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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED
OR
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM 7/1/97 TO 12/31/97*
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:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None N/A
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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 and non-voting stock held by
non-affiliates of the Registrant, based upon the closing price of the
Registrant's Common Stock as reported on the Nasdaq National Market on February
27, 1998, was approximately $289,784,000. Shares of Common Stock held by each
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
for other purposes.
The number of outstanding shares of the Registrant's Common Stock on
February 27, 1998 was 10,508,352.
* The Registrant has changed its fiscal year end from June 30 to
December 31. While the Registrant is required, pursuant to Rule 13a-10, to
provide audited financial statements and other information covering the
transition period, this report, (including the audited financial statements
contained herein) also covers the period from January 1, 1997 to June 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 7, 1998 are incorporated by reference in Part III
hereof.
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INSIGHT ENTERPRISES, INC.
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. Business................................................................. 1
ITEM 2. Properties............................................................... 10
ITEM 3. Legal Proceedings........................................................ 10
ITEM 4. Submission of Matters to a Vote of Security Holders...................... 10
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder
Matters............................................................... 10
ITEM 6. Selected Consolidated Financial and Operating Data....................... 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and..........
Results of Operations................................................. 12
ITEM 8. Financial Statements and Supplementary Data.............................. 20
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 20
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................... 20
ITEM 11. Executive Compensation................................................... 20
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........... 20
ITEM 13. Certain Relationships and Related Transactions........................... 20
PART IV
ITEM 14. Exhibits and Reports on Form 8-K......................................... 21
SIGNATURES............................................................................... 22
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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, electronic commerce, targeted direct marketing and
advertising in computer magazines and publications. The Company offers an
extensive assortment of more than 50,000 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 500% from 109 in
calendar 1992 to 652 at the end of calendar 1997, most of whom focus on outbound
telemarketing. Approximately two-thirds of the Company's orders in each of
calendar 1997 and 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.
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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 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 43% over the last five years to 652 in
calendar 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, e-mail 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 calendar 1997 and 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 50,000 computer and computer-related products based on the Wintel
standard. The Company has received authorization from and offers brand name
products of manufacturers, 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.
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Efficient Technologically-Driven Operator. The Company has developed a highly
refined operating model to support an efficient fulfillment and distribution
infrastructure. The Company's business model has yielded inventory turns of 19
and 17 times in calendar 1997 and 1996, respectively. The Company also uses
technologically advanced, proprietary, real-time information systems to enhance
the integration of its sales, distribution and accounting functions, with the
goal of lowering operating expenses and further improving customer service and
satisfaction levels. To minimize its inventory exposure, the Company uses a
variety of inventory control procedures and policies, including automated
"just-in-time" management and electronic 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.
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 500% since 1992 to 652 as of December 31, 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 calendar 1996, the Company has increased the number of its account
executives by 278, 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 offset 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 direct 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 domestic and
international acquisition opportunities that would further expand and enhance
its existing product offerings to the business customer and expects to complete
one or more acquisitions in 1998. The Company seeks to acquire new accounts
through its outbound telemarketing force, electronic commerce, targeted direct
marketing, 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 4% of its sales
via the Internet in calendar 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.
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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, electronic commerce,
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 service from
well-trained account executives. Once established, these one-on-one
relationships are maintained and enhanced through frequent telecommunications
and supplemented by customized marketing materials designed to meet each
customer's specific computing needs. At December 31, 1997, the Company employed
652 account executives, an increase of 74% from 374 account executives at
December 31, 1996, most of whom are focused on outbound marketing.
Specialty Marketing. Specialty marketing includes direct mail, other inbound
and outbound telemarketing services, e-mail promotions, package inserts and fax
broadcasts. The Company also communicates with customers through World Wide Web.
The Company has developed, and continuously updates, a Web site,
http://www.insight.com, that features selected product offerings and specials
and other useful information.
To increase national exposure, promote local interest and increase traffic on
its Web site, the Company entered into a multi-year sponsorship of the
"Insight.com Bowl", a post-season intercollegiate football game. Formerly known
as the Copper Bowl, this game is played in Tucson, Arizona in December. The
Company announced its sponsorship on November 6, 1997.
During the Insight.com Bowl, which was telecast live by ESPN on December 27,
1997, the Company debuted its first national television commercial. The
30-second spot was designed to encourage high-technology business buyers to
visit Insight's Web site at Subsequently, the commercial aired to targeted
business audiences in the Phoenix and Kansas City markets.
Catalogs. The Company's catalogs are mailed to the Company's customers and to
potential customers. During calendar 1997 and 1996, the Company published and
distributed 11.0 million and 12.2 million catalogs, respectively. 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 and Net Buyer(R).
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
"Factors That May Affect Future Results and Financial Conditions-Reliance on
Suppliers; Allocation of
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Goods." Additionally, the Insight logo and telephone number are included in
promotions by selected manufacturers. The Company believes that supplier
reimbursements leverage the Company's marketing reach and builds relationship
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 calendar 1997 to end-users in the Company's four major market segments
were as follows: business - 76%, education institutions - 8%, government
organizations - 5%, and home - 11%. The percentage of sales to business
customers has increased from 67% in calendar 1996. No single customer accounted
for more than 1.1% of net sales during calendar 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.
Each account executive is responsible for building a customer base. Most
first time callers are assigned to an account executive. All subsequent incoming
calls from that customer are then directed to their account executive. The
Company's information system allows on-line retrieval of relevant customer
information, including the customer's history and product information, including
list price, cost and availability, as well as upselling and cross-selling
opportunities. 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 outbound call volume and favorable repeat
orders in part to the strength of its account executives. During calender 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 23.9% from
$723 in calendar 1996 to $896 in calendar 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.
The Company started operations in Canada during September 1997. The Canadian
operation is located in Montreal, Quebec and is the Company's first operation
outside of the United States. At December 31, 1997 there were 20 account
executives in Canada. The Company's operating model in Canada is the same as the
United States.
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 11% and 13% of the Company's net sales during each
of calendar 1997 and calendar 1996, respectively. 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.
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PRODUCTS AND MERCHANDISING
The Company offers computers, hardware, and software products. The following
chart provides information regarding selected products offered by the Company
during calendar 1997 and 1996:
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Percentage of
Product Sales
Product Categories 1997 1996 Selected Product Manufacturers
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Computers: Compaq IBM
Hewlett-Packard Toshiba
Notebooks............................... 29% 27%
Desktops................................ 13% 9%
Hard disk drives........................... 13% 20% Iomega Seagate
Quantum Western Digital
Memory/Processors.......................... 7% 8% Intel PNY
Kingston
Monitors/Video............................. 7% 7% Mag Innovision Princeton Graphic
Systems
NEC ViewSonic
Network/Connectivity....................... 7% 7% Hewlett-Packard 3Com
Megahertz U.S. Robotics
Printers................................... 6% 5% Canon Hewlett-Packard
Epson Okidata
Software................................... 8% 6% Corel Microsoft
Lotus Symantec
Miscellaneous.............................. 10% 11% American Power Adaptec
Conversion Creative Labs
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Computers are the fastest growing product category of the Company
representing 42% of product sales in calendar 1997, up from 36% of product sales
in calendar 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
capacities and speed continue to increase, the average order size continues to
decrease, which caused the decrease in percent of product sales of hard disk
drives from 20% in calendar 1996 to 13% in calendar 1997. During 1997, the
Company's sales of refurbished products represented 4% of product 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
50,000 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.
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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, but are in working condition, are sold at a discount through a
separate local retail outlet and through a separate section of the Company's Web
site, which helps to minimize losses to the Company from returned products.
