<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
for the transition period from __________ to __________
Commission File Number: 0-25092
INSIGHT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0766246
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6820 SOUTH HARL AVENUE, TEMPE, ARIZONA 85283
(Address of principal executive offices) (Zip Code)
(602) 902-1001
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the issuer's common stock as of the July 31,
1998 was 15,980,003.
<PAGE> 2
INSIGHT ENTERPRISES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997.............................. 3
Condensed Consolidated Statements of Earnings -
Three and Six Months Ended June 30, 1998 and 1997................ 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997.......................... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8
PART II - OTHER INFORMATION......................................... 15
Item 4 - Submission of Matters to a Vote of Security Holders........ 15
Item 6 - Exhibits and Reports on Form 8-K........................... 15
SIGNATURES.......................................................... 16
2
<PAGE> 3
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 10,430 $ 6,982
Accounts receivable, net .................................... 99,132 80,639
Inventories ................................................. 36,324 46,100
Prepaid expenses and other current assets ................... 5,567 8,195
-------- --------
Total current assets ............................... 151,453 141,916
Property and equipment, net ...................................... 24,788 20,432
Other assets ..................................................... 7,333 35
-------- --------
$183,574 $162,383
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 53,152 $ 22,949
Accrued expenses and other current liabilities .............. 4,509 4,304
-------- --------
Total current liabilities .......................... 57,661 27,253
Long-term debt, less current portion ............................. 8,515 --
Line of credit ................................................... -- 32,750
Stockholders' equity:
Preferred stock, $.01 par value, 3,000,000 shares authorized,
no shares issued .......................................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized,
15,979,289 at June 30, 1998 and 15,551,613 at
December 31, 1997 shares issued and outstanding ........... 160 156
Paid-in capital ............................................. 78,609 72,564
Retained earnings ........................................... 38,629 29,660
-------- --------
Total stockholders' equity ......................... 117,398 102,380
-------- --------
$183,574 $162,383
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .................................. $ 237,384 $ 139,255 $ 444,180 $ 270,080
Costs of goods sold ........................ 207,915 121,285 389,369 235,388
------------ ------------ ------------ ------------
Gross profit ...................... 29,469 17,970 54,811 34,692
Selling, general and administrative expenses 21,747 13,073 39,622 25,413
------------ ------------ ------------ ------------
Earnings from operations .......... 7,722 4,897 15,189 9,279
Non-operating income (expense), net ........ (116) 133 (493) 255
------------ ------------ ------------ ------------
Earnings before income taxes ...... 7,606 5,030 14,696 9,534
Income tax expense ......................... 2,903 2,079 5,660 3,837
------------ ------------ ------------ ------------
Net earnings ...................... $ 4,703 $ 2,951 $ 9,036 $ 5,697
============ ============ ============ ============
Earnings per share:
Basic ............................. $ 0.30 $ 0.19 $ 0.57 $ 0.37
============ ============ ============ ============
Diluted ........................... $ 0.28 $ 0.19 $ 0.55 $ 0.36
============ ============ ============ ============
Shares used in per share calculation:
Basic ............................. 15,937,547 15,224,858 15,811,728 15,193,256
============ ============ ============ ============
Diluted ........................... 16,578,963 15,852,263 16,516,296 15,896,075
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................... $ 9,036 $ 5,697
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation ............................................... 1,628 1,166
Tax benefit from stock options exercised ................... 2,329 1,010
Provision for losses on accounts receivable ................ 1,935 2,606
Provision for obsolete and slow-moving inventories ......... 631 687
Deferred income tax benefit ................................ (1,315) (393)
Loss on disposal of property and equipment ................. -- 11
Change in assets and liabilities:
Increase in accounts receivable ....................... (20,390) (23,577)
Decrease in inventories ............................... 9,142 2,247
Decrease in prepaid expenses and other current
assets ............................................ 3,942 1,237
Increase in other assets .............................. (7,303) (117)
Increase in accounts payable .......................... 30,108 692
Increase in accrued expenses and
