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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 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 (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1305 WEST AUTO DRIVE
TEMPE, ARIZONA 85284
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (480) 902-1001
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant, based upon the closing price of the
Registrant's Common Stock as reported on the Nasdaq National Market on February
29, 2000, was approximately $843,944,000. Shares of Common Stock held by each
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
for other purposes.
The number of outstanding shares of the Registrant's Common Stock on
February 29, 2000 was 26,898,600.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 16, 2000 are incorporated by reference in Part
III hereof.
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INSIGHT ENTERPRISES, INC.
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. Business................................................................. 1
ITEM 2. Properties............................................................... 9
ITEM 3. Legal Proceedings........................................................ 9
ITEM 4. Submission of Matters to a Vote of Security Holders...................... 9
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder
Matters............................................................... 10
ITEM 6. Selected Consolidated Financial and Operating Data....................... 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and..........
Results of Operations................................................. 12
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk............... 19
ITEM 8. Financial Statements and Supplementary Data.............................. 19
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 19
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................... 19
ITEM 11. Executive Compensation................................................... 19
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........... 20
ITEM 13. Certain Relationships and Related Transactions........................... 20
PART IV
ITEM 14. Exhibits and Reports on Form 8-K......................................... 20
SIGNATURES ......................................................................... 22
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PART I
ITEM 1. BUSINESS
GENERAL
Insight Enterprises, Inc. ("Insight" or the "Company") through its
subsidiary, Insight Direct Worldwide, Inc., is a global direct marketer of brand
name computers, hardware and software. We market primarily to small- and
medium-sized businesses of 50 to 1,000 employees, through a combination of
pro-active outbound telephone-based sales, and electronic commerce and
marketing. We offer an extensive assortment of more than 100,000 SKUs of
computer hardware and software, including such popular name brands as Compaq,
Gateway, Hewlett-Packard, IBM, Microsoft, Toshiba and 3COM. Our knowledgeable
sales force, aggressive marketing strategies and streamlined distribution,
together with our advanced proprietary information system, have resulted in
customer loyalty and profitable growth.
We seek to create strong, long-term relationships with our customers
through the use of a well-trained, dedicated outbound sales force whose goal is
to increase penetration of existing accounts, encourage repeat buying and ensure
customer satisfaction. To that end, the Company has increased its number of
account executives by 693% over the last five years, from 194 in 1994 to 1,538
at the end of 1999, most of whom focus on outbound telemarketing.
We have developed a highly refined operating model to support an efficient
fulfillment and distribution infrastructure. We believe our technologically
advanced, proprietary real-time information systems enhance the integration of
our sales, distribution and accounting functions, allowing the Company to
leverage operating expenses and improve customer service. Moreover, our
efficient use of technology has resulted in an expanded product offering, while
maintaining a "just-in-time" inventory system.
In 1998, we expanded operations outside of North America with the
acquisition of two European computer direct marketing companies. The first, in
April 1998, was the acquisition of a full-service direct marketing organization
based in Worksop, England, along with 85% of a related Internet service provider
company. In January 2000, we acquired an additional 10% of the Internet service
provider company. In December 1998 we acquired a leading direct marketer based
near Frankfurt, Germany. Our European subsidiaries represented 10% of net sales
in 1999.
In September 1998, increasing our customer base in the United States, we
acquired New Orleans-based computer direct marketer Treasure Chest Computers,
Inc. During 1999, the operations of this direct marketer were moved to existing
facilities in Tempe, Arizona and Indianapolis, Indiana.
Insight, through its subsidiary Direct Alliance Corporation, is a global
outsourcing provider of direct marketing services primarily to third party
original equipment manufacturers. These services include marketing, sales,
configuration and distribution.
Our objectives are to increase sales and profitability in all areas by (i)
expanding our customer base, (ii) increasing penetration of our existing
customer base, (iii) expanding globally, (iv) leveraging our existing
infrastructure, (v) expanding product offerings, (vi) utilizing emerging
technologies, and (vii) expanding our outsourcing clients. Our goal is to become
the primary source for providing computer products to our target markets.
The Company's executive offices are located at 1305 West Auto Drive, Tempe,
Arizona 85284, and its telephone number is (480) 902-1001. Sales and
administrative offices, outsourcing operations and related distribution
facilities are also situated in Tempe, Arizona. Our full-service distribution
center was relocated to Indianapolis, Indiana in early 1998. We maintain World
Wide Web sites at www.insight.com and www.direct-alliance.com.
Insight was incorporated in Delaware in 1991 and is the successor to the
business that commenced operations in 1988. Unless otherwise indicated, the
"Company" or "Insight" as used herein refers to Insight Enterprises, Inc. and
its subsidiaries and predecessors.
INDUSTRY BACKGROUND
Computer, hardware and software sales continue to increase in the United
States and worldwide. We believe that sales of computers and related products
have increased principally because of the following: (i) decreasing prices of
computers, hardware, and software resulting primarily from technological
advances and intense competition among manufacturers, retailers, and resellers,
(ii) improvements in computer hardware performance and the development of new
software applications, (iii) increased use of computers by businesses,
educational institutions, and governments, (iv) increased user familiarity with
computers, (v) rapid technological advances, resulting in shorter product life
cycles, and (vi) component commonality resulting from the emergence of industry
standards.
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The market for computers and related products is served through a variety
of distribution channels, and intense competition for market share has forced
computer manufacturers to seek new channels to distribute their products. We
believe the direct marketing channel that we operate in is the fastest growing
segment of the PC product markets both in the U.S. and worldwide. Additionally,
we believe that larger companies, such as Insight, are taking away market share
from smaller companies.
We believe that as businesses and individuals become increasingly familiar
with computers, they are more receptive to direct marketing. We believe that as
customers become more receptive to direct marketing the customers' purchase
decision, will be based increasingly on product selection and availability,
price, convenience, and customer service. We believe that direct marketers offer
broader product selection, lower prices, and greater purchasing convenience than
traditional retail stores.
We believe new entrants into the direct marketing channel must overcome a
number of significant barriers to entry, including (i) the time and resources
required to build a customer base of sufficient size and a well-trained account
executive sales base, (ii) the significant investment required to develop an
information and operating infrastructure, (iii) the advantages enjoyed by
established larger competitors with purchasing and operating efficiencies, (iv)
the reluctance of manufacturers and distributors to allocate product and
cooperative advertising funds and establish electronic transactional
relationships with additional participants, and (v) the difficulty of
identifying and recruiting management personnel.
We believe that we will continue to benefit from industry changes as a
cost-effective provider of a full range of computer and related products through
direct marketing. We believe that traditional distribution channels, such as
retail stores, do not satisfy customers' key purchase criteria of product
selection and availability, price, convenience and customer service, thus
creating opportunity for growth of direct marketers of computer products.
Additionally, the Company believes that recently emerging Internet-only computer
providers, though currently offering attractive pricing, have not to date
offered the necessary support functions (e.g. dedicated account executive, term
purchases, efficient return privileges) to satisfy the Company's targeted
customers, small- and medium-sized businesses.
OPERATING STRATEGY
Our objective is to become the global leader in the direct sales and direct
marketing of computers and related products to the computer-literate end-user.
The key elements of our strategy are as follows:
Small- to Medium-Size Business Market Focus. We target businesses with 50
to 1,000 employees, which we believe is one of the most valuable segments of the
computer market because they demand leading, high-performance technology
products, purchase frequently, are value conscious, and require less technical
support. Our operating model positions us to more effectively serve this
business segment of the market through our competitive pricing, extensive
product availability, high levels of customer service, and cost-effective
distribution systems and technological innovation.
Well Trained Account Executives and Attractive Targeted Marketing. We offer
our products through integrated direct marketing that includes outbound and
inbound telesales, electronic commerce, electronic direct marketing, printed
catalogs and selectively targeted advertisements in trade publications. We focus
our effort on outbound telemarketing and, to this end, have increased the number
of account executives at a compound annual rate of 51% over the last five years
to 1,538 in 1999. To support our marketing effort, we have prioritized our
customer database, assigned account responsibility to specific account
executives and enhanced sales training.
Use of E-Commerce. We actively promote the use of e-commerce with our
customers. We believe that providing the customer with a seamless e-commerce
system supported by well-trained account executives results in a highly
efficient business model with high customer satisfaction. Additionally, through
the promotion of e-commerce we hope to increase sales and facilitate the
customer's ease of doing business with Insight.
Building Customer Loyalty. We strive to create a strong, long-term
relationship with our business customers, which we believe increases the
productivity of our existing accounts, encourages repeat buying, and ensures
customer satisfaction. We believe that a key to building customer loyalty is to
provide customers with a team of knowledgeable and empowered account executives
backed by a strong support staff. Most business customers are assigned a trained
account executive who handles orders and notifies them of products and services
that may be of specific interest. We believe these strong one-on-one
relationships improve the likelihood that the customer will look to Insight for
future purchases.
Broad Selection of Branded Products. We provide the convenience of one-stop
shopping by offering our customers a broad, comprehensive selection of more than
100,000 computer and related products based on the Wintel standard. We offer
brand name products of major manufacturers, including, Compaq, Gateway,
Hewlett-Packard, IBM, Microsoft, Toshiba and 3COM. Our breadth of product
offering combined with our efficient, high-volume and cost-effective direct
marketing practices allows us to offer competitive prices. We have developed
"direct-ship" programs with many of our suppliers through the use of electronic
data interchange links allowing us to expand further our product offerings,
without increasing inventory and handling costs or exposure to inventory risk.
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Efficient Technologically Driven Operator. We have developed a highly
refined operating model to support an efficient fulfillment and distribution
infrastructure. Our business model yielded inventory turns of 57 and 26 times in
1999 and 1998, respectively. We also use technologically advanced, proprietary,
real-time information systems to enhance the integration of our sales,
distribution and accounting functions, with the goal of lowering operating
expenses and further improving customer service and satisfaction levels. To
minimize our inventory exposure, we use a variety of inventory control
procedures and policies, including automated "just-in-time" management and
electronic "direct-ship" programs with suppliers. Fifty-three percent of our
orders in 1999 were shipped directly to the customer from our suppliers. In
addition, we use other automated systems involving telephony, credit card
processing and standard email notification to further streamline operations and
to continue to improve profitability and increase customer satisfaction.
We also desire to become the leading global provider of direct marketing
services by leveraging our core operating competencies and offering these
competencies to companies seeking to direct market their products. We expect to
continue to leverage opportunistically these capabilities in the future.
GROWTH STRATEGY
Our growth strategy is to increase sales and earnings by (i) expanding our
customer base, (ii) increasing penetration of our existing customer base, (iii)
expanding globally, (iv) leveraging our existing infrastructure, (v) expanding
our product offerings, (vi) utilizing emerging technologies and (vii) expanding
our outsourcing clients.
Expand Customer Base. We believe we have captured less than a third of the
accounts in our target market, small- and medium-sized businesses. We seek to
acquire new account relationships through proactive outbound telemarketing,
electronic commerce and marketing.
Increase Penetration of Existing Customer Base. We believe the Company is
the primary provider of computers and related products for less than half of our
customers. We seek to become the primary provider for our customers by
developing and increasing the number of account executives who focus on outbound
telemarketing opportunities. We believe proactive account management and
assignment of specific identified account executives dedicated to developing
closer relationships with active business customers will enable us to increase
the volume, frequency, and breadth of the business. Additionally, in order to
increase our capability to contact accounts, we have increased the number of
account executives by 693% since 1994, to 1,538 as of December 31, 1999, most of
whom focus on outbound telemarketing. In addition, we have added senior level
sales managers to our management team in order to enhance sales productivity. We
continue to refine our customer database to better understand and service our
customers resulting in long-term customer relationships.
Global Expansion. We seek to become a global leader in direct marketing. To
that end, we established operations in Canada in 1997 and in the United Kingdom
and Germany in 1998. For the year ended December 31, 1999, 10% of the Company's
net sales were from European subsidiaries. We intend to continue expanding
globally through additional acquisitions of direct marketing companies or
establishing additional locations.
Leverage Existing Infrastructure. We have expended considerable resources
to develop our infrastructure to support planned growth. Since the end of 1998,
we have increased the number of account executives by 466 and invested in our
information systems. We believe that ultimately these investments will allow us
to increase sales, without a corresponding increase in operating expenses. We
expect to continue to reduce operating expenses as a percent of sales and
improve profitability through increased productivity of new account executives,
cost-effective marketing, utilization of electronic commerce and economies of
scale. In addition, we have developed strong relationships with our suppliers
and continue to offset certain expenses through the receipt of supplier
reimbursements. We intend to continue to leverage our core operations by
offering outsourcing of direct marketing services to leading manufacturers of
computers and related products.
Expand Product Offering. We offer an extensive assortment of products. Many
of our products are offered through the use of our proprietary software which
enables us to maintain a "virtual inventory" through real-time access to
supplier products via electronic data interchange links. In 1999, 53% of the
Company's shipments were "direct shipped" from non-Insight distribution
facilities, compared to 50% in 1998. We intend to continue to expand our product
offerings through increased use of the electronic "direct ship" programs with
suppliers as well as seeking new product authorizations, as they become
available to direct channels. In addition, we intend to continue to analyze
domestic and international acquisition opportunities that would further expand
and enhance our existing product offerings to the business customer.
Utilize Emerging Technologies. The Company has historically been a leader
in creating and capitalizing on emerging technologies in direct marketing and it
intends to continue to capitalize on such new advances. The Company expects to
continue to utilize emerging marketing and distribution channels such as the
Internet and on-line computer services to generate sales, distribute product
information, provide product support, and obtain additional customer leads. The
Company experienced a 159% increase in unassisted Internet sales, which
constituted approximately 9.1% and 5.2% of its sales in 1999 and 1998,
respectively. We believe that our target business customers are technologically
sophisticated and will increase
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utilization of such services. These new distribution channels continue to expand
the scope of our marketing efforts, and we believe that they will lead to
increased sales and profitability. In particular, we believe that our direct
marketing capabilities will provide us a competitive advantage in the rapidly
expanding Internet commerce channel. We expect to further utilize our direct
marketing expertise in order fulfillment and distribution to take advantage of
these new direct marketing channels as they continue to develop.
