SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: September 30, 2001
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.
1305 West Auto Drive, Tempe, Arizona 85284(Address of principal executive offices) (Zip Code)
(480) 902-1001(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes No
The number of shares outstanding of the issuer’s common stock as of November 1, 2001 was 41,659,497.
TABLE OF CONTENTS
INSIGHT ENTERPRISES, INC.FORM 10-Q QUARTERLY REPORTThree and Nine Months Ended September 30, 2001
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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except per share data)
See accompanying notes to condensed consolidated financial statements.
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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(in thousands, except per share data)(unaudited)
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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)
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INSIGHT ENTERPRISES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
1. Description of Business
Insight Enterprises, Inc. (the “Company”) is a holding company with two operating units: Insight Direct Worldwide, Inc. (“Insight”) and Direct Alliance Corporation (“Direct Alliance”).
Insight is a global direct marketer of computers, hardware and software with locations in the United States, Canada, the United Kingdom and Germany. Insight sells products via a staff of customer-dedicated account executives utilizing proactive outbound telephone-based sales, electronic commerce and electronic marketing and via the Internet.
Direct Alliance enables manufacturers of brand name products to directly access customers and improve the efficiency of their indirect sales channels. Direct Alliance provides outsourced services that include demand generation, direct sales management, Internet enablement, product fulfillment and transaction management services.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and notes have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2001, the results of operations for the three and nine months ended September 30, 2001 and 2000, and the cash flows for the nine months ended September 30, 2001 and 2000. The condensed consolidated balance sheet as of December 31, 2000 was derived from the audited consolidated financial statements at such date. Certain amounts in the condensed consolidated financial statements have been reclassified to conform to the current presentation. The results of operations for such interim periods are not necessarily indicative of results for the full year. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements, including the related notes thereto, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
The condensed consolidated financial statements include the accounts of Insight Enterprises, Inc. and its subsidiaries, which are primarily wholly-owned. Intercompany accounts and transactions have been eliminated in consolidation.
In July 2000, the Company’s Board of Directors approved a 3-for-2 stock split effected in the form of a stock dividend and paid on September 18, 2000 to the stockholders of record at the close of business on August 21, 2000. All share amounts and earnings per share have been retroactively adjusted to reflect this 3-for-2 stock split.
3. Line of Credit
The Company has a $100,000,000 credit facility with a finance company. The agreement provides for cash advances outstanding at any one time up to a maximum of $100,000,000 on the line of credit, subject to limitations based upon the Company’s eligible accounts receivable and inventories. Cash advances bear interest at the London Interbank Offered Rate (LIBOR) plus 0.80% (3.43% at
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INSIGHT ENTERPRISES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)(unaudited)
September 30, 2001) payable monthly. The credit facility can be used to facilitate the purchases of inventories from certain suppliers and that portion is classified on the balance sheet as accounts payable. As of September 30, 2001, the balance of this portion of the credit facility was $27,093,000. As of September 30, 2001, we had a long-term outstanding balance of $4,120,000 and $68,787,000 was available under the line of credit.
The credit facility expires in February 2003 at which time the outstanding balance is due. The line is secured by substantially all of the assets of the Company. The line of credit contains various covenants, including the requirement that the Company maintain a specific dollar amount of tangible net worth and restrictions on payment of cash dividends.
4. Income Taxes
Income tax expense as provided for the three and nine months ended September 30, 2001 and 2000 is based upon the estimated annual income tax rate of the Company.
5. Subsequent Events
In October 2001, Insight acquired the stock of Action plc (LSE:ACS) (“Action”), a United Kingdom-based direct marketer of computers and computer related products for approximately $39 million cash.
Additionally, in October 2001, Insight acquired the stock of Kortex Computer Centre Ltd. (“Kortex”), a Canadian-based direct marketer of computers and computer related products. Under the terms of the agreement, Insight will acquire Kortex for approximately $3.5 million cash with additional consideration in the next three years contingent on sales and profitability.