other current liabilities ......................... 218 438
-------- --------
Net cash provided by (used in) operating activities 29,961 (8,296)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ............................ (5,996) (4,850)
-------- --------
Net cash used in investing activities ............. (5,996) (4,850)
-------- --------
Cash flows from financing activities:
Net repayments on line of credit ............................... (32,750) --
Net borrowing of long term debt, less current position ......... 8,515 --
Issuance of common stock ....................................... 3,720 562
-------- --------
Net cash provided by (used in) financing activities (20,515) 562
-------- --------
Effect of exchange rate on cash and cash equivalents ................ (2) --
-------- --------
Increase (decrease) in cash and cash equivalents .................... 3,448 (12,584)
Cash and cash equivalents at beginning of period .................... 6,982 21,166
-------- --------
Cash and cash equivalents at end of period .......................... $ 10,430 $ 8,582
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Insight Enterprises, Inc. and subsidiaries ("Insight" or the "Company")
is a direct marketer of computers, hardware and software. The Company markets
primarily to small and medium-sized enterprises, through a combination of
outbound telemarketing, electronic commerce, targeted direct marketing and
advertising in computer magazines and publications. Insight has locations in the
United States, Canada and the United Kingdom. Additionally, Insight provides
direct marketing services to manufacturers seeking to outsource their direct
marketing activities. The services provided include marketing, sales and
distribution.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
and notes have been prepared in accordance with the requirements of Form 10-Q
and consequently do not include all of the disclosure normally required by
generally accepted accounting principles. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring accruals, necessary to present
fairly the financial position of Insight as of June 30, 1998, the results of
operations for the three and six months ended June 30, 1998 and 1997, and the
cash flows for the six months ended June 30, 1998 and 1997. The condensed
consolidated balance sheet as of December 31, 1997 was derived from the audited
consolidated financial statement at such date. Certain amounts in the condensed
consolidated financial statements have been reclassified to conform to the
current presentation. The results of operations for such interim periods are not
necessarily indicative of results for the full year. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements, including the related notes thereto, in
Insight's Annual Report on Form 10-K for the year ended December 31, 1997.
The condensed consolidated financial statements include the accounts of
Insight Enterprises, Inc. and its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
In July 1998, the Company's Board of Directors approved a 3-for-2 stock
split effected in the form of a stock dividend and payable on September 8, 1998
to the stockholders of record at the close of business on August 17, 1998. All
share amounts and earnings per share have been retroactively adjusted to reflect
this 3-for-2 stock split. All share amounts, and earnings per share also reflect
the 3-for-2 stock split effected in the form of a stock dividend and paid on
September 17, 1997.
In January 1998, Insight changed its fiscal year end to December 31
from June 30.
6
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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. LINE OF CREDIT
Insight has a $70,000,000 credit facility with a finance company. The
agreement provides for cash advances outstanding at any one time up to a maximum
of $70,000,000 on the line of credit, subject to limitations based upon the
Company's eligible accounts receivable and inventories. Cash advances bear
interest at the London Interbank Offered Rate (LIBOR) plus 1.40% (7.09% at June
30, 1998) payable monthly. The credit facility can be used to facilitate the
purchases of inventories from certain suppliers and that portion is classified
on the balance sheet as accounts payable. As of June 30, 1998, the balance of
this portion of the credit facility was $9,090,000. As of June 30, 1998, an
additional $54,670,000 was available under the line of credit.
The credit facility expires in August 2000 at which time the
outstanding balance is due. The line is secured by substantially all of the
assets of the Company. The line of credit contains various covenants including
the requirements that the Company maintain a specific dollar amount of tangible
net worth and restrictions on payment of cash dividends.
4. LONG-TERM DEBT
In May 1998, the Company completed a long-term financing arrangement on
its sales facility in Tempe, Arizona. The financing arrangement totals
$8,625,000 at a fixed interest rate of 7.15% and is fully amortized over the
15-year period. The debt is secured by the property and the improvements.