Expansion of Outsourcing Clients. We currently offer outsourcing services
to 6 different customers. We intend to continue to actively solicit new
customers from both within and outside the computer industry.
MARKETING
We sell our products through the direct marketing channel. Our marketing
programs are designed to attract new customers and to stimulate additional
purchases from existing customers. Through our marketing programs, we emphasize
our broad product offering, competitive pricing, fast delivery, customer support
and multiple payment options. We use a variety of marketing techniques to reach
existing and prospective customers including outbound telemarketing, electronic
marketing and communications, catalogs and specialty marketing programs.
Outbound Telemarketing. We maintain a core group of outbound telemarketing
account executives who contact specified customers on a systematic basis to
generate additional sales. In addition, when time permits, these account
executives utilize various prospecting techniques in order to increase the size
of our customer base. We believe that small- and medium-sized businesses respond
favorably to a one-on-one relationship with personalized service from
well-trained account executives. Once established, these one-on-one
relationships are maintained and enhanced through frequent telecommunications
supplemented by e-marketing materials designed to meet each customer's specific
computing needs. At December 31, 1999, the Company employed 1,538 account
executives, an increase of 43% from 1,072 account executives at December 31,
1998, most of whom are focused on outbound marketing.
Electronic Marketing and Communications. We maintain a global Web site
www.insight.com, which features our current product offerings, special
promotions, technical product specifications and other useful information.
Customers may place orders while at the site using a credit card or electronic
purchase order. Unassisted Web orders - those transacted without the assistance
of an Insight account executive - represented 9.1% of the Company's net sales in
1999. We believe this percentage will increase as the popularity and credibility
of the Internet grows and as businesses and electronic customers increase their
use of the Web to procure computing products.
Our outbound telesales account executives encourage customers to utilize
the Company's web site, www.insight.com, for placing orders, and we offer
selected businesses customized web sites that are designed by our electronic
marketing team. These customized web areas allow businesses to procure computing
products from us at specially negotiated volume pricing. We also create
awareness of our products to an audience of electronically savvy customers and
prospects through graphically rich electronic catalogs, electronic postcards and
other branded sales messages transmitted via E-mail.
Catalogs. Our catalogs are selectively mailed to existing active customers
to increase sales to those customers. Each catalog provides detailed product
descriptions, manufacturers' specifications, pricing and the Company's service
and support features. As part of our outsourcing services, we also produce
catalogs for certain manufacturers. These catalogs are circulated periodically,
and for select manufacturers the catalog is inserted into the manufacturer's
product packaging.
Advertising. We place targeted advertisements in trade publications in the
United States, the United Kingdom and Germany. These color advertisements
provide detailed product descriptions, manufacturers' specifications and pricing
information and emphasize the Insight's service and support features.
Additionally, the Insight logo and telephone number are included in promotions
by selected manufacturers.
Specialty Marketing. We continue to increase our national exposure, promote
local interest, and increase traffic on our Web site through sponsorship of the
"Insight.com Bowl", a post-season intercollegiate football game. The Company
announced its multi-year sponsorship on November 6, 1997. During the 1999
Insight.com Bowl, which was telecast live by ESPN on December 31, 1999, we aired
television commercials showcasing the Company and its products. These 15-second
spots were designed to introduce the Insight brand to prospective customers and
encourage high-technology business buyers to visit Insight's Web site at
www.insight.com.
Supplier Reimbursements. We obtain supplier reimbursements from certain
product manufacturers. Such reimbursements may be in the form of discounts,
advertising allowances, price protection or rebates. Additionally, manufacturers
may also provide mailing lists, contacts or leads. In other cases, we receive
reimbursements from suppliers based upon the volume of purchases, or sales, of
the suppliers' product. No assurance can be given that we will continue to
receive such reimbursements or that we will be able to collect outstanding
amounts relating to these reimbursements in a timely manner, or at all. A
reduction in or discontinuance of, a significant delay in receiving, or the
inability to collect such reimbursements could have a material adverse effect on
the Company's business, results of operations and financial
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condition. We believe that supplier reimbursements leverage our marketing reach
and strengthen relationships with leading manufacturers.
Customers. We maintain an extensive database of customers and potential
customers. Based on dollar volume, approximate percentages of net sales for 1999
to end-users in the Company's four major market segments were as follows:
business, including computer resellers - 82%, educational institutions - 5%,
government organizations - 2%, and home - 11%. The percentage of net sales to
business customers has increased from 80% in 1998. No single customer accounted
for more than two percent of net sales during 1999.
SALES
We believe that our ability to establish and maintain long term
relationships and to encourage repeat purchases is dependent, in part, on the
strength of our account executives. Because our customers' primary contact with
the Company is through our account executives, we are committed to maintaining a
qualified and knowledgeable sales staff.
Of the 1,538 account executives employed by the Company at December 31,
1999; 1,273 were devoted to Insight Direct Worldwide, Inc. and 265 to Direct
Alliance Corporation. The Company employed 1,072 account executives on December
31, 1998; 954 at Insight Direct Worldwide, Inc. and 118 at Direct Alliance
Corporation.
We focus on recruiting and training high-quality personnel. New account
executives are required to participate in an extensive training program to
develop proficiency and knowledge of the Company's products. This program
consists of class work focusing on technical product information, sales and
customer service, and supervised inbound and outbound sales experience.
Additionally, the Company, in conjunction with product manufacturers and
distributors, sponsors weekly training sessions introducing new products and
emphasizing fast-selling products. The Company also has a training program that
seeks to refine sales skills and introduce new policies and procedures. Our
sales division is open 365 days a year, 24 hours a day.
Each account executive is responsible for building a customer base. Most
first time callers are assigned to an account executive, and subsequent incoming
calls from that customer are then directed to their account executive. Our
information system allows on-line retrieval of relevant customer information,
including the customer's history and product information, such as list price,
cost and availability, as well as upselling and cross-selling opportunities.
Account executives are empowered to negotiate sales prices, and part of their
compensation is based upon the gross profit dollars generated. Most account
executives also make outbound sales calls to customers.
We attribute our high outbound call volume and favorable repeat orders in
part to the strength of our account executives. We have established dedicated
sales divisions focusing on business, education, and government accounts. These
account executives have demonstrated the experience needed to interact with
sophisticated purchasing agents and the management information staffs of larger
organizations.
The Company has experienced an increase in average order size of 1% from
$915 in 1998 to $921 in 1999. The average order size of the Company's Insight
Direct Worldwide, Inc. subsidiary has decreased 1% from $962 in 1998 to $952 in
1999 while the average order size of the Company's Direct Alliance Corporation
subsidiary has decreased 9% from $601 in 1998 to $544 in 1999. This increase in
average order size is attributable to the increased sales to business customers,
the fact that Insight Direct Worldwide's net sales increased as a percentage of
total net sales, and was partially offset by decreasing prices on many products
offered by the Company.
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PRODUCTS AND MERCHANDISING
We offer computers, hardware and software products. The following chart
provides information regarding selected products offered by the Company during
1999 and 1998:
PERCENTAGE OF
PRODUCT SALES
------------------
PRODUCT CATEGORIES 1999 1998 SELECTED PRODUCT MANUFACTURERS
- ------------------ ---- ---- ------------------------------
Computers: Compaq IBM
Hewlett-Packard Toshiba
Notebooks............................... 18% 22%
Desktops and Servers.................... 17% 18%
Hard disk drives........................... 7% 8% Iomega Seagate
Maxtor Western Digital
Memory/Processors.......................... 8% 5% Intel PNY
Kingston Viking
Monitors/Video............................. 6% 6% Mag Innovision Princeton Graphic
Systems
ViewSonic
Network/Connectivity....................... 8% 8% Cisco Systems Intel
Hewlett Packard 3Com
Printers................................... 9% 9% Epson Lexmark
Hewlett-Packard Okidata
Software................................... 11% 10% Adobe Novell
Microsoft Symantec
Miscellaneous.............................. 16% 14% American Power Adaptec
Conversion Belkin
Our largest product category is computers, representing 35% of product
sales in 1999, down from 40% of product sales in 1998. The decrease in computers
as a percentage of sales is due to the decrease in the sales price per unit and
the fact that sales in this category are significantly lower in the European
operations, which were acquired in 1998.
We select our products based upon existing and proven technology. We will
not introduce a new product until we believe that a sufficient market has
developed. Our product managers and buyers evaluate new products and the
effectiveness of existing products, and select products for inclusion in our
marketing based upon market demand, product features, quality, reliability,
sales trend, price, margins and warranties. Because our goal is to offer the
latest in technology, we quickly replace slower selling products with new
products. We offer more than 100,000 computer and related products based on the
Wintel standard. Historically, we have made purchases/sales from/to other
computer resellers in order to offer our customers favorable pricing, or to
balance our inventory to minimize inventory exposure risk.
SERVICE AND SUPPORT
We believe we achieve high levels of customer satisfaction. Approximately
two-thirds of our orders in both 1999 and 1998 were placed by customers who had
previously purchased products from the Company. Our dedication to prompt,
efficient customer service are important factors in customer retention and
overall satisfaction.
Fast Product Delivery. Utilizing our proprietary information system,
customer orders are sent to our distribution center or to one of our "direct
ship" suppliers for processing immediately after credit approval. Federal
Express has set up its own packing facility within the Company's distribution
center, and we have integrated Federal Express' and United Parcel Service's
labeling and tracking system into the Insight information system to ensure
prompt delivery. Additionally, we have integrated our information system with
our "direct ship" suppliers; as a result, shipments from these suppliers are
transparent to Insight's customers. However, we assume the risks and rewards of
ownership and therefore record the revenues and related costs derived from the
sale of such products in our net sales, and cost of goods sold, respectively. We
ship most of our orders on the day the orders are received and credit is
approved.
Specialty Communications. Our employees use the Internet network to enhance
customer support and inter-business correspondence. The network access provides
a convenient communication device enabling customers to contact their sales,
customer service, and technical support representatives via E-mail messages. The
customer may elect to receive a message via electronic mail automatically upon
shipment to confirm that the order has been shipped.
Warranties and Product Returns. Most of the products marketed by the
Company are warranted by the manufacturer. We usually request that customers
return their defective products directly to the manufacturer for warranty
service. On selected products, and for selected customer service reasons, we
accept returns directly from the customer and then either
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credit the customer or ship a replacement product. We generally offer a limited
15- or 30-day money back guarantee for unopened products and (selected opened
products); however certain products are subject to restocking fees. The returned
products are quickly processed and returned to the manufacturer or supplier for
repair, replacement, or credit to the Company, or resold by the Company if
unopened. Products that cannot be returned to the manufacturer for warranty
processing, but are in working condition, are promptly sold to inventory
liquidators, which helps us minimize losses from returned products.
TECHNOLOGY BASED OPERATIONS
We believe our implementation of advanced technological systems provides
competitive advantages by increasing the productivity of our account executives,
delivering more efficient customer service and reducing order processing and
inventory costs. Our account executives can access the Company's proprietary
information system to obtain (i) a customer history, (ii) the cost and
availability of the current order, (iii) gross profit information, (iv) the
compatibility of products ordered, and (v) cross-selling and up-selling
opportunities. We believe that the information available to our account
executives empowers them to make better decisions, provide superior customer
service, and increase overall profitability. We have incorporated redundancy in
our management information systems and back-up systems and generators that will
help to minimize the impact of interruption in our management information or
telecommunication systems. We believe that our investment in information
technology will continue to improve efficiency.
We have integrated our sales, accounting, inventory, and distribution
systems. Utilizing our proprietary information system, orders are electronically
sent to either the Insight distribution center or to a "direct ship" supplier
for processing immediately upon credit approval. All products received in the
Company's distribution center have a standard UPC code, manufacturer bar code,
or supplier bar code, or are issued an Insight bar code. Our proprietary
superscan process checks orders to ensure accurate fulfillment prior to shipping
and then records reduction in inventory. We have implemented a re-ordering
system that calculates lead times and, in some instances, automatically
re-orders from certain suppliers. Our sophisticated system accepts price quotes
from several competing suppliers and automatically re-orders from the supplier
with the most competitive price. We have integrated our order processing,
labeling, and tracking systems with Federal Express and United Parcel Service to
ensure overnight delivery. Additionally, we have implemented an on-line, real
time credit card address verification and approval system through a third-party
provider with Visa(R), MasterCard(R), American Express(R) and Discover(R) to
instantaneously match the address provided by the customer with the specific
credit card billing address and obtain transaction approval.
We are in the process of replacing certain of our core business function
software applications in order to accommodate expanding business needs. Some
applications were installed in 1999 and others will continue in 2000 and beyond.
Our telephone system can automatically route calls, depending on their
originating data, to specific sales groups, or to the best-selling account
executives. Our telephone system also uses menu systems that permit the
customers to route themselves to the appropriate service or sales area, or to
their assigned account executives.
PURCHASING AND DISTRIBUTION
Purchasing/Inventory Management. During 1999, we purchased products from
approximately 600 suppliers. Approximately 17% (based on dollar volume) of these
purchases were directly from manufacturers, with the balance from distributors.
Purchases from Ingram Micro, Inc. (a distributor), our largest supplier,
accounted for approximately 26% of our total product purchases in 1999. The top
five suppliers as a group (Ingram Micro; Tech Data Corporation (a distributor);
Merisel, Inc. (a distributor); Toshiba America Information Systems, Inc. and
Synnex Information Technologies, Inc. (a distributor)) accounted for
approximately 64% of our total product purchases during 1999. We believe we have
excellent relationships with our suppliers, which have resulted in favorable
return and price protection policies, as well as supplier reimbursements.
Although brand names and individual products are important to our business, we
believe that competitive sources of supply are available in substantially all of
our product categories and therefore we are not dependent on any single
supplier. We believe that 60%-70% of the purchases by our customers are made
without regard to brand.
Inventory Management. We utilize "just-in-time" inventory management to
reduce inventory costs. Our order fulfillment and inventory controls allow us to
forecast and order products "just-in-time" for shipping. We promote the use of
electronic data interchange with our suppliers, which helps to reduce overhead
and the use of paper in the ordering process. Additionally, some distributors
will "direct ship" products directly to the customer, which reduces physical
handling by the Company. Fifty-three percent of our orders were "direct shipped"
from non-Insight distribution facilities in 1999. Such "direct shipments" are
transparent to the customer. However, we assume the risks and rewards of
ownership and therefore record the revenue and related costs from the sales of
such products in our net sales and cost of goods sold, respectively. These
inventory management techniques allow us to offer a greater range of products
without increased inventory requirements, and to have reduced inventory exposure
and faster order fulfillment time, resulting in inventory turns of 57 and 26
times for 1999 and 1998, respectively.