TECHNOLOGY BASED OPERATIONS
The Company believes its implementation of advanced technological systems
provides competitive advantages by increasing the productivity of its account
executives, delivering more efficient customer service and reducing order
processing and inventory costs. The Company's account executives can access the
information system to obtain (i) a customer history, (ii) the cost and
availability of the current order, (iii) the compatibility of products ordered,
and (iv) cross-selling and up-selling opportunities based upon products ordered.
The Company believes that the information available to the Company's account
executives empowers them to make better decisions, provide superior customer
service and increase overall profitability. 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Factors That May
Affect Future Results and Financial Conditions" for a discussion of the risks to
the Company associated with the year 2000 problem. The Company believes that its
investment in information technology will continue to improve its efficiency.
The Company has integrated its sales, accounting, inventory and distribution
systems. Utilizing the Company's proprietary information system, orders are 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 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 calendar 1997, the Company purchased
products from approximately 400 suppliers. Approximately 44% (based on dollar
volume) of these purchases were directly from manufacturers, with the balance
from distributors. Purchases from Ingram Micro D, Inc., a distributor and the
Company's largest supplier, accounted for approximately 19% of the Company's
product purchases in calendar 1997. The top five suppliers as a group (Ingram
Micro D., Merisel, Inc. (a distributor), Toshiba America Information Systems,
Inc., International Business Machines and Seagate Technology, Inc.) accounted
for approximately 59% of the Company's product purchases during calendar 1997.
7
<PAGE> 10
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 have inventory turns
of 19 and 17 times for calendar 1997 and 1996, respectively.
The industry in which the Company operates is characterized by rapid
technological change and the frequent introduction of new products and product
enhancement, and, while the Company attempts to anticipate and react to new
product introductions and to mitigate its exposure to losses from inventory
obsolescence, there can be no assurance that such efforts will be successful or
that unexpected new product introductions will not have a material adverse
effect on the demand for the Company's inventory.
Distribution Center. Activities performed in the Company's approximately
136,000-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 separate 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. A small portion of the Canadian facility is dedicated to
distribution. In calendar 1998, the Company will be adding a distribution center
in Indianapolis, Indiana. The facility is approximately 108,000 square feet and
will have the same capacities as the Arizona facilities. The Company chose the
location because of its proximity to commercial distribution hubs in the area,
interstates and the Indianapolis International Airport.
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 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 calendar years 1997 and 1996, the Company also provided
outsourcing services to Air Taser, a manufacturer of nonlethal 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.
Calendar 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 calendar 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.
8
<PAGE> 11
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 11% of the Company's net sales during calendar
1997. Various states have sought to impose on direct marketers the burden of
collecting state sales or use taxes on the sales of products shipped to that
state's residents. The United States Supreme Court affirmed its position that
under the Commerce Clause of the United States Constitution, a state cannot
constitutionally impose sales or use tax collection obligations on an
out-of-state mail order company whose only contacts with the state are the
distribution of catalogs and other advertising materials through the mail and
the subsequent delivery of purchased goods by United States mail or by
interstate common carrier. If the Supreme Court changes its position or if
legislation is passed to overturn the United States Supreme Court's decision,
the imposition of a sales or use tax collection obligation on the Company in
states to which it ships products would result in additional administrative
expenses to the Company, could result in price increases to the customer or
otherwise have a material adverse effect on the Company. From time to time,
legislation to overturn this decision of the Supreme Court has been introduced,
although to date, no such legislation has been passed.
PATENTS, TRADEMARKS AND LICENSES
The Company does not maintain a traditional research and development group,
but works closely with computer product manufacturers and other technology
developers to stay abreast of the latest developments in computer technology.
Where necessary, the Company has obtained licenses for certain technology. The
Company conducts its business under the trademark and service mark "Insight" and
its related logo. The Company intends to use and protect these and its other
marks, as it deems necessary. The Company believes its trademarks and service
marks have significant value and are an important factor in the marketing of its
products.
PERSONNEL AND TRAINING
As of December 31, 1997, the Company employed 1,114 persons, 348 were in
management support services and administration; 652 were account executives; 15
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.
Insight has invested in its employees' future and the Company's future,
through Insight University, an ongoing program of internal and external
training. The training programs include: a sales training program, a new hire
training program, general industry and computer education and employee and
management development. Insight's Sales Training Program is dedicated to
ensuring quality sales and customer services. Classes offered target sales
management, account executives and sales support by providing new skills through
the entire sales process. The Company's sales training program encompasses a
two-week extensive product, system, and procedural training program. Insight has
contracted with Learning International, Inc., a training company, to assist in
focusing training in the areas of account penetration and development.
Management Development training is a focus for Insight and provides each manager
with individual development plans through classes relevant to his/her needs.
9
<PAGE> 12
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 first quarter of
calendar 1996, and consolidated its sales and administrative functions into a
103,000 square foot facility on this land during 1997 to better support the
Company expanding operations. The Company also leases approximately 217,000
square feet in 7 facilities in Tempe, Arizona which houses its distribution,
warehouse and outsourcing activities. The Company also leases another 14,000
square feet in a facility in Quebec, Canada which houses its sales,
administration, distribution and warehousing activities for its Canadian
subsidiary. The leases for approximately 12% of such space expire in 1998, 62%
expire in 1999, 20% expire in 2001 and the remaining 6% expire in 2003. In 1998,
the Company leased a distribution center of approximately 108,000 square feet in
Indianapolis, Indiana. The Company may require more space in the future. The
amount and timing of future space needs will depend upon the extent of the
Company's growth. The Company believes that suitable facilities will be
available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "NSIT." The bid price information included herein is derived from the
Nasdaq Monthly Statistical Report, represents quotations by dealers, may not
reflect applicable markups, markdowns or commissions, and does not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
HIGH BID LOW BID
-------- -------
<S> <C> <C>
Calendar Year 1996
First Quarter......................................... $10 1/3 $ 7 3/4
Second Quarter........................................ 18 9 9/16
Third Quarter......................................... 25 12 13/16
Fourth Quarter......................................... 26 1/2 18 1/3
Calendar Year 1997
First Quarter......................................... 24 1/3 16 1/2
Second Quarter........................................ 20 1/3 15 1/2
Third Quarter......................................... 37 5/8 19 13/16
Fourth Quarter........................................ 45 1/4 30 7/8
</TABLE>
As of February 27, 1998, there were 10,508,352 shares outstanding of the
Common Stock of the Company held by approximately 80 stockholders of record. The
Company estimates that there are approximately 2,400 beneficial holders of the
Company's Common Stock.
10
<PAGE> 13
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.
