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Insight Enterprises, Inc.
800.INSIGHT
www.insight.com
INSIGHT ENTERPRISES, INC.
2006 ANNUAL REPORT
2006 Financial Results
A Great Year
A Greeting from Richard A. Fennessy,
President and Chief Executive Officer
2006 was a great year for
Insight. Thanks to our valued
teammates, clients and partners,
we had a very exciting and successful
year. I am proud to report that we
achieved record annual net sales, record
net earnings from continuing operations
and record diluted earnings per share from
continuing operations. Specifically, our
consolidated annual net sales were $3.82 billion,
a 20 percent increase over 2005, while net earnings
from continuing operations were $65.7 million, a 37
percent increase year over year. Additionally, diluted
earnings per share from continuing operations also grew
38 percent over 2005 to $1.35.
While I am pleased to report our record financials results, I am
even more pleased to report that we made significant progress
during 2006 in strengthening the foundation of the Company which
positions us for even greater success in the years ahead.
Insight accelerated our Trusted Advisor strategy. In 2005, we
developed our strategic plan and new vision, which is to be a Trusted
Advisor to our clients, helping them enhance their business performance
through innovative technology solutions. With the strategy and direction in
place, the focus of 2006 was on the execution of the plan. One aspect of our
plan was to align the entire Company’s focus on our core business of providing IT
solutions. Therefore, on June 30, 2006, we completed the divesture of Direct Alliance,
our business process outsourcing segment. A second aspect of our plan was to enhance
our capabilities in order to strengthen the trusted advisor relationship with our clients.
To enhance our capabilities, we invested in our new skills development program, Insight
World Class, with an initial deployment in our North American operations. As a result, we
experienced higher productivity, lower attrition and increased attach rates for services during
2006. Due to the success of Insight World Class in North America, we plan to begin deploying the
program globally during 2007. To further support our plan to enhance capabilities, on September 7,
2006, we completed the acquisition of Software Spectrum, one of the world’s leading providers of
business-to-business IT solutions and services with particular expertise in the selection, purchase and
management of business software.
Insight gained market sharethrough a combination of organic growth and the strategic acquisition of
Software Spectrum. While overall market demand continued to be challenging, Insight executed very well in
driving growth during our integration efforts and benefited from seasonally strong results in North America, EMEA
and APAC during the fourth quarter. Based on our fourth quarter experience, we continue to be very excited about
our cross-selling opportunities to leverage Insight’s extensive portfolio of hardware, software and services.
Board of Directors
(Front row, left to right)
Michael M. Fisher, Director and Chairman of the Audit Committee; Richard A. Fennessy, President,
Chief Executive Officer and Director; Kathleen S. Pushor, Director; Bennett Dorrance, Director;
Eric J. Crown, Chairman Emeritus.
(Back row, left to right)
Larry A. Gunning, Director; Timothy A. Crown, Chairman of the Board; Robertson C. Jones, Director
and Chairman of the Nominating and Governance Committee; Stanley Laybourne, Chief Financial
Officer, Secretary, Treasurer and Director.
(Not pictured)
David J. Robino, Director and Chairman of the Compensation Committee.
Insight improved profitabilityby improving gross margin and
increasing operational efficiency. In 2006, we maintained
product margins, increased vendor funding, improved our
attach rates for services, increased account executive
productivity, streamlined business processes and increased
the use of e-commerce tools with our clients. As an example
of our progress, our North America services business grew by
26 percent in 2006, while also improving its gross margins.
In 2006, we also made the necessary investments to prepare
the organization to upgrade our IT systems to the mySAP
Business Suite starting in 2007 to help fuel continual
improvements in our operational efficiencies in future years.
Insight strengthened relationshipsand the overall Insight
experience for our teammates, clients and partners. Across
each of these key relationships, we made strong progress.
(cid:129) Client satisfaction and loyalty, as measured in our monthly
client satisfaction surveys, showed notable improvements
in 2006. Further, in October 2006, HR Chally Group, a
third-party market research firm, awarded our North American
sales force a “World Class” rating after interviewing clients
and prospects of IT resellers and asking them to rate their
IT providers. Insight was the only company in its industry to
be rated “World Class.”
(cid:129) Teammate satisfaction, as measured in our annual teammate
satisfaction survey, strengthened across the world.
Additionally, in December 2006, Insight was named one of
the “25 Best Service Companies to Sell For” in Selling Power
magazine, which ranks the largest sales forces in America.
Insight moved up from a ranking of 23rd in 2005 to 12th
in 2006.
(cid:129) Lastly, partner satisfaction strengthened. We completed our
annual partner satisfaction survey in early January 2007, and
overall satisfaction within North America improved compared
to 2005 results.
As we look forward, we are well positioned for continued
success. Our 2007 goals have remained fairly consistent
with those for 2006. They are:
1. Continue to drive a lasting competitive advantage by
enhancing teammate, client and partner relationships;
2. Improve Insight’s operational efficiency through process
and systems best practices adoption;
3. Accelerate sales and services skills and capabilities to
support our trusted advisor strategy globally;
4. Utilize a team-based selling model to leverage Insight’s
portfolio of hardware, software and services to expand
existing client share of wallet and increase client
acquisition; and
5. Gain profitable market share and focus on winning in the
market place by driving continual improvements in our
daily execution, working closely as One Team to ensure
our success.
As evidence of our commitment to success in 2007, we have
directly tied our executive incentive compensation plans to
these goals, and we are driving complete alignment throughout
the organization.
“Winning Together” is the mantra of our organization in 2007
as we continue to drive the execution of our strategic trusted
advisor vision. We are aligned, focused and motivated to
ensure 2007 is a great year for our teammates, clients,
partners and stockholders.
Richard A. Fennessy
President and Chief Executive Officer
Insight Enterprises, Inc.
About Insight
Insight Enterprises, Inc. is a leading provider of brand-name information technology (“IT”)
hardware, software and services to large enterprises, small- to medium-sized businesses
and public sector institutions in North America, Europe, the Middle East, Africa and Asia-
Pacific. The Company has approximately 4,500 teammates worldwide and generated
sales of $3.8 billion for its most recent fiscal year, which ended December 31, 2006.
Insight is ranked number 543 on Fortune Magazine’s 2007 ‘Fortune 1000’ list.
The Company is organized in the following three operating segments,
which are primarily defined by their related geographies:
Operating
Segment
Geography
% of 2006
Consolidated Net Sales
North America
U.S. and Canada
EMEA
APAC
Europe, Middle
East and Africa
Asia-Pacific
80%
19%
1%
Currently, our offerings in North America and
the United Kingdom include brand-name IT
hardware, software and services. Our
offerings in the remainder of our EMEA
segment and in APAC currently only
include software and select
software-related services.
For more information, please
call 480.902.1001 in the
United States or visit
www.insight.com.
Key Financial Charts
$4,000,000
$3,750,000
$3,500,000
$3,250,000
$3,000,000
$2,750,000
$2,500,000
$2,225,000
$2,000,000
5
8
0
,
7
1
8
,
3
$
7
0
7
,
3
8
1
,
3
$
4
0
6
,
8
0
0
,
3
$
9
6
9
,
9
7
7
,
2
$
0
9
7
,
9
0
8
,
2
$
2002
2003
2004
2005
2006
Net Sales
(in thousands)
$2.00
$1.50
$1.00
$0.50
0
$0.50
$1.00
$1.50
3
6
.
1
$
8
5
.
1
$
0
1
.
1
$
5
7
.
0
$
2003
2004
2005
2006
2002
)
2
2
.
1
$
(
Diluted Earnings (Loss)
Per Share
$100,000
$80,000
$60,000
$40,000
$20,000
0
($20,000)
($40,000)
($60,000)
7
5
4
,
0
8
$
8
1
8
,
6
7
$
1
1
0
,
4
5
$
5
2
1
,
5
3
$
2003
2004
2005
2006
2002
)
8
0
5
,
4
5
$
(
Net Earnings (Loss)
(in thousands)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
/ X/
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006
/ /
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to ___________.
or
Commission File Number: 0-25092
INSIGHT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
86-0766246
(IRS Employer
Identification No.)
1305 West Auto Drive, Tempe, Arizona 85284
(Address of principal executive offices, Zip Code)
Registrant’s telephone number, including area code: (480) 902-1001
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class
Common stock, par value $0.01
(Title of Class)
Name Of Each Exchange On Which Registered
NASDAQ
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No X
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X
No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. / /
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer X
Accelerated Filer
Non-accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No X
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based upon the
closing price of the Registrant’s common stock as reported on The Nasdaq Global Select Market on June 29, 2007, the last business day of
the Registrant’s most recently completed second fiscal quarter, was $1,090,737,456.
The number of issued and outstanding shares of the Registrant’s common stock on June 29, 2007 was 49,100,749.
INSIGHT ENTERPRISES, INC.
ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2006
TABLE OF CONTENTS
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART I
Business ............................................................................................................
Risk Factors.......................................................................................................
Unresolved Staff Comments .............................................................................
Properties ..........................................................................................................
Legal Proceedings .............................................................................................
Submission of Matters to a Vote of Security Holders .......................................
PART II
Market for the Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ........................................
Selected Financial Data .....................................................................................
Management’s Discussion and Analysis of Financial Condition and
Results of Operations ....................................................................................
Quantitative and Qualitative Disclosures about Market Risk............................
Financial Statements and Supplementary Data .................................................
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ......................................................................................
Controls and Procedures....................................................................................
Other Information..............................................................................................
PART III
Directors, Executive Officers and Corporate Governance ................................
Executive Compensation...................................................................................
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...................................................................
Certain Relationships and Related Transactions, and Director Independence ..
Principal Accountant Fees and Services............................................................
ITEM 15.
PART IV
Exhibits and Financial Statement Schedules ...................................................
SIGNATURES ...........................................................................................................................
EXHIBITS TO FORM 10-K......................................................................................................
Page
5
22
28
28
29
30
30
33
38
58
60
114
114
115
115
119
140
142
142
143
144
145
INSIGHT ENTERPRISES, INC.
EXPLANATORY NOTE REGARDING THIS AMENDMENT
Insight Enterprises, Inc. is filing this Form 10-K/A (“Amended Filing”) in order to amend our annual report on Form 10-
K for the year ended December 31, 2006, originally filed on July 26, 2007 (“Original Filing”), to expand or correct
disclosures in the Original Filing as discussed below. In this filing, we refer to the Original Filing as amended by this
Amended Filing as “this Form 10-K” or “this Annual Report on Form 10-K.” The expanded or corrected disclosures are
based on a comment letter dated August 23, 2007 from the staff of the Division of Corporation Finance of the Securities and
Exchange Commission (“SEC”) in conjunction with the SEC’s review of our Original Filing. As disclosed in Part I, Item 1B
of this Amended Filing, none of the staff’s comments remain unresolved as of the date of this filing. The following items
were amended:
• We removed the reference to third-party valuations from our disclosure of critical accounting estimates related to
valuation of long-lived assets including purchased intangible assets and goodwill on page 47.
• We deleted the references to salaries and wages, employee-related expenses and contract labor expenses excluding stock-
based compensation as a percentage of net sales from our discussion of results of operations, specifically selling and
administrative expenses, on pages 50 and 51. The disclosure of these non-GAAP financial measures in our Original
Filing was inadvertent.
• We modified the disclosure on page 56 of days sales outstanding in ending accounts receivable, inventory turns and days
purchases outstanding in ending accounts payable to only disclose amounts calculable from the face of the financial
statements and have disclosed the manner in which such amounts are calculated. We also expanded the discussion of our
consolidated cash flow operating metrics to describe the impact of the acquisition of Software Spectrum on the
interrelationships between accounts receivable and net sales, inventories and cost of sales and accounts payable and
purchases.
• We added disclosure to Note 9 to our consolidated financial statements to indicate the amount of employee termination
benefits and facility based costs incurred in the total liability recognized with the acquisition of Software Spectrum that
was disclosed in our Original Filing. We also corrected the amounts in the table detailing changes in these liabilities
during the year because the amounts in the table in our Original Filing inadvertently only detailed changes in the
liabilities during the quarter ended December 31, 2006 instead of the activity from acquisition date through December
31, 2006, as stated in the description of the contents of the table.
• We corrected the tax benefit amounts related to the exercise of employee stock options and other employee stock
programs applied to stockholders’ equity disclosed in Note 11 to our consolidated financial statements to agree with the
amounts that were correctly disclosed in our consolidated statements of stockholders’ equity in our Original Filing.
• We added disclosure to Note 16 to our consolidated financial statement to disclose that we have not provided net sales
amounts by product or service type for the years ended December 31, 2006, 2005 and 2004, as it is impracticable for us
to do so.
• We expanded Note 18 to our consolidated financial statement to include disclosure of the primary reasons for the
acquisition of Software Spectrum and the factors that contributed to the recognition of goodwill, disclosure of the
amount assigned to each major intangible asset class and disclosure of the gross carrying amount and accumulated
amortization, in total by major intangible asset class for each period presented.
The staff’s letter did not include any comments relating to our restatement of our consolidated financial statements as
disclosed in the Original Filing, and the Amended Filing does not reflect any changes to the disclosures related to that
restatement.
There were no changes to our consolidated statements of earnings, of stockholders’ equity and comprehensive income
and of cash flows for the years ended December 31, 2006, 2005 and 2004, or our consolidated balance sheets as of December
31, 2006 and 2005 in this Amended Filing as compared to our consolidated financial statements included in the Original
Filing.
As part of the Amended Filing, Exhibits 31.1, 31.2 and 32.1, containing the certifications of our Chief Executive Officer
and Chief Financial Officer, as well as Exhibit 23.1, containing the consent of our independent register public accounting
firm, that were filed as exhibits to the Original Filing have been re-executed and re-filed as of the date of this Amended
Filing.
1
INSIGHT ENTERPRISES, INC.
EXPLANATORY NOTE REGARDING RESTATEMENT OF OUR
CONSOLIDATED FINANCIAL STATEMENTS
This Annual Report on Form 10-K contains the restatement of our consolidated statements of earnings, of
stockholders’ equity and comprehensive income and of cash flows for the years ended December 31, 2005 and 2004, our
consolidated balance sheet as of December 31, 2005 and selected consolidated financial data for the years ended
December 31, 2005, 2004, 2003 and 2002, and for each of the quarters in the year ended December 31, 2005 and the
quarters ended March 31, and June 30, 2006.
Based on information provided by an independent committee of the Board of Directors (the “Options
Subcommittee”) resulting from its review of the Company’s historical stock option granting practices, we identified
errors in the Company’s accounting related to stock option compensation expenses in prior periods. The Options
Subcommittee’s review encompassed all options on Company securities granted to directors, officers, or employees from
the Company’s initial public offering in January 1995 through November 30, 2005 (the “Relevant Period”). During this
period, the Company made more than 28,000 individual option grants, involving options on more than 28 million (split-
adjusted) shares, on 957 separate grant dates. Additionally, the Company undertook an analysis of the results of the
Options Subcommittee’s review as well as all stock option activity during the Relevant Period. We determined that
corrections to our consolidated financial statements were required to reflect additional material charges for stock-based
compensation expenses and related income tax effects.
Our consolidated retained earnings as of December 31, 2005 incorporates an aggregate of approximately $30.9
million in incremental stock option-related compensation charges relating to the period from January 24, 1995 through
December 31, 2005. This charge is net of a $16.5 million tax benefit related to the restatement adjustments. This
additional compensation expense results from our determination, based upon the Options Subcommittee’s review and the
Company’s analysis, that for accounting purposes, the dates initially used to measure compensation expense for many
stock option grants to employees, executive officers and outside non-employee directors during the period could not be
relied upon. In particular, the Options Subcommittee identified various categories of grants that had been made by the
Company during the period under review including: (a) discretionary grants of various types; (b) anniversary grants; (c)
promotion grants; (d) new hire grants; and (e) program grants. In general, the Options Subcommittee found: (x) a lack of
significant issues with respect to new hire grants; (y) that during a portion of the period under review, the Company
retrospectively selected dates for anniversary grants and promotion grants based on the lowest price in a particular
period; and (z) inadequate documentation surrounding certain discretionary grants, including grants to officers that
required approval by the Compensation Committee. We determined that the revised measurement dates for accounting
purposes differed from the originally selected measurement dates due primarily to: (i) insufficient or incomplete
approvals; (ii) inadequate or incomplete establishment of the terms of the grants, including the list of individual
recipients; and (iii) the use of hindsight to select exercise prices.
In those cases in which the Company had previously used a measurement date that we determined could no longer
be relied upon, we undertook to identify the most supportable measurement date from the available evidence. For the
grant dates specifically reviewed by the Options Subcommittee, management analyzed the documents identified during
the review performed by the Options Subcommittee, the information contained in the Company’s stock plan
administration database application (“Equity Edge”), minute books, personnel files, payroll records, Securities and
Exchange Commissions (“SEC”) filings, electronic files on the Company’s computer network and human resources
systems to determine the appropriate measurement dates. We considered the information available for each recipient
included in each of the grant dates to determine the most supportable measurement date for each individual grant within
the grant date. For the remaining grants not specifically reviewed by the Options Subcommittee, management reviewed
each grant date and all available support contained in the Stock Plan Administration hard copy files, human resources
system data and Equity Edge information for each recipient included in each of the individual grant dates to determine
the type of grant and most supportable measurement date for each individual grant within the grant date. The Company
used the information contained in Equity Edge to categorize the grants, if possible, into the various categories discussed
above. Individual grants categorized in Equity Edge as new hire or anniversary grants were separately accumulated and
analyzed. For more information on our restatement, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in Item 7 and Note 2 of our Notes to the Consolidated Financial Statements in Item 8 of this
Annual Report.
In addition to the restatements for stock-based compensation, we recorded an adjustment for $1.0 million to record a
legal settlement expense that was recorded in the first quarter of 2006, which should have been recorded in the fourth
quarter of 2005. The tax effect of this adjustment was $0.4 million.
2
INSIGHT ENTERPRISES, INC.
All financial information contained in this Annual Report on Form 10-K gives effect to the restatements of our
consolidated financial statements as described above. We have not amended, and we do not intend to amend, our
previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for each of the fiscal years and fiscal
quarters of 1995 through 2005, and for the first six months of the fiscal year ended December 31, 2006. Financial
information included in reports previously filed or furnished by Insight Enterprises, Inc. for the periods from January 1,
1995 through June 30, 2006 should not be relied upon and are superseded by the information in this Annual Report on
Form 10-K.
Management has determined that we have a material weakness in our internal control over financial reporting
relating to the implementation and administration of our equity compensation programs and the accounting for awards
thereunder as of December 31, 2006. As described in more detail in Item 9A of this Annual Report, although the
Company made its last stock option grant on November 30, 2005, based on the findings of the Options Subcommittee,
the problems uncovered during the review have caused the Company to undertake remedial measures to ensure that
similar problems cannot occur in connection with its grants of restricted stock. We have identified and are implementing
measures designed to remedy this material weakness.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, including statements in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this report, 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
continuing operations, non-operating income and expenses or net earnings; effects of acquisitions; projections of capital
expenditures and growth; hiring plans; plans for future operations; the availability of financing and our needs or plans
relating thereto; plans relating to our products and services; the effect of new accounting principles or changes in
accounting policies; the effect of guaranty and indemnification obligations; statements of belief; and statements of
assumptions underlying any of the foregoing. Forward-looking statements are identified by such words as “believe,”
“anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will,” “may” and variations of such words and similar
expressions, and 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 statements. 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
changes in the information technology industry and/or the economic environment;
our reliance on partners for product availability, marketing funds, purchasing incentives and competitive
products to sell;
disruptions in our information technology and voice and data networks, including the upgrade to mySAP and
the migration of Software Spectrum to our information technology and voice and data networks;
the integration and operation of Software Spectrum, including our ability to achieve the expected benefits of the
acquisition;
actions of our competitors, including manufacturers/publishers of products we sell;
the informal inquiry from the SEC and the fact that we could be subject to stockholder litigation related to the
investigation by the Options Subcommittee of our Board of Directors into our historical stock option granting
practices and the related restatement of our consolidated financial statements;
the recently enacted changes in securities laws and regulations, including potential risk resulting from our
evaluation of internal controls under the Sarbanes-Oxley Act of 2002;
the risks associated with international operations;
sales of software licenses are subject to seasonal changes in demand;
increased debt and interest expense and lower availability on our financing facilities;
increased exposure to currency exchange risks;
our dependence on key personnel;
risk that purchased goodwill or amortizable intangible assets become impaired;
our failure to comply with the terms and conditions of our public sector contracts;
risks associated with our very limited experience in outsourcing business functions to India;
rapid changes in product standards; and
intellectual property infringement claims.
3
INSIGHT ENTERPRISES, INC.
Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the
Securities and Exchange Commission (“SEC”).
In addition, these forward-looking statements include statements regarding the informal inquiry commenced by the
SEC and a stockholder’s demand to inspect our books and records pursuant to Section 220 of the Delaware General
Corporation Law. There can be no assurances that forward-looking statements will be achieved, and actual results could
differ materially from those suggested by the forward-looking statements. Important factors that could cause actual
results to differ materially include: adjustments to the consolidated financial statements that may be required related to
the SEC informal inquiry; and risks of litigation and governmental or other regulatory inquiry or proceedings arising out
of or related to the Company’s historical stock option granting practices. Therefore, any forward-looking statements in
this release should be considered in light of various important factors, including the risks and uncertainties listed above,
as well as others.
We assume no obligation to update, and do not intend to update, any forward-looking statements. We do not
endorse any projections regarding future performance that may be made by third parties.
4
INSIGHT ENTERPRISES, INC.
Item 1. Business
PART I
Insight Enterprises, Inc. (“Insight” or the “Company”) is a leading provider of brand-name information technology
(“IT”) hardware, software and services to large enterprises, small- to medium-sized businesses (“SMB”) and public
sector institutions in North America, Europe, the Middle East, Africa and Asia-Pacific. The Company is organized in the
following three operating segments, which are primarily defined by their related geographies:
Operating Segment*
North America
EMEA
APAC
Geography
United States (“U.S.”) and
Canada
Europe, Middle East and Africa
Asia-Pacific
% of 2006
Consolidated Net Sales
% of 2006 Consolidated
Earnings from
Operations
80%
19%
1%
82%
17%
1%
*Additional detailed segment and geographic information can be found in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in Part II, Item 7 and in Note 16 to the Consolidated Financial
Statements in Part II, Item 8 of this report.
Prior to the acquisition of Software Spectrum, Inc. (“Software Spectrum”) on September 7, 2006 and the divestiture
of Direct Alliance Corporation (“Direct Alliance”) on June 30, 2006, we were organized in three operating segments,
two of which were the geographic operating segments that provided IT products and services, Insight North America and
Insight UK, and the third of which was our discontinued operation that provided business process outsourcing, Direct
Alliance.
Beginning with the fourth quarter of 2006, as a result of the Software Spectrum acquisition, we operate in three
geographic operating segments: North America; EMEA; and APAC. To the extent applicable, prior period information
disclosed in this report by operating segment has been reclassified to conform to the current period presentation.
Our strategic plan over the past few years has been to transform Insight from an IT products provider to an IT
solutions provider through a combination of organic growth, driven by continuous improvement initiatives, and targeted
acquisitions. Consistent with our strategy, our acquisition of Software Spectrum enhanced our customer (referred to
within the company and this document as “clients”) value proposition in many ways, such as:
•
•
•
augmenting our solution capabilities, particularly relative to software lifecycle management;
expanding our penetration within profitable categories, most notably software and services; and
increasing our global presence through expansion in EMEA and APAC.
With the acquisition of Software Spectrum, our product mix changed significantly. Prior to the acquisition of
Software Spectrum, software sales represented approximately 12% of net sales. After the acquisition of Software
Spectrum, software sales represent approximately 35% to 40% of annual net sales.
As a result of these changes, we have become a leading provider of a broad range of top brand-name IT hardware,
software and services, helping companies around the world design, enable, manage and secure their IT environment.
Insight services clients in more than 170 countries and has the process knowledge, technical expertise and management
tools necessary to ease the burden of designing and deploying IT solutions while streamlining IT management and costs.
Our clients include large enterprises, SMB and public sector institutions. Currently, our offerings in North America and
the United Kingdom include brand-name IT hardware, software and services. Our offerings in the remainder of our
EMEA segment and in APAC currently only include software and select software-related services.
We were incorporated in Delaware in 1991 as the successor to an Arizona corporation that commenced operations in
1988. We began operations in the U.S., expanded into Canada in 1997 and into the United Kingdom in 1998. In
September 2006, through our acquisition of Software Spectrum, we penetrated deeper into global markets in EMEA and
APAC, where Software Spectrum already had an established footprint and strategic relationships. Our corporate
headquarters are located in Tempe, Arizona.
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INSIGHT ENTERPRISES, INC.
Acquisitions/Dispositions History
Over the past few years, we have completed acquisitions and dispositions in each of our operating segments.
In 2004, we sold our 95% ownership interest in Plus Net plc (“PlusNet”), an Internet service provider in the United
Kingdom. As a result, PlusNet is disclosed as a discontinued operation for the year ended December 31, 2004 and all
prior periods presented.
On June 30, 2006, we completed the sale of 100% of the outstanding stock of Direct Alliance, a business process
outsourcing provider in the U.S. As a result of the disposition, Direct Alliance is disclosed as a discontinued operation
for the year ended December 31, 2006 and all prior periods presented.
Consistent with our strategic plan for growth through targeted acquisitions, on September 7, 2006 we completed our
acquisition of Software Spectrum, a global technology solutions provider with particular expertise in the selection,
purchase and management of software. The purchase price was $287.0 million plus working capital of $64.4 million,
which included cash acquired of $30.3 million. The purchase price was allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed based on their estimated fair values, and the excess purchase price over
fair value of net assets acquired was recorded as goodwill. Goodwill related to the Software Spectrum acquisition was
$209.7 million at December 31, 2006. Software Spectrum’s results of operations have been included in our consolidated
results of operations subsequent to the acquisition date.
On March 1, 2007, we completed the sale of PC Wholesale, a division of our North America operating segment. As
a result of the disposition, PC Wholesale will be disclosed as a discontinued operation beginning in the three months
ended March 31, 2007.
Operating Segments
The following discussion of our operating segments should be read in conjunction with the operating segment
disclosures and information regarding geographic operations found in Note 16 to the Consolidated Financial Statements
in Part II, Item 8 of this report. A discussion of factors potentially affecting our operations is discussed in “Risk Factors”
in Part I, Item 1A of this report.
North America, EMEA and APAC
North America, EMEA and APAC are reported as separate operating segments. However, they all operate with
similarly structured business models and in strategic positions as leading providers of IT solutions. Currently, our
offerings in North America and the United Kingdom include brand-name IT hardware, software and services. Our
offerings in the remainder of our EMEA segment and in APAC currently only include software and select software-
related services. We co-branded as “Insight” and “Software Spectrum” subsequent to the acquisition date, primarily to
allow time for an orderly transition to a common brand. We completed the conversion to the “Insight” brand in all
segments in the second quarter of 2007.
North America, with operations in the U.S. and Canada, is our largest operating segment, representing 80% and 82%
of consolidated net sales and earnings from operations, respectively, in 2006. This segment is the combination of Insight
North America and the former Software Spectrum North American operations acquired in September 2006. EMEA,
which has operations in fourteen countries in Europe and strategic relationships serving our clients in the Middle East
and Africa, represented 19% and 17% of consolidated net sales and earnings from operations, respectively, in 2006.
EMEA is the combination of Insight UK and the former Software Spectrum EMEA operations acquired in September
2006. APAC, with operations in Australia, China, Hong Kong, New Zealand and Singapore, represented 1% of both
consolidated net sales and earnings from operations in 2006. APAC is the former Software Spectrum APAC operations
acquired in September 2006 and the China office we opened in October 2006.
Business Overview
Insight is a leading provider of brand-name IT hardware, software and services to large enterprises, SMB and public
sector institutions in North America, EMEA and APAC. Over the past few years, we have been evolving our business
model and branding efforts to emphasize Insight’s ability to provide total technology solutions to meet our clients’
business-driven needs. Our value proposition to our clients is that we serve as a trusted advisor, helping our clients
enhance their business performance through innovative technology solutions. Historically, we had primarily been
engaged in our clients’ acquisition cycle once they had substantially determined their IT needs. Our role has shifted to
one of a trusted advisor, where we are involved earlier in the acquisition cycle, assisting our clients as they make
technology decisions. We believe this creates stronger relationships with our clients, allowing us to add greater value to
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INSIGHT ENTERPRISES, INC.
our clients’ business, to expand the range of products and services we sell to each of our current clients and to attract
new clients. We are focused on bringing more value to our clients, employees (referred to within the Company and this
document as “teammates”) and suppliers (referred to within the Company and this document as “partners”) through the
evolution of Insight’s value proposition. We have transitioned from a focus on the base competencies of product
selection, price and availability to a focus on value differentiators, such as software licensing, advanced configuration
services, tailored solutions, technical expertise and e-enablement. We believe a solution is defined not by what you sell,
but how you sell it. The solution to a client’s business needs may include IT hardware, software, services or any
combination of these offerings. The key to creating an effective solution is to understand the client’s business needs and
assist in determining the right IT solution to address those needs and enhance business performance. Although we have
initiatives to increase solution selling in our large enterprise client base, we also see a significant opportunity to sell
solutions to meet the needs of our current and prospective SMB clients. IT products and services are currently sold to
the SMB market in the U.S. by a variety of national product resellers, but we believe that no national providers of IT
products and services are effectively serving this market as a true IT solutions provider. We also believe that our
expanded business model, knowledgeable sales force, targeted marketing strategies, streamlined distribution, advanced
services capabilities and commitment to total IT solutions further differentiate us from our competitors serving the SMB
market.
In 2005, we developed a five-year strategic plan and presented it to our Board of Directors and our teammates. In
2006, we made significant progress in executing that plan. Namely, we sold our business processing outsourcing
business to focus on our core business of providing IT solutions. We completed the acquisition of Software Spectrum,
one of the world’s leading providers of business-to-business IT solutions and services with particular expertise in the
selection, purchase and management of business software. The acquisition accelerated the expansion of our technology
solutions capabilities and our global presence. We believe that the combination of the software expertise of Software
Spectrum and Insight’s expertise in hardware and services solidifies our value proposition as a trusted advisor of
business solutions to our clients. With this more robust offering, we are executing Insight’s global vision by penetrating
deeper into global markets where Software Spectrum already had an established footprint. Immediately upon closing the
acquisition, we began integrating the two organizations into one team and announced our leadership team for the new
organization. Since the acquisition, we have finalized our plan for integrating the individual functions within the
organization, such as Marketing, People and Development, IT and Finance. Our integration, with the exception of IT
systems, is now substantially complete, and we are functioning as one team with a united vision. This acquisition was an
integral part of our ability to increase market share during 2006.
We have also continued our focus on driving improvements in our relationships with our clients, teammates and
partners. We made strong progress in improving each of these key relationships.
•
•
•
Client satisfaction and loyalty, as measured in our monthly client satisfaction surveys, increased
dramatically in 2006. Further, in October 2006, H.R. Chally Group, a third-party market research firm,
awarded our North American sales force a “World Class” rating after interviewing clients and prospects of
IT resellers and asking them to rate their IT providers. Insight was the only company in its industry to be
rated “World Class.”
Teammate satisfaction, as measured in our annual teammate satisfaction survey, strengthened across the
world. Additionally, in December 2006, Insight was named one of the “25 Best Service Companies to Sell
For” in Selling Power magazine, which ranks the largest sales forces in America. Insight moved up from a
ranking of 23rd in 2005 to 12th in 2006.
Lastly, partner satisfaction strengthened. We completed our annual partner satisfaction survey in early
January 2007, and overall satisfaction within North America improved compared to 2005 results.
We attribute the improvements noted above to our strengthening of the foundation of our business through:
•
•
•
a new vision and values;
a clear strategy; and
a stronger team.
Operating Strategy
The key elements of our operating strategy are:
•
•
Solutions-oriented business model;
Integrated sales and marketing;
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INSIGHT ENTERPRISES, INC.
•
•
•
•
Broad selection of brand-name IT hardware and software;
Strong tools and expertise on software asset management;
Services offerings; and
Efficient technology-based operations.
Solutions-Oriented Business Model. This model offers our business clients the benefits of complete IT solutions
that take advantage of our multiple vendor product choices, competitive pricing, fast and efficient delivery and a vast
array of customized services. We have transitioned our business model beyond product fulfillment to include the
capability to advise our clients on business issues and develop technology solutions to address their business issues. We
believe this transition was essential to respond to changes in the way businesses plan for, implement, leverage and
manage technology. We can offer advice to help our clients find the right solution to uniquely address their business
needs due to our expertise across a broad, multi-vendor line offering. We offer service capabilities designed to complete
our solutions offerings and improve our clients’ business results. We have the ability to serve as the central project
manager for many combinations of services a client may require, from the most basic, such as warranties and financing
options, to the very complex, such as custom configuration, large technology deployments, centralized management of
mobile technology, software license planning, network design and implementation, asset tagging and asset disposal. We
have what we consider to be one of the most robust services organizations in the industry and are focused on all aspects
of technology lifecycle management. As a result, we are able to provide expert resources to design, deploy and manage
today’s complex technology environments. With our acquisition of Software Spectrum, we have a significantly
enhanced portfolio of services around software solutions. We augment our sales teams with service sales resources and
technical pre-sale subject matter experts, believing that this enables our sales team to be positioned as a trusted advisor to
our clients. As a result, we can be a one stop source for all of our clients’ IT needs. We deliver strategic business value
to our clients by ensuring that technology solutions drive business results and by streamlining IT management, reporting
and costs. In North America, our largest area of operation, we believe we have a strong competitive advantage in the
degree to which we can provide these products and services across all targeted client groups.
Integrated Sales and Marketing. We market and sell IT solutions through a variety of integrated direct sales and
marketing techniques including:
•
•
•
•
•
•
•
•
•
a staff of client-dedicated account executives utilizing proactive outbound telephone-based sales;
a client-focused, face-to-face field sales force;
a nationally deployed dedicated service sales organization in the U.S.;
a team of software sales specialists;
a small group of knowledgeable account executives dedicated to taking inbound calls;
electronic commerce (primarily the Internet and electronic data interchange (“EDI”));
targeted marketing (including print and electronic marketing and communications, advertising, client
events and specialty marketing programs);
comprehensive product and services catalogs; and
pre-sale technical sales support teams.
We align our technical sales support resources and tailor our marketing model to each client market. Our marketing
programs emphasize our solutions offerings, service capabilities, competitive pricing, efficient procurement and
financing options. A large portion of our marketing will continue to focus on increasing awareness of our service
capabilities and the value of our solutions-oriented business model, as well as driving increased demand for our IT
hardware, software and services offerings.
Components of our sales and marketing strategy include:
Focus on Large Enterprises, SMB and Public Sector Institutions. We target businesses as well as government and
educational entities. Our target client employs over 100 people who regularly use business technology in the
performance of their jobs. We believe this is the most valuable portion of the IT hardware, software and services market
because these entities demand high-performance technology solutions, appreciate well-trained account executives,
purchase frequently, are value conscious and are knowledgeable buyers who require less technical support than the
average individual consumer. Our operating model, which allows us to tailor our offerings to the size and complexity of
our client, positions us to serve this portion of the market effectively by combining highly qualified field and telesales
account executives, advanced service capabilities, focus on client service, competitive pricing and cost-effective
distribution systems. During 2006, virtually all of our net sales were to large enterprise, SMB and public sector
institutions, and no single client accounted for more than 3% of our consolidated net sales.
Net sales to U.S. public sector clients include federal, state and local governmental entities, educational institutions
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INSIGHT ENTERPRISES, INC.
and non-profit organizations. Net sales from these clients are derived from: open market sales to federal, state and local
government agencies; sales made to federal agencies and departments under the Multiple Award Schedule contract with
the U.S. General Services Administration and blanket purchase agreements from various government departments; sales
made to various state and local government agencies; and sales made to educational institutions and non-profit
organizations. Net sales to public sector clients in our EMEA segment include central and local government entities,
educational institutions, non-profit organizations and national healthcare service organizations. Net sales from our
EMEA public sector clients are derived primarily in the United Kingdom from open market sales to individual entities
and to consortium buyers and from contracts, such as the Catalist contract, which represents a restricted procurement
channel whereby only approved vendors are permitted to bid on available opportunities. For a discussion of risks
associated with public sector contracts, see “Risk Factors – The failure to comply with the terms and conditions of our
public sector contracts could result in, among other things, fines or other liabilities,” in Part I, Item 1A of this report.
Recruit, Train and Retain a Quality Sales Force. The majority of our SMB account executives focus on outbound
telesales by contacting existing clients on a systematic basis to generate additional sales. In addition, these account
executives utilize various prospecting techniques in order to increase our client base. To support the account executives,
we maintain an extensive database of clients and potential clients. We have established dedicated outbound sales
divisions focusing on large enterprises (generally at least 2,500 PCs), SMB (generally less than 2,500 PCs), and the
public sector entities (government, educational and not for profit institutions). Account executives in these sales
divisions interact with sophisticated IT decision makers and procurement executives as well as various other executives
of organizations to establish mutually beneficial relationships. Once established, the one-on-one relationships between
our clients and their account executives are maintained and enhanced primarily through frequent communications by
telephone and face-to-face meetings, supplemented by marketing communications and programs. We also enhance our
telesales operations by maintaining a group of face-to-face field account executives and service sales professionals in a
number of cities throughout North America, EMEA and APAC. These face-to-face field account executives and service
sales professionals typically service larger enterprise accounts, government accounts or SMB accounts that have
advanced system and service needs. Starting in 2006, we geographically aligned clients in the U.S. assigned to our SMB
account executives. We believe this enables us to utilize our face-to-face field account executives to help strengthen
relationships with SMB clients, as well as partner representatives, in their geographical areas by assisting as needed the
SMB account executives. Additionally, we have a small group of knowledgeable account executives dedicated to taking
inbound calls generated by our direct marketing activities.
We believe our ability to establish and maintain long-term relationships and to encourage repeat purchases is
dependent, in part, on the quality of our account executives. Because our clients’ primary contact with us is through our
account executives, we focus on recruiting, training and retaining qualified and knowledgeable sales staff. During 2006,
we expanded our training programs for new account executives. We launched improved new hire training, the Trusted
Advisor Program (“TAP”), in July 2005 to give our new account executives the training, development and support they
need to be successful in our competitive market. The ten-month program covers sales, systems and solutions with the
objective of preparing account executives for their role as a trusted advisor. Through the program, teammates undergo
classroom learning, call lab work and time on a TAP sales team prior to graduating to the sales floor full time.
Additionally, the TAP program offers teammates several certifications in partner training, ranging from solutions to in-
depth product training. Since the introduction of the TAP program, we have reduced attrition and have improved the
productivity of our account executives. We continuously improve our sales training programs to focus on enhancing
existing skills or developing new skills for varying aspects of the sales process.
With the assistance of our marketing department, each account executive is responsible for building a client base
and proactively servicing the needs of established clients. Our IT systems allow online retrieval of relevant client
information, including the client’s profile, history and product information, such as price, cost and availability, as well as
up-selling and cross-selling opportunities. This capability helps our account executives to have the type of conversations
that help to deepen client relationships, identify client needs and build our “share-of-wallet” with our client base.
Additionally, as part of the new mySAP Business Suite (“mySAP”) IT system upgrade to be completed in mid 2007 for
our U.S. hardware and services operations, we are increasing our use of customer relationship management (“CRM”)
tools and analytics to target the right solution or offer to clients with the greatest propensities to have an interest in
certain products. Account executives are empowered to negotiate sales prices within established ranges, and a large part
of their compensation is based upon gross profit dollars from sales they generate. As the account executive gains
experience, we give them greater latitude to make decisions, and with greater experience, the percentage of total
compensation based on gross profit dollars generated also increases. Compensation programs are designed to promote
and reward top performers in the organization.
With the acquisition of Software Spectrum in September 2006, we added approximately 400 software sales account
executives to our sales force. Supporting our software sales efforts, our technology assessment services engineers assist
our clients in selecting the appropriate software solutions. These engineers are trained on multiple, complex
technologies and hold several certifications for a particular software solution or category. Our software sales force and
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INSIGHT ENTERPRISES, INC.
technology assessment services engineers help our clients acquire and manage software in a more cost-effective way
with the partner licensing programs, reporting services and software asset management tools that we offer. These
software account executives are resident in the countries in which we operate and are better situated to understand the
needs of, and to communicate with, our clients in our sales offices located in Australia, Belgium, Canada, China,
Denmark, Finland, France, Germany, Hong Kong, Italy, the Netherlands, Norway, Singapore, Spain, Sweden,
Switzerland, the United Kingdom and the U.S. Additionally, although we do not have physical offices located in
Austria, Ireland, New Zealand and Russia, we do have software account executives resident in these countries providing
us with a local sales presence. In those regions in which we do not have a physical presence, such as Africa and India,
we serve our clients through strategic relationships.
Information regarding the number and tenure of account executives in North America, EMEA and APAC, including
former Software Spectrum account executives at December 31, 2006, with a comparison to legacy Insight-only account
executives at December 31, 2005, follows:
North America
EMEA
12/31/06
12/31/05
12/31/06
12/31/05
APAC
12/31/06
Number of account
executives..........................
Experience:
Less than one year ...................
One to two years.......................
Two to three years ....................
More than three years...............
1,294
22%
15%
11%
52%
100%
1,074
25%
14%
10%
51%
100%
476
266
54
37%
21%
13%
29%
100%
40%
26%
14%
20%
100%
31%
30%
13%
26%
100%
Average tenure ......................... 4.4 years
3.9 years
2.7 years
2.3 years
2.5 years
Increase in tenure is important to our business as our statistics show that account executive productivity increases
with experience. The increase in average tenure for North America is due primarily to increased retention efforts,
including performance-based incentives and enhanced training programs, and headcount reductions based on
performance, which largely resulted in the elimination of less experienced account executives. Average tenure for
EMEA has increased primarily to increased retention efforts partially offset by the loss of some of our tenured account
executives in 2005 resulting from targeted recruiting efforts by our competition.
For a discussion of risks associated with our dependence on key personnel, including sales personnel, see “Risk
Factors – We depend on key personnel,” in Part I, Item 1A of this report.
Focus on Client Service. We strive to create strong, long-term relationships with our clients, which we believe
promotes client satisfaction and ultimately increases the percentage of IT spending awarded to us. We believe that a key
to building client loyalty is to provide clients with a knowledgeable account executive backed by a strong support staff
that can help clients find the right IT solutions to solve business needs. Most business clients are assigned a trained
account executive that understands the client’s business needs and proactively identifies and provisions technology
solutions that meet those needs. In addition to our account executives, we also have technical specialists who support
our sales force, creating a team approach to addressing clients’ various needs within a total solutions framework.
Although additional support personnel may interact with the client, such as our solutions center or third-party service
providers, the client’s dedicated account executive remains the primary contact with Insight. We believe that solving
clients’ unique business and technology challenges through strong one-to-one sales and project management
relationships will improve the likelihood that clients will look to us for future product and service purchases.
We realize that fast delivery and efficient fulfillment are also important to our clients. Client hardware orders are
sent to one of our distribution centers or to one of our “direct ship” partners for processing immediately after the order is
released. We have integrated labeling and tracking systems with major freight carriers into our IT system to ensure
prompt and traceable delivery. Additionally, we have integrated our IT system with our “direct ship” partners making
shipments from these partners virtually transparent to our clients. We ship almost all of our orders on the day the orders
are released for shipment.
We believe that effective client service is an important factor in client retention and overall satisfaction. We will
implement additional automation of our business processes as we complete our upgrade to mySAP and believe these
improvements will further increase client satisfaction and retention.
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INSIGHT ENTERPRISES, INC.
Promote Use of E-Commerce. We believe that providing the client with a seamless e-commerce system, supported
by well-trained account executives results in a highly efficient business model that delivers high client satisfaction.
Account executives encourage clients to place on-line orders via our Web site, www.insight.com, and we offer selected
businesses their own customized landing pages, which are designed by our electronic marketing team. These pages
allow businesses to customize views based on their needs and procurement guidelines and to purchase IT hardware,
software and certain services from us at pre-negotiated, volume-based pricing. In addition, we implement automated
approval routing to help clients ensure compliance with their company policies. We also create awareness of our
products and services to clients and prospects through graphically rich electronic newsletters, electronic postcards and
other branded sales messages transmitted via e-mail. Through the promotion of e-commerce, including EDI and our
Web site, we hope to increase sales, facilitate our clients’ ease of doing business with us, drive enhanced client
satisfaction and decrease administrative costs. As part of our integration of Software Spectrum,
www.softwarespectrum.com was re-branded to www.insight.com during the first quarter of 2007.
Selectively Employ Advertising, Specialty Marketing and Catalogs. We advertise in technology publications
targeting business decision makers in North America. These advertisements focus on the communication of our trusted
advisor value proposition and are designed to create a strong brand image for our target audience.
We continue to increase our national exposure, promote local interest and encourage visits to our Web site through
title sponsorship of the “Insight Bowl,” a post-season intercollegiate football game, now in its tenth year. During the
2006 Insight Bowl, telecast live by NFL Network on December 29, 2006, we aired television commercials highlighting
our solutions capabilities as well as commercials showcasing partners’ products offered by us. These 30-second spots
encouraged business decision makers in the U.S. to call us or visit our Web site. Additionally, 2006 marked Insight’s
first year as the title sponsor of the Insight Fiesta Bowl Block Party in Tempe, Arizona.
We also leverage more traditional merchandising vehicles targeted to specific target clients, such as catalogs and
direct mail pieces. These merchandising pieces emphasize our solutions offerings, encourage clients and prospects to
contact us for more information, and may also provide detailed product descriptions, manufacturers’ specifications and
pricing information. Additionally, the Insight logo and telephone number are included from time to time in promotions
by selected manufacturers/publishers.
During 2006, we continued to expand our catalog distribution to include catalogs aimed at specific vertical markets
or industries, such as healthcare, legal and financial services. These vertically focused catalogs provide specific vertical
market solutions.
Broad Selection of Brand-Name IT Hardware and Software. We provide added convenience by offering our
clients a comprehensive selection of brand-name IT hardware products (in North America and the United Kingdom only)
and software titles. We offer products from hundreds of manufacturers and publishers, including Hewlett-Packard
(“HP”), Microsoft, Cisco, Lenovo, IBM, Symantec, Adobe, Toshiba, Sony and American Power Conversion Corporation
(“APC”). Our scale and purchasing power combined with our efficient, high-volume and cost effective direct sales and
marketing, allow us to offer competitive prices. We believe that offering multiple vendor choices enables us to better
serve clients’ needs by providing a variety of product solutions to best address their specific business needs, based on
particular client preferences or other criteria, such as real-time best pricing and availability, or compatibility with
existing technology. We have developed “direct-ship” programs with many of our partners through the use of EDI and
extensible markup language (“XML”) links allowing us to expand our product offerings without further increasing
inventory, handling costs or inventory risk exposure. Thus, we are able to offer a vast product offering with billions of
dollars in virtual inventory. Convenience and product options among multiple brands are key competitive advantages
against manufacturers/publishers’ direct selling programs, which are generally limited to their own brands and may not
be able to offer clients a complete or best solution across all product categories.
We select our products based on existing and proven technology and anticipated client needs. Our product
managers and buyers evaluate the effectiveness of new and existing products and select those products for inclusion in
our offerings based on the fit in strategic solutions, market demand, product features, quality, reliability, sales trends,
price, margins and warranties.
The manufacturer warrants most of the products we market, and it is our policy to request that clients return their
defective products directly to the manufacturer for warranty service. On selected products, and for selected client service
reasons, we may accept returns directly from the client and then either credit the client or ship a replacement product.
We generally offer a limited 15- to 30-day return policy for unopened products and certain opened products, which are
consistent with manufacturers’ terms; however, for some products we may charge restocking fees. Products returned
opened are quickly processed and returned to the manufacturer or partner for repair, replacement or credit to us. We
resell most unopened products returned to us. Products that cannot be returned to the manufacturer for warranty
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INSIGHT ENTERPRISES, INC.
processing, but are in working condition, are promptly sold to inventory liquidators, to end users as “previously sold” or
“used” products or through other channels to limit our losses from returned products.
For a discussion of risks associated with our reliance on partners, see “Risk Factors – We rely on our partners for
product availability, marketing funds, purchasing incentives and competitive products to sell,” in Part I, Item 1A of this
report.
Strong Tools and Expertise on Software Asset Management. As a one-stop, global IT solutions provider, we are
also able to present our clients strong tools and expertise in software asset management. Our tools and expertise include:
Advice, Information and Education. We advise, inform and educate our clients regarding the wide range of
procurement and licensing choices available to them. We publish newsletters, service and product brochures and product
catalogs and also provide other timely information coincident with major product releases. We author and provide white
papers and consulting advice to our clients to allow them to realize the potential benefits associated with licensing
programs. We provide our clients with a methodology for evaluating their individual software management process and
analyzing issues in selecting and implementing the licensing programs offered by various publishers. Our advice is
designed to assist clients in selecting a software management plan, including internal distribution services,
communicating with end users, reporting and complying with licensing agreements.
As part of our integration of Software Spectrum, we re-branded www.softwarespectrum.com to www.insight.com
during the first quarter of 2007. Our Web site contains company news and information designed to educate clients about
our services, our software titles (including third-party reviews), the publishers we represent and the latest trends in the
industry. We conduct on-line seminars, or webinars, to train our clients on our on-line services and host partner
webinars. Additionally, we convene a global client roundtable twice a year and schedule other roundtables as part of our
publisher marketing.
Licensing Services. Our clients can acquire software applications either through licensing agreements or by
purchasing boxed products. The majority of our clients purchase their software applications through licensing
agreements, which we believe is a result of the ease of administration they provide and their cost-effective nature.
Licensing agreements, or right-to-copy agreements, allow a client to either purchase a license for each of its users in a
single transaction or periodically report its software usage, paying a license fee for each user. For clients, the overall
cost of using one of these methods of acquiring software may be substantially less than purchasing boxed products.
As software publishers choose different procedures for implementing licensing agreements, businesses are faced
with a significant challenge to evaluate all the alternatives and procedures to ensure that they select the appropriate
agreements, comply with the publishers’ licensing terms and properly report and pay for their software licenses. A large,
multinational corporation may have over 100,000 users, increasing the complexity associated with purchasing and
managing their software assets. We work closely, either locally or globally, with our clients to understand their
requirements and educate them regarding the options available under partner licensing agreements.
Many of our clients who have elected to purchase software licenses through licensing agreements have also
purchased software maintenance, which allows clients to receive new versions, upgrades or updates of software products
released during the maintenance period in exchange for a specified annual fee. These fees may be paid in monthly,
quarterly or annual installments. Upgrades and updates are revisions to previously published software that improve or
enhance certain features of the software and/or correct errors found in previous versions. We assist our partner
publishers and clients in tracking and renewing these agreements.
Our proprietary systems support the requirements necessary to service licensing agreements for our clients. Our
systems provide individualized client contract management data, assist clients in complying with licensing agreements
and provide clients with necessary reporting information.
In connection with certain enterprise-wide licensing agreements, publishers may choose to bill and collect from
clients directly. In these cases, we earn a referral fee directly from the publisher.
Insight:LicenseAdvisor™. Our Insight LicenseAdvisor ™ product is a proprietary integrated software asset
management platform that is designed to enable organizations to gain better control of their software assets, thereby
saving money and helping to ensure software license compliance. In spite of investing in software asset management
tools, clients have noted that they may still make unnecessary purchases, fall out of compliance with software licenses,
are slow to distribute software to their employees, and do not feel that they are in control of their software asset lifecycle.
Our software solution is designed to help companies close compliance gaps and manage complex licenses by
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INSIGHT ENTERPRISES, INC.
determining who is entitled to purchase or use a software license, the right media for a license entitlement, how to access
the software, how to entitle users, groups and the enterprise to receive the software, and how to manage entitlements
going forward. The software is designed to integrate with a company’s internal processes and other asset management
technology to allow the company to purchase, deploy and manage their software assets more efficiently.
Services Offerings. Although sales of services in 2006 represented a small percentage of our net sales
(approximately 2%) and gross profit (approximately 5%), we believe our services offerings differentiate us from our
competitors. We believe these services offerings help to establish strong, deep-rooted relationships with clients as they
look to us for more than just product fulfillment and view us as partners in creating integrated product and service
solutions for their IT needs. As sales of services increase, we expect services will likely become a greater percentage of
gross profit because sales of services are generally at a higher gross margin than product sales. Currently, many of these
service capabilities are more widely available to clients in North America than in any other geography. Our investment
in our services capabilities in North America during 2006 resulted in year over year growth in net sales of 27% compared
to 2005. We provide our clients a wide variety of services that focus on the following areas:
•
Custom Configuration – At our ISO 9001:2000 certified customer configuration lab in the U.S., we custom
configure servers, desktops, laptops and peripherals, including services such as:
o
o
o
o
asset tagging;
basic testing;
hardware and software configuration; and
software imaging and installation.
• Advanced Integration – Our ISO 9001: 2000 certified advanced integration lab in the U.S. provides
technical operations, resources and expertise to manage and implement large-scale network rollouts,
including:
o workstations, servers and connectivity equipment;
o
o
o
o wireless activations and configurations.
individual user customization of file servers, switches, routers and racks;
pre-built networks, including IP addressing;
live network testing and turnkey deployment; and
• National Repair Center – Our ISO 9001:2000 certified national repair center in the U.S. is dedicated to
maintaining our clients’ equipment and ensuring optimal performance levels through a variety of services
including:
o
o
o
o
break fix services;
hot swap/spare program;
asset retrieval, refurbishment or redeployment; and
end of lease processing.
