<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: SEPTEMBER 30, 1999
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 October 29,
1999 was 25,858,242.
<PAGE> 2
INSIGHT ENTERPRISES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998............................. 3
Condensed Consolidated Statements of Earnings -
Three and Nine Months Ended September 30, 1999 and 1998.............. 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998........................ 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 9
Item 3 - Quantitative and Qualitative Disclosures about Market Risk..... 15
PART II - OTHER INFORMATION............................................. 16
Item 6 - Exhibits and Reports on Form 8-K............................... 16
SIGNATURES.............................................................. 17
</TABLE>
2
<PAGE> 3
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 28,736 $ 12,974
Accounts receivable, net .................................. 205,537 139,305
Inventories, net .......................................... 20,809 34,449
Prepaid expenses and other current assets ................. 4,977 7,169
--------- ---------
Total current assets ............................. 260,059 193,897
Property and equipment, net .................................... 45,907 33,075
Goodwill, net .................................................. 23,686 24,020
Other assets ................................................... 751 406
--------- ---------
$ 330,403 $ 251,398
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 123,961 $ 80,259
Accrued expenses and other current liabilities ............ 16,931 11,763
--------- ---------
Total current liabilities ........................ 140,892 92,022
Line of credit ................................................. -- --
Long-term debt, less current portion ........................... 8,905 8,268
Stockholders' equity:
Preferred stock, $.01 par value, 3,000,000 shares
authorized, no shares issued ............................ -- --
Common stock, $.01 par value, 30,000,000 shares authorized,
25,823,232 at September 30, 1999 and 25,432,642 at
December 31, 1998 shares issued and outstanding ......... 258 254
Paid-in capital ........................................... 106,822 100,923
Retained earnings ......................................... 74,226 50,142
Accumulated other comprehensive income - foreign
currency translation .................................... (700) (211)
--------- ---------
Total stockholders' equity ....................... 180,606 151,108
--------- ---------
$ 330,403 $ 251,398
========= =========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ........................... $ 397,074 $ 261,207 $ 1,100,438 $ 705,387
Costs of goods sold ................. 349,127 231,098 970,361 620,467
----------- ----------- ----------- -----------
Gross profit ............... 47,947 30,109 130,077 84,920
Operating expenses .................. 31,891 21,669 89,501 61,291
----------- ----------- ----------- -----------
Earnings from operations ... 16,056 8,440 40,576 23,629
Non-operating expense, net .......... 218 124 681 617
----------- ----------- ----------- -----------
Earnings before income taxes 15,838 8,316 39,895 23,012
Income tax expense .................. 6,448 3,131 15,811 8,791
----------- ----------- ----------- -----------
Net earnings ............... $ 9,390 $ 5,185 $ 24,084 $ 14,221
=========== =========== =========== ===========
Earnings per share:
Basic ...................... $ 0.37 $ 0.21 $ 0.94 $ 0.59
=========== =========== =========== ===========
Diluted .................... $ 0.35 $ 0.20 $ 0.90 $ 0.57
=========== =========== =========== ===========
Shares used in per share calculation:
Basic ...................... 25,717,350 24,323,097 25,596,006 23,919,428
=========== =========== =========== ===========
Diluted .................... 26,941,080 25,449,465 26,743,064 24,999,451
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings .......................................................................... $ 24,084 $ 14,221
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization ..................................................... 5,551 2,797
Tax benefit from stock options exercised .......................................... 1,000 4,731
Provision for losses on accounts receivable ....................................... 4,103 2,924
Provision for obsolete and slow moving inventories ................................ 2,234 1,038
Deferred income tax expense ....................................................... 2,602 (1,812)
Change in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable .............................................. (70,245) (35,628)
Decrease in inventories ...................................................... 11,287 28,965
(Increase) decrease in prepaid expenses and other current assets ............. (416) 5,008
Increase in other assets and goodwill ........................................ (873) (263)
Increase in accounts payable ................................................. 43,595 21,503
Increase (decrease) in accrued expenses and other
current liabilities ...................................................... 5,380 (1,279)
-------- --------
Net cash provided by operating activities ................................ 28,302 42,205
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ................................................... (15,846) (7,134)
Purchase of United Kingdom direct marketer and internet service
provider, plus cash overdraft assumed ............................................. -- (3,534)