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. During January
1998, the Board of Directors approved the change of the Company's year end to
December 31 and the Company now presents its results of operations, cash flow
and financial position for all periods on a calendar year basis. Previously,
such information was presented on a June 30 fiscal year basis. The selected
consolidated financial data presented below under the captions "Consolidated
Statements of Earnings Data" and " Consolidated Balance Sheet Data" as of and
for each of the years in the three-year period ended December 31, 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 December 31, 1997 and 1996, and for each of the years in the three-year
period ended December 31, 1997 and the independent auditors' report thereon, are
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(unaudited) (unaudited)
(in thousands, except per share data and share amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Net sales ................................... $ 627,735 $ 410,919 $ 272,051 $ 216,699 $ 141,213
Cost of goods sold .......................... 548,612 354,501 232,063 183,366 117,202
----------- ----------- ---------- ---------- ----------
Gross profit ................................ 79,123 56,418 39,988 33,333 24,011
Selling, general and administrative expenses 56,895 44,237 32,771 29,248 22,006
----------- ----------- ---------- ---------- ----------
Earnings from operations .................... 22,228 12,181 7,217 4,085 2,005
Non-operating income (expense), net ......... (73) 328 (397) (638) (345)
----------- ----------- ---------- ---------- ----------
Earnings before income taxes ................ 22,155 12,509 6,820 3,447 1,660
Income tax expense .......................... 8,937 4,951 2,701 1,181 476
----------- ----------- ---------- ---------- ----------
Net earnings ................................ $ 13,218 $ 7,558 $ 4,119 $ 2,266 $ 1,184
=========== =========== ========== ========== ==========
Earnings per share(1)(2)
Basic ................................. $ 1.30 $ 0.90 $ 0.63 $ 0.59
=========== =========== ========== ==========
Diluted ................................. $ 1.23 $ 0.85 $ 0.59 $ 0.54
=========== =========== ========== ==========
Shares used in per share calculations(1)(2)
Basic ................................... 10,197,642 8,367,315 6,520,135 4,186,047
=========== =========== ========== ==========
Diluted ................................. 10,708,773 8,901,477 6,940,495 4,637,252
=========== =========== ========== ==========
SELECTED OPERATING DATA:
"Insight" catalogs distributed .............. 10,953,000 12,231,000 9,310,000 4,826,000 1,679,000
Account executives (end of period) .......... 652 374 236 194 129
Inventory turnover(3) ....................... 19x 17x 13x 18x 13x
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................. $114,663 $ 70,362 $31,179 $ 3,202 $ 2,095
Total assets..................................... 168,515 114,465 69,548 38,192 27,809
Short-term debt.................................. - - - 12,846 3,560
Long-term debt, excluding current portion........ 32,750 - - 971 324
Stockholders' equity............................. 102,380 83,941 37,546 4,901 3,582
</TABLE>
- ----------
(1) Net earnings per share and shares used in per share calculation for the
year ended December 31, 1994 is pro forma and unaudited and for calendar
1994, reflect the elimination of executive compensation expense in excess
of the amounts due
11
<PAGE> 14
under employment contracts with two officers effective as of October 1,
1994 and reflect the additional income taxes on S corporation earnings
assuming an effective tax rate of 39.6%. Certain subsidiaries of the
Company were S corporations prior to June 30, 1994 and were not subject to
federal and state income taxes. As a result of these adjustments, pro forma
net earnings is $2,487,000 for the year ended December 31, 1994. Shares
used in per share 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.
(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
year by the average of the beginning and ending inventory for the year and
inventory at quarter ends within that year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Item and elsewhere in this report may be
"forward-looking statements" within the meaning of The Private Securities
Litigation Reform Act of 1995. These forward-looking statements may include
projections of matters that may affect revenue or net earnings; projections of
capital expenditures; projections of growth; hiring plans; plans for future
operations; financing needs or plans; plans relating to the Company's products;
and assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified. Future events and actual results could differ materially from
those set forth in, contemplated by, or underlying the forward-looking
information. Some of the important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
made by the Company include, but are not limited to, the following: fluctuations
in operating results, intense competition, management of rapid growth, need for
additional financing, reliance on suppliers, rapid change in product standards,
inventory obsolescence, risk of business interruption, changing methods of
distribution, sales tax uncertainty, future acquisitions, increasing marketing,
postage and shipping cost, reliance on outsourcing arrangements, year 2000
issues, and dependence on key personnel. The section in this Item entitled
"Factors That May Affect Future Results and Financial Condition" discusses these
important factors in greater detail. The Company undertakes no obligations to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, or otherwise.
OVERVIEW
The Company commenced operations in 1988 as a direct marketer of hard disk
drives and other mass storage products. In calendar 1990, the Company began
marketing its own Insight-brand computers and in calendar 1991 and 1992 added
hardware, software and other name brand computers to its product line. Through
calendar 1992, the Company based its marketing practices primarily on
advertising in computer magazines and the use of inbound toll-free
telemarketing. In calendar 1993, the Company shifted its marketing strategy to
the publication of proprietary catalogs and the use of outbound account
executives focused on the business, education and government markets. During
calendar 1995, the Company began to de-emphasize the sale of Insight-brand
computers and discontinued the sale of Insight-brand computers in the fourth
quarter of calendar 1995. Although the cost savings from this decision have
positively impacted earnings from operations, gross margin has been negatively
affected. The Company expects gross margins to continue to decline in 1998
primarily due to industry-wide pricing pressures and to a continued shift in
product mix.
In calendar 1997, Insight continued to increase its focus on the business,
education and government markets, which aggregated approximately 89% of its
business in calendar 1997. During calendar 1995, the Company nearly doubled its
catalog circulation to generate leads and aggressively tested new lists. In
calendar 1997, the Company decreased 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 to 75, per quarter, during 1998.
In order to leverage its infrastructure, the Company, in calendar 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
12
<PAGE> 15
seasonal in nature, as their target customers can have cyclical buying patterns.
Outsourcing represented 7.8% and 8.7% of the Company's net sales in calendar
1997 and calendar 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 calendar periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0%
Costs of goods sold.............................. 87.4 86.3 85.3
----- ----- -----
Gross profit..................................... 12.6 13.7 14.7
Selling, general and administrative
expenses.................................... 9.1 10.7 12.0
----- ----- -----
Earnings from operations......................... 3.5 3.0 2.7
Non-operating income (expense), net.............. (0.0) 0.0 (0.2)
----- ----- -----
Earnings before income taxes..................... 3.5 3.0 2.5
Income tax expense............................... 1.4 1.2 1.0
----- ----- -----
Net earnings..................................... 2.1% 1.8% 1.5%
===== ===== =====
</TABLE>
CALENDAR 1997 COMPARED TO CALENDAR 1996
Net Sales. Net sales increased $216.8 million, or 52.8%, to $627.7 million in
calendar 1997 from $410.9 million in calendar 1996. Sales derived from direct
marketing increased $203.5 million, or 54.3%, to $578.5 million in calendar 1997
from $375.0 million in calendar 1996. This increase resulted primarily from
deeper account penetration, a greater percentage of business customers,
increased emphasis on outbound telemarketing, increased account executive
productivity, more effective sales management, and an increase in the Company's
customer base and average order size. A significant factor in the average order
size increase was an increase in sales of notebook and desktop computers. Sales
derived from outsourcing arrangements increased $13.3 million, or 37.0%, to
$49.2 million in calendar 1997 from $35.9 million in calendar 1996.
Gross Profit. Gross profit increased $22.7 million, or 40.2%, to $79.1
million in calendar 1997 from $56.4 million in calendar 1996. As a percentage of
sales, gross margin decreased from 13.7% in calendar 1996 to 12.6% in calendar
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 calendar 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 $12.7 million, or 28.6%, to $56.9 million in
calendar 1997 from $44.2 million in calendar 1996, but decreased as a percent of
sales to 9.1% in calendar 1997 from 10.7% in calendar 1996. This decline was
attributable to increased economies of scale, and the Company's continued shift
in its marketing strategy, including the reduction in advertising costs as a
percent of sales due to the increase in supplier reimbursements from
manufacturers and a reduction of more expensive advertising in computer
publications. These decreases were partially offset by additional costs
associated with an increase in the number of account executives and losses
experienced in the initial months of new outsourcing contracts.
Non-Operating Income (Expense), Net. Non-operating income (expense), net,
which consists primarily of interest, changed from $328,000 of interest income,
net in calendar 1996 to $73,000 of interest expense, net in calendar 1997.
Interest expense primarily relates to borrowings under the Company's line of
credit which have been necessary to finance the Company's growth. Interest
expense has increased as the net proceeds from Insight's public offerings in
November 1995 and November 1996 have been utilized by operating activities.
Additionally, the interest expense associated with the Company's new sales and
administrative facility was capitalized up to the date of occupancy. Interest
income is generated by the Company through short-term investments, some of which
are investment grade tax advantaged bonds.
13
<PAGE> 16
Income Tax Expense. The Company's effective tax rate was 40.3% and 39.6% for
the calendar years 1997 and 1996, respectively. The increase in the effective
tax rate reflects an increase in the Company's marginal tax rate, which was
partially offset by investments made in tax advantaged bonds.