The industry in which we operate is characterized by rapid technological
change and the frequent introduction of new products and product enhancement.
While we attempt to anticipate and react to new product introductions and to
mitigate our
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exposure to losses from inventory obsolescence, there can be no assurance that
such efforts will be successful, or that unexpected new product introductions
will not have a material adverse effect on the demand for our inventory or
product offerings.
Distribution Center. The majority of our U.S. distribution operations,
including Direct Alliance Corporation, are conducted at our 178,000-square foot
shipping facility in Indianapolis, Indiana. Activities performed in this
distribution center include receipt and shipping of inventory, configuration of
computer systems, and returned product processing. Orders are transmitted
electronically from the account executive to the distribution center upon credit
approval, where a packing slip is printed automatically for order fulfillment.
All inventory items are bar coded and placed in designated bin locations that
are marked with both readable and bar coded identifiers. Product movement is
computer directed and radio frequency scanned for verification. Radio frequency
technology also is used to perform daily inventory cycle counts to ensure
inventory accuracy. We also use a proprietary super-scan process to ensure
accurate order fulfillment. Our outsourcing operations are also served by our
distribution center in Tempe, Arizona. We also have distribution facilities in
Canada, the United Kingdom and Germany.
OUTSOURCING
We seek to leverage our core competencies in direct marketing by providing
turnkey direct marketing services. We believe that outsourcing provides
manufacturers the ability to reduce operational overhead, stimulate demand for
their products through other marketing channels, increase sales and enhance
customer satisfaction.
We provide direct marketing services to certain computer product
manufacturers. These services include publishing and circulating catalogs,
placing advertisements under the manufacturer's name, providing account
executives dedicated solely to the manufacturer's product line, configuration
capabilities and fulfilling and/or shipping orders and handling returns. Our
outsourcing account executives interface with customers as representatives of
the applicable manufacturers, not Insight. Most of the outsourcing arrangements
are service-based whereby the Company derives net sales based upon a percentage
of the revenues generated from sales of the manufacturers' product. Revenues
from outsourcing sales and 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 outsourcing arrangements, Insight takes title to
inventories of products and assumes the risk of collection of accounts
receivable. Revenues and the related costs from the sales of such products are
included in the Company's net sales and cost of sales, respectively. The rate of
our net sales growth in the future 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, because the manufacturers'
target customers can have cyclical buying patterns. Although we are presently
focused on computer-related products, we intend to evaluate opportunities to
leverage our sales, marketing, and distribution capabilities in areas involving
non-computer products, from time to time.
COMPETITION
The computer and related products industry is highly competitive. We expect
competition will increase as retailers and direct marketers who have not
traditionally sold computer and related products enter the industry or if the
industry's rate of growth slows. We compete with a large number and wide variety
of marketers and resellers of computers and related products, including
traditional computer and related products retailers, computer superstores,
Internet-only computer providers, consumer electronics and office supply
superstores, mass merchandisers, and national direct marketers (including
value-added resellers and specialty retailers, aggregators, distributors,
franchisers, manufacturers and national computer retailers some of which have
their own direct marketing operations).
Certain of our competitors have longer operating histories and greater
financial, technical, marketing, and other resources than the Company. In
addition, many of these competitors offer a wider range of products and services
than the Company and may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Many current and
potential competitors also have greater name recognition and more extensive
promotional activities, offer more attractive terms to customers and adopt more
aggressive pricing policies than the Company. There can be no assurance that the
Company will be able to compete effectively with current or future competitors
or that the competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
SALES OR USE TAX
We presently collect sales tax only in states in which we have a physical
presence. These states include Arizona, Indiana, Louisiana and Tennessee.
Various states have sought to impose on direct marketers the burden of
collecting state sales or use taxes on the sales of products shipped to that
state's residents. The United States Supreme Court has affirmed its position
that, under the Commerce Clause of the United States Constitution, a state
cannot constitutionally impose sales or use tax collection obligations on an
out-of-state mail order company whose only contacts with the state are the
distribution of catalogs and other advertising materials through the mail and
the subsequent delivery of purchased goods by United States mail or by
interstate common carrier from a point outside of the state. If the Supreme
Court changes its position or if
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legislation is passed to overturn the Supreme Court's decision, the imposition
of a sales or use tax collection obligation on us for states to which we ship
products would result in additional administrative expenses and could result in
price increases to the customer or otherwise have a material adverse effect on
our business. From time to time, legislation to overturn this decision of the
Supreme Court has been introduced, although to date, no such legislation has
been passed. Additionally, there is the possibility of a tax being imposed on
Internet sales although today none has been enacted. We also collect a goods and
services tax in Canada, and a value added tax in the United Kingdom and Germany.
PATENTS, TRADEMARKS AND LICENSES
We do not maintain a traditional research and development group, but work
closely with computer product manufacturers and other technology developers to
stay abreast of the latest developments in computer technology. Where necessary,
we have obtained licenses for certain technology. We conduct our business under
the trademark and service mark "Insight" and its related logo. We believe our
trademarks and service marks have significant value and are an important factor
in the marketing of our products, and we intend to protect them.
PERSONNEL AND TRAINING
As of December 31, 1999, the Company employed 2,521 persons; 849 were in
management support services and administration, 1,538 were account executives
and 134 were in warehouse/distribution. Our employees are not represented by any
labor union, and the Company has experienced no work stoppages. We believe our
employee relations are good.
We have invested in our employees' future and the Company's future through
Insight University, an ongoing program of internal and external training. The
training programs include a new hire orientation program, a sales training
program, general industry and computer education as well as ongoing employee and
management development programs. Insight's Sales Training Program is dedicated
to ensuring quality sales and customer services. The Sales Training Program
encompasses a five-week extensive product, system and procedural training
program. Ongoing sales skill classes target the positions of sales management,
account executives and sales support by providing new skills for the entire
sales process. Management development is a focus for Insight University and
provides each manager with development opportunities through classes relevant to
his/her needs. We focus on a self-directed learning environment made possible
via an e-learning initiative.
REGULATORY AND LEGAL MATTERS
The direct response business as conducted by the Company is subject to the
Merchandise Mail and Telephone Order Rule and related regulations promulgated by
the Federal Trade Commission, the Arizona Attorney General and various
regulatory authorities in other states where the customers purchase products. We
believe the Company is in compliance with such regulations and has implemented
programs and systems to assure its ongoing compliance.
ITEM 2. PROPERTIES
Our executive officers are located in a 21,000 square foot building, which
the Company owns. We also own a 103,000 square foot facility in Tempe, Arizona
which houses part of Insight Direct Worldwide Inc.'s sales force and a 56,000
square foot facility in Tempe, Arizona that houses the sales and administration
functions of Direct Alliance Corporation. All three of the buildings which we
own are encumbered. We lease approximately 140,000 square feet in three
facilities in Arizona, which house our administrative, support and outsourcing
distribution activities. In 1998, we leased a distribution center of
approximately 178,000 square feet in Indianapolis, Indiana. We also lease
another 42,000 square feet in Canada, 23,000 square feet in Louisiana, 42,000
square feet in the United Kingdom, and 27,000 square feet in Germany. We lease
two homes in the United Kingdom for Company employees. A portion of the space in
Canada is being used to house account executives managing U.S. business
accounts. The leases for approximately 14% of such space expire in 2000, 26%
expire in 2001, 6% expire in 2002, 8% expire in 2003, 40% expire in 2004 and the
remaining 6% expire between 2006 and 2012. We may require more space in the
future. The amount and timing of future space needs will depend upon the extent
of our growth. We believe that suitable facilities will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the ordinary
course of business. While it is not feasible to predict the ultimate disposition
of these matters, in the opinion of management their outcome will not have a
material adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our Common Stock is traded on the Nasdaq National Market under the symbol
"NSIT." The bid price information included herein is derived from the Nasdaq
Monthly Statistical Report, represents quotations by dealers, may not reflect
applicable markups, markdowns or commissions and does not necessarily represent
actual transactions.
COMMON STOCK
HIGH PRICE LOW PRICE
Year 1998
First Quarter......................................... $19.084 $14.778
Second Quarter........................................ 19.500 13.000
Third Quarter......................................... 25.333 17.111
Fourth Quarter........................................ 36.833 12.000
Year 1999
First Quarter......................................... 40.000 18.625
Second Quarter........................................ 30.250 18.750
Third Quarter......................................... 35.375 24.250
Fourth Quarter........................................ 41.750 29.000
As of February 29, 2000, there were 26,898,600 shares outstanding of the
Common Stock of the Company held by approximately 117 stockholders of record. We
estimate there are approximately 6,600 beneficial holders of our Common Stock.
Dividends. We have never paid a cash dividend on our Common Stock, and our
credit facility prohibits the payment of cash dividends without the lender's
consent. The Board of Directors anticipates that all of the Company's earnings
will be retained for use in its business and does not intend to pay any cash
dividends in the foreseeable future.
On January 6, 1999, the Company's Board of Directors approved a 3-for-2
stock split effected in the form of a stock dividend and payable 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, share prices and
net earnings per share in this Annual Report on Form 10-K have been
retroactively adjusted to reflect these 3-for-2 stock splits.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto, and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. The selected consolidated financial data
presented below under the captions "Consolidated Statements of Earnings Data"
and "Consolidated Balance Sheet Data" as of and for each of the years in the
five-year period ended December 31, 1999 are derived from the consolidated
financial statements of the Company, which consolidated financial statements
have been audited by KPMG LLP, independent certified public accountants. The
consolidated financial statements as of December 31, 1999 and 1998, and for each
of the years in the three-year period ended December 31, 1999 and the
independent auditors' report thereon, are included as part of this document.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- ---------
(in thousands, except per share data, share amounts and selected
operating data)
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Net sales........................................ $ 1,518,369 $ 1,002,784 $ 627,735 $ 410,919 $ 272,051
Cost of goods sold............................... 1,337,370 881,910 548,612 354,501 232,063
----------- ------------ ------------ ------------ ----------
Gross profit..................................... 180,999 120,874 79,123 56,418 39,988
Operating expenses............................... 121,476 86,989 56,895 44,237 32,771
Aborted acquisition costs........................ 2,302 - - - -
----------- ------------ ------------ ------------ ------------
Earnings from operations......................... 57,221 33,885 22,228 12,181 7,217
Non-operating expense (income), net.............. 446 713 73 (328) 397
----------- ------------ ------------ ------------ ------------
Earnings before income taxes..................... 56,775 33,172 22,155 12,509 6,820
Income tax expense............................... 23,188 12,722 8,937 4,951 2,701
----------- ------------ ------------ ------------ ------------
Net earnings..................................... $ 33,587 $ 20,450 $ 13,218 $ 7,558 $ 4,119
=========== ============ ============ ============ ============
Earnings per share (1)...........................
Basic........................................ $ 1.30 $ 0.84 $ 0.58 $ 0.40 $ 0.28
=========== ============= ============ ============ ============
Diluted...................................... $ 1.25 $ 0.81 $ 0.55 $ 0.38 $ 0.26
=========== ============= ============ ============ ============
Shares used in per share calculations (1)
Basic........................................ 25,787,624 24,234,358 22,944,695 18,826,460 14,670,305
============ ============ ============ ============ ============
Diluted...................................... 26,938,306 25,327,032 24,094,740 20,028,323 15,616,114
============ ============ ============ ============ ============
SELECTED OPERATING DATA:
Account executives (end of period)............... 1,538 1,072 652 374 236
Inventory turnover (2)........................... 57x 26x 17x 17x 13x
DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- --------- ------------- ----------- ---------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................. $ 141,527 $ 101,875 $ 114,663 $ 70,362 $ 31,179
Total assets..................................... 375,382 251,398 162,383 110,790 69,548
Short-term debt.................................. 898 347 - - -
Long-term debt and line of credit, excluding
current portion................................ 14,832 8,268 32,750 - -
Stockholders' equity............................. 208,764 151,108 102,380 83,941 37,546
- ----------
(1) As adjusted to reflect the 3-for-2 stock splits effected in the
form of stock dividends and payable on February 18, 1999, September 8,
1998 and September 17, 1997. All share amounts, share prices and earnings
per share in the Annual Report on Form 10-K have been retroactively
adjusted to reflect these 3-for-2 stock splits.
(2) Inventory turnover is calculated by dividing cost of goods sold for the
year by the average of the beginning and ending inventories for the year
and inventories at quarter ends within that year.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Item and elsewhere in this report may
be "forward-looking statements" within the meaning of The Private Securities
Litigation Reform Act of 1995. These forward-looking statements may include
projections of matters that may affect sales, gross profit, operating expenses
or net earnings; projections of capital expenditures; projections of growth;
hiring plans; plans for future operations; financing needs or plans; plans
relating to the Company's products; and assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking information. Some of the important factors that
could cause the Company's actual results to differ materially from those
projected in forward-looking statements made by the Company include, but are not
limited to, the following: fluctuations in operating results, intense
competition, reliance on outsourcing arrangements, mix of outsourcing
arrangements, past and future acquisitions and international operations, risk of
business interruption, management of rapid growth, need for additional
financing, changing methods of distribution, reliance on suppliers, changes in
vendor rebate programs, rapid change in product standards, inventory
obsolescence, dependence on key personnel, sales and income tax uncertainty,
increasing marketing, postage and shipping costs and Year 2000. The section in
this Item entitled "Factors That May Affect Future Results and Financial
Condition" discusses these important factors in greater detail. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
OVERVIEW
We commenced operations in 1988 as a direct marketer of hard disk drives
and other mass storage products. Since then, we have has expanded our product
line to include name brand computers and a full line of hardware and software
products. Net sales include direct marketing sales to businesses, educational
institutions, government organizations, consumers and computer resellers, as
well as from outsourcing services. Initially, we focused our marketing effort
primarily on advertising in computer magazines and the use of inbound toll-free
telemarketing. We have shifted our 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, we have hired a number of account executives, and plan to continue
to actively increase our account executive base by approximately 150 to 250,
net, per quarter through 2000.