Purchase of United States direct marketer, net of cash acquired ....................... -- (27)
-------- --------
Net cash used in investing activities .................................... (15,846) (10,695)
-------- --------
Cash flows from financing activities:
Net repayments on line of credit ...................................................... -- (32,070)
Net (repayments) borrowings of long term debt, less current portion ................... (972) 8,409
Issuance of common stock .............................................................. 4,903 4,551
-------- --------
Net cash provided by (used in) financing activities ...................... 3,931 (19,110)
-------- --------
Effect of exchange rate on cash and cash equivalents ....................................... (625) (149)
-------- --------
Increase in cash and cash equivalents ...................................................... 15,762 12,251
Cash and cash equivalents at beginning of period ........................................... 12,974 6,982
-------- --------
Cash and cash equivalents at end of period ................................................. $ 28,736 $ 19,233
======== ========
Supplemental disclosure of non-cash financing and investing activity:
Property and equipment acquired through capital lease transactions .................... $ 1,615 $ --
======== ========
</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 (collectively "Insight" or
the "Company") is a global direct marketer of computers, hardware and software
with locations in the United States, Canada, the United Kingdom and Germany. The
Company markets primarily to small and medium-sized enterprises, through a
combination of outbound telemarketing, electronic commerce, electronic marketing
and targeted direct mail catalogs. Additionally, Insight provides direct
marketing services to original equipment manufacturers in the computer industry
seeking to outsource their direct marketing activities. The services provided
include marketing, sales, configuration and distribution.
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 disclosures normally required by
generally accepted accounting principles. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments necessary to present fairly the financial position of Insight as of
September 30, 1999, the results of operations for the three and nine months
ended September 30, 1999 and 1998, and the cash flows for the nine months ended
September 30, 1999 and 1998. The condensed consolidated balance sheet as of
December 31, 1998 was derived from the audited consolidated financial statements
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, 1998.
On April 3, 1998, the Company acquired all of the outstanding stock of
a United Kingdom direct marketer of computers and computer-related products and
85% of the outstanding common stock of a United Kingdom internet service
provider for a total of 187,227 shares of the Company's common stock (valued at
$2,516,000) and $3,534,000 in cash, including acquisition costs and a cash
overdraft position that was assumed, with further consideration payable in the
future contingent on profitability of the acquired companies. The Company has
recorded goodwill of $7,040,000 for these acquisitions.
On September 13, 1998, the Company acquired all of the outstanding
stock of a United States direct marketer of computers and computer-related
products for 451,338 shares of the Company's common stock (valued at
$10,000,000), plus $27,000 of acquisition costs, net of cash acquired, with
further consideration payable in the future contingent on profitability of the
acquired company. The Company has recorded goodwill of $10,683,000 for this
acquisition.
On December 16, 1998, the Company acquired all of the outstanding stock
of a German holding company and a German direct marketer of computers and
computer-related products for a total of 82,116 shares of the Company's common
stock (valued at $1,810,000) and $4,521,000 in cash, including acquisition costs
and net of cash acquired, with further consideration payable in the future
contingent on profitability of the acquired company. The Company has recorded
goodwill of $7,278,000 for this acquisition.
6
<PAGE> 7
INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
All three acquisitions have been accounted for by the purchase method
of accounting, and accordingly the acquired companies' assets and liabilities
have been recorded at their fair values at the date of acquisition. The excess
of the purchase price, including acquisition costs net of cash acquired and a
cash overdraft position assumed, over the fair values of the net assets
acquired, has been recorded as goodwill and is being amortized over 20 years.
Any further consideration which is payable related to these acquisitions, which
is contingent on profitability of the acquired companies, will be recorded as
additional goodwill and will be amortized over the remaining life of the asset.
The results of the operations of the acquired companies have been recorded in
the financial statements of the Company beginning with the effective date of
each acquisition.
The condensed consolidated financial statements include the accounts of
Insight Enterprises, Inc. and its subsidiaries, which are primarily
wholly-owned. Intercompany accounts and transactions have been eliminated in
consolidation.
In January 1999, the Company's Board of Directors approved a 3-for-2
stock split effected in the form of a stock dividend and paid on February 18,
1999 to the stockholders of record at the close of business on January 25, 1999.