Enterprise Consulting – We evaluate, design, implement and manage business technology projects for our
clients. Our enterprise consulting competencies include:
o
infrastructure assessment and design;
o wireless LAN design and implementation;
o Microsoft assessment, design and implementation;
o
o
IP voice and telephony solutions; and
network security.
Resource Management – We offer highly skilled technical staff to augment our clients’ existing IT staff in
areas such as:
desk side support;
help desk support;
installs, moves, adds and changes;
o
o
o
o LAN administration; and
o
critical server restoration.
Project Management – We provide clients with experienced project managers who coordinate the planning,
design, deployment, and support of their IT projects and ongoing service programs. This service is
performed via our Project Management Office which provides standard methodology and quality
assurance.
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•
•
•
INSIGHT ENTERPRISES, INC.
• National Implementation Programs – Together with selected highly qualified service partners, we provide
comprehensive, customized implementation services, including:
o
o
national implementation and deployment projects and
national service maintenance programs.
A significant amount of services provided in North America are delivered through extensive in-house capabilities,
including services performed in our ISO 9001:2000 certified custom configuration and advanced integration labs and our
ISO 9001:2000 national repair center. On certain service offerings or in certain geographies, we manage delivery of
services by contracting with highly qualified service partners. We believe this combination is a key differentiator from
direct competitors in North America. Our EMEA and APAC operating segments manage delivery of services using in-
house teammates and by contracting with highly qualified service partners. Regardless of delivery methods or
geography, the client’s dedicated account executive remains the primary contact throughout the entire implementation
process, and we offer to act as the central project manager to assure consistent quality of service across the project. This
commitment to project management is central to our value proposition for delivering total technology solutions, and we
believe it enhances the development of strong, long-term relationships with clients.
Our account executives are supported by teams of qualified experts that specialize in specific emerging and/or
complex technologies. In North America, we currently have technical sales support teams focused on the following
product and service categories:
Enterprise Solutions;
Lifecycle Management;
• Advance Network Solutions;
•
•
• Mobility;
•
•
•
•
•
•
•
Project Management;
Security;
Software License Management;
Storage/High Performance Systems;
Third-party Extended Warranties;
Financial Services/Leasing; and
Technology Disposal.
In EMEA, we currently have teams of qualified experts focused on:
Connectivity (United Kingdom only);
•
• Helpdesk (France and United Kingdom only);
• Networking (France, Germany and United Kingdom only);
• Virtualization (France and Germany only);
•
•
•
•
•
• Warranties and Configuration (United Kingdom only); and
• Wireless (United Kingdom only).
Servers (United Kingdom only);
Storage and High Performance Systems, (UK only);
Software Asset Management;
Software Deployment Services;
Software Licensing/Planning;
In APAC, we currently have teams of qualified experts focused on Software Licensing/Planning.
Historically in the industry, advanced services were available nationally to larger enterprise clients. However, we
have the ability to provide certain of those services to our SMB clients and view this as an opportunity for growth.
Determining which services are best suited to the SMB clients, expanding our services capabilities, creating awareness of
our capabilities and increasing sales to this client group will be a significant focus in the future. For 2006, our service
offerings to SMB clients continued to focus primarily on integration, third-party extended warranties and leasing.
However, in 2007, we plan to expand our services offerings to SMB clients to include image loads, wireless deployment,
asset disposal and managed services.
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INSIGHT ENTERPRISES, INC.
We believe that there is no other global reseller able to offer the same breadth and depth of IT solutions that we offer
across all target client groups in North America, EMEA and APAC.
Efficient Technology-Based Operations. We believe our implementation of advanced technological systems
provides a competitive advantage by increasing the productivity of our account executives, delivering more efficient
client service and reducing order processing and inventory costs. Our technology-based operations center around our IT
systems, our distribution centers, electronic procurement and voice and data networks.
IT Systems. We are in the process of upgrading from SAP version 4.6 to mySAP. We have reengineered our
processes to prepare for the upgrade rollout and believe that the benefits will include:
•
•
•
•
•
•
•
•
•
increased sales executive and client support productivity;
automated service tracking and billing;
enhanced CRM capabilities;
streamlined opportunity management;
improved ability to provide sales with qualified leads;
improved service contract management and reporting;
further automation of manual and inefficient processes;
reduced custom programming and maintenance; and
adoption of best practices around business processes.
We currently plan to deploy our IT system in the U.S., including the upgrade to mySAP, to our legacy Software
Spectrum operations in the U.S. in mid 2008 and to our operations outside of the U.S. over the next two years. Although
mySAP has enhanced functionality, our current IT systems in all geographies allow our account executives to obtain a
wide range of information, including:
•
•
•
•
•
client information;
product information;
product pricing, gross profit and availability;
product compatibility and alternative product offerings and accessories; and
order status.
We believe the information available to our account executives enables them to make better decisions regarding
solution, product and services recommendations, provide superior client service and increase overall profitability. We
also believe that our investment in IT will continue to improve the efficiency of our operations.
Distribution Centers. Our U.S. distribution operations are conducted within a 440,000 square foot distribution
facility in Hanover Park, Illinois. Activities performed in our Illinois distribution center include receipt and shipping of
inventory and returned product processing. Additionally, this distribution center houses our national repair center and
our advanced integration and custom configuration labs. We also have a small distribution facility in Canada, small
software-only distribution facilities in Germany and France and a 53,000 square foot distribution facility in the United
Kingdom. All of our IT systems have capabilities that interface our sales, distribution, inventory and accounting
functions. Through our IT systems, we send orders electronically to one of our distribution centers or to a “direct ship”
partner for processing immediately upon order release, and the distribution center or partner automatically prints a
packing slip for order fulfillment. Products received in our distribution centers are assigned a unique bar code and
placed in designated bin locations. We use systematic checks to ensure accurate fulfillment and to provide real-time
reduction in inventories. We have implemented a re-ordering system that calculates lead times, accepts price quotes
from competing partners and, in some instances, automatically orders from the partner with the most competitive price
and availability. We have integrated our order processing, labeling and tracking systems with major freight carriers to
ensure prompt and traceable delivery. We utilize a combined physical and virtual distribution model, utilizing “just-in-
time” inventory management and “direct ship” relationships with partners to reduce inventory costs and increase client
satisfaction. We also purchase and hold inventory for our integration labs related to upcoming projects with large
enterprise and public sector clients. We promote the use of EDI or XML links with our partners, which we believe helps
to reduce overhead, simplify the order fulfillment cycle and reduce the use of paper in the ordering process. Our
physical distribution capabilities allow us to inventory product as needed to take advantage of product allocations, make
opportunistic purchases or meet the service requirements of our clients. Our inventory management techniques, utilizing
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INSIGHT ENTERPRISES, INC.
our system capabilities, allow us to offer a greater range of products without increased inventory requirements, and to
reduce inventory exposure and shorten order fulfillment time.
Electronic Procurement. We participate in the electronic procurement arena in order to help clients control costs,
streamline the procurement process and improve operational efficiencies. We do this primarily through our Web site and
our Electronic Business-to-Business Partner Program (e-B2B Partner Program):
• Our Web Site. Our Web site, via customized landing pages, provides tools which allow clients to restrict
purchasing only to pre-approved products or allow an administrator at a client location to give users within
that organization access to the client’s on-line account, but restrict the level of their activity and the features
and options available to them. Through our Web site, we make available open-order status and purchase
activity reports formatted to meet each client’s specifications. We also maintain a suite of Internet-based
tools that enable clients to manage their software procurement. For most of our larger clients, we create
customized electronic product catalogs containing product information and pricing. These electronic
catalogs are accessed through search engine functionality, which enables clients to quickly locate and
compare products they need.
• Our e-B2B Partner Program. Under our e-B2B Partner Program, we have established relationships with e-
procurement providers, such as Ariba, Oracle, Perfect Commerce and SAP to support clients’
implementations of the various e-procurement platforms in an effort to streamline procurement processes
and improve operational efficiencies.
Voice and Data Networks. Our voice and data networks are an important part of our technology-based operations as
the majority of our sales, marketing and client service efforts are conducted either via the telephone or over the Web.
Our telephone system is programmed to route inbound calls automatically, depending on their originating data, to
specific sales groups, or to specific account executives. Our telephone system also uses menu functions that permit the
clients to route themselves to the appropriate sales, service or support area or to their assigned account executives. In
general, our technology infrastructure and our data connectivity, in particular, are important links in our efforts to
increase the ease of transacting business with us.
For a discussion of risks associated with our IT systems and voice and data networks, see “Risk Factors –
Disruptions in our IT systems and voice and data networks, including the migration of Software Spectrum to our IT
voice and data networks, could affect our ability to service our clients and cause us to incur additional expenses,” in Part
I, Item 1A of this report.
Growth Strategy
Our financial goals are focused on growing market share and net earnings at a rate that outpaces the market. To
achieve our goals, we are focused on the following areas:
selling additional products and services to our existing client base;
expanding our client base;
capitalizing on our international presence;
increasing our gross profit;
lowering our selling and administrative expenses as a percentage of net sales; and
•
•
•
•
•
• making opportunistic strategic acquisitions.
Selling Additional Products and Services to Our Existing Client Base. Although expanding our client base is part
of our growth strategy, we believe there is an even greater opportunity to increase sales within our existing client base
by:
•
•
•
•
•
driving incremental business by leveraging the combined strengths of our legacy Insight and legacy
Software Spectrum teammates in products, software and services and cross-selling software offerings to
legacy Insight clients and products and service offerings to legacy Software Spectrum clients;
increasing solution sales to drive increased share of wallet with existing clients;
leveraging our services capabilities to enhance profitability;
driving improvements in account executive productivity;
aligning sales and marketing strategies; and
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INSIGHT ENTERPRISES, INC.
•
leveraging e-commerce capabilities.
Our marketing initiatives focus on demand generation, communication of our solutions capabilities and growth of
Insight brand awareness. We believe, particularly in the U.S., that the full breadth of our solution-focused offerings is an
important differentiating factor from our competitors. Specific solutions have been and will continue to be brought to
market through our portfolio selling approach and will be supported by:
•
sales training and education;
•
assessment and selling tools;
•
awareness building;
•
client events;
•
demand generation;
•
product management;
•
procurement;
•
services development;
• Web merchandising; and
•
sales incentives.
We believe this integrated, targeted approach will allow us to communicate our value proposition to our clients,
partners and account executives more effectively.
Expanding Our Client Base. We intend to increase our direct sales and targeted marketing efforts in each of our
client segments. We seek to acquire new account relationships through proactive outbound telesales, face-to-face field
sales, electronic commerce, targeted direct marketing and increased advertising focused on Insight brand awareness and
the differentiating factors of our business model.
Capitalizing on Our International Presence. We seek to capitalize on our international presence in an effort to
achieve our long-term goal of becoming a global leader for IT solutions. To that end, we plan to exploit our global
footprint which was significantly expanded with the acquisition of Software Spectrum in September 2006. A value
driver in our integration planning and execution is our plan to eventually build IT hardware and services capability in
select countries in EMEA and APAC to enhance our existing software expertise. Our expanded global presence provides
us with an increased client base, expanded product offerings and the ability to leverage our existing infrastructure and
partner relationships. We believe that our ability to service clients globally very much differentiates us in the market.
We also believe that APAC, in particular, offers strong opportunities for growth with some of the fastest growing global
economies in the world. For a discussion of risks associated with international operations, see “Risk Factors – There are
risks associated with international operations that are different than those inherent in the U.S. and our exposure to the
risks of a global market could hinder our ability to maintain and expand international operations,” in Part I, Item 1A of
this report.
Increasing Our Gross Profit. We believe that in order to meet our net earnings targets, we need to increase our
gross profit. We are focused on the following initiatives that we believe will contribute to gross profit growth:
•
•
•
•
•
increasing attach rates for warranties, integration, leasing, accessories and services;
accelerating growth rates in net sales to SMB clients, which are generally conducted at higher gross
margins;
actively managing freight margin;
leveraging and expanding our use of automated pricing tools; and
driving growth of higher margin categories.
Lowering Our Selling and Administrative Expenses as a Percentage of Net Sales. In addition to increasing gross
profit, we are focused on reducing our selling and administrative expenses as a percentage of net sales. We believe the
following initiatives will help lower selling and administrative expenses as a percentage of net sales:
•
•
•
continuing to tighten our management system and focus on expense management throughout the
organization;
leveraging mySAP functionality to automate manual processes and adopt best practices;
improving sales-to-support ratios;
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INSIGHT ENTERPRISES, INC.
•
•
enhancing our alignment with our key partners to fully leverage our partners’ investments in their Insight
relationship; and
achieving cost synergies from the acquisition of Software Spectrum.
As noted in the above initiatives, key to our success is the integration of Software Spectrum into our operations and
the realization of the strategic and financial synergies we expect from the combined business. We took a comprehensive
approach to ensure the effectiveness of our integration, which included utilization of an outside integration consultant
and the development of a disciplined project management approach. Our integration planning and execution were
focused on new sources of value including:
•
•
•
•
•
•
•
aligning sales to capture client synergies – selling IT hardware and services to the legacy Software
Spectrum client base and selling software into the legacy Insight client base to create incremental net new
sales;
retaining top talent/skills – keeping and motivating key teammates from both companies;
leveraging our expertise in selling to SMB clients – creating new markets for software sales by exploiting
expertise and existing relationships;
capitalizing on our global footprint – eventually building IT hardware and services capabilities in select
countries in EMEA and APAC;
identifying synergies to reduce operating expenses – making smart decisions that optimize efficiency and
operating margin;
growing our services business – expanding our breadth of offerings and target service market; and
leveraging scale in procurement and product management – using our increased buying power to improve
our cost equation.
Additionally, we anticipate that we will complete the upgrade of our SAP, version 4.6, system to mySAP in our U.S.
hardware and services business in mid 2007. We believe the mySAP upgrade, targeted to streamline workflow within
the organization, will provide us with enhanced IT tools that will assist us in achieving our financial and operating goals.
Making Opportunistic Strategic Acquisitions. In September 2006, our strategic acquisition of Software Spectrum
broadened our client base, expanded our geographic reach, complemented our existing operating structure, deepened our
software capabilities and enhanced our product and service offerings. It is part of our growth strategy to continue to
evaluate and consider strategic acquisition opportunities if and when they become available. For a discussion of risks
associated with strategic acquisitions, see “Risk Factors – The integration and operation of Software Spectrum may
disrupt our business and create additional expenses, and we may not achieve the anticipated benefits of the acquisition,”
in Part I, Item 1A of this report.
Industry
Prior to late 2000, the industry experienced strong growth rates amidst a healthy economic environment. Sales of IT
products in the following years decreased worldwide due to sluggish economic growth and a lengthening of IT
replacement cycles. This slowdown in spending was evident beginning in late 2000, and signs of an anticipated recovery
were only first seen through slightly increased activity in the latter half of 2003, which continued in 2004 through 2006.
We remain optimistic that IT spending will continue to increase in 2007 at a similar rate as that in 2006, although we
believe the motivation and demand for purchases has changed from that of the pre-2000 era, and we have repositioned
ourselves to respond to these changes so that we may increase our market share. Technology purchases are being made
to address business-driven needs, and financial officers and other senior executives are increasingly playing greater roles
in the final purchasing decisions. We believe that demand is no longer driven, for example, only by increased speed and
functionality of basic desktop computers, but by the total cost of ownership and return on investment of IT expenditures.
Therefore, direct marketers are increasing efforts to include services among their offerings, and outbound telesales
organizations are being complemented by face-to-face field sales. We have been at the forefront of this trend since
acquiring extensive advanced service capabilities in early 2002 and enhanced software lifecycle management capabilities
with Software Spectrum in September of 2006. Other direct marketers have recently made efforts to include varying
levels of services among their offerings. We believe that we are better positioned to take advantage of this shift in client
purchasing as we began migrating from pure product fulfillment-driven direct marketing strategies to our solutions-
oriented model of providing IT hardware, software and services much earlier than other direct marketers. We believe
that in addition to the changing motivation for purchases, the industry is evolving in other ways, too. The market for IT
hardware, software and services is served through a variety of distribution channels, and intense competition for market
share has forced manufacturers/publishers to re-examine the psychology behind clients’ purchasing behaviors and to
seek the most cost effective and efficient channels to distribute their products. Clients are changing the way they plan
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INSIGHT ENTERPRISES, INC.
for, purchase and implement technology purchases, and participants in the supply chain, including us, continue to change
to keep pace with or be in front of these changes. We believe the following trends have emerged:
• Manufacturers and publishers are continuing their use of the direct channel, through direct marketers and
through their own internal resources, to market and sell products directly to clients in order to grow sales
and lower overall selling costs. However, manufacturers and publishers are expecting their direct
marketing partners to provide more than just sales and products fulfillment. Manufacturers and publishers
desire partners that are knowledgeable about the differentiators of their products and can help deploy the
products in the client’s IT environment.
Consolidation has occurred over the past few years among direct marketers and service providers, and as
larger direct marketers continue to broaden their client reach and increase the depth and breadth of product
and service offerings, we believe that larger direct marketers will continue to take market share away from
smaller resellers.
•
• Microsoft and other publishers have initiated sales agency licensing programs under which resellers
recognize the sales agency fee received directly from the software publisher as net sales and not the entire
sales price of the software. Additionally, software maintenance contracts are recorded under net revenue
recognition, and therefore, only the gross profit on the transaction is recorded as net sales. The increase in
sales of licenses under sales agency licensing programs as well as sales of software maintenance contracts
makes period-to-period comparability of sales and costs of goods sold more difficult. As a result, we
believe the focus should be on gross profit as the key measure of business performance and period-to-
period trends.
Additionally, with increased competition and an overall improved industry-wide supply chain, IT hardware products
experience continual declines in average selling prices. Therefore, in order to increase net sales, unit sales must grow at
a rate faster than the decline in average selling prices.
We believe that we will continue to benefit from industry changes as a cost-effective provider of a full range of IT
hardware, software and services. While purchasing decisions will continue to be influenced by product selection and
availability, price and convenience, we believe that solution offerings, knowledge of account executives and client
service will become the differentiators businesses will look for when procuring solutions that minimize their total cost of
ownership. We believe that Insight delivers strategic business value by streamlining IT management and costs. By
combining technology hardware, software and services, Insight creates custom-tailored solutions designed to meet
clients’ unique requirements and changing IT goals. For a discussion of risks associated with uncertain economic
conditions and actions of competitors, see “Risk Factors – Changes in the IT industry and/or the economic environment
may reduce demand for the products, software and services we sell,” and “Risk Factors – The IT hardware, software and
services industry is intensely competitive, and actions of our competitors, including manufacturers and publishers of
products we sell, can negatively affect our business,” in Part I, Item 1A of this report.
Competition
The IT hardware, software and services industry is highly competitive. We compete with a large number and wide
variety of marketers and resellers of IT hardware, software and services, including:
•
•
•
•
•
•
product manufacturers, such as Dell, HP, IBM and Lenovo;
direct marketers, such as CDW Corporation (North America) and PC World Business (United Kingdom);
software resellers, such as ASAP Software, SoftChoice and Softwarehouse International
systems integrators, such as Compucom Systems, Inc.;
national and regional resellers, including value-added resellers and specialty retailers, aggregators,
distributors, national computer retailers, computer superstores, Internet-only computer providers, consumer
electronics and office supply superstores and mass merchandisers; and
national and global service providers, such as IBM Global Services, HP and EDS.
Product manufacturers continue to sell directly to business clients, particularly larger enterprise clients.
Manufacturers, however, typically do not offer the breadth of multi-branded product offerings that direct marketers such
as us offer, nor do they have sufficient scale to penetrate the SMB space cost-effectively. Additionally, most
manufacturers, as well as other direct marketers, do not provide the advanced level of services that we offer our clients.
We believe that we offer enhanced solutions capabilities, broader product selection and availability, competitive prices,
and greater purchasing convenience than traditional retail stores or value-added resellers, and that our dedicated account
executives offer the necessary support functions (e.g., knowledge of technology solutions, credit terms and efficient
return processes) which Internet-only sellers usually do not provide.
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INSIGHT ENTERPRISES, INC.
We are not aware of any competitors with both the breadth and depth of solution offerings we have in the U.S. or the
ability to service software clients on a global level. This allows us to differentiate ourselves with a client service strategy
that spans the continuum from fast delivery of competitively priced products, to licensing expertise and knowledgeable,
industry experienced teammates to advanced IT solutions, and a selling approach that permits us to grow with clients and
solidify those relationships.
Software publishers may intensify their efforts to sell their products directly to end users to the exclusion of the
indirect sales channel. Over the past few years, some publishers have instituted programs for the direct sale of large
order quantities of software to major corporate accounts with only a referral fee paid to the reseller. We anticipate that
these types of transactions will continue to be used by various publishers in the future. We believe that the total
combined range of services and software titles we provide to our clients cannot be easily substituted by individual
software publishers, particularly because individual publishers do not offer the scope of services or range of software
titles required by most of our clients.
Although the barriers to entry into the industry for an Internet-only reseller are relatively low, we believe that new
entrants into the direct marketing channel must overcome a number of significant barriers to entry including:
•
•
•
•
•
the time and resources required to build a client base of sufficient size and a well-trained account executive
sales base;
the significant investment required to develop an IT and operating infrastructure;
the advantages enjoyed by established larger competitors with purchasing and operating efficiencies;
the reluctance of manufacturers and distributors to allocate product and supplier reimbursements and
establish electronic transactional relationships with additional participants; and
the difficulty of identifying and recruiting qualified management personnel and a sufficient number of
account executives to sell technically advanced products.
Some of our competitors have longer operating histories and greater financial, technical, marketing and other
resources than us. In addition, some of these competitors may be able to respond more quickly to new or changing
opportunities, technologies and client requirements. Many current and potential competitors also have greater name
recognition and engage in more extensive promotional marketing and advertising activities, offer more attractive terms to
clients and adopt more aggressive pricing policies than we do.
For a discussion of risks associated with the actions of our competitors, see “Risk Factors – The IT hardware,
software and services industry is intensely competitive, and actions of our competitors, including manufacturers and
publishers of products we sell, can negatively affect our business,” in Part I, Item 1A of this report.
Partners
During 2006, we purchased products and software from approximately 3,700 partners. Approximately 54% (based
on dollar volume) of these purchases from partners were from distributors, with the balance purchased directly from
manufacturers or software publishers. Purchases from HP, a manufacturer, Ingram Micro and Tech Data, both of which
are distributors, accounted for approximately 15%, 15%, and 13%, respectively, of our aggregate purchases in 2006. No
other partner accounted for more than 10% of purchases in 2006. Our top five partners as a group for 2006 were HP,
Ingram Micro, Tech Data, Microsoft and SYNNEX. Approximately 58% of our total purchases during 2006 came from
this group of partners. These percentages only included Software Spectrum purchases since September 2006,
accordingly, we anticipate that our purchases from Microsoft will increase substantially during 2007. Although brand
names and individual products are important to our business, we believe that competitive sources of supply are available
in substantially all of our product categories and many of our software offerings such that, with the exception of
Microsoft, we are not dependent on any single partner for sourcing products or software.
We obtain supplier reimbursements from certain product manufacturers and software publishers based typically
upon the volume of sales or purchases of the manufacturers’ products or publishers’ software. In other cases, such
reimbursements may be in the form of participation in our partner programs, discounts, advertising allowances, price
protection or rebates. Manufacturers and publishers may also provide mailing lists, contacts or leads to us. We believe
that supplier reimbursements allow us to increase our marketing reach and strengthen our relationships with leading
manufacturers and publishers. These reimbursements are important to us, and any elimination or substantial reduction
would increase our costs of goods sold or marketing expenses and decrease our earnings from operations and net
earnings. During 2006, sales of HP products and Microsoft products accounted for approximately 26% and 15%,
respectively, of our consolidated net sales. No other manufacturer’s products accounted for more than 10% of our
consolidated net sales in 2006. Sales of product from our top five manufacturers/publishers as a group (HP, Microsoft,
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INSIGHT ENTERPRISES, INC.
Cisco, Lenovo and IBM) accounted for approximately 61% of Insight’s consolidated net sales during 2006. We believe
that the majority of IT purchases by our clients are made based on the ability of our total product and service offering to
meet their IT needs more than on specific brands.
Given the significant increase in software as a percentage of our net sales due to the acquisition of Software
Spectrum in September 2006, our reliance on Microsoft in 2007 and beyond for both sales and vendor funding will
increase. For a discussion of risks associated with our reliance on partners, see “Risk Factors – We rely on our partners
for product availability, marketing funds, purchasing incentives and competitive products to sell,” in Part I, Item 1A of
this report.
Teammates
We believe our teammate relations are good. Our teammates are not represented by any labor union, and we have
not experienced any work stoppages. Certain of our teammates in various countries outside of the U.S. are subject to
laws providing representation rights to teammates on workers councils. At December 31, 2006, we had 4,568 teammates
as follows:
Management, support services
and administration .................
Sales account executives............
Distribution ................................
Total ...................................
North
America
1,896
1,294
131
3,321
EMEA
APAC
Consolidated
592
476
55
1,123
70
54
-
124
2,558
1,824
186
4,568
We have invested in our teammates’ future and our future through an ongoing program of internal and external
training. Training programs include new hire orientation, sales training, general industry and computer education,
technical training, specific product training and on-going teammate and management development programs. We
emphasize on-the-job training and provide our teammates and managers with development opportunities through on-line
and classroom training relevant to their needs.
Seasonality
General economic conditions have an effect on our business and results of operations. We also experience some
seasonal trends in our sales of IT hardware, software and services. For example:
•
•
•
software sales are seasonally significantly higher in our second and fourth quarter;
business clients, particularly larger enterprise businesses in the U.S., tend to spend more in our fourth
quarter as they utilize their remaining capital budget authorizations, and less in the first quarter; and
sales to the federal government in the U.S. are often stronger in our third quarter.
These trends create overall seasonality in our consolidated results such that sales and profitability are expected to be
higher in the second and fourth quarters of the year. We expect between 25% and 30% of our 2007 net sales and gross
profit, as well as between 30% and 35% of our 2007 earnings from operations, to occur in each of the second and fourth
quarters.
Backlog
Virtually all of our backlog historically has been and continues to be open cancelable purchase orders, and we do not
believe that backlog as of any particular date is indicative of future results.
Intellectual Property
We do not maintain a traditional research and development group, but we do develop and seek to protect a range of
intellectual property, including trademarks, service marks, copyrights, domain name rights, trade dress, trade secrets and
similar intellectual property. We rely on applicable statutes and common law rights, trade-secret protection and
confidentiality and license agreements, as applicable, with teammates, clients, vendors and others to protect our
intellectual property rights. We have registered a number of domain names, and our principal trademark is a registered
mark. We have also applied for registration of other marks, in the U.S. and in select international jurisdictions, and from
time to time, file patent applications. We may, in the future, license certain of our proprietary intellectual property rights
to third parties. It is important for us to work closely with computer product manufacturers and other technology
developers to stay current on the latest developments in technology in order to improve our internal operations and for
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the benefit of our clients. We believe our trademarks and service marks, in particular, have significant value and we
continue to invest in the promotion of our trademarks and service marks and in our protection of them.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and the reports of beneficial ownership filed pursuant to Section 16(a) of the Exchange Act are available free of
charge on our Web site at www.insight.com, as soon as reasonably practicable after we electronically file with, or furnish
to, the Securities and Exchange Commission (“SEC”). Additionally, the public may read and copy any materials that we
file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on
the operation of the SEC’s Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a Web site at www.sec.gov that contains all of information we file with, or furnish to, the SEC. Please see
“Explanatory Note Regarding Restatement of Our Consolidated Financial Statements” above regarding our previous
reports not being amended for the restatement of our financial statements, and that the financial information included in
reports previously filed or furnished by Insight Enterprises, Inc. for prior periods should not be relied upon, and are
superseded by the information in this Annual Report on Form 10-K.
Item 1A. Risk Factors
Changes in the IT industry and/or the economic environment may reduce demand for the IT hardware, software
and services we sell. Our results of operations are influenced by a variety of factors, including the condition of the IT
industry, general economic conditions, shifts in demand for, or availability of, IT hardware, software, peripherals and
services and industry introductions of new products, upgrades or methods of distribution. Net sales can be dependent on
demand for specific product categories, and any change in demand for or supply of such products could have a material
adverse effect on our net sales, and/or cause us to record write-downs of obsolete inventory, if we fail to react in a timely
manner to such changes. Our operating results are also highly dependent upon our level of gross profit as a percentage
of net sales, which fluctuates due to numerous factors, including changes in prices from partners, changes in the amount
and timing of supplier reimbursements and marketing funds that are made available, volumes of purchases, changes in
client mix, the relative mix of products sold during the period, general competitive conditions, the availability of
opportunistic purchases and opportunities to increase market share. In addition, our expense levels, including integration
related costs and the costs and salaries incurred in connection with the hiring of account executives, are based, in part, on
anticipated net sales and the anticipated amount and timing of vendor funding. Therefore, we may not be able to reduce
spending in a timely manner to compensate for any unexpected net sales shortfall and any such inability could have a
material adverse effect on our business, results of operations and financial condition.
We rely on our partners for product availability, marketing funds, purchasing incentives and competitive
products to sell. We acquire products for resale both directly from manufacturers/publishers and indirectly through
distributors. The loss of a partner could cause a disruption in the availability of products. Additionally, there is no
assurance that as manufacturers/publishers continue to sell directly to end users and through the distribution channel,
they will not limit or curtail the availability of their product to resellers like us. From time to time, products we offer
may become subject to manufacturer allocation, which limits the number of units available to us. Our inability to obtain
a sufficient quantity of product, or an allocation of products from a manufacturer in a way that favors one of our
competitors relative to us, could cause us to be unable to fill clients’ orders in a timely manner, or at all, which could
have a material adverse effect on our business, results of operations and financial condition. In addition, a reduction in
the amount of credit granted to us by our partners could increase our cost of working capital and have a material adverse
effect on our business, results of operations and financial condition.
Certain manufacturers/publishers and distributors provide us with substantial incentives in the form of rebates,
supplier reimbursements and marketing funds, early payment discounts, referral fees and price protections. Vendor
funding is used to offset, among other things, inventory, costs of goods sold, marketing costs and other operating
expenses. Certain of these funds are based on our volume of net sales or purchases, growth rate of net sales or purchases
and marketing programs. If we do not grow our net sales over prior periods or if we are not in compliance with the terms
of these programs, there could be a material negative effect on the amount of incentives offered or paid to us by
manufacturers/publishers. Additionally, partners routinely change the requirements for, and the amount of, funds
available. No assurance can be given that we will continue to receive such incentives or that we will be able to collect
outstanding amounts relating to these incentives in a timely manner, or at all. A reduction in, the discontinuance of, a
significant delay in receiving or the inability to collect such incentives, particularly related to programs with our largest
vendors, HP and Microsoft, could have a material adverse effect on our business, results of operations and financial
condition.
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Although product is generally available from multiple sources via the distribution channel as well as directly from
manufacturers/publishers, we rely on the manufacturers/publishers of products we offer not only for product availability
and vendor funding, but also for development and marketing of products that compete effectively with products of
manufacturers/publishers we do not currently offer, particularly Dell. We do have the ability to sell, and from time to
time do sell, Dell product if it is specifically requested by our clients and approved by Dell, although we do not currently
proactively advertise or offer Dell products.
Disruptions in our IT systems and voice and data networks, including the upgrade to my SAP and the migration
of Software Spectrum to our IT systems and voice and data networks, could affect our ability to service our clients
and cause us to incur additional expenses. We believe that our success to date has been, and future results of
operations will be, dependent in large part upon our ability to provide prompt and efficient service to our clients. Our
ability to provide that level of service is largely dependent on the accuracy, quality and utilization of the information
generated by our IT systems, which affect our ability to manage our sales, client service, distribution, inventories and
accounting systems and the reliability of our voice and data networks. In January 2004, we completed the IT system
conversion to SAP, version 4.6, across all of Insight’s operations serving U.S. clients. We have been making and will
continue to make enhancements and upgrades to the system, including our current upgrade to mySAP. We currently
plan to deploy our IT system in the U.S., including the upgrade to mySAP, to our legacy Software Spectrum operations
in the U.S. in mid 2008 and to our operations outside of the U.S. over the next two years. Additionally, certain assumed
expense synergies are dependent on migrating Software Spectrum to our IT systems. There can be no assurances that
these enhancements or conversions will not cause disruptions in our business, and any such disruption could have a
material adverse effect on our results of operations and financial condition. The conversion of EMEA to this software
platform will enable us to sell hardware and services to clients in that region and therefore any delay would have an
effect on future sales growth. Further, any delay in the timing could decrease and/or delay our expense savings and any
such disruption could have a material adverse effect on our results of operations and financial condition. Additionally, if
we complete conversions that shorten the life of existing technology or render it impaired, we could incur additional
depreciation expense and/or impairment charges. Although we have built redundancy into most of our IT systems, have
documented system outage policies and procedures and have comprehensive data backup, we do not have a formal
disaster recovery or business continuity plan. Substantial interruption in our IT systems or in our telephone
communication systems would have a material adverse effect on our business, results of operations and financial
condition.
The integration and operation of Software Spectrum may disrupt our business and create additional expenses,
and we may not achieve the anticipated benefits of the acquisition. Integration of an acquisition involves numerous
risks, including difficulties in the conversion of IT systems and assimilation of operations of the acquired company, the
diversion of management’s attention from other business concerns, risks of entering markets in which we have had no or
only limited direct experience, assumption of unknown liabilities, the potential loss of key teammates and/or clients,
difficulties in completing strategic initiatives already underway in the acquired and acquiring companies, and
unfamiliarity with partners of the acquired company, each of which could have a material adverse effect on our business,
results of operations and financial condition. The success of our integration of Software Spectrum assumes certain
synergies and other benefits. We cannot assure that these risks or other unforeseen factors will not offset the intended
benefits of the acquisition, in whole or in part.
The IT hardware, software and services industry is intensely competitive, and actions of our competitors,
including manufacturers and publishers of products we sell, can negatively affect our business. Competition has
been based primarily on price, product availability, speed of delivery, credit availability and quality and breadth of
product lines and, increasingly, is also based on the ability to tailor specific solutions to client needs. We compete with
manufacturers/publishers, including manufacturers/publishers of products we sell, as well as a large number and wide
variety of marketers and resellers of IT hardware, software and services. Product manufacturers/publishers have
programs to sell directly to business clients, particularly larger corporate clients, and are thus a competitive threat to us.
In addition, the manner in which software products are distributed and sold and the manner in which publishers
compensate channel partners like us are continually changing. Software publishers may intensify their efforts to sell their
products directly to end-users, including our current and potential clients, and may reduce the compensation to resellers
or change the requirements for earning these amounts. Other products and methodologies for distributing software may
be introduced by publishers, present competitors or other third parties. An increase in the volume of products sold
through any of these competitive programs or distributed directly electronically to end-users or a decrease in the amount
of referral fees paid to us, or increased competition for providing services to these clients, could have a material adverse
effect on our business, results of operations and financial condition.
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Additionally, we believe our industry will see further consolidation as product resellers and direct marketers
combine operations or acquire or merge with other resellers, service providers and direct marketers to increase
efficiency, service capabilities and market share. Moreover, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to enhance their product and service offerings.
Accordingly, it is possible that new competitors or alliances among competitors may emerge and acquire significant
market share. Generally, pricing is very aggressive in the industry, and we expect pricing pressures to continue. There
can be no assurance that we will be able to negotiate prices as favorable as those negotiated by our competitors or that
we will be able to offset the effects of price reductions with an increase in the number of clients, higher net sales, cost
reductions, greater sales of services, which are typically at higher gross margins, or otherwise. Price reductions by our
competitors that we either cannot or choose not to match could result in an erosion of our market share and/or reduced
sales or, to the extent we match such reductions, could result in reduced operating margins, any of which could have a
material adverse effect on our business, results of operations and financial condition.
Certain of our competitors in each of our operating segments have longer operating histories and greater financial,
technical, marketing and other resources than we do. In addition, some of these competitors may be able to respond
more quickly to new or changing opportunities, technologies and client requirements. Many current and potential
competitors also have greater name recognition and engage in more extensive promotional activities, offer more
attractive terms to clients and adopt more aggressive pricing policies than we do. Additionally, some of our competitors
have higher margins and/or lower operating cost structures, allowing them to price more aggressively. There can be no
assurance that we will be able to compete effectively with current or future competitors or that the competitive pressures
we face will not have a material adverse effect on our business, results of operations and financial condition.
We have received an informal inquiry from the SEC and could be subject to stockholder litigation and other
regulatory proceedings related to the Options Subcommittee’s investigation of our historical stock option granting
practices and the related restatement of our consolidated financial statements. As described in the Explanatory Note
immediately preceding Part I, Item 1 of this report, Note 2 “Restatement of Consolidated Financial Statements” to
consolidated financial statements and in “Restatement of Consolidated Financial Statements” in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7 of this report, we identified
errors in the Company’s accounting related to stock option compensation expenses in prior periods and determined that
corrections to our consolidated financial statements were required to reflect additional material charges for stock-based
compensation expenses and related income tax effects.
There is a pending informal inquiry from the SEC regarding our historical option granting practices, and we cannot
make any assurances regarding the results of that inquiry. One purported derivative lawsuit was filed and subsequently
dismissed without prejudice at the request of the plaintiff. The Options Subcommittee’s investigation, our internal
review and related activities have already required the Company to incur substantial expenses for legal, accounting, tax
and other professional services and any future related investigations or litigation could require further expenditures and
harm our business, financial condition, results of operations and cash flows. Further, if the Company is subject to
adverse findings in litigation, regulatory proceedings or government enforcement actions, the Company could be
required to pay damages or penalties or have other remedies imposed, which could harm its business, financial condition,
results of operations and cash flows.
While the Company believes it has made appropriate judgments in determining the correct measurement dates for its
stock option grants, the SEC may disagree with the manner in which the Company has accounted for and reported, or not
reported, the financial effect. Accordingly, there is a risk the Company may have to further restate its prior financial
statements, amend prior filings with the SEC, or take other actions not currently contemplated.
The Company has received three Nasdaq Staff Determination letters stating that, as a result of the delayed filings,
the Company was not in compliance with the filing requirements for continued listing as set forth in Marketplace Rule
4310(c)(14) and was therefore subject to delisting from the Nasdaq Global Select Market. To date, the Nasdaq Listing
Qualifications Panel and the Nasdaq Listing Council have granted requests for continued listing, subject to the Company
filing delinquent reports by the dates specified by Nasdaq. With the filing of this report and the filing of our Annual
Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2007, the Company believes that it has remedied its non-compliance with Marketplace Rule
4310(c)(14). However, if the SEC disagrees with the manner in which the Company has accounted for and reported, or
not reported, the financial effect of past stock option grants, there could be further delays in filing subsequent SEC
reports that might result in delisting of the Company’s common stock from the Nasdaq Global Select Market.
Evaluation of internal control over financial reporting under the Sarbanes-Oxley Act of 2002 will continue to
affect our results. Complying with the requirements of the Sarbanes-Oxley Act of 2002, and Nasdaq’s conditions for
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continued listing have imposed significant legal and financial compliance costs, and are expected to continue to impose
significant costs and management burden on us.
Additionally, we cannot be sure that we will be able to successfully remediate the currently reported material
weakness in our system of internal control over financial reporting. Our efforts to comply with Section 404 of the
Sarbanes-Oxley Act and the related regulations regarding our required assessment of our internal control over financial
reporting and our external auditors’ audit of the assessment of our internal control over financial reporting continues to
require the commitment of significant financial and managerial resources.
There are risks associated with international operations that are different than those inherent in the U.S. and our
exposure to the risks of a global market could hinder our ability to maintain and expand international operations.
We have operation centers in Australia, Canada, Germany, France, the U.S., and the United Kingdom, as well as sales
offices in Australia, Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, Italy, the Netherlands,
Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the U.S., and sales presence in Austria,
Ireland, New Zealand and Russia. In the regions in which we do not currently have a physical presence, such as Africa,
Japan and India, we serve our clients through strategic relationships. In implementing our international strategy, we may
face barriers to entry and competition from local companies and other companies that already have established global
businesses, as well as the risks generally associated with conducting business internationally. The success and
profitability of international operations are subject to numerous risks and uncertainties, many of which are outside of our
control, such as:
political or economic instability;
changes in governmental regulation;
changes in import/export duties;
trade restrictions;
difficulties and costs of staffing and managing operations in certain foreign countries;
•
•
•
•
•
• work stoppages or other changes in labor conditions;
•
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taxes and other restrictions on repatriating foreign profits back to the U.S.;
payment terms; and
seasonal reductions in business activity in some parts of the world.
In addition, until a payment history is established with clients in a new region, the likelihood of collecting
receivables generated by such operations, on a timely basis or at all, could be less than expected. As a result, there is a
greater risk that reserves established with respect to the collection of such receivables may be inadequate. Furthermore,
changes in policies and/or laws of the U.S. or foreign governments resulting in, among other things, higher taxation,
currency conversion limitations or the expropriation of private enterprises could reduce the anticipated benefits of their
international operations. Any actions by countries in which we conduct business to reverse policies that encourage
foreign trade could have a material adverse effect on our results of operations and financial condition.
The acquisition of Software Spectrum utilized the majority of our cash balances, increased our outstanding debt
and interest expense and lowered the availability on our financing facilities, all of which could have a material
adverse effect on our results of operations and financial condition. Our financing facilities include a $225.0 million
accounts receivable securitization financing facility, a $75.0 million revolving line of credit and a $75.0 million five-year
term loan. As of December 31, 2006, we had $254.3 million outstanding under these facilities and approximately $144.8
million, including $37.5 million of increased availability upon our request, was available. The availability under the
accounts receivable securitization facility is subject to formulas based on our eligible trade accounts receivable. The
accounts receivable securitization financing facility expires in September 2009, and the revolving credit facility expires
in September 2011. Additionally, most of our financing facilities have variable interest rates, which increases our
exposure to interest rate fluctuations and may result in greater interest expense than we have forecasted.
International operations expose us to currency exchange risk and we cannot predict the effect of future
exchange rate fluctuations on our business and operating results. International operations are sensitive to currency
exchange risks. We have currency exposure arising from both sales and purchases denominated in foreign currencies.
Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating margins.
For example, if these foreign currencies appreciate against the U.S. dollar, it will become more expensive in U.S. dollars
to pay expenses with foreign currencies. In addition, currency devaluation against the U.S. dollar can result in a loss to
us if we hold deposits of that currency. We currently do not conduct any hedging activities, and, to the extent that we
continue not to do so in the future, we may be vulnerable to the effects of currency exchange-rate fluctuations. In
addition, some currencies are subject to limitations on conversion into other currencies, which can limit the ability to
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otherwise react to rapid foreign currency devaluations. We cannot predict the effect of future exchange-rate fluctuations
on business and operating results and significant rate fluctuations could have a material adverse effect on results of
operations and financial condition.
International operations also expose us to currency fluctuations as we translate the financial statements of our
foreign operations to U. S. dollars. Although the effect of currency fluctuations on our financial statements has not
generally been material in the past, there can be no guarantee that the effect of currency fluctuations will not be material
in the future.
Sales of software licenses are subject to seasonal changes in demand and resulting sales activities. With the
acquisition of Software Spectrum, our product mix changed significantly. Prior to the acquisition of Software Spectrum,
software sales represented approximately 12% of net sales. After the acquisition of Software Spectrum, software sales
represent approximately 35% to 40% of annual net sales. Our software business is subject to seasonal change. In
particular, software sales are seasonally much higher in our second and fourth quarter. As a result, our quarterly results
will be materially affected by lower demand in the first and third quarter. A majority of our costs are not variable and
therefore a substantial reduction in sales during a quarter could have a negative effect on operating results. In addition,
periods of higher sales activities during certain quarters may require a greater use of working capital to fund the business.
During these periods, these increased working capital requirements could temporarily increase our leverage and liquidity
needs and expose us to greater financial risk during those periods. Due to these seasonal changes, the operating results
for any three-month period will not necessarily be indicative of the results that may be achieved for any subsequent fiscal
quarter or for a full fiscal year.
We depend on certain key personnel. Our future success will be largely dependent on the efforts of key
management personnel. The loss of one or more of these new leaders could have a material adverse effect on our
business, results of operations and financial condition. We cannot offer assurance that we will be able to continue to
attract or retain highly qualified executive personnel or that any such executive personnel will be able to increase
stockholder value. We also believe that our future success will be largely dependent on our continued ability to attract
and retain highly qualified management, sales, service and technical personnel. We cannot offer assurance that we will
be able to attract and retain such personnel. Further, we make a significant investment in the training of our sales
account executives. Our inability to retain such personnel or to train them either rapidly enough to meet our expanding
needs or in an effective manner for quickly changing market conditions could cause a decrease in the overall quality and
efficiency of our sales staff, which could have a material adverse effect on our business, results of operations and
financial condition.
If purchased goodwill or amortizable intangible assets become impaired, we may be required to record a
significant charge to earnings. The purchase price allocation for the acquisition of Software Spectrum resulted in a
material amount allocated to goodwill and amortizable intangible assets. In accordance with GAAP, we review our
amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may
not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a
change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be
recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower
growth rates in our industry. We may be required to record a significant non-cash charge to earnings in our consolidated
financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is
determined, resulting in a negative effect on our results of operations.
The failure to comply with the terms and conditions of our public sector contracts could result in, among other
things, fines or other liabilities. Net sales to public sector clients are derived from sales to federal, state and local
governmental departments and agencies, as well as to educational institutions, through open market sales and various
contracts. Government contracting is a highly regulated area. Noncompliance with government procurement regulations
or contract provisions could result in civil, criminal, and administrative liability, including substantial monetary fines or
damages, termination of government contracts, and suspension, debarment or ineligibility from doing business with the
government. In addition, substantially all of our contracts in the public sector are terminable at any time for convenience
of the contracting agency or upon default. The effect of any of these possible actions by any governmental department
or agency or the adoption of new or modified procurement regulations or practices could materially adversely affect our
business, financial position and results of operations.
We have very limited experience in outsourcing business functions to India. Early in 2006, Software Spectrum
entered into a business solutions partner agreement to outsource certain business processes, such as credit and
collections, accounts payable and other administrative and back-office positions, to a third-party provider with operations
in India. If we continue or expand this outsourcing of certain business functions to India, we could be required to change
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our existing operations and to adopt new policies and procedures for managing the third-party provider. We have very
limited experience in outsourcing business functions to India, and there is no assurance that we will be successful in
achieving meaningful cost reductions or greater resource efficiency from utilizing this third-party provider. The
outsourcing of business functions to India may also cause disruption in our business that could have a material adverse
effect on our results of operations and financial condition.
Rapid changes in product standards may result in substantial inventory obsolescence. The IT industry is
characterized by rapid technological change and the frequent introduction of new products and product enhancements,
both of which can decrease demand for current products or render them obsolete. In addition, in order to satisfy client
demand, protect ourselves against product shortages, obtain greater purchasing discounts and react to changes in original
equipment manufacturers’ terms and conditions, we may decide to carry relatively high inventory levels of certain
products that may have limited or no return privileges. There can be no assurance that we will be able to avoid losses
related to inventory obsolescence on these products.
We may not be able to protect out intellectual property adequately, and we may be subject to intellectual property
infringement claims. To protect our intellectual property, we rely on copyright and trademark laws, unpatented
proprietary know-how, and trade secrets and patents, as well as confidentiality, invention assignment, non-competition
and non-solicitation agreements. There can be no assurance that these measures will afford us sufficient protection of
our intellectual property, and it is possible that third parties may copy or otherwise obtain and use our proprietary
information without authorization or otherwise infringe on our intellectual property rights. The disclosure of our trade
secrets could impair our competitive position and could have a material adverse effect on our business relationships,
results of operations, financial condition and future growth prospects. Likewise, many businesses are actively investing
in, developing and seeking protection for intellectual property in the areas of search, indexing, e-commerce and other
Web-related technologies, as well as a variety of on-line business models and methods, all of which are in addition to
traditional research and development efforts for IT products and application software. As a result, disputes regarding the
ownership of these technologies are likely to arise in the future, and, from time to time, parties do assert various
infringement claims against us in the form of cease-and-desist letters, lawsuits and other communications. If there is a
determination that we have infringed the proprietary rights of others, we could incur substantial monetary liability, be
forced to stop selling infringing products or providing infringing services, be required to enter into costly royalty or
licensing agreements, if available, or be prevented from using the rights, which could force us to change our business
practices in the future. As a result, these types of claims could have a material adverse effect on our business, results of
operations and financial condition.
We issue equity-based awards, such as restricted stock units, under our long-term incentive plans, and these
issuances dilute the interests of stockholders. We have reserved shares of our common stock for issuance under our
1998 Ling-Term Incentive Plan (the “1998 LTIP”) and our 1999 Broad Based Employee Stock Option Plan (the “1999
Broad Based Plan”). As approved by our stockholders, our 1998 LTIP provides that additional shares of common stock
may be reserved for issuance based on a formula contained in that plan. The formula provides that the total number of
shares of common stock remaining for grant under the 1998 LTIP and any of our other option plans, plus the number of
shares subject to unexercised options and unvested grants of restricted stock granted under any plan, shall not exceed
20% of the outstanding shares of our common stock at the time of calculation of the additional shares. Therefore, we
reserve additional shares on an ongoing basis for issuance under this plan. At December 31, 2006, we had options
outstanding to acquire 5,283,463 shares of common stock and there were 73,332 shares of restricted common stock and
687,199 restricted common stock units unreleased. Based on the 1998 LTIP formula, we had 3,729,617 shares of
common stock available for grant at December 31, 2006.
When stock options with an exercise price lower than the current market price are exercised, the risk increases that
our stockholders will experience dilution of earnings per share due to the increased number of shares outstanding. Also,
the terms upon which we will be able to obtain equity capital may be affected, because the holders of outstanding options
can be expected to exercise them at a time when we would, in all likelihood, be able to obtain needed capital on terms
more favorable to us than those provided in outstanding options.
Some anti-takeover provisions contained in our certificate of incorporation, bylaws and stockholders rights
agreement, as well as provisions of Delaware law and executive employment contracts, could impair a takeover
attempt. We have provisions in our certificate of incorporation and bylaws which could have the effect (separately, or in
combination) of rendering more difficult or discouraging an acquisition deemed undesirable by our Board of Directors.
These include provisions:
•
authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other
rights superior to our common stock;
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INSIGHT ENTERPRISES, INC.
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•
•
•
•
limiting the liability of, and providing indemnification to, directors and officers;
limiting the ability of our stockholders to call special meetings;
requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders
and for nominations of candidates for election to our Board of Directors;
controlling the procedures for conduct of Board and stockholder meetings and election and removal of
directors; and
specifying that stockholders may take action only at a duly called annual or special meeting of stockholders.
These provisions, alone or together, could deter or delay hostile takeovers, proxy contests and changes in control or
management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of
the Delaware General Corporation Law, which prevents some stockholders from engaging in certain business
combinations without approval of the holders of substantially all of our outstanding common stock.
On December 14, 1998, each stockholder of record received one Preferred Share Purchase Right (“Right”) for each
outstanding share of common stock owned. Each Right entitles stockholders to buy .00148 of a share of our Series A
Preferred Stock at an exercise price of $88.88. The Rights will be exercisable if a person or group acquires 15% or more
of our common stock or announces a tender offer for 15% or more of the common stock. However, should this occur,
the Right will entitle its holder to purchase, at the Right’s exercise price, a number of shares of common stock having a
market value at the time of twice the Right’s exercise price. Rights held by the 15% holder will become void and will
not be exercisable to purchase shares at the bargain purchase price. If we are acquired in a merger or other business
combination transaction after a person acquires 15% or more of the our common stock, each Right will entitle its holder
to purchase at the Right’s then current exercise price a number of the acquiring company’s common shares having a
market value at the time of twice the Right’s exercise price.
Additionally, we have employment agreements with certain officers and management teammates under which
severance payments would become payable in the event of specified terminations without cause or terminations under
certain circumstances after a change in control. If such persons were terminated without cause or under certain
circumstances after a change of control, and the severance payments under the current employment agreements were to
become payable, the severance payments would generally be equal to either one or two times the persons’ annual salary
and bonus.
Any provision of our certificate of incorporation, bylaws or employment agreements, or Delaware law that has the
effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium
for their shares of our common stock and also could affect the price that some investors are willing to pay for our
common stock.
Sales of additional common stock and securities convertible into our common stock may dilute the voting power
of current holders. We may issue equity securities in the future whose terms and rights are superior to those of our
common stock. Our certificate of incorporation authorizes the issuance of up to 3,000,000 shares of preferred stock.
These are “blank check” preferred shares, meaning our Board of Directors is authorized, from time to time, to issue the
shares and designate their voting, conversion and other rights, including rights superior, or preferential, to rights of
already outstanding shares, all without stockholder consent. No preferred shares are outstanding, and we currently do
not intend to issue any shares of preferred stock. Any shares of preferred stock that may be issued in the future could be
given voting and conversion rights that could dilute the voting power and equity of existing holders of shares of common
stock and have preferences over shares of common stock with respect to dividends and liquidation rights.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive offices are located at 1305 West Auto Drive, Tempe, Arizona 85284. We conduct sales,
distribution, services, and administrative activities in owned and leased facilities, and some of our face-to-face field
account executives conduct business from home offices. We have renewal rights in most of our property leases, and we
anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities
on acceptable terms. We believe that our facilities will be suitable and adequate for our present purposes, and that the
capacity in the majority of our facilities is not fully utilized. In the future, we may need to purchase, build or lease
additional facilities to meet the requirements projected in our long-term business plan. If we decide to exit the current
leases, we may have to continue to make payments under the current leases or pay penalties to cancel the leases.