5. INCOME TAXES
Income tax expense as provided for the three and six months ended June
30, 1998 and 1997 is based upon the estimated annual income tax rate of the
Company.
6. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998.
SFAS 130 establishes standards for the reporting and presentation of
comprehensive income and its components in financial statements. Comprehensive
income encompasses net income and "other comprehensive income," which includes
all other non-owner transactions and events that change stockholders' equity.
Other comprehensive income for the three and six months ended June 30, 1998 and
1997 was immaterial.
7
<PAGE> 8
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that are
inherently subject to risk and uncertainties. Forward-looking statements can be
identified by the use of forward-looking terminology such as "expects,"
"should," "believes," or "anticipates" or the negative thereof or comparable
terminology, or by discussions of Company goals and strategy. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not
limited to the following: fluctuations in operating results, intense
competition, management of rapid growth, need for additional financing, reliance
on suppliers, rapid change in product standards, inventory obsolescence, risk of
business interruption, changing methods of distribution, sales and income tax
uncertainty, future acquisitions, increasing marketing, postage and shipping
cost, reliance on outsourcing arrangements, year 2000 issues, and dependence on
key personnel. These factors are discussed in greater detail under "Factors That
May Affect Future Results and Financial Condition" in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission.
OVERVIEW
The Company commenced operations in 1988 as a direct marketer of hard
disk drives and other mass storage products. In 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
include 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-branded
computers and discontinued the sale of Insight-branded computers in the fourth
quarter of calendar 1995. Although the cost savings from this decision have
positively impacted earnings from operations, gross profit percentage has been
negatively affected. The Company expects gross margins to continue to decline in
1998 primarily due to pricing strategies and market conditions.
During calendar 1995, the Company nearly doubled its catalog
circulation to aggressively test new lists and generate leads. In calendar 1997,
the Company did not increase its catalog circulation because the Company used
the information generated from prior years' tests to target mailings to its best
prospective customers while increasing its focus on penetrating existing
accounts. In 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. The Company has hired a number of senior sales
managers and account executives, and plans to continue to actively increase its
account executive base by approximately 50 to 100, net, per quarter during 1998.
In October 1997, Insight began operations in Canada and on April 3,
1998, Insight acquired a computer direct marketing company in the United Kingdom
("U.K."). International sales represented 8.2% of net sales, in the quarter
ended June 30, 1998.
In order to leverage its infrastructure, the Company, in calendar 1992,
began providing direct marketing services to third parties. Under some of the
Company's outsourcing arrangements, the Company takes title to inventories of
products and assumes the risk of collection of accounts receivable in addition
to its 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
8
<PAGE> 9
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
these types of arrangements based on a percentage of the net sales generated
from products sold. Accordingly, the rate of the Company's net sales growth in
future periods may be affected by the mix of outsourcing arrangements which are
in place from time to time. Additionally, some of the programs may be more
seasonal in nature, as their target customers can have cyclical buying patterns.
Outsourcing represented 7.9% and 5.9% of the Company's sales for the six months
ended June 30, 1998 and 1997, respectively.
Generally, pricing in the computer and related products industry is
very aggressive. The Company expects pricing pressures to continue and that it
will be required to reduce its prices to remain competitive. The continued
acceptance of electronic commerce might place additional pricing pressure on the
Company. Such price reductions could have a material adverse effect on the
Company's financial condition and results of operations.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Costs of goods sold ................. 87.6 87.1 87.7 87.2
----- ----- ----- -----
Gross profit ............... 12.4 12.9 12.3 12.8
Selling, general and administrative
expenses ....................... 9.1 9.4 8.9 9.4
----- ----- ----- -----
Earnings from operations ... 3.3 3.5 3.4 3.4
Non-operating income (expense), net . (0.1) 0.1 (0.1) 0.1
----- ----- ----- -----
Earnings before income taxes 3.2 3.6 3.3 3.5
Income tax expense .................. 1.2 1.5 1.3 1.4
----- ----- ----- -----
Net earnings ............... 2.0% 2.1% 2.0% 2.1%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net Sales. Net sales increased $98.1 million, or 70%, to $237.4 million
for the three months ended June 30, 1998 from $139.3 million for the three
months ended June 30, 1997. The Company increased its number of orders shipped
by 54% from 164,000 for the quarter ended June 30, 1997 to 252,000 for the
quarter ended June 30, 1998. The Company also experienced an 11% increase in
its average order size from $842 to $934 for the three months ended June
30,1997 and 1998, respectively. International sales represented $19.5 million
or 8.2% of total net sales for the quarter ended June 30, 1998. The Company's
organic growth, excluding the sales from the recently acquired U.K. operations,
was still 60%. The Company's net sales are comprised of two components: direct
marketing sales and sales from outsourcing arrangements with manufacturers.