Additionally, 3-for-2 stock splits were effected in the form of stock dividends
on September 8, 1998 and September 17, 1997. All share amounts and earnings per
share have been adjusted to reflect these 3-for-2 stock splits.
3. LINE OF CREDIT
Insight has a $100,000,000 credit facility. The agreement provides for
cash advances outstanding at any one time up to a maximum of $100,000,000 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 0.80% (6.18% at September 30, 1999) 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 September 30, 1999, the balance of this portion
of the credit facility was $34,471,000. As of September 30, 1999, an additional
$65,529,000 was available under the line of credit.
The credit facility expires in February 2002 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. INCOME TAXES
Income tax expense as provided for the three and nine months ended
September 30, 1999 and 1998 is based upon the estimated annual income tax rate
of the Company.
7
<PAGE> 8
INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. 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 earnings and "other comprehensive income," which includes
all other non-owner transactions and events that change stockholders' equity.
Other comprehensive income for the three and nine months ended September 30,
1999 and 1998 was immaterial.
6. PROPOSED MERGER WITH ACTION COMPUTER SUPPLIES HOLDINGS PLC
On October 18, 1999, the Company announced that it had terminated a
proposed merger with a United Kingdom-based IT direct marketer. The Company
expects to take a non-recurring pretax charge of approximately $2.3 million
related to the proposed merger in the fourth quarter of 1999.
8
<PAGE> 9
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, past and
future acquisitions, international operations, risk of business interruption,
year 2000 issues, reliance on outsourcing arrangements, mix of outsourcing
arrangements, changing methods of distribution, reliance on suppliers, changes
in vendor rebate programs, rapid change in product standards, inventory
obsolescence, sales and use tax uncertainty, increasing marketing, postage and
shipping cost, 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, 1998, 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. Since then, the Company has
expanded its product line to include name brand computers, a full line of
hardware products and software. Net sales include direct marketing sales from
businesses, educational institutions, government organizations, consumers and
computer resellers, as well as from outsourcing services. Initially, the Company
based its marketing practices primarily on advertising in computer magazines and
the use of inbound toll-free telemarketing. The Company has shifted its
marketing strategy to the use of outbound account executives, complimented by
the use of electronic commerce and marketing, focused primarily on the business,
education and government markets. To that end, the Company has hired a number of
account executives, and plans to continue to actively increase its account
executive base by approximately 150 to 250, net, per quarter through 2000.
In the fourth quarter of 1997, the Company began expanding
internationally, first by initiating operations in Canada. During 1998, the
Company entered the United Kingdom market in the second quarter and the German
market in the fourth quarter, both through acquisitions. On October 18, 1999,
the Company announced that it had terminated a proposed merger with a United
Kingdom-based IT direct marketer. The Company expects to take a non-recurring
pretax charge of approximately $2.3 million related to the proposed merger in
the fourth quarter of 1999.
9
<PAGE> 10
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In order to leverage its infrastructure and increase its net earnings,
the Company, in 1992, began providing direct marketing services to third party
original equipment manufacturers. Presently, most of the outsourcing
arrangements are service-based whereby the Company derives net sales based on a
percentage of the revenues generated from products sold. Revenues so derived
from service-based sales and all direct costs related to the generation of the
revenues are included in the Company's net sales and cost of goods sold,
respectively. Under certain of the Company's other 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
and the related costs derived from the sales of such products are included in
the Company's net sales and cost of goods sold, respectively. The rate of the
Company's net sales growth in future periods may be affected by the mix of type
of outsourcing arrangements which are in place from time to time. Additionally,
some of the programs may be seasonal in nature, as their target customers can
have cyclical buying patterns.
