<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, 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 July 30,
1999 was 25,663,578.
<PAGE> 2
INSIGHT ENTERPRISES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998............................................................................. 3
Condensed Consolidated Statements of Earnings -
Three and Six Months Ended June 30, 1999 and 1998............................................................... 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 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................................................ 16
PART II - OTHER INFORMATION........................................................................................ 16
Item 4 - Submission of Matters to a Vote of Security Holders...................................................... 16
Item 6 - Exhibits and Reports on Form 8-K.......................................................................... 17
SIGNATURES......................................................................................................... 18
</TABLE>
2
<PAGE> 3
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 31,641 $ 12,974
Accounts receivable, net............................................. 169,222 139,305
Inventories, net..................................................... 22,243 34,449
Prepaid expenses and other current assets............................ 6,547 7,169
------------ ------------
Total current assets........................................ 229,653 193,897
Property and equipment, net............................................... 40,785 33,075
Goodwill, net ............................................................ 22,540 24,020
Other assets ............................................................ 405 406
------------ ------------
$ 293,383 $ 251,398
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 106,931 $ 80,259
Accrued expenses and other current liabilities....................... 10,931 11,763
------------ ------------
Total current liabilities................................... 117,862 92,022
Line of credit............................................................ -- --
Long-term debt, less current portion...................................... 7,983 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,
25,627,540 at June 30, 1999 and 25,432,642 at
December 31, 1998 shares issued and outstanding.................... 256 254
Paid-in capital...................................................... 103,560 100,923
Retained earnings.................................................... 64,836 50,142
Accumulated other comprehensive income - foreign
currency translation............................................... (1,114) (211)
------------ ------------
Total stockholders' equity.................................. 167,538 151,108
------------ ------------
$ 293,383 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales...................................... $ 365,228 $ 237,384 $ 703,364 $ 444,180
Costs of goods sold............................ 322,964 207,915 621,234 389,369
------------- ------------- ------------- -------------
Gross profit.......................... 42,264 29,469 82,130 54,811
Selling, general and administrative
expenses...................................... 29,302 21,747 57,610 39,622
------------- ------------- ------------- -------------
Earnings from operations.............. 12,962 7,722 24,520 15,189
Non-operating expense, net..................... 188 116 463 493
------------- ------------- ------------- -------------
Earnings before income taxes.......... 12,774 7,606 24,057 14,696
Income tax expense............................. 4,887 2,903 9,363 5,660
------------- ------------- ------------- -------------
Net earnings.......................... $ 7,887 $ 4,703 $ 14,694 $ 9,036
============= ============= ============= =============
Earnings per share:............................
Basic................................. $ 0.31 $ 0.20 $ 0.58 $ 0.38
============= ============= ============= =============
Diluted............................... $ 0.30 $ 0.19 $ 0.55 $ 0.36
============= ============= ============= =============
Shares used in per share calculation:
Basic................................. 25,588,571 23,906,321 25,535,334 23,717,593
============= ============= ============= =============
Diluted............................... 26,615,830 24,868,447 26,644,055 24,774,445
============= ============= ============= =============
</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>
SIX MONTHS ENDED
JUNE 30,
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings .................................................................... $ 14,694 $ 9,036
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization.................................................. 3,493 1,628
Tax benefit from stock options exercised....................................... 423 2,329
Provision for losses on accounts receivable.................................... 2,038 1,935
Provision for obsolete and slow-moving inventories............................. 1,713 631
Deferred income tax expense.................................................... 511 (1,315)
Change in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable........................................... (32,216) (18,054)
Decrease in inventories................................................... 10,268 11,617
(Increase) decrease in prepaid expenses and other current assets.......... (96) 4,239
Decrease (increase) in other assets....................................... 515 (362)
Increase in accounts payable.............................................. 27,347 26,338
Decrease in accrued expenses and other current liabilities................ (370) (3,828)
--------- ---------
Net cash provided by operating activities............................. 28,320 34,194
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment................................................ (10,790) (4,175)
Purchase of United Kingdom direct marketer and internet service
provider, plus cash overdraft assumed.......................................... - (3,534)
--------- ---------
Net cash used in investing activities................................. (10,790) (7,709)
--------- ---------
Cash flows from financing activities:
Net repayments on line of credit................................................... - (32,750)
Net borrowing (repayments) of long term debt, less current portion................. (277) 8,515
Issuance of common stock........................................................... 2,216 1,200
--------- ---------
Net cash provided by (used in) financing activities .................. 1,939 (23,035)
--------- ---------
Effect of exchange rate on cash and cash equivalents.................................... (802) (2)
--------- ---------
Increase in cash and cash equivalents................................................... 18,667 3,448
Cash and cash equivalents at beginning of period........................................ 12,974 6,982
--------- ---------
Cash and cash equivalents at end of period.............................................. $ 31,641 $ 10,430
========= =========
</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, targeted direct mail catalogs and advertising in computer magazines
and publications. 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, consisting only of normal recurring accruals, necessary to present
fairly the financial position of Insight as of June 30, 1999, the results of
operations for the three and six months ended June 30, 1999 and 1998, and the
cash flows for the six months ended June 30, 1999 and 1998. The condensed
consolidated balance sheet as of December 31, 1998 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, 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.