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INSIGHT ENTERPRISES, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 can not 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, international operations, risk of business interruption, management of rapid growth, need for additional financing, changing methods of distribution, reliance on suppliers, changes in supplier reimbursement programs, rapid change in product standards, inventory obsolescence, dependence on key personnel, sales and income tax uncertainty and increasing marketing, postage and shipping costs. These factors are discussed in greater detail under “Factors That May Affect Future Results and Financial Condition” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission. 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
Insight
Insight commenced operations in 1988 as a direct marketer of hard disk drives and other mass storage products. Since then, we have 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. Our marketing strategy utilizes outbound account executives, complimented by the use of electronic commerce and marketing, focused primarily on the small- to medium-sized business market. We currently have direct marketing operations in the United States, Canada, the United Kingdom and Germany.
Direct Alliance
In 1992, we began providing direct marketing services to third-party original equipment manufacturers to leverage our infrastructure and increase our net earnings. Presently, all of our outsourcing arrangements are service fee based whereby the Company derives net sales based primarily upon a cost plus arrangement and a percentage of the sales price from products sold. Revenues from service fee based programs and direct costs related to the generation of those revenues are included the Company’s net sales and costs of goods sold, respectively. Also, as an accommodation to select service fee based program clients, we purchase and immediately resale products to our clients for immediate
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INSIGHT ENTERPRISES, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
resale to their customers. These pass-through product sales are completed at little or no gross margin and are included in sales and costs of goods sold. Prior to October 1, 2000, under certain product based outsourcing arrangements, Direct Alliance took title to inventories of products and assumed the credit risk associated with sales to the end user. Revenues and related costs from the sales of such products are included in the Company’s net sales and costs of goods sold, respectively. Starting in 1998, we began to strategically shift outsourcing arrangements from product based to service fee based programs. As a result, effective October 1, 2000 all of Direct Alliance’s programs are service fee based programs which may include pass-through product sales for certain clients. 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 affected by the product mix, the number of lines per order and the mix of outsourcing arrangements. We expect pricing pressures to continue, and we may be required to reduce our prices to remain competitive. Such pricing pressures could have a material adverse effect on the Company’s financial condition and results of operations.
Results of Operations
The following table sets forth for the periods indicated certain financial data of the Company as a percentage of net sales:
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Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000
Net Sales. Net sales of the Company decreased $50.1 million, or 9%, to $490.2 million for the three months ended September 30, 2001 from $540.3 million for the three months ended September 30, 2000.
Net sales derived from Insight, the direct marketing business, decreased $39.9 million, or 8%, to $463.0 million for the three months ended September 30, 2001 from $502.9 million for the three months ended September 30, 2000. Net sales for Insight’s North American business decreased 9% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000. The decrease in sales is due to the decline in technology spending in the United States. Net sales for Insight’s European business increased 17% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000. The increase in net sales resulted primarily from deeper account penetration, increased market share and an expanded customer base. These increases were offset slightly by declines in the exchange rates for the United Kingdom and Germany and a decrease in sales in Germany due to the conversion from consumer customers to small- to medium-sized business customers. Insight’s average order size decreased to $1,278 for the three months ended September 30, 2001 from $1,383 for the three months ended September 30, 2000 due to a decrease in the percentage of sales of computers which was offset by the sale of more line items per order. North American sales represented 93% and 94% of Insight’s net sales for the three months ended September 30, 2001 and 2000, respectively. Average order size for our sales in North America decreased from $1,518 for the three months ended September 30, 2000 to $1,345 for the three months ended September 30, 2001 again due to a decrease in the percentage of sales of computers which was offset by the sale of more line items per order. European sales represented 7% and 6% of Insight’s net sales for the three months ended September 30, 2001 and 2000, respectively. Average order size for our sales in Europe increased from $536 for the three months ended September 30, 2000 to $766 for the three months ended September 30, 2001 due to an increase in the percentage of computer sales and an increase in the number of lines per order. Insight’s target market, small- and medium-sized business (including education and government), increased from 97% of net sales for the three months ended September 30, 2000 to 98% for the three months ended September 30, 2001. Insight had 1,644 account executives at September 30, 2001, with 1,421 in North America and 223 in Europe, a change from 1,704, 1,531 and 173, respectively, at September 30, 2000.