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. The Company expects
gross margins to continue to decline by approximately one to two tenths of one
percent per quarter on average in 1999, and thereafter primarily due to
industry-wide pricing pressures and pricing strategies.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales....................................................... 100.0% 100.0% 100.0% 100.0%
Costs of goods sold............................................. 87.9 88.5 88.2 88.0
------ ------ ------- -------
Gross profit........................................... 12.1 11.5 11.8 12.0
Operating expenses.............................................. 8.1 8.3 8.1 8.7
------ ------ ------- -------
Earnings from operations............................... 4.0 3.2 3.7 3.3
Non-operating expense, net...................................... 0.0 0.0 0.1 0.0
------ ------ ------- -------
Earnings before income taxes........................... 4.0 3.2 3.6 3.3
Income tax expense.............................................. 1.6 1.2 1.4 1.3
------ ------ ------- -------
Net earnings.......................................... 2.4% 2.0% 2.2% 2.0%
====== ====== ======= =======
</TABLE>
10
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net Sales. Net sales increased $135.9 million, or 52.0%, to $397.1
million for the three months ended September 30, 1999 from $261.2 million for
the three months ended September 30, 1998. The Company had 1,389 (1,153 were
devoted to the direct marketing side and 236 were devoted to outsourcing
programs) and 976 (852 were devoted to the direct marketing side and 124 were
devoted to outsourcing programs) account executives at September 30, 1999 and
1998, respectively. The Company increased its number of orders shipped by 44.1%
from 270,000 for the quarter ended September 30, 1998 to 389,000 for the quarter
ended September 30, 1999. The Company increased its unassisted web sales from
5.2% of total net sales to 9.1% of total net sales for the quarters ended
September 30, 1998 and 1999, respectively. European sales represented $37.4
million, or 9.4%, of total net sales for the quarter ended September 30, 1999 as
compared to $14.6 million, or 5.6%, of total net sales for the quarter ended
September 30, 1998.
Net sales derived from direct marketing increased $137.1 million, or
60.7%, to $363.0 million for the three months ended September 30, 1999 from
$225.9 million for the three months ended September 30, 1998. The increase in
direct marketing net sales resulted primarily from an increased account
executive base used to penetrate the Company's target market, deeper account
penetration, an increase in the Company's customer base and internet
enhancements that have increased unassisted web sales.
Net sales derived from outsourcing arrangements decreased $1.2 million,
or 3.4%, to $34.1 million for the three months ended September 30, 1999 from
$35.3 million for the three months ended September 30, 1998. Outsourcing sales
represented 8.6% and 13.5% of total net sales in the quarters ended September
30, 1999 and 1998, respectively. The decrease in sales from outsourcing services
resulted primarily from a shift to more service-based arrangements from
revenue-based arrangements. The growth rate of the outsourcing arrangements may
be affected by the mix of type of outsourcing arrangements - that is,
service-based versus revenue-based outsourcing programs. The Company is actively
seeking other outsourcing arrangements with major manufacturers.
Gross Profit. Gross profit increased $17.8 million, or 59.2%, to $47.9
million for the three months ended September 30, 1999 from $30.1 million for the
three months ended September 30, 1998. As a percentage of net sales, gross
profit increased from 11.5% for the three months ended September 30, 1998 to
12.1% for the three months ended September 30, 1999. The increase in gross
profit percentage primarily resulted from the direct operation's ability to
maintain product margin, increased gross profit provided by service-related
outsourcing programs, increased supplier reimbursements as a result of our
increasing size of operations and the lessening impact of a seasonal outsourcing
program due to our overall growth in operations. The increase was enhanced by
the Company's ability, as a result of its increased volume and financial
position, to take advantage of supplier payment discounts, rebates and
purchasing opportunities. The Company expects its gross profit percentage to
decline one to two tenths of one percent per quarter on average through 1999 and
thereafter primarily due to pricing strategies, industry-wide pricing pressures
and product and outsourcing program mix.
11
<PAGE> 12
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating Expenses. Operating expenses increased $10.2 million, or
47.2%, to $31.9 million for the three months ended September 30, 1999 from $21.7
million for the three months ended September 30, 1998, but decreased as a
percentage of net sales to 8.1% (8.0% excluding amortization of goodwill) for
the three months ended September 30, 1999 from 8.3% for the three months ended
September 30, 1998. The decline was attributable to increasing economies of
scale, the utilization of emerging technologies, the issuance of restricted
stock for bonus compensation (generally with a three year vesting schedule and a
$44 stock price acceleration clause) and continued cost-cutting measures. This
decline was partially offset by costs associated with the increase in the number
of account executives and rapid growth, integration costs from acquisitions and
goodwill amortization which totaled $306,000 in the quarter ended September 30,
1999, compared to $65,000 for the quarter ended September 30, 1998.
