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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended: September 30, 2003

OR

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.

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

The number of shares outstanding of the issuer’s common stock as of November 5, 2003 was 46,566,773.

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INSIGHT ENTERPRISES, INC.
FORM 10-Q QUARTERLY REPORT
Three Months Ended September 30, 2003

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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

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” in Part 1, Item 2, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, among other statements, projections of matters that affect net sales, gross profit, operating expenses, earnings from operations or net earnings; projections of capital expenditures; projections for growth; hiring plans; plans for future operations, including the execution of acquisition integration plans; 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 information. 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:

•

risks associated with our integration and operation of past and future acquired businesses;

•

reduced demand for products and services in our industry;

•

reliance on information and telephone communication systems;

•

current unfavorable economic conditions;

•

actions of competitors;

•

changes in supplier reimbursement and buying programs;

•

risks associated with international operations;

•

reliance on a limited number of outsourcing clients;

•

changes in state sales tax collection;

•

changing methods of distribution;

•

dependence on key personnel;

•

reliance on suppliers;

•

availability of short-term financing arrangements;

•

rapid changes in product standards;

•

intellectual property infringement claims;

•

results of litigation;

•

recently enacted and proposed changes in securities laws and regulations; and

•

risks that are otherwise described from time to time in our Securities and Exchange Commission reports, 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 Part I, Item 2 of this report.

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

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

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. 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.

Description of Business

          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, advanced IT services and outsourcing of business processes. Our business is organized in four operating segments:

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Single-source provider of IT products and services – North America (“Insight North America”);

•

Direct marketer of IT products and services – United Kingdom (“Insight UK”);

•

Business process outsourcing provider (“Direct Alliance”); and

•

Other – Internet service provider (“PlusNet”).

          Insight North America is a leading single source provider of IT products and services, offering a broad line of over 200,000 brand name products primarily to businesses in the United States and Canada. Insight North America also offers its customers IT services such as advanced integration, custom configuration, network design, deployment and installation, as well as third-party services such as warranties, training and leasing. Insight North America sells these products and services through a staff of customer-dedicated account executives utilizing proactive outbound telephone-based sales, a customer-focused face-to-face field sales force and electronic commerce (primarily the Internet).

          Insight UK is a direct marketer of IT products and services, offering a broad line of over 70,000 brand name products to businesses in the United Kingdom. Insight UK sells these products through a staff of customer-dedicated account executives utilizing proactive outbound telephone-based sales, a customer-focused face-to-face field sales force, a comprehensive catalog mailed to regular and prospective buyers that generates in-bound telephone calls and electronic commerce (primarily the Internet).

          Direct Alliance provides marketplace solutions in the areas of logistics and supply chain management, financial services, direct sales and channel management, direct marketing and analytics using proprietary technology, infrastructure and processes. Direct Alliance’s services enable manufacturers of brand name products to sell directly to customers and support existing indirect sales channels in a cost-effective and timely manner.

          PlusNet offers broadband and “dial-up” Internet access to businesses and consumers in the United Kingdom.

2.

Basis of Presentation

          In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2003, the results of operations for the three and nine months ended September 30, 2003 and 2002, stockholders’ equity for the nine months ended September 30, 2003 and the cash flows for the nine months ended September 30, 2003 and 2002. The condensed consolidated balance sheet as of December 31, 2002 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 accounting principles generally accepted in the United States of America.

          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. 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, 2002.

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

          The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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 subsidiaries, which are primarily wholly-owned. 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. References to Comark refer collectively to Comark, Inc. and Comark Investments, Inc. References to Action refer to Action plc and references to Kortex refer to Kortex Computer Center ltd.

3.

Stock-Based Compensation

          We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” 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 stock-based employee compensation plans. Under this method, compensation expense related to stock options is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,” 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 recognize compensation expense for any of our stock option plans because we do not issue stock options at exercise prices below the market value at date of grant. Had compensation cost for our stock option plans been determined consistent with SFAS No. 123, our net earnings and earnings per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share data):

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

          We recognize compensation expense associated with the issuance of restricted stock ratably over the vesting period. The total compensation expense associated with restricted stock is determined by multiplying the number of shares awarded 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. Unvested shares of restricted stock are forfeited if the recipient resigns or is terminated for cause.