Net sales derived from Direct Alliance, the outsourcing business, decreased $10.2 million, or 27%, to $27.2 million for the three months ended September 30, 2001 from $37.4 million for the three months ended September 30, 2000. This decrease resulted from the shift in the mix of outsourcing arrangements from product based programs to service fee based programs and a large seasonal product based program in 2000 offset by the expansion of service fee based programs. As a result of Direct Alliance’s strategic emphasis on service fee based programs as opposed to product based programs, 100% of Direct Alliance’s net sales were from service fee based programs (16% via pass through product sales) in the three months ended September 30, 2001 compared to 64% (14% via pass through product sales) in the three months ended September 30, 2000. If net sales had been recognized for all programs as if they were product based programs, net sales from Direct Alliance would have increased 20% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000.
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Gross Profit. The Company’s gross profit decreased $9.0 million, or 14%, to $54.7 million for the three months ended September 30, 2001 from $63.7 million for the three months ended September 30, 2000. As a percentage of net sales, gross profit decreased from 11.8% for the three months ended September 30, 2000 to 11.2% for the three months ended September 30, 2001. Insight’s gross profit, as a percentage of net sales, decreased from 11.5% for the three months ended September 30, 2000 to 10.5% for the three months ended September 30, 2001. Direct Alliance’s gross profit, as a percentage of net sales, increased from 15.3% for the three months ended September 30, 2000 to 22.0% for the three months ended September 30, 2001. The fluctuations in gross profit percentage primarily resulted from Insight’s decreased product margin due to the decision to aggressively move product at the end of the quarter to compensate for a sales reduction due to the tragic events of September 11, 2001 offset by increased gross profit provided by Direct Alliance’s service fee based programs. Other components of costs of goods sold remained relatively constant as a percentage of net sales. We expect our future gross profit percentage to fluctuate depending on factors such as industry-wide pricing pressures, supplier reimbursement programs, pricing/selling strategies and our product and outsourcing program mix.
Operating Expenses. The Company’s operating expenses increased $3.8 million, or 10%, to $41.0 million for the three months ended September 30, 2001 from $37.2 million for the three months ended September 30, 2000. Included, as a reduction of selling and administrative expenses for the three months ended September 30, 2000 is $750,000 of proceeds from an insurance claim related to aborted acquisition costs incurred in the fourth quarter of 1999. These proceeds are not included in the operating expense percentage of the operating units, Insight and Direct Alliance, as discussed herein. Operating expenses as a percentage of net sales increased to 8.4% for the three months ended September 30, 2001 from 6.9% for the three months ended September 30, 2000. The Company’s operating expenses as a percentage of net sales for Insight were 8.5% for the three months ended September 30, 2001 and 7.0% for the three months ended September 30, 2000. The increase in the operating expense percentage at Insight was attributable to continued investment in account executives, European growth and IT professionals , increases in the reserve for bad debts and the inability to reduce operating expenses at quarter end to compensate for the reduction in sales and gross profit after September 11, 2001. Operating expenses as a percentage of net sales for Direct Alliance were 6.4% for the three months ended September 30, 2001 and 6.8% for the three months ended September 30, 2000. The percentages for these periods are not directly comparable because of the differing mix of service fee based and product based programs in the periods and the differing accounting treatment of direct costs between the two program types. Under service fee based programs, all direct costs related to the generation of the fees are included in costs of goods sold, and not in operating expenses as is the case with product based programs.
Insight’s overall unassisted web sales represented 11.8% of its net sales for the three months ended September 30, 2001, up from 11.5% from the three months ended September 30, 2000. The percentage of Insight shipments made using our electronic “direct ship” programs with our suppliers increased to 72.4% for the three months ended September 30, 2001 from 67.4% from the three months ended September 30, 2000. Annualized inventory turnover for the Company for the three months ended September 30, 2001 was 90 times compared to 68 times for the three months ended September 30, 2000.