Non-Operating Expense, Net. Non-operating expense, net, which consists
primarily of interest expense, increased to $218,000 for the three months ended
September 30, 1999 from $124,000 for the three months ended September 30, 1998.
Interest expense primarily relates to borrowings associated with the financing
of the sales facility in Tempe, Arizona and the financing of inventory purchases
under the Company's line of credit. Interest expense was offset by interest
income, which was generated by the Company through short-term investments, some
of which are investment grade tax advantaged bonds.
Income Tax Expense. The Company's effective tax rate was 40.7% and
37.7% for the quarters ended September 30, 1999 and 1998, respectively. The
increase in the effective tax rate reflects the higher effective tax rates of
the European entities and the non-deductibility of international goodwill for
tax purposes.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net Sales. Net sales increased $395.0 million, or 56.0%, to $1,100.4
million for the nine months ended September 30, 1999 from $705.4 million for the
nine months ended September 30, 1998. The Company increased its number of orders
shipped by 58.3% from 753,000 for the nine months ended September 30, 1998 to
1,192,000 for the nine months ended September 30, 1999. The Company increased
its unassisted web sales from 4.3% of total net sales to 8.7% of total net sales
for the nine months ended September 30, 1998 and 1999, respectively. European
sales represented $113.2 million, or 10.3%, of total net sales for the nine
months ended September 30, 1999 as compared to $28.7 million, or 4.1%, of total
net sales for the nine months ended September 30, 1998.
Net sales derived from direct marketing increased $383.3 million, or
60.4%, to $1,018.2 million for the nine months ended September 30, 1999 from
$634.9 million for the nine months ended September 30, 1998. The increase in
direct marketing net sales resulted primarily from an increased account
executive base used to penetrate the Company's target market, deeper account
penetration, sales from three acquisitions accounted for under the purchase
method of accounting, an increase in the Company's customer base and internet
enhancements that have increased unassisted web sales.
Net sales derived from outsourcing arrangements increased $11.7
million, or 16.6%, to $82.2 million for the nine months ended September 30, 1999
from $70.5 million for the nine months ended September 30, 1998. Outsourcing
sales represented 7.5% and 10.0% of total net sales in the nine months ended
September 30, 1999 and 1998, respectively. The increase in sales from
outsourcing
12
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INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
services resulted from the successful addition of new programs and sales
improvements in existing programs, however, the growth rate was slowed by the
shift to service-based programs from revenue-based programs. The future growth
rate of outsourcing may be affected by the mix of type of outsourcing
arrangements - that is, service-based versus revenue-based outsourcing programs.
The Company is actively seeking other outsourcing arrangements with major
manufacturers.
Gross Profit. Gross profit increased $45.2 million, or 53.2%, to $130.1
million for the nine months ended September 30, 1999 from $84.9 million for the
nine months ended September 30, 1998. As a percentage of net sales, gross profit
decreased from 12.0% for the nine months ended September 30, 1998 to 11.8% for
the nine months ended September 30, 1999. The decline in gross profit percentage
primarily resulted from pricing strategies and market conditions. The decrease
was partially offset by the direct operation's ability to maintain product
margin, increased gross profit provided by service-related outsourcing programs
and the Company's ability, as a result of its increased volume and financial
position, to take advantage of supplier payment discounts, supplier
reimbursements, rebates and purchasing opportunities.
Operating Expenses. Operating expenses increased $28.2 million, or
46.0%, to $89.5 million for the nine months ended September 30, 1999 from $61.3
million for the nine months ended September 30, 1998, but decreased as a
percentage of net sales to 8.1% (8.0% excluding amortization of goodwill) for
the nine months ended September 30, 1999 from 8.7% for the nine months ended
September 30, 1998. The decline was attributable to increased economies of
scale, the utilization of emerging technologies, the issuance of restricted
stock for bonus compensation (generally with a three year vesting schedule and a
$44 stock price acceleration clause) and continued cost-cutting measures. This
decline was partially offset by costs associated with the increase in the number
of account executives and rapid growth, costs associated with maintaining an
international infrastructure necessary for rapid growth and goodwill
amortization which totaled $917,000 in the nine months ended September 30, 1999,
compared to $110,000 for the nine months ended September 30, 1998.
Non-Operating Expense, Net. Non-operating expense, net, which consists
primarily of interest expense, increased to $681,000 for the nine months ended
September 30, 1999 from $617,000 for the nine months ended September 30, 1998.