CALENDAR 1996 COMPARED TO CALENDAR 1995
Net Sales. Net sales increased $138.8 million, or 51.0%, to $410.9 million in
calendar 1996 from $272.1 million in calendar 1995. Sales derived from direct
marketing increased $130.8 million, or 53.6%, to $375.0 million in calendar 1996
from $244.2 million in calendar 1995. This increase resulted primarily from an
increase in the number of account executives from 236 to 374, increased emphasis
on outbound telemarketing, a more than 30% increase in "Insight" catalog
circulation 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 $8.0 million, or 28.7%, to $35.9 million in calendar 1996 from $27.9
million in calendar 1995. The increase in outsourcing sales resulted from
increased sales from existing outsourcing arrangements and the addition of new
outsourcing contracts with manufacturers, offset in part by a de-emphasis of
sales to third-party marketers.
Gross Profit. Gross profit increased $16.4 million, or 41.0%, to $56.4
million in calendar 1996 from $40.0 million in calendar 1995. As a percentage of
sales, gross margin decreased from 14.7% in calendar 1995 to 13.7% in calendar
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 12% of sales in calendar
1995 but less than 0.1% of sales in calendar 1996. Additionally, the Company
experienced significant growth in the notebook category which carries a lower
gross margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $11.4 million, or 35.0%, to $44.2 million in
calendar 1996 from $32.8 million in calendar 1995, but decreased as a percent of
sales to 10.7% in calendar 1996 from 12.0% in calendar 1995. 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 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 second quarter of calendar 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 $366,000 in calendar 1995. No advertising costs were
deferred or included in other assets as of December 31, 1996.
Non-Operating Income (Expense), net. Non-operating income (expense), net,
which consists primarily of interest, changed from $397,000 of interest expense
in calendar 1995 to $328,000 of interest income in calendar 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 secondary public offerings in January
1995 and November 1995 and a more favorable interest rate available to the
Company under its credit facility entered in June 1995. Additionally, the
interest expense associated with the Company's new facility has been
capitalized. 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 39.6% in each of
calendar 1996 and 1995.
14
<PAGE> 17
SEASONALITY AND QUARTERLY RESULTS
The Company has historically experienced seasonal fluctuations in its growth
of net sales, earnings from operations and net earnings. As the Company has
increased its percentage of sales from 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 a percentage of net sales
could be affected by the mix of outsourcing arrangements which are in place from
time to time. Additionally, some of the outsourcing programs can be seasonal in
nature, as their target customers can have cyclical buying patterns. The
following table sets forth certain quarterly information for the Company's two
most recent calendar years:
<TABLE>
<CAPTION>
QUARTERS ENDED
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR 31,
1997 1997 1997 1997 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............... $186,329 $171,326 $139,255 $130,825 $112,931 $102,383 $100,950 $ 94,655
Costs of goods sold ..... 162,944 150,280 121,285 114,103 97,909 88,434 86,934 81,224
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ............ 23,385 21,046 17,970 16,722 15,022 13,949 14,016 13,431
Selling, general and
administrative
expenses ............... 16,392 15,090 13,073 12,340 11,482 10,919 11,078 10,758
-------- -------- -------- -------- -------- -------- -------- --------
Earnings from operations. 6,993 5,956 4,897 4,382 3,540 3,030 2,938 2,673
Non-operating income
(expense), net .......... (288) (40) 133 122 285 45 22 (24)
-------- -------- -------- -------- -------- -------- -------- --------
Earnings before income
taxes.................. 6,705 5,916 5,030 4,504 3,825 3,075 2,960 2,649
Income tax expense ...... 2,710 2,390 2,079 1,758 1,514 1,217 1,170 1,050
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings ............ $ 3,995 $ 3,526 $ 2,951 $ 2,746 $ 2,311 $ 1,858 $ 1,790 $ 1,599
======== ======== ======== ======== ======== ======== ======== ========
Net Earnings per share:
Basic .............. $ 0.39 $ 0.35 $ 0.29 $ 0.27 $ 0.25 $ 0.23 $ 0.22 $ 0.20
======== ======== ======== ======== ======== ======== ======== ========
Diluted ............ $ 0.37 $ 0.33 $ 0.28 $ 0.26 $ 0.23 $ 0.21 $ 0.21 $ 0.19
======== ======== ======== ======== ======== ======== ======== ========
</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 the remainder for general corporate
purposes, including working capital, capital expenditures and facilities
expansion.
The Company's primary capital needs have been to fund the working capital
requirements and capital expenditures necessitated by its sales growth. Capital
expenditures for calendar 1997 and 1996 were $9.4 million each year, primarily
for the construction of a sales and administration building on a 17 acre site in
Tempe, Arizona in 1996 and the continued upgrade of the Company's equipment,
systems and facilities in 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 $39.9 million for calendar 1997 as compared to $12.5 million used
in operating activities for calendar 1996. The negative cash flow in calendar
1997 is primarily due to a $43.2 million increase in accounts receivable and a
$19.8 million increase in inventories. These increases were primarily funded
with net borrowings under the line of credit of $32.8 million and operating
earnings.
The Company has a $70 million credit facility with a finance company. As of
December 31, 1997, the Company had a $32.8 million outstanding balance and $25.6
million was available under the line of credit. 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
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.
15
<PAGE> 18
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 calendar
1998. The Company's ability to continue funding its planned growth beyond
calendar 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 calendar years.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("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 is effective for the Company for
the calendar year ended December 31, 1997; earlier application was not
permitted. This new accounting standard requires presentation of basic earnings
per share and diluted earnings per share, as defined in the statement.
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
is effective for the Company for the calendar year ended December 31, 1997.
ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY
The FASB has issued several new pronouncements that are not yet adopted by
the Company.
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
quarter ending March 31, 1998, 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 calendar year
ending December 31, 1998, 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 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 calendar 1998 primarily due to
industry-wide pricing pressures and a continued shift in product mix. In
addition, the Company's expense levels are based, in part, on anticipated
16
<PAGE> 19
revenues. Therefore, the Company may not be able to control spending in a timely
manner to compensate for any unexpected revenue shortfall. As a result,
quarterly period-to-period comparisons of the Company's financial results are
not necessarily meaningful and should not be relied upon as an indication of
future performance.
Highly Competitive Industry. The computer and related products industry is
highly competitive. Competition is based primarily on product availability,
price, speed of delivery, credit availability, ability to tailor specific
solutions to customer needs, quality and breadth of product lines. The Company
expects competition to increase as retailers and direct marketers who have not
traditionally sold computers and related products enter the industry and if the
industry's rate of growth in the United States slows. The Company competes with
a large number and wide variety of marketers and resellers of computers and
related products, including traditional computer and related products retailers,
computer superstores, 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
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 calendar 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.
17
<PAGE> 20
Reliance on Suppliers; Allocation of Goods. The Company acquires products
for resale both directly from manufacturers and indirectly through distributors.
Purchases from Ingram Micro D, Inc., a distributor of computers and related
products, accounted for approximately 19% of the Company's aggregate purchases
for calendar 1997. No other supplier accounted for more than 16% of purchases in
calendar 1997. However, the top five suppliers as a group accounted for
approximately 59% of the Company's product purchases during calendar 1997
period. The loss of Ingram Micro D, Inc. 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, 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 11% of the
Company's net sales during calendar 1997. Various states have sought to impose
on direct marketers the burden of collecting state sales or use taxes on the
sales of products shipped to that state's residents. The United States Supreme
Court affirmed its position that under the Commerce Clause of the United States
Constitution, a state cannot constitutionally impose sales or use tax collection
obligations on an out-of-state mail order company whose only contacts with the
state are the distribution of catalogs and other advertising materials through
the mail and the subsequent delivery of purchased goods by United States mail or
by interstate common carrier. If the Supreme Court changes its position or if
legislation is passed to overturn the Supreme Court's decision, the imposition
of a sales or use tax collection obligation on the Company in states to which it
ships products would result in additional administrative expenses to the
Company, could result in price increases to the customer or could otherwise have
a material adverse effect on the Company's business, results of operations and
financial condition. From time to time, legislation to overturn this decision of
the Supreme Court has been introduced, although to date, no such legislation has
been passed.