Non-Operating Income, Net. Non-operating income, net, which consists primarily of interest income and interest expense, decreased to $33,000 for the three months ended September 30, 2001 from $277,000 for the three months ended September 30, 2000. Interest income is generated by the Company through short-term investments, some of which are investment grade tax- advantaged bonds. Interest expense primarily relates to borrowings associated with the financing of facility acquisitions and the
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financing of inventory purchases under the Company’s line of credit. Decrease in other income is due to declines in interest rates earned on short-term investments further decreased by fixed interest rates on mortgages and capital leases.
Income Tax Expense. The Company’s effective tax rate was 39.7% for the three months ended September 30, 2001 and 2000.
Net Earnings. The Company’s net earnings decreased $7.9 million, or 49%, to $8.3 million for the three months ended September 30, 2001 from $16.2 million for the three months ended September 30, 2000. Diluted earnings per share decreased 47% to $0.20 for the three months ended September 30, 2001 from $0.38 for the three months ended September 30, 2000. Net earnings for Insight decreased 58% to $5.7 million for the three months ended September 30, 2001 from $13.7 million for the three months ended September 30, 2000. Net earnings for Direct Alliance increased 28% to $2.6 million from $2.0 million for the three months ended September 30, 2000. The insurance proceeds discussed previously in operating expenses are not included in the net earnings of the operating units, Insight and Direct Alliance, as discussed herein.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000
Net Sales. Net sales of the Company increased $56.8 million, or 4%, to $1,552.5 million for the nine months ended September 30, 2001 from $1,495.7 million for the nine months ended September 30, 2000.
Net sales derived from Insight, the direct marketing business, increased $62.8 million, or 4%, to $1,476.0 million for the nine months ended September 30, 2001 from $1,413.2 million for the nine months ended September 30, 2000. Net sales for Insight’s North American direct business increased 5% for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. Net sales for Insight’s European business increased 1% for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The increase in net sales resulted primarily from deeper account penetration, increased market share, an expanded customer base (both domestic and international), expanded product offerings and Internet enhancements that increased unassisted transactions. These increases were offset by declines in the exchange rates for Canada, the United Kingdom and Germany and a decrease in sales in Germany due to the conversion from consumer customers to small- to medium-sized business customers. North American sales represented 93% of Insight’s net sales for the nine months ended September 30, 2001 and 2000. European sales represented 7% of its net sales for the nine months ended September 30, 2001 and 2000, respectively.
Net sales derived from Direct Alliance, the outsourcing business, decreased $6.0 million, or 7%, to $76.5 million for the nine months ended September 30, 2001 from $82.5 million for the nine months ended September 30, 2000. Outsourcing sales represented 5% and 6% of total Company net sales in the nine months ended September 30, 2001 and 2000, respectively. This decrease resulted from the the shift in the mix of outsourcing arrangements from product based programs to service fee based programs offset by the expansion of service fee based programs. As a result of Direct Alliance’s strategic emphasis on service fee based programs as opposed to product based programs, 100% of Direct Alliance’s net sales were from service fee based programs (15% via pass through product sales) in the nine months ended September 30, 2001 compared to 67% (10% via pass through product sales) in the nine months ended
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September 30, 2000. If net sales had been recognized for all programs as if they were product based programs, net sales from Direct Alliance would have increased 65% for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000.