Interest expense primarily relates to borrowings associated with the financing
of the sales facility in Tempe, Arizona and the financing of inventory purchases
under the Company's line of credit. Interest expense was offset by interest
income, which was 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% and
38.2% for the nine months ended September 30, 1999 and 1998, respectively. The
increase in the effective tax rate reflects the higher effective tax rates of
the European entities and the non-deductibility of international goodwill for
tax purposes.
SEASONALITY
The Company has historically experienced seasonal fluctuations in its
growth of net sales, earnings from operations and net earnings. As the Company
has shifted its percentage of sales from the home market to the business,
education and government markets, which presently accounts for 89% of net sales,
the Company's quarterly net sales, earnings from operations and net earnings
have been less
13
<PAGE> 14
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
impacted by seasonality. Due to their lower percentages of business, education
and government customers, the Company's recent acquisitions may cause seasonal
fluctuations in net sales for the Company. Additionally, 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 types 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.
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.
In previous years, cash flows from operations generally have been
negative due primarily to increases in accounts receivable and inventories
necessitated by sales growth and the continued shift from sales in the home
market to sales in the business, education and government markets. This trend
has changed as the Company had decreased its inventory levels and increased the
percentage of inventory shipments made directly by suppliers to the Company's
customers.
The Company's net cash provided by operating activities was $28.3
million for the nine months ended September 30, 1999 and $42.2 million for the
nine months ended September 30, 1998. The positive cash flow in the current year
was primarily generated from a $43.6 million increase in accounts payable, a
$11.3 million decrease in inventories and net earnings of $24.1 million. The
decrease in inventories resulted from the Company's use of direct shipments from
distributors and original equipment manufacturers (which represented 57% and 55%
of shipments for the nine months ended September 30, 1998 and 1999,
respectively). These funds were primarily used to fund a $70.2 million increase
in accounts receivable which occurred as the result of increased sales.
Capital expenditures for the nine months ended September 30, 1999 and
1998 were $15.8 million and $7.1 million, respectively. Capital expenditures for
the nine months ended September 30, 1999 primarily relate to new software
applications. Capital expenditures for the nine months ended September 30, 1998
primarily relate to equipment for the Company's new distribution center in
Indiana and furniture and equipment for additional office space in Tempe,
Arizona.
The Company's future capital requirements include financing the growth
of working capital items such as accounts receivable and inventories, the
purchase of software enhancements, the purchase of equipment, furniture and
fixtures to accommodate future growth and funds needed for future organic growth
and/or acquisitions. 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 2000. The Company's ability to continue funding its planned
growth beyond 2000 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. See Note 3 of Notes to Condensed
Consolidated Financial Statements for a description of the Company's $100
million credit facility.
14
<PAGE> 15
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 COMPLIANCE
Many of the world's computer systems currently record years in a
two-digit format. Such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions. The
potential costs and uncertainties associated with this issue will depend on a
number of factors, including software, hardware and the nature of the industry
in which a company operates. Additionally, companies must coordinate with other
entities with which they electronically interact, such as vendors, customers and
lenders.
The Company has completed its assessment of its Year 2000 issues with
respect to both information technology ("IT") systems and non-IT systems. This
completed assessment has not revealed any material Year 2000 issues. Remediation
and testing has been completed.
The Company has completed modifying its existing core-business
functions applications to be Year 2000 compliant. The Company presently believes
that with modifications to existing software, the cost of which has not been
material, the Year 2000 problem will not pose significant operational problems
for the Company's internal operations. To date, the Company's assessment of
non-IT systems, such as its buildings and equipment, has not revealed any
material Year 2000 issues, assuming no disruption in telephone, electric
services and delivery.
Additionally, the Company is in the process of replacing its
core-business function applications in order to accommodate its expanding
business needs. These applications are believed to be Year 2000 compliant
software, purchased with such certification from the source vendor. Certain of
these applications have been installed during the third quarter of 1999 and
final testing is being performed.