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.
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.
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, over the fair values of the
net assets acquired, has been recorded as goodwill. Any further consideration,
which is contingent on profitability of the acquired companies, related to these
three acquisitions would be recorded as additional goodwill.
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 with a finance company. 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% (6.01% at June
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 June 30, 1999, the balance of
this portion of the credit facility was $33,977,000. As of June 30, 1999, an
additional $66,023,000 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 six months ended June
30, 1999 and 1998 is based upon the estimated annual income tax rate of the
Company.
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 six months ended June 30, 1999 and
1998 was immaterial.
7
<PAGE> 8
INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. PROPOSED MERGER WITH ACTION COMPUTER SUPPLIES HOLDINGS PLC
On May 9, 1999, the Company announced that it had entered into a
definitive merger agreement with Action Computer Supplies Holdings PLC
("Action") (LSE:ACS). Action is a United Kingdom-based IT direct marketer,
offering computer products and services to small, medium and large businesses
with operations in the United Kingdom and Spain. Under the terms of the merger
agreement, Insight will merge with Action in a tax-free exchange of shares. The
combined companies have current annualized sales of approximately $1.6 billion.
The original terms of the merger agreement provided for holders of
Action stock to receive 0.16 shares of Insight common stock for each of their
shares. On July 27, 1999, the Company announced that it and Action had agreed to
revise the terms of the proposed merger. Under the terms of the revised
agreement, holders of Action stock would receive 0.12 shares of Insight common
stock for each of their shares. With the revision, Insight expects to issue
approximately 4.23 million new shares, representing 14.2% of the Company's
Common Stock in the transaction. The merger is expected to be accounted for as a
pooling of interests. The transaction is subject to customary closing conditions
including the approval of shareholders of both Insight and Action and required
U.K. regulatory approval. The Company expects that the merger transaction will
be completed in October 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 and international operations, risk of business interruption,
year 2000 issues, reliance on and seasonality of outsourcing arrangements,
changing methods of distribution, reliance on suppliers, 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. In 1990, the Company began
marketing its own Insight-brand computers and in 1991 and 1992, added hardware,
software and other name brand computers to its product line. Through 1992, the
Company based its marketing practices primarily on advertising in computer
magazines and the use of inbound toll-free telemarketing. In 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 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 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
1999 and thereafter primarily due to industry-wide pricing pressures and pricing
strategies.
During 1995, the Company nearly doubled its catalog circulation to
generate leads and aggressively tested new lists. Since 1996, the Company has
decreased its catalog circulation because the Company used the information
generated from prior year tests to target mailings to its best customers and
instead increased its focus on penetrating existing accounts by aggressively
increasing its outbound sales force. To that end, 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 75, net, per
quarter during 1999. In 1998, Insight introduced its graphically rich electronic
catalogs and continued to focus on the business, education and government
markets, which aggregated approximately 90% of its business in 1998.
In the fourth quarter of 1997, the Company began 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. Sales in
these European markets accounted for 5.5% of the Company's net sales in 1998.
9
<PAGE> 10
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On May 9, 1999, the Company announced that it has entered into a
definitive merger agreement with Action Computer Supplies Holdings PLC
("Action"). Action is a United Kingdom-based IT direct marketer, offering
computer products and services to small, medium and large businesses with
operations in the United Kingdom and Spain. The Company will merge with Action
in a tax-free exchange of shares. The combined companies have current annualized
sales of approximately $1.6 billion. The terms of the merger agreement, as
amended, provide for holders of Action stock to receive 0.12 shares of Insight's
common stock for each of their shares. The Company expects to issue
approximately 4.23 million new shares of common stock in the transaction. The
merger is expected to be accounted for as a pooling of interests. The
transaction is subject to customary closing conditions including the approval of
shareholders of both the Company and Action and required U.K. regulatory
approval. The Company expects that the merger will be completed in October 1999.