9
<PAGE> 10
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 (CONTINUED)
Sales derived from direct marketing increased $85.0 million, or 65%, to
$216.4 million for the three months ended June 30, 1998 from $131.4 million for
the three months ended June 30, 1997. The increase in direct marketing sales
resulted primarily from increased emphasis on outbound telemarketing, deeper
account penetration, a greater percentage of business customers, an increase in
the Company's customer base, internet enhancements that have increased
unassisted transactions and an increase in the average order size.
Sales derived from outsourcing arrangements increased $13 million, or
164%, to $20.9 million for the three months ended June 30, 1998 from $7.9
million for the three months ended June 30, 1997. The increase in sales from
outsourcing services resulted from the successful addition of new programs. Some
of these new outsourcing programs can be seasonal in nature, as their target
customers can have cyclical buying patterns. The growth rate of the outsourcing
arrangements may be affected by the mix of outsourcing arrangements -
service-based versus revenue-based. The Company is actively seeking other
outsourcing arrangements with major manufacturers.
Gross Profit. Gross profit increased $11.5 million, or 64%, to $29.5
million for the three months ended June 30, 1998 from $18 million for the three
months ended June 30, 1997. As a percentage of sales, gross profit decreased
from 12.9% for the three months ended June 30, 1997 to 12.4% for the three
months ended June 30, 1998. However, it increased sequentially from 12.3% in the
first quarter of 1998. The increase sequentially was due to opportunistic
purchases, garnered efficiencies in supply chain management and higher gross
profit percentages experienced in the U.K. As a percentage of net sales, gross
margin of the Company's direct marketing sales decreased due to a continued
shift in product mix, pricing strategies and market conditions. The Company
experienced significant growth in the software category which carries a lower
gross profit percentage and a significant decline in hard disk drives as a
percentage of sales which carries a higher gross profit percentage. The Company
expects gross profit percentage from its direct marketing sales to continue to
decline in 1998 primarily due to pricing strategies, supplier reimbursement
programs, market conditions and shifts in product mix. The gross profit
percentage on the Company's outsourcing business decreased primarily as a result
of a change in product mix within the revenue-based portion of its outsourcing
business. Also, the addition of new outsourcing programs over the last 12 months
has had a negative impact on the overall gross profit percentage.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8.7 million, or 66%, to $21.8 million for the
three months ended June 30, 1998 from $13.1 million for the three months ended
June 30, 1997, but decreased as a percentage of net sales to 9.1% for the three
months ended June 30, 1998 from 9.4% for the three months ended June 30, 1997.
The decline was attributable to increased economies of scale, an increase in the
average order size and more effective marketing which were partially offset by
the additional costs of hiring and training new account executives, costs
associated with rapid growth and higher operating expenses in the U.K. In the
quarter ended June 30, 1998, the Company added 189 account executives. This
number includes 39 account executives added with the U.K.-based acquisition in
April and a significant number of account executives added to the outsourcing
side for a new service-based arrangement. The Company gradually is moving its
main distribution center to Indiana and during the current quarter incurred the
overlapping expense of two main distribution centers in the United States.