As part of the Company's Year 2000 assessment, it is continuing to
verify the Year 2000 readiness of third parties (vendors, customers and lenders)
with whom the Company has material relationships. At present, the Company is not
able to determine the effect on the Company's results of operations, liquidity,
and financial condition in the event the Company's material vendors, customers
and lenders are not Year 2000 compliant. In a worst case scenario, possible
consequences include loss of communications links, loss of electric power, and
inability to process transactions or engage in similar normal business
activities resulting in the inability to sell and deliver products to customers.
In addition, since not all customer situations can be anticipated, the Company
may experience sales returns of merchandise, although such returns should not
materially affect the Company's financial condition. The Company will continue
to monitor the progress of its material vendors, customers and lenders and
formulate a contingency plan at that point in time when the Company does not
believe a material vendor, customer or lender will be compliant. The Company's
internal contingency planning will be reviewed regularly until Year 2000
actually begins.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
15
<PAGE> 16
INSIGHT ENTERPRISES, INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule for the nine months ended
September 30, 1999.
27.2 Financial Data Schedule for the nine months ended
September 30, 1998.
(b) Reports on Form 8-K
On August 12, 1999, the Company filed a report on Form 8-K to
disclose the Supplemental Merger Agreement, dated July 27, 1999, by and
between Insight Enterprises, Inc. and Action Computer Suppliers
Holdings PLC.
On October 20, 1999, the Company filed a report on Form 8-K to
disclose that on October 18, 1999 it terminated the merger agreement
between Insight Enterprises, Inc. and Action Computer Supplies Holdings
PLC.
16
<PAGE> 17
INSIGHT ENTERPRISES, INC.
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: NOVEMBER 10, 1999 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
17
<PAGE> 18
Exhibits
27.1 Financial Data Schedule for the nine months ended September
30, 1999.
27.2 Financial Data Schedule for the nine months ended September
30, 1998.
18
<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 SEPTEMBER 30, 1999 AND THE RELATED CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS FOR THE 9 MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDING
SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 28,736
<SECURITIES> 0
<RECEIVABLES> 214,910
<ALLOWANCES> 9,373
<INVENTORY> 20,809
<CURRENT-ASSETS> 260,059
<PP&E> 58,028
<DEPRECIATION> 12,121
<TOTAL-ASSETS> 330,403
<CURRENT-LIABILITIES> 140,892
<BONDS> 8,905
0
0
<COMMON> 258
<OTHER-SE> 180,348
<TOTAL-LIABILITY-AND-EQUITY> 330,403
<SALES> 1,100,438
<TOTAL-REVENUES> 1,100,438
<CGS> 970,361
<TOTAL-COSTS> 970,361
<OTHER-EXPENSES> 85,313
<LOSS-PROVISION> 4,103
<INTEREST-EXPENSE> 766
<INCOME-PRETAX> 39,895
<INCOME-TAX> 15,811
<INCOME-CONTINUING> 24,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,084
<EPS-BASIC> 0.94
<EPS-DILUTED> 0.90
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF INSIGHT ENTERPRISES AND SUBSIDIARIES AS
OF SEPTEMBER 30, 1998 AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF
EARNINGS FOR THE 9 MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDING
SEPTEMBER 30, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,233
<SECURITIES> 0
<RECEIVABLES> 123,444
<ALLOWANCES> 6,218
<INVENTORY> 21,121
<CURRENT-ASSETS> 163,028
<PP&E> 36,312
<DEPRECIATION> 9,006
<TOTAL-ASSETS> 206,942
<CURRENT-LIABILITIES> 59,105
<BONDS> 9,626
0
0
<COMMON> 249
<OTHER-SE> 137,962
<TOTAL-LIABILITY-AND-EQUITY> 206,942
<SALES> 705,387
<TOTAL-REVENUES> 705,387
<CGS> 620,467
<TOTAL-COSTS> 620,467
<OTHER-EXPENSES> 58,272
<LOSS-PROVISION> 2,924
<INTEREST-EXPENSE> 712
<INCOME-PRETAX> 23,012
<INCOME-TAX> 8,791
<INCOME-CONTINUING> 14,221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,221
<EPS-BASIC> 0.59<F1>
<EPS-DILUTED> 0.57<F1>
<FN>
<F1>EPS-BASIC AND EPS-DILUTED ARE RESTATED TO INCLUDE THE EFFECT OF THE 3-FOR-2
STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND PAID ON FEBRUARY 18, 1999.
</FN>
</TABLE>
