committee may require the surrender of such other Award in consideration of the
grant of the new Award. Awards granted in addition to or in tandem with other
Awards may be granted either at the same time as or at a different time from the
grant of such other Awards.
12.2 EXCHANGE PROVISIONS. The Committee may at any time offer to
exchange or buy out any previously granted Award for a payment in cash, Stock,
or another Award (subject to Section 12.1), based on the terms and conditions
the Committee determines and communicates to the Participant at the time the
offer is made.
12.3 TERM OF AWARD. The term of each Award shall be for the period as
determined by the Committee, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right granted in tandem with the
Incentive Stock Option exceed a period of ten years from the date of its grant.
12.4 FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and
any applicable law or Award Agreement, payments or transfers to be made by the
Company or a Subsidiary on the grant or exercise of an Award may be made in such
forms as the Committee determines at or after the time of grant, including
without limitation, cash, Stock, other Awards, or other property, or any
combination, and may be made in a single payment or transfer, in installments,
or on a deferred basis, in each case determined in accordance with rules adopted
by, and at the discretion of, the Committee.
12.5 LIMITS ON TRANSFER. No right or interest of a Participant in any
Award may be pledged, encumbered, or hypothecated to or in favor of any party
other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such
13
<PAGE> 14
Participant to any other party other than the Company or a Subsidiary. Except as
otherwise provided by the Committee, no Award shall be assignable or
transferable by a Participant other than by will or the laws of descent and
distribution.
12.6 BENEFICIARIES. Notwithstanding Section 12.5, a Participant may, in
the manner determined by the Committee, designate a beneficiary to exercise the
rights of the Participant and to receive any distribution with respect to any
Award upon the Participant's death. A beneficiary, legal guardian, legal
representative, or other person claiming any rights under the Plan is subject to
all terms and conditions of the Plan and any Award Agreement applicable to the
Participant, except to the extent the Plan and Award Agreement otherwise
provide, and to any additional restrictions deemed necessary or appropriate by
the Committee. If the Participant is married, a designation of a person other
than the Participant's spouse as his beneficiary with respect to more than 50
percent of the Participant's interest in the Award shall not be effective
without the written consent of the Participant's spouse. If no beneficiary has
been designated or survives the Participant, payment shall be made to the person
entitled thereto under the Participant's will or the laws of descent and
distribution. Subject to the foregoing, a beneficiary designation may be changed
or revoked by a Participant at any time provided the change or revocation is
filed with the Committee.
12.7 STOCK CERTIFICATES. All Stock certificates delivered under the
Plan are subject to any stop-transfer orders and other restrictions as the
Committee deems necessary or advisable to comply with Federal or state
securities laws, rules and regulations and the rules of any national securities
exchange or automated quotation system on with the Stock is listed, quoted, or
traded. The Committee may place legends on any Stock certificate to reference
restrictions applicable to the Stock.
12.8 TENDER OFFERS. In the event of a public tender for all or any
portion of the Stock, or in the event that a proposal to merge, consolidate, or
otherwise combine with another company is submitted for stockholder approval,
the Committee may in its sole discretion declare previously granted Options to
be immediately exercisable. To the extent that this provision causes Incentive
Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the
excess Options shall be deemed to be Non-Qualified Stock Options.
12.9 ACCELERATION UPON A CHANGE OF CONTROL. If a Change of Control
occurs, all outstanding Options, Stock Appreciation Rights, and other Awards
shall become fully exercisable and all restrictions on outstanding Awards shall
lapse. To the extent that this provision causes Incentive Stock Options to
exceed the dollar limitation set forth in Section 7.2(d), the excess Options
shall be deemed to be Non-Qualified Stock Options. Upon, or in anticipation of,
such an event, the Committee may cause every Award outstanding hereunder to
terminate at a specific time in the future and shall give each Participant the
right to exercise Awards during a period of time as the Committee, in its sole
and absolute discretion, shall determine, except in the event that the surviving
or
14
<PAGE> 15
resulting entity agrees to assume the Awards on terms and conditions that
substantially preserve the Participant's rights and benefits of the Award then
outstanding.