Gross Profit. The Company’s gross profit increased $300,000, or 0.2%, to $177.4 million for the nine months ended September 30, 2001 from $177.1 million for the nine months ended September 30, 2000. As a percentage of net sales, gross profit decreased from 11.8% for the nine months ended September 30, 2000 to 11.4% for the nine months ended September 30, 2001. Insight’s gross profit, as a percentage of net sales, decreased from 11.5% for the nine months ended September 30, 2000 to 10.9% for the nine months ended September 30, 2001. Direct Alliance’s gross profit, as a percentage of net sales, increased from 16.9% for the nine months ended September 30, 2000 to 22.2% for the nine months ended September 30, 2001. The fluctuations in gross profit percentage primarily resulted from Insight’s decreased product margin amidst pricing strategies and pressures and increased gross profit provided by Direct Alliance’s service fee based programs. Other components of costs of goods sold remained relatively constant as a percentage of net sales, with the exception of supplier reimbursement programs which increased slightly. We expect our future gross profit percentage to fluctuate depending on factors such as industry-wide pricing pressures, supplier reimbursement programs, pricing/selling strategies and our product and outsourcing program mix.
Operating Expenses. The Company’s operating expenses, before the effect of a $1.4 million pre-tax charge for the effect of aborted IPO costs related to Direct Alliance Corporation described below, increased $13.6 million, or 13%, to $120.6 million for the nine months ended September 30, 2001 from $107.0 before the effect of a $1.1 million pretax restricted common stock charge described below for the nine months ended September 30, 2000. Operating expenses, before one-time charges, as a percentage of net sales increased to 7.7% for the nine months ended September 30, 2001 from 7.1% for the nine months ended September 30, 2000. Included, as a reduction of selling and administrative expenses for the nine months ended September 30, 2000 is $750,000 of proceeds from an insurance claim related to aborted acquisition costs incurred in the fourth quarter of 1999. These proceeds are not included in the operating expense percentage of the operating units, Insight and Direct Alliance, as discussed herein. Operating expenses as a percentage of net sales for Insight, before a one-time charge, were 7.9% for the nine months ended September 30, 2001 and 7.2% for the nine months ended September 30, 2000. The increase in the operating expense percentage at Insight was attributable to continued investment in account executives, European growth and IT professionals offset by the efficiency of its sales and marketing approach to generate sales dollars and continued cost-cutting measures. Operating expenses as a percentage of net sales for Direct Alliance, before one-time charges, were 6.4% for the nine months ended September 30, 2001 and 6.7% for the nine months ended September 30, 2000. The percentages for these periods are not directly comparable because of the differing mix of service fee based and product based programs in the periods and the differing accounting treatment of direct costs between the two program types. Under service fee based programs, all direct costs related to the generation of the fees are included in costs of goods sold, and not in operating expenses as is the case with product based programs.
Aborted IPO Costs. The Company withdrew its planned initial public offering and spin-off of Direct Alliance Corporation on June 6, 2001. The Company has recorded a pre-tax charge of $1.4 million in operating expenses during the nine months ended September 30, 2001 related to the aborted IPO costs.
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Restricted Stock Charge. As previously disclosed, the Company issued shares of restricted common stock as incentives to certain officers and employees. The restricted common shares are valued at the date of grant, amortized over the three-year vesting period and a portion contain an acceleration clause which causes the shares to automatically vest if the Company’s stock closed above a certain price of either $29 or $44 per share. On May 15, 2000, the Company’s stock closed above $29 causing 76,264 restricted common stock shares to automatically vest. The Company recorded a pre-tax charge of $1.1 million during the nine months ended September 30, 2000 related to the early vesting of this restricted common stock. This charge represents the unamortized portion of the restricted stock in excess of the scheduled amortization.
Non-Operating Income, Net. Non-operating income, net, which consists primarily of interest income and interest expense, decreased to $51,000 for the nine months ended September 30, 2001 from $915,000 for the nine months ended September 30, 2000. Interest income is generated by the Company through short-term investments, some of which are investment grade tax-advantaged bonds. Interest expense primarily relates to borrowings associated with the financing of facility acquisitions and the financing of inventory purchases under the Company’s line of credit. Decrease in other income is due to declines in interest rates earned on short-term investments further decreased by fixed interest rates on mortgages and capital leases.