In the fourth quarter of 1997, we began expanding internationally, by
initiating operations in Canada. During 1998, we entered the United Kingdom
market in the second quarter and the German market in the fourth quarter, both
through acquisitions.
In 1992, we began providing direct marketing services to third-party
original equipment manufacturers to leverage our infrastructure and increase our
net earnings. Presently, most of our outsourcing arrangements are service-based
whereby the Company derives revenue based on a percentage of the sales price
from products sold. Revenues from service-based sales and the direct costs that
relate to the generation of those revenues are included in the Company's net
sales and cost of goods sold, respectively. Under certain other outsourcing
arrangements, the Company takes title to the products and assumes the risk of
collection of accounts receivable in addition to its sales functions. Revenue
and 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 our 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 the manufacturers' target customers can
have cyclical buying patterns.
Generally, pricing in the computer and related products industry is very
aggressive and declining. Therefore, to increase sales we seek to expand our
customer base, increase our penetration of existing customers, expand into new
markets, expand our product offering and expand our outsourcing clients. The
level of sales is also effected by the product mix, the number of lines per
order and the mix of type of outsourcing arrangements. We expect pricing
pressures to continue and we may be required to reduce our prices to remain
competitive. The continued acceptance of electronic commerce might place
additional pricing pressure on the Company. Such pricing pressures could have a
material adverse effect on the Company's financial condition and results of
operations. We expect gross margins to continue to decline by approximately one
to two tenths of one percent per quarter on average in 2000, and thereafter,
primarily due to industry-wide pricing pressures and pricing strategies.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial data
as a percentage of net sales:
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- ------- -------
Net sales....................................... 100.0% 100.0% 100.0%
Costs of goods sold............................. 88.1 87.9 87.4
-------- ------- -------
Gross profit.................................... 11.9 12.1 12.6
Operating expenses.............................. 8.0 8.7 9.1
Aborted acquisition costs....................... 0.2 - -
-------- ------- -------
Earnings from operations........................ 3.7 3.4 3.5
Non-operating expense, net...................... 0.0 0.1 0.0
-------- ------- -------
Earnings before income taxes.................... 3.7 3.3 3.5
Income tax expense.............................. 1.5 1.3 1.4
-------- ------- -------
Net earnings.................................... 2.2% 2.0% 2.1%
======== ======= =======
1999 COMPARED TO 1998
Net Sales. Net sales increased $515.6 million, or 51.4%, to $1,518.4
million in 1999 from $1,002.8 million in 1998. Sales derived from direct
marketing increased $503.9 million, or 55.3%, to $1,414.6 million in 1999 from
$910.7 million in 1998. This increase resulted primarily from deeper account
penetration, increased market share, an expanded customer base (both domestic
and international), expanded product offering, acquisitions of direct marketing
companies accounted for by the purchase method of accounting and Internet
enhancements that increased unassisted transactions to 9.1% of sales for 1999,
from 5.2% of sales for 1998. Sales derived from outsourcing arrangements
increased $11.7 million, or 12.8%, to $103.8 million in 1999 from $92.1 million
in 1998. This increase resulted from expansion of existing programs, and the
addition of new programs, but the growth rate also reflects a shift in the mix
of outsourcing arrangements from revenue-based programs to service-based
programs. Sales from European markets accounted for 10.3% and 5.5% of the
Company's net sales in 1999 and 1998, respectively. This increase resulted
primarily from our acquisition in 1998 of two foreign-based companies, accounted
for by the purchase method of accounting.
Gross Profit. Gross profit increased $60.1 million, or 49.7%, to $181.0
million in 1999 from $120.9 million in 1998. As a percentage of sales, gross
margin decreased from 12.1% in 1998 to 11.9% in 1999. Our gross margin on sales
decreased because of industry pricing pressures, a shift in product mix and
pricing strategies. These decreases were partially offset by a significant
increase in gross profit dollars from the outsourcing service arrangements and
by the Company's ability, as a result of its increased volume and financial
position, to take advantage of supplier payment discounts, supplier
reimbursements, rebates and purchasing opportunities. We expect gross margin to
continue to decline in 2000 primarily due to industry-wide pricing pressures and
pricing strategies.
Operating Expenses. Operating expenses increased $34.5 million, or 39.6%,
to $121.5 million in 1999 from $87.0 million in 1998, but decreased as a percent
of sales to 8.0% in 1999 from 8.7% in 1998. This decline was attributable to
increased economies of scale and the utilization of emerging technologies. We
increased our unassisted web sales to 9.1% of sales for 1999 from 5.2% of sales
for 1998. We also increased the percentage of shipments made using our
electronic "direct ship" programs with our suppliers to 53% in 1999 from 50% in
1998. These enhancements were partially offset by additional costs associated
with an increase in the number of account executives, the infrastructure
necessary to build up the Company's international operations, and higher costs
incurred to integrate new acquisitions.
The Company has issued shares of restricted stock to certain officers and
employees. These shares vest over three years with the unvested shares being
forfeited if the recipient is no longer an employee of the Company. The
restricted stock is valued at the date of their grant and such amount is
amortized over the vesting period. The majority of these restricted stock shares
contain an acceleration clause which would cause them to automatically vest if
the Company's stock closes at or above a certain price, ranging from $44 to $66.
At December 31, 1999 there were 132,974 shares of restricted stock outstanding
which represents $2,909,000 of unamortized deferred compensation.
Aborted Acquisition Costs. On October 18, 1999, we announced that we had
terminated a proposed European merger. Therefore, the 1999 fourth quarter and
year-end financial results reflect a $2.3 million, pre-tax, charge for the
aborted acquisition costs.
Non-Operating Expense, Net. Non-operating expense, net, which consists
primarily of interest expense, net of interest income, decreased to $446,000 in
1999 from $713,000 in 1998. Interest expense relates primarily to, borrowings
under the Company's line of credit, which have been necessary to finance the
Company's growth and interest expense associated with the financing of our
facilities in Tempe, Arizona. Interest expense is offset by interest income
generated from short-term investments, some of which are investment grade
tax-advantaged bonds. Overall, interest expense decreased because of our
improved cash position.
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Income Tax Expense. The Company's effective tax rate was 40.8% and 38.4%
for the years 1999 and 1998, respectively. The increase in the effective tax
rate is due to not being able to recognize certain tax benefits from losses at
foreign subsidiaries, and non-deductibility of the goodwill in foreign
subsidiaries.
1998 COMPARED TO 1997
Net Sales. Net sales increased $375.1 million, or 59.8%, to $1,002.8
million in 1998 from $627.7 million in 1997. Sales derived from direct marketing
increased $332.2 million, or 57.4%, to $910.7 million in 1998 from $578.5
million in 1997. This increase resulted primarily from deeper account
penetration, increased market share, expanded customer base - both domestic and
international, expanded product offering, acquisitions of direct marketing
companies accounted for by the purchase method of accounting and Internet
enhancements that increased unassisted transactions to 5.2% of sales for 1998,
from 1.8% of sales for 1997. Sales derived from outsourcing arrangements
increased $42.9 million, or 87.2%, to $92.1 million in 1998 from $49.2 million
in 1997. This increase resulted from expansion of existing programs and the
addition of new programs. Sales from international markets accounted for 7.8%
and 0.2% of the Company's net sales in 1998 and 1997, respectively. This
increase resulted primarily from our acquisition in 1998 of two foreign-based
companies, accounted for by the purchase method of accounting.
Gross Profit. Gross profit increased $41.8 million, or 52.8%, to $120.9
million in 1998 from $79.1 million in 1997. As a percentage of sales, gross
margin decreased from 12.6% in 1997 to 12.1% in 1998. Our gross margin on sales
decreased due to industry pricing pressures, a shift in product mix and pricing
strategies. These decreases were partially offset by the Company's ability, as a
result of its increased volume and financial position, to take advantage of
supplier payment discounts, supplier reimbursements, rebates and purchasing
opportunities. The Company expects gross margin to continue to decline in 1999
primarily due to industry-wide pricing pressures and pricing strategies.
Operating Expenses. Operating expenses increased $30.1 million, or 52.9%,
to $87.0 million in 1998 from $56.9 million in 1997, but decreased as a percent
of sales to 8.7% in 1998 from 9.1% in 1997. This decline was attributable to
increased economies of scale and the utilization of emerging technologies. We
increased our unassisted web sales to 5.2% of sales for 1998 from 1.8% of sales
for 1997. We also significantly increased the percentage of shipments made using
our electronic "direct ship" programs with our suppliers to 50% in 1998 from 29%
in 1997. These enhancements were partially offset by additional costs associated
with an increase in the number of account executives, the infrastructure
necessary to build up the Company's international operations and higher costs
incurred to integrate new acquisitions.
Non-Operating Expense, Net. Non-operating expense, net, which consists
primarily of interest, increased from $73,000 in 1997 to $713,000 in 1998.
Interest expense relates primarily to borrowings under the Company's line of
credit which have been necessary to finance the Company's growth and interest
expense associated with the financing of the sales facility in Tempe, Arizona.
Interest expense is offset by interest income, generated from short-term
investments, some of which are investment grade tax-advantaged bonds.
Income Tax Expense. The Company's effective tax rate was 38.4% and 40.3%
for the years 1998 and 1997, respectively. The decrease in the effective tax
rate reflects the implementation of a tax minimization strategy during 1998,
changes to the Arizona income tax laws and investments made in tax-advantaged
bonds, but was partially offset by an increase in the Company's marginal federal
income tax rate.
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SEASONALITY AND QUARTERLY RESULTS
We have historically experienced seasonal fluctuations in our growth of net
sales, earnings from operations and net earnings. However, as we increase our
percentage of sales from business, education, and government markets, our
quarterly net sales, earnings from operations and net earnings have been less
impacted by seasonality. Our net sales growth rate, earnings from operations,
and net earnings as a percentage of net sales could be affected by the mix of
outsourcing arrangements, which are in place from time to time. Additionally,
some of the outsourcing programs can be seasonal in nature, because the
manufacturers' target customers can have cyclical buying patterns. For example,
we obtained a revenue-based outsourcing program in 1997 which offered high
dollar but low margin products primarily sold in the third quarter which
increased sales for the quarter, but impacted gross margin negatively. As our
overall size has grown, the impact from this program has been mitigated. The
following table sets forth certain quarterly information for the Company's two
most recent years:
QUARTERS ENDED
--------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1999 1999 1999 1999
---------- --------- --------- ----------
Net sales ..................................... $ 417,931 $ 397,074 $ 365,228 $ 338,136
Costs of goods sold ........................... 367,009 349,127 322,964 298,270
--------- --------- --------- ---------
Gross profit .................................. 50,922 47,947 42,264 39,866
Operating expenses ............................ 31,975 31,891 29,302 28,308
Aborted acquisition costs ..................... 2,302 - - -
--------- --------- --------- ---------
Earnings from operations ...................... 16,645 16,056 12,962 11,558
Non-operating expense (income), net ........... (235) 218 188 275
--------- --------- --------- ---------
Earnings before income taxes .................. 16,880 15,838 12,774 11,283
Income tax expense ............................ 7,377 6,448 4,887 4,476
--------- --------- --------- ---------
Net earnings .................................. $ 9,503 $ 9,390 $ 7,887 $ 6,807
========= ========= ========= =========
Net earnings per share:
Basic .................................... $ 0.36 $ 0.37 $ 0.31 $ 0.27
========= ========= ========= =========
Diluted .................................. $ 0.35 $ 0.35 $ 0.30 $ 0.26
========= ========= ========= =========
QUARTERS ENDED
------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1998 1998 1998 1998
--------- --------- --------- -----------
Net sales ..................................... $ 297,397 $ 261,207 $ 237,384 $ 206,796
Costs of goods sold ........................... 261,443 231,098 207,915 181,454
--------- --------- --------- ---------
Gross profit .................................. 35,954 30,109 29,469 25,342
Operating expenses ............................ 25,698 21,669 21,747 17,875
Aborted acquisition costs ..................... - - - -
--------- --------- --------- ---------
Earnings from operations ...................... 10,256 8,440 7,722 7,467
Non-operating expense (income), net ........... 96 124 116 377
--------- --------- --------- ---------
Earnings before income taxes .................. 10,160 8,316 7,606 7,090
Income tax expense ............................ 3,931 3,131 2,903 2,757
--------- --------- --------- ---------
Net earnings .................................. $ 6,229 $ 5,185 $ 4,703 $ 4,333
========= ========= ========= =========
Net earnings per share:
Basic .................................... $ 0.25 $ 0.21 $ 0.20 $ 0.18
========= ========= ========= =========
Diluted .................................. $ 0.24 $ 0.20 $ 0.19 $ 0.18
========= ========= ========= =========
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital needs are to fund the working capital requirements and
capital expenditures necessitated by our sales growth. Capital expenditures for
1999 and 1998 were $28.4 million and $13.8 million, respectively, primarily for
the continued upgrade of the Company's equipment, systems, software and
facilities.
Until the last two years, cash flows from operations generally have been
negative due primarily to increases in accounts receivable and inventories
necessitated by the sales growth of the Company and the continued shift from
sales to the home market to sales in the business, education and government
markets. However, the Company's net cash provided by operating activities was
$64.1 million for 1999 as compared to $45.1 million provided by operating
activities for 1998. The positive cash flow in 1999 is primarily generated by a
$55.1 million increase in accounts payable, $33.6 million in net earnings and a
decrease of $12.2 million in inventories. These funds were used to fund a $67.5
million increase in accounts receivables.
At the year-end, we had a $100 million credit facility with a finance
company. As of December 31, 1999, we had no long-term outstanding balance, and
$45.3 million was available under the line of credit. The agreement provides for
cash advances outstanding at any one time up to a maximum of $100 million on the
line of credit, subject to limitations based upon the Company's eligible
accounts receivable and inventories. Cash advances bear interest at LIBOR plus
.80%. The credit facility can be used for the purchases of inventories from
certain suppliers with that portion being classified on the balance sheet as
accounts payable. At December 31, 1999, $54.7 million of the facility was used
to facilitate the purchase of inventories. The credit facility expires in
February 2002. The line is secured by substantially all of the assets of the
Company. The line of credit contains various covenants including the requirement
that the Company maintain a specified amount of tangible net worth as well as
restrictions on the payment of cash dividends.