18
<PAGE> 21
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.
Risks Associated with Year 2000 Problem. Several currently installed computer
systems and software products, including several used by the Company, are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. Therefore, the Company's
date critical functions related to the year 2000 and beyond, such as sales,
distribution, purchasing, inventory control, marketing, product management, and
financial systems may be adversely affected unless these computer systems are or
become year 2000 compliant. The Company is in the process of preparing its
computer-based systems for the year 2000 and plans on utilizing both internal
and external resources to identify, correct, replace, or reprogram, and test its
systems for year 2000 compliance in advance of the year 2000. In addition, in
order to accommodate its rapid growth, the Company is evaluating a possible
replacement of its existing software over the next two years with software that
would be year 2000 compliant. The Company continues to evaluate the estimated
costs associated with these efforts based on actual experience and does not
expect the future costs of resolving its internal year 2000 problems to be
material. However, no assurance can be given that the Company's computer systems
will be year 2000 compliant in a timely manner or that the Company will not
incur significant additional expenses pursuing year 2000 compliance.
Furthermore, even if the Company's systems are year 2000 compliant, there can be
no assurance that the Company will not be adversely affected by the failure of
others to become year 2000 compliant or by the failure of the Company's
suppliers to provide year 2000 compliant products for resale by the Company. For
example, the Company may be adversely affected by, among other things, warranty
and other claims made by the Company's customers related to product failures
caused by the year 2000 problem, the disruption or inaccuracy of data provided
to the Company by non-year 2000 compliant third parties, and the failure of the
Company's service providers, such as credit card processors and independent
shipping companies to become year 2000 compliant. Despite the Company's efforts
to date, there can be no assurance that the year 2000 problem will not have a
material adverse affect on the Company in the future.
19
<PAGE> 22
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 24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial
disclosure matters during the periods reported herein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the captions "Information Concerning
Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
its Annual Meeting of Stockholders to be held May 7, 1998 (the "Proxy
Statement") is incorporated herein by reference. The Company anticipates filing
the Proxy Statement within 120 days after December 31, 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.
20
<PAGE> 23
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 24.
2. Exhibits.
(a) Exhibits (unless otherwise noted, exhibits are filed herewith)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <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 (6) -- 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)(2) -- Form of Indemnification Agreement
10.2 (1)(3) -- 1994 Stock Option Plan of the Registrant
10.3 (1)(3) -- Predecessor Stock Option Plan
10.4 (3)(4) -- 1995 Employee Stock Purchase Plan of the Registrant
10.5 (3)(5) -- Amendment to 1994 Stock Option Plan of the Registrant
10.6 (3)(7) -- 1998 Long-Term Incentive Plan
11 -- Computation of Net Earnings per Common Share
21 -- Subsidiaries of the Registrant
23 -- Consent of KPMG Peat Marwick LLP
27.1 -- Financial Data Schedule as of and for the year ended December 31, 1997
27.2 -- Financial Data Schedule as of and for the year ended December 31, 1996
27.3 -- Financial Data Schedule as of and for the year ended December 31, 1995
</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) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997.
(7) Incorporated by reference to the Company's Notice of 1997 Annual
Meeting of Stockholders.
(b) No current Reports on Form 8-K were filed by the Company
during the fourth quarter of the calendar year ended December
31, 1997.
A Form 8-K was filed by the Company on January 30, 1998
reporting the change of the Company's fiscal year end from
June 30 to December 31.
21
<PAGE> 24
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 March 26, 1998
- ----------------------------------------------- Directors and Chief Executive Officer
Eric J. Crown (Principal Executive Officer)
/s/ Timothy A. Crown Director and President March 26, 1998
- -----------------------------------------------
Timothy A. Crown
/s/ Stanley Laybourne Chief Financial Officer, March 26, 1998
- ----------------------------------------------- Secretary, Treasurer and
Stanley Laybourne Director (Principal Financial and
Accounting Officer)
/s/ Larry A. Gunning Director March 26, 1998
- -----------------------------------------------
Larry A. Gunning
/s/ Robertson C. Jones Director March 26, 1998
- -----------------------------------------------
Robertson C. Jones
</TABLE>
22
<PAGE> 25
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................................ 24
Consolidated Balance Sheets - December 31, 1997 and 1996............................... 25
Consolidated Statements of Earnings - For each of the years in the
three-year period ended December 31, 1997............................................. 26
Consolidated Statements of Stockholders' Equity - For each of the years
in the three-year period ended December 31, 1997...................................... 26
Consolidated Statements of Cash Flows - For each of the years in the
three-year period ended December 31, 1997............................................. 27
Notes to Consolidated Financial Statements.............................................. 28
</TABLE>
23
<PAGE> 26
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 December 31, 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 December 31, 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 December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
January 29, 1998
24
<PAGE> 27
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................................... $ 6,982 $ 21,166
Accounts receivable, net of allowances for doubtful accounts of $3,274 and $3,214,
respectively....................................................................... 86,771 47,772
Inventories ....................................................................... 46,100 27,530
Prepaid expenses and other current assets ......................................... 8,195 4,418
-------- --------
Total current assets ........................................................ 148,048 100,886
Property and equipment, net ............................................................... 20,432 13,466
Other assets .............................................................................. 35 113
-------- --------
$168,515 $114,465
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 29,081 $ 27,938
Accrued expenses and other current liabilities .................................... 4,304 2,586
-------- --------
Total current liabilities ................................................... 33,385 30,524
Line of credit ............................................................................ 32,750 --
Commitments
Stockholders' equity:
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; 10,367,742 in 1997 and 10,089,873 in 1996 shares issued and
outstanding...................................................................... 104 101
Additional paid-in capital ........................................................ 72,616 67,366
Retained earnings ................................................................. 29,660 16,474
-------- --------
Total stockholders' equity .................................................... 102,380 83,941
-------- --------
$168,515 $114,465
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- -------
<S> <C> <C> <C>
Net sales.................................................................. $ 627,735 $ 410,919 $ 272,051
Costs of goods sold........................................................ 548,612 354,501 232,063
----------- ----------- -----------
Gross profit...................................................... 79,123 56,418 39,988
Selling, general and administrative expenses............................... 56,895 44,237 32,771
----------- ----------- -----------
Earnings from operations.......................................... 22,228 12,181 7,217
Non-operating income (expense), net........................................ (73) 328 (397)
----------- ----------- -----------
Earnings before income taxes...................................... 22,155 12,509 6,820
Income tax expense......................................................... 8,937 4,951 2,701
----------- ----------- -----------
Net earnings...................................................... $ 13,218 $ 7,558 $ 4,119
=========== =========== ===========
Earnings per share:
Basic............................................................. $ 1.30 $ 0.90 $ 0.63
=========== =========== ===========
Diluted........................................................... $ 1.23 $ 0.85 $ 0.59
=========== =========== ===========
Shares used in per share calculation:
Basic............................................................. 10,197,642 8,367,315 6,520,135
=========== =========== ===========
Diluted........................................................... 10,708,773 8,901,477 6,940,495
=========== =========== ===========
</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 December 31, 1994.......................... $ 30 $ 74 $ 4,797 $ 4,901
Issuance of common stock........................... 51 28,475 - 28,526
Net earnings....................................... - - 4,119 4,119
------ -------- ---------- -------
Balances at December 31, 1995.......................... 81 28,549 8,916 37,546
Issuance of common stock........................... 20 38,120 - 38,140
Tax benefit recognized on stock options exercised.. - 697 - 697
Net earnings....................................... - - 7,558 7,558
------ -------- ---------- -------
Balances at December 31,1996........................... 101 67,366 16,474 83,941
Issuance of common stock........................... 3 2,418 - 2,421
Tax benefit recognized on stock options exercised.. - 2,832 - 2,832
Foreign currency translation adjustment............ - - (32) (32)
Net earnings....................................... - - 13,218 13,218
------ -------- ---------- -------
Balances at December 31, 1997.......................... $ 104 $ 72,616 $ 29,660 $102,380
====== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings .................................................................. $ 13,218 $ 7,558 $ 4,119