Additionally, the U.K. has operating expenses of approximately 16% of U.K. net
sales. If U.K. operations had the same efficiencies as the United States
operations, the Company's overall selling, general and administrative percentage
would have approximated last quarter's.
10
<PAGE> 11
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 (CONTINUED)
Non-Operating Income (Expense), Net. Non-operating income (expense),
net, which consists primarily of interest, decreased to $116,000 of expense,
net, for the three months ended June 30, 1998 from $133,000 of interest income,
net, for the three months ended June 30, 1997. Interest expense primarily
relates to borrowings under the Company's line of credit and long-term debt
which have been necessary to finance the Company's growth and sales facility.
Interest income was generated by the Company through short-term investments,
some of which are tax advantaged bonds.
Income Tax Expense. The Company's effective tax rate was 38.2% and
41.3% for the quarters ended June 30, 1998 and 1997, respectively. The decrease
in the effective tax rate reflects the implementation of a tax minimization
strategy during 1998 and changes to Arizona income taxes, but was partially
offset by an increase in the Company's marginal tax rate.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net Sales. Net sales increased $174.1 million, or 64%, to $444.2
million for the six months ended June 30, 1998 from $270.1 million for the six
months ended June 30, 1997. The percentage of net sales to business, education
and government customers increased from 88% for the six months ended June 30,
1997 to 91% for the six months ended June 30, 1998. This continued shift to a
customer segment that makes larger purchases resulted in an increase in the
average order size of 12% from $818 to $914 for the six months ended June 30,
1997 and 1998, respectively. Additionally, the Company increased its number of
orders shipped by 47% from 328,000 to 483,000 for the six months ended June 30,
1997 and 1998, respectively. The Company's organic growth, excluding the sales
from the recently acquired U.K. operations, was still 59%. The Company's net
sales are comprised of two components: direct marketing sales and sales from
outsourcing arrangements with manufacturers.
Sales derived from direct marketing increased $154.6 million, or 61% to
$408.9 million for the six months ended June 30, 1998 from $254.3 million for
the six months ended June 30, 1997. The increase in direct marketing sales
resulted primarily from increased emphasis on outbound telemarketing, deeper
account penetration, a greater percentage of business customers, an increase in
the Company's customer base, internet enhancements that have increased
unassisted transactions and an increase in the average order size.
Sales derived from outsourcing arrangements increased $19.4 million, or
123% to $35.2 million for the six months ended June 30, 1998 from $15.8 million
for the six months ended June 30, 1997. The increase in sales from outsourcing
services resulted from the successful addition of new programs. Some of these
new outsourcing programs can be seasonal in nature, as their target customers
can have cyclical buying patterns. The growth rate of the outsourcing
arrangements may be affected by the mix of outsourcing arrangements -
service-based versus revenue-based. The Company is actively seeking other
outsourcing arrangements with major manufacturers.
Gross Profit. Gross profit increased $20.1 million, or 58%, to $54.8
million for the six months ended June 30, 1998 from $34.7 million for the six
months ended June 30, 1997. As a percentage of sales, gross profit decreased
from 12.8% for the six months ended June 30, 1997 to 12.3% for the six months
ended June 30, 1998. As a percentage of net sales, gross margin on the Company's
direct marketing sales decreased due to a
11
<PAGE> 12
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 (CONTINUED)
continued shift in product mix, pricing strategies and market conditions. The
Company experienced significant growth in the software category which carries a
lower gross profit percentage and a significant decline in hard disk drives as a
percentage of sales which carries a higher gross profit percentage. The Company
expects gross profit percentage from its direct marketing sales to continue to
decline in 1998 primarily due to pricing strategies, supplier reimbursement
programs, market conditions and shifts in product mix. The gross profit
percentage on the Company's outsourcing business decreased primarily as a result
of a change in product mix within the revenue-based portion of its outsourcing
business. Also, the addition of new outsourcing programs, over the last 12
months has had a negative impact on the overall gross profit percentage.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $14.2 million, or 56%, to $39.6 million for
the six months ended June 30, 1998 from $25.4 million for the six months ended
June 30, 1997, but decreased as a percentage of net sales to 8.9% for the six
months ended June 30, 1998 from 9.4% for the six months ended June 30, 1997. The
decline was attributable to increased economies of scale, an increase in the
average order size and more effective marketing which were partially offset by
the additional costs of hiring and training new account executives, costs
associated with rapid growth and higher operating expenses in the United
Kingdom.
