UNITED STATES

FORM 10-Q

(Mark One)

For the quarterly period ended: March 31, 2005

OR

o 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 þ   No o

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ   No o

The number of shares outstanding of the issuer’s common stock as of May 4, 2005 was 48,389,037.

INSIGHT ENTERPRISES, INC.
FORM 10-Q QUARTERLY REPORT
Three Months Ended March 31, 2005

TABLE OF CONTENTS

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INSIGHT ENTERPRISES, INC.

FORWARD-LOOKING STATEMENTS

     Certain statements in this Quarterly Report on Form 10-Q, including statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, are “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 affect net sales, gross profit, operating expenses, earnings from operations or net earnings; projections of capital expenditures and growth; hiring plans; plans for future operations; financing needs or plans; plans relating to our products and services; statements of belief; and statements of assumptions underlying any of 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 statement. Some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements include, but are not limited to, the following:

	•	changes in the economic environment and/or the information technology industry;
	•	our reliance on suppliers for product availability, marketing funds, purchasing incentives and competitive products to sell;
	•	our reliance on a limited number of outsourcing clients;
	•	actions of our competitors, including manufacturers of products we sell;
	•	disruptions in our information technology and voice and data networks;
	•	our failure to comply with the terms and conditions of our public sector contracts;
	•	the risks associated with international operations;
	•	our integration and operation of future acquired businesses;
	•	our dependence on key personnel;
	•	the decreased effectiveness of equity compensation resulting from changes in accounting for equity compensation;
	•	rapid changes in product standards;
	•	our ability to renew or replace short-term financing facilities;
	•	recently enacted and proposed changes in securities laws and regulations;
	•	intellectual property infringement claims; and
	•	risks that are otherwise described from time to time in the reports that we file with the SEC, including but not limited to the items discussed in “Factors that Could Affect Future Results” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report.

We assume no obligation to update, and do not intend to update, any forward-looking statements.

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PART 1- FINANCIAL INFORMATION

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

4

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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INSIGHT ENTERPRISES, INC.

1. Basis of Presentation and Recently Issued Accounting Pronouncements

     We are a leading provider of information technology (“IT”) products and services to businesses in the United States, Canada and the United Kingdom. Our offerings include brand name computing products, IT services and outsourcing of business processes. As of March 31, 2005, we were organized in the following operating segments:

	•	Provider of IT products and services – North America (“Insight North America”);
	•	Provider of IT products and services – United Kingdom (“Insight UK”); and
	•	Business process outsourcing provider (“Direct Alliance”).

     In 2004, we sold our entire investment in PlusNet, a leading internet service provider in the United Kingdom in which we previously owned a 95% interest. As a result of this sale, PlusNet’s results of operations are presented as a discontinued operation. We did not allocate interest or general corporate overhead expense related to the sale of our investment in PlusNet to the discontinued operation.

     The accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly our financial position as of March 31, 2005, our results of operations for the three months ended March 31, 2005 and 2004, and our cash flows for the three months ended March 31, 2005 and 2004. The condensed consolidated balance sheet as of December 31, 2004 was derived from the audited consolidated financial statements at such date. 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 United States generally accepted accounting principles (“GAAP”).

     The results of operations for such interim periods are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, including the related notes thereto, in our Annual Report on Form 10-K for the year ended December 31, 2004.

     The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

     The condensed consolidated financial statements include the accounts of Insight Enterprises, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. References to “the Company,” “we,” “us,” “our” and the like refer to Insight Enterprises, Inc. and its consolidated subsidiaries, unless the context otherwise requires.

Recently Issued Accounting Pronouncements

     In October 2004, the Financial Accounting Standards Board (“FASB”) released FASB Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”), which provides guidance under FASB Statement No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on an enterprise’s income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. We have not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, we have not adjusted our tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

     In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. We do not expect the adoption of SFAS 153 to have a material effect on our consolidated financial statements.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employee” (“APB No. 25”). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 107, which provided additional guidance in applying the provisions of SFAS 123R. In April 2005, the SEC amended the compliance dates of SFAS 123R so that registrants will be required to implement the standard as of the beginning of the first annual period that begins after June 15, 2005. We will be required to implement this standard effective January 1, 2006. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the modified retrospective methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS 123R and expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in future expenses that are similar to the current pro forma disclosures under SFAS No. 123.