Our future capital requirements include financing the growth of working
capital items such as accounts receivable and inventories, and the purchase of
software enhancements, equipment, furniture and fixtures and other facilities to
accomplish future growth. We anticipate that cash flow from operations together
with the funds available under our credit facility will be adequate to support
the Company's presently anticipated cash and working capital requirements
through 2000. Our ability to continue funding our planned growth beyond 2000 is
dependent upon our ability to generate sufficient cash flow to obtain additional
funds through equity or debt financing.
INFLATION
We do not believe that inflation has a material effect on the Company's
operations.
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NEW ACCOUNTING STANDARDS
We adopted Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), effective January 1, 1998.
SFAS No. 130 establishes standards for the reporting and presentation of
comprehensive income and its components in financial statements. Comprehensive
income encompasses net income and "other comprehensive income", which includes
all other non-owner transactions and events that change stockholders' equity.
We adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), effective January 1, 1998. SFAS No. 131
establishes standards for reporting information about operating segments in
annual financial statements, selected information about operating segments in
interim financial reports and disclosures about products and services,
geographic areas and major customers. Insight only has one business segment,
direct marketing.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
establishes standards for the accounting and reporting for derivative
instruments including certain derivative instruments embedded in other contracts
and hedging activities. This statement generally requires recognition of gains
and losses on hedging instruments based on changes in fair value or the earnings
effect of forecasted transactions. As issued, SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999,
the FASB issued SFAS No. 137, -Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133--An
Amendment of FASB Statement No. 133, which deferred the effective date of SFAS
No. 133 until June 15, 2000. We are currently evaluating the impact of SFAS No.
133.
ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY
There are no new applicable accounting standards that we have not adopted.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
Our future results and financial condition are dependent on our ability to
continue to successfully market, sell and distribute computers, hardware and
software and to provide direct marketing outsourcing services. Inherent in this
process are a number of factors that we must successfully manage in order to
achieve favorable operating results and financial condition. Potential risks and
uncertainties that could affect our future operating results and financial
condition include, without limitation, the factors discussed below.
Fluctuations in Operating Results. Our results of operations are influenced
by a variety of factors, including general economic conditions, the condition of
the computer and related products industry, shifts in demand for or availability
of computer and related products and industry announcements of new products,
upgrades or methods of distribution. Sales can be dependent on specific product
categories, and any change in demand for or supply of such products could have a
material adverse effect on our sales. Our operating results are also highly
dependent upon our level of gross profit as a percentage of net sales which
fluctuates due to numerous factors including opportunities to increase market
share, the availability of opportunistic purchases, changes in prices from
suppliers, reductions in the amount of supplier reimbursements that are made
available, general competitive conditions and the relative mix of products sold
during the period. We expect gross margins to continue to decline by
approximately one to two tenths of one percent per quarter on average in 2000
primarily due to industry-wide pricing pressures and pricing strategies. In
addition, our expense levels, including the costs and salaries in connection
with the hiring of account executives, are based, in part, on anticipated sales.
Therefore, we may not be able to control spending in a timely manner to
compensate for any unexpected sales shortfall. As a result, quarterly
period-to-period comparisons of our financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Highly Competitive Industry. The computer and related products industry is
highly competitive. Competition is based primarily on product availability,
price, speed of delivery, credit availability, ability to tailor specific
solutions to customer needs, quality and breadth of product lines. We expect
competition to increase as retailers and direct marketers who have not
traditionally sold computers and related products enter the industry and as the
industry's rate of growth in North America and Europe slows. The Company
competes with a large number and wide variety of marketers and resellers of
computers and related products, including traditional computer and related
products retailers, computer superstores, Internet-only computer providers,
consumer electronics and office supply superstores, mass merchandisers and
national direct marketers (including value-added resellers and specialty
retailers, aggregators, distributors, franchisers, manufacturers and national
computer retailers some of which have commenced their own direct marketing
operations). Certain of our competitors have longer operating histories and
greater financial, technical, marketing and other resources than we do. In
addition, many of these competitors offer a wider range of products and services
than we do and may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Many current and
potential competitors also have greater name recognition, engage in more
extensive promotional activities and adopt more aggressive pricing policies than
we do. There can be no assurance that we will be able to compete effectively
with current or future competitors or that the
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competitive pressures we face will not have a material adverse effect on our
business, results of operations and financial condition.
The computer and related products industry is undergoing significant
change. We believe that consumers have become more accepting of large-volume,
cost-effective channels of distribution such as national direct marketers,
Internet-only computer providers, computer superstores, consumer electronic and
office supply superstores, and mass merchandisers. Major computer original
equipment manufacturers have begun to sell their products directly to end-users.
Additionally, product resellers and direct marketers are combining operations or
acquiring or merging with other resellers and direct marketers to increase
efficiency. Moreover, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products and services. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and acquire significant
market share. Generally, pricing is very aggressive in the industry and we
expect pricing pressures to continue. There can be no assurance that we will be
able to offset the effects of price reductions with an increase in the number of
customers, higher sales, cost reductions or otherwise. Such pricing pressures
could result in an erosion of our market share, reduced sales and reduced
operating margins, any of which could have a material adverse effect on our
business, results of operations and financial condition. We expect gross margins
to continue to decline by approximately one to two tenths of one percent per
quarter on average in 2000 primarily due to industry-wide pricing pressures and
pricing strategies.
Possible Nonrenewal or Cancellation of Outsourcing Arrangements; Expansion
of services to non-computer customers. We perform direct marketing outsourcing
services for certain manufacturers in the computer industry pursuant to various
arrangements. These parties may cancel such arrangements on relatively short
notice or fail to renew them upon expiration. There is no assurance that we will
be able to replace any manufacturers that terminate or fail to renew their
relationships with us. Additionally, we seek to expand our offerings outside of
the computer industry. The failure to maintain current arrangements or the
inability to enter into new ones within or without the computer industry could
have a material adverse effect on our business, results of operations and
financial condition.
Risks Associated with Past and Future Acquisitions; International
Operations. We completed three acquisitions during 1998 and incurred expenses
totaling $2.3 million related to an aborted merger in 1999. Additionally, we may
seek to acquire additional businesses to expand or complement our operations.
The magnitude, timing and nature of any future acquisitions will depend on a
number of factors, including suitable acquisition candidates, the negotiation of
acceptable terms, our financial capabilities and general economic and business
conditions. There is no assurance that we will identify acquisition candidates
that would result in successful combinations or that any such acquisitions will
be consummated on acceptable terms. Any future acquisitions may result in
potentially dilutive issuance of equity securities, the incurrence of additional
debt and amortization of expenses related to goodwill and intangible assets, all
of which could adversely affect our profitability. In addition, acquisitions
involve numerous risks, including difficulties in the assimilation of operations
of the acquired company, the diversion of management's attention from other
business concerns, risks of entering markets in which we have had no or only
limited direct experience and the potential loss of key employees of the
acquired company, all of which in turn could have a material adverse effect on
our business, results of operations and financial condition.
In addition, we initiated an operation in Canada in 1997 and completed
acquisitions in Europe in 1998 as part of our effort to penetrate international
markets. In implementing this strategy, we face barriers to entry and the risk
of competition from local and other companies that already have established
global businesses as well as the risks generally associated with conducting
business internationally, including exposure to currency fluctuations,
limitations on foreign investment and the additional expense and risks inherent
in operating in geographically and culturally diverse locations. Because we may
continue to develop our international business through acquisitions, we may also
be subject to risks associated with such acquisitions, including those relating
to the marriage of different corporate cultures and shared decision-making.
There can be no assurance that we will succeed in increasing our international
business, if at all, in a profitable manner.
Business Interruption; Reliance on Management Information Systems. We
believe that our success to date has been, and future results of operations will
be, dependent in large part upon our ability to provide prompt and efficient
service to customers. In addition, our success is largely dependent on the
accuracy, quality and utilization of the information generated by our management
information systems, which affect our ability to manage our sales, accounting,
inventory and distribution systems. We began in 1998 a major information system
upgrade to replace our core business function software applications to
accommodate our expanding business needs which will continue in 2000 and beyond.
Although we have redundant systems, with full data backup, a substantial
interruption in the information system or in our telephone communication systems
would have a material adverse effect on our business, results of operations and
financial condition.
Managing Rapid Growth; No Assurance of Additional Financing. Since our
inception, we have experienced substantial changes in and expansion of our
business and operations. Our past expansion has placed, and any future expansion
would place, significant demands on our administrative, operational, financial
and other resources. Our operating expenses and staffing levels have increased
and are expected to increase substantially in the future. In particular, we have
hired a
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significant number of additional personnel, including senior sales managers,
account executives and other persons with experience in both the computer and
direct marketing industries, and there can be no assurance that such persons
will perform to our expectations. Competition for such personnel is intense, and
there can be no assurance that we will be able to continue to attract,
assimilate and retain additional highly qualified persons in the future. In
addition, we expect that any future expansion will continue to challenge our
ability to hire, train, motivate and manage our employees. We also expect over
time to expend considerable resources to expand/convert our management
information system and to implement a variety of new systems and procedures. If
our sales do not increase in proportion to our operating expenses, our
management information systems do not expand to meet increasing demands, or we
fail to attract, assimilate and retain qualified personnel or otherwise fail to
manage our expansion effectively, there would be a material adverse effect on
our business, results of operations and financial condition. There can be no
assurance that we will achieve our growth strategy.
Historically, cash flow from operations has been insufficient to finance
our growth, and we have relied upon a line of credit and proceeds from public
offerings to finance working capital requirements. There can be no assurance
that our operations will generate sufficient cash flow or that adequate
financing will be available to finance continued growth.
Changing Methods of Distribution. The manner in which computers and related
products are distributed and sold is changing, and new methods of distribution
and sale, such as on-line shopping services via the Internet, have emerged.
Hardware and software manufacturers have sold, and may intensify their efforts
to sell, their products directly to end-users. From time to time, certain
manufacturers have instituted programs for the direct sales of large order
quantities of hardware and software to certain major corporate accounts. These
types of programs may continue to be developed and used by various
manufacturers. In addition, manufacturers may attempt to increase the volume of
software products distributed electronically to end-users. An increase in the
volume of products sold through or used by consumers of any of these competitive
programs or distributed electronically to end-users could have a material
adverse effect on our business, results of operations and financial condition.
Reliance on Suppliers; Allocation of Goods. We acquire products for resale
both directly from manufacturers and indirectly through distributors. Purchases
from Ingram Micro, Inc., a distributor of computers and related products,
accounted for approximately 26% of aggregate purchases for 1999. No other
supplier accounted for more than 20% of purchases in 1999. However, the top five
suppliers as a group accounted for approximately 64% of our product purchases
during 1999. The loss of Ingram Micro, Inc. or any other supplier could cause a
short-term disruption in the availability of products. Certain of the products
offered from time to time by us are subject to manufacturer allocation, which
limits the number of units of such products available to resellers like us. Our
inability to obtain a sufficient quantity of products, in particular, high
demand products such as desktops and notebooks, or an allocation of products
from a manufacturer in a way which favors one of our competitors relative to us
could cause us to be unable to fill customers' orders in a timely manner, or at
all, which could have a material adverse effect on the Company's business,
results of operations and financial condition. Certain suppliers provide us with
substantial incentives in the form of payment discounts, supplier
reimbursements, price protections and rebates. Supplier funds are used to
offset, among other things, cost of goods sold, marketing costs and other
operating expenses. We compete with other market competitors for these funds. No
assurance can be given that we will continue to receive such incentives or that
we will be able to collect outstanding amounts relating to these incentives in a
timely manner or at all. A reduction in, discontinuance of, a significant delay
in receiving or the inability to collect such incentives could have a material
adverse effect on our business, results of operations and financial condition.
Rapid Changes in Product Standards and Risk of Inventory Obsolescence. The
computer and related products industry is characterized by rapid technological
change and the frequent introduction of new products and product enhancements
which can decrease demand for current products or render them obsolete. In
addition, in order to satisfy customer demand, protect ourselves against product
shortages and to obtain greater purchasing discounts, we may carry increased
inventory levels of certain products in the future. We can have limited or no
return privileges with respect to certain of our products. There can be no
assurance that we will be able to avoid losses related to inventory
obsolescence.
Dependence on Key Personnel. Our future success will be largely dependent
on the efforts of key management personnel. The loss of one or more of these key
employees could have a material adverse effect on our business, results of
operations and financial condition. In addition, we believe that our future
success will be largely dependent on our continued ability to attract and retain
highly qualified management, sales and technical personnel, and there can be no
assurance that we will be able to attract and retain such personnel. Further, we
make a significant investment in the training of our sales account executives.
Our inability to retain such personnel or to train them rapidly enough to meet
our expanding needs could cause a decrease in the overall quality and efficiency
of our sales staff, which could have a material adverse effect on our business,
results of operations and financial condition.
State Sales or Use Tax Collection. We presently collect sales tax only in
states in which we have a physical presence. The states include Arizona,
Indiana, Louisiana and Tennessee. Various states have sought to impose on direct
marketers the burden of collecting state sales or use taxes on the sales of
products shipped to that state's residents. The United States
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Supreme Court has affirmed its position that, under the Commerce Clause of the
United States Constitution, a state cannot constitutionally impose sales or use
tax collection obligations on an out-of-state mail order company whose only
contacts with the state are the distribution of catalogs and other advertising
materials through the mail and the subsequent delivery of purchased goods by
United States mail or by interstate common carrier from a point outside of the
state. If the Supreme Court changes its position or if legislation is passed to
overturn the Supreme Court's decision, the imposition of a sales or use tax
collection obligation on us in states to which we ship products would result in
additional administrative expenses and could result in price increases to the
customer or could otherwise have a material adverse effect on our business. From
time to time, legislation to overturn this decision of the Supreme Court has
been introduced, although to date no such legislation has been passed.
Additionally, there is the possibility of a tax being imposed on sales
transacted via the Internet although today none has been enacted. We also
collect a goods and services tax in Canada, and a value-added tax in the United
Kingdom and Germany.
Risk of Increasing Marketing, Postage and Shipping Costs. We mail catalogs
to active customers through the United States Postal Service and international
services and ship products to customers by commercial delivery services.