In order to leverage its infrastructure, the Company, in 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 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. 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.
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. Accordingly, 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. Outsourcing represented 9.2% and 7.8% of the Company's net
sales in 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.
10
<PAGE> 11
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales....................................................... 100.0% 100.0% 100.0% 100.0%
Costs of goods sold............................................. 88.4 87.6 88.3 87.7
------ ------ ------- -------
Gross profit........................................... 11.6 12.4 11.7 12.3
Selling, general and administrative expenses.................... 8.1 9.1 8.2 8.9
------ ------ ------- -------
Earnings from operations............................... 3.5 3.3 3.5 3.4
Non-operating expense, net...................................... 0.0 0.1 0.1 0.1
------ ------ ------- -------
Earnings before income taxes........................... 3.5 3.2 3.4 3.3
Income tax expense.............................................. 1.3 1.2 1.3 1.3
------ ------ ------- -------
Net earnings........................................... 2.2% 2.0% 2.1% 2.0%
====== ====== ======= =======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales increased $127.8 million, or 54%, to $365.2
million for the three months ended June 30, 1999 from $237.4 million for the
three months ended June 30, 1998. The Company had 1,260 and 881 account
executives at June 30, 1999 and 1998, respectively. The Company increased its
number of orders shipped by 53% from 252,000 for the quarter ended June 30, 1998
to 385,000 for the quarter ended June 30, 1999. European sales represented $34.0
million, or 9.3%, of total net sales for the quarter ended June 30, 1999 as
compared to $14.1 million, or 5.9%, of total net sales for the quarter ended
June 30, 1998.
Net sales derived from direct marketing increased $121.9 million, or
56%, to $338.3 million for the three months ended June 30, 1999 from $216.4
million for the three months ended June 30, 1998. The increase in direct
marketing net sales resulted primarily from increased account executive
productivity, deeper account penetration, an increase in the Company's customer
base and internet enhancements that have increased unassisted transactions from
4.1% of total net sales to 8.7% of total net sales for the quarters ended June
30, 1998 and 1999, respectively.
Net sales derived from outsourcing arrangements increased $6.0 million,
or 28.7%, to $26.9 million for the three months ended June 30, 1999 from $20.9
million for the three months ended June 30, 1998. Outsourcing sales represented
7.4% and 8.8% of total net sales in the quarters ended June 30, 1999 and 1998,
respectively. The increase in sales from outsourcing services resulted from the
successful addition of new programs and sales improvements in existing programs.
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.
11
<PAGE> 12
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gross Profit. Gross profit increased $12.8 million, or 43%, to $42.3
million for the three months ended June 30, 1999 from $29.5 million for the
three months ended June 30, 1998. As a percentage of net sales, gross profit
decreased from 12.4% for the three months ended June 30, 1998 to 11.6% for the
three months ended June 30, 1999. The decline in gross profit percentage
primarily resulted from pricing strategies and market share opportunities. The
decrease was partially offset by the Company's ability, as a result of its
increased volume and financial position, to take advantage of supplier payment
discount, supplier reimbursements, rebates and purchasing opportunities. The
Company expects its gross profit percentage to continue to decline one to two
tenths of one percent per quarter on average in 1999 and thereafter primarily
due to pricing strategies and industry-wide pricing pressures.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.6 million, or 35%, to $29.3 million for the
three months ended June 30, 1999 from $21.8 million for the three months ended
June 30, 1998, but decreased as a percentage of net sales to 8.1% (8.0%
excluding amortization of goodwill) for the three months ended June 30, 1999
from 9.1% for the three months ended June 30, 1998. The decline was attributable
to increasing economies of scale the utilization of emerging technologies 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 $305,000 in the quarter ended June 30, 1999, compared to $45,000 of
goodwill amortization for the quarter ended June 30, 1998.
Non-Operating Expense, Net. Non-operating expense, net, which consists
primarily of interest expense, increased to $188,000 for the three months ended
June 30, 1999 from $116,000 for the three months ended June 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 38.3% and
38.2% for the quarters ended June 30, 1999 and 1998, respectively.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales increased $259.2 million, or 58%, to $703.4
million for the six months ended June 30, 1999 from $444.2 million for the six
months ended June 30, 1998. The Company had 1,260 and 881 account executives at
June 30, 1999 and 1998, respectively. The Company increased its number of orders
shipped by 66% from 483,000 for the six months ended June 30, 1998 to 803,000
for the six months ended June 30, 1999. European sales represented $75.9
million, or 10.8%, of total net sales for the six months ended June 30, 1999 as
compared to $14.1 million, or 2.3%, of total net sales for the six months ended
June 30, 1998.