28
INSIGHT ENTERPRISES, INC.
Information about significant sales, distribution, services and administration facilities in use as of December 31,
2006 is summarized in the following table:
Operating Segment Location
Headquarters
Tempe, Arizona, USA
Primary Activities
Executive Offices
Own or Lease
Own
North America
EMEA
APAC
Tempe, Arizona, USA
Tempe, Arizona, USA
Bloomingdale, Illinois, USA
Hanover Park, Illinois, USA
Plano, Texas, USA
Liberty Lake, Washington, USA
Winnipeg, Manitoba, Canada
Montreal, Quebec, Canada
Mississauga, Ontario, Canada
Montreal, Quebec, Canada
Sheffield, United Kingdom
Sheffield, United Kingdom
Uxbridge, United Kingdom
Munich, Germany
Paris, France
Appledorn, Netherlands
Milan, Italy
Madrid, Spain
Stockholm, Sweden
Brussels, Belgium
Zurich, Switzerland
Sales and Administration
Administration
Sales and Administration
Services and Distribution
Sales and Administration
Sales and Administration
Sales and Administration
Sales and Administration
Sales and Administration
Distribution
Sales and Administration
Distribution
Sales and Administration
Sales and Administration
Sales and Administration
Sales
Sales
Sales
Sales
Sales
Sales
Sydney, New South Wales, Australia Sales and Administration
Melbourne, Victoria, Australia
Brisbane, Queensland, Australia
Perth, Western Australia, Australia
Pudong, Shanghai, China
Wan Chai, Hong Kong
Singapore
Sales
Sales
Sales
Sales
Sales
Sales
Own
Lease
Own
Lease
Lease
Lease
Lease
Own
Lease
Lease
Own
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
Lease
In addition to those listed above, North America has leased sales offices in various cities across the U.S., United
Kingdom and Canada. For additional information on operating leases, see Note 8 to the Consolidated Financial
Statements in Part II, Item 8 of this report. We own sales, administration and distribution facilities in Tempe, Arizona
that we currently lease to Direct Alliance, our discontinued operation. These properties are not included in the table
above. For additional information on our buildings held for lease, see Note 19 to the Consolidated Financial Statements
in Part II, Item 8 of this report. We also have leased facilities in the United Kingdom that are no longer in use due to the
integration of previous acquisitions. These properties are also not included in the table above.
Item 3. Legal Proceedings
We are party to various legal proceedings arising in the ordinary course of business, including asserted preference
payment claims in client bankruptcy proceedings, claims of alleged infringement of patents, trademarks, copyrights and
other intellectual property rights and claims of alleged non-compliance with contract provisions.
In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS No. 5”), 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 are adjusted to reflect the effects of negotiations,
settlements, rulings, advice of legal counsel and other information and events pertaining to a particular claim. 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. Legal expenses related to defense, negotiations,
settlements, rulings and advice of outside legal counsel are expensed as incurred.
29
INSIGHT ENTERPRISES, INC.
In June 2006, our subsidiary, Software Spectrum, Inc. was named as a defendant in a civil lawsuit, Allocco v.
Gardner (Superior Court, County of San Diego), regarding certain software resale transactions with Peregrine Systems,
Inc. The subsidiary was named as successor to Corporate Software & Technology, Inc. (“CS&T”) and alleges that
during October 2000 CS&T participated in or aided and abetted a fraudulent scheme by Peregrine to inflate Peregrine’s
stock price. Pursuant to the terms of the agreement by which we acquired Software Spectrum, Inc. from Level 3
Communications, Inc. (“Level 3”, the former corporate parent of Software Spectrum, Inc.), Level 3 has agreed to
indemnify, defend and hold us harmless for this matter. The discovery process is on-going, and we strongly dispute any
allegations of participation in fraudulent behavior. On our behalf, Level 3 is vigorously defending this matter.
In October 2006, we received a letter of informal inquiry from the SEC requesting certain documents relating to our
stock option grants and practices. We have cooperated with the SEC and will continue to do so. We cannot predict the
outcome of this investigation.
Software Spectrum, as successor to CST, is party to litigation brought in the Belgian courts regarding a dispute over
the terms of a tender awarded by the Belgian Ministry of Defence (“MOD”) in November 2000. In February 2001, CST
brought a breach of contract suit against MOD in the Court of First Instance in Brussels and claimed breach of contract
damages in the amount of approximately $150,000. MOD counterclaimed against CST for cost to cover in the amount
of approximately $2,700,000, and, in July 2002, CST added a Belgian subsidiary of Microsoft as a defendant. We
believe that MOD’s counterclaims are unfounded, and we are vigorously defending the claim.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during our 2006 fourth quarter.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market Information
Our common stock trades under the symbol “NSIT” on the Nasdaq Global Select Market. The following table
shows, for the calendar quarters indicated, the high and low closing price per share for our common stock as reported on
the Nasdaq Global Select Market.
Common Stock
Year 2006
Fourth Quarter ..................................................................
Third Quarter ....................................................................
Second Quarter .................................................................
First Quarter......................................................................
Year 2005
High Price
$22.69
20.96
22.46
22.14
Fourth Quarter ..................................................................
Third Quarter ....................................................................
Second Quarter .................................................................
First Quarter......................................................................
$21.60
21.19
20.47
20.36
Low Price
$18.59
16.22
17.78
19.79
$18.14
18.20
17.39
17.23
As of June 29, 2007, we had 49,100,749 shares of common stock outstanding held by approximately 109
stockholders of record. This figure does not include an estimate of the number of beneficial holders whose shares are
held of record by brokerage firms and clearing agencies.
We have never paid a cash dividend on our common stock, and our financing facilities prohibit the payment of cash
dividends without the lenders’ consent. We intend to retain all of our earnings for use in our business and currently do
not intend to pay any cash dividends in the foreseeable future.
30
INSIGHT ENTERPRISES, INC.
Securities Authorized For Issuance under Equity Compensation Plans
The following table gives information about our common stock that may be issued upon the exercise of options
under all of our existing equity compensation plans of December 31, 2006:
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options
Weighted
Average
Exercise Price
of
Outstanding
Options
Number of Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
(Excluding Securities
Reflected in
Column (a))
Plan Category
Equity compensation plans approved by
(a)
(b)
(c)
security holders..................................
5,109,352
$19.33
3,729,617
Equity compensation plans not approved by
security holders..................................
174,111 (1)
$21.77
-
Total
5,283,463
$19.41
3,729,617
Restricted equity compensation plans not
approved by security holders (2) .........
—
—
434,907
(1) Consists of options that are outstanding under our 1999 Broad Based Plan which was not approved by our stockholders. In
September 1999, we established the 1999 Broad Based Plan for our employees. The total number of stock options initially
available for grant under the 1999 Broad Based Plan was 1,500,000; provided, however, that no more than 20% of the shares of
stock available under the 1999 Broad Based Plan may be awarded to the Officers. Stock options available for grant under the
1999 Broad Based Plan are included in the total shares of common stock available to grant for awards under the 1998 Plan or 1999
Broad Based Plan discussed above. See further description of the plans in Note 3 to our Financial Statements in Part II, Item 8 of
this report.
(2)
Includes restricted shares available for grant under the 1998 Employee Restricted Stock Plan and the 1998 Officer Restricted
Stock Plan. See further description of the plans in Note 3 to our Financial Statements in Part II, Item 8 of this report.
Issuer Purchases of Equity Securities
Total number of
shares
purchased
Average price
paid per share
Total number of shares
purchased as part of
publicly announced
plans or programs
Approximate dollar value of
shares that may yet be
purchased under the
plans or programs(1)
- $
-
-
- $
-
-
-
-
$
-
-
-
-
50,000,000
50,000,000
50,000,000
Period
October 1-31, 2006........................
November 1-30, 2006....................
December 1-31, 2006 ....................
Total ..............................................
(1) On January 26, 2006, we announced that our Board of Directors had authorized the repurchase of up to $50,000,000 of our
common stock. We have made no repurchases under this program since the inception of the program.
31
INSIGHT ENTERPRISES, INC.
Stock Price Performance Graph
Set forth below is a graph comparing the percentage change in the cumulative total stockholder return on our
common stock with the cumulative total return of the Nasdaq Stock Market U.S. Companies (Market Index), the
Nasdaq Retail Trade Stocks for the period starting January 1, 2002 and ending December 31, 2006. The graph
assumes that $100 was invested on January 1, 2002 in our common stock and in each of the two Nasdaq indices, and
that, as to such indices, dividends were reinvested. We have not, since our inception, paid any cash dividends on our
common stock. Historical stock price performance shown on the graph is not necessarily indicative of future price
performance.
$ 1 8 0
$ 1 8 0
$ 1 6 0
$ 1 6 0
$ 1 4 0
$ 1 4 0
$ 1 2 0
$ 1 2 0
$ 1 0 0
$ 1 0 0
$ 8 0
$ 8 0
$ 6 0
$ 6 0
$ 4 0
$ 4 0
$ 2 0
$ 2 0
$ 0
$ 0
N S I T
N S I T
M a r k e t I n d e x
M a r k e t I n d e x
P e e r I n d e x
P e e r I n d e x
J a n . 1 ,
J a n . 1 ,
2 0 0 2
2 0 0 2
D e c . 3 1 ,
D e c . 3 1 ,
2 0 0 2
2 0 0 2
D e c . 3 1 ,
D e c . 3 1 ,
2 0 0 3
2 0 0 3
D e c . 3 1 ,
D e c . 3 1 ,
2 0 0 4
2 0 0 4
D e c . 3 1 ,
D e c . 3 1 ,
2 0 0 5
2 0 0 5
D e c . 3 1 ,
D e c . 3 1 ,
2 0 0 6
2 0 0 6
Insight Enterprises, Inc.
Common Stock (NSIT)
Nasdaq Stock Market U.S.
Companies (Market Index)
Nasdaq Retail Trade Stocks
(Peer Index)
Jan. 1,
2002
Dec. 31,
2002
Dec. 31,
2003
Dec. 31,
2004
Dec. 31,
2005
Dec. 31,
2006
$ 100.00
34.17
77.30
84.38
80.63
77.59
$ 100.00
68.12
101.85
110.84
113.20
124.37
$ 100.00
85.94
119.66
151.78
153.22
167.33
32
INSIGHT ENTERPRISES, INC.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with our Consolidated Financial
Statements and the Notes thereto in Part II, Item 8 and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in Part II, Item 7 of this report. The information presented in following tables has been
adjusted to reflect the restatement of our consolidated financial results which is more fully described in the “Explanatory
Note Regarding Restatement of our Consolidated Financial Statements” immediately preceding Part I of this Form 10-K
and in Note 2 “Restatement of Consolidated Financial Statements” in the notes to the consolidated financial statements.
We derived the selected consolidated financial data as of December 31, 2006 and 2005 and for the years ended
December 31, 2006, 2005 and 2004 from our audited consolidated financial statements, and accompanying notes,
included in Part II, Item 8 of this report. The consolidated statements of operations data for the years ended December
31, 2005 and 2004 and the consolidated balance sheet data as of December 31, 2005 have been restated in connection
with the restatements discussed in Note 2 of the notes to the consolidated financial statements. The consolidated
statement of operations data for the years ended December 31, 2003 and 2002 and the consolidated balance sheet data as
of December 31, 2004, 2003 and 2002 have been restated below as discussed in footnote 2.
We have not amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for
the periods affected by the restatement. The financial information that has been previously filed or otherwise reported
for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and
related financial information contained in those previously filed reports should no longer be relied upon.
2006
Years Ended December 31,
2004
2003
2005
As Restated As Restated As Restated
As Restated
(2)
(1)
(1)
(in thousands, except per share data)
2002
(2)
Consolidated Statements of Operations Data (3)
Net sales.......................................................................... $ 3,817,085
3,338,022
Costs of goods sold.........................................................
479,063
Gross profit ...............................................................
Operating expenses:
Selling and administrative expenses .............................
Severance and restructuring expenses...........................
Reductions in liabilities assumed in a previous
acquisition...................................................................
Goodwill impairment(4).................................................
Earnings (loss) from operations ................................
Non-operating (income) expense:
Interest income..............................................................
Interest expense ............................................................
Net foreign currency exchange (gain) loss....................
Other expense, net ........................................................
Earnings (loss) from continuing operations
before income taxes ..................................................
Income tax expense.........................................................
Earnings (loss) from continuing operations ..............
Earnings from discontinued operations, net of taxes (5)
Net earnings before cumulative effect of change in
374,523
729
-
-
103,811
(4,355)
6,793
(1,135)
901
101,607
35,899
65,708
11,110
$ 3,183,707
2,809,167
374,540
$ 3,008,604
2,657,406
351,198
$ 2,809,790
2,491,673
318,117
$ 2,779,969
2,472,733
307,236
284,682
11,962
280,290
2,435
278,282
3,465
259,283
1,500
(664)
-
78,560
(3,394)
1,914
72
782
79,186
31,143
48,043
6,617
(3,617)
-
72,090
(1,849)
2,011
262
1,190
70,476
19,617
50,859
29,598
(2,504)
-
38,874
(833)
2,608
398
1,680
35,021
11,493
23,528
11,597
-
91,587
(45,134)
(381)
3,569
67
1,099
(49,488)
13,961
(63,449)
8,941
accounting principle....................................................
76,818
54,660
80,457
35,125
(54,508)
Cumulative effect of change in accounting
principle, net of taxes of $330 in 2005..........................
Net earnings (loss) .......................................................... $
-
76,818
$
(649)
54,011
-
80,457
$
-
35,125
-
(54,508)
$
$
33
INSIGHT ENTERPRISES, INC.
2006
Years Ended December 31,
2004
2003
2005
As Restated As Restated As Restated
As Restated
(2)
(1)
(1)
(in thousands, except per share data)
2002
(2)
Net earnings (loss) per share - Basic:
Net earnings (loss) from continuing operations ........ $
Net earnings from discontinued operations .................
Cumulative effect of change in accounting principle
Net earnings (loss) per share..................................... $
Net earnings (loss) per share - Diluted:
Net earnings (loss) from continuing operations ........ $
Net earnings from discontinued operations .................
Cumulative effect of change in accounting principle
Net earnings (loss) per share..................................... $
Shares used in per share calculations:
Basic .........................................................................
Diluted ......................................................................
1.36
0.23
-
1.59
1.35
0.23
-
1.58
$
$
$
$
0.99
0.13
(0.01)
1.11
0.98
0.13
(0.01)
1.10
$
$
$
$
1.05
0.61
-
1.66
1.03
0.60
-
1.63
$
$
$
$
0.51
0.25
-
0.76
0.50
0.25
-
0.75
$
$
$
$
(1.42)
0.20
-
(1.22)
(1.42)
0.20
-
(1.22)
48,373
48,564
48,553
49,057
48,389
49,220
46,315
46,581
44,808
44,808
2006
2005
As Restated
(1)
2003
As Restated As Restated As Restated
(2)
2002
(2)
December 31,
2004
(2)
(in thousands)
Consolidated Balance Sheet Data
Working capital .............................................................. $ 407,898
1,774,151
Total assets .....................................................................
30,000
Short-term debt ...............................................................
224,250
Long-term debt ..............................................................
690,350
Stockholders’ equity .......................................................
-
Cash dividends declared per common share ...................
$ 367,184
922,340
66,309
-
569,913
-
$ 370,873
887,641
25,000
-
565,517
-
$ 230,193
792,124
65,004
-
448,245
-
$ 181,331
773,731
94,592
13,146
385,497
-
(1) See the explanatory note in the front of this Form 10-K, “Restatement of Consolidated Financial Statements” in Part II, Item 7 and
Note 2 to the Consolidated Financial Statements in Part II, Item 8 of this report.
(2) The selected consolidated financial data as of December 31, 2004, 2003 and 2002 and for the years ended December 31, 2003 and
2002 have been adjusted to reflect the restatements described in Note 2, “Restatement of Consolidated Financial Statements,” to the
Consolidated Financial Statements in Part II, Item 8 of this report.
(3) Our consolidated statements of operations data above include results of acquisitions from their respective acquisition dates. See
further discussion in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
(4) Goodwill Impairment. Based on results of our 2002 annual goodwill impairment assessment, we recorded a non-cash goodwill
impairment charge of $91.6 million, which represented the entire goodwill balance recorded at Insight UK.
(5) Earnings from Discontinued Operations. During the year ended December 31, 2006, we sold Direct Alliance, a business process
outsourcing provider in the U.S. During the year ended December 31, 2004, we sold our 95% ownership in PlusNet, an Internet
service provider in the United Kingdom. Accordingly, we have accounted for both entities as discontinued operations and have
reported their results of operations as discontinued operations in the consolidated statements of earnings. Included in earnings from
discontinued operations for the years ended December 31, 2006 and 2004 are the gain on the sale of Direct Alliance of $14.9
million, $9.0 million, net of taxes, and the gain on the sale of PlusNet of $23.7 million, $18.3 million net of taxes, respectively.
34
3,465
(2,504)
38,874
(833)
2,608
398
1,680
35,021
11,493
INSIGHT ENTERPRISES, INC.
The tables below reflect the effect of the restatement adjustments on our 2003 and 2002 Statements of Earnings (in
thousands, except per share data):
Year Ended December 31, 2003
Net sales............................................... $ 2,886,047 $
Costs of goods sold.............................. 2,546,586
Gross profit ................................... 339,461
(76,257) $
(54,913)
(21,344)
Adjustments
-
-
As Restated
$ 2,809,790
2,491,673
318,117
As Reported
Discontinued
Operations(B)
279,539
(4,911)
3,654(A)
278,282
Operating expenses:
Selling and administrative expenses.
Severance and restructuring
expenses .........................................
Reductions in liabilities assumed in
a previous acquisition .....................
Earnings from operations..............
Non-operating (income) expense:
Interest income
Interest expense
Net foreign currency exchange loss
Other expense, net
3,465
(2,504)
58,961
-
-
-
-
(16,433)
(3,654)
(833)
2,608
398
2,074
-
-
-
(394)
-
-
-
-
Earnings from continuing
operations before income taxes...
54,714
Income tax expense ............................. 18,952
(16,039)
(5,880)
(3,654)
(1,579)
Net earnings from continuing
operations...................................
Net earnings from
discontinued operation...............
Net earnings .................................. $ 37,754 $
35,762
1,992
(10,159)
(2,075)
23,528
10,159
-
$
(554)
(2,629)
$
11,597
35,125
Net earnings per share - Basic:
Net earnings from continuing
operations .................................. $
Net earnings from discontinued
operation....................................
Net earnings per share .................. $
Net earnings per share - Diluted:
Net earnings from continuing
operations ................................... $
Net earnings from discontinued
operation .....................................
Net earnings per share .................. $
Shares used in per share calculations:
0.77 $
(0.22) $
(0.04)
$
0.51
0.05
0.82 $
0.22
-
$
(0.02)
(0.06)
$
0.25
0.76
0.76 $
(0.22) $
(0.04)
$
0.50
0.05
0.81 $
0.22
-
$
(0.02)
(0.06)
$
0.25
0.75
Basic
Diluted
46,315
46,885
-
-
-
(304)
46,315
46,581
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax
benefit.
(B) Adjustment to reclassify the operations of Direct Alliance to discontinued operations as described in Note 11.
35
INSIGHT ENTERPRISES, INC.
Year Ended December 31, 2002
Net sales............................................... $ 2,875,895 $
Costs of goods sold.............................. 2,547,486
Gross profit ................................... 328,409
As Reported
Discontinued
Operations(B) Adjustments
-
-
(95,926) $
(74,753)
(21,173)
As Restated
$ 2,779,969
2,472,733
307,236
250,394
(3,928)
12,817(A)
259,283
Operating expenses:
Selling and administrative expenses.
Severance and restructuring
expenses .........................................
Goodwill impairment .......................
Loss from operations ....................
Non-operating (income) expense:
Interest income
Interest expense
Net foreign currency exchange loss
Other expense, net
1,500
91,587
(15,072)
(381)
3,569
67
1,337
-
-
(17,245)
-
-
-
(238)
-
-
(12,817)
-
-
-
-
1,500
91,587
(45,134)
(381)
3,569
67
1,099
(49,488)
13,961
Loss from continuing
operations before income taxes...
(19,664)
Income tax expense ............................. 24,451
(17,007)
(6,159)
(12,817)
(4,331)
Net loss from continuing
operations...................................
Net earnings from
discontinued operation...............
Net (loss) earnings ........................ $ (42,840) $
(44,115)
1,275
(10,848)
(8,486)
(63,449)
10,848
-
(3,182)
(11,668)
$
8,941
(54,508)
$
Net loss per share - Basic:
Net earnings from continuing
operations .................................. $
Net earnings from discontinued
operation....................................
Net earnings per share .................. $
Net loss per share - Diluted:
Net earnings from continuing
operations ................................... $
Net earnings from discontinued
operation .....................................
Net earnings per share .................. $
Shares used in per share calculations:
(0.98) $
(0.24) $
(0.19)
$
(1.42)
0.02
(0.96) $
0.24
-
$
(0.07)
(0.26)
$
0.20
(1.22)
(0.98) $
(0.24) $
(0.19)
$
(1.42)
0.02
(0.96) $
0.24
-
$
(0.07)
(0.26)
0.20
(1.22)
$
Basic
Diluted
44,808
44,808
-
-
-
-
44,808
44,808
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax
benefit.
(B) Adjustment to reclassify the operations of Direct Alliance to discontinued operations as described in Note 11.
36
The table below reflects the effect of the restatement adjustments on our 2004, 2003 and 2002 balance sheet data (in
thousands):
INSIGHT ENTERPRISES, INC.
December 31, 2004
December 31, 2003
As Reported Adjustments
As Restated
As Reported Adjustments
As Restated
Consolidated Balance Sheet Data
$
Working capital ............................. $ 371,267
Total assets .................................... 887,641
25,000
Short-term debt ..............................
Long-term debt .............................
-
Stockholders’ equity ...................... 559,559
Cash dividends declared per
common share..............................
-
(394)(A) $ 370,873
887,641
25,000
-
565,517
-
-
-
5,958(A)
$
230,294 $
792,124
65,004
-
439,369
(101)(A) $ 230,193
792,124
65,004
-
8,876(A) 448,245
-
-
-
-
-
-
-
-
December 31, 2002
As Reported Adjustments
As Restated
Consolidated Balance Sheet Data
$
Working capital ............................. $ 181,331
Total assets .................................... 773,731
94,592
Short-term debt ..............................
13,146
Long-term debt .............................
Stockholders’ equity ...................... 375,291
Cash dividends declared per
common share..............................
-
-
-
-
-
10,206(A)
$
181,331
773,731
94,592
13,146
385,497
-
-
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax benefit.
37
INSIGHT ENTERPRISES, INC.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of our operations, which gives effect to the
restatement discussed in Note 2 to the Consolidated Financial Statements, should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in Item 8 of this report. Our actual results could differ
materially from those contained in these forward-looking statements due to a number of factors, including those discussed in
“Risk Factors” in Part 1, Item 1A and elsewhere in this report.
Restatement of Consolidated Financial Statements
Background
We announced on October 19, 2006 that the Company’s Board of Directors had appointed an Options Subcommittee,
comprised of independent directors, to conduct a review of the Company’s stock options. Certain present and former
directors and executive officers of the Company were named as defendants in a derivative lawsuit related to stock option
practices from 1997 to 2002, filed in Superior Court, County of Maricopa, Arizona on September 21, 2006. The Company
had been named as a nominal defendant in that action. On December 22, 2006, we filed a motion to dismiss the complaint
based on plaintiff’s failure to make a pre-suit demand on the Company’s Board of Directors. Before the opposition to the
motion was due, the plaintiff voluntarily asked the Court to dismiss the lawsuit, and, on January 19, 2007, the Court granted
the plaintiff’s motion to voluntarily dismiss the lawsuit without prejudice. In addition, we announced on November 6, 2006
that on October 27, 2006, the Company received an informal inquiry from the SEC requesting certain documents and
information relating to the Company’s stock option granting practices from January 1, 1996 to the present.
The Options Subcommittee was assisted by independent legal counsel and independent forensic accounting consultants.
At the conclusion of its review, the Options Subcommittee reported its findings to the Company’s Board of Directors and to
KPMG LLP, the Company’s independent registered public accounting firm, on March 9, 2007 and March 13, 2007,
respectively. Management, assisted by its own independent legal counsel and independent forensic consultants, then
undertook an analysis of the results of the Options Subcommittee’s review, as well as all stock option activity during the
period after the Company’s initial public offering on January 24, 1995 through November 30, 2005, the last date on which we
granted stock options (the “Relevant Period”).
In a Form 8-K filed on April 5, 2007, we reported that based on the findings of the Options Subcommittee and the
conclusions reached to date by management in its analysis, our previously issued financial statements would require
restatement and should no longer be relied upon.
We determined, based upon the Options Subcommittee’s review and the Company’s analysis, that for accounting
purposes, the dates initially used to measure compensation expense for various stock option grants to employees, executive
officers and outside non-employee directors during the period could not be relied upon. The revised measurement dates
identified for accounting purposes differed from the originally selected measurement dates due primarily to (i) insufficient or
incomplete approvals, (ii) inadequate or incomplete establishment of the terms of the grants, including the list of individual
recipients, and (iii) the use of hindsight to select exercise prices. The restated consolidated financial statements included in
this Annual Report on Form 10-K reflect the corrections resulting from our determination.
We have incurred substantial expenses related to the Options Subcommittee’s review and the Company’s analysis. We
have incurred approximately $11.8 million in costs for legal fees, external audit firm fees and external consulting fees
through June 30, 2007 and anticipate approximately $3 million in additional fees will be incurred through August 2007 in the
completion of financial statement restatement and related matters.
In addition to the restatements for stock-based compensation, we recorded an adjustment for $1.0 million to record a
legal settlement expense that was recorded in the first quarter of 2006, which should have been recorded in the fourth quarter
of 2005. The tax effect of this adjustment was $0.4 million.
38
INSIGHT ENTERPRISES, INC.
Restatement Adjustments
Our restated consolidated financial statements contained in this Form 10-K incorporate stock-based compensation
expense, including the income tax impacts related to the restatement adjustments. The restatement adjustments result in a
$30.9 million reduction of retained earnings as of December 31, 2006. This amount includes reductions in our consolidated
net earnings of approximately $0.1 million for each of the years ended December 31, 2005 and 2004. The total restatement
impact for the years ended December 31, 1995 through December 31, 2001, of $16.4 million, net of related tax benefits of
$8.4 million, has been reflected as a prior period adjustment to beginning retained earnings as of January 1, 2002.
The total unamortized pre-tax stock-based compensation was less than $0.1 million at December 31, 2006.
In addition to the restatements for stock-based compensation, we recorded a pre-tax adjustment for $1.0 million to record
a legal settlement expense that was recorded in the first quarter of 2006, which should have been recorded in the fourth
quarter of 2005. The tax effect of this adjustment was $0.4 million.
The tables below present the decrease (increase) in net earnings resulting from the individual restatement adjustments for
each respective period presented and are explained in further detail following the table (in thousands):
Six Months
Ended
June 30, 2006
2005
2004
Year Ended
2003
2002
2001
2000
Stock option compensation from
continuing operations:
Discretionary Grants ....................... $
Anniversary Grants .........................
Promotion Grants............................
New Hire Grants .............................
Program Grants...............................
Total stock compensation expense
from continuing operations .........
Other miscellaneous accounting
adjustments:
Adjustment to record legal
settlement in appropriate period....
Total other miscellaneous
accounting adjustments ...............
Total adjustments to earnings
from continuing operations
before income taxes ....................
Income tax (expense) benefit ........
Total adjustments to earnings
from continuing operations ........
Total stock option compensation
expense from discontinued
operations ...................................
Income tax benefit ........................
Total adjustments to earnings
from discontinued operations,
net of taxes .................................
Total adjustments to net earnings
before cumulative effect of
change in accounting principle ..
Total adjustments to cumulative
effect of change in accounting
principle .....................................
$
-
-
-
-
-
-
$
42
-
2
7
-
51
196 $
13
5
19
1
3,510 $ 11,716
929
105
39
28
127
24
(15)
8
$ 4,190 $
1,591
186
14
89
5,830
1,432
111
48
23
234
3,654
12,817
6,070
7,444
(1,000)
1,000
(1,000)
1,000
-
-
-
-
-
-
-
-
-
-
(1,000)
(390)
1,051
392
234
196
3,654 12,817
1,579 4,331
6,070
2,009
7,444
2,620
(610)
659
38
2,075 8,486
4,061
4,824
-
-
-
41
16
25
56
23
880 4,834
326 1,652
2,951
980
2,344
790
33
554 3,182
1,971
1,554
(610)
684
71
2,629 11,668
6,032
6,378
-
-
-
-
-
-
-
Total decrease (increase) in net
earnings....................................... $
(610) $
684
$
71 $
2,629 $ 11,668
$
6,032 $
6,378
39
Stock option compensation from
continuing operations:
Discretionary Grants ....................... $
Anniversary Grants .........................
Promotion Grants............................
New Hire Grants .............................
Program Grants...............................
Total stock compensation expense
from continuing operations .........
1,341
243
97
350
71
2,102
$
1,654 $
11
21
108
188
528 $
-
-
31
69
1,982
628
INSIGHT ENTERPRISES, INC.
1999
1998
1997
1996
1995
Total
Year Ended
$
18
1
-
15
-
34
-
-
34
13
21
13
5
1 $ 29,026
4,347
-
551
-
617
1
477
-
2
35,018
-
-
-
-
2
1
35,018
12,320
1
22,698
2
1
12,381
4,217
-
-
2,102
702
1,400
704
215
-
-
-
-
1,982
657
628
210
1,325
418
433
162
123
47
489
271
76
8
1
8,164
1,889
1,596
494
29
2
30,862
-
-
-
-
-
-
1,889
$
1,596 $
494 $
29
$
2 $ 30,862
Other miscellaneous accounting
adjustments:
Adjustment to record legal
settlement in appropriate period....
Total other miscellaneous
accounting adjustments ...............
Total adjustments to earnings
from continuing operations
before income taxes ....................
Income tax benefit.........................
Total adjustments to earnings
from continuing operations ........
Total stock option compensation
expense from discontinued
operations ...................................
Income tax benefit ........................
Total adjustments to earnings
from discontinued operations,
net of taxes .................................
Total adjustments to net earnings
before cumulative effect of
change in accounting principle ..
Total adjustments to cumulative
effect of change in accounting
principle .....................................
Total decrease (increase) in net
earnings....................................... $
Stock Option Compensation —These adjustments are from our determination, based upon the Options Subcommittee’s
review and the Company’s analysis, that, for accounting purposes, the dates initially used to measure compensation expense
for numerous option grants to employees, executive officers and outside non-employee directors during the period could not
be relied upon for various categories of option grants including: (i) discretionary grants of various types; (ii) anniversary
grants; (iii) promotion grants; (iv) new hire grants; and (v) program grants. The revised measurement dates identified for
accounting purposes differed from the originally selected measurement dates due primarily to: (i) insufficient or incomplete
approvals; (ii) inadequate or incomplete establishment of the terms of the grants, including the list of individual recipients;
and (iii) the use of hindsight to select exercise prices.
Specifically, for each of the categories of option grants discussed in more detail under “Accounting Considerations”
below, we noted the following:
Stock option grants with insufficient or incomplete approvals. The Company determined that the original recorded grant
date could not be relied on because there was correspondence or other evidence that indicated that not all required approvals
had been obtained, including for certain grants, Compensation Committee approval. The Company remeasured these option
grants with a revised measurement date supported by the required level of approval, as described below, and accounted for
these grants as fixed awards under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(“APB No. 25”).
40
INSIGHT ENTERPRISES, INC.
Inadequate or incomplete establishment of the terms of the grants. The Company determined that for certain stock
option grants, the number of shares and the exercise price were not known with finality at the original measurement date.
The Company determined that the original recorded grant date could not be relied on because there was correspondence or
other evidence that indicated that the Company had not finalized the number of stock options allocated to each individual
recipient and the related exercise price. Based on available supporting documentation, the Company determined the date by
which the number of stock options to be awarded to each recipient was finalized and the other terms of the award were
established and accounted for these grants as fixed awards under APB No. 25.
The use of hindsight to select exercise prices. As noted below, the Company followed an informal policy of awarding
options to individual employees in recognition of the anniversary of their employment with the Company or in conjunction
with employee promotions using hindsight to select the exercise price. In many instances, little or no documentation to
support dates selected for option grants could be located by the Company. Further, instances of favorable, retrospective date
selection of discretionary grants were identified. Also, as noted below, the investigation noted instances of inadequate
documentation, or retrospective date selection, relating to the award of grants to the Company’s top three executive officers,
all of which required Compensation Committee approval. Based on available supporting documentation, the Company
determined a revised measurement date and accounted for these grants as fixed awards under APB No. 25.
Other Miscellaneous Accounting Adjustments — In addition to the restatements for stock-based compensation, we recorded a
pre-tax adjustment for $1.0 million to record a legal settlement expense that was recorded in the first quarter of 2006, which
should have been recorded in the fourth quarter of 2005. The tax effect of this adjustment was $0.4 million.
Income Tax Benefit — We recorded a net income tax benefit of approximately $16.5 million in connection with the stock
option-related compensation charges during the period from fiscal year 1995 to December 31, 2006. This tax benefit has
resulted in an increase of our deferred tax assets for most U.S. affected stock options prior to the exercise or forfeiture of the
related options. With the exception of UK employees exercising options after 2002, the Company recorded no tax benefit or
deferred tax asset for affected stock options granted to non-U.S. employees because we determined that we could not receive
tax benefits for these options. Further, we limited the deferred tax assets recorded for affected stock options granted to certain
highly paid officers to reflect estimated limitations on tax deductibility under Internal Revenue Code Section 162(m). Upon
exercise or forfeiture of the underlying options, the excess or deficiency in deferred tax assets is written-off to paid-in capital
in the period of exercise or forfeiture.
Payroll taxes, interest and penalties — Management is considering possible ways to address the impact that Section 409A of
the Internal Revenue Code may have as a result of the exercise price of stock options being less than the fair market value of
our common stock on the revised measurement date. Section 409A imposes additional taxes to our employees on stock
options granted with an exercise price lower than the fair market value on the date of grant that vest after December 31, 2004.
The Internal Revenue Service has issued transition rules under Section 409A that allows for a correction, or cure, for options
subject to Section 409A. We may offer the holders of outstanding options the opportunity to affect a cure of all affected
stock options. In connection with this cure, we may make cash bonus payments in an aggregate amount of up to $200,000 in
2008 to our non-officer employees.
Accounting Considerations — Stock-Based Compensation
We originally accounted for all employee, officer and director stock option grants as fixed grants under APB No. 25,
using a measurement date of the recorded grant date. We issued all grants with an exercise price equal to the fair market
value of our common stock on the recorded grant date, and therefore originally recorded no stock-based compensation
expense.
As a result of the findings of the Options Subcommittee, and our own further review of our stock option granting
practices, we determined that the measurement dates for certain stock option grants differed from the recorded grant dates for
such grants. Based on the analysis described below, the Company concluded that it was appropriate to revise the
measurement dates for these grants based upon its findings. The Company calculated stock-based compensation expense
under APB No. 25 based upon the intrinsic value as of the adjusted measurement dates of stock option awards determined to
be “fixed” under APB No. 25 and the vesting provisions of the underlying options. The Company calculated the intrinsic
value on the adjusted measurement date as the closing price of its common stock on such date as reported on the NASDAQ
National Market, now the NASDAQ Global Select Market, less the exercise price per share of common stock as stated in the
underlying stock option agreement, multiplied by the number of shares subject to such stock option award. The Company
recognizes these amounts as compensation expense over the vesting period of the underlying options in accordance with the
provisions of FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans. We also determined that variable accounting treatment was appropriate under APB No. 25 for certain stock
option grants for which evidence was obtained that the terms of the options may have been communicated to those recipients
41
INSIGHT ENTERPRISES, INC.
and that those terms were subsequently modified (stock option grants cancelled and repriced). When variable accounting is
applied to stock option grants, we remeasure, and report in our consolidated statements of earnings, the intrinsic value of the
options at the end of each reporting period until the options are exercised, cancelled or expire unexercised.
The Company determined the most supportable measurement dates for each of the various categories of options grants as
follows:
Discretionary Grants. Discretionary grants included grants to the Company’s outside directors, the Chief Executive
Officer (“CEO”), President and Chief Financial Officer (the “three highest ranking executives” of the Company), other
Section 16 Officers, and all other Company employees.
The Company determined that it had granted stock options to its outside directors pursuant to the Company’s stock plans
or Board of Directors’ minutes in the majority of instances; however, in a few instances, certain grants to these individuals
require alternative measurement dates based on the approval dates specified in plan documents or signed minutes. The
Company recorded a pre-tax adjustment to compensation expense totaling less than $0.1 million associated with all grants to
outside directors during the Relevant Period.
During the Relevant Period, the Company followed a practice of requiring Compensation Committee approval of the
stock option awards to the three highest ranking executives of the Company. For some grants, the Compensation Committee
minutes did not indicate approval of an award. In other instances, the Company either did not locate minutes or the evidence
was inconclusive concerning when a specific meeting occurred. The Company determined that certain grants to these
individuals require alternative measurement dates. For example, due to inconclusive evidence regarding the date of
Compensation Committee approval, because the Board had approved the Proxy Statement in which the award was
specifically listed, the Proxy Statement filing date was selected as the best evidence of a measurement date for the award.
The Company recorded a pre-tax adjustment to compensation expense totaling $13.3 million for all grants to the three highest
ranking executives of the Company during the Relevant Period. Alternatively, for those grants where the Proxy Statement
filing date was selected, had we used the highest or lowest closing price of our common stock between the grant date and the
Proxy Statement filing date as the revised measurement date (as a measurement date could have occurred on any date
between those two dates), the pre-tax adjustment to compensation expense would have been $3.2 million higher using the
highest price and $6.9 million lower using the lowest price.
Prior to May 16, 2003, the CEO approved stock option awards to Section 16 Officers. Evidence of CEO approval
typically consisted of an email containing the grant terms. Effective with the May 16, 2003 Compensation Committee
meeting, the Compensation Committee was required to approve grants to the Section 16 Officers. Evidence of Compensation
Committee approval included Compensation Committee minutes or a signed Unanimous Written Consent (“UWC”). The
Company determined that certain grants to these individuals require alternative measurement dates based on the date of
approval identified in the supporting documentation. The Company recorded a pre-tax adjustment to compensation expense
totaling $9.5 million in connection with discretionary grants to Section 16 Officers, in addition to the $13.3 million pre-tax
adjustment for grants to the three highest ranking executives of the Company, during the Relevant Period.
Throughout most of the Relevant Period, the Company’s option plans granted discretion to the CEO to award option
grants to any Company employee, other than the top three executives. The CEO in turn authorized a defined number of
options in connection with certain discretionary grants during the Relevant Period that were allocated by certain senior
executives amongst employees within particular business units. In certain instances, the review revealed that lists of grantees
within specified business units had not been finalized as of the grant date. Where required, the Company identified
alternative measurement dates for these discretionary grants and recorded the required pre-tax adjustment to compensation
expense totaling $7.9 million during the Relevant Period.
During the Relevant Period, the Company also granted annual performance-based options to employees at the discretion
of certain executives and managers within each business unit. Based on the supporting documentation, the business units
finalized the list of awards by person on different dates. The Company reconciled each list to the actual awards contained in
the Company’s stock plan administration database to determine the date by which each business unit’s list was finalized. The
Company recorded a pre-tax adjustment to compensation expense totaling $6.5 million for six grant dates during the Relevant
Period that primarily related to annual performance reviews.
Anniversary Grants. Throughout the Relevant Period, the Company followed an informal policy of awarding options to
individual employees in recognition of the anniversary of their employment with the Company or in conjunction with
employee promotions. The number of these options was determined by the employee’s level within the Company, or, in the
case of promotion grants, the level to which the employee was promoted. The majority of these grants were modest in size,
generally 500 options or less. In the case of senior management, anniversary or promotion grants could be much larger, at
42
INSIGHT ENTERPRISES, INC.
5,000 or 7,500 options. Occasionally, very senior executives, other than the top three executives, received larger grants for
anniversaries or promotions, but these were relatively few and were generally done on a case-by-case basis.
The Options Subcommittee review indicated that the Company’s anniversary related options were granted with
measurement dates determined by three general methods, depending upon the time period in the Relevant Period. From the
beginning of the Relevant Period through the end of 1998, anniversary grants were generally granted with a measurement
date on an employee’s actual anniversary date. For a period of time between 1999 and 2002, the grant dates generally were
selected retrospectively based on either the low price of a month or the low price of the quarter. In the third quarter of 2002,
the Company began a practice of awarding anniversary grants on the 15th day of each month for the balance of 2002, and in
January 2003, the Company essentially ceased making anniversary grants, except for minimal contractual grants to certain
United Kingdom employees which continued into 2005.
The Company used email correspondence or other documentation maintained in the Stock Plan Administration files and
information obtained from the Company’s human resources system and payroll records to determine each employee’s
anniversary date based on the employee’s hire (and corresponding anniversary) date. The general granting practice for
anniversary awards in place at the relevant point in time was used to determine the appropriate measurement date for each
employee’s anniversary award. For a limited number of grants, absent evidence of the employee’s hire date, the date the
employee record of the stock options was added to the Company’s stock plan administration database application was used as
the measurement date for the awards identified as anniversary grants. For periods where the Company issued anniversary
grants using quarterly or monthly lows, or other low prices, alternate measurement dates were required. The Company
recorded a pre-tax compensation expense adjustment totaling $6.6 million for anniversary grants during the Relevant Period.
Promotion Grants. Promotion grants were generally handled in the same manner as anniversary grants. In some
instances, promotion grants were awarded on the promotion effective date and other times at the low price of the month or
quarter. The Company’s analysis revealed that the Company had a general practice of granting promotion options on the
employees’ promotion effective dates from 1998 through 2000. The Company selected either the promotion effective date, if
available, or the date the employee record of the stock options was added to the Company’s stock plan administration
database application, if the promotion effective date was not available, as the measurement date for the promotion grants
issued from 1998 through 2000. For subsequent periods where the Company issued promotion grants using quarterly or
monthly lows, or other low prices, alternate measurement dates were required. The Company recorded a pre-tax
compensation expense adjustment totaling $2.2 million for promotion grants during the Relevant Period.
New Hire Grants. Throughout the Relevant Period, the Company issued an option grant to each new employee on the
employee’s start date. The Company had a uniform practice of granting a specific number of options depending on the
incoming employee’s level within the Company. For example, the lowest level employees would receive 50 options on their
start date, while certain managers might receive 2,500 options. Senior executive officers would typically receive much larger
grants upon joining the Company, and those grants were typically negotiated as part of a total compensation package that
were reflected in an employment agreement or offer letter. In general, the Company found a lack of significant issues with
respect to new hire grants. Compensation expense was required to be recorded for administrative and error corrections and in
a small number of cases where it was determined that an employee received an award with an effective date earlier than their
actual start date, or where the amount of the grant was negotiated or otherwise selected after the employee began working at
the Company. Additionally, during certain limited periods, due to a limited number of options being available to grant, the
Company issued certain new hire grants at a later date along with the period’s anniversary grants at the low price of the
month or quarter, in which case the Company determined that alternate measurement dates were required. The Company
recorded a pre-tax compensation expense adjustment totaling $0.7 million for new hire grants during the Relevant Period.
Program Grants. The Company had numerous routine grant programs under which options were awarded to employees
who participated on specific teams within the Company, completed certain training programs or achieved certain goals in
their jobs. These options (generally 50 to 250 options) were typically only granted to individual employees below a certain
level. Although these grants were routinely made on an annual or quarterly basis, no official written policies existed
describing the exact criteria or timing for each grant program. Not all of the grants awarded pursuant to these programs could
be identified due to incomplete or inconsistent documentation. The Company typically determined the most supportable
measurement date based on communication of the list of recipients and the respective number of options to be granted to
Stock Plan Administration. In those instances where the review failed to reveal a specific date when lists were received in
Stock Plan Administration, the Company selected the date the employee record of the stock options was added to the
Company’s stock plan administration database application as the measurement date. The Company recorded a pre-tax
adjustment to compensation expense totaling $0.6 million for these program grants during the Relevant Period.
43
INSIGHT ENTERPRISES, INC.
For some grants, the Company identified no supporting documentation to determine the timing of the approval of the
terms of the grant. In these instances, the Company selected the date the employee record of the stock options was added to
the Company’s stock plan administration database application as the measurement date.
Related Proceedings
In October 2006, we received a letter of informal inquiry from the SEC requesting certain documents relating to our
stock option grants and practices. We have cooperated with the SEC and will continue to do so. We cannot predict the
outcome of this investigation.
Overview
On September 7, 2006, we completed our acquisition of Software Spectrum, Inc. (“Software Spectrum”) for a cash
purchase price of $287.0 million plus working capital of $64.4 million, which includes cash acquired of $30.3 million.
Accordingly, the results of operations from Software Spectrum are included in our consolidated results of operations since
the acquisition date. Prior to the acquisition of Software Spectrum, we were organized in two segments: Insight North
America; and Insight UK. Beginning with the fourth quarter of 2006, as a result of the acquisition, we operate in three
geographic operating segments: North America; EMEA; and APAC. To the extent applicable, prior period information
disclosed in this report by operating segment has been reclassified to conform to the current period presentation. Currently,
our offerings in North America and the United Kingdom include brand-name IT hardware, software and services. Our
offerings in the remainder of our EMEA segment and in APAC currently only include software and select software-related
services.
Founded in 1983 and headquartered in Plano, Texas, Software Spectrum is one of the world’s leading providers of
business-to-business IT solutions and services, with particular expertise in the selection, purchase and management of
software. The Software Spectrum operations deliver value-added technology solutions across the globe through sales and
operations centers in North America, Europe, the Middle East, Africa and Asia-Pacific.
This acquisition represents a significant step in Insight’s evolution to becoming a trusted advisor to our clients
throughout the world on technology solutions to address business needs. We had identified expansion of software sales and
services capabilities as a necessary augmentation of Insight’s value proposition, and we have begun to leverage our
capabilities to drive services and solutions into the small- and medium-sized business space and to further penetrate the large
enterprise sector.
On June 30, 2006, we completed the sale of 100% of the outstanding stock of Direct Alliance Corporation as business
process outsourcing was not a core element of our growth strategy. Accordingly, the results of operations attributable to
Direct Alliance for all periods presented are classified as a discontinued operation in our Consolidated Financial Statements
in Part II, Item 8. See Note 19 to the Consolidated Financial Statements in Part II, Item 8 for further discussion.
On March 1, 2007, we completed the sale of PC Wholesale, a division of our North America operating segment.
Accordingly, the results of operations attributable to PC Wholesale for all periods presented will be classified as a
discontinued operation in our Consolidated Financial Statements for the period ended March 31, 2007 and for all periods
thereafter. See Note 21 to the Consolidated Financial Statements in Part II, Item 8 for further discussion.
Net sales for the year ended December 31, 2006 increased 20% to $3.82 billion from $3.18 billion for the year ended
December 31, 2005. Net earnings for the year ended December 31, 2006 increased 42% to $76.8 million from $54.0 million
for the year ended December 31, 2005. Net earnings for the year ended December 31, 2006 include the effect of the
following items:
•
•
•
stock-based compensation expense of $13.7 million or $8.5 million, net of tax;
severance and restructuring expenses of $729,000 or $454,000, net of tax; and
gain on sale of discontinued operation of $14.9 million or $9.0 million, net of tax.
Net earnings for the year ended December 31, 2005 include the effect of the following items:
•
•
•
•
stock-based compensation expense of $858,000 or $512,000, net of tax;
severance and restructuring expenses of $13.0 million or $8.5 million, net of tax;
income from reductions in liabilities assumed in a previous acquisition of $664,000 or $306,000, net of tax; and
cumulative effect from a change in accounting principle of $979,000 or $649,000, net of tax.
44
INSIGHT ENTERPRISES, INC.
Although included in our consolidated financial statements, we exclude the items noted above when internally evaluating
gross profit, selling and administrative expenses, earnings from continuing operations, tax expense, net earnings and diluted
earnings per share for the Company and when evaluating gross profit, selling and administrative expenses and earnings from
operations for our individual operating segments. We exclude these items to evaluate financial performance against budgeted
amounts, to calculate incentive compensation, to assist in forecasting future performance and to compare our results to
competitors’ financial results.
Overviews of each of our operating segments are discussed below and reconciliations of segment results of operations to
consolidated results of operations can be found in Note 16 to our Consolidated Financial Statements provided in Part II, Item
8 of this report.
Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of
our consolidated financial statements, the changes in certain key items in those consolidated financial statements from year to
year, the primary factors that contributed to those changes, as well as how certain critical accounting estimates affect our
consolidated financial statements.
Our North America net sales increased 13% from $2.71 billion in 2005 to $3.08 billion in 2006, due primarily to the
acquisition of Software Spectrum. Our North America operations achieved a 13% increase in earnings from operations.
Overall, our North America hardware and services categories performed well during the year, with sales from public sector
clients growing faster than the market, while sales from SMB clients were in-line with the market, and hardware sales to
large enterprise clients declined compared to last year. Increases in earnings from operations were achieved through
improvements in our gross profit as we maintained product margins, increased vendor funding, improved attach rates for
services, increased sales rep productivity, streamlined business processes, and increased use of e-commerce tools.
Our EMEA operations, which included only the United Kingdom in 2005, recognized net sales that were up 51% from
$470.2 million in 2005 to $710.3 million in 2006 due primarily to the acquisition of Software Spectrum. Our EMEA
operations achieved a 246% increase in earnings from operations. We were pleased with the performance of our EMEA
software category as it posted seasonally strong results in the fourth quarter of 2006. In addition, our UK hardware and
services categories’ performance was strong and grew faster than the market.
Our APAC segment, which was added as a result of the acquisition of Software Spectrum, recognized net sales and
earnings from operations of $30.0 million and $1.1 million, respectively, in 2006. We were pleased with the results of our
APAC segment as it achieved strong growth and results in line with its internal budgets. Although this segment represents a
small percentage of our consolidated results, we are excited about the growth opportunities this region brings.
Critical Accounting Estimates
General
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”). For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements
in Part II, Item 8 of this report. The preparation of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Members of our senior management have discussed the development, selection and disclosure of these estimates
with the Audit Committee of our Board of Directors. Actual results, however, may differ from estimates we have made. We
believe the following critical accounting estimates reflect our significant estimates and assumptions used in the preparation of
the consolidated financial statements.
Accounting for Stock-Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123R, “Share-Based Payment,” using the modified prospective transition method and, therefore,
have not restated prior periods’ results. Under the fair value recognition provisions of SFAS No. 123R, we recognize stock-
based compensation net of an estimated forfeiture rate and only recognize compensation expense for those shares expected to
vest over the requisite service period of the award. We elected to not make any modifications to existing stock options
45
INSIGHT ENTERPRISES, INC.
outstanding prior to January 1, 2006, such as accelerating the vesting of previously granted options, as we did not believe it
made business sense to do so. We did, however, take the opportunity to reevaluate our equity compensation plans, and
starting in 2006, we elected to issue service-based and performance-based restricted stock units (“RSUs”) instead of stock
options or restricted shares. The number of RSUs ultimately awarded under the performance-based RSUs varies based on
whether we achieve certain financial results. We will record compensation expense each period based on our estimate of the
most probable number of RSUs that will be issued under the grants of performance-based RSUs. Our expected 2007 equity
compensation expense, which includes expense attributable to RSU grants, as well as to vesting of stock options, restricted
stock and RSUs issued in prior years, is estimated to be between $13.0 million and $15.0 million. The actual amount will
likely vary based on achievement of 2007 financial results. The expense range given assumes targeted financial results are
achieved.
Prior to our adoption of SFAS No. 123R, we applied the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Under this
method, compensation expense was recorded on the measurement date only if the current market price of the underlying
stock exceeded the exercise price. The measurement date is the date when the number of shares and exercise price are known
with finality. For grants determined to be “variable” under APB No. 25, we remeasure, and report in our statement of
earnings, the intrinsic value of the options at the end of each reporting period until the options are exercised, cancelled or
expire unexercised. As a result of the application of APB No. 25 and restatement of our consolidated financial statements, as
described in “Restatement of Consolidated Financial Statements” above, we have incurred pre-tax stock-based compensation
expense of $13.7 million, $858,000 and $352,000, in 2006, 2005 and 2004, respectively. See the “Explanatory Note
Regarding Restatement of our Consolidated Financial Statements” immediately preceding Part I of this Form 10-K,
“Restatement of Consolidated Financial Statements” in Part II, Item 7, and Note 2, “Restatement of Consolidated Financial
Statements,” of the notes to consolidated financial statements.
In order to comply with the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” we
determined the estimated fair value of stock options on the date of the grant using the Black-Scholes-Merton (“Black-
Scholes”) option-pricing model. The Black-Scholes model required us to apply highly subjective assumptions, including
expected stock price volatility, expected life of the option and the risk-free interest rate. If we decide to issue stock options in
the future, we will use an option-pricing model to determine the fair value of stock options as permitted by SFAS No. 123R.
A change in one or more of the assumptions used in the option-pricing model may result in a material change to the estimated
fair value of the stock-based compensation.
See Note 3 to our Consolidated Financial Statements in Part II, Item 8 of this report for further discussion of stock-based
compensation.