Income Tax Expense. The Company’s effective tax rate was 39.4% and 39.5% for the nine months ended September 30, 2001 and 2000, respectively. The decrease is due primarily to the decrease in the income tax rate for the State of Arizona.
Net Earnings. The Company’s net earnings, before the effect of $830,000, net of tax, aborted IPO costs related to Direct Alliance Corporation, decreased $8.4 million, or 20%, to $34.5 million for the nine months ended September 30, 2001 from $42.9 million, before the effect of a $685,000, net of tax, restricted common stock charge for the nine months ended September 30, 2000. Diluted earnings per share, before one-time charges, decreased 21% to $0.81 for the nine months ended September 30, 2001 from $1.02 for the nine months ended September 30, 2000. Net earnings for Insight, before a one-time charge, decreased 27% to $27.2 million for the nine months ended September 30, 2001 from $37.0 million for the nine months ended September 30, 2000. Net earnings for Direct Alliance, before one-time charges, increased 36% to $7.3 million for the nine months ended September 30, 2001 from $5.4 for the nine months ended September 30, 2000. The insurance proceeds discussed previously in operating expenses are not included in the net earnings of the operating units, Insight and Direct Alliance, as discussed herein.
Seasonality
Although the Company has historically experienced variability in the rates of sales growth, we have not experienced seasonality in our overall business during the past several years as we increased our percentage of sales from businesses, educational institutions, government organizations and computer resellers. Some of the outsourcing programs can be seasonal in nature because the manufacturers’ target customers can have cyclical buying patterns, but the impact on overall sales is negligible.
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Liquidity and Capital Resources
Our primary capital needs have been to fund the working capital requirements and capital expenditures necessitated by our sales growth.
The Company’s net cash provided by operating activities was $75.5 million for the nine months ended September 30, 2001 compared to $26.0 million for the nine months ended September 30, 2000. The positive cash flow in the current period was primarily due to a $42.7 million decrease in accounts receivable and $33.6 million in net earnings. These funds were used to fund a $19.6 million decrease in accounts payable.
Capital expenditures for the nine months ended September 30, 2001 and 2000 were $26.8 million and $28.4 million, respectively. Capital expenditures for the nine months ended September 30, 2001 primarily relate to the acquisition of new facilities in Sheffield, England, office furniture and equipment for facilities purchased during 2000 and new software applications. Capital expenditures for the nine months ended September 30, 2000 primarily relate to the acquisition of an additional Direct Alliance facility in Tempe, Arizona, an additional Insight facility in Montreal, Canada, computer hardware and new software applications.
Our future capital requirements include financing the growth of working capital items such as accounts receivable and inventories, the purchase of software enhancements, the purchase of equipment, furniture and fixtures to accommodate future growth and funds needed for future organic growth and/or acquisitions. We anticipate that cash flow from operations together with the funds available under our credit facility should be adequate to support the Company’s presently anticipated cash and working capital requirements through 2002. Our ability to continue funding planned growth beyond 2001 is dependent upon our ability to generate sufficient cash flow or to obtain additional funds through equity or debt financing. See Note 3 of Notes to Condensed Consolidated Financial Statements for a description of the Company’s $100 million credit facility.
Recent Accounting Pronouncements
On October 3, 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. Statement 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. Statement 144 will be effective for the year ending December 31, 2002. It is not expected to have a material impact on our consolidated financial statements.
In July 2001, the FASB issued Statement No. 141, Business Combinations(“Statement 141”), and Statement No. 142, Goodwill and Other Intangible Assets(“Statement 142”). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement
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141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement No. 144.
The Company is required to adopt the provisions of Statement 141 immediately and Statement 142 is effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s statement of earnings.
As of the date of adoption, the Company expects to have unamortized goodwill in the amount of approximately $32.6 million (excluding the effects of any fluctuations in foreign currency translation and
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the effects of acquisitions completed subsequent to September 30, 2001) and unamortized identifiable intangible assets in the amount of $0, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $1.6 million and $1.5 million for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company’s financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
Part II — Other Information
Item 6. Exhibits and Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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