Shipping, postage and paper costs are significant expenses in the operation of
our business. Historically, we have experienced increases in postage, shipping
and paper costs. There can be no assurance that we will be able to offset future
increased costs. The inability to pass on these increased costs could have a
material adverse effect on our business, results of operations and financial
condition. In addition, we ship primarily through Federal Express and United
Parcel Service, and labor disputes or other service interruptions with Federal
Express, United Parcel Service, the U.S. Postal Service or other commercial
carriers could have an adverse effect on the Company's operating costs and
ability to deliver products on a timely basis.
Year 2000. Many currently installed computer systems and software products
were coded to accept only two-digit year entries in the date code field.
Consequently, subsequent to December 31, 1999, many of these systems became
subject to failure or malfunction. Although we are not aware of any material
Year 2000 issues at this time, Year 2000 problems may occur or be made known to
us in the future. Year 2000 issues may possibly affect the hardware and software
products that are manufactured by third-parties and sold by us. We do not
warrant that such products are Year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has interest rate exposure arising from our line of credit,
which has a variable interest rate. This variable interest rate is impacted by
changes in short-term interest rates. We manage interest rate exposure through
our conservative debt ratio target and our mix of fixed and variable rate debt.
At December 31, 1999, the fair value of the Company's long-term debt
approximated its carrying value.
We also have foreign currency translation exposure arising from the
purchase and operation of foreign entities. We monitor our foreign currency
exposure and may from time to time enter into hedging transactions to manage
this exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in this Report beginning
at page 24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial
disclosure matters during the periods reported herein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the captions "Information Concerning
Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
its Annual Meeting of Stockholders to be held May 16, 2000 (the "Proxy
Statement") is incorporated herein by reference. We anticipate filing our Proxy
Statement within 120 days after December 31, 1999. With the exception of the
foregoing information and other information specifically incorporated by
reference into this Form 10-K, the Proxy Statement is not being filed as a part
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" in the Proxy
Statement is incorporated herein by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBIT, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements.
The consolidated financial statements of Insight Enterprises, Inc. and
subsidiaries and the Independent Auditors' Report are filed herein beginning on
page 24.
2. Exhibits.
Exhibits (unless otherwise noted, exhibits are filed herewith)
EXHIBIT NO. DESCRIPTION
2 (1) -- Form of Articles of Merger and Certificate of Merger between Insight Enterprises, Inc., an
Arizona corporation, and Insight Enterprises, Inc., a Delaware corporation (the
"Registrant")
3.1 (6) -- Amended and Restated Certificate of Incorporation of Registrant
3.2 -- Bylaws of the Registrant
4.1 (1) -- Specimen Common Stock Certificate
4.2 (11) -- Form of Certificate of Designation of Preferred Shares
10.1 (1)(2) -- Form of Indemnification Agreement
10.2 (1)(3) -- 1994 Stock Option Plan of the Registrant
10.3 (1)(3) -- Predecessor Stock Option Plan
10.4 (3)(4) -- 1995 Employee Stock Purchase Plan of the Registrant
10.5 (3)(5) -- Amendment to 1994 Stock Option Plan of the Registrant
10.6 (3)(7) -- 1998 Long-Term Incentive Plan
10.7 (3)(8) -- Form of Restricted Stock Agreement
10.8 (3)(9) -- Employment Agreement between Insight Enterprises, Inc. and Eric J. Crown dated as of
March 31, 1998.
10.9 (3)(9) -- Employment Agreement between Insight Enterprises, Inc. and Timothy A. Crown dated as of
March 31, 1998.
10.10 (3)(9) -- Employment Agreement between Insight Enterprises, Inc. and Stanley Laybourne dated as of
March 31, 1998.
10.11 (3)(10) -- 1998 Employee Restricted Stock Plan
10.12 (3)(10) -- 1998 Officer Restricted Stock Plan
10.13 (12) -- Shareholder's Rights Agreement
10.14 (3) -- 1999 Broad Based Employee Stock Option Plan
11 -- Computation of Net Earnings per Common Share
21 -- Subsidiaries of the Registrant
23 -- Consent of KPMG LLP
27 -- Financial Data Schedule as of and for the year ended December 31, 1999
----------
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (No. 33-86142) declared effective January 24, 1995.
(2) The Company has entered into a separate indemnification agreement with
each of its current directors and executive officers that differ only
in party names and dates. Pursuant to the instructions accompanying
Item 601 of Regulation S-K, the Registrant is filing the form of such
indemnification agreement.
(3) Management contract or compensatory plan or arrangement.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995.
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(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997.
(7) Incorporated by reference to the Company's Notice of 1997 Annual
Meeting of Stockholders.
(8) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1998.
(9) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended March 31, 1998.
(10) Incorporated by reference to the Company's Form S-8 filed on December
17, 1998.
(11) Incorporated by reference to the Company's current report on Form 8-K
filed on March 17, 1999.
(12) Incorporated by reference to the Company's Form 8-A filed on March 17,
1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSIGHT ENTERPRISES, INC.
By /s/ Eric J. Crown
------------------------------------
Eric J. Crown
Chairman of the Board and
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Eric J. Crown Chairman of the Board March 24, 2000
- -----------------------------------------------
Eric J. Crown Co-Chief Executive Officer
(Principal Executive Officer)
/s/ Timothy A. Crown Director, Co-Chief Executive Officer and March 24, 2000
- ----------------------------------------------- President
Timothy A. Crown
/s/ Stanley Laybourne Chief Financial Officer, March 24, 2000
- ----------------------------------------------- Secretary, Treasurer and
Stanley Laybourne Director (Principal Financial and
Accounting Officer)
/s/ Larry A. Gunning Director March 24, 2000
- -----------------------------------------------
Larry A. Gunning
/s/ Robertson C. Jones Director March 24, 2000
- -----------------------------------------------
Robertson C. Jones
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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report............................................................ 24
Consolidated Balance Sheets - December 31, 1999 and 1998............................... 25
Consolidated Statements of Earnings - For each of the years in the
three-year period ended December 31, 1999............................................. 26
Consolidated Statements of Stockholders' Equity and Comprehensive Income
- For each of the years in the three-year period ended December 31, 1999............. 26
Consolidated Statements of Cash Flows - For each of the years in the
three-year period ended December 31, 1999............................................. 27
Notes to Consolidated Financial Statements.............................................. 28
23
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Insight Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Insight
Enterprises, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Insight
Enterprises, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Phoenix, Arizona
January 28, 2000, except as to Note 16,
which is as of March 21, 2000.
24
27
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS DECEMBER 31,
------------------------
1999 1998
--------- ---------
Current assets:
Cash and cash equivalents .................................. $ 66,675 $ 12,974
Accounts receivable, net of allowances for doubtful
accounts of $9,277 and $7,128, respectively ................ 200,910 139,305
Inventories, net ........................................... 18,928 34,449
Prepaid expenses and other current assets .................. 6,800 7,169
--------- ---------
Total current assets .................................... 293,313 193,897
Property and equipment, net ..................................... 56,436 33,075
Goodwill, net of accumulated amortization of $1,592 and $418,
respectively .................................................. 25,285 24,020
Other assets .................................................... 348 406
--------- ---------
$ 375,382 $ 251,398
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................... $ 638 $ 347
Current portion of obligations under capital leases ........ 260 --
Accounts payable ........................................... 135,201 79,912
Accrued expenses and other current liabilities ............. 15,687 11,763
--------- ---------
Total current liabilities ................................ 151,786 92,022
Long-term debt, less current portion ............................ 13,798 8,268
Obligations under capital leases, less current portion .......... 1,034 --
Commitments
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; 26,801,675 and 25,432,642 shares issued and
outstanding in 1999 and 1998, respectively .............. 268 254
Additional paid-in capital ................................. 125,923 100,923
Retained earnings .......................................... 83,729 50,142
Accumulated other comprehensive income - foreign currency
translation adjustment ................................... (1,156) (211)
--------- ---------
Total stockholders' equity .............................. 208,764 151,108
---------- ---------
$ 375,382 $ 251,398
========== =========
See accompanying notes to consolidated financial statements.
25
28
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
----------- ----------- ----------
Net sales ...................................................................... $ 1,518,369 $1,002,784 $ 627,735
Costs of goods sold ............................................................ 1,337,370 881,910 548,612
---------- ---------- ----------
Gross profit ............................................................. 180,999 120,874 79,123
Operating expenses ............................................................. 121,476 86,989 56,895
Aborted acquisition costs ...................................................... 2,302 -- --
---------- ---------- ----------
Earnings from operations ................................................. 57,221 33,885 22,228
Non-operating expense, net ..................................................... 446 713 73
---------- ---------- ----------
Earnings before income taxes ............................................. 56,775 33,172 22,155
Income tax expense ............................................................. 23,188 12,722 8,937
---------- ---------- ----------
Net earnings ............................................................. $ 33,587 $ 20,450 $ 13,218
========== ========== ==========
Earnings per share:
Basic .................................................................... $ 1.30 $ 0.84 $ 0.58
========== ========== ==========
Diluted .................................................................. $ 1.25 $ 0.81 $ 0.55
========== ========== ==========
Shares used in per share calculation:
Basic .................................................................... 25,787,624 24,234,358 22,944,695
========== ========== ==========
Diluted .................................................................. 26,938,306 25,327,032 24,094,740
========== ========== ==========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME EQUITY
------ ------------ ---------- ------------- -------------
Balances at December 31, 1996............. $227 $67,240 $16,474 $ - $83,941
Issuance of common stock under stock
option plans and employee stock
purchase plan ...................... 6 2,415 - - 2,421
Tax benefit recognized on stock
exercised........................... - 2,832 - - 2,832
Comprehensive income:
Foreign currency translation
adjustment, net of tax............ - - - (32) (32)
Net earnings........................ - - 13,218 - 13,218
--------
Total comprehensive income............ 13,186
---- -------- ------- ------- --------
Balances at December 31, 1997............ 233 72,487 29,692 (32) 102,380
Issuance of common stock for
acquisitions........................ 7 14,321 - - 14,328
Issuance of common stock under stock
plans and employee stock purchase
plan................................ 14 7,734 - - 7,748
Tax benefit recognized on stock
options exercised................... - 6,381 - - 6,381
Comprehensive income:
Foreign currency translation
adjustment, net of tax............ - - - (179) (179)
Net earnings........................ - - 20,450 - 20,450
--------
Total comprehensive income............ 20,271
---- -------- ------- ------- --------
Balances at December 31, 1998............ 254 100,923 50,142 (211) 151,108
Issuance of common stock under stock
plans and employee stock purchase
plan................................ 14 16,734 - - 16,748
Tax benefit recognized on stock options
exercised.......................... - 8,266 - - 8,266
Comprehensive income:
Foreign currency translation
adjustment, net of tax............ - - - (945) (945)
Net earnings........................ - - 33,587 - 33,587
--------
Total comprehensive income............ 32,642
---- -------- ------- ------- --------
Balances at December 31, 1999............ $268 $125,923 $83,729 $(1,156) $208,764
==== ======== ======= ======= ========
See accompanying notes to consolidated financial statements.
26
29
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net earnings $ 33,587 $ 20,450 $ 13,218
Adjustments to reconcile net earnings to net
cash provided by (used in)
operating activities:
Depreciation and amortization 7,913 4,303 2,461
Tax benefit from stock options exercised 8,266 6,381 2,832
Provision for losses on accounts receivable 5,749 5,366 4,164
Provision for obsolete and slow moving
inventories 3,067 1,802 1,080
Deferred income taxes 1,791 (2,553) 291
Change in assets and liabilities, net of
acquisitions
Increase in accounts receivable (67,522) (58,573) (37,031)
Decrease (increase) in inventories 12,214 15,879 (19,650)
Decrease (increase) in prepaid expenses and
other current assets (1,448) 4,018 (4,068)
Decrease (increase) in other assets 950 (827) 78
Increase (decrease) in accounts payable 55,108 50,250 (4,989)
Increase (decrease) in accrued expenses and
other current liabilities 4,429 (1,364) 1,718
-------- -------- --------
Net cash provided by (used in) operating
activities 64,104 45,132 (39,896)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (28,419) (13,839) (9,427)
Purchase of LC Design Werbeagentur GmbH and
Computerprofis Computersyteme and
Burokommunikation, net of cash acquired (2,487) (4,521) -
Purchase of Choice Peripherals Limited
and Plusnet Technologies Limited,
plus cash overdraft assumed - (3,534) -
Purchase of Treasure Chest Computers, Inc.,
net of cash acquired (1,225) (27) -
-------- -------- --------
Net cash used in investing activities (32,131) (21,921) (9,427)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayment) on line of credit - (32,750) 32,750
Net borrowings of long-term debt 5,827 8,094 -
Net repayment of obligations under capital
leases (124) - -
Issuance of common stock 16,748 7,748 2,421
-------- -------- --------
Net cash provided by (used in) financing
activities 22,451 (16,908) 35,171
-------- -------- --------
Effect of exchange rate on cash and cash
equivalents (723) (311) (32)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 53,701 5,992 (14,184)
Cash and cash equivalents at beginning of
year 12,974 6,982 21,166
-------- -------- --------
Cash and cash equivalents at end of year $66,675 $12,974 $6,982
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $1,017 $912 $261
======== ======== ========
Cash paid during the year for income taxes $11,808 $4,705 $10,504
======== ======== ========
Supplemental disclosure of non-cash financing
and investing activity:
Property and equipment acquired through
capital lease transactions $1,418 $- $-
======== ======== ========
See accompanying notes to consolidated financial statements.
27
30
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) Operations and Summary of Significant Accounting Policies
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. INSIGHT
markets primarily to small and medium-sized businesses, through a combination of
proactive outbound telephone-based sales, electronic commerce, electronic
marketing, targeted direct mail catalogs and selectively targeted advertisements
in trade 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.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Insight
Enterprises, Inc. and its wholly-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
On April 3, 1998, the Company acquired all of the outstanding stock of Choice
Peripherals Limited, a United Kingdom direct marketer of computers and
computer-related products, and 85% of the outstanding common stock of Plusnet
Technologies Limited, 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 total
goodwill of $6,860,000 for these acquisitions. On January 26, 2000, the Company
acquired an additional 10% of the outstanding common stock of Plusnet
Technologies Limited for $1,800,000.