     In March 2005, the FASB issued FSP No. 46(R)-5, “Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities” (“FSP 46(R)-5”), which provides guidance for a reporting enterprise on whether it holds an implicit variable interest in a variable interest entity (VIE) or potential VIE when specific conditions exist. FSP 46(R)-5 is effective the first interim period beginning after March 31, 2005. We do not expect the adoption of FSP 46(R)-5 to have a material effect on our consolidated financial statements.

2. Stock Based Compensation

     We currently apply the intrinsic value-based method of accounting prescribed by APB No. 25 and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation - an interpretation of APB Opinion No. 25” to account for our fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123 established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting described above and have adopted the disclosure requirements of SFAS No. 123. Accordingly, we do not currently recognize compensation expense for any of our stock-based plans because we do not issue options at exercise prices below the market

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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

value at date of grant. In addition, we recognize expense using the accelerated vesting methodology of FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”

     We have issued shares of restricted common stock as incentives to certain officers and employees and may do so in the future. We recognize 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 our common stock and have voting rights, regardless of whether such shares have vested. At March 31, 2005, there were 75,000 shares of restricted common stock outstanding. Compensation expense recognized for stock-based employee compensation awards for the quarters ended March 31, 2005 and 2004 was approximately $121,000 and $62,000, respectively.

     Had compensation cost for our stock-based plans been determined consistent with SFAS No. 123, our net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):

     For purposes of the SFAS No. 123 pro forma net earnings and net earnings per share calculations, the fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted-average assumptions used for grants of stock options during the three months ended March 31, 2005: dividend yield – 0%; expected volatility – 71%; risk-free interest rate – 3.96%; and expected lives – 2.80 years. We have not issued any stock options in Direct Alliance since 2000.

     Effective January 1, 2006, we will be required to adopt SFAS 123R, as discussed in Note 1.

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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

3. Earnings Per Share (“EPS”)

     Basic EPS is computed by dividing net earnings from continuing operations available to common stockholders by the weighted-average number of common shares outstanding during each quarter. Diluted EPS includes the effect of stock options assumed to be exercised using the treasury stock method. A reconciliation of the denominators of the basic and diluted EPS calculations was as follows (in thousands, except per share data):

     The following weighted average outstanding stock options during the three months ended March 31, 2005 and 2004 were not included in the diluted EPS calculations because the exercise prices of these options were greater than the average market price of our common stock during the respective periods (in thousands):

4. Discontinued Operation

     In 2004, we sold our 95% ownership in PlusNet, an internet service provider in the United Kingdom, which had been accounted for as a separate operating segment. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we have accounted for PlusNet as a discontinued operation and have reported PlusNet’s results of operations as a discontinued operation in the condensed consolidated statements of earnings.

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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

     The following amounts for the three months ended March 31, 2005 and 2004 represent PlusNet’s results of operations and have been segregated from continuing operations and reflected as discontinued operation (in thousands):

5. Termination of Our Relationship with an Equity Method Investee

     In March 2004, we invested in Executive Technology, Inc., fka ExecTechDirect Technology, Inc. (“ET”), a minority-owned reseller of information technology products and services. We recorded the initial investment of $400,000 at cost in “other assets” on our consolidated balance sheet. Our investment represented 20% of the total outstanding common and preferred shares of ET in the form of Series A Preferred shares and was accounted for under the equity method. Accordingly, in 2004, 20% of ET’s earnings or losses were recorded in our consolidated statements of earnings under “equity in loss of investee.” In January 2005, we terminated our Mentor-Protégé agreement, sold back our investment to ET for $1 and discontinued providing advances to third-party suppliers on behalf of ET. Additionally, effective February 28, 2005, we discontinued providing outsourcing services to ET. Accordingly, ET is no longer an equity method investment or a related party.

     We are in the final stages of completing existing projects with ET and had a receivable of $4,238,000 from ET at March 31, 2005, which is classified as accounts receivable. This balance is secured by certain ET accounts receivable and is paid to us via a lock-box arrangement as ET’s customers pay ET. We have also provided a $250,000 letter of credit that reduces the availability on our $30,000,000 line of credit to allow ET to obtain financing.

6. Financing Facilities

     Our financing facilities include a $200,000,000 accounts receivable securitization financing facility, a $30,000,000 revolving line of credit and a $40,000,000 inventory financing facility.