Allowances for Doubtful Accounts
Our net accounts receivable balance was $994.9 million and $480.5 million as of December 31, 2006 and 2005,
respectively. The allowance for doubtful accounts was $23.3 million and $15.9 million as of December 31, 2006 and 2005,
respectively. Increases in accounts receivable and related allowance for doubtful accounts were due primarily to the
acquisition of Software Spectrum. The allowance is determined using estimated losses on accounts receivable based on
historical write-offs, evaluation of the aging of the receivables and the current economic environment. Should our clients’ or
vendors’ circumstances change or actual collections of client and vendor receivables differ from our estimates, adjustments to
the provision for losses on accounts receivable and the related allowances for doubtful accounts would be recorded. See
further information on our allowance for doubtful accounts in Note 15 to the Consolidated Financial Statements in Part II,
Item 8 of this report.
Write-Downs of Inventories
We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at normal
margins. Write-downs are recorded so that inventories reflect the approximate net realizable value and take into account our
contractual provisions with our partners governing price protection, stock rotation and return privileges relating to
obsolescence. Because of the large number of transactions and the complexity of managing the process around price
protection and stock rotation, estimates are made regarding write-downs of the carrying amount of inventories. Additionally,
assumptions about future demand, market conditions and decisions by manufacturers/publishers to discontinue certain
products or product lines can affect our decision to write down inventories. If our assumptions about future demand change
or actual market conditions are less favorable than those projected, additional write-downs of inventories may be required. In
any case, actual values could be different from those estimated.
46
Valuation of Long-Lived Assets Including Purchased Intangible Assets and Goodwill
INSIGHT ENTERPRISES, INC.
We review property, plant and equipment and purchased intangible assets for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. Our asset impairment review assesses the fair
value of the assets based on the estimated undiscounted future cash flows expected to result from the use of the asset plus net
proceeds expected from disposition of the asset (if any) and compares the fair value to the carrying value. If the carrying
value exceeds the fair value, an impairment loss is recognized for the difference. This approach uses our estimates of future
market growth, forecasted net sales and costs, expected periods the assets will be utilized, and appropriate discount rates.
Annually, during the fourth quarter of each year, we assess whether goodwill is impaired. Upon determining the
existence of goodwill impairment, we measure that impairment based on the amount by which the book value of goodwill
exceeds its implied fair value. The implied fair value of goodwill is determined by deducting the fair value of a reporting
unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole. Determining the fair value of
reporting units, as well as identifiable assets and liabilities, uses our estimates of market capitalization allocation, future
market growth, forecasted sales and costs and appropriate discount rates. Additional impairment assessments may be
performed on an interim basis if we encounter events or changes in circumstances that would indicate that, more likely than
not, the book value of goodwill has been impaired. Based on impairment tests performed, there was no impairment of
goodwill during the years ended December 31, 2006, 2005 or 2004.
We identify potential impairment of goodwill through our strategic reviews of our reporting units and operations
performed in conjunction with restructuring actions. Deterioration of our business in a geographic region or within a
reporting unit in the future could lead to impairment adjustments as such issues are identified.
Severance and Restructuring Activities
We have engaged, and may continue to engage, in severance and restructuring activities which require us to utilize
significant estimates related primarily to employee termination benefits, estimated costs to terminate leases or remaining
lease commitments on unused facilities, net of estimated subleases. Should the actual amounts differ from our estimates,
adjustments to severance and restructuring expenses in subsequent periods would be necessary. We do not currently expect
the remaining estimates at December 31, 2006 to increase in the future; however, if we are successful in negotiating early
terminations of these leases, the remaining estimates may decrease. A detailed description of our severance, restructuring
and acquisition integration activities and remaining accruals for these activities at December 31, 2006 can be found in Note 9
to the Consolidated Financial Statements in Part II, Item 8 of this report.
Taxes on Earnings
Our effective tax rate includes the effect of certain undistributed foreign earnings for which no U.S. taxes have been
provided because such earnings are planned to be reinvested indefinitely outside the U.S. Earnings remittance amounts are
planned based on the projected cash flow needs as well as the working capital and long-term investment requirements of our
foreign subsidiaries and our domestic operations. Material changes in our estimates of cash, working capital and long-term
investment requirements could affect our effective tax rate.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be
realized. We consider past operating results, future market growth, forecasted earnings, historical and projected taxable
income, the mix of earnings in the jurisdictions in which we operate, prudent and feasible tax planning strategies and
statutory tax law changes in determining the need for a valuation allowance. If we were to determine that we would not be
able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged
to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the
net deferred tax assets would be realized, the previously provided valuation allowance would be reversed. However, the
reversal of a valuation allowance established in purchase accounting upon the acquisition of Software Spectrum would result
in a reduction of goodwill as opposed to a benefit to earnings. Additional information about the valuation allowance can be
found in Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this report.
Contingencies
From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various
governmental, client and vendor audits. We continually assess whether or not such claims have merit and warrant accrual under
the “probable and estimable” criteria of SFAS No. 5, “Accounting for Contingencies.” Where appropriate, we accrue estimates
of anticipated liabilities in the consolidated financial statements. Such estimates are subject to change and may affect our results
47
INSIGHT ENTERPRISES, INC.
of operations and our cash flows. Additional information about contingencies can be found in Note 14 to the Consolidated
Financial Statements in Part II, Item 8 of this report.
RESULTS OF OPERATIONS
The following table sets forth for the periods presented certain financial data as a percentage of net sales for the years
ended December 31, 2006, 2005 and 2004:
2006
2005
As Restated
(1)
2004
As Restated
(1)
Net sales.................................................................................................
Costs of goods sold ................................................................................
Gross profit .................................................................................
100.0%
87.4
12.6
100.0%
88.2
11.8
100.0%
88.3
11.7
Operating expenses:
Selling and administrative expenses...................................................
Severance and restructuring expenses ................................................
Reductions in liabilities assumed in a previous acquisition ...............
Earnings from operations ............................................................
9.8
0.1
-
2.7
Non-operating (income) expense:
Interest income ...................................................................................
Interest expense..................................................................................
Net foreign currency exchange (gain) loss.........................................
Other expense, net ..............................................................................
Earnings from continuing operations before income taxes .........
Income tax expense................................................................................
Net earnings from continuing operations ....................................
Earnings from discontinued operations, net of taxes...................
Net earnings before cumulative effect of change in
accounting principle ................................................................
Cumulative effect of change in accounting principle, net of
taxes.........................................................................................
Net earnings ................................................................................
(0.1)
0.2
(0.0)
0.0
2.6
0.9
1.7
0.3
2.0
-
2.0%
8.9
0.4
(0.0)
2.5
(0.1)
0.1
0.0
0.0
2.5
1.0
1.5
0.2
1.7
(0.0)
1.7%
9.3
0.1
(0.1)
2.4
(0.1)
0.1
0.0
0.0
2.4
0.7
1.7
1.0
2.7
-
2.7%
(1) See Note 2 “Restatement of Consolidated Financial Statements,” to the Consolidated Financial Statements in Part II, Item
8 of this report for information on our restatement.
2006 Compared to 2005
Net Sales. Net sales for the year ended December 31, 2006 increased 20% to $3.82 billion from $3.18 billion for the
year ended December 31, 2005. Sales contributed from the acquisition of Software Spectrum are included from the
acquisition date of September 7, 2006 and approximated 14% of total net sales for 2006. Our net sales by operating segment
for the years ended December 31, 2006 and 2005 were as follows (in thousands):
North America .........................................
EMEA......................................................
APAC.......................................................
Consolidated ............................................
$
$
2006
3,076,826
710,294
29,965
3,817,085
2005
$ 2,713,468
470,239
-
$ 3,183,707
% Change
13%
51%
-
20%
North America’s net sales for the year ended December 31, 2006 increased 13% to $3.08 billion from $2.71 billion for
the year ended December 31, 2005, due primarily to the acquisition of Software Spectrum. Overall, our North America
hardware and services categories performed well during the year, with sales from public sector clients growing faster than the
market, while sales from SMB clients were in-line with the market, and hardware sales to large enterprise clients declined
compared to last year. North America had 1,294 account executives at December 31, 2006, an increase from 1,074 at
December 31, 2005 due primarily to the acquisition of Software Spectrum. Net sales per average number of account
executives in North America increased to $2.6 million for the year ended December 31, 2006 from $2.5 million for the year
ended December 31, 2005. The average tenure of our account executives in North America has increased from 3.9 years at
December 31, 2005 to 4.3 years at December 31, 2006. The increase is due primarily the addition of more tenured account
executives with the acquisition of Software Spectrum.
48
INSIGHT ENTERPRISES, INC.
EMEA’s net sales for the year ended December 31, 2006 increased 51% to $710.3 million from $470.2 million for the
year ended December 31, 2005. Overall, our growth in EMEA was due to the acquisition of Software Spectrum as our
EMEA software category posted seasonally strong results in the fourth quarter of 2006. EMEA had 476 account executives
at December 31, 2006, an increase from 266 at December 31, 2005 due primarily to the acquisition of Software Spectrum.
Net sales per average number of account executives in EMEA increased to $1.9 million for the year ended December 31,
2006 compared to $1.8 million for the year ended December 31, 2005. The average tenure of our account executives in
EMEA has increased from 2.3 years at December 31, 2005 to 2.7 years at December 31, 2006. The increase is due primarily
to a decrease in account executive turnover and to the addition of more tenured account executives with the acquisition of
Software Spectrum.
APAC’s net sales for the year ended December 31, 2006 were $30.0 million. We were pleased with the results of our
APAC segment as it achieved strong growth and results in line with its internal budgets.
Net sales by product category for North America, EMEA and APAC were as follows for the years ended December 31,
2006 and 2005:
Product Categories
Computers:
Notebooks and PDAs .............................
Desktops and Servers .............................
Software..........................................................
Network and Connectivity..............................
Printers............................................................
Storage Devices ..............................................
Supplies and Accessories................................
Monitors and Video ........................................
Memory and Processors..................................
Miscellaneous .................................................
North America
Percentage of Product
Net Sales
EMEA
Percentage of Product
Net Sales
APAC
Percentage of Product
Net Sales
2006
2005
2006
2005
2006
2005
15%
14%
29%
18%
14%
7%
7%
7%
6%
5%
7%
100%
17%
16%
33%
12%
12%
8%
8%
7%
7%
5%
8%
100%
13%
10%
23%
40%
6%
6%
6%
6%
6%
3%
4%
100%
18%
15%
33%
15%
8%
8%
8%
8%
10%
4%
6%
100%
0%
0%
0%
97%
0%
0%
0%
0%
0%
0%
3%
100%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
In general, we continue to experience declines in average selling prices for most of our hardware product categories,
which requires us to sell more units in order to maintain or increase the level of sales. Additionally, average selling prices for
printers, monitors and notebooks have been declining at a greater rate than the other product categories as demand and
competition for these products have increased. With the acquisition of Software Spectrum, our product mix changed
significantly. Prior to the acquisition of Software Spectrum, software sales represented approximately 12% of net sales.
After the acquisition of Software Spectrum, we expect software sales to represent approximately 35% to 40% of consolidated
net sales.
Gross Profit. The increase in sales of licenses under sales agency licensing programs as well as sales of software
maintenance contracts makes period-to-period comparability of sales and costs of goods sold more difficult. As a result, we
believe the focus should be on gross profit as the key measure of business performance and period-to-period trends. Gross
profit increased 28% to $479.1 million for the year ended December 31, 2006 from $374.5 million for the year ended
December 31, 2005. As a percentage of net sales, gross profit increased to 12.6% for the year ended December 31, 2006
from 11.8% for the year ended December 31, 2005. Our gross profit and gross profit as a percent of net sales by operating
segment for the years ended December 31, 2006 and 2005 were as follows (in thousands):
North America ................................
EMEA.............................................
APAC..............................................
Consolidated ...................................
2006
$ 378,978
95,184
4,901
$ 479,063
% of Net
Sales
12.3%
13.4%
16.4%
12.6%
2005
$ 311,125
63,415
-
$ 374,540
% of Net
Sales
11.5%
13.5%
-
11.8%
North America’s gross profit increased for the year ended December 31, 2006 by 22% to $379.0 million from $311.1
million for the year ended December 31, 2005. As a percentage of net sales, gross profit increased to 12.3% for the year
ended December 31, 2006 from 11.5% for the year ended December 31, 2005 due primarily to increases in agency fees for
49
INSIGHT ENTERPRISES, INC.
Microsoft enterprise software agreement renewals, favorable collection experience, which enabled us to record reductions
in the reserve for vendor receivables, and increases in sales of services, which generate higher gross margins. These
increases were offset partially by decreases in freight margins and decreases in product margin, which includes vendor
funding. Gross profit per average number of account executives in North America increased to $320,000 for the year ended
December 31, 2006 compared to $290,000 for the year ended December 31, 2005.
EMEA’s gross profit increased for the year ended December 31, 2006 by 50% to $95.2 million from $63.4 million for
the year ended December 31, 2005. As a percentage of net sales, gross profit decreased to 13.4% for the year ended
December 31, 2006 from 13.5% for the year ended December 31, 2005. The decrease in gross margin is due primarily to
decreases in product margin, which includes vendor funding, and decreases in freight margins. These decreases in gross
margin were offset partially by higher agency fees for Microsoft enterprise software agreement renewals. Gross profit per
average number of account executives in EMEA increased to $257,000 for the year ended December 31, 2006 compared to
$238,000 for the year ended December 31, 2005.
APAC reported a gross profit of $4.9 million for the year ended December 31, 2006. As a percentage of net sales, gross
profit was 16.4% for the year ended December 31, 2006.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased to $374.5 million for the year
ended December 31, 2006 from $284.7 million for the year ended December 31, 2005 and increased as a percent of net sales
to 9.8% for the year ended December 31, 2006 from 8.9% for the year ended December 31, 2005. Selling and administrative
expenses as a percent of net sales by operating segment for the years ended December 31, 2006 and 2005 were as follows (in
thousands):
2006*
% of Net
Sales
North America ................................
EMEA.............................................
APAC..............................................
Consolidated ...................................
$
$
293,030
77,701
3,792
374,523
9.5%
10.9%
12.7%
9.8%
2005*
As Restated (1)
233,892
$
50,790
-
284,682
$
% of Net
Sales
8.6%
10.8%
-
8.9%
*Corporate charges of $306,000 and $694,000 previously allocated to our discontinued operation, Direct Alliance, for
the year ended December 31, 2006 and 2005, respectively, have been reallocated to our North America operating segment.
(1) See Note 2 “Restatement of Consolidated Financial Statements” in Part II, Item 8.
North America’s selling and administrative expenses increased for the year ended December 31, 2006 by 25% to $293.0
million from $233.9 million for the year ended December 31, 2005. As a percentage of net sales, selling and administrative
expenses increased to 9.5% for the year ended December 31, 2006 from 8.6% for the year ended December 31, 2005. The
increase in selling and administrative expenses is primarily attributable to:
•
Salaries and wages, employee-related expenses and contract labor increased approximately $48 million due to
increases in expenses related to the acquired business, increases in stock-based compensation expense, increases in
sales incentive programs and increases in bonus expenses due to increased overall financial performance. Stock-
based compensation expense of $11.6 million and $778,000 is included in North America’s selling and
administrative expenses for the year ended December 31, 2006 and 2005, respectively;
• Depreciation increased approximately $3.9 million, primarily as a result of $2.9 million of accelerated depreciation
during 2006 related to portions of our current operating system that will not be utilized after our upgrade to mySAP;
• Amortization of intangible assets acquired with the acquisition of Software Spectrum in September 2006 was
•
approximately $2.3 million in 2006;
Professional fees increased by approximately $1.6 million associated with the review of historical stock option
practices in 2006; and
• Other integration-related expenses, such as travel, legal and accounting fees, also experienced increases in 2006.
EMEA’s selling and administrative expenses increased 53% to $77.7 million for the year ended December 31, 2006 from
$50.8 million for the year ended December 31, 2005. As a percentage of net sales, selling and administrative expenses
increased to 10.9% for the year ended December 31, 2006 from 10.8% for the year ended December 31, 2005. The increase
in selling and administrative expenses is primarily attributable to:
50
INSIGHT ENTERPRISES, INC.
•
Salaries and wages, employee-related expenses and contract labor increased approximately $18.3 million due to
increases in expenses related to the acquired business, increases in stock-based compensation expense, increases in
sales incentive programs and increases in bonus expenses due to increased overall financial performance. Stock-
based compensation expense of $1.1 million is included in EMEA’s selling and administrative expenses for the year
ended December 31, 2006. No stock-based compensation expense was recorded for EMEA in 2005;
• Depreciation increased approximately $1.2 million, primarily as a result of increases in facility costs related to our
new London office;
• Amortization of intangible assets acquired with the acquisition of Software Spectrum in September 2006 was
approximately $1.3 million in 2006; and
• Other integration-related expenses, such as travel, legal and accounting fees, also experienced increases in 2006;
These increases were offset partially by the effect of higher net sales and a property tax rebate of approximately $1.0
million recorded during the year ended December 31, 2006.
APAC’s selling and administrative expenses were $3.8 million for the year ended December 31, 2006. Stock-based
compensation expense of $12,000 is included in APAC’s selling and administrative expenses for the year ended December
31, 2006.
Severance and Restructuring Expenses. During the year ended December 31, 2006, North America and EMEA
recorded severance expense of $508,000 and $221,000, respectively, associated with the elimination of Insight positions as
part of our integration and expense reduction plans. During the year ended December 31, 2005, EMEA moved into a new
facility and recorded restructuring costs of $6.9 million for the remaining lease obligations on the previous lease and $1.0
million for duplicate rent expense for the new facility for the last half of 2005. Also, during 2005, North America and EMEA
recorded severance and restructuring expenses of $3.7 million and $414,000, respectively, for severance attributable to the
elimination of 89 positions, primarily in support and management. See Note 9 to Consolidated Financial Statements in Part
II, Item 8 of this report for further discussion of severance and restructuring activities.
Reductions in Liabilities Assumed in Previous Acquisition. During the year ended December 31, 2005, EMEA settled
certain liabilities assumed in a previous acquisition for $664,000 less than the amounts originally recorded. See Note 10 to
the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion.
Interest Income. Interest income of $4.4 million and $3.4 million for the year ended December 31, 2006 and 2005,
respectively, was generated through short-term investments. The increase in interest income is due to a generally higher level
of cash available to be invested in short-term investments and increases in interest rates earned on those investments during
the year ended December 31, 2006.
Interest Expense. Interest expense of $6.8 million and $1.9 million for the year ended December 31, 2006 and 2005,
respectively, primarily relates to borrowings under our financing facilities. The increase in interest expense is due to
increased borrowings outstanding in the year ended December 31, 2006 due to the acquisition of Software Spectrum in
September 2006 and increases in interest rates.
Net Foreign Currency Exchange Gain (Loss). Net foreign currency exchange gain was $1.1 million for the year ended
December 31, 2006 compared to a net foreign currency exchange loss of $72,000 for the year ended December 31, 2005.
These amounts consist primarily of foreign currency transaction gains or losses for intercompany balances that are not
considered long-term in nature.
Other (Income) Expense, Net. Other income, net, was $39,000 for the year ended December 31, 2006 compared to
other expense, net of $782,000 for the year ended December 31, 2005. These amounts consist primarily of bank fees
associated with our financing facilities and cash management and the amortization of deferred financing fees.
Income Tax Expense. Our effective tax rates for continuing operations for the years ended December 31, 2006 and
2005 were 35.3% and 39.3%, respectively. Our effective tax rate for the year ended December 31, 2006 was lower than for
the year ended December 31, 2005 primarily due to a benefit recognized during the year ended December 31, 2006 for the
reversal of accrued income taxes of $1.4 million resulting from the determination that a reserve previously recorded for
potential tax exposures was no longer necessary and to several tax planning initiatives as well as the change in the percentage
of taxable income being taxed in countries with lower tax rates than the U.S. as a result of the acquisition of Software
Spectrum.
Earnings from Discontinued Operation. On June 30, 2006, we completed the sale of 100% of the outstanding stock of
Direct Alliance. Accordingly, the results of operations attributable to Direct Alliance for all periods presented have been
51
classified as a discontinued operation. See Note 19 to the Consolidated Financial Statements in Part II, Item 8 of this report
for further discussion.
INSIGHT ENTERPRISES, INC.
2005 Compared to 2004
Net Sales. Net sales for the year ended December 31, 2005 increased 6% to $3.18 billion compared to the year ended
December 31, 2004. Our net sales by operating segment for the years ended December 31, 2005 and 2004 were as follows
(in thousands):
North America .........................................
EMEA......................................................
Consolidated ............................................
$
$
2005
2,713,468
470,239
3,183,707
2004
$ 2,557,402
451,202
$ 3,008,604
% Change
6%
4%
6%
North America’s net sales increased for the year ended December 31, 2005 by 6% to $2.7 billion compared to the year
ended December 31, 2004. The increase in net sales over the prior year was due primarily to a stable demand environment
and our initiatives to deliver technology solutions to business clients more effectively and efficiently. During the latter half
of 2005, we saw increased growth rates in sales to SMB clients while growth rates in sales to our large enterprise clients
declined from the first half of the year. We made changes in our North America executive management team, sales
leadership, recruiting and training and have increased marketing activities, all of which we believe helped position us to
increase growth rates in our sales to SMB clients in 2006. North America had 1,074 account executives at December 31,
2005 compared with 1,106 at December 31, 2004. The decrease in account executives was due to planned headcount
reductions in order to reduce costs and increase the productivity of the remaining account executives. Additionally, we
delayed increasing the number of account executives while we restructured the fundamentals of our recruiting processes and
our new hire training program. Net sales per average number of account executives in North America increased 15% from
$2.2 million for the year ended December 31, 2004 to $2.5 million for the year ended December 31, 2005, which we believe
was attributable to internal initiatives, such as training and automation, all of which were designed to allow our account
executives to work more productively. The average tenure of our account executives in North America increased from 3.5
years at December 31, 2004 to 3.9 years at December 31, 2005. The increase was due primarily to a decrease in account
executive turnover.
In 2005 and 2004, EMEA included only operations in the United Kingdom. EMEA’s net sales increased 4% to $470.2
million for the year ended December 31, 2005 compared to the year ended December 31, 2004. In British pounds sterling,
net sales increased 5.0% compared to the year ended December 31, 2004, a rate we believe was faster than the market. We
believe our additions of experienced account executives and management focused on large corporate enterprises, as well as
our various internal initiatives to drive sales growth across all client groups, contributed to our ability to increase our market
share in the United Kingdom during the year ended December 31, 2005. EMEA had 266 account executives at December 31,
2005 compared to 298 at December 31, 2004. The decrease was due primarily to aggressive recruiting of our more
experienced account executives by some of our competition in early 2005. Net sales per average number of account
executives in EMEA increased 17% from $1.5 million for the year ended December 31, 2004 to $1.8 million for the year
ended December 31, 2005, which we believe was attributable to internal initiatives designed to allow our account executives
to work more productively. The average tenure of our account executives in EMEA increased to 2.3 years compared to 2.2
years at December 31, 2004 due primarily to a decrease in new hires during 2005.
52
INSIGHT ENTERPRISES, INC.
Net sales by product category for North America and EMEA were as follows for the years ended December 31, 2005 and
2004:
Product Categories
Computers:
Notebooks and PDAs ........................................
Desktops and Servers ........................................
Software.....................................................................
Network and Connectivity.........................................
Printers.......................................................................
Storage Devices .........................................................
Supplies and Accessories...........................................
Monitors and Video ...................................................
Memory and Processors.............................................
Miscellaneous ............................................................
North America
Percentage of Product
Net Sales
EMEA
Percentage of Product
Net Sales
2005
2004
2005
2004
17%
16%
33%
12%
12%
8%
8%
7%
7%
5%
8%
100%
16%
18%
34%
12%
11%
9%
7%
7%
7%
6%
7%
100%
18%
15%
33%
15%
8%
8%
8%
8%
10%
4%
6%
100%
18%
13%
31%
15%
8%
10%
7%
8%
11%
4%
6%
100%
In general, we experienced declines in average selling prices for most of our product categories, which required us to sell
more units than in previous periods in order to maintain or increase the level of sales. Additionally, average selling prices for
printers, monitors, desktops and notebooks declined at a greater rate than the other product categories as demand and
competition for these products increased. The largest product category was computers, representing 33% of North America
product net sales and 33% of EMEA product sales for the year ended December 31, 2005.
Gross Profit. Gross profit increased 7% to $374.5 million for the year ended December 31, 2005 from $351.2 million
for the year ended December 31, 2004. As a percentage of net sales, gross profit increased to 11.8% for the year ended
December 31, 2005 from 11.7% for the year ended December 31, 2004. Our gross profit and gross profit as a percent of net
sales by operating segment for the years ended December 31, 2005 and 2004 were as follows (in thousands):
North America ................................
EMEA.............................................
Consolidated ...................................
2005
$ 311,125
63,415
$ 374,540
% of Net
Sales
11.5%
13.5%
11.8%
2004
$ 289,604
61,594
$ 351,198
% of Net
Sales
11.3%
13.7%
11.7%
North America’s gross profit increased for the year ended December 31, 2005 by 7% to $311.1 million from $289.6
million for the year ended December 31, 2004. As a percentage of net sales, gross profit increased to 11.5% for the year
ended December 31, 2005 from 11.3% for the year ended December 31, 2004 due primarily to increases in freight margin,
increases in agency fees for Microsoft enterprise software agreement renewals, increases in supplier reimbursements as a
percentage of net sales and increases in services. These increases were offset partially by decreases in product margin due to
the increase in the percentage of sales to large corporate enterprise clients, which are generally transacted at lower product
margins, and an increase in the write-downs of inventories as a percentage of sales.
In 2005 and 2004, EMEA included only operations in the United Kingdom. EMEA’s gross profit increased for the year
ended December 31, 2005 by 3% to $63.4 million from $61.6 million for the year ended December 31, 2004. As a
percentage of net sales, gross profit decreased to 13.5% for the year ended December 31, 2005 from 13.7% for the year ended
December 31, 2004 due primarily to decreases in product margin resulting from an aggressive pricing environment as well as
some product mix shift to lower margin products and a decrease in service sales. These downward pressures on gross profit
were offset partially by decreases in the write-downs of inventories as a percentage of sales and increases in supplier
discounts.
Operating Expenses.
Selling and Administrative Expenses. Selling and administrative expenses increased 2% to $284.7 million for the year
ended December 31, 2005 from $280.3 million for the year ended December 31, 2004, but decreased as a percent of net sales
to 8.9% for the year ended December 31, 2005 from 9.3% for the year ended December 31, 2004. Selling and administrative
53
expenses as a percent of net sales by operating segment for the years ended December 31, 2005 and 2004 were as follows (in
thousands):
INSIGHT ENTERPRISES, INC.
North America ................................
EMEA.............................................
Consolidated ...................................
2005
As Restated (1)
233,892*
$
50,790
284,682
$
% of Net
Sales
8.6%
10.8%
8.9%
2004
As Restated (1)
$
226,782*
53,508
280,290
$
% of Net
Sales
8.9%
11.9%
9.3%
*Corporate charges of $694,000 and $646,000 previously allocated to our discontinued operation, Direct Alliance, for
the year ended December 31, 2005 and 2004, respectively, have been reallocated to our North America operating segment.
(1) See Note 2 “Restatement of Consolidated Financial Statements” in Part II, Item 8.
North America’s selling and administrative expenses increased for the year ended December 31, 2005 by 3% to $232.9
million compared to the year ended December 31, 2004. As a percentage of net sales, selling and administrative expenses
decreased to 8.6% for the year ended December 31, 2005 from 8.9% for the year ended December 31, 2004. In 2005, North
America benefited from increased net sales, savings from restructuring activities and increases in operational efficiencies.
These savings were offset by increased expenses in areas we were investing in for growth, most notably marketing,
information technology and training. Additionally, selling and administrative expenses for the year ended December 31,
2004 included $1.2 million of expenses associated with the hiring of our chief executive officer.
In 2005 and 2004, EMEA included only operations in the United Kingdom. EMEA’s selling and administrative
expenses decreased 5% to $50.8 million for the year ended December 31, 2005 compared to the year ended December 31,
2004. As a percentage of net sales, selling and administrative expenses decreased to 10.8% for the year ended December 31,
2005 from 11.9% for the year ended December 31, 2004. The decrease was primarily due to bonus expenses recorded in
2004 of $3.2 million, including employer taxes, related to management incentive plans with the top executives at a
discontinued operation. In 2005, EMEA also benefited from increased net sales, savings from restructuring activities and
increases in operational efficiencies. These savings were offset by increased expenses in areas we were investing in for
growth, most notably marketing, sales support and sales compensation plans.
Severance and Restructuring Expenses. During the year ended December 31, 2005, Insight UK moved into a new
facility and recorded restructuring costs of $6.9 million for the remaining lease obligations on the previous lease and $1.0
million for duplicate rent expense for the new facility for the last half of 2005. Also, during 2005, North America and EMEA
recorded severance and restructuring expenses of $3.7 million and $414,000, respectively, for severance attributable to the
elimination of 89 positions, primarily in support and management. The North America amount included the severance for the
former President of Insight North America of $2.4 million. During the year ended December 31, 2004, North America and
EMEA recorded $2.0 million and $377,000, respectively, of severance and restructuring expenses attributable to the
elimination of certain sales, support and management functions. These amounts included $1.6 million recorded for the
retirement of our Executive Vice President, Chief Administrative Officer, General Counsel and Secretary and our agreement
to terminate his employment without cause. See Note 9 to the Consolidated Financial Statements in Part II, Item 8 of this
report for further discussion of severance and restructuring activities.
Reductions in Liabilities Assumed in Previous Acquisition. During the years ended December 31, 2005 and 2004,
EMEA settled certain liabilities assumed in a previous acquisition for $664,000 and $3.6 million, respectively, less than the
amounts originally recorded. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this report for further
discussion.
Interest Income. Interest income of $3.4 million and $1.8 million for the year ended December 31, 2005 and 2004,
respectively, was generated through short-term investments. The increase in interest income was due to a generally higher
level of cash available invested in short-term investments and increases in interest rates earned on those investments during
the year ended December 31, 2005.
Interest Expense. Interest expense of $1.9 million and $2.0 million for the year ended December 31, 2005 and 2004,
respectively, primarily related to borrowings under our financing facilities. The decrease in interest expense was due to a
reduction in the amounts outstanding under our interest-bearing financing facilities, offset partially by increases in interest
rates during the year ended December 31, 2005.
54
INSIGHT ENTERPRISES, INC.
Net Foreign Currency Exchange (Gain) Loss. Net foreign currency exchange loss decreased to $72,000 for the year
ended December 31, 2005 from $262,000 for the year ended December 31, 2004. These amounts consisted primarily of
foreign currency transaction gains or losses for intercompany balances that are not considered long-term in nature.
Other Expense, Net. Other expense, net, decreased to $782,000 for the year ended December 31, 2005 from $1.2
million for the year ended December 31, 2004. These amounts consisted primarily of bank fees associated with our financing
facilities and cash management.
Income Tax Expense. Our effective tax rates for continuing operations for the year ended December 31, 2005 and 2004
were 39.3% and 28.0%, respectively. Our effective tax rate for the year ended December 31, 2005 was higher than for the
year ended December 31, 2004 primarily due to a $5.5 million tax benefit recorded during the year ended December 31, 2004
as a result of a decrease in the deferred tax valuation allowance for our United Kingdom operations. The increase in the rate
for 2005 was also due to a higher percentage of earnings that are taxable in the U.S. at higher rates.
Earnings from Discontinued Operations. On June 30, 2006, we completed the sale of 100% of the outstanding stock of
Direct Alliance to TeleTech, and the results of operations attributable to Direct Alliance for all periods presented have been
classified as a discontinued operation. In 2004, we sold our entire investment in PlusNet. Accordingly, the gain on the sale
of PlusNet and the results of operations attributable to PlusNet have been classified as a discontinued operation in 2004. See
Note 19 to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion.
Liquidity and Capital Resources
The following table sets forth for the periods presented certain consolidated cash flow information for the years ended
December 31, 2006, 2005 and 2004 (in thousands):
2006
2005
2004
Net cash provided by operating activities ....................
Net cash (used in) provided by investing activities......
Net cash provided by (used in) financing activities .....
Net cash provided by (used in) discontinued
operations .................................................................
Foreign currency exchange effect on cash flow...........
Decrease in cash and cash equivalents.........................
Cash and cash equivalents at beginning of year...........
Cash and cash equivalents at end of year.....................
$
82,602
(309,159)
242,749
As Restated (1) As Restated (1)
18,795
$
2,706
(12,359)
15,747
(8,487)
2,095
$
105
3,255
19,552
35,145
54,697
$
(6,958)
(5,695)
(3,298)
38,443
35,145
$
$
(9,135)
(3,461)
(3,454)
41,897
38,443
$
(1) See Note 2 “Restatement of Consolidated Financial Statements” in Part II, Item 8.
Cash and Cash Flow
Our primary uses of cash in the past few years have been to fund our working capital requirements, capital expenditures,
repurchases of our common stock and acquisitions.
Net cash provided by operating activities. Cash flows from operations for the year ended December 31, 2006 and 2005
were $82.6 million and $15.7 million, respectively. Cash flows from operations for the year ended December 31, 2006
resulted primarily from net earnings from continuing operations before depreciation and amortization, and increases in
accounts payable and decreases in inventories. These increases in operating cash flows were partially offset by increases in
accounts receivable. The increased accounts payable and accounts receivable balances can be primarily attributed to the
Software Spectrum acquisition. Cash flows from operations for the year ended December 31, 2005 resulted primarily from
net earnings from continuing operations before depreciation and amortization partially offset by increases in accounts
receivable and inventories. The increase in accounts receivable was due to increases in net sales with terms longer than net
30 at the end of 2005 primarily related to our large enterprise and public sector clients. The increase in inventories was due
primarily to increases in opportunistic purchases and a decision to carry additional inventories for our integration labs and
upcoming projects with large enterprise and public sector clients at the end of 2005. Cash flows from operations for the year
ended December 31, 2004 resulted primarily from net earnings before depreciation and the gain on the sale of our investment
in PlusNet, a discontinued operation, offset by an increase in accounts receivable and inventories due primarily to increased
sales compared to 2003.
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INSIGHT ENTERPRISES, INC.
Our consolidated cash flow operating metrics for the years ended December 31, 2006, 2005 and 2004 are as follows:
Days sales outstanding in ending accounts receivable (“DSOs”)(a) ............
Inventory turns (excluding inventories not available for sale) (b) ................
Days purchases outstanding in ending accounts payable (“DPOs”) (c)........
2006
94
30
66
2005
54
26
24
2004
54
29
29
(a) Calculated as the balance of Accounts receivable, net at the end of the year divided by daily Net sales. Daily Net
sales is calculated as Net sales divided by 360 days.
(b) Calculated as Costs of goods sold divided by average inventories. Average inventories is calculated as the sum of
the balances of beginning Inventories plus ending Inventories divided by two.
(c) Calculated as the balances of Accounts payable plus Inventories financing facility at the end of the year divided by
daily Costs of goods sold. Daily Costs of goods sold is calculated as Costs of goods sold divided by 360 days.
The increase in DSOs and in DPOs from the year ended December 31, 2006 is due primarily to including Software
Spectrum sales from only September 7, 2006. Increases in DSOs and DPOs also resulted from the difference in Software
Spectrum’s client base. Software Spectrum’s clients are predominantly larger enterprises with negotiated longer payment
terms than Insight’s typical historical SMB client base. Further, expansion into differing foreign jurisdictions has impacted
these metrics due to typical business practices in the respective countries. The increase in inventory turns is primarily due to
the fact that Software Spectrum operations require very little inventory. The $31.1 million of inventories not available for
sale at December 31, 2006 represents inventories segregated pursuant to binding client contracts, which will be recorded as
net sales when the criteria for sales recognition are met.
Assuming sales continue to increase in the future, we expect that cash flow from operations will be used, at least
partially, to fund working capital as we typically pay our suppliers on average terms that are shorter than the average terms
granted to our clients in order to take advantage of supplier discounts.
Net cash used in investing activities. Cash flows used in investing activities for the year ended December 31, 2006 and
2005 were $309.9 million and $8.5 million, respectively. During the year ended December 31, 2006, we received $46.3
million for the sale of Direct Alliance and used $321.2 million, net of cash acquired of $30.3 million, to acquire Software
Spectrum. In January 2005, we received $26.5 million owed to us by an underwriter related to the 2004 sale of our
investment in PlusNet, a discontinued operation. Capital expenditures of $35.0 million for the year ended December 31,
2006 primarily related to investments to upgrade our IT systems to mySAP, including capitalized costs of software developed
for internal use, IT equipment and software licenses. Capital expenditures for the year ended December 31, 2005 of $35.0
million primarily related to capitalized costs of software developed for internal use, the purchase of a previously leased office
facility, leasehold improvements primarily in our Illinois distribution center and in Insight UK’s London facility and
computer equipment. Capital expenditures for the year ended December 31, 2004 of $16.9 million primarily related to
software, computer equipment and capitalized costs of software developed for internal use. Capital expenditures in 2004
were offset by proceeds from the sale of a discontinued operation and proceeds from the sale of a building. See Note 19 to
the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion about our discontinued
operations. We expect total capital expenditures in 2007 to be between $30.0 million and $35.0 million.
Net cash provided by financing activities. Cash flows provided by financing activities for the year ended December 31,
2006 and 2005 were $242.7 million and $2.1 million, respectively. During the year ended December 31, 2006, the
acquisition of Software Spectrum was partially financed by new term loan borrowings of $75.0 million under our amended
and restated credit facility and $173.0 million under our amended accounts receivables securitization financing facility.
During the year ended December 31, 2005, cash was provided by borrowings on our short-term financing facility and our line
of credit and by cash received from common stock issuances as a result of stock option exercises. Cash was primarily used to
make repayments on our short-term financing facility and to repurchase shares of our common stock.
In January 2006, our Board of Directors approved a stock repurchase program that allows us to purchase up to an
additional $50.0 million of our common stock; however, no repurchases under this program were made during the year ended
December 31, 2006.
We anticipate that cash flow from operations, together with the funds available under our financing facilities, will be
adequate to support our presently anticipated cash and working capital requirements for operations over the next twelve
months. Additionally, we expect to use any excess cash primarily to reduce outstanding debt incurred in connection with the
acquisition of Software Spectrum.
56
INSIGHT ENTERPRISES, INC.
Cash and cash equivalents held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to
the U.S. We do not provide for U.S. income taxes on the undistributed earnings of foreign subsidiaries as earnings are
reinvested and, in the opinion of management, will continue to be reinvested indefinitely outside of the U.S. The undistributed
earnings of foreign subsidiaries that are deemed to be permanently invested outside of the U.S. were $3.5 million at December
31, 2006.
As part of our long-term growth strategy, we intend to consider acquisition opportunities from time to time, which may
require additional debt or equity financing.
See Note 7 to our Consolidated Financial Statements in Part II, Item 8 of this report for a description of our financing
facilities, including terms, amounts outstanding, amounts available and weighted average borrowings and interest rates
during the year.
Off Balance Sheet Arrangements
We have entered into off-balance sheet arrangements, which include guaranties and indemnifications, as defined by the
SEC’s Final Rule 67, “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and
Aggregate Contractual Obligations.” The guaranties and indemnifications are discussed in Note 14 to the Consolidated
Financial Statements in Part II, Item 8 of this report. We believe that none of our off-balance sheet arrangements have, or is
reasonably likely to have, a material current or future effect on our financial condition, sales or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Contractual Obligations for Continuing Operations
At December 31, 2006, our contractual obligations for continuing operations were as follows (in thousands):
Long-Term Debt (a).................................
Operating lease obligations......................
Severance and restructuring obligations (b)
Other contractual obligations (c) .............
Total.........................................................
Payments due by period
Total
239,250
66,060
17,293
67,932
$ 390,535
Less than
1 Year
15,000
13,227
9,186
18,901
$ 56,314
1-3
Years
198,000
22,396
8,107
33,486
$ 261,989
3-5
Years
26,250
15,121
-
4,900
$ 46,271
More than 5
Years
-
15,316
-
10,645
25,961
$
(a)
Includes our accounts receivable securitization facility that expires September 2009 and our term loan facility that is
scheduled to be paid off in September 2011.
(b) As a result of approved severance and restructuring plans, we expect future cash expenditures related to employee
termination benefits and facilities based costs. See further discussion in Note 9 to the Consolidated Financial
Statements in Part II, Item 8 of this report.
Includes:
(c)
I. Estimated interest payments in 2007 of $27.8 million based on the average projected balances at December
II.
31, 2007, December 31, 2008 and December 31, 2009 under the asset backed securitization facility, revolving
credit facility and term loan using the December 31, 2006 weighted average interest rate of 6.4% per annum.
Amounts totaling $9.7 million over the next seven years to the Valley of the Sun Bowl Foundation for
sponsorship of the Insight Bowl and $9.9 million over the next nine years for advertising and marketing
events with the Arizona Cardinals NFL team at the University of Phoenix stadium.
III. During the year ended December 31, 2005, we recorded $979,000, $649,000 net of taxes, for the cumulative
effect of a change in accounting principle for the adoption of FIN No. 47. FIN No. 47 states that companies
must recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are
conditional on a future event if the amount can be reasonably estimated. This interpretation applies to certain
provisions in our facility lease agreements in the U.S. and the United Kingdom. Some of our leases stipulate
that any leasehold improvements performed by the tenant with landlord approval become the landlord’s
property upon expiration of the lease. However, some landlords further reserve the right to make the
determination as to whether the premises must be returned to their original condition, normal wear and tear
excepted, at our expense. Because of these provisions, FIN No. 47 now requires us to record a liability for
the estimated fair value of this legal obligation to return the premises to the original condition with the offset
recorded as an increase to the cost of the leasehold improvements. We estimate that we will owe $3.2 million
in future years in connection with returning our leased facilities to original condition.
See further discussion in Note 14 to the Consolidated Financial Statements in Part II, Item 8 of this report.
57
INSIGHT ENTERPRISES, INC.
Although we set purchase targets with our suppliers tied to the amount of supplier reimbursements we receive, we have
no material contractual purchase obligations.
Acquisitions
Our strategy includes the possible acquisition of other businesses to expand or complement our operations. The
magnitude, timing and nature of any future acquisitions will depend on a number of factors, including the availability of
suitable acquisition candidates, the negotiation of acceptable terms, our financial capabilities and general economic and
business conditions. Financing of future acquisitions would result in the utilization of cash, incurrence of additional debt,
issuance of stock or a combination of any of the three.
Inflation
We have historically not been adversely affected by inflation, as technological advances and competition within the IT
industry have generally caused the prices of the products we sell to decline and product life cycles tend to be short. This
requires our growth in unit sales to exceed the decline in prices in order to increase our net sales. We believe that most price
increases could be passed on to our clients, as prices charged by us are not set by long-term contracts; however, as a result of
competitive pressure, there can be no assurance that the full effect of any such price increases could be passed on to our
clients.
Recently Issued Accounting Standards
See Note 1 of our Consolidated Financial Statements in Part II, Item 8 of this report for a description of recent
accounting pronouncements, including our expected dates of adoption and the estimated effects on our results of operations
and financial condition.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Risk
We have interest rate exposure arising from our financing facilities, which have variable interest rates. These variable
interest rates are affected by changes in short-term interest rates. We manage interest rate exposure by maintaining a
conservative debt to equity ratio.
Although the credit agreement we entered into to finance in part the acquisition of Software Spectrum increased our
exposure to market risk from changes in interest rates, we believe that the effect of reasonably possible near-term changes in
interest rates on our financial position, results of operations and cash flows will not be material. Our financing facilities
expose net earnings to changes in short-term interest rates since interest rates on the underlying obligations are variable. We
had $71.3 million outstanding under our term loan, $15.0 million outstanding under our revolving line of credit and $168.0
million outstanding under our accounts receivable securitization financing facility at December 31, 2006. The interest rates
attributable to the term loan, the line of credit and the financing facility were 6.48%, 8.25% and 6.00%, respectively, per
annum at December 31, 2006. A change in annual net earnings from continuing operations resulting from a hypothetical
10% increase or decrease in interest rates would approximate $1.0 million.
Foreign Currency Exchange Risk
We have operation centers in Australia, Canada, Germany, France, the U.S., and the United Kingdom, as well as sales
offices in Australia, Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, Italy, the Netherlands,
Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the U.S., and sales presence in Austria, Ireland,
New Zealand and Russia. In each of these countries, the majority of sales, expenses and capital purchasing activities are
transacted in the respective functional currencies. Therefore, we have foreign currency translation exposure for changes in
exchange rates for these currencies. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely
affect our operating margins. For example, if these foreign currencies appreciate against the U.S. dollar, it will become more
expensive in terms of U.S. dollars to pay expenses with foreign currencies. Because we operate in numerous functional
currencies, we cannot predict the effect of future exchange-rate fluctuations on business and operating results and significant
rate fluctuations could have a material adverse effect on results of operations and financial condition.
In addition, although our foreign subsidiaries have intercompany accounts that eliminate upon consolidation, such
accounts expose us to foreign currency rate movements. Exchange rate fluctuations on short-term intercompany accounts are
58
INSIGHT ENTERPRISES, INC.
recorded in our consolidated statements of earnings under “Net foreign exchange (gain) loss,” while exchange rate
fluctuations on long-term intercompany accounts are recorded in our consolidated balance sheets under “accumulated other
comprehensive loss” in stockholders’ equity. We also maintain cash accounts denominated in currencies other than the local
currency which expose us to foreign exchange rate movements.
We monitor our foreign currency exposure and may from time to time enter into hedging transactions to manage this
exposure. There were no hedging transactions during the quarter ended December 31, 2006, and there were no hedging
instruments outstanding at December 31, 2006.
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INSIGHT ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm................................................
Consolidated Balance Sheets – December 31, 2006 and 2005..............................................
Consolidated Statements of Earnings – For each of the years in the
three-year period ended December 31, 2006.......................................................................
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
– For each of the years in the three-year period ended December 31, 2006 .......................
Consolidated Statements of Cash Flows – For each of the years in the
three-year period ended December 31, 2006.......................................................................
Notes to Consolidated Financial Statements .........................................................................
Page
61
64
65
66
67
69
60
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Insight Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Insight Enterprises, Inc. and subsidiaries as of
December 31, 2006 and 2005, and the related consolidated statements of earnings, stockholders’ equity and comprehensive
income, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Insight Enterprises, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the consolidated financial statements as of December 31,
2005 and for each of the years in the two-year period ended December 31, 2005 have been restated.
As discussed in note 3 to the consolidated financial statements, the Company changed its method of accounting for stock-
based compensation upon adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment,
effective January 1, 2006. As discussed in note 1 to the consolidated financial statements, the Company adopted FASB
Financial Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB
Statement No. 143, as of December 31, 2005. The net effect of the recognition of conditional asset retirement obligations was
recognized as a cumulative effect of a change in accounting principle.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the effectiveness of Insight Enterprises, Inc. and subsidiaries’ internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated July 25, 2007 expressed an unqualified opinion on
management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.
KPMG LLP
Phoenix, Arizona
July 25, 2007
61
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Insight Enterprises, Inc.:
We have audited management’s assessment, included in Item 9A (a), “Management’s Report on Internal Control Over
Financial Reporting,” that Insight Enterprises, Inc. and subsidiaries did not maintain effective internal control over financial
reporting as of December 31, 2006, because of the effect of a material weakness identified in management’s assessment,
based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Insight Enterprises, Inc. and subsidiaries’ management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on
the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that 1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; 2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The
Company identified a material weakness in its internal control over financial reporting as of December 31, 2006, arising from
the combined effect of the following control deficiencies in the Company’s accounting for equity based awards: (i)
inadequate policies and procedures to determine the grant date and exercise price of equity awards; (ii) inadequate
supervision and training for personnel involved in the stock option granting process; and (iii) inadequate documentation and
monitoring of the application of accounting policies and procedures regarding equity awards. We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of Insight Enterprises, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements
of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period
ended December 31, 2006. This material weakness was considered in determining the nature, timing, and extent of audit
tests applied in our audit of the 2006 financial statements, and this report does not affect our report dated July 25, 2007,
which expressed an unqualified opinion on those consolidated financial statements.
In our opinion, management’s assessment that Insight Enterprises, Inc. and subsidiaries did not maintain effective internal
control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on criteria established
in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the
objectives of the control criteria, Insight Enterprises, Inc. and subsidiaries has not maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
62
Insight Enterprises, Inc. acquired Software Spectrum, Inc. during 2006 and management excluded from its assessment of the
effectiveness of Insight Enterprises Inc.’s internal control over financial reporting as of December 31, 2006, Software
Spectrum, Inc.’s internal control over financial reporting associated with 51% of total assets (34% excluding goodwill and
other identifiable intangible assets) and 14% of net sales, respectively, included in the consolidated financial statements of
Insight Enterprises, Inc. and subsidiaries as of and for the year ended December 31, 2006. Our audit of internal control over
financial reporting of Insight Enterprises, Inc. also excluded an evaluation of the internal control over financial reporting of
Software Spectrum, Inc.
KPMG LLP
Phoenix, Arizona
July 25, 2007
63
INSIGHT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
December 31,
Current assets:
Cash and cash equivalents................................................................................................
Accounts receivable, net ..................................................................................................
Inventories........................................................................................................................
Inventories not available for sale......................................................................................
Deferred income taxes......................................................................................................
Other current assets ..........................................................................................................
Total current assets .....................................................................................................
Property and equipment, net ..........................................................................................................
Buildings held for lease, net ...........................................................................................................
Goodwill..........................................................................................................................................
Intangible assets, net .......................................................................................................................
Other assets .....................................................................................................................................
2006
$ 54,697
994,892
97,751
31,112
15,583
32,359
1,226,394
129,256
16,522
296,781
86,929
18,269
$1,774,151
2005
As
Restated
(1)
$ 35,145
480,458
121,223
35,528
22,535
7,089
701,978
133,017
-
87,124
-
221
$ 922,340
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable .................................................................................................................... $ 611,367
136,401
Accrued expenses and other current liabilities ......................................................................
15,000
Current portion of long-term debt...........................................................................................
40,728
Deferred revenue.....................................................................................................................
15,000
Line of credit ...........................................................................................................................
-
Inventories financing facility ..................................................................................................
-
Short-term financing facility...................................................................................................
818,496
Total current liabilities.......................................................................................................
Long-term debt................................................................................................................................
Long-term deferred income taxes...................................................................................................
Long-term liabilities........................................................................................................................
224,250
19,403
21,652
1,083,801
$ 183,501
55,956
-
24,747
21,309
4,281
45,000
334,794
-
15,371
2,262
352,427
Commitments and contingencies (Notes 7, 8, 9, 14)
Stockholders’ equity:
Preferred stock, $0.01 par value, 3,000 shares authorized, no shares issued ........................
Common stock, $0.01 par value, 100,000 shares authorized; 48,868 and 47,736
shares issued and outstanding in 2006 and 2005, respectively.........................................
Additional paid-in capital .......................................................................................................
Retained earnings....................................................................................................................
Accumulated other comprehensive income – foreign currency translation adjustment .......
Total stockholders’ equity .................................................................................................
-
-
489
363,308
297,664
28,889
690,350
$1,774,151
477
334,404
220,846
14,186
569,913
$ 922,340
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
See accompanying notes to consolidated financial statements.
64
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Net sales ................................................................................................................
Costs of goods sold ...............................................................................................
Gross profit.............................................................................................
Operating expenses:
Selling and administrative expenses.................................................................
Severance and restructuring expenses ..............................................................
Reductions in liabilities assumed in a previous acquisition.............................
Earnings from operations.......................................................................
Non-operating (income) expense:
Interest income ..................................................................................................
Interest expense .................................................................................................
Net foreign currency exchange (gain) loss .......................................................
Other expense, net.............................................................................................
Earnings from continuing operations before income taxes...................
Income tax expense...............................................................................................
Net earnings from continuing operations ..............................................
Earnings from discontinued operations, net of taxes of $7,153,
$4,090 and $11,646, respectively, including gains on sale in 2006
and 2004 ...............................................................................................
Net earnings before cumulative effect of change in accounting
principle................................................................................................
Cumulative effect of change in accounting principle, net of taxes of $330
in 2005.................................................................................................................
Net earnings ..........................................................................................................
Net earnings per share - Basic:
Net earnings from continuing operations .............................................
Net earnings from discontinued operations...........................................
Cumulative effect of change in accounting principle ...........................
Net earnings per share............................................................................
Net earnings per share - Diluted:
Net earnings from continuing operations .............................................
Net earnings from discontinued operations...........................................
Cumulative effect of change in accounting principle ...........................
Net earnings per share............................................................................
2006
2004
As
Years Ended December 31,
2005
As
Restated
(1)
$ 3,817,085 $ 3,183,707 $ 3,008,604
2,657,406
2,809,167
3,338,022
351,198
374,540
479,063
Restated
(1)
374,523
729
-
103,811
284,682
11,962
(664)
78,560
280,290
2,435
(3,617)
72,090
(4,355)
6,793
(1,135)
901
101,607
35,899
65,708
(3,394)
1,914
72
782
79,186
31,143
48,043
(1,849)
2,011
262
1,190
70,476
19,617
50,859
11,110
6,617
29,598
76,818
54,660
80,457
-
76,818 $
(649)
54,011 $
-
80,457
$
$
$
$
1.36 $
0.23
-
1.59 $
0.99 $
0.13
(0.01)
1.11 $
1.35 $
0.23
-
0.98 $
0.13
$ 1.58 $
(0.01)
1.10 $
1.05
0.61
-
1.66
1.03
0.60
-
1.63
Shares used in per share calculation:
Basic .......................................................................................................