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation ................................................................ 2,461 1,204 916
Tax benefit from stock options exercised .................................... 2,832 697 --
Provision for losses on accounts receivable ................................. 4,164 1,801 878
Provision for obsolete and slow moving inventories .......................... 1,261 914 341
Deferred income taxes ....................................................... 291 (881) 331
Change in assets and liabilities:
Increase in accounts receivable ........................................... (43,163) (18,735) (14,493)
Increase in inventories ................................................... (19,831) (2,854) (13,756)
Decrease (increase) in prepaid expenses and other current assets .......... (4,068) (1,752) (341)
Decrease (increase) in other assets ....................................... 78 999 (955)
Increase (decrease) in accounts payable .................................. 1,143 (2,278) 13,065
Increase (decrease) in accrued expenses and other current liabilities ..... 1,718 800 (513)
-------- -------- --------
Net cash used in operating activities ................................... (39,896) (12,527) (10,408)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ........................................... (9,427) (9,415) (3,658)
-------- -------- --------
Net cash used in investing activities ................................... (9,427) (9,415) (3,658)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit ................................ 32,750 -- (12,846)
Repayment of capital lease obligations ........................................ -- -- (139)
Repayment of notes payable to stockholders .................................... -- -- (856)
Issuance of common stock ...................................................... 2,421 38,140 28,526
-------- -------- --------
Net cash provided by financing activities ............................... 35,171 38,140 14,685
-------- -------- --------
Effect of exchange rate on cash and cash equivalents .............................. (32) -- --
-------- -------- --------
Increase (decrease) in cash and cash equivalents .................................. (14,184) 16,198 619
Cash and cash equivalents at beginning of year .................................... 21,166 4,968 4,349
-------- -------- --------
Cash and cash equivalents at end of year .......................................... $ 6,982 $ 21,166 $ 4,968
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ........................................ $ 261 $ 111 $ 461
======== ======== ========
Cash paid during the year for income taxes .................................... $ 10,504 $ 5,205 $ 2,688
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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.
In August 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 stockholders of record at the close of business on August 27, 1997. All share
amounts, share prices and earnings per share have been retroactively adjusted to
reflect this 3-for-2 stock split.
In January 1998, Insight changed its year end to December 31 from June 30.
Financial results for prior periods are now presented on a calendar year basis
for all years presented.
Cash Equivalents
INSIGHT considers all highly liquid investments with original maturities at
the date of purchase of three months or less to be cash equivalents.
Inventories
Inventories, principally purchased computers, hardware and software, are
stated at the lower of weighted average cost 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 29 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 Costs
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 advertising.
28
<PAGE> 31
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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.
Foreign Currency Translation
The financial statements of the Company's Canadian subsidiary are
translated into US dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Assets and liabilities of the subsidiary are translated into US
dollars at current exchange rates. Income and expense items are translated at
the average exchange rate for the year. The resulting translation adjustments
are recorded directly as a separate component of stockholders' equity. All
transaction gains or losses are recorded in the statement of earnings.
Earnings Per Share
Basic earnings per share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
during each year. Diluted earnings per share includes the impact of stock
options assumed to be exercised using the treasury stock method. The denominator
for diluted earnings per share is greater than the denominator used in basic
earnings per share by 511,131 shares in 1997, 534,162 shares in 1996 and 420,360
shares in 1995. The numerator is the same for both basic and diluted earnings
per share.
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.
29
<PAGE> 32
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(2) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Building ................................ $ 9,875 $ --
Land .................................... 2,160 2,160
Equipment ............................... 5,998 2,956
Furniture and fixtures .................. 6,544 2,594
Leasehold improvements .................. 1,145 1,328
Software ................................ 952 331
Construction in progress ................ -- 7,891
-------- --------
26,674 17,260
Accumulated depreciation and amortization (6,242) (3,794)
-------- --------
Property and equipment, net ............. $ 20,432 $ 13,466
======== ========
</TABLE>
(3) Line of Credit
INSIGHT has a $70,000,000 credit facility with a finance company. The
agreement provides for cash advances outstanding at any one time up to a maximum
of $70,000,000 on the line of credit, subject to limitations based upon the
Company's eligible accounts receivable and inventories. As of December 31, 1997,
$25,552,000 was available under the line of credit. Cash advances bear interest
at the London Interbank Offered Rate (LIBOR) plus 1.40% (7.12% at December 31,
1997) payable monthly. The credit facility can be used to facilitate the
purchases of inventories from certain suppliers and that portion is classified
on the balance sheet as accounts payable. As of December 31, 1997 and 1996, the
balance of this portion of the credit facility was $6,950,000 and $4,730,000
respectively.
The credit facility expires in August 2000 at which time the outstanding
balance is due. The line is secured by substantially all of the assets of the
Company. The line of credit contains various covenants including the
requirements that the Company maintain specific dollar amount of tangible net
worth and restrictions on payment of cash dividends.
(4) 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 $1,209,000, $721,000 and $521,000, for the
years ended December 31, 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 December 31, 1997
are as follows:
<TABLE>
<CAPTION>
Years ending December 31,: (in thousands)
-------------------------- --------------
<S> <C> <C>
1998 $ 1,168
1999 742
2000 568
2001 423
2002 113
Thereafter 47
--------
$ 3,061
========
</TABLE>
30
<PAGE> 33
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(5) Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
---------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................................ $ 6,842 $ 4,647 $ 2,059
State.................................................................. 1,759 1,224 542
---------- --------- ---------
8,601 5,871 2,601
---------- --------- ---------
Deferred:
Federal................................................................ 261 (710) 77
State.................................................................. 75 (210) 23
---------- --------- ---------
336 (920) 100
---------- --------- ---------
$ 8,937 $ 4,951 $ 2,701
========== ========= =========
</TABLE>
Income tax expense amounted to $8,937,000, $4,951,000 and $2,701,000 for
the years ended December 31, 1997, 1996 and 1995, respectively (an effective
rate of 40.3%, 39.6% and 39.6% for the years ended December 31, 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 DECEMBER 31,
1997 1996 1995
---------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense............................................ $ 7,533 $ 4,253 $ 2,319
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit.................. 1,210 669 373
Other, net............................................................. 194 29 9
---------- --------- ---------
$ 8,937 $ 4,951 $ 2,701
========== ========= =========
</TABLE>
Sources of deferred income taxes and their tax effects are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred revenue........................................................... $ 30 $ (228) $ 337
Prepaid expenses........................................................... 42 154 67
Allowances for doubtful accounts and returns............................... 1,082 (472) (115)
Inventory allowances....................................................... (12) (259) (75)
Miscellaneous accruals..................................................... (657) 51 21
Accrued vacation and other payroll liabilities............................. (140) (166) (111)
Other, net................................................................. (9) 0 (24)
---------- --------- ---------
$ 336 $ (920) $ 100
========== ========= =========
</TABLE>
31
<PAGE> 34
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred revenue............................................................. $ (14) $ 15
Allowance for doubtful accounts and returns.................................. 266 1,316
Accrued warranty costs....................................................... - -
Inventory allowances......................................................... 473 451
Miscellaneous accruals....................................................... 687 29
Accrued vacation and other payroll liabilities............................... 534 385
Other........................................................................ 9 -
--------- ---------
Total gross deferred tax assets......................................... 1,955 2,196
--------- ---------
Deferred tax liabilities:
Prepaid expenses............................................................. (416) (366)
Other........................................................................ - -
--------- ---------
Total gross deferred tax liabilities.................................... (416) (366)
--------- ---------
Net deferred tax asset.................................................. $ 1,539 $ 1,830
========= =========
</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 December 31, 1997 and 1996. Reversal of
INSIGHT's temporary differences is expected to occur in the near future due to
their short-term nature.