On September 13, 1998, the Company acquired all of the outstanding stock of
Treasure Chest Computers, Inc., 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.
The Company has also included in goodwill the costs to relocate the business to
Arizona and Indiana. Additionally, in 1999 the Company negotiated a settlement
to eliminate any contingent future acquisition costs. This amount has been
recorded as goodwill and no additional payments to the seller will be required.
The Company has recorded total goodwill of $10,683,000 for this acquisition.
On December 16, 1998, the Company acquired all of the outstanding stock of
LC-Design Werbeagentur GmbH, a German holding company, and Computerprofis
Computersysteme and Burokommunikation, 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. In 1999, the Company negotiated a settlement to
eliminate any contingent future acquisition costs. This amount has been recorded
as goodwill and no additional payments to the seller will be required. The
Company has recorded total goodwill of $9,334,000 for this acquisition.
All 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 or cash
overdraft position assumed, over the fair value of the net assets acquired has
been recorded as goodwill and is being amortized over 20 years. Any further
acquisition costs which is payable related to these acquisitions, which is
contingent on profitability of the acquired companies, will be recorded as
goodwill and will be amortized over the remaining life of the asset. The results
of operations of the acquired companies have been recorded in the consolidated
financial statements of the Company beginning with the effective date of each
acquisition. See Note 14 for pro forma financial information.
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 payable on February 18, 1999
to 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, share prices and
earnings per share have been retroactively adjusted to reflect these 3-for-2
stock splits.
Cash Equivalents
INSIGHT considers all highly liquid investments with original maturities at
the date of purchase of three months or less to be cash equivalents.
28
31
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
Inventories
Inventories, principally purchased computers, hardware and software, are
stated at the lower of weighted average cost (which approximates cost under the
first-in first-out method) or market. Provisions are made currently for
obsolete, slow moving and nonsalable inventory.
Property and Equipment
Property and equipment are stated at cost. Major improvements and betterments
are capitalized; maintenance, repairs and minor replacements are expensed as
incurred. Depreciation is provided using the straight-line method over the
economic lives of the assets ranging from three to 29 years. Leasehold
improvements are amortized over the shorter of the underlying lease term or
asset life. The cost of computer software developed or obtained for internal
use, including internal costs incurred for upgrades and enhancements that result
in additional functionality, is capitalized and amortized over its estimated
useful life of three to ten years.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight line basis over the expected
periods to be benefited, generally 20 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Sales Recognition
Sales are recognized upon shipment to the customer. Provisions are made
currently for estimated product returns expected to occur under INSIGHT's return
policy. Presently, most of the outsourcing arrangements are service-based
whereby the Company derives net sales based on a percentage of the sales
generated from products sold. Sales so derived from service-based arrangements
and all direct costs related to the generation of the sales 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. Sales 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.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable earnings in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment date.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are translated
into United States dollars in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation." Assets and
liabilities of the subsidiaries are translated into United States dollars at
current exchange rates. Income and expense items are translated at the average
exchange rate for each month within the year. The resulting translation
adjustments are recorded directly as a separate component of stockholders'
equity. All transaction gains or losses are recorded in the statement of
earnings.
Earnings Per Share
Basic earnings per share is computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
each year. Diluted earnings per share includes the impact of stock options
assumed to be exercised using the treasury stock method. The denominator for
diluted earnings per share is greater than the denominator used in basic
earnings per share by 1,150,682 shares in 1999, 1,092,674 shares in 1998 and
1,150,045 shares in 1997. The numerator is the same for both basic and diluted
earnings per share.
29
32
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
Stock-Based Compensation
In accordance with the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," the Company measures stock-based
compensation expense as the excess of the market price at the grant date over
the amount the employee must pay for the stock. The Company's policy is to grant
stock options at fair market value at the date of grant; accordingly, no
compensation expense is recognized. As permitted, the Company has elected to
adopt the pro forma disclosure provisions only of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123").
The Company is recognizing the compensation expense associated with the
issuance of restricted stock over the vesting period. The total compensation
expense associated with restricted stock represents the value based upon the
number of shares awarded multiplied by the closing price on the date of grant.
Recipients of restricted stock are entitled to receive any dividends declared on
the Company's Common Stock and have voting rights, regardless of whether such
shares have vested. Unvested shares of restricted stock are forfeited if the
recipient is no longer an employee of the Company.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. Additionally, such estimates and assumptions affect the
reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
Segment Reporting
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprises and Related Information" ("SFAS No. 131"). SFAS No.
131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about products and services, geographical areas, and major customers.
The adoption of SFAS No. 131 does not affect results of operations or financial
position. The Company operates in one segment; direct marketing. See Note 13.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"), effective January 1, 1998. SFAS No. 130 establishes standards for the
reporting and presentation of comprehensive income and its components in
financial statements. Comprehensive income encompasses net income and "other
comprehensive income", which includes all other non-owner transactions and
events that change stockholders' equity.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Reclassifications
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform with the 1999 presentation.
30
33
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
(2) Property and Equipment
Property and equipment consist of the following:
DECEMBER 31,
----------------------
1999 1998
-------- --------
(IN THOUSANDS)
Land ........................................................................ $ 3,639 $ 2,160
Buildings ................................................................... 16,641 10,486
Equipment ................................................................... 15,546 9,530
Furniture and fixtures ...................................................... 14,963 10,066
Leasehold improvements ...................................................... 4,117 2,487
Software .................................................................... 15,657 6,708
-------- --------
70,563 41,437
Accumulated depreciation and amortization ................................... (14,127) (8,362)
-------- --------
Property and equipment, net ................................................. $ 56,436 $ 33,075
======== ========
(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. As of December 31, 1999,
$45,261,000 was available under the line of credit. Cash advances bear interest
at the London Interbank Offered Rate ("LIBOR") plus 0.80% (resulting in an
interest rate of 7.29% at December 31, 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 December 31, 1999 and 1998, the balance of this portion of the
credit facility was $54,739,000 and $21,601,000, respectively.
The credit facility expires in February 2002. The line is secured by
substantially all of the assets of the Company. The line of credit contains
various covenants, including the requirement that the Company maintain a
specified dollar amount of tangible net worth and restrictions on payment of
cash dividends.
(4) Long-Term Debt
Long-term debt at December 31, 1999 and 1998 consists of the following:
1999 1998
-------- --------
(IN THOUSANDS)
7.15% first mortgage note payable in monthly installments of $78,249, including
interest, with final payment due in May 2013. The debt is secured by the land,
building and improvements to which it relates ....................................................... $ 8,086 $ 8,434
8.02% first mortgage note payable in monthly installments of $44,013, including
interest, with final payment due in December 2014. The debt is secured by the
land, building and improvements to which it relates ................................................. 4,600 --
8.02% first mortgage note payable in monthly installments of $16,266, including
interest, with final payment due in December 2014. The debt is secured by the
land, building and improvements to which it relates ................................................. 1,700 --
Notes payables with interest ranging from 6.05% to 6.52% payable in quarterly
installments of $12,294, including interest with final payments due from
September 2000 to July 2001 ......................................................................... 50 94
Other notes payables ................................................................................ -- 87
-------- --------
Total long-term debt ........................................................................... 14,436 8,615
Less current portion ........................................................................... (638) (347)
-------- --------
Long-term debt, less current portion ........................................................... $ 13,798 $ 8,268
======== ========
31
34
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
The aggregate annual maturities of long-term debt as of December 31, 1999 are
as follows:
Years ending December 31, (in thousands)
--------------------------- ----------------
2000............ $ 638
2001............ 656
2002............ 696
2003............ 749
2004............ 807
Thereafter.......... 10,890
-------
$14,436
=======
(5) Leases
The Company is obligated under a capital lease for furniture that expires in
July 2004. At December 31, 1999, this furniture is recorded in furniture and
fixtures at a total cost of $1,418,000.
The Company has several non-cancelable operating leases, primarily for office
and distribution center space. Rental expense for operating leases was
$3,594,000, $2,550,000 and $1,209,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1999 are as follows:
Years ending December 31, Capital Leases Operating Leases
-------------- ----------------
(in thousands) (in thousands)
2000............. $ 326 $ 2,297
2001............. 327 1,246
2002............. 326 1,017
2003............. 327 866
2004............. 164 405
Thereafter.......... - 1,345
------ -------
Total minimum lease payments................. 1,470 $ 7,176
=======
Less amount representing interest at 5.69%... (176)
------
Present value of net minimum capital lease payment 1,294
Less current portion of obligation under capital leases (260)
------
Obligations under capital leases, less current portion $1,034
======
(6) Income Taxes
Income tax expense (benefit) consists of the following:
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
Current:
Federal......................................... $18,720 $13,193 $6,842
State........................................... 2,043 2,061 1,759
Foreign......................................... 964 - -
------- ------ ------
21,727 15,254 8,601
------- ------ ------
Deferred:
Federal......................................... 1,204 (2,227) 261
State........................................... 257 (305) 75
------- ------ ------
1,461 (2,532) 336
------- ------ ------
$23,188 $12,722 $8,937
======= ======= ======
32
35
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
The effective income tax rates for the years ended December 31, 1999, 1998
and 1997, were 40.8%, 38.4% and 40.3%, respectively. The actual expense differs
from the "expected" tax expense (computed by applying the U.S. federal corporate
income tax rate of 35% in 1999, 1998 and 1997) as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
Computed "expected" tax expense.................... $19,871 $11,806 $7,533
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit 1,495 1,141 1,210
Foreign operating losses for which no tax
benefit was recognized 1,031 - -
Non-deductible amortization..................... 424 - -
Other net....................................... 367 (225) 194
-------- ------- ------
Provision for income taxes...................... $23,188 $12,722 $8,937
======= ======= ======
At December 31, 1999, U.S. income taxes have not been provided on the
unremitted earnings of subsidiaries operating outside the U.S. These earnings,
which are considered to be invested indefinitely, would become subject to U.S.
income tax if they were remitted as dividends, were lent to the Company, or if
the Company were to sell its stock in the subsidiaries.
Sources of deferred income taxes and their tax effects are as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
Software development costs......................... $3,157 $ - $ -
Deferred revenue................................... (14) - 30
Prepaid expenses................................... 24 61 42
Allowances for doubtful accounts and returns....... (920) (1,287) 1,082
Inventory allowances............................... (142) 202 (12)
Miscellaneous accruals............................. (211) (1,386) (657)
Accrued vacation and other payroll liabilities..... (51) 26 (140)
Other, net......................................... (382) (148) (9)
------ ------- -----
$1,461 $(2,532) $ 336
====== ======= =====
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are presented below:
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
Deferred tax assets:
Allowance for doubtful accounts and returns..... $2,473 $1,553 $ 266
Foreign tax loss carry forwards................. 1,031 - -
Accrued warranty costs.......................... 244 144 -
Inventory allowances............................ 413 271 473
Miscellaneous accruals.......................... 2,284 2,073 687
Accrued vacation and other payroll liabilities.. 559 508 534
Other........................................... 295 (1) (5)
------ ------ ------
Subtotal..................................... 7,299 4,548 1,955
Valuation allowance............................. (1,031) - -
------ ------ ------
Total gross deferred tax assets.............. 6,268 4,548 1,955
------ ------ ------
Deferred tax liabilities:
Software development costs...................... (3,157) - -
Prepaid expenses................................ (501) (477) (416)
------ ------ ------
Total gross deferred tax liabilities......... (3,658) (477) (416)
------ ------ ------
Net deferred tax asset....................... $2,610 $4,071 $1,539
====== ====== ======
33
36
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
Due to INSIGHT's profitable operations, management believes that realization
of the deferred tax assets, net of applicable valuation allowances, is more
likely than not. The amount of the deferred tax assets considered realizable
could be reduced or increased if estimates of future taxable income during the
carryforward period are reduced or increased. Reversal of INSIGHT's temporary
differences is expected to occur in the near future due to their short-term
nature. The net deferred tax asset at December 31, 1999, 1998 and 1997 is
included in prepaid expenses and other current assets on the consolidated
balance sheet.
(7) Benefit Plans
INSIGHT has adopted a defined contribution benefit plan which complies with
section 401(k) of the Internal Revenue Code. Employees who complete six months
of service are eligible to participate in the Plan. The Plan allows for INSIGHT
to match up to 25% of the employees' contributions up to a maximum six percent
of total compensation. Contribution expense was $568,000, $410,000 and $339,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
In August 1995, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). Under the terms of the Purchase Plan, employees other than
officers may purchase a total of up to 337,500 shares of Common Stock. The
purchase price per share is 85% of the market value per share of Common Stock
determined as of the beginning of the quarterly purchase period as specified in
the Purchase Plan. As of December 31, 1999, 102,571 shares have been issued
under the Purchase Plan.
(8) Stock Plans
In November 1994, INSIGHT established a 1994 Stock Option Plan (the "1994
Plan"). Options exercisable for a total of 1,687,500 shares of Common Stock are
issuable under the 1994 Plan. During fiscal 1996 Insight amended the 1994 Plan,
increasing the number of issuable shares by 1,181,250. A total of 2,868,750
shares of Common Stock have been reserved for issuance upon the exercise of
options under the 1994 Plan. The 1994 Plan provides for the grant to employees
of either "incentive stock options", within the meaning of Section 422 of the
Code, or nonqualified stock options. Under the 1994 Plan, only employees
(including officers) of the Company are eligible to receive incentive stock
options. The 1994 Plan is administered by the Board of Directors of the Company
(or a committee of the Board) which determines the terms of options granted
under the 1994 Plan, including the exercise price and the number of shares
subject to the option. The 1994 Plan provides the Board of Directors with the
discretion to determine when options granted thereunder shall become
exercisable. As of December 31, 1999, 15,636 stock options under the 1994 Plan
were available for grant.