ARTICLE 13 CHANGES IN CAPITAL STRUCTURE
13.1 GENERAL. In the event a stock dividend is declared upon the Stock,
the shares of Stock then subject to each Award (and the number of shares subject
thereto) shall be increased proportionately without any change in the aggregate
purchase price therefor. In the event the Stock shall be changed into or
exchanged for a different number or class of shares of Stock or of another
corporation, whether through reorganization, recapitalization, stock split-up,
combination of shares, merger or consolidation, there shall be substituted for
each such share of Stock then subject to each Award (and for each share of Stock
then subject thereto) the number and class of shares of Stock into which each
outstanding share of Stock shall be so exchanged, all without any change in the
aggregate purchase price for the shares then subject to each Award.
ARTICLE 14 AMENDMENT, MODIFICATION AND TERMINATION
14.1 AMENDMENT, MODIFICATION AND TERMINATION. With the approval of the
Board, at any time and from time to time, the Committee may terminate, amend or
modify the Plan.
14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 15 GENERAL PROVISIONS
15.1 NO RIGHTS TO AWARDS. No Participant , employee, or other person
shall have any claim to be granted any Award under the Plan, and neither the
Company nor the Committee is obligated to treat Participants, employees, and
other persons uniformly.
15.2 NO STOCKHOLDERS RIGHTS. No Award gives the Participant any of the
rights of a stockholder of the Company unless and until shares of Stock are in
fact issued to such person in connection with such Award.
15.3 WITHHOLDING. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Company, an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any taxable event arising as a result of this Plan.
15
<PAGE> 16
15.4 NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Award Agreement
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary.
15.5 UNFUNDED STATUS OF AWARDS. The Plan is intended to be an
"unfunded" plan for incentive compensation. With respect to any payments not yet
made to a Participant pursuant to an Award, nothing contained in the Plan or any
Award Agreement shall give the Participant any rights that are greater than
those of a general creditor of the Company or any Subsidiary.
15.6 INDEMNIFICATION. To the extent allowable under applicable law,
each member of the Committee or of the Board shall be indemnified and held
harmless by the Company from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by such member in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action or failure
to act under the Plan and against and from any and all amounts paid by him or
her in satisfaction of judgment in such action, suit, or proceeding against him
or her provided he or she gives the Company an opportunity, at its own expense,
to handle and defend the same before he or she undertakes to handle and defend
it on his or her own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be
entitled under the Company's Articles of Incorporation or By-Laws, as a matter
of law, or otherwise, or any power that the Company may have to indemnify them
or hold them harmless.
15.7 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
savings, profit sharing, group insurance, welfare or other benefit plan of the
Company or any Subsidiary.
15.8 EXPENSES. The expenses of administering the Plan shall be borne by
the Company and its Subsidiaries.
15.9 TITLES AND HEADINGS. The titles and headings of the Sections in
the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings, shall
control.
15.10 FRACTIONAL SHARES. No fractional shares of stock shall be issued
and the Committee shall determine, in its discretion, whether cash shall be
given in lieu of fractional shares or whether such fractional shares shall be
eliminated by rounding up.
15.11 SECURITIES LAW COMPLIANCE. With respect to any person who is, on
the relevant date, obligated to file reports under Section 16 of the 1934 Act,
16
<PAGE> 17
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any
provision of the Plan or action by the Committee fails to so comply, it shall be
void to the extent permitted by law and voidable as deemed advisable by the
Committee.
15.12 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company
to make payment of awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Company shall be under no obligation to
register under the Securities Act of 1933, as amended (the "1933 Act"), any of
the shares of Stock paid under the Plan. If the shares paid under the Plan may
in certain circumstances be exempt from registration under the 1933 Act, the
Company may restrict the transfer of such shares in such manner as it deems
advisable to ensure the availability of any such exemption.
15.13 GOVERNING LAW. The Plan and all Award Agreements shall be
construed in accordance with and governed by the laws of the State of Delaware.
17
<PAGE> 1
EXHIBIT 11
INSIGHT ENTERPRISES, INC.