(6) 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.
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.
(7) 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. The Plan allows for INSIGHT
to match up to 25% of the employees' contributions up to a maximum 6% of total
compensation. Contribution expense was $339,000, $165,000, and $100,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
32
<PAGE> 35
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(8) Stock Option Plans
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. As of
December 31, 1997, 9,494 stock options under the 1994 Plan were available for
grant.
In October 1997, the shareholders approved the establishment of the 1998
Long-Term Incentive Plan (the 1998 LTIP) for officers, directors and consultants
or independent contractors. The 1998 LTIP authorizes grants of incentive stock
options, non-qualified stock options, stock appreciation rights, performance
shares, restricted stock and performance-based awards. The total number of
shares of Common Stock initially available for awards under the 1998 LTIP is
525,000. Additionally, for each 12 month period beginning July 1, 1998 and
ending June 30, 2007, an additional 1% to 4%, at the determination of the Board
of Directors, of the outstanding shares of Common Stock shall be reserved for
issuance under the Plan on a cumulative basis with a calculation of such
additional shares to be made on the first day of each quarter of the applicable
calendar year; provided, each such calculation of additional shares shall be
limited to an amount of additional shares such that the number of shares of
Common Stock remaining for grant under the Plan and any of the Company's other
option plans, plus the number of shares of Common Stock granted but not yet
exercised under the Plan and any of the Company's other option plans shall not
exceed 20% of the outstanding shares of Common Stock of the Company at the time
of calculation of the additional shares.
The 1998 LTIP will be administered by the Compensation Committee of the
Board of Directors. Except as provided below, the Compensation Committee has the
exclusive authority to administer the 1998 LTIP, including the power to
determine eligibility, the types of awards to be granted, the price and the
timing of awards. The 1998 LTIP does, however, provide that the Company's CEO
has the authority to grant awards to any individual (other than the three
highest-ranking executives of the Company) and provided further that any grant
to an individual who is subject to Section 16 of the Securities Exchange Act of
1934 may not be exercisable for at least six months from the date of grant. As
of December 31, 1997, 257,725 shares of common stock available for awards under
the 1998 LTIP were available to grant.
Generally, options granted expire in ten years, are exercisable during the
optionee's lifetime only by the recipient and are non-transferable. Unexercised
options generally terminate shortly following 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 only the disclosure provisions of SFAS No. 123.
33
<PAGE> 36
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net earnings As Reported $ 13,218 $ 7,558 $ 4,119
========= ======== =======
Pro forma $ 12,154 $ 6,966 $ 3,900
========= ======== =======
Diluted earnings per share As Reported $ 1.23 $ 0.85 $ 0.59
========= ========= =======
Pro forma $ 1.13 $ 0.78 $ 0.56
========= ========= =======
</TABLE>
Pro forma net earnings reflect only options granted in calendar 1997, 1996
and 1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to January 1995
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 calendar 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 50% 50% 50%
Risk free interest rate 5.6% 6.0% 5.3%
Expected lives 1.9 years 2.4 years 2.5 years
</TABLE>
Activity related to the stock option plans is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at the beginning of year ....... 1,006,114 $ 10.02 523,412 $ 4.27 313,952 $0.48
Granted................................. 792,168 25.99 672,974 13.06 372,375 6.66
Exercised............................... (270,044) 8.16 (155,940) 3.98 (115,289) 0.83
Expired ................................ (222,778) 17.48 (34,332) 9.24 (47,626) 6.29
---------- ----------- ---------
Balance at the end of year............. 1,305,460 18.82 1,006,114 10.02 523,412 4.27
========== ========== =========
Exercisable at the end of year ......... 202,652 5.29 216,006 2.82 279,742 2.14
========== ========== =========
Weighted-average fair value
of options granted during the year ..... $ 6.37 $ 3.91 $ 2.00
========== ========== =========
</TABLE>
34
<PAGE> 37
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
The following table summarizes the status of outstanding stock options as of
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------------
Weighted Weighted
Range of Number of Average Average Weighted
Exercise Options Remaining Exercise Number of Options Average
Prices Outstanding Contractual Life Price Exercisable Exercise Price
------ ----------- ---------------- ----- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.48 - $ 8.67 410,778 7.06 years $6.23 178,800 $3.84
8.83 - 17.67 278,738 8.87 16.36 18,852 14.62
17.83 - 19.83 269,971 7.54 19.71 500 17.83
21.82 - 38.00 341,023 9.31 34.96 4,500 22.33
39.13 - 42.56 4,950 9.88 41.94 - -
--------- -------
0.48 - 42.56 1,305,460 8.14 18.82 202,652 5.29
========= =======
</TABLE>
(9) 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 market value per share of common stock
determined as of the beginning of the quarterly purchase period as specified in
the Purchase Plan.
(10) Non-Operating Income (Expense), net
Non-operating income (expense), net, has fluctuated year to year between
$73,000 and $397,000 of interest expense, net, in calendar 1997 and 1995,
respectively, to $328,000 of interest income, net, in calendar 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 as a result of the use of the net proceeds from the Company's public
offerings. Additionally, interest expense of $164,000 associated with the
Company's new sales and administrative facility was capitalized.
(11) 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 as of December 31, 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.
35
<PAGE> 38
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(12) Supplemental Financial Information
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended December 31, 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 December 31, 1997................ $ 3,214 $ 4,164 $ (4,104) $ 3,274
========= ========= ========= =========
Year ended December 31, 1996................ $ 2,179 $ 1,801 $ (766) $ 3,214
========= ========= ========= =========
Year ended December 31, 1995................ $ 2,119 $ 878 $ (818) $ 2,179
========= ========= ========= =========
Allowances for obsolescence of inventories:
Year ended December 31, 1997................ $ 1,142 $ 1,080 $ (825) $ 1,397
========= ========= ========= =========
Year ended December 31, 1996................ $ 435 $ 914 $ (207) $ 1,142
========= ========= ========= =========
Year ended December 31, 1995................ $ 277 $ 341 $ (183) $ 435
========= ========= ========= =========
</TABLE>
36
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <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 (6) -- 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)(2) -- Form of Indemnification Agreement
10.2 (1)(3) -- 1994 Stock Option Plan of the Registrant
10.3 (1)(3) -- Predecessor Stock Option Plan
10.4 (3)(4) -- 1995 Employee Stock Purchase Plan of the Registrant
10.5 (3)(5) -- Amendment to 1994 Stock Option Plan of the Registrant
10.6 (3)(7) -- 1998 Long-Term Incentive Plan
11 -- Computation of Net Earnings per Common Share
21 -- Subsidiaries of the Registrant
23 -- Consent of KPMG Peat Marwick LLP
27.1 -- Financial Data Schedule as of and for the year ended December 31, 1997
27.2 -- Financial Data Schedule as of and for the year ended December 31, 1996
27.3 -- Financial Data Schedule as of and for the year ended December 31, 1995
</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) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997.
(7) Incorporated by reference to the Company's Notice of 1997 Annual
Meeting of Stockholders.
(b) No current Reports on Form 8-K were filed by the Company
during the fourth quarter of the calendar year ended December
31, 1997.