Diluted....................................................................................................
48,373
48,564
48,553
49,057
48,389
49,220
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
See accompanying notes to consolidated financial statements.
65
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
Balances at December 31, 2003-As Reported......
Prior period adjustments ..................................
Balances at December 31, 2003-As Restated (1) .
Issuance of common stock under employee
stock plans .................................................
Stock-based compensation expense.................
Tax benefit from employee gains on stock-
based compensation ...................................
Comprehensive income:
Foreign currency translation adjustment,
net of tax ..............................................
Reduction in foreign currency
translation adjustment due to sale
of investment in discontinued
operation ..............................................
Net earnings ..............................................
Total comprehensive income ...........................
Balances at December 31, 2004-As Restated (1) .
Issuance of common stock under employee
Common Stock
Shares Par Value
$ 471
47,116
-
-
471
47,116
2,287
-
23
-
-
-
-
-
-
-
-
-
49,403
494
stock plans .................................................
Stock-based compensation expense.................
Tax benefit from employee gains on stock-
1,059
-
based compensation ...................................
Repurchase of treasury stock ...........................
Retirement of treasury stock ............................
-
-
(2,726)
Comprehensive income:
Foreign currency translation
adjustment, net of tax...........................
Net earnings ..............................................
Total comprehensive income ...........................
Balances at December 31, 2005-As Restated (1) .
Issuance of common stock under
employee stock plans.................................
Stock-based compensation expense.................
1,132
-
47,736
477
Tax benefit from employee gains on
stock-based compensation .........................
Comprehensive income:
Foreign currency translation
adjustment, net of tax...........................
Net earnings...............................................
Total comprehensive income ...........................
Balances at December 31, 2006 ............................
48,868 $
489
10
-
-
-
(27)
-
-
12
-
-
-
-
-
-
-
-
-
Treasury Stock
Additional
Paid-in
Shares Par Value Capital
$266,803
39,593
306,396
-
-
-
-
-
-
Accumulated
Other
Comprehensive Retained
Earnings
$150,351
(30,717)
119,634
Income
$ 21,744
-
21,744
27,622
352
3,956
-
-
-
-
-
-
6,458
-
-
-
-
(1,596)
-
-
80,457
338,326
26,606
200,091
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
Stockholders’
Equity
$ 439,369
8,876
448,245
27,645
352
3,956
6,458
(1,596)
80,457
85,319
565,517
10,774
858
-
(2,726)
2,726
-
(49,998)
49,998
1,161
-
(16,715)
-
-
-
-
-
-
-
10,784
858
-
-
(33,256)
1,161
(49,998)
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
(12,420)
-
-
54,011
334,404
14,186
220,846
14,822
13,692
390
-
-
-
-
-
-
-
-
14,703
-
-
76,818
$363,308
$ 28,889
$297,664
(12,420)
54,011
41,591
569,913
14,834
13,692
390
14,703
76,818
91,521
$ 690,350
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
See accompanying notes to consolidated financial statements.
66
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net earnings from continuing operations ............................................................
Plus: net earnings from discontinued operations.................................................
Less: cumulative effect of change in accounting principle, net ..........................
Net earnings .........................................................................................................
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization .........................................................................
Provision for losses on accounts receivable.....................................................
Write-downs of inventories..............................................................................
Non-cash stock-based compensation ...............................................................
Gain on sale of discontinued operations ..........................................................
Excess tax benefit from employee gains on stock-based compensation.........
Deferred income taxes......................................................................................
Tax benefit from employee gains on stock-based compensation....................
Cumulative effect of change in accounting principle, net ...............................
Gain on sale of building ...................................................................................
Equity in loss of investee..................................................................................
Changes in assets and liabilities:
Increase in accounts receivable ........................................................................
Increase in receivables from equity method investee ......................................
Decrease (increase) in inventories ...................................................................
Decrease (increase) in other current assets ......................................................
Increase in other assets .....................................................................................
Increase (decrease) in accounts payable ..........................................................
(Decrease) increase in inventories financing facility.......................................
Increase in deferred revenue ............................................................................
Increase (decrease) in accrued expenses and other liabilities..........................
Net cash provided by operating activities ................................................
Cash flows from investing activities:
Acquisition of Software Spectrum, net of cash acquired ................................
Purchases of property and equipment ..............................................................
Proceeds from sale of discontinued operation, net of direct expenses............
Cash receipt of underwriter receivable ............................................................
Proceeds from sale of building.........................................................................
Investment in equity method investee..............................................................
Net cash (used in) provided by investing activities..................................
Cash flows from financing activities:
Borrowings on short-term financing facility....................................................
Repayments on short-term financing facility ..................................................
Borrowings on long-term financing facility ....................................................
Repayments on long-term financing facility ..................................................
Borrowings on term loan..................................................................................
Increase in book overdrafts ..............................................................................
Repayments on term loan.................................................................................
Net (repayments) borrowings on line of credit................................................
Proceeds from sales of common stock under employee stock plans ..............
Excess tax benefit from employee gains on stock-based compensation.........
Repurchase of common stock ..........................................................................
Net cash provided by (used in) financing activities .................................
Cash flows from discontinued operations:
Net cash used in operating activities................................................................
Net cash provided by (used in) investing activities .........................................
Net cash used in financing activities ...............................................................
Net cash provided by (used in) discontinued operations .........................
67
Years Ended December 31,
2005
2006
As
Restated
(1)
2004
As
Restated
(1)
$ 65,708
11,110
-
76,818
$ 48,043
6,617
(649)
54,011
$ 50,859
29,598
-
80,457
25,372
3,033
8,442
13,731
(14,872)
(1,085)
2,744
-
-
-
-
(290,612)
-
21,287
10,152
(8,370)
208,499
(4,281)
2,514
29,230
82,602
(321,167)
(34,242)
46,250
-
-
-
(309,159)
20,000
(65,000)
291,000
(123,000)
75,000
37,261
(3,750)
(6,309)
16,462
1,085
-
242,749
(8,909)
11,710
(2,696)
105
14,622
5,542
7,625
817
-
-
4,509
2,638
649
-
-
(39,374)
-
(27,583)
6,680
(1,802)
(6,438)
(13,256)
8,478
(1,371)
15,747
-
(35,027)
-
26,540
-
-
(8,487)
75,000
(55,000)
-
-
-
-
-
21,309
10,784
-
(49,998)
2,095
(3,020)
(3,783)
(155)
(6,958)
16,740
5,519
7,070
296
(23,725)
-
(2,615)
7,093
-
(328)
400
(55,003)
(3,098)
(32,839)
(639)
(496)
439
11,957
2,519
5,048
18,795
-
(16,901)
18,629
-
1,378
(400)
2,706
95,000
(125,000)
-
-
-
-
-
(10,004)
27,645
-
-
(12,359)
(5,486)
(3,804)
155
(9,135)
INSIGHT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Years Ended December 31,
2005
2006
As
Restated
(1)
2004
As
Restated
(1)
Foreign currency exchange effect on cash flow........................................................
Increase (decrease) in cash and cash equivalents......................................................
Cash and cash equivalents at beginning of year........................................................
Cash and cash equivalents at end of year ..................................................................
3,255
19,552
35,145
$ 54,697
(5,695)
(3,298)
38,443
$ 35,145
(3,461)
(3,454)
41,897
$ 38,443
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ..............................................................
Cash paid during the year for income taxes.....................................................
$ 5,814
$ 40,820
$ 1,617
$ 20,600
$ 1,939
$ 23,275
Supplemental disclosure of non-cash financing and investing activities:
Leasehold improvement related to conditional asset retirement obligation ...
Receivable from underwriter from sale of discontinued operation.................
$
$
-
-
$ 1,310
-
$
-
$
$ 26,849
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
See accompanying notes to consolidated financial statements.
68
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Operations and Summary of Significant Accounting Policies
Description of Business
We are a leading provider of brand-name information technology (“IT”) hardware, software and services to large
enterprises, small- to medium-sized businesses (“SMB”) and public sector institutions in North America, Europe, the Middle
East, Africa and Asia-Pacific. The Company is organized in the following three operating segments, which are primarily
defined by their related geographies:
Operating Segment
North America
Geography
United States (“U.S.”) and Canada
EMEA
APAC
Europe, Middle East and Africa
Asia-Pacific
Prior to the acquisition of Software Spectrum, Inc. (“Software Spectrum”) on September 7, 2006 and the divestiture of
Direct Alliance Corporation (“Direct Alliance”) on June 30, 2006, we were organized in three operating segments, two of
which were the geographic operating segments that provided IT products and services, Insight North America and Insight
UK, and the third of which was our discontinued operation that provided business process outsourcing, Direct Alliance.
Beginning with the fourth quarter of 2006, we operate in three geographic operating segments: North America; EMEA;
and APAC. To the extent applicable, prior period information disclosed in this report by operating segment has been
reclassified to conform to the current period presentation. Currently, our offerings in North America and the United
Kingdom include brand-name IT hardware, software and services. Our offerings in the remainder of our EMEA segment and
in APAC currently only include software and select software-related services.
Acquisitions and Dispositions
Consistent with our strategic plan for growth through targeted acquisitions, on September 7, 2006, we completed our
acquisition of Software Spectrum, a global technology solutions provider with expertise in the selection, purchase and
management of software. As a result of the acquisition, the purchase price of $287,000,000 plus working capital of
$64,380,000, which included cash acquired of $30,285,000, was allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair values. The excess purchase price over fair value of net assets
acquired was recorded as goodwill. Goodwill related to the Software Spectrum acquisition was $209,671,000 at December
31, 2006. Software Spectrum’s results of operations have been included in our consolidated results of operations subsequent
to the acquisition date. See further information in Note 18.
On June 30, 2006, we completed the sale of 100% of the outstanding stock of Direct Alliance, a business process
outsourcing provider in the U.S., for a cash purchase price of $46,250,000, subject to earn out and claw back provisions.
Accordingly, Direct Alliance’s results of operations for all periods presented are classified as a discontinued operation. See
further information in Note 19.
On March 1, 2007, we completed the sale of PC Wholesale, a division of our North America operating segment. As a
result of the disposition, PC Wholesale will be disclosed as a discontinued operation beginning in the three months ended
March 31, 2007. See further information in Note 21.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Insight Enterprises, Inc. and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation. References to “the Company,”
“we,” “us,” “our” and other similar words refer to Insight Enterprises, Inc. and its consolidated subsidiaries, unless the
context suggests otherwise.
69
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Additionally, these estimates
and assumptions affect the reported amounts of sales and expenses during the reporting period. Actual results could differ from
those estimates. On an ongoing basis, we evaluate our estimates, including those related to allowances for doubtful accounts,
write-downs of inventories, litigation-related obligations and valuation allowances for deferred tax assets.
Cash Equivalents
We consider all highly liquid investments with maturities at the date of purchase of three months or less to be cash
equivalents.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts to ensure trade receivables are not overstated due to uncollectibility.
The allowance is determined using estimated losses on accounts receivable based on historical write-offs, evaluation of the
aging of the receivables and the current economic environment. We write off individual accounts against the reserve when
we become aware of a client’s or vendor’s inability to meet its financial obligations, such as in the case of bankruptcy filings,
or deterioration in the client's or vendor’s operating results or financial position.
Inventories
We state inventories, principally purchased IT hardware, at the lower of weighted average cost (which approximates cost
under the first-in, first-out method) or market. We evaluate inventories for excess, obsolescence or other factors that may
render inventories unmarketable at normal margins. Write-downs are recorded so that inventories reflect the approximate net
realizable value and take into account our contractual provisions with suppliers governing price protection, stock rotation and
return privileges relating to obsolescence.
Inventories not available for sale relate to product sales transactions in which we are warehousing the product and will be
deploying the product to clients’ designated locations subsequent to period end. Additionally, we may perform services on a
portion of the product prior to shipment to our clients and will be paid a fee for doing so. Although the product contracts are
non-cancelable with customary credit terms beginning the date the inventories are segregated in our warehouse and invoiced
to the client, and the warranty periods begin on the date of invoice, these transactions do not meet the sales recognition
criteria under GAAP. Therefore, we have not recorded sales and the inventories are classified as “inventories not available
for sale” on our consolidated balance sheet until the product is shipped. If clients remit payment before we ship product to
them, we record the payments received as “deferred revenue” on our consolidated balance sheet until such time as the
product is shipped.
Property and Equipment
We state property and equipment at cost. We capitalize major improvements and betterments, while maintenance, repairs
and minor replacements are expensed as incurred. Depreciation or amortization is provided using the straight-line method
over the following estimated economic lives of the assets:
Leasehold improvements ........................................
Furniture and fixtures ..............................................
Equipment ...............................................................
Software...................................................................
Buildings..................................................................
Estimated Economic Life
Shorter of underlying
lease term or asset life
2-7 years
3-5 years
3-10 years
29 years
External direct costs of materials and services consumed in developing or obtaining internal use computer software and
payroll and payroll-related costs for employees who are directly associated with and who devote time to internal use
computer software projects, to the extent of the time spent directly on the project, are capitalized.
Reviews are regularly performed to determine whether facts and circumstances exist which indicate that the useful life is
shorter than originally estimated or the carrying amount of assets may not be recoverable. When an indication exists, we
70
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related
asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on
the excess of the carrying amount over the estimated fair value of those assets.
Goodwill
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of net identified
tangible and intangible assets acquired. We perform an annual review in the fourth quarter of every year, or more frequently
if indicators of potential impairment exist, to determine if the carrying value of recorded goodwill is impaired. The
impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. See
additional discussion of the impairment review process at Note 6.
Intangible Assets
We amortize intangible assets acquired in the acquisition of Software Spectrum using the straight-line method over the
following estimated economic lives of the intangible assets:
Customer relationships ............................................
Acquired technology related assets .......................
Non-compete agreements........................................
Trade name ..............................................................
Estimated Economic Life
10 years
5 years
1 year
7 months
Self Insurance
We are self-insured for medical insurance benefits up to certain annual stop-loss limits. Such costs are estimated and
accrued based on our maximum liability under the stop-loss limits, which estimates both known and incurred but not reported
claims.
Foreign Currencies
We use the U.S. dollar as our reporting currency. The functional currencies of our significant foreign subsidiaries are
generally the local currencies. Accordingly, assets and liabilities of the subsidiaries are translated into U.S. dollars at the
exchange rate in effect at the balance sheet dates. Income and expense items are translated at the average exchange rate for each
month within the year. The resulting translation adjustments are recorded directly in other comprehensive income as a separate
component of stockholders’ equity. Net foreign currency transaction (gains) losses, including transaction (gains) losses on
intercompany balances that are not of a long-term investment nature, are reported as a separate component of non-operating
(income) expense in our consolidated statements of earnings.
Sales Recognition
We adhere to guidelines and principles of sales recognition described in Staff Accounting Bulletin No. 104, “Revenue
Recognition” (“SAB 104”), issued by the staff of the Securities and Exchange Commission (the “SEC”). Under SAB 104,
sales are recognized when the title and risk of loss are passed to the client, there is persuasive evidence of an arrangement for
sale, delivery has occurred and/or services have been rendered, the sales price is fixed and determinable and collectibility is
reasonably assured. Using these tests, the vast majority of our hardware sales represent product sales recognized upon
shipment. Usual sales terms are FOB shipping point, at which time title and risk of loss has passed to the client and delivery
has occurred. We make provisions for estimated product returns that we expect to occur under our return policy based upon
historical return rates.
We also adhere to the guidelines and principles of software revenue recognition described in Statement of Position 97-2,
“Software Revenue Recognition” (“SOP 97-2”). Revenue is recognized from software sales when clients acquire the right to
use or copy software under license, but in no case prior to the commencement of the term of the initial software license
agreement, provided that all other revenue recognition criteria have been met (i.e., evidence of the arrangement exists, the fee
is fixed or determinable and collectibility of the fee is reasonably assured).
From time to time, in the sale of hardware, software and services, we may enter into contracts that contain multiple
elements or non-standard terms and conditions. Sales of services currently represent a small percentage of our net sales, and
a significant amount of services that are performed in conjunction with hardware and software sales are completed in our
facilities prior to shipment of the product. In these circumstances, net sales for the hardware, software and services are
71
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
recognized upon shipment. Net sales of services that are performed at client locations are often service-only contracts and
are recorded as sales when the services are performed. If the service is performed at a client location in conjunction with a
hardware, software or other services sale, we recognize net sales in accordance with SAB 104 and Emerging Issues Task
Force (“EITF”) 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables.” Accordingly, we recognize sales
for delivered items only when all of the following criteria are satisfied:
•
•
•
the delivered item(s) has value to the client on a stand-alone basis;
there is objective and reliable evidence of the fair value of the undelivered item(s); and
if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item(s) is considered probable and substantially in our control.
We sell certain third-party service contracts and software assurance or subscription products for which we are not the
primary obligor. These sales do not meet the criteria for gross sales recognition as defined in SAB 104 and EITF 99-19,
“Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”), and thus are recorded on a net sales
recognition basis. As we enter into contracts with third-party service providers or vendors, we evaluate whether the
subsequent sales of such services should be recorded as gross sales or net sales in accordance with the sales recognition
criteria outlined in SAB 104 and EITF 99-19. We determine whether we act as a principal in the transaction and assume the
risks and rewards of ownership or if we are simply acting as an agent or broker. Under gross sales recognition, the entire
selling price is recorded in sales and our cost to the third-party service provider or vendor is recorded in costs of goods sold.
Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to sales resulting
in net sales equal to the gross profit on the transaction, and there are no costs of goods sold.
Vendor Funding
We receive payments and credits from vendors, including consideration pursuant to volume sales incentive programs,
volume purchase incentive programs and shared marketing expense programs. Vendor funding received pursuant to volume
sales incentive programs is recognized as a reduction to costs of goods sold. Vendor funding received pursuant to volume
purchase incentive programs is allocated to inventories based on the applicable incentives from each vendor and is recorded
in cost of goods sold as the inventory is sold. Vendor funding received pursuant to shared marketing expense programs is
recorded as a reduction of the related selling and administrative expenses in the period the program takes place only if the
consideration represents a reimbursement of specific, incremental, identifiable costs. Consideration that exceeds the specific,
incremental, identifiable costs is classified as a reduction of costs of goods sold. The amount of vendor funding recorded as a
reduction of selling and administrative expenses totaled $20,138,000, $9,630,000 and $7,478,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. The increase from 2005 to 2006 is mainly due to the acquisition of
Software Spectrum.
Advertising Costs
Advertising costs are expensed as they are incurred. Advertising expense of $23,950,000, $18,839,000 and $15,364,000
was recorded for the years ended December 31, 2006, 2005 and 2004, respectively. These amounts were partially offset by
vendor funding received pursuant to shared marketing expense programs recorded as a reduction of selling and administrative
expenses, as discussed above.
Shipping and Handling
We record freight billed to our clients as net sales and the related freight costs as costs of goods sold.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable earnings in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
earnings in the period that includes the enactment date.
72
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Conditional Asset Retirement Obligations
We adopted FASB Financial Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN No.
47”) during the year ended December 31, 2005. FIN No. 47 states that companies must recognize a liability for the fair value of
a legal obligation to perform asset-retirement activities that are conditional on a future event if the amount can be reasonably
estimated. This interpretation applies to certain provisions in our facility lease agreements. Some of our leases stipulate that any
leasehold improvements performed by us with landlord approval become the landlord’s property upon expiration of the lease.
However, some of our landlords further reserve the right to make the determination as to whether the premises must be returned
to their original condition, normal wear and tear excepted, at our expense. Because of these provisions, we are required to
record a liability for the estimated fair value of this legal obligation to return the premises to the original condition with the offset
recorded as an increase to the cost of the leasehold improvements. As a result, during the fourth quarter of 2005, we recorded
leasehold improvements of $1,310,000 and long term liabilities of $2,289,000. Had the obligation been recorded at January 1,
2005, the balance would have been $1,625,000. Additionally, we recorded a non-cash cumulative effect of a change in
accounting principle of $979,000 ($649,000 net of tax), representing cumulative amortization of the leasehold improvements and
accretion of the long term liability since the lease inception dates.
The following table illustrates the effect on net earnings and earnings per share if this interpretation had been applied during
the periods presented (in thousands, except per share data):
Years Ended December 31,
2005
As Restated (1)
2004
As Restated (1)
Net earnings as reported .....................................................
Total depreciation and interest accretion costs, net of tax
Pro forma net earnings .......................................................
Basic net earnings per share:
As reported...................................................................
Pro forma......................................................................
Diluted net earnings per share:
As reported...................................................................
Pro forma......................................................................
$
$
$
$
$
$
54,011
$
140
$
54,151
80,457
115
80,572
1.11
1.11
1.10
1.10
$
$
$
$
1.66
1.66
1.63
1.63
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
Net Earnings From Continuing Operations 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 year. 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 follows (in thousands, except per share data):
Years Ended December 31,
2006
2005
2004
As Restated (1) As Restated (1)
Numerator:
Net earnings from continuing operations......................................... $
65,708
$
48,043 $
50,859
Denominator:
Weighted-average shares used to compute basic EPS .....................
Potential dilutive common shares due to dilutive stock
options..........................................................................................
Weighted-average shares used to compute diluted EPS ..................
48,373
191
48,564
48,553
48,389
504
49,057
831
49,220
Net earnings from continuing operations per share:
Basic ................................................................................................ $
Diluted ............................................................................................. $
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
1.36
1.35
$
$
0.99 $
0.98 $
1.05
1.03
73
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following weighted-average outstanding stock options during the year ended December 31, 2006 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):
Weighted-average outstanding stock options having no dilutive
effect .....................................................................................................
3,293
3,938
4,552
Years Ended December 31,
2006
2005
2004
Reclassifications
Certain amounts in the 2005 and 2004 consolidated financial statements have been reclassified to conform to the 2006
presentation.
Recently Issued Accounting Standards
In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”), which amends
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”).
SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to
be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also
clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all
financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after
September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including
for interim periods, for that fiscal year. We do not expect the adoption of SFAS No. 155 will have a material effect on our
consolidated financial statements and disclosures.
In June 2006, the EITF reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net
Presentation)” (“EITF No. 06-3”) that, for periods beginning after December 15, 2006, entities may adopt a policy of
presenting taxes in the income statement on either a gross or net basis. Gross or net presentation may be elected for each
different type of tax, but similar taxes should be presented consistently. Taxes within the scope of EITF No. 06-3 would
include taxes that are imposed concurrent with or subsequent to a revenue transaction between a seller and a customer. EITF
No. 06-3 will not affect the method that we employ to present sales taxes in our consolidated financial statements, as we
currently present sales net of taxes, and we anticipate that we will continue to do so in the future.
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48
applies to all entities subject to income taxes and covers all tax positions accounted for in accordance with FASB Statement No.
109, “Accounting for Income Taxes.” This interpretation will require that we recognize the effect of a tax position in our
consolidated financial statements if there is a greater likelihood than not of the position being sustained upon audit, based on the
technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006,
with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We
have determined that there will not be a material adjustment to beginning retained earnings as a result of the implementation of
FIN 48 in the first quarter of 2007.
On May 2, 2007, the FASB issued FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No.
48,” or FSP FIN 48-1, which amends FIN 48 to provide guidance about how an enterprise should determine whether a tax
position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax
position is considered to be effectively settled if the taxing authority completed its examination, the company does not plan to
appeal, and it is remote that the taxing authority would reexamine the tax position in the future.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS No. 157”), which provides guidance for using fair value to measure assets and liabilities. The standard also responds
to investors’ requests for more information about (1) the extent to which companies measure assets and liabilities at fair
value, (2) the information used to measure fair value, and (3) the effect that fair-value measurements have on earnings.
SFAS No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value.
74
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The standard does not expand the use of fair value to any new circumstances. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are in
the process of determining the effect that the adoption of SFAS No. 157 will have on our consolidated financial statements
and disclosures.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB No. 108”). SAB No. 108 provides guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108
establishes an approach that requires quantification of financial statement errors based on the effects of each of a company’s
balance sheets and statements of operations and the related financial statement disclosures. SAB No. 108 permits existing
public companies to record the cumulative effect of initially applying this approach in the first year ending after
November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the
beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the
use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error
being corrected through the cumulative adjustment and how and when it arose. The adoption of SAB No. 108 will not have a
material effect on our consolidated financial statements and disclosures.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), which
becomes effective for fiscal periods beginning after November 15, 2007. Under SFAS No. 159, companies may elect to
measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis,
with changes in fair value recognized in earnings each reporting period. This election, called the “fair value option,” will
enable some companies to reduce volatility in reported earnings caused by measuring related assets and liabilities differently.
We do not expect that the adoption of SFAS No. 159 will have a material effect on our consolidated financial statements and
disclosures.
(2) Restatement of Consolidated Financial Statements
Background
We announced on October 19, 2006 that the Company’s Board of Directors had appointed an Options Subcommittee,
comprised of independent directors, to conduct a review of the Company’s stock options. Certain present and former
directors and executive officers of the Company were named as defendants in a derivative lawsuit related to stock option
practices from 1997 to 2002, filed in Superior Court, County of Maricopa, Arizona on September 21, 2006. The Company
had been named as a nominal defendant in that action. On December 22, 2006, we filed a motion to dismiss the complaint
based on plaintiff’s failure to make a pre-suit demand on the Company’s Board of Directors. Before the opposition to the
motion was due, the plaintiff voluntarily asked the Court to dismiss the lawsuit, and, on January 19, 2007, the Court granted
the plaintiff’s motion to voluntarily dismiss the lawsuit without prejudice. In addition, we announced on November 6, 2006
that on October 27, 2006, the Company received an informal inquiry from the Securities and Exchange Commission (the
“SEC”) requesting certain documents and information relating to the Company’s stock option granting practices from
January 1, 1996 to the present.
The Options Subcommittee was assisted by independent legal counsel and independent forensic accounting consultants.
At the conclusion of its review, the Options Subcommittee reported its findings to the Company’s Board of Directors and to
KPMG LLP, the Company’s independent registered public accounting firm, on March 9, 2007 and March 13, 2007,
respectively. Management, assisted by its own independent legal counsel and independent forensic consultants, then
undertook an analysis of the results of the Options Subcommittee’s review, as well as all stock option activity during the
period after the Company’s initial public offering on January 24, 1995 through November 30, 2005, the last date on which we
granted stock options (the “Relevant Period”).
Based upon the investigation and determinations made by the Options Subcommittee of the Board of Directors and
management’s undertaking of a review of historical stock option activity, the Company identified errors in its accounting
related to stock option compensation expense for each of the fiscal years ended 1995 through 2005 and for the first quarter of
the year ended December 31, 2006. In a Form 8-K filed on April 5, 2007, we reported that based on the findings of the
Options Subcommittee and the conclusions reached to date by management in its analysis, our previously issued financial
statements would require restatement and should no longer be relied upon.
75
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We determined, based upon the Options Subcommittee’s review and the Company’s analysis, that for accounting
purposes, the dates initially used to measure compensation expense for various stock option grants to employees, executive
officers and outside non-employee directors during the period could not be relied upon. The revised measurement dates
identified for accounting purposes differed from the originally selected measurement dates due primarily to: (i) insufficient or
incomplete approvals; (ii) inadequate or incomplete establishment of the terms of the grants, including the list of individual
recipients; and (iii) the use of hindsight to select exercise prices. These restated consolidated financial statements reflect the
corrections resulting from our determination.
Restatement Adjustments
Our restated consolidated financial statements contained in this Form 10-K incorporate stock-based compensation
expense, including the income tax impacts related to the restatement adjustments. The restatement adjustments result in a
$30.9 million reduction of retained earnings as of December 31, 2006. This amount includes reductions in our consolidated
net earnings of approximately $0.1 million for each of the years ended December 31, 2005 and 2004. The total restatement
impact for the years ended December 31, 1995 through December 31, 2003, of $30.7 million, net of related tax benefits of
$16.3 million, has been reflected as a prior period adjustment to beginning retained earnings as of January 1, 2004. The
Company also recorded restatement adjustments to its selected quarterly financial information for the quarters ended March
31, 2006 and December 31, 2005. See Note 20 for the Company’s quarterly financial information.
The total unamortized stock-based compensation was less than $0.1 million at December 31, 2006.
In addition to the restatements for stock-based compensation, we recorded a pre-tax adjustment for $1.0 million to record
a legal settlement expense that was recorded in the first quarter of 2006, which should have been recorded in the fourth
quarter of 2005. The tax effect of this adjustment was $0.4 million.
The following table summarizes the effect of the restatement adjustments on beginning retained earnings as of January 1,
2004, and net earnings for the years ended December 31, 2005 and 2004 (in thousands):
Net Earnings
December 31,
2005
2004
Retained Earnings
January 1,
2004
As previously reported........................................... $
54,695
$
80,528
$
150,351
Adjustments:
Stock option compensation expense.................
Other miscellaneous accounting
adjustments.....................................................
Income tax benefit ............................................
(92)
(1,000)
408
Total adjustments ..................................................
(684)
(290)
-
219
(71)
(47,017)
-
16,300
(30,717)
As restated ............................................................. $
54,011
$
80,457
$
119,634
76
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tables below present the decrease (increase) in net earnings resulting from the individual restatement adjustments for
each respective period presented and are explained in further detail following the table (in thousands):
Six Months
Ended
June 30, 2006
(unaudited)
2005
2004
2003
(unaudited)
2002
2001
(unaudited) (unaudited) (unaudited)
2000
Year Ended
Stock option compensation from
continuing operations:
Discretionary Grants ....................... $
Anniversary Grants .........................
Promotion Grants............................
New Hire Grants .............................
Program Grants...............................
Total stock compensation
expense from continuing
operations ....................................
Other miscellaneous accounting
adjustments:
Adjustment to record legal
settlement in appropriate period....
Total other miscellaneous
accounting adjustments ...............
Total adjustments to earnings
from continuing operations
before income taxes ....................
Income tax (expense) benefit ........
Total adjustments to earnings
from continuing operations ........
Total stock option compensation
expense from discontinued
operations ...................................
Income tax benefit ........................
Total adjustments to earnings
from discontinued operations,
net of taxes .................................
Total adjustments to net earnings
before cumulative effect of
change in accounting principle ..
Total adjustments to cumulative
effect of change in accounting
principle .....................................
$
-
-
-
-
-
-
42 $
-
2
7
-
196 $
13
5
19
1
3,510 $
127
24
(15)
8
11,716 $ 4,190 $
929
105
39
28
1,591
186
14
89
5,830
1,432
111
48
23
51
234
3,654
12,817
6,070
7,444
(1,000)
1,000
(1,000)
1,000
-
-
-
-
-
-
-
-
-
-
(1,000)
(390)
1,051
392
234
196
3,654 12,817
4,331
1,579
6,070
2,009
7,444
2,620
(610)
659
38
2,075
8,486
4,061
4,824
-
-
-
41
16
56
23
880
326
4,834
1,652
2,951
980
2,344
790
25
33
554
3,182
1,971
1,554
(610)
684
71
2,629 11,668
6,032
6,378
-
-
-
-
-
-
-
Total decrease (increase) in net
earnings....................................... $
(610) $
684 $
71 $
2,629 $
11,668 $
6,032 $
6,378
77
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1999
(unaudited)
1998
(unaudited)
1997
(unaudited)
1996
(unaudited)
1995
(unaudited)
Total
(unaudited)
Year Ended
Stock option compensation from
continuing operations:
Discretionary Grants ....................... $
Anniversary Grants .........................
Promotion Grants............................
New Hire Grants .............................
Program Grants...............................
Total stock compensation expense
from continuing operations .........
1,341
243
97
350
71
2,102
$
1,654 $
11
21
108
188
528 $
-
-
31
69
1,982
628
$
18
1
-
15
-
34
-
-
34
13
21
13
5
1 $ 29,026
4,347
-
551
-
617
1
477
-
2
35,018
-
-
-
-
2
1
35,018
12,320
1
22,698
2
1
12,381
4,217
-
-
2,102
702
1,400
704
215
-
-
-
-
1,982
657
628
210
1,325
418
433
162
123
47
489
271
76
8
1
8,164
1,889
1,596
494
29
2
30,862
-
-
-
-
-
-
1,889
$
1,596 $
494 $
29
$
2 $ 30,862
Other miscellaneous accounting
adjustments:
Adjustment to record legal
settlement in appropriate period....
Total other miscellaneous
accounting adjustments ...............
Total adjustments to earnings
from continuing operations
before income taxes ....................
Income tax benefit.........................
Total adjustments to earnings
from continuing operations ........
Total stock option compensation
expense from discontinued
operations ...................................
Income tax benefit ........................
Total adjustments to earnings
from discontinued operations,
net of taxes ..................................
Total adjustments to net earnings
before cumulative effect of
change in accounting principle ..
Total adjustments to cumulative
effect of change in accounting
principle .....................................
Total decrease (increase) in net
earnings....................................... $
Stock Option Compensation —These adjustments are from our determination, based upon the Options Subcommittee’s review
and the Company’s analysis, that for accounting purposes, the dates initially used to measure compensation expense for
numerous option grants to employees, executive officers and outside non-employee directors during the period could not be
relied upon for various categories of option grants including: (i) discretionary grants of various types; (ii) anniversary grants; (iii)
promotion grants; (iv) new hire grants; and (v) program grants. The revised measurement dates identified for accounting
purposes differed from the originally selected measurement dates due primarily to: (i) insufficient or incomplete approvals; (ii)
inadequate or incomplete establishment of the terms of the grants, including the list of individual recipients; and (iii) the use of
hindsight to select exercise prices.
Specifically, for each of the categories of option grants discussed in more detail under “Accounting Considerations”
below, we noted the following:
Stock option grants with insufficient or incomplete approvals. The Company determined that the original recorded grant
date could not be relied on because there was correspondence or other evidence that indicated that not all required approvals
had been obtained, including for certain grants, Compensation Committee approval. The Company remeasured these option
grants with a revised measurement date supported by the required level of approval, as described below, and accounted for
these grants as fixed awards under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(“APB No. 25”).
78
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Inadequate or incomplete establishment of the terms of the grants. The Company determined that for certain stock
option grants, the number of shares and the exercise price were not known with finality at the original measurement date.
The Company determined that the original recorded grant date could not be relied on because there was correspondence or
other evidence that indicated that the Company had not finalized the number of stock options allocated to each individual
recipient and the related exercise price. Based on available supporting documentation, the Company determined the date by
which the number of stock options to be awarded to each recipient was finalized and the other terms of the award were
established and accounted for these grants as fixed awards under APB No. 25.
The use of hindsight to select exercise prices. As noted below, the Company followed an informal policy of awarding
options to individual employees in recognition of the anniversary of their employment with the Company or in conjunction
with employee promotions using hindsight to select the exercise price. In many instances, little or no documentation to
support dates selected for option grants could be located by the Company. Further, instances of favorable, retrospective date
selection of discretionary grants were identified. Also, as noted below, the investigation noted instances of inadequate
documentation, or retrospective date selection, relating to the award of grants to the Company’s top three executive officers,
all of which required Compensation Committee approval. Based on available supporting documentation, the Company
determined a revised measurement date and accounted for these grants as fixed awards under APB No. 25.
Income Tax Benefit — The Company recorded a net income tax benefit of approximately $8.1 million in connection with the
stock-based compensation related expense during the period from fiscal year 2002 to December 31, 2006, net of estimated
limitations under Internal Revenue Code Section 162(m). This tax benefit resulted in an increase of the Company’s deferred
tax assets for most U.S. affected stock options prior to the exercise or forfeiture of the related options. With the exception of
UK employees exercising options after 2002, the Company recorded no tax benefit or deferred tax asset for affected stock
options granted to non-U.S. employees because the Company determined that it could not receive tax benefits for these
options. Further, the Company limited the deferred tax assets recorded for affected stock options granted to certain highly
paid officers to reflect estimated limitations on tax deductibility under Internal Revenue Code Section 162(m). Upon
exercise or forfeiture of the underlying options, the excess or deficiency in deferred tax assets are written-off to paid-in
capital in the period of exercise or forfeiture.
Accounting Considerations — Stock-Based Compensation
We originally accounted for all employee, officer and director stock option grants as fixed grants under APB No. 25,
using a measurement date of the recorded grant date. We issued all grants with an exercise price equal to the fair market
value of our common stock on the recorded grant date, and therefore originally recorded no stock-based compensation
expense.
As a result of the findings of the Options Subcommittee, and our own further review of our stock option granting
practices, we determined that the measurement dates for certain stock option grants differed from the recorded grant dates for
such grants. Based on the analysis described below, the Company concluded that it was appropriate to revise the
measurement dates for these grants based upon its findings. The Company calculated stock-based compensation expense
under APB No. 25 based upon the intrinsic value as of the adjusted measurement dates of stock option awards determined to
be “fixed” under APB No. 25 and the vesting provisions of the underlying options. The Company calculated the intrinsic
value on the adjusted measurement date as the closing price of its common stock on such date as reported on the NASDAQ
National Market, now the NASDAQ Global Select Market, less the exercise price per share of common stock as stated in the
underlying stock option agreement, multiplied by the number of shares subject to such stock option award. The Company
recognizes these amounts as compensation expense over the vesting period of the underlying options in accordance with the
provisions of FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans. We also determined that variable accounting treatment was appropriate under APB No. 25 for certain stock
option grants for which evidence was obtained that the terms of the options may have been communicated to those recipients
and that those terms were subsequently modified (stock option grants cancelled and repriced). When variable accounting is
applied to stock option grants, we remeasure, and report in our consolidated statements of earnings, the intrinsic value of the
options at the end of each reporting period until the options are exercised, cancelled or expire unexercised.
The Company determined the most supportable measurement dates for each of the various categories of options grants as
follows:
79
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Discretionary Grants. Discretionary grants included grants to the Company’s outside directors, the Chief Executive
Officer (“CEO”), President and Chief Financial Officer (the “three highest ranking executives” of the Company), other
Section 16 Officers, and all other Company employees.
The Company determined that it had granted stock options to its outside directors pursuant to the Company’s stock plans or
Board of Directors’ minutes in the majority of instances; however, in a few instances, certain grants to these individuals require
alternative measurement dates based on the approval dates specified in plan documents or signed minutes. The Company
recorded a pre-tax adjustment to compensation expense totaling less than $0.1 million associated with all grants to outside
directors during the Relevant Period.
During the Relevant Period, the Company followed a practice of requiring Compensation Committee approval of the stock
option awards to the three highest ranking executives of the Company. For some grants, the Compensation Committee minutes
do not indicate approval of an award. In other instances, the Company either did not locate minutes or the evidence was
inconclusive concerning when a specific meeting occurred. The Company determined that certain grants to these individuals
require alternative measurement dates. For example, due to inconclusive evidence regarding the date of Compensation
Committee approval, because the Board had approved the Proxy Statement in which the award was specifically listed, the Proxy
Statement filing date was selected as the best evidence of a measurement date for the award. The Company recorded a pre-tax
adjustment to compensation expense totaling $13.3 million for all grants to the three highest ranking executives of the Company
during the Relevant Period.
Prior to May 16, 2003, the CEO approved stock option awards to Section 16 Officers. Evidence of CEO approval typically
consisted of an email containing the grant terms. Effective with the May 16, 2003 Compensation Committee meeting, the
Compensation Committee was required to approve grants to the Section 16 Officers. Evidence of Compensation Committee
approval included Compensation Committee minutes or a signed Unanimous Written Consent (“UWC”). The Company
determined that certain grants to these individuals require alternative measurement dates based on the date of approval identified
in the supporting documentation. The Company recorded a pre-tax adjustment to compensation expense totaling $9.5 million in
connection with discretionary grants to Section 16 Officers, in addition to the $13.3 million pre-tax adjustment for grants to the
three highest ranking executives of the Company, during the Relevant Period.
Throughout most of the Relevant Period, the Company’s option plans granted discretion to the CEO to award option
grants to any Company employee, other than the top three executives. The CEO in turn authorized a defined number of
options in connection with certain discretionary grants during the Relevant Period that were allocated by certain senior
executives amongst employees within particular business units. In certain instances, the review revealed that lists of grantees
within specified business units had not been finalized as of the grant date. Where required, the Company identified
alternative measurement dates for these discretionary grants and recorded the required pre-tax adjustment to compensation
expense totaling $7.9 million during the Relevant Period.
During the Relevant Period, the Company also granted annual performance-based options to employees at the discretion
of certain executives and managers within each business unit. Based on the supporting documentation, the business units
finalized the list of awards by person on different dates. The Company reconciled each list to the actual awards contained in
the Company’s stock plan administration database to determine the date by which each business unit’s list was finalized. The
Company recorded a pre-tax adjustment to compensation expense totaling $6.5 million for six grant dates during the Relevant
Period that primarily related to annual performance reviews.
Anniversary Grants. Throughout the Relevant Period, the Company followed an informal policy of awarding options to
individual employees in recognition of the anniversary of their employment with the Company or in conjunction with
employee promotions. The number of these options was determined by the employee’s level within the Company, or, in the
case of promotion grants, the level to which the employee was promoted. The majority of these grants were modest in size,
generally 500 options or less. In the case of senior management, anniversary or promotion grants could be much larger, at
5,000 or 7,500 options. Occasionally, very senior executives, other than the top three executives, received larger grants for
anniversaries or promotions, but these were relatively few and were generally done on a case-by-case basis.
The Options Subcommittee review indicated that the Company’s anniversary related options were granted with
measurement dates determined by three general methods, depending upon the time period in the Relevant Period. From the
beginning of the Relevant Period through the end of 1998, anniversary grants were generally granted with a measurement
date on an employee’s actual anniversary date. For a period of time between 1999 and 2002, the grant dates generally were
selected retrospectively based on either the low price of a month or the low price of the quarter. In the third quarter of 2002,
the Company began a practice of awarding anniversary grants on the 15th day of each month for the balance of 2002, and in
80
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 2003, the Company essentially ceased making anniversary grants, except for minimal contractual grants to certain
United Kingdom employees which continued into 2005.
The Company used email correspondence or other documentation maintained in the Stock Plan Administration files and
information obtained from the Company’s human resources system and payroll records to determine each employee’s
anniversary date based on the employee’s hire (and corresponding anniversary) date. The general granting practice for
anniversary awards in place at the relevant point in time was used to determine the appropriate measurement date for each
employee’s anniversary award. For a limited number of grants, absent evidence of the employee’s hire date, the date the
employee record of the stock options was added to the Company’s stock plan administration database application was used as
the measurement date for the awards identified as anniversary grants. For periods where the Company issued anniversary
grants using quarterly or monthly lows, or other low prices, alternate measurement dates were required. The Company
recorded a pre-tax compensation expense adjustment totaling $6.6 million for anniversary grants during the Relevant Period.
Promotion Grants. Promotion grants were generally handled in the same manner as anniversary grants. In some
instances, promotion grants were awarded on the promotion effective date and other times at the low price of the month or
quarter. The Company’s analysis revealed that the Company had a general practice of granting promotion options on the
employees’ promotion effective dates from 1998 through 2000. The Company selected either the promotion effective date, if
available, or the date the employee record of the stock options was added to the Company’s stock plan administration
database application, if the promotion effective date was not available, as the measurement date for the promotion grants
issued from 1998 through 2000. For subsequent periods where the Company issued promotion grants using quarterly or
monthly lows, or other low prices, alternate measurement dates were required. The Company recorded a pre-tax
compensation expense adjustment totaling $2.2 million for promotion grants during the Relevant Period.
New Hire Grants. Throughout the Relevant Period, the Company issued an option grant to each new employee on the
employee’s start date. The Company had a uniform practice of granting a specific number of options depending on the
incoming employee’s level within the Company. For example, the lowest level employees would receive 50 options on their
start date, while certain managers might receive 2,500 options. Senior executive officers would typically receive much larger
grants upon joining the Company, and those grants were typically negotiated as part of a total compensation package that
were reflected in an employment agreement or offer letter. In general, the Company found a lack of significant issues with
respect to new hire grants. Compensation expense was required to be recorded for administrative and error corrections and in
a small number of cases where it was determined that an employee received an award with an effective date earlier than their
actual start date, or where the amount of the grant was negotiated or otherwise selected after the employee began working at
the Company. Additionally, during certain limited periods, due to a limited number of options being available to grant, the
Company issued certain new hire grants at a later date along with the period’s anniversary grants at the low price of the
month or quarter, in which case the Company determined that alternate measurement dates were required. The Company
recorded a pre-tax compensation expense adjustment totaling $0.7 million for new hire grants during the Relevant Period.
Program Grants. The Company had numerous routine grant programs under which options were awarded to employees
who participated on specific teams within the Company, completed certain training programs or achieved certain goals in
their jobs. These options (generally 50 to 250 options) were typically only granted to individual employees below a certain
level. Although these grants were routinely made on an annual or quarterly basis, no official written policies existed
describing the exact criteria or timing for each grant program. Not all of the grants awarded pursuant to these programs could
be identified due to incomplete or inconsistent documentation. The Company typically determined the most supportable
measurement date based on communication of the list of recipients and the respective number of options to be granted to
Stock Plan Administration. In those instances where the review failed to reveal a specific date when lists were received in
Stock Plan Administration, the Company selected the date the employee record of the stock options was added to the
Company’s stock plan administration database application as the measurement date. The Company recorded a pre-tax
adjustment to compensation expense totaling $0.6 million for these program grants during the Relevant Period.
For some grants, the Company identified no supporting documentation to determine the timing of the approval of the
terms of the grant. In these instances, the Company selected the date the employee record of the stock options was added to
the Company’s stock plan administration database application as the measurement date.
81
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Effect of the Restatement Adjustments on our Consolidated Financial Statements
The following tables present the effect of the financial statement restatement adjustments on the Company’s previously
reported consolidated statements of earnings for the years ended December 31, 2005 and 2004 (in thousands, except per share
data):
Year Ended December 31, 2005
Net sales.......................................................... $ 3,261,150 $
Costs of goods sold .........................................
Gross profit ..............................................
2,869,239
391,911
As Reported
Discontinued
Operations(C) Adjustments
-
-
(77,443) $
(60,072)
(17,371)
As Restated
$ 3,183,707
2,809,167
374,540
Operating expenses:
Selling and administrative expenses............
Severance and restructuring expenses .........
Reductions in liabilities assumed in a
previous acquisition.................................
Earnings from operations .........................
Non-operating (income) expense:
Interest income ............................................
Interest expense ...........................................
Net foreign currency exchange loss.............
Other expense, net .......................................
Earnings from continuing operations
before income taxes .............................
Income tax expense.........................................
Net earnings from continuing operations .
Net earnings from discontinued operation
Net earnings before cumulative effect of
289,250
12,967
(664)
90,358
(3,394)
1,914
72
781
(5,619)
(1,005)
-
(10,747)
-
-
-
1
1,051(A) (B) 284,682
11,962
-
-
(1,051)
-
-
-
-
(664)
78,560
(3,394)
1,914
72
782
90,985
35,641
55,344
-
(10,748)
(4,106)
(6,642)
6,642
(1,051)
(392)
(659)
(25) (A)
79,186
31,143
48,043
6,617
change in accounting principle.............
Cumulative effect of change in accounting
principle ...............................................
Net earnings............................................. $
55,344
(649)
54,695 $
Net earnings per share - Basic:
Net earnings from continuing operations... $
Net earnings from discontinued operation
Cumulative effect of change in accounting
principle ...............................................
Net earnings per share ............................. $
1.14 $
-
(0.01)
1.13 $
Net earnings per share - Diluted:
Net earnings from continuing
operations............................................... $
Net earnings from discontinued operation
Cumulative effect of change in accounting
principle ...............................................
Net earnings per share ............................. $
1.13 $
-
(0.01)
1.12 $
Shares used in per share calculations:
Basic ........................................................
Diluted .....................................................
48,553
49,042
-
-
-
$
(0.14) $
0.14
-
-
$
(0.14) $
0.14
$
-
-
-
-
(684)
-
(684)
(0.01)
(0.01)
-
(0.02)
(0.01)
(0.01)
-
(0.02)
54,660
(649)
54,011
0.99
0.13
(0.01)
1.11
0.98
0.13
(0.01)
1.10
$
$
$
$
$
-
15
48,553
49,057
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax benefit.
(B) Adjustment for a legal settlement expense that was recorded in the first quarter of 2006, which should have been
recorded in the fourth quarter of 2005.
(C) Adjustment to reclassify the operations of Direct Alliance to discontinued operations as described in Note 11.
82
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Year Ended December 31, 2004
Net sales............................................... $ 3,082,725 $
Costs of goods sold .............................. 2,712,294
Gross profit ................................... 370,431
As Reported
Discontinued
Operations(B) Adjustments As Restated
$ 3,008,604
2,657,406
351,198
(74,121) $
(54,888)
(19,233)
-
-
285,742
(5,686)
234(A)
280,290
Operating expenses:
Selling and administrative expenses.
Severance and restructuring
expenses..........................................
Reductions in liabilities assumed in
a previous acquisition .....................
Earnings from operations ..............
Non-operating (income) expense:
Interest income
Interest expense
Net foreign currency exchange loss
Other expense, net
2,435
(3,617)
85,871
(1,849)
2,011
262
631
-
-
(13,547)
-
-
-
559
-
2,435
-
(234)
-
-
-
-
(3,617)
72,090
(1,849)
2,011
262
1,190
70,476
19,617
Earnings from continuing
operations before income taxes...
84,816
Income tax expense.............................. 24,729
(14,106)
(4,916)
(234)
(196)
Net earnings from continuing
operations...................................
Net earnings from
discontinued operation ...............
Net earnings.................................. $
Net earnings per share - Basic:
Net earnings from continuing
operations................................... $
Net earnings from discontinued
operation....................................
Net earnings per share .................. $
Net earnings per share - Diluted:
Net earnings from continuing
operations.................................... $
Net earnings from discontinued
operation......................................
Net earnings per share .................. $
Shares used in per share calculations:
60,087
(9,190)
(38)
50,859
20,441
80,528 $
9,190
-
$
(33)
(71) $
29,598
80,457
1.24 $
0.19
$
0.42
1.66 $
(0.19)
-
$
1.22 $
0.19
$
0.42
1.64 $
(0.19)
-
$
-
-
-
-
-
-
$
$
$
$
1.05
0.61
1.66
1.03
0.60
1.63
Basic
Diluted
48,389
49,231
-
-
-
(11)
48,389
49,220
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax benefit.
(B) Adjustment to reclassify the operations of Direct Alliance to discontinued operations as described in Note 11.
83
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the effect of the restatement adjustments on the Company’s previously reported
consolidated balance sheet as of December 31, 2005 (in thousands):
As Reported
December 31, 2005
Adjustments
As Restated
ASSETS
Current Assets:
Cash and cash equivalents.................................
Accounts receivable, net ...................................
Inventories.........................................................
Inventories not available for sale ......................
Deferred income taxes.......................................
Other current assets ...........................................
Total current assets .................................
$
Property and equipment ............................................
Goodwill ...................................................................
Other assets...............................................................
Total assets .............................................
$
35,145 $
480,458
121,223
35,528
22,535
7,089
701,978
133,017
87,124
221
922,340 $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable ..............................................
Accrued expenses and other current liabilities..
Deferred revenue...............................................
Short-term financing facility .............................
Line of credit.....................................................
Inventories financing facility ............................
Total current liabilities ............................
Long-term deferred income taxes .............................
Other long-term liabilities.........................................
Total liabilities ........................................
Stockholders’ equity:
Preferred stock ..................................................
Common stock ..................................................
Additional paid in capital ..................................
Retained earnings ..............................................
Accumulated other comprehensive income-
foreign currency translation adjustment........
Total stockholders’ equity .......................
$
183,501 $
54,926
24,747
45,000
21,309
4,281
333,764
20,290
2,262
356,316
-
477
299,043
252,318
14,186
566,024
-
-
-
-
-
-
-
-
-
-
-
$
35,145
480,458
121,223
35,528
22,535
7,089
701,978
133,017
87,124
221
$ 922,340
-
30(A)
1,000(B)
-
-
-
-
1,030
$ 183,501
55,956
24,747
45,000
21,309
4,281
334,794
(4,919)(A)
-
(3,889)
15,371
2,262
352,427
-
-
-
477
35,361(A)
334,404
(31,472) (A) 220,846
-
3,889
14,186
569,913
Total liabilities and stockholders’ equity
$
922,340 $
-
$ 922,340
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax benefit.
(B) Adjustment for a legal settlement expense that was recorded in the first quarter of 2006, which should have been
recorded in the fourth quarter of 2005.
84
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the effect of the restatement adjustments on the Company’s previously reported cash flow
amounts for the years ended December 31, 2005 and 2004 (in thousands):
Year Ended December 31, 2005
As Reported
Discontinued
Operations(C) Adjustments
As Restated
Cash flows from operating activities
Net earnings from continuing operations.......... $
Plus: net earnings from discontinued operation
Cumulative effect of change in accounting
principle ..........................................................
Net earnings ...................................................
55,344
-
(649)
54,695
$
(6,642) $
6,642
(659) (A)
(25) (A)
$
48,043
6,617
-
-
-
(684)
(649)
54,011
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization..........................
Provisions for losses on accounts receivable ....
Write-downs of inventories ..............................
Non-cash stock-based compensation expense ..
Deferred income taxes ......................................
Tax benefits from employee gains on stock-
based compensation ........................................
Cumulative effect of change in accounting
principle, net ...................................................
Change in assets and liabilities:
Increase in accounts receivable.........................
Increase in inventories ......................................
Decrease in other current assets........................
Increase in other assets .....................................