4.

Earnings Per Share

          Our basic earnings per share (“EPS”) is calculated based on net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes additional dilution from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options.

          The reconciliation of the numerators and denominators of the basic and diluted EPS calculations were as follows for the three and nine-month periods ended September 30, 2003 and 2002 (in thousands, except per share data):

5.

Financing Arrangements

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

          We have entered into an agreement to sell accounts receivable periodically to a special purpose accounts receivable and financing entity (the “SPE”), which is exclusively engaged in purchasing accounts receivable from us. The SPE is a wholly-owned, bankruptcy-remote entity that we have consolidated in our condensed 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 Liabilities.” Accordingly, the accounts receivable remain recorded on our condensed consolidated financial statements. At September 30, 2003, the SPE owned $317,252,000 of accounts receivable that are recorded at fair value and are included in our condensed consolidated balance sheet, of which $167,241,000 was eligible for funding. The facility expires December 30, 2003, and accordingly, the $10,000,000 outstanding at September 30, 2003 is recorded as short-term debt. Interest is payable monthly and the interest rate on

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

borrowed funds as of September 30, 2003 was 1.66%. We also pay a commitment fee on the facility equal to 0.35% of the unused balance. At September 30, 2003, $157,241,000 was available under the facility. We have no reason to believe the facility will not be renewed on or before December 30, 2003.

          As of September 30, 2003, we had 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 floating rate or the LIBOR based rate (5.55% and 2.70%, respectively at September 30, 2003). Any amounts outstanding would be recorded as long-term liabilities. The credit facility expires on December 31, 2005. We have an outstanding letter of credit that reduces the availability on this line of credit by $10,000,000. At September 30, 2003, $20,000,000 was available under the line of credit.

          Our $40,000,000 secured inventories facility can be used to facilitate the purchases of inventories from certain suppliers and amounts outstanding are classified on the condensed consolidated balance sheet as accounts payable. As of September 30, 2003, there was $4,387,000 outstanding under the inventories facility and $35,613,000 was available. This facility is non-interest bearing if paid within its terms and expires December 31, 2005.

          The facilities contain various covenants including the requirement that we maintain a specified amount of tangible net worth and do not exceed leverage and minimum fixed charge requirements. We were in compliance with all such covenants at September 30, 2003.

6.

Income Taxes

          Our effective tax rate was 33.6% and 33.4%, respectively, for the three and nine months ended September 30, 2003 and 40.5% and 38.5%, respectively, for the three and nine months ended September 30, 2002. Our effective tax rates differ from the United States federal statutory rate of 35% in all periods due to state income taxes, net of federal income tax benefit, and lower tax rates on earnings in Canada and the United Kingdom. The effective tax rate for the nine months ended September 30, 2003 was also reduced because income resulting from the reduction of certain Insight UK liabilities assumed in connection with a previous acquisition was not taxable and because we realized a tax benefit related to a UK foreign currency exchange loss in conjunction with an intercompany debt-to-equity conversion.

7.

Goodwill

          The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows (in thousands):

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

          There is no goodwill recorded at Insight UK or Direct Alliance.

          During the nine months ended September 30, 2003, Insight UK settled certain liabilities assumed in the acquisition of Action in late 2001 for $2,504,000 less than the amounts originally recorded. Normally, these items would be recorded as a reduction to goodwill. However, Insight UK recorded a goodwill impairment charge during the fourth quarter of 2002 which eliminated its entire goodwill balance. Accordingly, the $2,504,000 reduction in assumed liabilities was recorded in the statement of earnings during the first quarter of 2003. The income resulting from the reduction in assumed liabilities was not taxable.

8.