Non-Operating Income (Expense), Net. Non-operating income (expense),
net, which consists primarily of interest, decreased to $493,000 of expense,
net, for the six months ended June 30, 1998 from $255,000 of interest income,
net, for the six months ended June 30, 1997. Interest expense primarily relates
to borrowings under the Company's line of credit and long-term debt which have
been necessary to finance the Company's growth and finance the sales facility.
Interest income was generated by the Company through short term investments,
some of which are tax advantaged bonds.
Income Tax Expense. The Company's effective tax rate was 38.5% and
40.2% for the six months ended June 30, 1998 and 1997, respectively. The
decrease in the effective tax rate reflects the implementation of a tax
minimization strategy during 1998 and changes to Arizona income taxes, but was
partially offset by an increase in the Company's marginal tax rate. The prior
year effective tax rate includes the benefits of investments made in
tax-advantaged bonds.
SEASONALITY
The Company has historically experienced seasonal fluctuations in its
growth of net sales, earnings from operations and net earnings. As the Company
has increased its percentage of sales from the business, education and
government markets, the Company's quarterly net sales, earnings from operations
and net earnings have been less impacted by seasonality. The Company's net sales
growth rate, earnings from operations and net earnings as a percentage of net
sales could be affected by the mix of outsourcing arrangements which are in
place from time to time. Additionally, some of the outsourcing programs can be
seasonal in nature, as their target customers can have cyclical buying patterns.
12
<PAGE> 13
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the working
capital requirements and capital expenditures necessitated by its sales growth.
Cash flows from operations historically have been negative due
primarily to increases in accounts receivable and inventories necessitated by
sales growth and the continued shift from sales to the home market to sales in
the business, education and government markets. However, the Company's net cash
provided by operating activities was $30.0 million for the six months ended June
30, 1998, as compared to $8.3 used in operating activities for the six months
ended June 30, 1997. The positive cash flow in the current year was primarily
generated from a $30.1 million increase in accounts payable, a $9.1 million
decrease in inventory and net earnings of $9.0 million. These funds were
primarily used to fund a $20.4 million increase in accounts receivable and net
repayments of $24.2 million of debt.
Capital expenditures for the six months ended June 30, 1998 and 1997
were $6.0 million and $4.9 million, respectively. Capital expenditures for the
six months ended June 30, 1998 primarily relate to equipment for the Company's
new distribution center in Indiana, furniture and equipment for additional
office space in Tempe, Arizona and fixed assets associated with the acquisition
of the U.K. operations. Capital expenditures for the six months ended June 30,
1997 primarily relate to the continued upgrade of the Company's equipment,
systems and facilities.
The Company's future capital requirements include financing the growth
of working capital items such as accounts receivable and inventories, and the
purchase of equipment, furniture and fixtures to 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 1998. The
Company's ability to continue funding its planned growth beyond 1998 is
dependent upon its ability to generate sufficient cash flow or to obtain
additional funds through equity or debt financing, or from other sources of
financing, as may be required.
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 year and a half 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
13
<PAGE> 14
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RISKS ASSOCIATED WITH YEAR 2000 PROBLEM (CONTINUED)
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.
14
<PAGE> 15
INSIGHT ENTERPRISES, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Shareholders' Meeting was held on May 7,
1998.
(b) At the Annual Shareholders' Meeting, a proposal was considered
as to the election of Eric J. Crown as a Class I director to
serve until the annual meeting of shareholders in 2001.
The director-nominee was elected with the voting results as
follows:
Proposal Voted For Voted Against Abstained Not Voted
Election of
Eric J. Crown as a 9,230,129 407,893 - 886,296
Class I director
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule for the six months ended
June 30, 1998.