Decrease in accounts payable ...........................
Decrease in inventories financing facility.........
Increase in deferred revenue .............................
Decrease in accrued expenses and other
current liabilities .............................................
Net cash provided by operating activities .........
18,204
5,292
7,625
766
4,537
2,638
649
(42,928)
(27,583)
6,879
(1,802)
(9,308)
(13,256)
8,555
(2,237)
12,726
Cash flows from investing activities
Cash receipt of underwriter receivable .............
Purchases of property and equipment ...............
Net cash used in investing activities ................
26,540
(38,809)
(12,269)
Cash flows from financing activities
Repayments on short-term financing facility....
Borrowings on short-term financing facility.....
Net borrowings on line of credit .......................
Repayment of long-term liabilities ...................
Repurchase of common stock ...........................
Proceeds from sales of common stock under
employee stock plans ......................................
Net cash provided by financing activities .........
(55,000)
75,000
21,309
(155)
(49,998)
10,784
1,940
(3,582)
250
-
-
-
-
-
-
51(A)
(28)(A)
-
-
3,554
-
(199)
-
2,870
-
(77)
230
3,046
-
3,782
3,782
-
-
-
155
-
-
155
-
-
-
-
-
-
-
-
-
636(A)(B)
(25)
-
-
-
-
-
-
-
-
-
-
14,622
5,542
7,625
817
4,509
2,638
649
(39,374)
(27,583)
6,680
(1,802)
(6,438)
(13,256)
8,478
(1,371)
15,747
26,540
(35,027)
(8,487)
(55,000)
75,000
21,309
-
(49,998)
10,784
2,095
85
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Year Ended December 31, 2005
As Reported
Discontinued
Operations(C)
Adjustments
As Restated
Cash flows from discontinued operation
Net cash used in operating activities.................
Net cash used in investing activities .................
Net cash used in financing activities.................
Net cash used in discontinued operation...........
Foreign currency exchange effect on cash flow.....
Decrease in cash and cash equivalents...................
Cash and cash equivalents at the beginning of the
year .....................................................................
Cash and cash equivalents at the end of the year ... $
-
-
-
-
(5,695)
(3,298)
38,443
35,145
$
(3,045)
(3,783)
(155)
(6,983)
-
-
-
-
$
25(A)
-
-
-
-
-
-
-
(3,020)
(3,783)
(155)
(6,958)
(5,695)
(3,298)
38,443
$ 35,145
Year Ended December 31, 2004
As Reported
Discontinued
Operations (C)
Adjustments
As Restated
Cash flows from operating activities
Net earnings from continuing operations............
Plus: net earnings from discontinued operation..
Net earnings........................................................
$
60,087 $
20,441
80,528
(9,190) $
9,190
-
(38)(A)
(33)(A)
(71)
$ 50,859
29,598
80,457
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization............................
Provisions for losses on accounts receivable ......
Write-downs of inventories ................................
Non-cash stock-based compensation expense ....
Deferred income taxes ........................................
Tax benefits from employee gains on stock-
based compensation..........................................
Gain on sale of building......................................
Gain on sale of discontinued operation...............
Equity in loss of investee....................................
Change in assets and liabilities:
Increase in accounts receivable ..........................
Increase in receivable from equity method
investee .............................................................
Increase in inventories ........................................
Increase in other current assets ...........................
Increase in other assets .......................................
Increase in accounts payable ..............................
Increase in inventories financing facility............
Increase in deferred revenue...............................
Increase in accrued expenses and other current
liabilities ...........................................................
Net cash provided by operating activities...........
20,357
5,606
7,070
62
(2,390)
7,093
(328)
(23,725)
400
(3,617)
(87)
-
-
-
-
-
-
-
(65,666)
10,663
(3,098)
(32,842)
(668)
(496)
1,813
11,957
2,486
5,150
13,309
-
3
29
-
(1,374)
-
33
(131)
5,519
-
-
-
234(A)
(225)(A)
16,740
5,519
7,070
296
(2,615)
-
-
-
-
-
-
-
-
-
-
-
-
7,093
(328)
(23,725)
400
(55,003)
(3,098)
(32,839)
(639)
(496)
439
11,957
2,519
29(A)
(33)
5,048
18,795
86
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Year Ended December 31, 2004
As Reported
Discontinued
Operations(C)
Adjustments
As Restated
Cash flows from investing activities
Purchases of property and equipment .................
Proceeds from sale of discontinued operation,
net of direct expenses.......................................
Proceeds from sale of building ...........................
Investment in equity method investee.................
Net cash (used in) provided by investing
activities...........................................................
Cash flows from financing activities
Repayments on short-term financing facility......
Borrowings on short-term financing facility.......
Net repayments on line of credit.........................
Borrowings on long term liabilities ....................
Proceeds from sales of common stock under
employee stock plans ........................................
Net cash used in financing activities...................
Cash flows from discontinued operation
Net cash used in operating activities...................
Net cash used in investing activities ...................
Net cash used in financing activities...................
Net cash used in discontinued operation.............
(20,705)
3,804
18,629
1,378
(400)
-
-
-
(1,098)
3,804
(125,000)
95,000
(10,004)
155
27,645
(12,204)
-
-
-
-
-
-
-
(155)
-
(155)
(5,519)
(3,804)
155
(9,168)
Foreign currency exchange effect on cash flow.......
Decrease in cash and cash equivalents.....................
Cash and cash equivalents at the beginning of the
year ........................................................................
Cash and cash equivalents at the end of the year ..... $
(3,461)
(3,454)
41,897
38,443 $
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
33(A)
-
-
33
-
-
-
-
(16,901)
18,629
1,378
(400)
2,706
(125,000)
95,000
(10,004)
-
27,645
(12,359)
(5,486)
(3,804)
155
(9,135)
(3,461)
(3,454)
41,897
$
38,443
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax benefit.
(B) Adjustment for a legal settlement expense that was recorded in the first quarter of 2006, which should have been
recorded in the fourth quarter of 2005.
(C) Adjustments to remove cash flows related to Direct Alliance. See further information in Note 19.
Related Proceedings
In October 2006, we received a letter of informal inquiry from the SEC requesting certain documents relating to our
stock option grants and practices. We cannot predict the outcome of this investigation.
(3) Stock Based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based
Payment” (“SFAS No. 123R”), which requires stock-based compensation to be measured based on the fair value of the award
on the date of grant and the corresponding expense to be recognized over the period during which an employee is required to
provide service in exchange for the award. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based
Payments” (“SAB No. 107”), relating to SFAS No. 123R. We have applied the provisions of SAB No. 107 in our adoption of
SFAS No. 123R. Prior to January 1, 2006, we issued stock options and restricted stock shares. For 2006, we have elected to
issue service-based and performance-based restricted stock units (“RSUs”) instead of stock options and restricted stock
shares.
We adopted SFAS No. 123R using the modified prospective transition method. Under this method, the provisions of
SFAS No. 123R apply to all awards granted or modified after the date on which we adopted SFAS No. 123R, and
compensation expense must be recognized for any unvested stock option awards outstanding based upon the fair value used
in determining our pro forma disclosures under FASB Statement No. 123, “Accounting for Stock-Based Compensation”
(“SFAS No. 123”). We have not restated prior periods for the adoption of SFAS No. 123R. We have recorded stock-based
87
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
compensation expense in prior periods related to the amortization of the fair value of restricted stock awards over their
respective vesting period. Stock-based compensation expense is classified in the same line item of the consolidated
statements of earnings as other payroll-related expenses for the specific employee.
Reported and pro forma net earnings and earnings per share for the years ended December 31, 2005 and 2004 were as
follows (in thousands, except per share data):
Net earnings, as reported ................................................................ $
Deduct: Stock-based compensation expense determined
under fair value method for all awards, net of tax .......................
Add: Stock-based compensation expense included in net
earnings, net of tax........................................................................
Pro forma net earnings.................................................................... $
Basic earnings per share:
As reported ....................................................................... $
Pro forma.......................................................................... $
Diluted earnings per share:
As reported ....................................................................... $
Pro forma.......................................................................... $
Years Ended December 31,
2004
As Restated (1)
2005
As Restated (1)
54,011
$
(9,261)
517
45,267
1.11
0.93
1.10
0.92
$
$
$
$
$
80,457
(8,516)
109
72,050
1.66
1.49
1.63
1.46
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
The restated stock-based compensation expense included in net earnings, net of tax, was $2,629,000, $11,668,000, $6,032,000,
$6,378,000, $1,889,000, $1,596,000, $494,000, $29,000 and $2,000 for the years ended December 31, 2003, 2002, 2001, 2000,
1999, 1998, 1997, 1996 and 1995, respectively.
We recorded the following pre-tax amounts for stock-based compensation, by operating segment, in our consolidated financial
statements (in thousands):
Years Ended December 31,
2006
2005
As Restated (1)
2004
As Restated (1)
North America* ..................................................... $
11,559
EMEA*.................................................................. $
1,143
APAC*................................................................... $
12
Total Continuing Operations ................................ $
12,714
Discontinued Operations........................................ $
978
$
$
$
$
$
778
19
-
797
61
$
$
$
$
$
240
55
-
295
57
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
* - Recorded in selling and administrative expenses.
We have various long-term incentive plans, including equity-based plans in Insight Enterprises, Inc. The purpose of the plans
is to benefit and advance stockholders’ interests by rewarding officers, directors and certain teammates (employees are referred to
within the Company and this document as teammates) for their contributions to our success, thereby motivating them to continue
to make such contributions in the future. The plans permit grants of incentive stock options, nonqualified stock options, restricted
stock shares and RSUs. The stock options, restricted stock shares and RSUs generally vest over a one to five year period from the
date of grant and the stock options expire five to ten years after the date of grant. Unexercised options generally terminate seven
88
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
business or ninety calendar days, depending on grant terms, after an individual ceases to be an employee. Unvested restricted
stock shares and RSUs terminate immediately after an individual ceases to be an employee.
Company Plans
In October 1997, the stockholders approved the establishment of the 1998 Long-Term Incentive Plan (the “1998 LTIP”) for
our officers, teammates, directors, consultants and independent contractors. The 1998 LTIP authorizes grants of incentive stock
options, non-qualified stock options, stock appreciation rights, performance shares, restricted common stock and performance-
based awards. In 2000, the stockholders approved an amendment to the 1998 LTIP increasing the number of shares eligible for
awards to 6,000,000 and allowing our Board of Directors to reserve (which they have done) additional shares such that the
number of shares of common stock available for grant under the 1998 LTIP and any of our other option plans, plus the number
of options to acquire shares of common stock granted but not yet exercised, or in the case of restricted stock, granted but not yet
vested, under the 1998 LTIP and any of our other option plans, shall not exceed 20% of the outstanding shares of our common
stock at the time of calculation of the additional shares. This plan has no set expiration date, but the Nasdaq Marketplace Rules
will require us to obtain new stockholder approval by 2010 if we desire to continue granting awards under this plan after 2010.
We currently plan to seek shareholder approval of a new 2007 Long Term Incentive Plan at our next Annual Meeting. As of
December 31, 2006, there were 3,729,617 total shares of common stock available to grant for awards under the 1998 LTIP and
1999 Broad Based Employee Stock Option Plan (the “1999 Broad Based Plan”). For further information on the 1999 Broad
Based Plan, see below.
In September 1998, we established the 1998 Employee Restricted Stock Plan (the “1998 Employee RSP”) for our
teammates. The total number of restricted common stock shares available for grant under the 1998 Employee RSP was 562,500
and as of December 31, 2006, 434,417 shares of restricted common stock were available for grant. There were no grants of
restricted common stock under this plan during the years ended December 31, 2006 and 2005.
In December 1998, we established the 1998 Officer Restricted Stock Plan (the “1998 Officer RSP”) for our officers. The
total number of restricted common stock shares available for grant under the 1998 Officer RSP was 56,250, and, as of December
31, 2006, 490 shares of restricted common stock were available for grant. There were no grants of restricted common stock
under this plan during the years ended December 31, 2006 and 2005.
In September 1999, we established the 1999 Broad Based Plan for our teammates. The total number of stock options
initially available for grant under the 1999 Broad Based Plan was 1,500,000; provided, however, that no more than 20% of the
shares of stock available under the 1999 Broad Based Plan may be awarded to the officers of the Company. Stock options
available for grant under the 1999 Broad Based Plan are included in the total shares of common stock available to grant for
awards under the 1998 LTIP and 1999 Broad Based Plan discussed under our description of the 1998 LTIP above.
The 1998 LTIP, 1998 Employee RSP, 1998 Officer RSP and 1999 Broad Based Plan are administered by the Compensation
Committee of the Board of Directors. Except as provided below, the Compensation Committee has the exclusive authority to
administer the plans, including the power to determine eligibility, the types of awards to be granted, the price and the timing of
awards. Through some combination of a delegation of authority from the Compensation Committee of the Board of Directors
and the express terms of the applicable plan, our Chief Executive Officer, was delegated the authority to grant awards to
individuals other than individuals who are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”).
Accounting for Stock Options Prior to SFAS No. 123R Implementation
Prior to our adoption of SFAS No. 123R, we applied the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related
interpretations to account for our fixed-plan stock options. Under this method, compensation expense was recorded on the date
of grant only if the current market price of the underlying stock exceeded the exercise price. See Note 2 “Restatement of
Consolidated Financial Statements.”
SFAS No. 123 established accounting and disclosure requirements using a fair value-based method of accounting for stock-
based employee compensation plans. Pro forma expense was presented in our disclosures using the accelerated vesting
methodology of FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans.” To determine the pro forma expense, we valued our stock options using the Black-Scholes-Merton (“Black-
Scholes”) option-pricing model. Our determination of fair value of stock options on the date of grant using an option-pricing
model was affected by our stock price, as well as assumptions regarding a number of subjective variables. These variables
include:
89
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
•
•
•
assumptions related to the expected life of the options, which were based on evaluations of historical and expected
future employee exercise behavior;
the risk-free interest rate, which was based on the U.S. Treasury rates at the date of grant with maturity dates
approximately equal to the expected life at the grant date; and
the historical price volatility of our stock, which was used as the basis for the expected volatility assumption.
The assumptions used in the Black-Scholes option pricing model to value options granted during the years ended December 31,
2005 and 2004 were:
Quarters Ended:
March 31, 2005 ................
June 30, 2005 ...................
September 30, 2005 .........
December 31, 2005 ..........
Quarters Ended:
March 31, 2004 ................
June 30, 2004 ...................
September 30, 2004 .........
December 31, 2004 ..........
Dividend Yield
Expected Volatility
Risk-Free Interest Rate
0%
0%
0%
0%
0%
0%
0%
0%
71%
69%
52%
43%
75%
74%
73%
72%
4.0%
3.7%
4.1%
4.3%
1.8%
3.2%
2.8%
3.2%
Expected Lives
(in years)
2.8
2.7
2.7
2.7
2.9
3.0
2.3
2.6
For the periods prior to January 1, 2006, we accounted for forfeitures as they occurred.
Accounting for Stock Options After SFAS No. 123R Implementation
There were no options granted during the year ended December 31, 2006, and we do not currently plan to grant any. The
current period expense for all unvested options granted prior to January 1, 2006, net of estimated forfeitures, has been
recognized in our consolidated statement of earnings for the year ended December 31, 2006. Forfeitures were estimated and will
be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
For the year ended December 31, 2006, we recorded in continuing operations stock-based compensation expense related to
stock options, net of forfeitures, of $8,145,000. As of December 31, 2006, total compensation cost related to non-vested stock
options not yet recognized is $4,096,000, which is expected to be recognized over the next 0.8 years on a weighted-average basis.
We used the criteria in SFAS No. 123R to calculate and establish the beginning balance of the additional paid-in capital pool
(“APIC pool”) related to the tax effects of employee stock-based compensation and to determine the subsequent effect on the
APIC pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that were
outstanding upon adoption of SFAS No. 123R.
90
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes our stock option activity during the year ended December 31, 2006:
Weighted
Average
Aggregate
Intrinsic Value
(in-the-money options)
Remaining
Contractual
Life (in years)
$
6,040,835
$
$
$
4,870,536
4,187,616
4,826,002
2.59
0.21
Weighted Average
Exercise Price
$
18.82
-
15.06
19.23
20.96
19.41
19.52
19.41
Outstanding at the beginning of year........
Granted......................................................
Exercised ...................................................
Expired ......................................................
Forfeited ...................................................
Outstanding at the end of year .................
Exercisable at the end of year...................
Vested and expected to vest......................
Weighted average grant date fair value for
options granted during 2006 ...................
Weighted average grant date fair value for
options granted during 2005 ...................
Weighted average grant date fair value for
options granted during 2004 ...................
Number
Outstanding
7,122,391
-
(1,092,870)
(381,216)
(364,842)
5,283,463
3,813,228
5,183,699
-
8.62
8.99
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price
of $18.87 as of December 31, 2006, which would have been received by the option holders had all option holders exercised
options and sold the underlying shares on that date. The aggregate intrinsic value for options exercised during 2005 and 2004
was $7,446,400 and $19,146,000, respectively.
The following table summarizes the status of outstanding stock options as of December 31, 2006:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
$ 5.09 – 18.35
18.36 – 19.24
19.25 – 20.36
20.44 – 22.67
22.69 – 41.00
Number of
Options
Outstanding
1,152,085
1,058,813
1,291,531
1,387,343
393,691
5,283,463
Weighted
Average
Remaining
Contractual
Life (in years)
2.94
3.19
2.86
2.13
2.27
2.71
Weighted
Average
Exercise
Price Per
Share
$
14.92
18.59
19.87
21.59
25.51
19.41
Number of
Options
Exercisable
Weighted
Average
Exercise
Price Per
Share
971,739 $
509,787
748,088
1,189,923
393,691
3,813,228
14.71
18.64
19.81
21.65
25.51
19.52
Accounting for Restricted Stock
We have issued shares of restricted common stock and RSUs as incentives to certain officers and teammates and plan to
grant RSUs in the future. We recognize compensation expense associated with the issuance of such shares and RSUs over the
vesting period for each respective share and RSU. The total compensation expense associated with restricted stock represents
the value based upon the number of shares or RSUs awarded multiplied by the closing price on the date of grant. Recipients of
restricted stock shares are entitled to receive any dividends declared on our common stock and have voting rights, regardless of
whether such shares have vested. Recipients of RSUs do not have voting or dividend rights until the vesting conditions are
satisfied and shares are released.
Starting in 2006, we have elected to issue service-based and performance-based RSUs instead of stock options or restricted
stock shares. The number of RSUs ultimately awarded under the performance-based RSUs will vary based on whether we
achieve certain financial results. We will record compensation expense each period based on our estimate of the probable
number of RSUs that will be issued under the grants of performance-based RSUs. Additionally, the compensation expense will
be adjusted for our estimate of forfeitures.
91
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2006 and 2005, we recorded in continuing operations stock-based compensation expense,
net of forfeitures, related to restricted stock shares and RSUs of $5,293,000 and $745,000, respectively. As of December 31,
2006 total compensation cost related to nonvested restricted stock was $11,622,000, which is expected to be recognized over the
next 1.2 years on a weighted-average basis.
The following table summarizes our restricted stock activity, including restricted stock shares and RSUs, during the year
ended December 31, 2006:
Nonvested at the beginning of year ..........
Granted......................................................
Vested........................................................
Forfeited ...................................................
Nonvested at the end of year ....................
RSUs expected to vest ..............................
Number
130,000
867,529
(82,873)
(154,125)
760,531
620,067
Fair Value
Weighted Average
Grant Date Fair Value
19.77
20.69
20.40 $ 1,604,270(a)
20.99
20.50 $
20.57 $
14,351,219(b)
11,700,664(b)
(a) The fair value of vested shares and RSUs represents the total pre-tax fair value, based on the closing stock price on the
day of vesting, which would have been received by holders of restricted stock shares and RSUs had all such holders sold
their underlying shares on that date. The aggregate intrinsic value for awards and RSUs that vested during 2005 and 2004
was $0 and $0, respectively.
(b) The aggregate fair value for the nonvested shares and the RSUs expected to vest represents the total pre-tax fair value,
based on our closing stock price of $18.87 as of December 31, 2006, which would have been received by holders of
restricted stock shares and RSUs had all such holders sold their underlying shares on that date.
Direct Alliance Stock Option Plan
In May 2000, we established the Direct Alliance Corporation 2000 Long-Term Incentive Plan (the “Direct Alliance Plan”).
We did not issue any stock options to acquire shares of common stock of Direct Alliance after 2000. The options that were
issued in 2000 were fully vested on May 5, 2005 and were exercised on May 5, 2006. As described in Note 19, Direct Alliance
was sold on June 30, 2006, and $2,696,000 was paid to the holders of the 1,997,500 exercised Direct Alliance stock options.
(4) Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents are assumed to be the fair value because of the liquidity of these
instruments. The carrying amounts for accounts receivable, accounts payable, accrued expenses and other current liabilities
approximate fair value because of the short maturity of these instruments. The carrying value on our variable rate long-term
debt approximates fair value because these borrowings have variable interest rate terms that approximate market interest rates
for similar debt instruments.
92
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) Property and Equipment
Property and equipment consist of the following (in thousands):
December 31,
Land .............................................................................................................................. $
Leasehold improvements .............................................................................................
Furniture and fixtures ...................................................................................................
Equipment.....................................................................................................................
Buildings.......................................................................................................................
Software........................................................................................................................
7,589
13,605
25,312
36,586
46,973
86,237
216,302
Accumulated depreciation............................................................................................
(87,046)
Property and equipment, net ........................................................................................ $ 129,256
2006
2005
$
7,591
8,464
29,602
34,128
65,215
78,415
223,415
(90,398)
$ 133,017
Depreciation expense, including amounts recorded in discontinued operations, was $21,561,000, $18,204,000, and
$20,357,000 for the year ended December 31, 2006, 2005 and 2004, respectively.
On June 30, 2006, in connection with the sale of a discontinued operation, we entered into a lease agreement where the
discontinued operation will lease from us the facilities it used prior to the sale. Accordingly, we have separately presented
the land and buildings as “buildings held for lease” on the consolidated balance sheet at December 31, 2006. See Note 19 for
further discussion.
Change in Accounting Estimate
In 2006, we accelerated the depreciation of certain software assets due to our decision to implement a new IT system.
We determined that portions of the old IT system would no longer be used after March 31, 2007, which shortened its
estimated useful life and increased the depreciation for the year ended December 31, 2006 by approximately $2,880,000.
(6) Goodwill
The changes in the carrying amount of goodwill for the year ended December 31, 2006 are as follows (in thousands):
North America
EMEA
APAC
Consolidated
Balance at December 31, 2005 ................... $
Software Spectrum acquisition ...................
Foreign currency translation adjustments ...
Balance at December 31, 2006 ................... $
$
87,124
130,541
(196)
217,469
$
- $
60,684
2,030
62,714 $
- $
16,196
402
16,598 $
87,124
207,421
2,236
296,781
Goodwill of $207,421,000 represented the excess of the purchase price over the estimated fair values assigned to
tangible and identifiable intangible assets acquired and liabilities assumed from the purchase of Software Spectrum on
September 7, 2006, as discussed in Note 18. In accordance with current accounting standards, the goodwill is not amortized
and will be tested for impairment annually in the fourth quarter of our fiscal year.
We perform an annual review in the fourth quarter of every year, or more frequently if indicators of potential impairment
exist, to determine if the carrying value of the recorded goodwill is impaired. Events or circumstances that could trigger an
impairment review include a significant adverse change in legal factors or in the business climate, unanticipated competition,
a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall
business, significant negative industry or economic trends, significant declines in our stock price for a sustained period or
significant underperformance relative to expected historical or projected future results of operations. The impairment review
process compares the fair value of the reporting unit in which goodwill resides to its carrying value. In testing for a potential
impairment of goodwill, we first compare the estimated fair value of the reporting unit with book value, including goodwill.
If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are
necessary. If, however, the fair value of the reporting unit is less than book value, then we are required to compare the
carrying amount of the goodwill with its implied fair value. The estimate of implied fair value of goodwill may require
independent valuations of certain internally generated and unrecognized intangible assets such as trademarks. If the carrying
amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an
93
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
amount equal to the excess. The results of the 2006, 2005 and 2004 annual assessments indicated that goodwill was not
impaired.
(7)
Debt
At December 31, 2006, our long-term debt consists of the following (in thousands):
Term loan ............................................................................................................................. $
Accounts receivable securitization financing facility .....................................................
Total ..............................................................................................................................
Less: current portion of term loan........................................................................................
Long-term debt............................................................................................................... $
2006
71,250
168,000
239,250
(15,000)
224,250
December 31,
On September 7, 2006, we entered into a credit agreement with various financial institutions that provides new credit
facilities of up to $150,000,000 to finance in part the acquisition of Software Spectrum and for general corporate purposes.
The credit facilities are composed of a five-year revolving credit facility in the amount of $75,000,000 and a five-year term
loan facility in the amount of $75,000,000. Additionally, we amended our accounts receivable securitization financing
facility to increase the maximum funding under the facility from $200,000,000 to $225,000,000 and extend its maturity
through September 7, 2009. The $71,250,000 outstanding under the five-year term loan facility is payable in quarterly
installments through September 2011. Amounts outstanding under the term loan bear interest at a floating rate equal to the
London Interbank Offered Rate (“LIBOR”) plus a spread of 0.625% to 1.375% (6.48% at December 31, 2006). In
conjunction with the acquisition, no amounts were borrowed under the revolving credit facility. Deferred financing fees of
$1,552,000 were capitalized in conjunction with the amendment to the credit facility to finance the acquisition. Such fees are
being amortized to interest expense over the five-year term of the term loan facility using the effective interest method.
At December 31, 2006, $15,000,000 was outstanding under our $75,000,000 revolving line of credit. Amounts
outstanding under the revolving line of credit bear interest, at our option, at the prime rate or a floating rate equal to a LIBOR
based rate plus a rate advance fee of 0.625% to 1.375% depending on the level of our leverage ratio (8.25% and 6.48% per
annum, respectively, at December 31, 2006). In addition, we pay a commitment fee of 0.225% on the unused portion of the
line. Because we generally use this line for short-term borrowing needs, our borrowings are generally at the prime rate and
amounts outstanding are recorded as current liabilities. The credit facility expires on September 7, 2009. At December 31,
2006, $60,000,000 was available under the line of credit. The revolving line of credit also has a feature which allows us to
increase the availability on the line of credit by $37,500,000, upon request. We do not pay any fees on the increased
availability under the line until we activate the additional credit.
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 $225,000,000 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” as we maintain effective control over the
receivables that are sold. Accordingly, the receivables remain recorded on our consolidated balance sheets. At December 31,
2006, the SPE owned $397,123,000 of receivables recorded at fair value and included in our consolidated balance sheet, of
which $215,307,000 was eligible for funding. The financing facility expires September 7, 2009. Interest is payable monthly,
and the interest rate at December 31, 2006 on borrowed funds was 6.00% per annum, including the 0.65% commitment fee
on the total $225,000,000 facility. We also pay a 0.25% usage fee on the unused balance. During the years ended December
31, 2006 and 2005, our weighted average interest rate per annum and weighted average borrowings under the facility were
5.7% and $63,948,000 and 3.7% and $23,658,000, respectively. At December 31, 2006, $168,000,000 was outstanding and
$47,307,000 was available under the facility.
Our financing facilities contain various covenants, including the requirement that we comply with leverage and
minimum fixed charge ratio requirements. In addition, our credit facilities prohibit the payment of cash dividends without
the lenders’ consent and the requirement that we provide annual and quarterly financial information. The annual information
is reported on by our independent registered public accounting firm to the lenders within a certain time period after the
annual period end. If we fail to comply with these covenants, the lenders would be able to demand payment within a
specified period of time. Because we were not current with our reporting obligations under the Securities Exchange Act
beginning on September 30, 2006 and ending on July 26, 2007, we would have been in violation of our financial reporting
94
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
covenants had we not obtained agreements from our lenders regarding the delivery of substitute financial information to
them. The agreements with our lenders waived our obligation to provide the filed reports and waived any events of default
occurring under the facility as a result of our failure to comply with the financial reporting covenants. We intend to provide
all late reports and current financial statements to our lenders upon becoming current in our filings.
(8) Leases
We have several non-cancelable operating leases with third parties, primarily for administrative and distribution center
space and computer equipment. Our facilities leases generally provide for periodic rent increases and many contain escalation
clauses and renewal options. We recognize rent expense on a straight-line basis over the length of the lease term. Rental
expense for these third-party operating leases was $9,491,000, $7,267,000 and $7,950,000 for the years ended December 31,
2006, 2005 and 2004, respectively, and is included in selling and administrative expenses in the consolidated statement of
earnings.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of
one year) as of December 31, 2006 are as follows (in thousands):
2007 .........................
2008 .........................
2009 .........................
2010 .........................
2011 .........................
Thereafter .....................
Total minimum lease payments .....................................................
Years Ending December 31, Operating Leases
13,227
12,142
10,254
9,217
5,904
15,316
66,060
$
$
(9) Restructuring and Acquisition Integration Activities
Acquisition-Related Cost Capitalized in 2006 as a Cost of Acquisition of Software Spectrum
We recorded $9,738,000 of employee termination benefits and $1,676,000 of facility based costs in connection with the
integration of Software Spectrum. These costs were accounted for under EITF Issue No. 95-3, “Recognition of Liabilities in
Connection with Purchase Business Combinations,” and were based on the integration plans that have been committed to by
management. Accordingly, these costs were recognized as a liability assumed in the purchase business combination and
included in the allocation of the cost to acquire Software Spectrum.
The employee termination benefits relate to severance payments for Software Spectrum teammates in North America
and EMEA who have been or will be terminated in connection with integration plans. The facilities based costs relate to
future lease payments or lease termination costs associated with vacating Software Spectrum facilities in EMEA.
The following table details the changes in these liabilities during the year ended December 31, 2006 (in thousands):
Acquisition-related costs ........................... $
Foreign currency translation adjustments..
Cash payments ..........................................
Balance at December 31, 2006.................. $
1,728
-
(731)
997
$
$
9,686
337
(495)
9,528
$
$
11,414
337
(1,226)
10,525
North America
EMEA
Consolidated
Severance and Restructuring Costs Expensed in 2006
During the year ended December 31, 2006, North America and EMEA recorded severance expense of $508,000 and
$221,000, respectively, associated with the elimination of Insight positions as part of our Software Spectrum integration plan
and expense reduction plans. Of these amounts, cash payments of $508,000 and $221,000 were made in North America and
EMEA, respectively.
Severance and Restructuring Costs Expensed in 2005
During the year ended December 31, 2005, Insight UK moved into a new facility and recorded restructuring costs of
$7,458,000, of which $6,447,000 represented the present value of the remaining lease obligations on the previous lease and
$1,011,000 represented duplicate rent expense for the new facility for the last half of 2005. Also, during the year ended
95
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005, Insight North America and Insight UK recorded employee termination benefits, related mainly to the
reduction in headcount of senior management and support staff, of $4,064,000, of which $113,000 was outstanding for North
America at December 31, 2005. During the year ended December 31, 2006, adjustments of $237,000 and $1,155,000 were
recorded to reflect the accretion of interest for the present value of the remaining lease obligations and fluctuations in the
British pound sterling exchange rates, respectively, offset by the release of employee termination benefit accruals in North
America of $113,000. Cash payments of $2,051,000 were made during the year ended December 31, 2006, resulting in an
accrual balance of $6,468,000 at December 31, 2006. In the accompanying consolidated balance sheet at December 31,
2006, $1,828,000 is expected to be paid in 2007 and is therefore included in accrued expenses and other current liabilities,
and $4,640,000 is expected to be paid after 2007 and is therefore included in long-term liabilities.
The following table details the changes in severance and restructuring liabilities during the year ended December 31,
2006 (in thousands):
North America
EMEA
Consolidated
Balance at December 31, 2005.................. $
Foreign currency translation and other
adjustments................................................
Cash payments ..........................................
Balance at December 31, 2006.................. $
113
$
7,127
$
(113)
-
-
$
1,392
(2,051)
6,468
$
7,240
1,279
(2,051)
6,468
(10) Reductions in Liabilities Assumed in a Previous Acquisition
During the year ended December 31, 2005, Insight UK settled certain liabilities assumed in a previous acquisition for
$664,000 less than the amounts originally recorded. The tax expense recorded during the year ended December 31, 2005
related to this income was $358,000.
(11)
Income Taxes
The following table presents the U.S. and foreign components of earnings from continuing operations before income
taxes and the related provision for income tax expense (benefit) (in thousands):
Earnings from continuing operations before income taxes:
2006
Years Ended December 31,
2005
As
As
2004
U.S................................................................................................................. $ 71,626
29,981
Foreign ..........................................................................................................
$ 101,607
$
59,583 $ 55,877
14,599
19,603
70,476
$ 79,186 $
Restated (1) Restated (1)
Provision for income tax expense (benefit) from continuing operations:
2006
Years Ended December 31,
2005
As
2004
As
Current:
Restated (1) Restated (1)
19,187 $
U.S. Federal................................................................................................... $ 23,846 $
1,439
U.S. State and local.......................................................................................
Foreign .........................................................................................................
8,131
32,783 28,757
1,128
7,809
20,370
1,890
(233)
22,027
Deferred:
U.S. Federal...................................................................................................
U.S. State and local.......................................................................................
Foreign ..........................................................................................................
(284)
797
2,603
3,116
$ 35,899 $
3,156
583
(1,353)
2,386
31,143 $
29
(90)
(2,349)
(2,410)
19,617
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
96
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income tax expense (benefit) relating to a discontinued operation is as follows:
2006
Years Ended December 31,
2005
As
2004
As
U.S................................................................................................................. $ 7,153
-
Foreign ..........................................................................................................
$ 7,153
$
$
4,090 $
-
4,090 $
10,326
1,320
11,646
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
The following schedule reconciles the differences between the U.S. federal income taxes at the U.S. statutory rate to our
provision (benefit) for income taxes (dollars in thousands):
Restated (1) Restated (1)
2006
Years Ended December 31,
2005
As
2004
As
Expected benefit at U.S. Statutory rate of 35% ................................................... $ 35,562
Change resulting from:
$ 27,715 $ 24,667
Restated (1) Restated (1)
State income taxes, net of federal income tax benefit..................................
Audits and adjustments, net..........................................................................
Change in valuation allowance.....................................................................
Foreign income taxed at different rates ........................................................
Non-deductible/ (deductible) goodwill impairment related charges ...........
Other, net.......................................................................................................
2,786
(2,519)
(134)
(996)
-
1,200
Provision for income tax expense ........................................................................ $ 35,899
Effective tax rate...................................................................................................
1,792
-
173 (7,488)
(386)
(222)
(160)
-
1,192
47
31,143 $ 19,617
35.3% 39.3% 27.7%
2,019
1,411
$
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
For foreign entities not treated as branches for U.S. tax purposes, we do not provide for U.S. income taxes on the undistributed
earnings of these subsidiaries as earnings are reinvested and, in the opinion of management, will continue to be reinvested
indefinitely outside of the U.S. The undistributed earnings of foreign subsidiaries that are deemed to be permanently invested
outside of the U.S. were $3,477,000 at December 31, 2006. It is not practicable to determine the unrecognized deferred tax
liability on those earnings.
97
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The significant components of deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
December 31,
2006
2005
As
Restated (1)
$
Miscellaneous accruals ................................................................................. $ 10,968
16,967
317
5,405
2,640
169
1,634
4,494
-
350
7,433
3,220
53,597
(19,830)
33,767
Net operating loss carryforwards..................................................................
Depreciation allowance carryforwards.........................................................
Allowance for doubtful accounts and returns ..............................................
Write-downs of inventories ..........................................................................
Depreciation and amortization......................................................................
Accrued vacation and other payroll liabilities..............................................
Foreign tax credit carryforwards ..................................................................
Capital loss carryforward..............................................................................
Intangible assets ............................................................................................
Deferred tax asset relating to stock compensation.......................................
Other, net.......................................................................................................
Gross deferred tax assets .......................................................................
Valuation allowance .....................................................................................
Total deferred tax assets ........................................................................
10,256
7,334
2,654
5,099
4,472
2,212
1,910
1,284
401
386
4,915
407
41,330
(8,251)
33,079
Deferred tax liabilities:
Depreciation and amortization......................................................................
Prepaid expenses...........................................................................................
Other, net.......................................................................................................
Total deferred tax liabilities ..................................................................
Net deferred tax (liability) asset............................................................ $
(37,153)
(434)
-
(37,587)
(3,820) $
(22,853)
(271)
(2,791)
(25,915)
7,164
The net current and non-current portions of deferred tax assets and liabilities are as follows (in thousands):
December 31,
Net current deferred tax asset............................................................................... $ 15,583
(19,403)
Net non-current deferred tax liability...................................................................
2006
Net deferred tax (liability) asset ................................................................... $ (3,820) $
2005
As
Restated (1)
22,535
$
(15,371)
7,164
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
As of December 31, 2006 we have U.S. state net operating loss carryforwards (“NOLs”) of $384,000 that begin to expire
in 2008 and will fully expire in 2026. We also have NOLs from various non-U.S. jurisdictions of $55,351,000. While the
majority of the non-U.S. NOLs have no expiration date, $970,000 will begin to expire in 2011 and will fully expire in 2016.
In addition, we have a foreign tax credit carryforward of $4,494,000 that begins to expire in 2015 and will fully expire in 2016.
On the basis of currently available information, we have provided valuation allowances for certain of our deferred tax
assets where we believe it is likely that the related tax benefits will not be realized. At December 31, 2006, our valuation
allowances totaled $19,830,000, representing all of our U.S. state NOLs, a portion of our non-U.S. NOLs, depreciation
allowances, and a U.S. deferred tax asset related to Software Spectrum foreign branches. In the future, if we determine that
additional realization of these deferred tax assets is more likely than not, the reversal of the related valuation allowance will
reduce income tax expense by $9,889,000 and will reduce goodwill related to the Software Spectrum acquisition by $9,941,000.
At December 31, 2005, our valuation allowances totaled $8,251,000, representing all of our non-U.S. NOLs, depreciation
allowances, and all of our U.S. capital loss carryforwards.
We believe it is more likely than not that forecasted income, including income that may be generated as a result of prudent
and feasible tax planning strategies, together with the tax effects of deferred tax liabilities, will be sufficient to fully recover our
remaining deferred tax assets.
98
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the change in the valuation allowance (in thousands):
8,251
Valuation allowance at beginning of year ........................................................... $
222
Debited (credited) to income tax expense............................................................
9,941
Valuation allowances on opening balance sheet of Software Spectrum.............
1,416
Foreign currency translation adjustments ............................................................
Valuation allowance at end of year...................................................................... $ 19,830
2006
2005
9,084
173
-
(1,006)
8,251
$
$
December 31,
Tax benefits of $390,000, $1,161,000 and $3,956,000 in the years ended December 31, 2006, 2005 and 2004,
respectively, related to the exercise of employee stock options and other employee stock programs were applied to
stockholders’ equity.
Various taxing jurisdictions are examining our tax returns for various tax years. Although the outcome of tax audits cannot be
predicted with certainty, management believes the ultimate resolution of these examinations will not result in a material adverse
effect to the Company’s financial position or results of operations.
(12) Benefit Plans
We have adopted a defined contribution benefit plan (the “Defined Contribution Plan”) which complies with section 401(k)
of the Internal Revenue Code. We currently match 25% of the employees’ pre-tax contributions up to a maximum of 6% of
eligible compensation per pay period. During the year, the termination of all Direct Alliance participants constituted a partial
plan termination in which all Direct Alliance participants were fully vested in all company match amounts. The acquisition of
Software Spectrum resulted in approximately 800 new employees that are eligible for the Defined Contribution Plan.
Contribution expense under this plan, including amounts recorded in discontinued operations, was $2,230,000, $1,467,000 and
$1,459,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
(13) Stockholder Rights Agreement
On December 14, 1998, each stockholder of record received one Preferred Share Purchase Right (“Right”) for each
outstanding share of common stock owned. Each Right entitles stockholders to buy .00148 of a share of our Series A Preferred
Stock at an exercise price of $88.88. The Rights will be exercisable if a person or group acquires 15% or more of our common
stock or announces a tender offer for 15% or more of the common stock. However, should this occur, the Right will entitle its
holder to purchase, at the Right’s exercise price, a number of shares of common stock having a market value at the time of twice
the Right’s exercise price. Rights held by the 15% holder will become void and will not be exercisable to purchase shares at the
bargain purchase price. If we are acquired in a merger or other business combination transaction after a person acquires 15% or
more of the our common stock, each Right will entitle its holder to purchase at the Right’s then current exercise price a number
of the acquiring company’s common shares having a market value at the time of twice the Right’s exercise price.
(14) Commitments and Contingencies
Contractual
We have entered into a sponsorship agreement through 2013 with the Valley of the Sun Bowl Foundation, d/b/a Insight
Bowl, which is the not-for-profit entity that conducts the Insight Bowl post-season intercollegiate football game. We have
committed to pay an aggregate amount of approximately $9,650,000 over the next eight years for sponsorship arrangements,
ticket purchases and miscellaneous expenses.
We have committed to pay the Arizona Cardinals an aggregate of approximately $9,900,000 over the next ten years for
advertising and marketing events at the University of Phoenix stadium, the home of the Arizona Cardinals.
We have entered into a transition services agreement with Level 3 Communications, Inc. (“Level 3”) related to our
acquisition of Software Spectrum. We have committed to pay an aggregate amount of approximately $1,000,000 during
2007 as part of the physical separation of Software Spectrum’s IT environment from Level 3.
In July 2007 we signed a Statement of Work with Wipro Limited to assist us in integrating our hardware, services and
software distribution operations in US, Canada, EMEA and APAC on mySAP. We have committed to pay Wipro an
99
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
aggregate amount of approximately $17,350,000 against milestones in 2007 through 2009 as set forth in the Statement of
Work.
Employment Contracts
We have employment contracts with certain officers and management teammates under which severance payments
would become payable and accelerated vesting of stock-based compensation would occur in the event of specified
terminations without cause or terminations under certain circumstances after a change in control. If such persons were
terminated without cause or under certain circumstances after a change of control, and the severance payments under the
current employment agreements were to become payable, the severance payments would generally be equal to either one or
two times the teammates’ annual salary and bonus. Additionally, we would record additional compensation expense for the
acceleration of the vesting of any stock-based compensation.
On May 2, 2007, we announced the retirement of Stanley Laybourne, the Company’s chief financial officer, secretary
and treasurer and a member of our Board of Directors. In connection with his retirement, we have agreed to provide him
payments and benefits consistent with those required for termination without cause under his existing employment
agreement, which has been previously filed with the SEC. Accordingly, we expect to pay him a lump sum severance payment
equal to two times his base salary plus two times his 2006 bonus. The total severance amount related to this retirement is
estimated to be approximately $2,842,000, including non-cash stock-based compensation expense for a ninety day extension
of the post termination exercise period for stock options, substantially all of which will be recorded in our financial
statements in the second quarter of 2007.
Guaranties
In the ordinary course of business, we may guarantee the indebtedness of our subsidiaries to vendors and clients. We
have not recorded specific liabilities for these guaranties in the consolidated financial statements because we have recorded
the underlying liabilities associated with the guaranties. In the event we are required to perform under the related contracts,
we believe the cost of such performance would not have a material adverse effect on our consolidated financial position or
results of operations.
Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify either
our client or a third-party service provider in the arrangement from any losses incurred relating to services performed on our
behalf or for losses arising from certain defined events, which may include litigation or claims relating to past performance.
These arrangements include, but are not limited to, our indemnification of our officers and directors to the maximum extent
under the laws of the State of Delaware, the indemnification of our lessors for certain claims arising from our use of leased
facilities, and the indemnification of the lenders that provide our credit facilities for certain claims arising from their
extension of credit to us. Such indemnification obligations may not be subject to maximum loss clauses. Management
believes that payments, if any, related to these indemnifications are not probable at December 31, 2006 and, if incurred,
would be immaterial. Accordingly, we have not accrued any liabilities related to such indemnifications in our consolidated
financial statements.
In connection with our sale of Direct Alliance in June 2006, the sale agreement contains certain indemnification
provisions pursuant to which we are required to indemnify the buyer for a limited period of time for liabilities, losses or
expenses arising out of breaches of covenants and certain breaches of representations and warranties relating to the condition
of the business prior to and at the time of sale. Management believes that payments related to these indemnifications, if any,
are not probable at December 31, 2006 and, if incurred, would be immaterial.
In connection with our sale of PC Wholesale in March 2007, the sale agreement contains certain indemnification
provisions pursuant to which we are required to indemnify the buyer for a limited period of time for liabilities, losses or
expenses arising out of breaches of covenants and certain breaches of representations and warranties relating to the condition
of the business prior to and at the time of sale. Management believes that payments related to these indemnifications, if any,
are not probable at March 31, 2007 and, if incurred, would not have a material adverse effect on our results of operations.
100
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Legal Proceedings
We are party to various legal proceedings arising in the ordinary course of business, including asserted preference
payment claims in client bankruptcy proceedings, claims of alleged infringement of patents, trademarks, copyrights and other
intellectual property rights and claims of alleged non-compliance with contract provisions.
In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS No. 5”), 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 are adjusted to reflect the effects of negotiations, settlements, rulings, advice of
legal counsel and other information and events pertaining to a particular claim. 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. Legal expenses related to defense, negotiations, settlements, rulings and
advice of outside legal counsel are expensed as incurred.
In June 2006, our subsidiary, Software Spectrum, Inc. was named as a defendant in a civil lawsuit, Allocco v. Gardner
(Superior Court, County of San Diego), regarding certain software resale transactions with Peregrine Systems, Inc. The
subsidiary was named as successor to Corporate Software & Technology, Inc. (“CS&T”) and alleges that during October
2000 CS&T participated in or aided and abetted a fraudulent scheme by Peregrine to inflate Peregrine’s stock price. Pursuant
to the terms of the agreement by which we acquired Software Spectrum, Inc. from Level 3 (the former corporate parent of
Software Spectrum, Inc.), Level 3 has agreed to indemnify, defend and hold us harmless for this matter. The discovery
process is on-going, and we strongly dispute any allegations of participation in fraudulent behavior. On our behalf Level 3 is
vigorously defending this matter.
In October 2006, we received a letter of informal inquiry from the SEC requesting certain documents relating to our
stock option grants and practices. We have cooperated with the SEC and will continue to do so. We cannot predict the
outcome of this investigation.
Software Spectrum, as successor to CST, is party to litigation brought in the Belgian courts regarding a dispute over the
terms of a tender awarded by the Belgian Ministry of Defence (“MOD”) in November 2000. In February 2001, CST brought
a breach of contract suit against MOD in the Court of First Instance in Brussels and claimed breach of contract damages in
the amount of approximately $150,000. MOD counterclaimed against CST for cost to cover in the amount of approximately
$2,700,000, and, in July 2002, CST added a Belgian subsidiary of Microsoft as a defendant. We believe that MOD’s
counterclaims are unfounded, and we are vigorously defending the claim.
Contingencies Related to Third-Party Review
From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various
governmental, client and vendor audits. We continually assess whether or not such claims have merit and warrant accrual
under the “probable and estimable” criteria of SFAS No. 5. Where appropriate, we accrue estimates of anticipated liabilities
in the consolidated financial statements. Such estimates are subject to change and may affect our results of operations and
our cash flows.
(15)
Supplemental Financial Information
A summary of additions and deductions related to the allowances for doubtful accounts receivable and allowances for sales
returns for the years ended December 31, 2006, 2005 and 2004 follows (in thousands):
Balance at
Beginning of
Period
Additions
Balance at
Deductions End of Period
Allowances for doubtful accounts receivable:
Year ended December 31, 2006 ......................
$ 15,892
$ 10,238*
$ (2,919)
Year ended December 31, 2005 ......................
$ 15,472
$ 5,291
$ (4,871)
Year ended December 31, 2004 ......................
$ 20,175
$ 5,606
$ (10,309)
$
$
$
23,211
15,892
15,472
101
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Allowance for sales returns:
Year ended December 31, 2006 ......................
Year ended December 31, 2005 ......................
Year ended December 31, 2004 ......................
$
$
$
312
434
543
$
$
$
95
112
117
$
$
$
(175)
(234)
(226)
$
$
$
232
312
434
*Includes $7,206,000 resulting from Software Spectrum acquisition.
(16)
Segment and Geographic Information
Beginning in the fourth quarter of 2006, we operate in three geographic operating segments: North America; EMEA;
and APAC. To the extent applicable, prior period information disclosed in this report by operating segment has been revised
to conform to the current period presentation. Currently, our offerings in North America and the United Kingdom include
brand-name IT hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC
currently only include software and select software-related services. We have not disclosed net sales amounts by product or
service type for the years ended December 31, 2006, 2005 and 2004, as it is impracticable for us to do so.
SFAS No. 131 requires disclosures of certain information regarding operating segments, products and services,
geographic areas of operation and major clients. The method for determining what information to report under SFAS No.
131 is based upon the “management approach,” or the way that management organizes the operating segments within a
company, for which separate financial information is evaluated regularly by the Chief Operating Decision Maker (“CODM”)
in deciding how to allocate resources. Our CODM is our Chief Executive Officer.
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 clients. None of our clients exceeded ten percent of consolidated net sales for the year ended December 31, 2006.
A portion of our operating segments’ selling and administrative expenses arise from shared services and infrastructure that
we have historically provided to them in order to realize economies of scale and to efficiently use resources. These expenses,
collectively identified as corporate charges, include senior management expenses, legal, tax, insurance services, treasury and
other corporate infrastructure expenses. Charges are allocated to our operating segments, and the allocations have been
determined on a basis that we considered to be a reasonable reflection of the utilization of services provided to or benefits
received by the operating segments. Corporate charges of $306,000, $694,000 and $646,000 for the years ended December 31,
2006, 2005 and 2004, respectively, previously allocated to our discontinued operation, Direct Alliance, have been reallocated to
our North America segment.
102
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tables below present information about our reportable operating segments as of and for the years ended December 31,
2006, 2005 and 2004 (in thousands):
North
America
Net sales .................................................. $ 3,076,826
Costs of goods sold.................................. 2,697,848
Gross profit ........................................
378,978
Operating expenses:
Selling and administrative expenses ........
Severance and restructuring expenses......
293,030
508
Earnings from operations................... $ 85,440
Year Ended December 31, 2006
EMEA
$ 710,294
615,110
95,184
APAC
$
29,965
25,064
4,901
77,701
221
17,262
$
3,792
-
1,109
$
Consolidated
$ 3,817,085
3,338,022
479,063
374,523
729
$ 103,811
Total assets .............................................. $ 2,051,754
$ 460,359
$
39,380
$ 1,774,151*
Year Ended December 31, 2005
As Restated (1)
North
America
Net sales .................................................. $ 2,713,468
Costs of goods sold.................................. 2,402,343
Gross profit ........................................
311,125
Operating expenses:
Selling and administrative expenses ........
Severance and restructuring expenses......
Reductions in liabilities assumed in a
233,892
3,650
EMEA
$ 470,239
406,824
63,415
50,790
8,312
previous acquisition .............................
-
Earnings from operations................... $ 73,583
(664)
4,977
$
Total assets- As Restated (1) .................. $ 1,114,325
$ 144,583
APAC
$
$
$
-
-
-
-
-
-
-
-
Consolidated
$ 3,183,707
2,809,167
374,540
284,682
11,962
(664)
78,560
$
$ 922,340*
Year Ended December 31, 2004
As Restated (1)
North
America
EMEA
APAC
Consolidated
Net sales .................................................. $ 2,557,402
Costs of goods sold.................................. 2,267,798
Gross profit ........................................
289,604
Operating expenses:
Selling and administrative expenses ........
Severance and restructuring expenses......
Reductions in liabilities assumed in a
226,782
2,058
$ 451,202
389,608
61,594
53,508
377
previous acquisition .............................
-
Earnings from operations................... $ 60,764
(3,617)
11,326
$
Total assets- As Restated (1) .................. $ 895,682
$ 148,308
$
$
$
-
-
-
-
-
-
-
-
$ 3,008,604
2,657,406
351,198
280,290
2,435
(3,617)
72,090
$
$ 887,641*
*Consolidated total assets are shown net of intercompany eliminations and corporate assets of $777,342,000, $336,568,000
and $156,349,000 at December 31, 2006, 2005 and 2004, respectively.
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
103
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of our geographic continuing operations (in thousands):
2006
Net sales ........................................................
Total long-lived assets...................................
2005
Net sales ........................................................
Total long-lived assets – As Restated (1) .....
2004
Net sales ........................................................
Total long-lived assets – As Restated (1) .....
United
States
Foreign
Total
$ 2,914,387
369,833
$
$ 902,698
$ 177,924
$ 3,817,085
$ 547,757
$ 2,573,181
180,791
$
$ 610,526
39,571
$
$ 3,183,707
$ 220,362
$ 2,439,869
$ 161,066
$ 568,735
$ 39,052
$ 3,008,604
$ 200,118
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
Foreign net sales and total long-lived assets summarized above for 2006, 2005 and 2004 include net sales and long-lived
assets of $525,467,000 and $62,385,000; $470,239,000 and $24,020,000; and $451,202,000 and $23,588,000, respectively,
attributed to the United Kingdom. Net sales by geographic area are presented by attributing net sales to external customers
based on the domicile of the selling location.
Although we could be affected by the international economic climate, management does not believe material credit risk
concentration existed at December 31, 2006. We monitor our clients’ financial condition and do not require collateral.
Historically, we have not experienced significant losses related to accounts receivable from any individual clients or similar
groups of clients.