Restructuring and Acquisition Integration Activities

Acquisition-Related Restructuring Costs Expensed in 2003

          During the nine months ended September 30, 2003, Insight North America recorded $2,283,000 in restructuring expenses associated with costs incurred to close Insight North America’s distribution facility in Indiana and $639,000 in connection with the elimination of certain support and management positions. The Indiana facility was closed in order to consolidate warehouse and distribution facilities in Illinois in accordance with the Comark integration plan. The restructuring expenses generally consist of employee termination benefits of $820,000, facilities based expenses of $954,000, and non-cash expenses related to abandoned assets of $1,148,000. The facilities based expenses consist of remaining lease obligations and expenses to remove leasehold improvements. Of the $954,000 recorded for facilities based expenses, $373,000 was paid and adjustments of $46,000, due to increases in estimated common area maintenance charges, were made leaving an accrual of $627,000 at September 30, 2003. The employee termination benefits relate to severance and termination benefits paid during the nine months ended September 30, 2003 to 109 employees.

          Also during the nine months ended September 30, 2003, Insight UK recorded $543,000 of restructuring expenses relating to severance associated with the elimination of service technicians and certain support and management functions. These expenses generally consist of employee termination benefits for 26 employees. During the nine months ended September 30, 2003, $329,000 was paid and adjustments of $89,000, due to decreases in estimated severance costs, were made leaving an accrual of $125,000 at September 30, 2003.

          We recorded the restructuring expenses in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” or SFAS No. 112, “Employers’ Accounting for Post-Employment Benefits,” as appropriate.

          The following table details the changes in these liabilities during the nine months ended September 30, 2003 (in thousands):

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

Acquisition-Related Restructuring Costs Capitalized in 2002 as a Cost of Acquisition of Comark

          During 2002, Insight North America recorded $1,819,000 of restructuring costs in connection with the integration of Comark. These costs were accounted for under Emerging Issues Task Force (“EITF”) Issue No. 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations.” The acquisition-related restructuring costs recorded in 2002 were based on the restructuring plans that were committed to by management in 2002. Accordingly, these costs were recognized as liabilities assumed in the purchase business combination and included in the allocation of the costs to acquire Comark.

          The charge of $1,819,000 to restructure the organization consisted of employee termination benefits and facilities based costs, of which $595,000 was still accrued at December 31, 2002. During the nine months ended September 30, 2003, an additional accrual was made to the employee termination benefits related to severance payments and transition bonuses of $1,083,000 for 29 additional employees who were terminated in connection with the elimination of certain duplicative activities resulting from the acquisition. These adjustments were offset by cash payments of $1,583,000. Additional facilities based costs of $19,000 were accrued during the nine months related to lease termination costs associated with vacating duplicate facilities. The cash payments for facilities based costs during the nine months ended September 30, 2003 were $76,000, leaving an accrual of $38,000 at September 30, 2003.

          The following table details the changes in these liabilities during the nine months ended September 30, 2003 (in thousands):

Acquisition-Related Restructuring Costs Capitalized in 2001 as a Cost of Acquisition of Action

          In 2001, Insight UK recorded costs of $18,440,000 relating to restructuring the operations of Action as part of the integration of this acquisition. These costs were accounted for under EITF Issue No. 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations.” The acquisition-related restructuring costs recorded in 2001 were based on the restructuring plans that were committed to by management in 2001. Accordingly, these costs were recognized as liabilities assumed in the purchase business combination and included in the allocation of the costs to acquire Action. Normally, adjustments to these amounts, other than foreign currency translation, would be recorded as a reduction to goodwill. However, Insight UK recorded a goodwill impairment charge during the fourth quarter of 2002 which eliminated its entire goodwill balance; therefore, any adjustments in assumed liabilities, other than foreign currency translation, are recorded in the statement of earnings in the line item “reductions in liabilities assumed in previous acquisition.” Foreign currency translation adjustments continue to be recorded directly in other comprehensive income as a separate component of stockholders’ equity.

          The $18,440,000 cost to restructure the organization consisted of employee termination benefits and facilities based costs of $3,532,000 and $14,908,000, respectively, of which $9,721,000 remained accrued at December 31, 2002. Employee termination benefits of $11,000 were paid during the nine months ended September 30, 2003. Adjustments to the accrued employee termination benefits of $231,000 during the nine months ended September 30, 2003 primarily represented decreases in estimated employee termination benefits.