Net sales derived from direct marketing increased $246.4 million, or
60%, to $655.3 million for the six months ended June 30, 1999 from $408.9
million for the six months ended June 30, 1998. The increase in direct marketing
net sales resulted primarily from increased account executive productivity,
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
12
<PAGE> 13
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
unassisted transactions from 3.8% of total net sales to 8.5% of total net sales
for the six months ended June 30, 1998 and 1999, respectively.
Net sales derived from outsourcing arrangements increased $12.8
million, or 36%, to $48.1 million for the six months ended June 30, 1999 from
$35.3 million for the six months ended June 30, 1998. Outsourcing sales
represented 6.8% and 7.9% of total net sales in the six months ended June 30,
1999 and 1998, respectively. The increase in sales from outsourcing services
resulted from the successful addition of new programs and sales improvements in
existing programs. 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 $27.3 million, or 50%, to $82.1
million for the six months ended June 30, 1999 from $54.8 million for the six
months ended June 30, 1998. As a percentage of net sales, gross profit decreased
from 12.3% for the six months ended June 30, 1998 to 11.7% for the six months
ended June 30, 1999. The decline in gross profit percentage primarily resulted
from pricing strategies and market conditions. The decrease was partially offset
by the Company's ability, as a result of its increase volume and financial
position, to take advantage of supplier payment discount, supplier
reimbursement, rebate ends purchasing opportunities. The Company expects its
gross profit percentage to continue to decline one to two tenths of one percent
per quarter on average in 1999 and thereafter primarily due to pricing
strategies and industry-wide pricing pressures.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $18.0 million, or 45%, to $57.6 million for
the six months ended June 30, 1999 from $39.6 million for the six months ended
June 30, 1998, but decreased as a percentage of net sales to 8.2% (8.1%
excluding amortization of goodwill) for the six months ended June 30, 1999 from
8.9% for the six months ended June 30, 1998. The decline was attributable to
increased economies of scale the utilization of emerging technologies the
utilization of emerging technologies 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 $611,000 in the six months ended June 30, 1999,
compared to $45,000 of goodwill amortization for the six months ended June 30,
1998.
Non-Operating Expense, Net. Non-operating expense, net, which consists
primarily of interest expense, decreased to $463,000 for the six months ended
June 30, 1999 from $493,000 for the six months ended June 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 38.9% and
38.5% for the six months ended June 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 their goodwill for tax
purposes.
13
<PAGE> 14
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. 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. For example, the
Company obtained a revenue-based outsourcing program in 1997 which offers high
dollar but low margin products primarily sold in the third quarter which
negatively impacts gross margin.
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 to 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 six months ended June 30, 1999 and $34.2 million for the six
months ended June 30, 1998. The positive cash flow in the current year was
primarily generated from a $27.3 million increase in accounts payable, a $10.3
million decrease in inventories and net earnings of $14.7 million. The decrease
in inventories resulted from the Company's increased use of direct shipments
from aggregators and original equipment manufacturers (which increased from 45%
to 51% of shipments for the six months ended June 30, 1998 and 1999,
respectively). These funds were primarily used to fund a $32.2 million increase
in accounts receivable which occurred as the result of increased sales.
Capital expenditures for the six months ended June 30, 1999 and 1998
were $10.8 million and $7.7 million, respectively. Capital expenditures for the
six months ended June 30, 1999 primarily relate to new software applications.
Capital expenditures for the six months ended June 30, 1998 primarily relate to
the acquisition of U.K. based companies, 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 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 1999. The
Company's ability to continue funding its planned growth beyond 1999 is
dependent upon its ability to generate sufficient cash flow or to obtain
additional
14
<PAGE> 15
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
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, to eliminate possible business impact, is continuing and is planned
to be completed in the third quarter of 1999.
The Company is in the process of 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 is not expected
to be 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 are scheduled to be installed during the third quarter of
1999 at which point the Company will proceed to the testing phase.
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 is not yet complete and will be reviewed regularly
until Year 2000 actually begins.
15
<PAGE> 16
INSIGHT ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Shareholders' Meeting was held on May 13,
1999.