27.2 Financial Data Schedule for the six months ended June
30, 1997.
(b) Reports on Form 8-K
On April 20, 1998, the Company filed a report on Form 8-K to
disclose the issuance of 83,212 shares of Common Stock
pursuant to the exemptions provided by Section 4 (2) of the
Securities Act of 1933, as amended and/or by Regulation S.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: AUGUST 13, 1998 INSIGHT ENTERPRISES, INC.
BY: /S/ ERIC CROWN
----------------------------------
ERIC J. CROWN
CHIEF EXECUTIVE OFFICER
BY: /S/ STANLEY LAYBOURNE
----------------------------------
STANLEY LAYBOURNE
CHIEF FINANCIAL OFFICER, SECRETARY
AND TREASURER
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF INSIGHT ENTERPRISES, INC. AND
SUBSIDIARIES AS OF JUNE 30, 1998 AND THE RELATED CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDING JUNE
30, 1998.
</LEGEND>
<CIK> 0000932696
<NAME> INSIGHT ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,430
<SECURITIES> 0
<RECEIVABLES> 104,307
<ALLOWANCES> 5,175
<INVENTORY> 36,324
<CURRENT-ASSETS> 151,453
<PP&E> 32,658
<DEPRECIATION> 7,870
<TOTAL-ASSETS> 183,574
<CURRENT-LIABILITIES> 57,661
<BONDS> 8,515
0
0
<COMMON> 160
<OTHER-SE> 117,238
<TOTAL-LIABILITY-AND-EQUITY> 183,574
<SALES> 444,180
<TOTAL-REVENUES> 444,180
<CGS> 389,369
<TOTAL-COSTS> 389,369
<OTHER-EXPENSES> 37,652
<LOSS-PROVISION> 1,935
<INTEREST-EXPENSE> 528
<INCOME-PRETAX> 14,696
<INCOME-TAX> 5,660
<INCOME-CONTINUING> 9,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,036
<EPS-PRIMARY> 0.57<F1>
<EPS-DILUTED> 0.55<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 TO BE PAID ON SEPTEMBER 8, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF INSIGHT ENTERPRISES, INC. AND
SUBSIDIARIES AS OF JUNE 30, 1997 AND THE RELATED CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDING JUNE
30, 1998.
</LEGEND>
<RESTATED>
<CIK> 0000932696
<NAME> INSIGHT ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,582
<SECURITIES> 0
<RECEIVABLES> 71,650
<ALLOWANCES> 2,907
<INVENTORY> 24,596
<CURRENT-ASSETS> 105,495
<PP&E> 22,087
<DEPRECIATION> 4,948
<TOTAL-ASSETS> 122,864
<CURRENT-LIABILITIES> 31,654
<BONDS> 0
0
0
<COMMON> 152
<OTHER-SE> 91,058
<TOTAL-LIABILITY-AND-EQUITY> 122,864
<SALES> 270,080
<TOTAL-REVENUES> 270,080
<CGS> 235,388
<TOTAL-COSTS> 235,388
<OTHER-EXPENSES> 22,497
<LOSS-PROVISION> 2,606
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 9,534
<INCOME-TAX> 3,837
<INCOME-CONTINUING> 5,697
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,697
<EPS-PRIMARY> 0.37<F1>
<EPS-DILUTED> 0.36<F1>
<FN>
<F1>EPS-PRIMARY AND EPS-DILUTED ARE RESTATED TO INCLUDE THE IMPACT OF FINANCIAL
ACCOUNTING STANDARDS BOARD STATEMENT NO. 128, THE EFFECT OF A 3-FOR-2 STOCK
SPLIT IN THE FORM OF A STOCK DIVIDEND TO BE PAID ON SEPTEMBER 8, 1998 AND THE
EFFECT OF A 3-FOR-2 STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND PAID ON
SEPTEMBER 17, 1997.
</FN>
</TABLE>