     We have an agreement to sell receivables periodically to a special purpose accounts receivable and financing entity (the “SPE”), which is exclusively engaged in purchasing receivables from us. The SPE is a wholly-owned, bankruptcy-remote entity that we have included in our consolidated financial statements. The SPE funds its purchases by selling undivided interests in up to $200,000,000 of eligible trade accounts receivable to a multi-seller conduit administered by an independent financial institution. The sales to the conduit do not qualify for sale treatment under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of

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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Liabilities” as we maintain effective control over the receivables that are sold. Accordingly, the receivables remain recorded on our consolidated financial statements. At March 31, 2005, the SPE owned $324,770,000 of receivables recorded at fair value and included in our consolidated balance sheet, of which $160,530,000 was eligible for funding. The financing facility expires December 30, 2005 and accordingly, any amounts outstanding would be recorded in current liabilities. Interest is payable monthly, and the interest rate at March 31, 2005 on borrowed funds was 3.16% per annum, including the 0.35% commitment fee on the total $200,000,000 facility. During the three months ended March 31, 2005 and 2004, our weighted average interest rate per annum and weighted average borrowings under the facility were 3.06% and $12,167,000 and 1.64% and $39,560,000, respectively. At March 31, 2005, no amounts were outstanding and $160,530,000 was available under the facility. We have no reason to believe the facility will not be renewed at the end of its current term.

     As of March 31, 2005, there were no amounts outstanding under our $30,000,000 revolving line of credit. The line of credit bears interest, payable quarterly, at a rate chosen by us among available rates subject to our leverage ratio and other terms and conditions. The available rates are the financial institution’s prime rate or the LIBOR based rate (5.75% and 4.12% per annum, respectively at March 31, 2005). The credit facility expires on December 31, 2007. We have an outstanding letter of credit that reduces the availability on this line of credit by $250,000 (See Note 5). At March 31, 2005, $29,750,000 was available under the line of credit.

     Our $40,000,000 secured inventories financing facility can be used to facilitate the purchases of inventories from certain suppliers. As of March 31, 2005, there was $6,300,000 outstanding under the inventories financing facility and $33,700,000 was available. This facility is non-interest bearing if paid within its terms and expires December 31, 2005.

     Our financing facilities contain various covenants including the requirement that we maintain a specified amount of tangible net worth and comply with leverage and minimum fixed charge requirements. In addition, our credit facilities prohibit the payment of cash dividends without the lenders’ consent. If we fall out of compliance with these covenants, the financial institutions, which finance our facilities, would be able to demand payment within the specified notice period. We were in compliance with all such covenants at March 31, 2005.

7. Income Taxes

     Our effective tax rate for continuing operations for the three months ended March 31, 2005 was 38.6%, which is higher than the United States federal statutory rate of 35% primarily due to:

	•	state income taxes, net of federal tax benefit; and
	•	the write-off of an excess deferred tax asset in the United Kingdom after final settlement of a liability assumed in a previous acquisition.

The items that increased our effective rate were offset partially by lower tax rates on earnings in the United Kingdom and Canada.

     Our effective tax rate for continuing operations for the three months ended March 31, 2004 was 30.8%, which is lower than the United States federal statutory rate of 35% primarily due to:

	•	the release of the remaining valuation allowance associated with the future tax benefit of a reduction in liabilities assumed in a previous acquisition;
	•	utilization of capital loss carryforwards in the United Kingdom; and
	•	lower tax rates on earnings in the United Kingdom and Canada.

The items that reduced our effective rate were offset partially by state income taxes, net of federal tax benefit.

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INSIGHT ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

8. Restructuring and Acquisition Integration Activities

Severance and Restructuring Costs Expensed in 2004

     In accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” during the year ended December 31, 2004, Insight North America, Insight UK and Direct Alliance recorded severance and restructuring expenses of $1,975,000, $377,000 and $83,000, respectively, for severance attributable to the elimination of certain sales, support and management functions. These amounts included $1,650,000 recorded for the retirement of P. Robert Moya, Executive Vice President, Chief Administrative Officer, General Counsel and Secretary and the planned elimination of this senior executive position. Of the amounts recorded, $137,000, $53,000 and $8,000 remained in Insight North America, Insight UK and Direct Alliance at December 31, 2004, respectively, and were included in accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheet at December 31, 2004. All of these amounts were paid during the three months ended March 31, 2005.

     The following table details the changes in severance and restructuring liabilities during the three months ended March 31, 2005 (in thousands):