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net earnings (pro forma for 1995) .................................. $ 9,866 $ 5,720 $ 3,307
========== ========== ==========
Weighted average shares:
Common shares outstanding .......................................... 9,402,305 7,481,474 5,161,115
Common equivalent shares issuable upon exercise of employee
stock options and warrant ........................................ 555,925 452,944 313,582
Shares deemed to be outstanding sufficient to repay notes payable to
stockholders' of $874,000 ....................................... -- -- 91,943
---------- ---------- ----------
Shares used is net earnings per share (pro forma for 1995) ............ 9,958,230 7,934,418 5,566,640
========== ========== ==========
Net earnings per share (pro forma for 1995) ........................... $ 0.99 $ 0.72 $ 0.59
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
FULLY DILUTED EARNINGS PER SHARE: (1)
Net earnings (pro forma for 1995) .................................. $ 9,866 $ 5,720 $ 3,307
=========== ========== ==========
Weighted average shares:
Common shares outstanding .......................................... 9,402,305 7,481,474 5,161,115
Common equivalent shares issuable upon exercise of employee
stock options and warrants ....................................... 603,498 523,819 357,517
Shares deemed to be outstanding sufficient to repay notes payable to
stockholders' of $874,000 ....................................... -- -- 91,943
----------- ---------- -----------
Shares used in net earnings per share (pro forma for 1995) ............ 10,005,803 8,005,293 5,610,575
=========== =========== ===========
Net earnings per share (pro forma for 1995) ........................... $ 0.99 $ 0.71 $ 0.59
=========== =========== ===========
</TABLE>
(1) The calculation is submitted in accordance with Regulation S-K Item 601
(b) (11), although the amounts of per share earnings on the fully
diluted basis are not required to be presented in the Consolidated
Statements of Earnings under the provisions of paragraph 40 of APB No.
15 because the reduction is less than three percent.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SUBSIDIARY STATE OF
INCORPORATION
- -------------------------------------------------------------------------------------------
<S> <C>
Insight Direct, Inc. Arizona
- -------------------------------------------------------------------------------------------
Insight Credit Corporation Arizona
- -------------------------------------------------------------------------------------------
Insight Distribution Network International, Inc. Arizona
- -------------------------------------------------------------------------------------------
Direct Alliance Corporation Arizona
- -------------------------------------------------------------------------------------------
B&M Distributing, Inc. Arizona
- -------------------------------------------------------------------------------------------
TN, Inc. Arizona
- -------------------------------------------------------------------------------------------
ITA, Inc. Arizona
- -------------------------------------------------------------------------------------------
Insight International, Inc. Arizona
- -------------------------------------------------------------------------------------------
Insight Canada, Inc. Arizona
- -------------------------------------------------------------------------------------------
Refurb Services, Inc. Arizona
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 23
[Letterhead of KPMG Peat Marwick LLP]
The Board of Directors
Insight Enterprises, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-96286, No. 33-96280 and No. 33-03158) on Form S-8 on Insight Enterprises,
Inc. of our report dated August 20, 1997, relating to the consolidated balance
sheets of Insight Enterprises, Inc. and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for each of the years in the three-year period ended June 30,
1997, which report appears on Form 10-K of Insight Enterprises, Inc.
KPMG Peat Marwick LLP
Phoenix, Arizona
September 17, 1997
<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
JUNE 30, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-K FOR THE ANNUAL PERIOD JUNE 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 8,582
<SECURITIES> 0
<RECEIVABLES> 71,650
<ALLOWANCES> 2,907
<INVENTORY> 24,596
<CURRENT-ASSETS> 105,495
<PP&E> 22,087
<DEPRECIATION> 4,948
<TOTAL-ASSETS> 122,864
<CURRENT-LIABILITIES> 31,654
<BONDS> 0
0
0
<COMMON> 102
<OTHER-SE> 91,108
<TOTAL-LIABILITY-AND-EQUITY> 122,864
<SALES> 485,394
<TOTAL-REVENUES> 485,394
<CGS> 421,731
<TOTAL-COSTS> 421,731
<OTHER-EXPENSES> 43,545
<LOSS-PROVISION> 3,627
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> 16,434
<INCOME-TAX> 6,568
<INCOME-CONTINUING> 9,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,866
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.99
</TABLE>