(b) At the Annual Shareholders' Meeting, Larry A. Gunning and
Robertson C. Jones were re-elected as Class II directors to
serve until the annual meeting of shareholders in 2002. The
terms of office as directors of Eric J. Crown, Timothy A.
Crown and Stanley Laybourne continued after the meeting.
(c) The director-nominees were re-elected with the following
voting results:
<TABLE>
<CAPTION>
PROPOSAL VOTED FOR VOTED AGAINST ABSTAINED BROKER NON-VOTES
<S> <C> <C> <C> <C>
Election of Larry A. Gunning as
a Class II director 22,757,095 - 673,923
Election of Robertson C. Jones
as a Class II director 22,757,869 - 673,149
</TABLE>
The proposals to amend the Company's Amended and Restated Certificate
of Incorporation to increase the total authorized number of shares of Common
Stock from 30,000,000, to 100,000,000 and of Preferred Stock from 3,000,000 to
10,000,000, as well as the proposal to approve amendments to the Insight
Enterprises, Inc. 1998 Long Term Incentive Plan, were tabled.
16
<PAGE> 17
INSIGHT ENTERPRISES, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Merger Agreement, dated May 10, 1999, by and between
Insight Enterprises, Inc. and Action Computer
Supplies Holdings PLC (incorporated by reference from
the Insight Enterprises, Inc. Current Report on Form
8-K filed on May 13, 1999).
2.2 Supplemental Merger Agreement, dated July 27, 1999,
by and between Insight Enterprises, Inc. and Action
Computer Supplies Holdings PLC (incorporated by
reference from the Insight Enterprises, Inc. Current
Report on Form 8-K filed on August 12, 1999).
27.1 Financial Data Schedule for the six months ended June
30, 1999.
27.2 Financial Data Schedule for the six months ended June
30, 1998.
(b) Reports on Form 8-K
On May 13, 1999, the Company filed a report on Form 8-K to
disclose a Merger Agreement, dated May 10, 1999, by and between
Insight Enterprises, Inc. and Action Computer Supplies Holdings PLC.
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.
17
<PAGE> 18
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: AUGUST 12, 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
18
<PAGE> 19
EXHIBIT INDEX
NUMBER DESCRIPTION
2.1 Merger Agreement, dated May 10, 1999, by and between Insight
Enterprises, Inc. and Action Computer Supplies Holdings PLC
(incorporated by reference from the Insight Enterprises, Inc.
Current Report on Form 8-K filed on May 13, 1999).
2.2 Supplemental Merger Agreement, dated July 27, 1999, by and
between Insight Enterprises, Inc. and Action Computer Supplies
Holdings PLC (incorporated by reference from the Insight
Enterprises, Inc. Current Report on Form 8-K filed on August
12, 1999).
27.1 Financial Data Schedule for the six months ended June 30,
1999.
27.2 Financial Data Schedule for the six months ended June 30,
1998.
<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, 1999 AND RELATED CONDENSED CONSOLIDATED STATEMENT OF
EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDING JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 31,641
<SECURITIES> 0
<RECEIVABLES> 177,194
<ALLOWANCES> 7,972
<INVENTORY> 22,243
<CURRENT-ASSETS> 229,653
<PP&E> 52,084
<DEPRECIATION> 11,299
<TOTAL-ASSETS> 293,383
<CURRENT-LIABILITIES> 117,862
<BONDS> 7,983
0
0
<COMMON> 256
<OTHER-SE> 167,282
<TOTAL-LIABILITY-AND-EQUITY> 293,383
<SALES> 703,364
<TOTAL-REVENUES> 703,364
<CGS> 621,234
<TOTAL-COSTS> 621,234
<OTHER-EXPENSES> 55,511
<LOSS-PROVISION> 2,053
<INTEREST-EXPENSE> 509
<INCOME-PRETAX> 24,057
<INCOME-TAX> 9,363
<INCOME-CONTINUING> 14,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,694
<EPS-BASIC> 0.58
<EPS-DILUTED> 0.55
</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, 1998 AND 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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-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> 240
<OTHER-SE> 117,158
<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-BASIC> 0.38
<EPS-DILUTED> 0.36
<FN>
EPS-BASIC AND EPS-DILUTED ARE RESTATED TO INCLUDE THE EFFECT OF THE 3-FOR-2
STOCK SPLITS IN THE FORM OF STOCK DIVIDENDS PAID ON FEBRUARY 18, 1999 AND
SEPTEMBER 8, 1998.
</FN>
</TABLE>