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

          The facilities based costs primarily consist of remaining lease commitments on unused facilities or estimated costs to terminate lease commitments, reduced by estimated subleases. Adjustments to the accrued facilities based costs during the nine months ended September 30, 2003 of $285,000 primarily represent fluctuations in the British pound sterling exchange rates. Facilities based costs of $937,000 were paid during the nine months ended September 30, 2003, resulting in an ending accrual balance at September 30, 2003 of $8,827,000.

          The following table details the change in these liabilities for the nine months ended September 30, 2003 (in thousands):

Acquisition-Related Restructuring Costs Expensed in Fiscal 2001

          In 2001, we recorded expenses relating to restructuring our existing operations as part of the integration of the acquisitions of Action and Kortex. The costs were accounted for under EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity” and have been included as a charge to the results of operations for the year ended December 31, 2001. Accordingly, these costs were recorded based on the restructuring plans that were committed to by management in 2001.

          The $3,653,000 charge to restructure the organization in 2001 consisted of employee termination benefits and facilities based expenses of $2,641,000 and $1,012,000, respectively. At December 31, 2002, facilities based costs of $279,000 and $19,000 remained accrued at Insight North America and Insight UK, respectively. The facilities based costs primarily consist of remaining lease commitments on unused facilities or estimated costs to terminate lease commitments. During the nine months ended September 30, 2003, facilities based costs of $91,000 were paid and adjustments of $159,000 were recorded due to decreases in estimated lease termination costs, resulting in an ending accrual for Insight North America of $29,000 at September 30, 2003.

          At September 30, 2003, facilities based costs of $19,000 remained accrued at Insight UK as there were no cash payments or adjustments made to the lease commitments associated with UK facilities that are no longer in use.

          The following table details the changes in the facilities based costs during the nine months ended September 30, 2003 (in thousands):

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

9.

Contingencies

          We are a defendant in a lawsuit, which is a consolidation of three separate actions brought by stockholders, pending in the United States District Court, District of Arizona. The lawsuit alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The plaintiff in this action alleges we, and certain of our officers, made false and misleading statements pertaining to our business, operations and management in an effort to inflate the price of our common stock. The lawsuit also names as co-defendants: Eric J. Crown, the Chairman of our Board of Directors; Timothy A. Crown, our Chief Executive Officer and President and a director; and Stanley Laybourne, our Executive Vice President, Chief Financial Officer and Treasurer and a director. In the complaint, which was filed in December 2002, the plaintiff seeks class action status to represent all buyers of our common stock from September 3, 2001 through July 17, 2002. On September 27, 2003, the court granted our motion to dismiss, but allowed plaintiffs leave to file an amended complaint, which they did on October 31, 2003. We will continue to defend the case vigorously, and intend to file a motion to dismiss the newly amended complaint. The costs associated with defending the allegations in this lawsuit and the potential outcome cannot be determined at this time and, accordingly, no estimate for such costs, other than the deductible amount under our directors and officers liability insurance policies has been included in these condensed consolidated financial statements.

          We are also a party to various legal proceedings arising in the ordinary course of business, including asserted preference payment claims in customer bankruptcy proceedings and claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights. In accordance with SFAS No. 5, “Accounting for Contingencies,” we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Although litigation is inherently unpredictable, we believe that we have adequate provisions for any probable and estimable losses. It is possible, nevertheless, that the results of our operations or cash flows could be materially and adversely affected in any particular period by the resolution of a legal proceeding.

10.

Segment Information

          We have the following reportable operating segments:

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Single-source provider of IT products and services – North America (“Insight North America”);

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Direct marketer of IT products and services – United Kingdom (“Insight UK”);

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Business process outsource provider (“Direct Alliance”); and

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Other – Internet service provider (“PlusNet”).

          All intercompany transactions are eliminated upon consolidation, and there are no differences between the accounting policies used to measure profit and loss for our segments and on a consolidated basis. Net sales are defined as net sales to external customers. None of our customers exceeded ten percent of consolidated net sales.

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