(17) Non-Operating (Income) Expense, Net
Non-operating (income) expense, net consists primarily of interest income, interest expense and foreign currency
exchange (gains) losses. Interest income of $4,355,000, $3,394,000 and $1,849,000 for the years ended December 31, 2006,
2005 and 2004, respectively, was generated through short-term investments. Interest expense of $6,793,000, $1,914,000 and
$2,011,000 for the years ended December 31, 2006, 2005 and 2004, respectively, primarily relates to borrowings under our
financing facilities. Net foreign currency exchange gain was $1.1 million for the year ended December 31, 2006 compared to
net foreign currency exchange losses of $72,000 and $262,000 for the years ended December 31, 2005 and 2004, respectively
and consist primarily of net foreign currency transaction gains or losses for intercompany balances that are not considered
long-term in nature. Other expense, net, of $901,000, $782,000 and $1,190,000 for the years ended December 31, 2006,
2005 and 2004, respectively, consist primarily of bank fees associated with our financing facilities and cash management and
the amortization of deferred financing fees.
104
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(18) Acquisition
On September 7, 2006, we completed our acquisition of Software Spectrum for a cash purchase price of $287,000,000 plus
working capital of $64,380,000, which included cash acquired of $30,285,000. Consistent with our strategy to transform
Insight from an IT products provider to an IT solutions provider, our acquisition of Software Spectrum enhanced our clients
value proposition in many ways, such as:
•
•
•
augmenting our solution capabilities, particularly relative to software lifecycle management;
expanding our penetration within profitable categories, most notably software and services; and
increasing our global presence through expansion in EMEA and APAC.
The following table summarizes the purchase price and the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition (in thousands):
Purchase price paid as:
Cash, net of cash acquired
Borrowings on lines of credit
Acquisition costs
Total purchase price
Fair value of net assets acquired:
Current assets
Identifiable intangible assets – see description below.
Property and equipment
Other assets
Current liabilities
Long-term liabilities
Total fair value of net assets acquired
Excess purchase price over fair value of net assets acquired (“goodwill”)
$
103,380
248,000
4,100
355,480
$
148,059
207,421
$
284,864
89,700
8,265
19,825
(225,086)
(29,509)
Under the purchase method of accounting, the purchase price as shown in the table above is allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price
over fair value of net assets acquired was recorded as goodwill. We may accrue additional charges in connection with the
integration of Software Spectrum, but the amounts cannot be reasonably estimated at present.
The estimated values of current assets and liabilities were based upon their historical costs on the date of acquisition due
to their short-term nature. Property and equipment were also estimated based upon historical costs as they most closely
approximated fair value. The estimated value of deferred revenue was based upon the guidance in EITF 01-03, “Accounting
in a Business Combination for Deferred Revenue of an Acquiree,” and was calculated as the estimated cost to fulfill the
contractual obligations acquired under various customer contracts plus a fair value profit margin. Of the total acquired
deferred revenue, approximately $327,000 will result in future cash flows as the majority of these contracts were prepaid
when consummated in the pre-acquisition period.
Identified intangible assets acquired in the acquisition of Software Spectrum totaled $89,700,000 and consist of the
following (in thousands):
Customer relationships................................................................................................. $ 86,100
1,700
Acquired technology related assets..............................................................................
Non-compete agreements.............................................................................................
200
1,700
Trade name ...................................................................................................................
89,700
(3,811)
1,040
Accumulated amortization ...........................................................................................
Foreign currency translation adjustments ....................................................................
Intangible assets, net at December 31, 2006................................................................ $ 86,929
105
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amortization is provided using the straight-line method over the following estimated economic lives of the intangible
assets:
Customer relationships ............................................
Acquired technology related assets .......................
Non-compete agreements........................................
Trade name ..............................................................
Estimated Economic Life
10 years
5 years
1 year
7 months
Amortization expense recognized for the period from the acquisition date through December 31, 2006 was $3,811,000.
Future amortization expense is as follows (in thousands):
2007 .........................
2008 .........................
2009 .........................
2010 .........................
2011 .........................
Thereafter .....................
Total amortization expense ............................................................
Years Ending December 31, Amortization Expense
9,838
9,024
9,024
9,024
8,938
40,041
85,889
$
$
Goodwill of $207,421,000 represents the excess of the purchase price over the estimated fair value assigned to tangible
and identifiable intangible assets acquired and liabilities assumed from Software Spectrum. The amount of goodwill that is
expected to be tax deductible is $206,986,000. In accordance with current accounting standards, the goodwill is not
amortized and will be tested for impairment annually in the fourth quarter of our fiscal year or more frequently if indicators
of potential impairment exist.
We have consolidated the results of operations for Software Spectrum since its acquisition on September 7, 2006. The
following table reports pro forma information as if the acquisition of Software Spectrum had been completed at the beginning
of the earliest period presented (in thousands, except per share amounts):
Net sales
As reported
Pro forma
$
$
3,817,085
4,984,318
2006
2005
As Restated (1)
3,183,707
$
4,242,448
$
2004
As Restated (1)
3,008,604
4,406,242
$
$
Earnings from continuing
operations
Net earnings
Diluted earnings per share
As reported
Pro forma
As reported
Pro forma
As reported
Pro forma
$
$
$
$
$
$
65,708
58,825
76,818
69,935
1.58
1.44
$
$
$
$
$
$
48,043
42,341
54,011
48,269
1.10
0.98
$
$
$
$
$
$
50,859
54,085
80,457
83,038
1.63
1.69
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
(19) Discontinued Operations
Direct Alliance
On June 30, 2006, we completed the sale of 100% of the outstanding stock of Direct Alliance for a purchase price of
$46,250,000. The purchase price did not include real estate and intercompany receivables, which had an estimated fair value
of $49,400,000 (book value of $43,237,000) and were distributed to us immediately prior to closing. In addition to payment
of the purchase price, the buyer is obligated to make a one-time bonus payment to us if Direct Alliance achieves certain gross
106
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
profit levels for the year ended December 31, 2006 (“Earn Out”). Additionally, the buyer is entitled to a claw back of the
purchase price of up to $5,000,000 if certain Direct Alliance client contracts are not renewed on terms prescribed in the sale
agreement. Also, we paid $2,696,000 to the holders of 1,997,500 exercised Direct Alliance stock options. This amount may
be further adjusted for the above described Earn Out and claw back. Adjustments, if any, for the above described Earn Out,
claw back and payments to holders of exercised Direct Alliance stock options will also adjust the gain recorded on the sale.
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have reported
the results of operations of Direct Alliance as a discontinued operation in the consolidated statements of earnings for all
periods presented. We did not allocate interest or general corporate overhead expense to the discontinued operation.
The following amounts for the three years ended December 31, 2006, respectively, represent Direct Alliance’s results of
operations. The following amounts have been segregated from continuing operations and reflected as a discontinued
operation (in thousands):
Net sales............................................................................. $
Costs of goods sold ............................................................
Gross profit.................................................................
Operating expenses:
Selling and administrative expenses...............................
Severance and restructuring expenses ............................
Earnings from discontinued operation........................
Non-operating income....................................................
Gain on sale....................................................................
Earnings from discontinued operation, including
gain on sale, before income tax expense....................
Income tax expense............................................................
Net earnings from discontinued operation,
including gain on sale ................................................ $
Years Ended December 31,
2005
2004
2006
34,095
27,138
6,957
3,566
-
3,391
-
14,872
18,263
7,153
As Restated (1) As Restated (1)
74,121
$
54,888
19,233
77,443 $
60,072
17,371
5,659
1,005
10,707
-
-
10,707
4,090
5,756
-
13,477
560
-
14,037
4,889
11,110
$
6,617 $
9,148
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
On June 30, 2006, in connection with the sale of Direct Alliance, we entered into a lease agreement with Direct
Alliance pursuant to which Direct Alliance will lease from us the facilities it used prior to the sale. The initial lease term is
for eighteen months starting July 1, 2006. Accordingly, we have separately presented the net book value of the buildings as
“buildings held for lease” on the consolidated balance sheet at December 31, 2006. Lease income related to these buildings
was $870,000 for the year ended December 31, 2006 and is classified as net sales. Since lease inception, depreciation
expense related to the buildings is $368,000 and is classified as costs of goods sold.
PlusNet
During the year ended December 31, 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. We sold 55% of our investment during
PlusNet’s IPO and our remaining investment in December 2004. We received net proceeds of approximately $45,478,000
and recorded a gain of $23,725,000 during the year ended December 31, 2004. Recorded on December 31, 2004
consolidated balance sheet was a receivable from the underwriter of $28,024,000 for the proceeds of the sale of the remaining
shares in December 2004, which was received in January 2005. Additionally, we recorded bonus expenses of $3,229,000,
including employer taxes, related to a management incentive plan with the top executives at PlusNet. The management
incentive plan compensated them, as a group, with approximately 12.5% of the gain, after certain adjustments, related to all
sales of PlusNet shares owned by Insight Enterprises. The bonus expenses were included in selling and administrative
expenses on the accompanying consolidated statements of earnings for the year ended December 31, 2004.
107
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following amounts for the year ended December 31, 2004 represent PlusNet’s results of operations and have been
segregated from continuing operations and reflected as a discontinued operation (in thousands):
Net sales............................................................................................................................
Costs of goods sold ...........................................................................................................
Gross profit................................................................................................................
Operating expenses:
Selling and administrative expenses..............................................................................
Earnings from discontinued operation.......................................................................
Non-operating income, net ...............................................................................................
Gain on sale ......................................................................................................................
Earnings from discontinued operation, including gain on sale, before income tax
expense .....................................................................................................................
Income tax expense...........................................................................................................
Net earnings from discontinued operation, including gain on sale ............................
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
Year Ended
December 31, 2004
As Restated (1)
$
23,161
15,892
7,269
4,852
2,417
(1,065)
(23,725)
27,207
6,757
20,450
$
108
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(20)
Selected Quarterly Financial Information (unaudited)
As required by Item 302 of Regulation S-K promulgated by the SEC, the following table sets forth selected unaudited
consolidated quarterly financial information for our two most recent years. The quarters ended March 31, 2006 and December
31, 2005 have been restated from previously reported information filed in the Company’s Form 10-Q’s and Form 10-K, as a
result of the restatement of its financial results discussed in Note 2 “Restatement of Consolidated Financial Statements” (in
thousands, except per share data):
Quarters Ended
Dec. 31,
2006
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2006
2005
2005
2006
2005
2006
As
Restated Restated
2005
As
Net sales............................................... $ 1,272,486 $ 918,592 $ 837,104 $ 788,903 $ 812,074 $ 823,599 $ 786,743 $ 761,291
Costs of goods sold .............................. 1,112,279 803,041 732,851 689,851 718,176 728,937 692,162 669,892
91,399
Gross profit ................................... 160,207 115,551 104,253 99,052 93,898 94,662
94,581
(1)
(1)
Operating expenses:
Selling and administrative expenses.
Severance and restructuring
expenses.........................................
Reductions in liabilities assumed in
a previous acquisition ....................
Earnings from operations ..............
Non-operating expense (income), net
Earnings from continuing
operations before income taxes...
126,707 89,553
80,775 77,488 70,361 71,506
72,975
69,840
-
729
-
- 7,520
378
4,064
-
-
-
33,500 25,269
2,977
(178)
-
-
23,478 21,564 16,017 22,778
68
(663)
234
-
-
17,542
(194)
(317)
-
(664)
22,223
(349)
30,523 25,447
Income tax expense.............................. 11,529 8,207
24,141 21,496 15,783 22,972
8,450 7,713 6,696 8,814
17,859
6,898
22,572
8,735
Net earnings from continuing
operations...................................
Net (loss) earnings from
discontinued operation ...............
Net earnings before cumulative
effect of change in accounting
principle ......................................
Cumulative effect of change in
18,994 17,240
15,691 13,783 9,087 14,158
10,961
13,837
(127)
-
10,196 1,041 1,994 1,224 1,724 1,675
18,867 17,240
25,887 14,824
11,081 15,382
12,685
15,512
accounting principle, net of taxes .....
-
-
-
-
(649)
-
-
-
Net earnings .................................. $ 18,867 $ 17,240 $ 25,887 $ 14,824 $ 10,432 $ 15,382 $ 12,685 $ 15,512
Net earnings per share - Basic:
Net earnings from continuing
operations................................... $
Net (loss) earnings from
discontinued operation ..............
Cumulative effect of change in
0.39 $
0.36 $
0.33 $
0.29 $
0.19 $
0.29 $
0.22 $
0.28
-
-
0.21
0.02
0.04
0.03
0.04
0.03
accounting principle ...................
Net earnings per share .................. $
-
0.39 $
-
0.36 $
-
0.54 $
-
0.31 $
(0.01)
0.22 $
-
0.32 $
-
0.26 $
-
0.31
Net earnings per share - Diluted:
Net earnings from continuing
operations.................................... $
Net (loss) earnings from
discontinued operation ................
Cumulative effect of change in
accounting principle ...................
Net earnings per share .................. $
0.38 $
0.35 $
0.32 $
0.29 $
0.19 $
0.29 $
0.22 $
0.28
-
-
0.21
0.02
0.04
0.02
0.04
0.03
-
0.38 $
-
0.35 $
-
0.53 $
-
0.31 $
(0.01)
0.22 $
-
0.31 $
-
0.26 $
-
0.31
(1) See Note 2 “Restatement of Consolidated Financial Statements.”
109
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the effect of the financial statement restatement adjustments on the Company’s previously
reported consolidated statements of earnings for the three months ended March 31, 2006 and December 31, 2005 (in
thousands, except per share data):
Net sales ............................................... $ 788,903 $
Costs of goods sold ..............................
689,851
Gross profit.................................... 99,052
Three Months Ended March 31, 2006
As Reported Adjustments
-
-
-
As Restated
$ 788,903
689,851
99,052
Operating expenses:
Selling and administrative expenses .
78,488
(1,000)(B)
Severance and restructuring
expenses .........................................
Earnings from operations ..............
Non-operating (income) expense:
Interest income..................................
Interest expense.................................
Net foreign currency exchange
(gain) loss ......................................
Other expense, net.............................
-
20,564
(922)
797
(31)
224
77,488
-
21,564
(922)
797
(31)
224
-
1,000
-
-
-
-
Three Months Ended December 31, 2005
As Reported Adjustments
-
$
-
-
812,074 $
718,176
93,898
As Restated
$ 812,074
718,176
93,898
69,310
1,000(B)
51(A)
7,520
17,068
-
(1,051)
(834)
888
21
159
-
-
-
-
70,361
7,520
16,017
(834)
888
21
159
Earnings from continuing
operations before income taxes ...
20,496
Income tax expense .............................. 7,323
1,000
390(B)
21,496
7,713
16,834
7,088
(1,051)
(392)(A)(B)
15,783
6,696
13,173
Net earnings from continuing
operations ...................................
Net earnings from
discontinued operation ...............
Net earnings before cumulative
change in accounting principle....
Cumulative effect of changes in
accounting principle, net of taxes
of $330 in 2005 ...........................
Net earnings .................................. $ 14,214 $
14,214
1,041
-
610
-
610
-
610
13,783
1,041
14,824
9,746
(659)
2,019
(25) (A)
9,087
1,994
11,765
(684)
11,081
-
$
14,824
$
(649)
11,116 $
-
(684)
(649)
10,432
$
Net earnings per share - Basic:
Net earnings from continuing
operations ................................... $
Net earnings from discontinued
0.27 $
0.01
$
0.29
$
0.20 $ (0.01)
$
0.19
operation ....................................
0.03
Cumulative effect of changes in
accounting principle
Net earnings per share .................. $
-
0.30 $
-
-
0.01
0.02
0.04
-
$
-
0.31
$
(0.01)
0.23 $
-
(0.01)
$
0.04
(0.01)
0.22
Net earnings per share - Diluted:
Net earnings from continuing
operations .................................... $
Net earnings from discontinued
operation......................................
Cumulative effect of changes in
accounting principle ....................
Net earnings per share .................. $
Shares used in per share calculations:
Basic
Diluted
0.27 $
0.01
$
0.29
$
0.20 $
(0.01)
$
0.19
0.02
-
0.29 $
48,002
48,685
-
-
0.01
-
(569)
0.02
0.04
-
$
-
0.31
$
(0.01)
0.23 $
-
(0.01)
$
0.04
(0.01)
0.22
48,002
48,116
47,628
48,054
-
21
47,628
48,075
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax benefit.
(B) Adjustment for a legal settlement expense that was recorded in the first quarter of 2006, which should have been
recorded in the fourth quarter of 2005.
110
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents balance sheet information as of June 30, and March 31, 2006, respectively, and September
30, June 30, and March 31, 2005, respectively, as restated from previously reported information filed in the Company’s Form
10-Q’s, as a result of the restatement of our financial results discussed in Note 2 “Restatement of Consolidated Financial
Statements” (in thousands):
As Reported
Adjustments
As Restated
June 30, 2006
March 31, 2006
As Reported Adjustments
As Restated
ASSETS
Current Assets:
Cash and cash equivalents............................ $
Accounts receivable, net ..............................
Inventories....................................................
Inventories not available for sale..................
Deferred income taxes..................................
Other current assets......................................
Total current assets ...........................
Property and equipment........................................
Buildings held for sale..........................................
Goodwill...............................................................
Other assets...........................................................
Total assets ....................................... $
LIABILITIES AND STOCKHOLDERS’
EQUITY
Current Liabilities:
Accounts payable ......................................... $
Accrued expenses and other current
liabilities.....................................................
Deferred revenue..........................................
Total current liabilities ......................
Long-term deferred income taxes .........................
Other long-term liabilities.....................................
Total liabilities ..................................
Stockholders’ equity:
Preferred stock .............................................
Common stock .............................................
Additional paid in capital .............................
Retained earnings.........................................
Accumulated other comprehensive
income- foreign currency translation
adjustment ..................................................
Total stockholders’ equity.................
Total liabilities and stockholders’
equity............................................. $
$
82,837 $
138,252 $
429,978
91,549
21,800
22,688
8,601
712,868
110,622
19,151
87,404
32
930,077 $
-
-
-
-
-
-
-
-
-
-
-
-
$ 138,252
429,978
91,549
21,800
22,688
8,601
712,868
110,622
19,151
87,404
32
$ 930,077
$
419,431
93,836
25,207
22,822
7,673
651,806
138,427
-
87,095
17
877,345 $
-
-
-
-
-
-
-
-
-
-
-
-
$
$
82,837
419,431
93,836
25,207
22,822
7,673
651,806
138,427
-
87,095
17
877,345
185,718 $
-
$ 185,718
$
171,211 $
-
$
171,211
71,694
23,887
281,299
16,499
327
298,125
-
483
314,301
292,414
419(A)
-
419
72,113
23,887
281,718
(4,918) (A)
-
(4,499)
11,581
327
293,626
-
-
-
483
35,361(A)
(30,862) (A)
349,662
261,552
66,982
23,741
261,934
20,375
196
282,505
-
483
311,107
266,533
419(A)
-
419
(4,918)(A)
-
(4,499)
-
-
35,361(A)
(30,862)(A)
67,401
23,741
262,353
15,457
196
278,006
-
483
346,468
235,671
24,754
631,952
-
4,499
24,754
636,451
16,717
594,840
-
4,499
16,717
599,339
930,077 $
-
$ 930,077
$
877,345 $
-
$
877,345
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax benefit.
(cid:3)
(cid:3)
111
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As Reported
September 30, 2005
Adjustments
As Restated
June 30, 2005
As Reported Adjustments As Restated
ASSETS
Current Assets:
Cash and cash equivalents.......................... $
Accounts receivable, net ............................
Inventories..................................................
Inventories not available for sale................
Deferred income taxes................................
Other current assets....................................
Total current assets .........................
Property and equipment......................................
Goodwill.............................................................
Other assets.........................................................
Total assets ..................................... $
LIABILITIES AND STOCKHOLDERS’
EQUITY
Current Liabilities:
Accounts payable ....................................... $
Accrued expenses and other current
liabilities...................................................
Deferred revenue........................................
Inventories financing facility .....................
Short-term financing facility ......................
Total current liabilities ....................
Line of credit ......................................................
Long-term deferred income taxes .......................
Other long-term liabilities...................................
Total liabilities ................................
Stockholders’ equity:
Preferred stock ...........................................
Common stock ...........................................
Additional paid in capital ...........................
Retained earnings.......................................
Accumulated other comprehensive
income- foreign currency translation
adjustment ................................................
Total stockholders’ equity...............
Total liabilities and stockholders’
equity........................................... $
67,466 $
439,041
91,929
35,316
19,782
8,636
662,170
127,272
87,126
187
876,755 $
-
-
-
-
-
-
-
-
-
-
-
$
65,738 $
$
67,466
439,041
91,929
35,316
19,782
8,636
662,170
127,272
87,126
187
$ 876,755
$
419,269
88,668
39,330
19,852
11,882
644,739
120,924
86,784
90
852,537 $
-
-
-
-
-
-
-
-
-
-
-
$
$
65,738
419,269
88,668
39,330
19,852
11,882
644,739
120,924
86,784
90
852,537
169,329 $
-
$ 169,329
$
176,900 $
-
$
176,900
51,285
26,816
14,519
45,000
306,949
-
13,305
28
320,282
-
475
294,233
241,822
394(A)
-
-
-
394
51,679
26,816
14,519
45,000
307,343
-
(6,353)(A)
-
(5,959)
-
6,952
28
314,323
-
-
-
475
36,747(A)
(30,788)(A)
330,980
211,034
57,117
37,767
4,499
-
276,283
2,491
12,777
71
291,622
-
486
298,606
242,671
394(A)
-
-
-
394
-
(6,353) (A)
-
(5,959)
-
-
36,747(A)
(30,788)(A)
57,511
37,767
4,499
-
276,677
2,491
6,424
71
285,663
-
486
335,353
211,883
19,943
556,473
-
5,959
19,943
562,432
19,152
560,915
-
5,959
19,152
566,874
876,755 $
-
$ 876,755
$
852,537 $
-
$
852,537
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax benefit.
112
INSIGHT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As Reported
March 31, 2005
Adjustments
As Restated
ASSETS
Current Assets:
Cash and cash equivalents............................ $
Accounts receivable, net ..............................
Inventories....................................................
Inventories not available for sale..................
Deferred income taxes..................................
Other current assets......................................
Total current assets ...........................
Property and equipment........................................
Goodwill...............................................................
Other assets...........................................................
Total assets ....................................... $
LIABILITIES AND STOCKHOLDERS’
EQUITY
Current Liabilities:
82,472 $
400,814
90,774
42,593
20,392
20,336
657,381
114,605
86,867
140
858,993 $
-
-
-
-
-
-
-
-
-
-
-
$
82,472
400,814
90,774
42,593
20,392
20,336
657,381
114,605
86,867
140
$ 858,993
Accounts payable ......................................... $
Accrued expenses and other current
liabilities.....................................................
Deferred revenue..........................................
Inventories financing facility .......................
Total current liabilities ......................
181,879 $
-
$ 181,879
50,584
36,004
6,300
274,767
394(A)
-
-
394
50,978
36,004
6,300
275,161
Long-term deferred income taxes .........................
Total liabilities ..................................
13,225
287,992
(6,352)
(5,958)
6,873
282,034
Stockholders’ equity:
Preferred stock .............................................
Common stock .............................................
Additional paid in capital .............................
Retained earnings.........................................
Accumulated other comprehensive
income- foreign currency translation
adjustment ..................................................
Total stockholders’ equity.................
Total liabilities and stockholders’
equity............................................. $
-
494
302,443
243,075
-
-
36,746(A)
(30,788) (A)
-
494
339,189
212,287
24,989
571,001
-
5,958
24,989
576,959
858,993 $
-
$ 858,993
(A) Adjustment for stock-based compensation expense pursuant to APB No. 25 and the associated income tax benefit.
(21)
Subsequent Event
On March 1, 2007, we completed the sale of PC Wholesale, a division of our North America operating segment that sells
to other resellers. The transaction generated proceeds of $28.7 million including net assets sold that are subject to certain
post-closing adjustments. We expect to have resolution of the post-closing adjustments by the end of August 2007. Any
post-closing adjustments will adjust the gain recorded on the sale. The sale of PC Wholesale is consistent with our strategic
plan as we concluded that selling IT products to other resellers is not a core element of our growth strategy.
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.
144”), the results of operations attributable to PC Wholesale for all periods presented will be classified as a discontinued
operation in our Consolidated Financial Statements for the period ended March 31, 2007 and for all periods thereafter.
113
INSIGHT ENTERPRISES, INC.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no disagreements with accountants on accounting or financial disclosure matters during the periods reported
herein.
Item 9A. Controls and Procedures
(a) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our
management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2006. In making this assessment, our management used the
criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).
The Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines a material weakness as a significant
deficiency, or a combination of significant deficiencies, that results in there being a more than remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected. The Company identified a material
weakness in its internal control over financial reporting as of December 31, 2006, arising from the combined effect of the
following control deficiencies in Company’s accounting for equity based awards:
•
•
•
Inadequate policies and procedures to determine the grant date and exercise price of equity awards;
Inadequate supervision and training for personnel involved in the stock option granting process; and
Inadequate documentation and monitoring of the application of accounting policies and procedures regarding equity
awards.
The material weakness resulted in errors in the accounting for equity based awards and in the restatement of our historical
consolidated financial statements. As a result of the material weakness described above, management has concluded that the
Company did not maintain effective internal control over financial reporting as of December 31, 2006, based on the criteria
established in COSO’s Internal Control — Integrated Framework.
The Company acquired Software Spectrum, Inc. (“Software Spectrum”) during 2006, and management excluded from its
assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, Software
Spectrum’s internal control over financial reporting associated with 51% of total assets (34% excluding goodwill and other
identifiable intangible assets) and 14% of net revenues, respectively, included in the consolidated financial statements of the
Company as of and for the year ended December 31, 2006.
KPMG LLP, an independent registered public accounting firm, has issued a report on management’s assessment of internal
control over financial reporting.
(b) Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act) during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial reporting.
Subsequent to December 31, 2006, we have begun taking several steps to remediate the material weakness described in (a)
above. We have implemented or are in the process of implementing internal control improvements in the following areas:
•
•
•
implementing new policies and procedures to ensure compliance with accounting principles applicable to equity
compensation, including restricted stock grants, and through training and additions to the staff;
developing an equity compensation training program for all teammates involved in the award of and accounting for
equity compensation;
restructuring reporting responsibility for the administration of our equity compensation programs; and
114
INSIGHT ENTERPRISES, INC.
•
adopting a written policy governing the award of equity compensation, including standardizing documentation of
approvals of all relevant terms of equity compensation awards.
The Compensation Committee of our Board of Directors, which was newly constituted in May 2007, has already revised
some of its policies and will now only approve equity compensation grants at meetings and not by written consent. The
Compensation Committee also has improved the process for documenting its actions and ensuring the timely reporting of its
actions to the Board of Directors.
(c) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as of the end of the
period covered in this report, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-
15(e) and 15d-15(e) under the Exchange Act) and determined that, as a result of the material weakness in internal control over
financial reporting described above, as of December 31, 2006 our disclosure controls and procedures are not effective to ensure
that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms.
(d) Inherent Limitations of Disclosure Controls and Internal Control Over Financial Reporting
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to risks that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information Concerning Directors and Executive Officers
Our Board currently consists of nine persons, divided into three classes serving staggered terms of three years. The terms of
three Class I directors will expire at the 2007 annual meeting (if re-elected, their new terms will expire at the 2010 annual
meeting). The terms of the Class II and Class III directors will expire at the 2008 and 2009 annual meetings, respectively. The
names of our directors and executive officers, and information about them, are set forth below.
Eric J. Crown
(Age 45)
• Class I Director
• Chairman Emeritus
On May 10, 2007, Mr. Crown informed us that he has decided not to stand for re-election
to the Board and will retire from Board service upon the completion of his current term at
the 2007 annual meeting of stockholders. Mr. Crown is a co-founder of the Company, has
served as Chairman of the Board and will retain his honorary title of Chairman Emeritus.
Mr. Crown has held various officer and director positions with us and our predecessor
corporations since 1988, including Chief Executive Officer. Eric J. Crown is the brother of
Timothy A. Crown.
Timothy A. Crown
(Age 43)
• Chairman of the Board
• Class III Director
• Chairman of the Executive
Committee
Mr. Crown, a co-founder of the Company, stepped down from the position of President and
Chief Executive Officer in November 2004, positions he had held since January 2000 and
October 2003, respectively. Mr. Crown has been a director since 1994 and assumed the
position of Chairman of the Board in November 2004. Mr. Crown had been employed by
us or one of our predecessors since 1988. Timothy A. Crown is the brother of Eric J.
Crown.
115
INSIGHT ENTERPRISES, INC.
Mr. Dorrance has been a director since 2004. He has been a Managing Director of DMB
Associates, a real estate service company based in Scottsdale, Arizona since 1984. Mr.
Dorrance has served on the Board of Directors of Campbell Soup Company since 1989.
He was also a member of the Board of Directors of Bank One Corporation from 1997 to
2000.
Mr. Fennessy was elected President and Chief Executive Officer effective November 2004
and was appointed Director in September 2005. From 1987 to 2004, Mr. Fennessy worked
for International Business Machines Corporation (“IBM”), where he held numerous
domestic and international executive positions. His most recent positions included:
General Manager, Worldwide, ibm.com; Vice President, Worldwide Marketing – Personal
Computer Division; and General Manager, Worldwide PC Direct organization.
Mr. Fisher has been a director since 2001 and is the Audit Committee’s designated
financial expert. Mr. Fisher has served as President of Power Quality Engineering, Inc., a
manufacturer of specialty filters, since 1995.
Mr. Gunning has been a director since 1995. He has been Manager and Director of 3D
Petroleum LLC, a petroleum company, since 2001. From 1988 to 2001, Mr. Gunning was
President and a Director of Pasco Petroleum Corp., a petroleum marketing company that
merged with 3D Petroleum LLC in 2001. Mr. Gunning is also a member and director of
Cobblestone AutoSpa, which owns and operates several full-service carwashes.
On May 2, 2007, Insight announced that Mr. Laybourne is retiring from the Company and
its Board of Directors. The effective date of his retirement is expected to be August 29,
2007. Mr. Laybourne has been a director since 1994. He became our Chief Financial
Officer and Treasurer in 1991, served as Executive Vice President from 2002 to 2006 and
served as Secretary from 1994 to October 2002 and from September 2004 to present. Mr.
Laybourne is a certified public accountant.
Bennett Dorrance
(Age 61)
• Class I Director
• Member of Compensation
and Nominating and
Governance Committees
• Member of Options
Subcommittee (September
2006 - March 2007)
Richard A. Fennessy
(Age 42)
• Principal Executive
Officer
• President and Chief
Executive Officer
• Class II Director
• Member of the Executive
Committee
Michael M. Fisher
(Age 61)
• Class I Director
• Chairman of the Audit
Committee
• Member of the Executive
Committee
• Member of Compensation
and Nominating and
Governance Committees
through April 30, 2007
Larry A. Gunning
(Age 63)
• Class II Director
• Member of the Nominating
and Governance Committee
• Chairman of Compensation
Committee through April
30, 2007
Stanley Laybourne
(Age 58)
• Principal Financial Officer
• Chief Financial Officer,
Secretary and Treasurer
• Class III Director
• Member of the Executive
Committee
116
Robertson C. Jones
(Age 62)
• Class II Director
• Chairman of the Nominating
and Governance Committee
• Member of the Audit
Committee
• Member of the
Compensation Committee
through April 30, 2007
Kathleen S. Pushor
(Age 49)
• Class III Director
• Member of Audit
Committee
• Member of Compensation
Committee effective May 1,
2007
• Member of Options
Subcommittee
(September 2006 -
March 2007)
• Member of Nominating
and Governance
Committee through April
30, 2007
David J. Robino
(Age 47)
• Class I Director
• Chairman of Compensation
Committee effective May 1,
2007
• Member of Nominating and
Governance Committee
effective May 1, 2007
Catherine W. Eckstein
(Age 50)
• Chief Marketing Officer
Stuart A. Fenton
(Age 39)
• President – Insight EMEA
INSIGHT ENTERPRISES, INC.
Mr. Jones has been a director since 1995. Mr. Jones was Senior Vice President and
General Counsel of Del Webb Corporation, a developer of master-planned residential
communities, from 1992 through 2001.
Ms. Pushor was appointed director in September 2005. Since January 2006, she has served
as President and Chief Executive Officer of the Greater Phoenix Chamber of Commerce.
From 2003 to 2005, she served as the Chief Executive Officer of the Arizona Lottery.
From 1999 to 2002, she operated an independent consulting practice in the technology
distribution sector, and from 1998 to 2005, she was a member of the Board of Directors of
Zones, Inc., a direct marketer of IT products.
Mr. Robino has been a director since May 2007. Mr. Robino served as a Non-Executive
Director of Memec Group Holdings Limited, a global distributor of specialty
semiconductors, from 2001 until the sale of that business to Avnet, Inc. in 2005. He
served Gateway, Inc. first as Executive Vice President and Chief Administrative Officer
and later as Vice Chairman from 1998 to 2001. Previously, he held executive positions at
The Nielsen Company from 1989 to 1995 and at AT&T from 1995 to 1997.
Ms. Eckstein joined Insight Enterprises, Inc. in March 2004 and was promoted to Chief
Marketing Officer of Insight Enterprises, Inc. in May 2005. Before joining Insight
Enterprises, Inc., Ms. Eckstein served as Senior Vice President of Marketing and Corporate
Vice President of Worldwide Marketing at Ingram Micro from 2000 to 2003.
Mr. Fenton joined Insight Enterprises, Inc. in October of 2002 and was most recently
promoted to President of our Insight EMEA operating segment in November 2006. Prior to
his promotion, he held the position of Managing Director of Insight Direct UK Ltd. From
1995 to 2002, Mr. Fenton held various positions at Micro Warehouse Inc., serving most
recently as the General Manager of Micro Warehouse Canada.
Gary M. Glandon
(Age 48)
• Chief People Officer
Mr. Glandon joined Insight Enterprises, Inc. in February 2005 as Chief People Officer. Prior
to joining Insight, Mr. Glandon served as Vice President of Human Resources for Honeywell
International’s Aerospace division from 2003 to 2005. From 2001 to 2003, Mr. Glandon
served as Vice President of Human Resources for Tanox, Inc., a publicly traded
biopharmaceutical firm.
117
INSIGHT ENTERPRISES, INC.
Karen K. McGinnis
(Age 40)
• Senior Vice President and
Chief Accounting Officer
• Assistant Secretary
Mark T. McGrath
(Age 42)
• President – Insight
North America/APAC
Ms. McGinnis joined Insight Enterprises, Inc. in March 2000 and was named Chief
Accounting Officer in September 2006. She has served as Assistant Secretary since January
2005 and was promoted to Senior Vice President of Finance in April 2001. Ms. McGinnis is
a certified public accountant.
Mr. McGrath joined Insight Enterprises, Inc. in May 2005 as President of Insight Direct
USA, Inc. He was appointed the President of our North America and APAC business
segments in September 2006. From 1987 to 2005, Mr. McGrath worked for IBM, most
recently serving as Vice President of IBM.com Americas, a division of IBM focused on
leveraging the phone and the web. Earlier positions held at IBM included Vice President,
IBM Direct (a division of ibm.com), and Vice President of Channel Sales, IBM Personal
Computing Division.
David B. Rice
(Age 54)
• Chief Information Officer
Mr. Rice joined Insight Enterprises, Inc. in July 2000 and was named Chief Information
Officer of Insight Enterprises, Inc. in February 2005. Mr. Rice has served as Chief
Information Officer of one of our operating entities from July 2000 to January 2005. Prior to
joining Insight, he served as Vice President, IT Mail Order Operations at PCS Health
Systems from 1994 to 2000.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, our directors, executive officers, and any persons holding more than 10%
of our common stock are required to report their initial ownership of our common stock and any subsequent changes in that
ownership to the SEC. Specific due dates for these reports have been established, and we are required to disclose any known
failure to file by these dates. Based upon a review of such reports furnished to us, or written representations that no reports
were required, we believe that these filing requirements were satisfied in a timely manner during the year ended December
31, 2006, except for five late Form 4 reports, filed on May 3, 2006, with respect to the annual grants of 1,000 RSUs to
Messrs. Dorrance, Fisher, Gunning, and Jones and Ms. Pushor granted on April 4, 2006.
Code of Ethics
We have adopted a Code of Ethics that applies to directors and all employees, including our Chief Executive Officer and
our senior financial executives. The Code of Ethics is posted on our website, www.insight.com, and may be found in our
“Investor Relations” section, which can be accessed in the drop down menu under “About Insight” on our welcome page.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendments to, or waivers from,
a provision of our Code of Ethics by posting such information on our website at the location specified above, unless
otherwise required by NASDAQ Marketplace Rules to disclose any such waiver on Form 8-K.
Policy on Stockholder Recommendations of Director Nominees
The Nominating and Governance Committee will consider Director candidates recommended by stockholders. No
changes have been made to the process by which stockholders may nominate a person or persons to serve as a member of the
Board of Directors. See further information on this process in our Proxy Statement for our Annual Meeting dated April 4,
2006.
Audit Committee
The Board has a standing Audit Committee which consists of Mr. Fisher, Chairman, Mr. Jones and Ms. Pushor. Each
member of the Audit Committee is an “independent director” as defined in NASDAQ Marketplace Rule 4200(a)(15). The
Board has determined that Mr. Fisher, the Chairman of the Audit Committee, is an “audit committee financial expert” as
defined in Regulation S-K.
118
INSIGHT ENTERPRISES, INC.
Item 11. Executive Compensation
Compensation Discussion and Analysis
The purpose of this Compensation Discussion and Analysis is to provide information about each material element of
compensation that we pay or award to, or that is earned by, our named executive officers. For 2006, our named executive
officers were:
Richard A. Fennessy, President and Chief Executive Officer;
Stanley Laybourne, Chief Financial Officer, Secretary and Treasurer;
•
•
• Mark T. McGrath, President, Insight North America/APAC;
•
• Gary M. Glandon, Chief People Officer.
Stuart A. Fenton, President, Insight EMEA; and
This Compensation Discussion and Analysis addresses and explains the numerical and related information contained in
the summary compensation tables and includes actions regarding executive compensation that occurred after the end of 2006,
including the award of discretionary bonuses related to 2006 performance, and the adoption of any new, or the modification
of any existing, compensation programs.
Executive Compensation Philosophy and Objectives
Our long-term success depends on our ability to attract and retain individuals who are committed to the Company’s
strategy and core values of client service, respect and integrity. Our general philosophy of executive compensation is to offer
total compensation, including base salaries, cash incentives and equity-based incentives, but to emphasize incentive
compensation which will:
•
•
•
•
•
be competitive in the marketplace;
permit us to attract and retain highly qualified executives;
encourage extraordinary effort on behalf of the Company;
reward the achievement of specific financial, strategic and tactical goals by the Company and the individual
executive which aligns the interests of management with the interests of our stockholders; and
be financially sound.
Compensation Consultants and Benchmarking
The Compensation Committee utilizes internal resources, including our Chief People Officer, to help it carry out its
responsibilities and has, from time to time, engaged independent consultants to assist it in fulfilling its responsibilities. The
Compensation Committee has the authority to obtain advice and assistance from, and receives appropriate funding from us
for, outside advisors as the Compensation Committee deems necessary to carry out its duties. During 2006, the
Compensation Committee retained Towers Perrin, a global human resource consulting firm, as its independent compensation
consultant to advise the Compensation Committee on all matters related to executive compensation and compensation
programs in general. As such, Towers Perrin conducted a competitive analysis of the compensation for the most senior
executives, including but not limited to the named executive officers, of the Company.
The Towers Perrin analysis measured the competitiveness of the Company’s compensation relative to two groups of
companies (the “comparison groups”). The comparison groups were chosen by Towers Perrin and approved by the
Compensation Committee based upon primary characteristics such as similar business focus, labor market and size.
Comparison Group One, which was considered to be the primary peer group, included nineteen publicly-traded product and
service competitors and suppliers and other enterprises which may compete with the Company for executive talent.
Comparison Group Two included twenty publicly-traded technology companies, many of which were significantly larger
than Insight. Because of the large variance in size among the companies in Comparison Group Two, Towers Perrin adjusted
the compensation data for the Comparison Group Two to reflect the revenue size of the Company. This size-adjusted data
was used as a basis of comparison of compensation between Insight and the companies in Comparison Group Two. As
neither group was limited to companies that are merely competitors or to those that are close comparisons in terms of sales
and market capitalization, the Company does not consider these groups to be peer groups for other purposes. The specific
companies included in the comparison groups are as follows:
119
INSIGHT ENTERPRISES, INC.
Comparison Group One (the primary peer group)
Affiliated Computer Services, Inc.
Amazon.com, Inc.
Avnet Inc.
BearingPoint, Inc.
Bell Microproducts, Inc.
CACI International, Inc.
CDW Corp.
CGI Group, Inc.
IKON Office Solutions, Inc.
Ingram Micro, Inc.
Lexmark International, Inc.
Office Depot, Inc.
PC Connection, Inc.
Perot Systems Corp.
PetSmart, Inc.
SYNNEX Corp.
Tech Data Corp.
Tellabs, Inc.
Unisys Corp.
Comparison Group Two
Apple, Inc.
Ceridian Corp.
Dell Inc.
Dendrite International, Inc.
Electronic Data Systems Corp.
EMC Corp. (Mass)
HLTH Corp.
Hewlett-Packard Co.
International Business Machines Corp.
IKON Office Solutions, Inc.
Intel Corp.
Lexmark International, Inc.
Microsoft Corp.
National Semiconductor Corp.
The Reynolds and Reynolds Co.
Sabre Holdings Corp.
Seagate Technology
Sun Microsystems, Inc.
Unisys Corp.
Xerox Corp.
The Towers Perrin study provided the Compensation Committee with compensation data for base salary, annual cash
incentives and long-term incentive compensation for each comparison group. The study generally concluded that, with
respect to total compensation, the Company is positioned below the median of each of the comparison groups. With respect
to total cash compensation, which includes base salaries and incentive compensation, the Towers Perrin study generally
concluded that the Company is competitive based on comparison group analysis. However, this conclusion was driven
primarily by above target performance in 2006 incentive compensation, while base salaries were noted to be below market.
With respect to long-term incentive compensation, Towers Perrin generally concluded that our equity-based incentive
compensation plan, including the use of performance-based RSUs and the target level of grants to each executive, is
competitive with market practices. The Towers Perrin report was delivered to the Compensation Committee in December
2006, and, accordingly, the Committee used the report, in addition to other relevant sources of information, such as past
studies and existing pay levels, internal pay equity considerations and other publicly available information about trends in
executive compensation, in setting compensation for executives for 2007. Additionally, Towers Perrin advised the
Compensation Committee and the Company regarding executive compensation programs generally and provided advice on
trends in compensation. The Committee anticipates that it will undertake similar periodic reviews in the future and that it
will use the services of outside consultants for similar services in the future.
Compensation Programs Design
The principal components of compensation for named executive officers are:
•
•
•
•
base salary and benefits;
short-term cash incentive compensation;
long-term equity-based incentive compensation; and
severance and change in control plans.
A significant percentage of total compensation is allocated to incentive compensation as a result of the executive
compensation philosophy and objectives discussed above. There is no pre-established policy or target for the allocation
between either cash or equity or short-term or long-term incentive compensation. Rather, the different elements of
compensation are designed to support and encourage varying behaviors, as described below:
Base Salary and Benefits
Base salary and benefits are designed to attract and retain executives by providing a fixed compensation based on
competitive market practice. This component of compensation is designed to reward an executive’s core competency in the
role relative to skills, experience and expected contributions to the Company.
The Compensation Committee reviews base salaries annually and targets base pay for executive officers at or near the
median of the comparison groups and adjusts, as appropriate, for tenure, performance and variations in actual position
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responsibilities from position descriptions in the comparison groups. The Towers Perrin study concluded that base salary
levels for executive officers were generally below the median levels of both comparison groups. As a result, on January 24,
2007, the Compensation Committee approved certain increases in executive base salaries; although the Compensation
Committee increased Mr. Fennessy’s base salary by less than one percent, preferring instead to emphasize performance-
based compensation by increasing his target cash incentive compensation. The approved 2007 salaries, as compared to 2006
salaries, include the following for named executive officers:
Richard A. Fennessy, President and Chief Executive Officer – $700,000 (2006 – $695,000);
Stanley Laybourne, Chief Financial Officer, Secretary and Treasurer – $375,000 (2006 – $350,000);
•
•
• Mark T. McGrath, President, Insight North America/APAC – $375,000 (2006 – $325,000);
•
• Gary M. Glandon, Chief People Officer – $255,000 (2006 – $235,000).
Stuart A. Fenton, President, Insight EMEA – $419,0001 (2006 – $370,4002); and
1 Mr. Fenton’s 2007 salary was translated into U.S. dollars using the British Pound Sterling exchange rate in effect
on January 24, 2007 of $1.98.
2 Mr. Fenton’s 2006 salary was translated into U.S. dollars using the British Pound Sterling average exchange rates
for the quarters ended March 31, 2006 of $1.75; June 30, 2006 of $1.83; September 30, 2006 of $1.87 and
December 31, 2006 of $1.96.
Our named executive officers participate in employee benefit plans generally available to our employees, including
medical, health, life insurance and disability plans. Our named executive officers are also eligible to participate in the
Company’s 401(k) plan, and receive Company matching contributions, which are generally available to our employees. Mr.
Fenton also receives an automobile allowance, which is a benefit generally available to the management team in the United
Kingdom, where Mr. Fenton resides. These benefits are part of our broad-based total compensation programs offered in the
geography in which each of the executives resides.
Short-Term Cash Incentive Compensation
The Compensation Committee views cash incentive compensation as a means of closely tying a significant portion of
the total potential annual cash compensation for executives to the financial performance of the Company or the portion of the
Company for which the executive has management responsibility. Our cash incentive compensation plans are designed to
reward individuals for the achievement of certain defined quarterly financial objectives of the Company, as well as annual
individual or Company financial, strategic and tactical objectives, or both. The financial objectives and performance goals
are approved by the Compensation Committee and are set at the beginning of the year. These objectives and goals are
integrated into the management cash incentive plans throughout the organization to foster a team environment where the
entire Company is focused on the same set of objectives and goals.
The Compensation Committee annually reviews financial objectives, performance goals and target cash incentive
compensation. The Compensation Committee targets cash incentive compensation for executive officers at or near the
median of the comparison groups and adjusts, as appropriate, for tenure, performance and variations in actual position
responsibilities from position descriptions in the comparison groups. The Towers Perrin study generally concluded that the
Company’s cash incentive compensation is competitive based on comparison group analysis.
2006 Cash Incentive Plan
Under the 2006 Cash Incentive Plan, Messrs. Fennessy, Laybourne, Fenton, McGrath and Glandon earned cash
incentive compensation based on achievement of financial objectives against targeted amounts for the Company or their
respective business units, with payout varying with financial performance levels below and above target levels (awards were
discretionary over or below specified levels). The target cash incentive amount was based on achievement of non-GAAP
quarterly operating margin percentages (non-GAAP quarterly operating margin is defined under the plan as the quarterly
operating margin modified for any adjustments which are reflected in the tabular reconciliation of financial measures
prepared in accordance with United States generally accepted accounting principles (“GAAP”) to non-GAAP financial
measures in the quarterly press releases of the results of operations of the Company), paid quarterly, and on achievement of
annual revenue growth, paid annually. For Mr. Glandon only, a portion was also paid quarterly and based on performance
against quarterly performance goals. Due to the over-achievement of financial goals, the actual 2006 incentive cash
compensation for the named executive officers was paid out at amounts higher than target as follows:
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INSIGHT ENTERPRISES, INC.
Richard A. Fennessy, President and Chief Executive Officer – $1,397,553 (target – $1,203,750);
Stanley Laybourne, Chief Financial Officer, Secretary and Treasurer – $900,646 (target – $775,750);
•
•
• Mark T. McGrath, President, Insight North America/APAC – $528,418 (target – $465,985);
•
• Gary M. Glandon, Chief People Officer – $163,546 (target – $144,450);
Stuart A. Fenton, President, Insight EMEA – $179,8801 (target – $183,3002); and
1 Mr. Fenton’s 2006 incentive compensation was translated into U.S. dollars using the British Pound
Sterling average exchange rates for the quarters ended March 31, 2006 of $1.75; June 30, 2006 of
$1.83; September 30, 2006 of $1.87 and December 31, 2006 of $1.96.
2 Mr. Fenton’s 2006 target incentive compensation was translated into U.S. dollars using the British
pound sterling exchange rate in effect at January 24, 2006 of $1.78.
Additionally, on February 15, 2007, the Compensation Committee also approved the following discretionary cash bonuses
for 2006 for the named executive officers:
Richard A. Fennessy, President and Chief Executive Officer – $150,000;
Stanley Laybourne, Chief Financial Officer, Secretary and Treasurer – $80,000;
•
•
• Mark T. McGrath, President, Insight North America/APAC – $50,000;
•
• Gary M. Glandon, Chief People Officer – $15,000.
Stuart A. Fenton, President, Insight EMEA – $78,3411; and
1 Mr. Fenton’s 2006 discretionary cash bonus was translated into U.S. dollars using the British Pound
Sterling
exchange rate in effect on February 15, 2007 of $1.96.
In determining the amount of these discretionary bonuses, the Compensation Committee considered the additional
responsibilities and projects assumed by these individuals during 2006, their performance in these roles and their overall cash
compensation. In particular, their efforts in connection with the divestiture of Direct Alliance and the acquisition and
integration of Software Spectrum, Inc. were considered. These amounts are in addition to incentives paid pursuant to the
2006 Cash Incentive Plan discussed above.
2007 Cash Incentive Plan
For 2007, the Compensation Committee retained its stance of increasing the emphasis on cash incentive compensation
relative to base salary and, accordingly, set cash incentive plans for executive officers such that a significant portion of total
compensation would be awarded through cash incentives if performance measures were met. Annual financial performance
targets were set in conjunction with the annual budget process and were considered to be a challenge, but potentially
achievable given the tactical and strategic plans that have been developed. The specific levels of performance have not been
communicated externally and involve confidential, commercial information disclosure of which could result in competitive
harm to the Company. Based on the Company’s financial performance during 2007 to date, it appears very likely that the
target performance measures will be met or exceeded for 2007. The total target cash incentive compensation for 2007 will
be based 60% on earnings from operations of the Company or the executives’ respective business units, to be determined and
paid quarterly against a sliding scale with a minimum payout of zero and a maximum payout at 145% of the earnings from
operations target. The remaining 40% of the target cash incentive compensation will be based on achievement against
annual performance goals, with the Nominating and Governance Committee measuring the performance of the Chief
Executive Officer of the Company and the Compensation Committee determining pay based on the results of that review and
the balance of the performance measurements being determined by the Chief Executive Officer. The Compensation
Committee may also make discretionary awards outside of the plan if performance goals are exceeded.
The Compensation Committee continued efforts in 2007 to adjust cash incentive structures to yield cash incentive
compensation and total cash compensation closer to amounts at or above the median of both comparison groups. As such,
the Compensation Committee initiated a concerted effort to align the basis of compensation over the entire senior
management team and remained committed to providing overall compensation for the entire team of named executive
officers that is competitive with total cash compensation offered in the market assuming performance measures are met. In
determining the amount of target cash incentive compensation for 2007, the Compensation Committee considered the results
of the Towers Perrin study and the additional scope and responsibilities assumed by these individuals during 2006, primarily
as a result of the acquisition of Software Spectrum, Inc. On January 24, 2007, the Compensation Committee approved the
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2007 target cash incentive compensation plan for named executive officers. The approved 2007 target cash incentive
compensation, as compared to 2006 target cash incentive compensation, includes the following for named executive officers:
Richard A. Fennessy, President and Chief Executive Officer – $1,400,000 (2006 target – $1,203,750);
Stanley Laybourne, Chief Financial Officer, Secretary and Treasurer – $800,000 (2006 target – $775,750);
•
•
• Mark T. McGrath, President, Insight North America/APAC – $500,000 (2006 target – $465,985);
•
• Gary M. Glandon, Chief People Officer – $155,000 (2006 target – $144,450).
Stuart A. Fenton, President, Insight EMEA – $241,0001 (2006 target – $183,3002); and
1 Mr. Fenton’s 2007 target incentive compensation was translated into U.S. dollars using the British
Pound Sterling exchange rate in effect on January 24, 2007 of $1.98.
2 Mr. Fenton’s 2006 target incentive compensation was translated into U.S. dollars using the British pound sterling
exchange rate in effect at January 24, 2006 of $1.78.
Long-Term Equity-Based Incentive Compensation
The Compensation Committee views long-term equity-based compensation as a critical component of the overall
executive compensation program. The principle objectives for long-term equity-based compensation are to:
•
•
•
•
enhance the link among Company performance, the creation of stockholder value and long-term incentive
compensation;
facilitate increased equity ownership by executives;
encourage retention through use of multiple-year vesting periods; and
provide competitive levels of total compensation to executive officers.
Long-term equity-based incentives are currently issued in the form of service and performance-based RSUs. We strongly
favor performance-based grants and anticipate that most if not all future RSU grants will have performance-based elements.
The performance-based RSUs are awarded for achieving threshold levels of financial performance with greater numbers of
shares awarded for higher levels of financial performance. If the Company’s financial performance does not meet or exceed
a set performance threshold, no performance-based RSUs are awarded. The performance-based RSUs are issued with a
three-year vesting period and the number of RSUs issued is based on the Company’s performance against pre-defined annual
key financial performance metrics (diluted EPS for 2006 and 2007). To encourage overachievement of targets, significant
upside exists related to the number of RSUs ultimately issued. The three-year vesting period is designed to encourage
continued employment with the Company. All grants of equity-based compensation are currently made under the
Company’s the 1998 LTIP.