A Form 8-K was filed by the Company on January 30, 1998
reporting the change of the Company's fiscal year end from
June 30 to December 31.
<PAGE> 1
EXHIBIT 11
INSIGHT ENTERPRISES, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net earnings .......................... $ 13,218 $ 7,558 $ 4,119
=========== =========== ===========
Weighted average shares:
Common shares outstanding ............. 10,197,642 8,367,315 6,520,135
----------- ----------- -----------
Shares used is basic earnings per share 10,197,642 8,367,315 6,520,135
=========== =========== ===========
Basic earnings per share ................. $ 1.30 $ 0.90 $ 0.63
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
DILUTED EARNINGS PER SHARE:
Net earnings .............................................. $ 13,218 $ 7,558 $ 4,119
=========== =========== ===========
Weighted average shares:
Common shares outstanding ................................. 10,197,642 8,367,315 6,520,135
Common equivalent shares issuable upon exercise of employee
stock options and warrants .............................. 511,131 534,162 420,360
----------- ----------- -----------
Shares used in diluted earnings per share ................. 10,708,773 8,901,477 6,940,495
=========== =========== ===========
Diluted earnings per share ................................... $ 1.23 $ 0.85 $ 0.59
=========== =========== ===========
</TABLE>
Earnings per share are restated to include the impact of Financial Accounting
Standards Board Statement No. 128 and the effect of a 3-for-2 stock split in the
form of a stock dividend paid on September 17, 1997. This exhibit also reflects
that the Registrant has changed its fiscal year from June 30 to December 31.
<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
Insight Direct Canada, Inc. Canada
JDC, Inc. Arizona
Insight.com Bowl Arizona
Apex Financial Arizona
</TABLE>
<PAGE> 1
EXHIBIT 23
{Letterhead of KPMG Peat Marwick LLP}
Independent Accountants' Consent
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 January 29, 1998, relating to the consolidated balance
sheets of Insight Enterprises, Inc. and subsidiaries as of December 31, 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 December 31,
1997, which report appears in the December 31, 1997 annual report on Form 10-K
of Insight Enterprises, Inc.
KPMG Peat Marwick LLP
Phoenix, Arizona
March 23, 1998
<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
DECEMBER 31, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE 12
MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-K FOR THE ANNUAL PERIOD DECEMBER 31, 1997.
</LEGEND>
<CIK> 0000932696
<NAME> INSIGHT ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,982
<SECURITIES> 0
<RECEIVABLES> 90,045
<ALLOWANCES> 3,274
<INVENTORY> 46,100
<CURRENT-ASSETS> 148,048
<PP&E> 26,674
<DEPRECIATION> 6,242
<TOTAL-ASSETS> 168,515
<CURRENT-LIABILITIES> 33,385
<BONDS> 32,750
0
0
<COMMON> 104
<OTHER-SE> 102,276
<TOTAL-LIABILITY-AND-EQUITY> 168,515
<SALES> 627,735
<TOTAL-REVENUES> 627,735
<CGS> 548,612
<TOTAL-COSTS> 548,612
<OTHER-EXPENSES> 52,356
<LOSS-PROVISION> 4,164
<INTEREST-EXPENSE> 448
<INCOME-PRETAX> 22,155
<INCOME-TAX> 8,937
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,218
<EPS-PRIMARY> 1.30<F1>
<EPS-DILUTED> 1.23<F1>
<FN>
<F1>EPS-PRIMARY AND EPS-DILUTED ARE RESTATED TO INCLUDE THE IMPACT OF FINANCIAL
ACCOUNTING STANDARDS BOARD STATEMENT NO. 128 AND THE EFFECT OF A 3-FOR-2 STOCK
SPLIT IN THE FORM OF A STOCK DIVIDEND PAID ON SEPTEMBER 17, 1997. THIS
SCHEDULE ALSO REFLECTS THAT THE REGISTRANT HAS CHANGED ITS FISCAL YEAR FROM
JUNE 30 TO DECEMBER 31. THIS SCHEDULE INCLUDES 12 MONTHS OF EARNINGS
INFORMATION.
</FN>
</TABLE>
<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
DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE 12
MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
THE 1997 FORM 10-K WHICH INCLUDES THE ANNUAL PERIOD ENDED DECEMBER 31, 1996.
</LEGEND>
<CIK> 0000932696
<NAME> INSIGHT ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,166
<SECURITIES> 0
<RECEIVABLES> 50,986
<ALLOWANCES> 3,214
<INVENTORY> 27,530
<CURRENT-ASSETS> 100,886
<PP&E> 17,260
<DEPRECIATION> 3,794
<TOTAL-ASSETS> 114,465
<CURRENT-LIABILITIES> 30,524
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 83,840
<TOTAL-LIABILITY-AND-EQUITY> 114,465
<SALES> 410,919
<TOTAL-REVENUES> 410,919
<CGS> 354,501
<TOTAL-COSTS> 354,501
<OTHER-EXPENSES> 42,169
<LOSS-PROVISION> 1,801
<INTEREST-EXPENSE> (61)
<INCOME-PRETAX> 12,509
<INCOME-TAX> 4,951
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,558
<EPS-PRIMARY> 0.90<F1>
<EPS-DILUTED> 0.85<F1>
<FN>
<F1>EPS-PRIMARY AND EPS-DILUTED ARE RESTATED TO INCLUDE THE IMPACT OF FINANCIAL
ACCOUNTING STANDARDS BOARD STATEMENT NO. 128 AND THE EFFECT OF A 3-FOR-2 STOCK
SPLIT IN THE FORM OF A STOCK DIVIDEND PAID ON SEPTEMBER 17, 1997. THIS
SCHEDULE ALSO REFLECTS THAT THE REGISTRANT HAS CHANGED ITS FISCAL YEAR FROM
JUNE 30 TO DECEMBER 31. THIS SCHEDULE INCLUDES 12 MONTHS OF EARNINGS
INFORMATION.
</FN>
</TABLE>
<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
DECEMBER 31, 1995 AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE 12
MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
THE 1997 FORM 10-K WHICH INCLUDES THE ANNUAL PERIOD ENDED DECEMBER 31, 1995.
</LEGEND>
<CIK> 0000932696
<NAME> INSIGHT ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,968
<SECURITIES> 0
<RECEIVABLES> 33,017
<ALLOWANCES> 2,179
<INVENTORY> 25,590
<CURRENT-ASSETS> 63,181
<PP&E> 7,847
<DEPRECIATION> 2,592
<TOTAL-ASSETS> 69,548
<CURRENT-LIABILITIES> 32,002
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 37,465
<TOTAL-LIABILITY-AND-EQUITY> 69,548
<SALES> 272,051
<TOTAL-REVENUES> 272,051
<CGS> 232,063
<TOTAL-COSTS> 232,063
<OTHER-EXPENSES> 31,871
<LOSS-PROVISION> 878
<INTEREST-EXPENSE> 419
<INCOME-PRETAX> 6,820
<INCOME-TAX> 2,701
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,119
<EPS-PRIMARY> 0.63<F1>
<EPS-DILUTED> 0.59<F1>
<FN>
<F1>EPS-PRIMARY AND EPS-DILUTED ARE RESTATED TO INCLUDE THE IMPACT OF FINANCIAL
ACCOUNTING STANDARDS BOARD STATEMENT NO. 128 AND THE EFFECT OF A 3-FOR-2 STOCK
SPLIT IN THE FORM OF A STOCK DIVIDEND PAID ON SEPTEMBER 17, 1997. THIS
SCHEDULE ALSO REFLECTS THAT THE REGISTRANT HAS CHANGED ITS FISCAL YEAR FROM
JUNE 30 TO DECEMBER 31. THIS SCHEDULE INCLUDES 12 MONTHS OF EARNINGS
INFORMATION.
</FN>
</TABLE>