In October 1997, the shareholders approved the establishment of the 1998
Long-Term Incentive Plan (the "1998 LTIP") for officers, directors and
consultants or independent contractors. The 1998 LTIP authorizes grants of
incentive stock options, non-qualified stock options, stock appreciation rights,
performance shares, restricted stock and performance-based awards. The total
number of shares of Common Stock initially available for awards under the 1998
LTIP was 1,181,250. Additionally, for each 12-month period which started on July
1, 1998 and goes through June 30, 2007, an additional one percent to four
percent, at the determination of the Board of Directors, of the outstanding
shares of Common Stock shall be reserved for issuance under the Plan on a
cumulative basis with a calculation of such additional shares to be made on the
first day of each quarter of the applicable calendar year; provided, each such
calculation of additional shares shall be limited to an amount of additional
shares such that the number of shares of Common Stock remaining for grant under
the Plan and any of the Company's other option plans, plus the number of shares
of Common Stock granted but not yet exercised under the Plan and any of the
Company's other option plans, shall not exceed 20% of the outstanding shares of
Common Stock of the Company at the time of calculation of the additional shares.
As of December 31, 1999, there were no shares of Common Stock available to grant
for awards under the 1998 LTIP.
In September 1998, INSIGHT established the 1998 Employee Restricted Stock
Plan (the "1998 Employee RSP") for the employees of the Company. The total
number of Restricted Stock shares initially available for grant under the 1998
Employee RSP is 375,000. As of December 31, 1999, 232,021 shares of restricted
stock were available for grant under the 1998 Employee RSP.
In December 1998, INSIGHT established the 1998 Officer Restricted Stock Plan
(the "1998 Officer RSP") for the officers of the Company. The total number of
Restricted Stock shares initially available for grant under the 1998 Officer RSP
is 37,500. As of December 31, 1999, 37,500 shares of restricted stock were
available for grant under the 1998 Officer RSP.
In September 1999, INSIGHT established the 1999 Broad Based Employee Stock
Option Plan (the "1999 Broad Base Plan") for the employees of the Company. The
total number of stock options initially available for grant under the 1999 Broad
Base Plan is 1,000,000; provided, however, that no more than 20% of the shares
of stock available under the plan may be
34
37
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
awarded to the Officers. As of December 31, 1999, 474,888 stock options were
available for grant under the 1999 Broad Base Plan.
The 1998 LTIP, 1998 Employee RSP, 1998 Officer RSP and 1999 Broad Base Plan
(the "Plans") are administered by the Compensation Committee of the Board of
Directors. Except as provided below, the Compensation Committee has the
exclusive authority to administer the Plans, including the power to determine
eligibility, the types of awards to be granted, the price and the timing of
awards. The Plans do, however, provide that the Company's CEO has the authority
to grant awards to any individual (other than the three highest-ranking
executives of the Company) and provides further that any grant to an individual
who is subject to Section 16 of the Security Exchange Act of 1934 may not be
exercisable for at least six months from the date of grant.
Generally, options granted expire in ten years, are exercisable during the
optionee's lifetime only by the recipient and are non-transferable. Unexercised
options generally terminate on the date an individual ceases to be an employee
of INSIGHT.
The Company has issued shares of restricted stock to certain officers and
employees. These restricted stock shares vest over three years with the unvested
shares being forfeited if the recipient is no longer an employee of the Company.
The restricted stock shares are valued at the date of their grant and are
amortized over their term. The majority of these restricted stock shares contain
an acceleration clause which would cause them to automatically vest if the
Company's stock closes at or above a certain price, ranging from $44 to $66. At
December 31, 1999 there were 132,974 shares of restricted stock outstanding
which represents $2,909,000 of unamortized deferred compensation.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
YEARS ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Net earnings As reported $33,587 $20,450 $13,218
======= ======= =======
Pro forma $29,360 $16,986 $12,154
======= ======= =======
Basic earnings per share As reported $ 1.30 $ 0.84 $0.58
====== ====== =====
Pro forma $ 1.14 $ 0.70 $0.53
====== ====== =====
Diluted earnings per share As reported $ 1.25 $ 0.81 $0.55
====== ====== =====
Pro forma $ 1.09 $ 0.67 $0.50
====== ====== =====
Pro forma net earnings reflect only options granted in 1995 through 1999.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net earnings amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January 1995 is not
considered under SFAS No. 123.
For purposes of the SFAS No. 123 pro forma net earnings and net earnings per
share calculation, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997:
YEARS ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
Dividend yield........................... 0% 0% 0%
Expected volatility...................... 50% 50% 50%
Risk-free interest rate.................. 6.3% 4.5% 5.6%
Expected lives........................... 2.4 years 2.1 years 1.9 years
35
38
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
Activity related to the stock option plans is summarized below:
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1997
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------ -------------- ------------ -------------- ------------ --------------
Balance at the
beginning of year........ 3,099,072 $13.39 2,937,285 $ 8.37 2,263,757 $ 4.45
Granted.................. 1,598,770 27.75 2,169,558 16.62 1,782,378 11.55
Exercised................ (1,268,865) 11.47 (1,230,159) 5.83 (607,599) 3.63
Expired ................. (352,169) 18.55 (777,612) 15.42 (501,251) 7.77
----------- ----------- ---------
Balance at the end of
year..................... 3,076,808 21.04 3,099,072 13.39 2,937,285 8.36
=========== =========== =========
Exercisable at the end
of year.................... 548,643 13.62 371,694 10.08 455,967 2.35
=========== =========== =========
Weighted-average fair
value of options granted
during the year.......... $ 8.11 $ 4.64 $ 2.83
=========== ========== ==========
The following table summarizes the status of outstanding stock options as of
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ----------------------------------
Weighted Weighted
Number of Average Average Number of Weighted
Range of Options Remaining Exercise Options Average
Exercise Prices Outstanding Contractual Life Price Exercisable Exercise Price
- ----------------------------------------------------------------- ----------------------------------
$ 2.67 - 13.33 643,072 6.64 years $ 9.47 321,512 $ 9.67
13.39 - 17.81 758,926 8.35 17.40 130,189 16.95
17.88 - 26.75 654,961 9.19 23.61 75,448 19.69
26.91 - 29.69 703,829 9.71 28.26 6,977 28.07
29.71 - 40.94 316,020 9.64 31.93 14,517 32.85
--------- -------
3,076,808 8.62 21.04 548,643 13.62
========= =======
(9) Shareholder Rights Plan
On December 14, 1998, each stockholder of record received one Preferred Share
Purchase Right ("Right") on each outstanding share of Common Stock owned. Each
Right entitles stockholders to buy one three-hundredth of a share of Series A
Preferred Stock of the Company at an exercise price of $200. The Rights will be
exercisable if a person or group acquires 15% or more of the Common Stock of the
Company or announces a tender offer for 15% or more of the Common Stock. Should
this occur, the Right will entitle its holder to purchase, at the Right's
exercise price, a number of shares of Common Stock having a market value at the
time of twice the Right's exercise price. Rights held by the 15% holder will
become void and will not be exercisable to purchase shares at the bargain
purchase price. If the Company is acquired in a merger or other business
combination transaction after a person acquires 15% or more of the Company's
Common Stock, each Right will entitle its holder to purchase at the Right's then
current exercise price a number of the acquiring company's common shares having
a market value at the time of twice the Right's exercise price.
(10) Non-Operating Expense, Net
Non-operating expense, net consists primarily of interest expense, net of
interest income. Interest expense relates primarily to borrowings under the
Company's line of credit, which has been necessary to finance the Company's
growth, and interest expense associated with the financing of our facilities in
Tempe, Arizona. Interest expense is offset by interest income generated from
short-term investments, some of which are investment grade tax-advantaged bonds.
36
39
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
(11) Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. The following summary presents a description of the methodologies
and assumptions used to determine such amounts.
Fair value estimates are made at a point in time and are based on relevant
market information and information about the financial instruments; they are
subjective in nature and involve uncertainties and matters of judgment and,
therefore, can not be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at any time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
Since the fair value is estimated as of December 31, 1999, the amounts that
will actually be realized or paid in settlement of the instrument could be
significantly different.
The carrying amounts for cash and cash equivalents are assumed to be the fair
value because of the liquidity of these instruments.
The carrying amounts for accounts receivable, accounts payable and accrued
expenses and other current liabilities approximate fair value because of the
short maturity of these instruments.
(12) Supplemental Financial Information
A summary of additions and deductions related to the allowances for accounts
receivable and inventories for the years ended December 31, 1999, 1998 and 1997
follows (in thousands):
BALANCE AT
BEGINNING OF BALANCE AT
PERIOD ADDITIONS DEDUCTION SEND OF PERIOD
------------ --------- ---------- --------------
Allowances for doubtful accounts receivable:
Year ended December 31, 1999.. $7,128 $5,749 $(3,600) $9,277
====== ====== ======= ======
Year ended December 31, 1998.. $3,274 $5,366 $(1,512) $7,128
====== ====== ======= ======
Year ended December 31, 1997.. $3,214 $4,164 $(4,104) $3,274
====== ====== ======= ======
Allowances for obsolescence of inventories:
Year ended December 31, 1999.... $1,761 $3,067 $(3,218) $1,610
====== ====== ======= ======
Year ended December 31, 1998.... $1,397 $1,802 $(1,438) $1,761
====== ====== ======= ======
Year ended December 31, 1997.... $1,142 $1,080 $ (825) $1,397
====== ====== ======= ======
(13) Segment Information
The Company operates in one industry segment; direct marketing. The Company's
principal markets are in North America and Europe.
None of the Company's customers exceeded two percent of net sales.
The following is a summary of the Company's geographic operations
(in thousands):
North
America Europe Total
---------- -------- ----------
1999
Net sales..................... $1,362,728 $155,641 $1,518,369
Total long-lived assets....... $61,510 $20,559 $ 82,069
1998
Net sales..................... $947,277 $55,507 $1,002,784
Total long-lived assets....... $39,412 $18,089 $ 57,501
37
40
INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999, 1998 AND 1997
Although the Company could be impacted by the international economic climate,
management does not believe material credit risk existed at December 31, 1999.
The Company monitors its customers' financial conditions and does not require
collateral. Historically, the Company has not experienced significant losses
related to receivables from any individual or groups of customers.
The following is a summary of the Company's product mix:
1999 1998
----- ------
Notebooks....................................... 18% 22%
Desktops........................................ 17 18
Hard disk drives................................ 7 8
Memory/Processors............................... 8 5
Monitors/Video.................................. 6 6
Network/Connectivity............................ 8 8
Printers........................................ 9 9
Software........................................ 11 10
Miscellaneous................................... 16 14
--- ---
100% 100%
=== ===
(14) Pro Forma Financial Information (unaudited)
The following summary, prepared on a pro forma basis, presents the results of
operations as if the three 1998 acquisitions, described in Note 1, had occurred
on January 1, 1998 (in thousands, except earnings per share figures):
YEARS ENDED DECEMBER 31,
1999 1998
Net sales....................................... $1,518,369 $ 1,118,600
Net earnings.................................... $ 33,587 $ 20,407
Basic earnings per share........................ $ 1.30 $ 0.83
Diluted earnings per share...................... $ 1.25 $ 0.79
The pro forma results are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisitions had been
effective at the beginning of 1998 and are not a projection of future results.
(15) Aborted Acquisition Costs
During 1999 the Company recorded a pre-tax charge of $2.3 million related to
an aborted acquisition. On October 18, 1999, Insight announced it had
terminated a proposed European merger and reflected the costs of the aborted
acquisition in its fourth quarter and year-end results.
(16) Subsequent Events
On January 26, 2000, the Company acquired an additional 10% of the
outstanding common stock of Plusnet Technologies Limited for $1,800,000.
On February 24, 2000, the Company's Board of Directors instituted a stock
repurchase program, which allows the Company to repurchase up to 1,000,000
shares of its common stock. Any shares repurchased will be held as treasury
shares, and could be used for employee benefit plans, acquisitions, contingency
payments on acquisitions or other general corporate purposes. Between February
25, 2000 and March 21, 2000, the Company purchased a total of 412,450 shares at
an average cost of $28.49 per share.
38
41
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2 (1) -- Form of Articles of Merger and Certificate of Merger between Insight Enterprises, Inc., an
Arizona corporation, and Insight Enterprises, Inc., a Delaware corporation (the
"Registrant")
3.1 (6) -- Amended and Restated Certificate of Incorporation of Registrant
3.2 -- Bylaws of the Registrant
4.1 (1) -- Specimen Common Stock Certificate
4.2 (11) -- Form of Certificate of Designation of Preferred Shares
10.1 (1)(2) -- Form of Indemnification Agreement
10.2 (1)(3) -- 1994 Stock Option Plan of the Registrant
10.3 (1)(3) -- Predecessor Stock Option Plan
10.4 (3)(4) -- 1995 Employee Stock Purchase Plan of the Registrant
10.5 (3)(5) -- Amendment to 1994 Stock Option Plan of the Registrant
10.6 (3)(7) -- 1998 Long-Term Incentive Plan
10.7 (3)(8) -- Form of Restricted Stock Agreement
10.8 (3)(9) -- Employment Agreement between Insight Enterprises, Inc. and Eric J. Crown dated as of
March 31, 1998.
10.9 (3)(9) -- Employment Agreement between Insight Enterprises, Inc. and Timothy A. Crown dated as of
March 31, 1998.
10.10 (3)(9) -- Employment Agreement between Insight Enterprises, Inc. and Stanley Laybourne dated as of
March 31, 1998.
10.11 (3)(10) -- 1998 Employee Restricted Stock Plan
10.12 (3)(10) -- 1998 Officer Restricted Stock Plan
10.13 (12) -- Shareholder's Rights Agreement
10.14 (3) -- 1999 Broad Based Employee Stock Option Plan
11 -- Computation of Net Earnings per Common Share
21 -- Subsidiaries of the Registrant
23 -- Consent of KPMG LLP
27 -- Financial Data Schedule as of and for the year ended December 31, 1999
----------
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (No. 33-86142) declared effective January 24, 1995.
(2) The Company has entered into a separate indemnification agreement with
each of its current directors and executive officers that differ only
in party names and dates. Pursuant to the instructions accompanying
Item 601 of Regulation S-K, the Registrant is filing the form of such
indemnification agreement.
(3) Management contract or compensatory plan or arrangement.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997.
(7) Incorporated by reference to the Company's Notice of 1997 Annual
Meeting of Stockholders.
(8) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1998.
(9) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended March 31, 1998.
(10) Incorporated by reference to the Company's Form S-8 filed on December
17, 1998.
(11) Incorporated by reference to the Company's current report on Form 8-K
filed on March 17, 1999.
(12) Incorporated by reference to the Company's Form 8-A filed on March 17,
1999.