The Compensation Committee reviews target equity-based incentive compensation annually and targets equity-based
incentive compensation for executive officers at or near the median of the comparison groups. With respect to long-term
incentive compensation, Towers Perrin generally concluded that our equity-based incentive compensation plan, including the
use of performance-based RSUs and the target level of grants to each executive, is competitive with market practices.
In order to link equity-based incentive compensation more closely to annual performance and to continue to align the
interests of management and stockholders and, in part, in light of changing market expectations, the Compensation
Committee adopted a practice of initiating annual grants of equity-based incentive compensation awards to executives early
in the year (as opposed to later in the year or periodically throughout the year) in connection with the annual budgeting
process. Also, early in the year, the Compensation Committee will approve a pool of shares from which the Chief Executive
Officer may make annual RSU program grants, as well as discretionary or new hire RSU grants throughout the year, or both,
to individuals other than individuals who are subject to the reporting requirements of Section 16(a) of the Exchange Act.
The pool of RSUs is based on the recommendation of management and review of the overall equity compensation expense
expected to be recorded in current and future years in the consolidated financial statements.
2006 Equity-Based Incentive Plan
For 2006, target RSUs granted to executive officers were 60% performance-based and 40% service-based. The number
of RSUs under the performance-based grants increased or decreased with actual non- GAAP EPS (non-GAAP EPS is
defined under the plan as EPS modified for any adjustments which are reflected in the tabular reconciliation of financial
measures prepared in accordance with United States GAAP to non-GAAP financial measures in the quarterly press releases
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INSIGHT ENTERPRISES, INC.
of the results of operations of the Company), greater or less than target EPS, with a minimum number of zero and a
maximum number of 150% of the target award. The Compensation Committee also has the ability to make discretionary
awards outside of the plan, although no discretionary awards were made to the named executive officers during 2006 or as a
result of 2006 performance. The RSUs vest in three equal annual installments beginning February 1, 2007.
Due to the over-achievement of 2006 actual EPS, as compared to target EPS, the 2006 total number of RSUs, which
included both service-based and performance-based RSUs, granted to the named executive officers, as compared to 2006
target awards, was as follows:
Richard A. Fennessy, President and Chief Executive Officer – 44,800 (target – 40,000);
Stanley Laybourne, Chief Financial Officer, Secretary and Treasurer – 33,600 (target – 30,000);
•
•
• Mark T. McGrath, President, Insight North America/APAC – 33,600 (target – 30,000);
•
• Gary M. Glandon, Chief People Officer – 16,800 (target – 15,000).
Stuart A. Fenton, President, Insight EMEA – 24,600 (target – 22,000); and
2007 Equity-Based Incentive Plan
Target RSUs granted to executive officers on February 14, 2007 were 100% performance-based. The number of RSUs
under the performance-based grants increases or decreases with actual EPS (for the fiscal year ending December 31, 2007, on
a consolidated non-GAAP diluted basis with non-GAAP EPS being defined under the plan as the actual 2007 EPS from
continuing operations excluding any expenses in 2007 related to the stock option review in excess of budgeted amounts)
greater or less than target EPS, with a minimum number of zero and a maximum number of 130% of the target award.
Annual financial performance targets are set in conjunction with the annual budget process and are considered to be a
challenge, but potentially achievable given the tactical and strategic plans that have been developed. The Compensation
Committee may also make discretionary awards outside of the Plan if performance goals are exceeded. Any performance-
based RSUs that are awarded will vest in three equal installments beginning February 14, 2008.
In determining the amount of target equity-based incentive compensation for 2007, the Compensation Committee
considered the results of the Towers Perrin study and the additional scope and responsibilities assumed by these individuals
during 2006, primarily as a result of the acquisition of Software Spectrum, Inc. The 2007 performance-based RSUs, granted
on February 14, 2007, included the following target awards for named executive officers, as compared to 2006 target awards:
Richard A. Fennessy, President and Chief Executive Officer – 50,000 (2006 target – 40,000);
Stanley Laybourne, Chief Financial Officer, Secretary and Treasurer – 37,500 (2006 target – 30,000);
•
•
• Mark T. McGrath, President, Insight North America/APAC – 37,500 (2006 target – 30,000);
•
• Gary M. Glandon, Chief People Officer – 18,750 (2006 target – 15,000).
Stuart A. Fenton, President, Insight EMEA – 27,500 (2006 target – 22,000); and
Severance and Change in Control Plans
Severance and change in control plans are designed to facilitate the Company’s ability to attract and retain executives as
the Company competes for talented employees in a marketplace where such protections are commonly offered. Severance
benefits provide benefits to ease an executive’s transition due to an unexpected employment termination by the Company
due to changes in the Company’s employment needs. Change in control benefits encourages executives to remain focused
on the Company’s business in the event of rumored or actual fundamental corporate changes. See further detail under the
section entitled “Employment Agreements, Severance and Change in Control Plans.”
Perquisites
We provide our executive officers with relatively limited perquisites that we believe are reasonable and in the best
interests of Insight and its stockholders. In 2006, Mr. Fenton was provided with an automobile allowance, which is a benefit
generally available to the management team in the United Kingdom, where Mr. Fenton resides. These benefits are part of
our broad-based total compensation programs offered in the geography in which each of the executives resides. The value of
aggregate perquisites to named executive officers did not exceed $10,000 for any individual named officer, except Mr.
Fenton.
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Stock Ownership Guidelines
On February 15, 2007, the Board, upon the recommendation of the Compensation Committee, adopted stock ownership
guidelines that:
•
•
•
are designed to align the interests of key executives, Board members and stockholders;
provide a five-year transition period to reach ownership guidelines; and
define which ownership interests will count towards the guidelines.
The guidelines specify that, as of each January 1, each executive and each Board member is expected to hold Insight shares
at least equal to a multiple of his or her annual base salary or annual amount of the quarterly board retainer. For the
President and Chief Executive Officer, two times annual base salary is required, for all other Executives, one times annual
base salary is required, and for Board members, two times annual base retainer is required. Failure to meet or to show
sustained progress toward meeting the Stock Ownership Guidelines may result in a reduction in future long term incentive
grants and also may result in a requirement to retain either a percentage of or all stock attained through Company grants of
equity until the Stock Ownership Guidelines are attained.
Role of Executives in the Compensation Setting Process.
The Compensation Committee has the overall responsibility for approving the cash based incentive compensation for the
officers subject to the reporting requirements of Section 16(a) of the Exchange Act. To facilitate this process, the Chief
Executive Officer and Chief People Officer prepare and present information and recommendations to the Committee for
review, consideration and approval.
With respect to compensation of all other teammates, the Committee functions in an oversight role as these decisions are
considered the responsibility of management. With respect to equity-based compensation, the Committee approves the pool
of available shares from which all grants of equity-based awards are made. Similar to cash based incentive compensation, for
all officers subject to the reporting requirements of Section 16(a) of the Exchange Act, the Chief Executive Officer and Chief
People Officer prepare and present information and recommendations to the Committee for review, consideration and
approval of the equity-based awards by the Compensation Committee. For all other teammates, management is responsible
for recommending to the Committee the persons to receive grants and the nature and size of the proposed equity-based
awards.
The Chief Executive Officer does not have the ability to call Compensation Committee meetings and does not attend
Compensation Committee meetings when his compensation is discussed. During 2006, the Chief Executive Officer did not
meet with Towers Perrin outside Compensation Committee meetings or retain any other compensation consultant.
Chief Executive Officer Compensation
The Compensation Committee determines compensation for the Chief Executive Officer using the same criteria it uses
for other executives, placing relatively less emphasis on base salary and, instead, creating greater performance-based
opportunities for short-term and long-term incentive compensation (cash and equity, respectively). The Nominating and
Governance Committee meets each year in executive session to evaluate the performance of the Chief Executive Officer, and
the Compensation Committee sets the compensation of the Chief Executive Officer following that performance review.
2006 and Prior
Mr. Fennessy joined the Company in November 2004, and, at that time, the Compensation Committee set a base salary
for Mr. Fennessy at $695,000, the salary of Mr. Fennessy’s predecessor. No change in base salary was made during 2005 or
2006. Additionally, at the time Mr. Fennessy joined the Company, the Compensation Committee decided that it was
important to provide Mr. Fennessy with equity compensation in the form of stock options and restricted stock in order to
motivate and reward him for long-term strategic management of the Company and increases in stockholder value, and the
Committee committed to making those awards in his employment agreement. Accordingly, and pursuant to his employment
agreement, upon his hire date, he received a grant of options to acquire 500,000 shares of our common stock. In January
2005, he received a grant of options to acquire 250,000 shares of our common stock and a grant of 75,000 shares of restricted
stock. As discussed above, Mr. Fennessy also received:
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INSIGHT ENTERPRISES, INC.
•
•
•
along with other executive officers, a grant of stock options to acquire 100,000 shares of our common
stock in May 2005;
grants of RSUs (16,000 target service-based RSUs and 24,000 target performance-based RSUs based on
achievement of non-GAAP EPS targets defined under the plan as EPS modified for any adjustments which
are reflected in the tabular reconciliation of financial measures prepared in accordance with GAAP to non-
GAAP financial measures in the quarterly press releases of the results of operations of the Company) in
January 2006; and
the opportunity to receive cash incentive compensation based on non-GAAP quarterly operating margin
percentages (non-GAAP quarterly operating margin is defined under the plan as the quarterly operating
margin modified for any adjustments which are reflected in the tabular reconciliation of financial measures
prepared in accordance with GAAP to non-GAAP financial measures in the quarterly press releases of the
results of operations of the Company), and annual net sales growth under the 2006 Cash Incentive Plan.
As noted above, for 2006, Mr. Fennessy earned the following cash compensation and equity awards under the 2006
compensation programs:
•
•
•
base salary – $695,000;
cash incentive compensation – $1,547,553 (includes a discretionary bonus of $150,000); and
number of service-based and performance-based RSUs – 44,800.
2007
For 2007, the Compensation Committee approved the following target cash compensation and target equity awards for
Mr. Fennessy:
•
•
•
base salary – $700,000;
target cash incentive compensation – $1,400,000; and
target number of performance-based RSUs – 50,000.
Mr. Fennessy’s 2007 salary was increased from $695,000 to $700,000, the first increase in base salary since Mr.
Fennessy joined the Company in November of 2004.
As discussed above, and consistent in design with the other named executive officers, the total 2007 target cash
incentive compensation of $1,400,000 for Mr. Fennessy will be based $840,000 (i.e., 60%) on earnings from operations, to
be determined and paid quarterly against a sliding scale with a minimum payout of zero and a maximum payout of 145% of
the earnings from operations target award. The remaining $560,000 (i.e., 40%) of the target cash incentive compensation
will be based on achievement against annual performance goals, with the Nominating and Governance Committee measuring
the performance of Mr. Fennessy and the Compensation Committee determining pay based on the results of that review. Mr.
Fennessy’s annual performance goals are determined at the beginning of the year and include financial, strategic and tactical
goals that both Mr. Fennessy and the Board agree are important to drive the Company’s success. As discussed above, annual
financial performance targets are set in conjunction with the annual budget process and are considered to be challenging, but
potentially achievable given the tactical and strategic plans that have been developed. The Compensation Committee may
also make discretionary awards outside of the plan if performance goals are exceeded.
The number of RSUs under the performance-based grants increases or decreases from the target amount of 50,000 with
actual EPS (for the fiscal year ending December 31, 2007, on a consolidated non-GAAP diluted basis defined under the plan
as the actual 2007 EPS from continuing operations excluding any expenses in 2007 related to the stock option review in
excess of budgeted amounts) greater or less than target EPS, with a minimum number of zero and a maximum number of
130% of the target award. The Compensation Committee may also make discretionary awards outside of the plan if
performance goals are exceeded. The RSUs will vest in three equal annual installments beginning February 14, 2008.
Tax and Accounting Considerations
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code (“Section 162(m)”) generally prohibits a public company from taking an
income tax deduction for compensation over one million dollars paid to the Chief Executive Officer and its four other highest
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paid executive officers unless certain conditions are met. While the anticipated tax treatment of base and incentive
compensation is given some weight in making compensation decisions, the Compensation Committee has not adopted a
policy of limiting awards of compensation to amounts that would be deductible under Section 162(m) because the
Compensation Committee believes that awards of compensation which would not comply with the Section 162(m)
requirements may at times further the long-term interests of the Company and its stockholders. The Compensation
Committee believes that it is important to maximize the corporate tax deductibility of executive compensation. Therefore, to
ensure deductibility of payments made in the future, the Company will be seeking stockholder approval of its 2007 Long
Term Incentive Plan at our next Annual Meeting.
Compensation Committee Report
Based on the Compensation Committee’s review of the above Compensation Discussion and Analysis and discussions
with management, the Compensation Committee recommends that the Board include the Compensation Discussion and
Analysis.
Larry A. Gunning, Chairman
Robertson C. Jones
Bennett Dorrance
Michael M. Fisher
COMPENSATION COMMITTEE:
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was at any time during 2006 or at any other time an officer or employee of
Insight, and no member had any relationship with Insight requiring disclosure under Item 404 of Regulation S-K. No
executive officer of Insight has served on the Board or Compensation Committee of any other entity that has or has had one
or more executive officers who served as a member of the Board or the Compensation Committee of Insight during the 2006
fiscal year.
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Summary Compensation Table
The table below sets forth the total compensation for services rendered to us by our principal executive officer, our
principal financial officer and our three other most highly compensated executive officers. We refer to these persons as
named executive officers. The amounts shown include both amounts paid and amounts deferred.
Name and Principal
Position
Year
Salary ($) Bonus ($)(1)
Stock Awards
($)(2)
Option Awards
($)(3)
Non-Equity
Incentive Plan
Compensation
($)(4)
All Other
Compensation
($)(5)
Total ($)
Richard A. Fennessy
President and
Chief Executive Officer 2006
Stanley Laybourne
Chief Financial Officer,
Secretary and Treasurer 2006
695,000
150,000
807,555
2,313,872
1,397,553
4,812
5,368,792
350,000
80,000
223,916
445,404
900,646
3,454
2,003,420
Mark T. McGrath
President – Insight
North America/APAC
Stuart A. Fenton(6)
President – Insight
2006
325,000
50,000
322,426
723,222
528,418
1,512
1,950,578
EMEA
2006
370,430
78,341
163,938
360,340
179,880
55,361
1,208,290
Gary M. Glandon
Chief People Officer
2006
235,000
15,000
111,958
340,953
163,546
3,476 869,933
(1) On February 15, 2007, the Compensation Committee approved discretionary cash bonuses for 2006 for the named executive officers.
(2) These amounts reflect the dollar amount of compensation expense recognized for financial statement purposes for the year ended
December 31, 2006, in accordance with SFAS No. 123R of awards pursuant to the 1998 LTIP and thus may include amounts from
awards granted in and prior to 2006. No estimate of forfeitures is included in these amounts nor were any actual forfeitures included
in these amounts.
(3) These amounts reflect the dollar amount of compensation expense recognized for financial statement purposes for the year ended
December 31, 2006, in accordance with SFAS No. 123R of awards pursuant to the 1998 LTIP and 1999 Broad Based Employee Stock
Option Plan (the “1999 Broad Based Plan”) and thus may include amounts from awards granted prior to 2006. Assumptions used in
the calculations of these amounts are included in the footnotes to the our audited consolidated financial statements for the fiscal years
ended December 31, 2006 and 2005 which are included in Note 3 to Part II, Item 8 of this report. No estimate of forfeitures is
included in these amounts nor were any actual forfeitures included in these amounts.
(4) Non-Equity Incentive Plan Compensation includes bonuses paid to executives under the 2006 cash incentive plan as described in the
Compensation Discussion and Analysis section.
(5) All Other Compensation represents payments to:
• Mr. Fennessy for matching contributions to his 401(k) and tax gross-up related to annual sales incentive trip of $3,300 and
$1,512, respectively.
• Mr. Laybourne for matching contributions to his 401(k) and tax gross-up related to annual sales incentive trip of $3,300 and
$154, respectively.
• Mr. McGrath for tax gross-up related to annual sales incentive trip of $1,512.
• Mr. Fenton for auto allowances, retirement plan contribution and insurance premiums of $27,472, $26,928 and $961. The cost of
the auto allowance for Mr. Fenton is considered a perquisite and exceeds $10,000.
• Mr. Glandon for matching contributions to his 401(k) and tax gross-up related to annual sales incentive trip of $3,300 and $176,
respectively
128
INSIGHT ENTERPRISES, INC.
(6) Mr. Fenton is native of the United Kingdom. He is paid in British Pounds Sterling. The amounts above were determined by
multiplying the average exchange rates applicable at March 31, 2006, June 30, 2006, September 30, 2006 and December 31, 2006 by
the compensation earned during the quarter.
Grants of Plan-Based Awards
The following table sets forth information regarding grants of plan-based awards made during the year ended December
31, 2006 to the named executive officers.
Estimated Future Payouts Under Non
Equity Incentive Plan Awards (1)
Estimated Future Payouts Under Equity
Incentive Plan Awards (2)
Name and Principal
Position
Grant
Date
Approval
Date(3)
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
(#)
All Other Stock
Awards: Number
of Shares of Stock
or Units (#) (4)
Grant Date
Fair Value of
Stock Awards
(S/Sh)
Maximum
(#)
Richard A. Fennessy
1/19/2006 12/14/2005
1/19/2006 12/14/2005
1/24/2006 12/14/2005
Stanley Laybourne
1/19/2006 12/14/2005
1/19/2006 12/14/2005
1/24/2006 12/14/2005
Mark T. McGrath
1/19/2006 12/14/2005
1/19/2006 12/14/2005
1/24/2006 12/14/2005
Stuart A. Fenton
1/19/2006 12/14/2005
1/19/2006 12/14/2005
1/24/2006 12/14/2005
Gary M. Glandon
1/19/2006 12/14/2005
1/19/2006 12/14/2005
1/24/2006 12/14/2005
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,203,750
-
-
1,805,625
-
-
-
24,000
-
-
36,000
-
-
-
-
1,163,625
-
-
-
18,000
-
-
27,000
-
-
-
-
775,750
-
-
465,985
-
-
698,978
-
-
189,446(5)
-
-
274,903(5)
-
-
144,450
-
-
199,342
-
-
-
-
-
-
-
-
-
18,000
-
-
13,000
-
27,000
-
-
19,500
-
-
9,000
-
-
13,500
-
-
-
16,000
-
-
12,000
-
-
12,000
-
-
9,000
-
-
6,000
-
21.36
21.36
-
21.36
21.36
-
21.36
21.36
-
21.36
21.36
-
21.36
21.36
-
(1)
(2)
(3)
Under the 2006 cash incentive compensation plan, Messrs. Fennessy, Laybourne, Fenton, McGrath and Glandon, earned cash
incentive compensation based on achievement of financial objectives against targeted amounts for the Company or their
respective business units, with payout varying with financial performance levels below and above target levels (awards were
discretionary over or below specified levels). The target cash incentive amount was based on achievement of non-GAAP
quarterly operating margin percentage, paid quarterly, on achievement of annual revenue growth, paid annually, and on the
achievement of individual goals, paid annually. For Mr. Glandon only, a portion was also paid quarterly based on performance
against quarterly performance goals. Additionally, for Mr. Fennessy only, the Nominating and Governance Committee of the
Board annually evaluates Mr. Fennessy’s performance for the preceding year and, based on that review, the Compensation
Committee, in its discretion, retains the right with respect to adjust his actual cash incentive compensation.
Pursuant to the 2006 performance-based equity-based incentive compensation program, grants of performance-based RSUs to
Messrs. Fennessy, Laybourne, Fenton, McGrath and Glandon were also made in January 2006, and the number of actual RSUs
ultimately awarded was determined by actual achievement of consolidated non-GAAP diluted EPS of the Company for the fiscal
year ending December 31, 2006 against target consolidated non-GAAP diluted EPS. On the vest date, the RSUs converted to
service-based RSUs and one-third of the RSUs vested, with the remainder vesting ratably over the following two years. All
grants of RSUs were made under the 1998 LTIP.
On December 14, 2005, the Compensation Committee approved the number of RSUs to be granted to each executive officer
subject to the reporting requirements of Section 16(a) of the Exchange Act on a date in January 2006 concurrent with the date
upon which all other eligible employees were granted RSUs.
129
INSIGHT ENTERPRISES, INC.
(4)
(5)
Under a service-based equity-based incentive compensation program, Messrs. Fennessy, Laybourne, Fenton, McGrath and
Glandon received, in January 2006, varying levels of grants of service-based RSUs which vest ratably over three years. All grants
of RSUs were made under the 1998 LTIP.
Mr. Fenton’s cash incentive threshold, target and maximum amounts for the 2006 cash incentive plan were translated into U.S.
dollars using the average British Pound Sterling exchange rate in effect on the grant date of January 24, 2006 ($1.78).
Employment Agreements, Severance and Change in Control Plans
The employment agreements with executives and the incentive compensation plans reflect our compensation
philosophy. The employment agreements for Messrs. Fennessy, Laybourne, McGrath, Fenton and Glandon provide for
continually renewing terms and establish base salaries and a mechanism for setting annual incentive bonuses. Under our
1998 LTIP, all outstanding options and other awards become fully exercisable and all restrictions on outstanding awards
shall lapse upon a change in control. All other change in control benefits are “double trigger” (accelerated vesting is
triggered by two events: a change in control plus a triggering termination under the change of control agreement), rather than
“single trigger” (automated accelerated vesting upon a change in control).
The material terms of the employment agreements are as follows:
Richard A. Fennessy.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
effective date as of November 15, 2004;
a two-year initial term that automatically renews for a new two-year term each successive day after the start of
the initial term;
an annual salary of $695,000, increased to $700,000 effective January 1, 2007;
a cash bonus of $350,000 that was paid within two weeks of the start date;
incentive compensation for years subsequent to 2005 determined by the Compensation Committee of the Board;
a 500,000 share grant of non-qualified stock options of the Company granted at the start date at a price equal to
the closing price of the Company’s common stock on the start date. The stock options vest ratably over three
years and expire five years from the date of grant. The shares will become fully vested upon termination of
employment for any reason, including cause, in the initial two year term and for the year following and will
fully vest;
a 250,000 share grant of non-qualified stock options of the Company granted on January 3, 2005 at a price
equal to the closing price of the Company’s common stock on January 3, 2005. The stock options vest ratably
over three years and expire five years from the date of grant, but the shares will become fully vested upon
termination of employment for any reason, including cause;
a 75,000 share grant of restricted stock of the Company granted on January 3, 2005. Restrictions lift ratably
over three years following the date of grant but the shares will become fully vested upon termination of
employment for any reason, including cause, or upon a change in control;
reasonable relocation and travel fees were reimbursed, and grossed-up for income taxes, during the period of
relocation, starting at the start date and continuing for up to nine months following start date; legal fees
incurred by Mr. Fennessy of up to $25,000 for preparation and negotiation of the employment contract were
reimbursed;
a severance payment upon termination “without cause” or termination by executive for “good reason” as those
terms are defined in the agreement, payable on the date of termination, equal to two times Mr. Fennessy’s
annual base salary, less any amounts paid during the notice period, and two times the higher annual bonus that
would have been awarded, based on the calculation then in effect, during the one of the two immediately
preceding fiscal years that would produce the higher award. Additionally, Mr. Fennessy will become fully
vested in the initial 500,000 share option grant granted on his start date;
130
INSIGHT ENTERPRISES, INC.
(xi)
(xii)
(xiii)
(xiv)
a severance payment following a “change in control” of the Company if Mr. Fennessy terminates his
employment “with cause” or the Company terminates his employment “without cause,” as those terms are
defined in the agreement, prior to the expiration of 24 months after the change in control occurs, payable within
ten days of his last day of work, equal to two times his highest annual base salary in effect during the term of
the agreement and two times the higher annual bonus that would have been awarded, based on the calculation
then in effect, during the one of the two immediately preceding fiscal years which would produce the higher
award. Mr. Fennessy will become vested in any and all stock bonus and stock option plans and agreements of
the Company in which Mr. Fennessy has an interest, vested or contingent. Additionally, Mr. Fennessy will be
eligible for benefits (life, disability, accident, group health and dental) through the earlier of 42 months
following termination or eligibility for new benefits. All payments made following a change in control are to be
grossed-up for Mr. Fennessy’s excise taxes if the payment exceeds prescribed limits;
in the event of Mr. Fennessy’s death, his estate will be entitled to his annual base salary due through the date of
his death and a prorated portion of any incentive compensation to which he would have been entitled had he not
died for the year in which the agreement terminated due to death. In addition, his estate will receive a lump
sum of the total amount of two times his annual base salary, less an amount equal to ninety days base salary;
in the event of Mr. Fennessy’s disability, he will be entitled to receive a lump sum of the total amount of two
times his annual base salary, less an amount equal to ninety days base salary; and
the agreement also provides for non-disclosure by Mr. Fennessy of our confidential information and includes
covenants by Mr. Fennessy not to compete with the Company for a period of two years following termination of
employment and not to solicit the employees, suppliers and customers for one year following termination of
employment.
The table below outlines the potential payments to Mr. Fennessy upon the occurrence of certain termination triggering
events assuming a hypothetical effective date of termination of December 31, 2006:
Triggering Event
Severance
Stock Based
Compensation
Awards(1)
Benefits
Total
Involuntary Termination Without Cause
or Voluntary Termination for Good
Reason
Involuntary Termination - Change in
Control
Disability
Death
(1)
$ 4,320,106
$
1,346,524
$ -
$ 5,666,630
4,495,106
2,200,494
52,500
6,748,100
2,097,250
1,225,000
-
-
-
2,097,250
-
1,225,000
This value represents the unamortized expense related to outstanding options and the unamortized expense related to
outstanding RSUs and restricted stock awards at December 31, 2006.
Stanley Laybourne.
(i)
(ii)
(iii)
(iv)
(v)
effective date as of November 1, 2003;
a two-year initial term that automatically renews for a new two-year term each successive day after the start of
the initial term;
an annual salary of $350,000, increased to $375,000 effective January 1, 2007;
incentive compensation for years subsequent to 2005 determined by the Compensation Committee of the Board;
a severance payment upon termination “without cause” or termination by executive for “good reason,” as those
terms are defined in the agreement, payable on the date of termination, equal to two times Mr. Laybourne’s
131
INSIGHT ENTERPRISES, INC.
(vi)
(vii)
(viii)
(ix)
annual base salary, less any amounts paid during the notice period, and two times the higher annual bonus that
would have been awarded, based on the calculation then in effect, during the one of the two immediately
preceding fiscal years that would produce the higher award;
a severance payment following a “change in control” of the Company if Mr. Laybourne terminates his
employment “with cause” or the Company terminates his employment “without cause,” as those terms are
defined in the agreement, prior to the expiration of 24 months after the change in control occurs, payable within
ten days of his last day of work, equal to two times his highest annual base salary in effect during the term of
the agreement and two times the higher annual bonus that would have been awarded, based on the calculation
then in effect, during the one of the two immediately preceding fiscal years which would produce the higher
award. Mr. Laybourne will become vested in any and all stock bonus and stock option plans and agreements of
the Company in which Mr. Laybourne has an interest, vested or contingent. Additionally, Mr. Laybourne will
be eligible for benefits (life, disability, accident, group health and dental) through the earlier of 42 months
following termination or eligibility for new benefits. All payments made following a change in control are to be
grossed-up for Mr. Laybourne’s excise taxes if the payment exceeds prescribed limits;
in the event of Mr. Laybourne’s death, his estate will be entitled to his annual base salary due through the date
of his death and a prorated portion of any incentive compensation to which he would have been entitled had he
not died for the year in which the agreement terminated due to death. In addition, his estate will receive a lump
sum of the total amount of two times his annual base salary, less ninety days;
in the event of Mr. Laybourne’s disability, he will be entitled to receive a lump sum of the total amount of two
times his annual base salary, less an amount equal to ninety days base salary; and
the agreement also provides for non-disclosure by Mr. Laybourne of our confidential information and includes
covenants by Mr. Laybourne not to compete with the Company for a period of two years following termination
of employment and not to solicit the employees, suppliers and customers for one year following termination of
employment.
The table below outlines the potential payments to Mr. Laybourne upon the occurrence of certain termination triggering
events assuming a hypothetical effective date of termination of December 31, 2006:
Triggering Event
Severance
Stock Based
Compensation
Awards(1)
Benefits
Total
Involuntary Termination Without Cause
or Voluntary Termination for Good
Reason
Involuntary Termination - Change in
Control
Disability
Death
(1)
$ 2,617,542
$
-
$ -
$ 2,617,542
2,711,292
721,095
52,500
3,484,887
656,250
656,250
-
-
-
656,250
-
656,250
This value represents the unamortized expense related to outstanding options and the unamortized expense related to
outstanding RSUs at December 31, 2006.
On May 2, 2007, Insight announced that Mr. Laybourne is retiring from the Company and its Board of Directors. The
effective date of his retirement is expected to be August 29, 2007. In connection with his retirement, the Company has
agreed to provide Mr. Laybourne payments and benefits consistent with those required for termination without cause under
his existing employment agreement. In addition, the Company has agreed to extend the exercise period for Mr. Laybourne’s
vested, unexercised options to 90 days following his retirement date. The calculation of Mr. Laybourne’s severance,
according to the terms described under his agreement, is $2,842,000 of non-cash stock-based compensation expense.
132
INSIGHT ENTERPRISES, INC.
Mark T. McGrath.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
effective as of May 23, 2005;
a two-year initial term that automatically renews for a new two-year term each successive day after the start of
the initial term;
an annual salary of $325,000, increased to $375,000 effective January 1, 2007;
incentive compensation for years subsequent to 2005 determined by the Compensation Committee of the Board;
a grant of 200,000 options to purchase shares of the common stock of Insight on the date Mr. McGrath
commenced employment with the exercise price set as the closing price for the common stock of Insight on the
date of grant. The options vest ratably over three years and expire five years from the date of grant;
a 15,000 share grant of restricted stock shares of the Company granted at the start date. Restrictions lift ratably
over three years following the date of grant;
reasonable relocation and travel fees reimbursed and grossed-up for income taxes, during the period of
relocation, starting at the start date and continuing for up to twelve months following start date;
if Mr. McGrath’s employment is terminated “without cause” or if he resigns with “good reason,” as those terms
are defined in the agreement, he will be entitled to a lump sum payment equal to two times his annual base
salary (less any pay during the ninety day notice period), a prorated portion of any incentive compensation
earned (and not previously paid) for the year in which termination (or resignation) takes place and one times the
higher annual bonus from the two immediately preceding fiscal years;
following a “change in control,” the agreement provides that if Mr. McGrath’s employment is terminated
“without cause” or if Mr. McGrath terminates his employment for “good reason,” as these terms are defined in
the agreement, prior to the expiration of 24 months following the change in control, Mr. McGrath will be
entitled to receive a lump sum payment equal to two times his highest annual base salary in effect during the
term of the agreement and two times the higher annual bonus from the two immediately preceding fiscal years.
Additionally, Mr. McGrath will become vested in any and all stock bonus and stock option plans and will be
eligible for benefits (life, disability, accident, group health and dental) through the earlier of 42 months
following termination or eligibility for new benefits. All payments made following a change in control are to be
grossed-up for Mr. McGrath’s excise taxes if the payment exceeds prescribed limits;
in the event of Mr. McGrath’s death, his estate will be entitled to his annual base salary due through the date of
his death and a prorated portion of any incentive compensation to which he would have been entitled had he not
died for the year in which the agreement terminated due to death. In addition, his estate will receive a lump
sum of the total amount of two times his annual base salary, less an amount equal to ninety days base salary;
in the event of Mr. McGrath’s disability, he will be entitled to receive a lump sum of the total amount of two
times his annual base salary, less an amount equal to ninety days base salary; and
the agreement also provides for non-disclosure by Mr. McGrath of our confidential information and includes
covenants by Mr. McGrath not to compete with the Company for a period of as long as two years following
termination of employment and not to solicit the employees, suppliers and customers for one year following
termination of employment.
133
INSIGHT ENTERPRISES, INC.
The table below outlines the potential payments to Mr. McGrath upon the occurrence of certain termination triggering
events assuming a hypothetical effective date of termination of December 31, 2006:
Triggering Event
Severance
Stock Based
Compensation
Awards(1)
Benefits
Total
Involuntary Termination Without Cause
or Voluntary Termination for Good
Reason
Involuntary Termination - Change in
Control
Disability
Death
(1)
$ 1,234,668
$
-
$ -
$ 1,234,668
1,906,836
1,072,309
52,500
3,031,645
656,250
656,250
-
-
-
656,250
-
656,250
This value represents the unamortized expense related to outstanding options and the unamortized expense related to
outstanding RSUs and restricted stock awards at December 31, 2006.
Stuart A. Fenton.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
effective date as of September 12, 2002, amended effective as of July 1, 2004;
a term of employment that continues until terminated in accordance with the terms of the agreement;
an annual salary of $370,400, increased to $419,000 effective January 1, 2007 (the amount is set in British
Pounds Sterling and does not fluctuate with currency changes);
eligibility for an incentive bonus, subject to achievement of performance criteria established by the
Compensation Committee of the Board;
a grant of 50,000 options to purchase shares of the common stock of Insight shortly after the date Mr. Fenton
commenced employment with the exercise price set as the closing price for the common stock of Insight on the
date of grant. Half of the options vest three years from the date of grant and the other half vests five years from
the date of grant;
upon termination of employment for reasons other than those specifically defined in the agreement, we would
be required to make a lump-sum payment in an amount equal to 165,000 GBP, less the amount paid in salary
during the required statutory notice period; and
the agreement also provides for non-disclosure by Mr. Fenton of our confidential information and includes
covenants by Mr. Fenton not to compete with the Company for a period of twelve months following termination
of employment and not to solicit the employees, suppliers and customers for a period of up to eighteen months
following termination of employment.
134
INSIGHT ENTERPRISES, INC.
The table below outlines the potential payments to Mr. Fenton upon the occurrence of certain termination triggering
events assuming a hypothetical effective date of termination of December 31, 2006:
Triggering Event
Severance
Stock Based
Compensation
Awards(1)
Total
Termination
$ 419,000
$
-
$ 419,000
Involuntary Termination - Change in
Control
(1)
This value represents the unamortized expense related to outstanding options and the unamortized expense related to
RSUs at December 31, 2006.
419,000
557,266
976,266
Gary M. Glandon.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
effective as of January 12, 2007;
a one-year initial term that automatically renews for a new one-year term each successive day after the start of
the initial term;
an annual base salary that may be adjusted from time to time in accordance with the procedures established by
the Compensation Committee for salary adjustments to executives ($255,000 in 2007);
eligibility for an annual incentive bonus, subject to achievement of performance criteria established by the
Compensation Committee of the Board;
if Mr. Glandon’s employment is terminated “without cause,” or if he resigns with “good reason,” he will be
entitled to a lump sum payment equal to his annual base salary for the remainder of the initial contract term or
current renewal term of the contract and incentive compensation equal to (1) with respect to any incentive
compensation plan with quarterly objectives, the sum of (i) a prorated bonus for the quarter in which the
termination takes place and (ii) four times executive’s bonus for the last completed quarter, plus (2) with respect
to any incentive compensation plan with annual objectives, a prorated bonus for the year in which the
termination takes place;
following a “change in control,” the agreement provides that if Mr. Glandon’s employment is terminated
“without cause” or if Mr. Glandon terminates his employment for “good reason,” as these terms are defined in
the agreement, prior to the expiration of 12 months following the change in control, Mr. Glandon will be
entitled to receive a lump sum payment equal to his annual base salary for the remainder of the initial contract
term or current renewal term of the contract and incentive compensation equal to (1) with respect to any
incentive compensation plan with quarterly objectives, the sum of (i) a prorated bonus for the quarter in which
the termination takes place and (ii) four times executive’s bonus for the last completed quarter, plus (2) with
respect to any incentive compensation plan with annual objectives, a prorated bonus for the year in which the
termination takes place;
in the event of Mr. Glandon’s death, his estate will be entitled to his annual base salary for ninety days
following the date of death in addition to incentive compensation equal to (1) with respect to any incentive
compensation plan with quarterly objectives, the sum of (i) a prorated bonus for the quarter in which the
termination takes place and (ii) the amount of incentive compensation for the last completed quarter prior to his
death, plus (2) with respect to any incentive compensation plan with annual objectives, a prorated bonus for the
year in which his death takes place;
(viii)
in the event of Mr. Glandon’s disability, he will be entitled to his annual base salary for ninety days following
the date of the disability in addition to incentive compensation equal to (1) with respect to any incentive
compensation plan with quarterly objectives, the sum of (i) a prorated bonus for the quarter in which the
disability takes place and (ii) the amount of incentive compensation for the last completed quarter prior to his
135
INSIGHT ENTERPRISES, INC.
disability, plus (2) with respect to any incentive compensation plan with annual objectives, a prorated bonus for
the year in which his disability takes place; and
(ix)
the agreement also provides for non-disclosure by Mr. Glandon of our confidential information and includes
covenants by Mr. Glandon not to compete with Insight for a period of one year following termination of
employment and not to solicit the employees, suppliers and customers for one year following termination of
employment.
(cid:3)
The table below outlines the potential payments to Mr. Glandon upon the occurrence of certain termination triggering
events assuming a hypothetical effective date of termination of December 31, 2006:
Triggering Event
Severance
Stock Based
Compensation
Awards(1)
Total
Involuntary Termination Without Cause or
Voluntary Termination for Good Reason
$ 612,092
$
-
$
612,092
Involuntary Termination - Change in Control
618,348
437,526
1,055,874
Disability
385,376
-
385,376
Death
(1)
385,376
-
385,376
This value represents the unamortized expense related to outstanding options and the unamortized expense related to
outstanding RSUs at December 31, 2006.
136
INSIGHT ENTERPRISES, INC.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information regarding outstanding equity awards at December 31, 2006 for the named
executive officers.
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested
(#)(3)
Equity
Incentive
Plan
Awards:
Market
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested
($)(4)
Market
Value of
Shares,
Units or
Other
Rights of
Stock That
Have Not
Vested
($)(2)
Number of
Shares or
Units of Stock
That Have Not
Vested
(#)(1)
-
-
-
50,000
16,000
-
-
-
-
943,500
301,920
-
-
-
-
-
-
28,800
-
-
-
-
-
543,456
-
-
-
-
-
-
-
12,000
-
-
10,000
12,000
-
-
-
-
-
-
9,000
-
-
-
6,000
-
-
-
-
-
-
-
-
226,440
-
-
188,700
226,440
-
-
-
-
-
-
169,830
-
-
-
113,220
-
-
-
-
-
-
-
-
-
21,600
-
-
-
21,600
-
-
-
-
-
-
15,600
-
-
-
10,800
-
-
-
-
-
-
-
-
407,592
-
-
-
407,592
-
-
-
-
-
-
294,372
-
-
-
203,796
Name
Richard A. Fennessy
Stanley Laybourne
Mark T. McGrath
Stuart Fenton
Gary M. Glandon
Number
of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
Option
Exercise Price
($)
333,334
83,334
33,334
-
-
-
25,000
37,500
69,750
90,000
7,500
15,000
112,500
26,667
150,000
-
-
66,667
-
-
-
8,333
34,875
8,333
20,000
-
-
-
16,667
20,000
-
-
166,666
166,666
66,666
-
-
-
-
-
23,250
-
-
-
-
53,333
-
-
-
133,333
-
-
-
-
11,625
8,333
40,000
25,000
-
-
33,333
40,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
19.90
20.36
18.53
-
-
-
15.22
16.92
21.25
18.42
18.42
18.42
22.67
18.53
16.19
-
-
19.72
-
-
-
7.04
21.25
16.18
18.53
10.02
-
-
18.35
18.53
-
-
137
Option
Expiration
Date
11/15/2009
1/3/2010
5/6/2010
-
-
-
9/30/2008
7/1/2009
2/4/2009
9/28/2009
9/28/2009
9/28/2009
2/3/2010
5/6/2010
1/2/2011
-
-
5/23/2010
-
-
-
3/4/2008
2/4/2009
8/26/2009
5/6/2010
10/14/2012
-
-
2/21/2010
5/6/2010
-
-
INSIGHT ENTERPRISES, INC.
(1)
(2)
(3)
Under various service-based equity-based incentive compensation programs, Messrs. Fennessy, Laybourne, McGrath, Fenton,
and Glandon have received varying levels of grants of service-based RSUs and restricted stock awards that will vest ratably over
three years. All grants of RSUs were made under the 1998 Plan.
Represents the value based upon the number of shares awarded multiplied by the closing price on December 31, 2006 (calculated
by multiplying the number of shares by $18.87, the closing price reported by The Nasdaq Global Select Market).
Pursuant to the 2006 performance-based equity-based incentive compensation program, grants of performance-based RSUs to
Messrs. Fennessy, Laybourne, Fenton, McGrath and Glandon were also made in January 2006, and the number of actual RSUs
ultimately awarded was determined by actual achievement of consolidated non-GAAP diluted EPS of the Company for the fiscal
year ending December 31, 2006 against target consolidated non-GAAP diluted EPS. On the vest date, the RSUs converted to
service-based RSUs and one-third of the RSUs vested, with the remainder vesting ratably over the following two years. All
grants of RSUs were made under the 1998 Plan.
(4)
Represents the value based upon the number of shares awarded multiplied by the closing price on December 31, 2006 (calculated
by multiplying the number of shares by $18.87, the closing price reported by The Nasdaq Global Select Market).
Option Exercises and Stock Vested Table
The following table sets forth information with respect to shares of Insight Enterprises, Inc. common stock acquired
through exercises of stock options and vesting of restricted shares and the number of shares acquired and value realized on
exercise or vesting by the named executive officers.
Option Awards
Stock Awards
Number of
Shares
Acquired
on Exercise (#)
Value Realized
on Exercise ($)
Number of
Shares
Acquired
on Vesting (#)
Value Realized
on Vesting ($)
-
50,000
50,000
300,000(1)
-
-
25,000
494,750
340,345
338,350
404,910(1)
-
-
-
-
-
-
-
5,000
91,500
Name
Richard A. Fennessy
Stanley Laybourne
Mark T. McGrath
(1)
On June 30, 2006, we completed the sale of 100% of the outstanding stock of Direct Alliance to TeleTech and paid $2,696,000 to
the holders of 1,997,500 exercised Direct Alliance stock options. See further discussion of this transaction in the footnotes to the
our audited consolidated financial statements for the fiscal years ended December 31, 2006, which are included in Note 19 in Part
II, Item 8 of this report.
138
INSIGHT ENTERPRISES, INC.
Director Compensation
Employee directors do not receive any separate compensation for their Board activities. Each non-employee director
receives $15,000 per quarter for serving on the Board, an additional $2,500 per quarter for each Board Committee on which
he or she serves and reimbursement for reasonable expenses incurred in connection with service as a director. An additional
$1,250 per quarter is paid to the director serving as Chairman of the Audit Committee. In 2006, outside directors received
2,000 RSUs upon joining the Board and 1,000 RSUs annually. Beginning in 2007, the annual award to outside directors
increased to 2,500 RSUs based on peer group comparisons reported by Towers Perrin and will vest over three years, subject
to continued Board service. For 2006, Mr. Timothy A. Crown, Chairman of the Board, was paid a $250,000 retainer in lieu
of standard compensation for directors and based primarily on his consultative relationship with our Chief Executive Officer,
Richard A. Fennessy, and his time commitments to the Company as Chairman of the Board. For 2007, the Compensation
Committee has recommended to the Board for approval and the Board has approved a $50,000 retainer for Mr. Timothy A.
Crown for service as Chairman of the Board, which is in addition to the standard fees for service as a non-employee director.
Name
Year
Fees Earned or
Paid in
Cash
($)
Stock Awards
Option Awards
All Other
Compensation
($)(1)
($)(2)
($)
Total ($)
Eric J. Crown(3)
2006
62,500
5,418
11,771
Timothy A. Crown
2006
250,000
5,418
304,126(4)
-
-
79,689
559,544
Bennett Dorrance
2006
82,500
5,418
19,055
-
106,973
Michael M. Fisher
2006
102,500
5,418
11,771
-
119,689
Larry A. Gunning
2006
80,000
5,418
11,771
-
97,189
Robertson C. Jones
2006
90,000
5,418
11,771
-
107,189
Kathleen S. Pushor
2006
82,500
5,418
17,201
-
105,119
David J. Robino(5)
2006
-
-
-
-
-
(1)
(2)
(3)
(4)
These amounts reflect the dollar amount recognized for financial statement purposes for the year ended December 31, 2006, in
accordance with SFAS No. 123R of awards pursuant to the 1998 Plan and thus may include amounts from awards granted prior
to 2006. Assumptions used in the calculations of these amounts are included in Note 3 to Part II, Item 8 of this report. An
estimate of forfeitures is not included in these amounts nor were any actual forfeitures included in these amounts.
These amounts reflect the dollar amount recognized for financial statement purposes for the year ended December 31, 2006, in
accordance with SFAS No. 123R of awards pursuant to the 1998 Plan and 1999 Broad Based Plan and thus may include amounts
from awards granted in and prior to 2006. Assumptions used in the calculations of these amounts are included in Note 3 to Part
II, Item 8 of this report. An estimate of forfeitures is not included in these amounts nor were any actual forfeitures included in
these amounts.
On May 10, 2007, Mr. Crown informed us that he has decided not to stand for re-election to the Board and will retire from Board
service upon the completion of his current term at the 2007 annual meeting of stockholders.
This compensation expense is related to a stock option award grant that Mr. Crown received on March 17, 2004 for 186,000
options while he was still our Chief Executive Officer. The award vests over four years.
(5)
Mr. Robino was appointed as a Class I director on May 1, 2007 and will stand for election at the 2007 meeting of stockholders.
The cost of certain perquisites and other personal benefits are not included because in the aggregate they did not exceed, in the case of
any named executive officer, $10,000.
139
INSIGHT ENTERPRISES, INC.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item and included under the captions “Securities Authorized for Issuance Under Equity
Compensation Plans” can be found in Part II, Item 5 of the Annual Report on Form 10-K.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of our common stock as of June 29,
2007 (except as otherwise indicated) by (i) each person or entity known to us own beneficially more than 5% of the outstanding
shares of common stock, (ii) each of our directors, (iii) each of the named executive officers and (iv) all directors and executive
officers as a group.
Name
FMR Corp
Barclays Global Investors, N.A. and affiliated entities
Prudential Financial, Inc.
Dimensional Fund Advisors Inc.
Jennison Associates LLC
Eric J. Crown
Richard A. Fennessy
Stanley Laybourne
Timothy A. Crown
Mark T. McGrath
Stuart A. Fenton
Gary M. Glandon
Robertson C. Jones
Bennett Dorrance
Michael M. Fisher
Larry A. Gunning
Kathleen S. Pushor
David J. Robino
Shares of Common Stock Beneficially
Owned (1)
Number of Shares
6,347,182 (2)
4,848,282 (3)
3,175,352 (4)
3,156,658 (5)
3,042,904 (6)
Percent
12.93%
9.87%
6.47%
6.43%
6.20%
953,406 (7)
1.91%
656,602 (8)
571,784 (9)
519,070 (10)
1.32%
1.15%
1.05%
159,534 (11)
*
108,074 (12)
*
78,934 (13)
*
14,094 (14)
*
14,001 (15)
*
13,819 (16)
*
12,094 (17)
*
2,001 (18)
*
-
*
All directors and executive officers as a group (15 persons)
3,348,494 (19)
6.48%
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to
securities. In accordance with SEC rules, a person is deemed to own beneficially any shares that such person has the right to acquire
within 60 days of the date of determination of beneficial ownership. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Except as indicated by footnote, and subject to community
property laws where applicable, to our knowledge the persons or entities named in the table above have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by them.
140
INSIGHT ENTERPRISES, INC.
(2) Share data based on information in an amendment to a Schedule 13G filed on February 14, 2007 with the SEC by FMR Corp. As of
December 31, 2006, the Schedule 13G indicates that FMR Corp. had sole voting power with respect to 1,235,567 shares, shared
voting power with respect to no shares, sole dispositive power with respect to 6,347,182 shares and shared dispositive power with
respect to no shares. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02199.
(3) Share data based on information in a Schedule 13G filed on January 23, 2007 with the SEC by Barclays Global Investors, NA
(“Barclays Investors”), Barclays Global Fund Advisors (“Barclays Fund Advisors”), Barclays Global Investors, LTD (“Barclays
Investors Ltd.”), Barclays Global Investors Japan Trust and Banking Company Limited (“Barclays Japan Trust”) and Barclays
Global Investors Japan Limited (“Barclays Japan Limited”). As of December 31, 2006, the Schedule 13G indicates that Barclays
Investors has sole voting power as to 3,151,201 shares and sole dispositive power as 3,310,442 shares, Barclays Fund Advisors has
sole voting power of 1,507,060 shares and sole dispositive power as to 1,507,060 shares, Barclays Investors Ltd. has sole voting
power and sole dispositive power as to 30,780 shares, Barclays Japan Trust and Barclays Japan Limited both have sole voting power
and sole dispositive power as to 0 shares. The address for Barclays Investors and Barclays Fund Advisors is 45 Fremont Street, San
Francisco 94105, the address for Barclays Investors Ltd. is Murray House, 1 Royal Mint Court, London, EC3N 4HH, the address for
Barclays Japan Trust and Barclays Japan Limited is Ebisu Prime Square Tower 8th Floor, 1-1-39 Hiroo Shibuy-Ku, Tokyo 150-0012
Japan.
(4) Share data based on information in an amendment to a Schedule 13G filed on February 9, 2007 with the SEC by Prudential Financial,
Inc. As of December 31, 2006, the Schedule 13G indicates that Prudential Financial Inc. had sole voting power with respect to
575,429 shares, shared voting power with respect to 2,599,923 shares, sole dispositive power with respect to 575,429 shares and
shared dispositive power with respect to 2,599,923 shares. The address of Prudential Financial, Inc. is 751 Broad Street, Newark,
New Jersey 07102-3777.
(5) Share data based on information in an amendment to a Schedule 13G filed on February 9, 2007 with the SEC by Dimensional Fund
Advisors Inc. As of December 31, 2006, the Schedule 13G indicates that Dimensional Fund Advisors Inc. had sole voting power with
respect to 3,156,658 shares, shared voting power with respect to no shares, sole dispositive power with respect to 3,156,658 shares and
shared dispositive power with respect to no shares. The address of Dimensional Fund Advisors Inc. is 1299 Ocean Avenue, 11th
Floor, Santa Monica, CA 90401.
(6) Share data based on information in a Schedule 13G filed on February 13, 2007 with the SEC by Jennison Associates LLC. As of
December 31, 2006, the Schedule 13G indicates that Jennison Associates LLC had sole voting power with respect to 3,042,904 shares,
shared voting power with respect to no shares, sole dispositive power with respect to no shares and shared dispositive power with
respect to 3,042,904 shares. The address of Jennison Associates LLC is 466 Lexington Avenue, New York, NY 10017.
(7)
(8)
(9)
Includes 700,061 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Crown is 1305 W. Auto
Drive, Tempe, AZ 85284.
Includes 566,668 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Fennessy is 1305 W.
Auto Drive, Tempe, AZ 85284.
Includes 560,584 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Laybourne is 1305 W.
Auto Drive, Tempe, AZ 85284.
(10) Includes 139,500 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Crown is 1305 W. Auto
Drive, Tempe, AZ 85284.
(11) Includes 133,334 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. McGrath is 1305 W. Auto
Drive, Tempe, AZ 85284.
(12) Includes 99,874 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Fenton is 1305 W. Auto
Drive, Tempe, AZ 85284.
(13) Includes 73,334 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Glandon is 1305 W. Auto
Drive, Tempe, AZ 85284.
(14) Includes 11,760 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Jones is 1305 W. Auto
Drive, Tempe, AZ 85284.
(15) Includes 9,167 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Dorrance is 1305 W. Auto
Drive, Tempe, AZ 85284.
(16) Includes 11,760 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Fisher is 1305 W. Auto
Drive, Tempe, AZ 85284.
(17) Includes 11,760 shares subject to options exercisable within 60 days of June 29, 2007. The address for Mr. Gunning is 1305 W. Auto
Drive, Tempe, AZ 85284.
141
INSIGHT ENTERPRISES, INC.
(18) Includes 1,667 shares subject to options exercisable within 60 days of June 29, 2007. The address for Ms. Pushor is 1305 W. Auto
Drive, Tempe, AZ 85284.
(19) Includes 2,534,616 shares subject to options exercisable within 60 days of June 29, 2007.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons and Certain Control Persons
Our practice has been that any transaction with respect to a director or executive officer who are subject to the reporting
requirements of Section 16(a) of the Exchange Act must be reviewed and approved in advance by the Audit Committee. Any
such related party transactions will only be approved or ratified if the Audit Committee determines that such transaction will
not impair the involved person's service to, and exercise of judgment on behalf of, the company, or otherwise create a conflict
of interest that would be detrimental to the company. All of the transactions relating to our directors and executive officers
who are subject to the reporting requirements of Section 16(a) of the Exchange Act described below have been reviewed and
approved or ratified by our Audit Committee.
We sponsor the Insight Bowl, a post-season intercollegiate football game that is played annually in Arizona. We have a
multi-year sponsorship agreement with the Valley of the Sun Bowl Foundation d/b/a Insight Bowl, the not-for-profit entity
that conducts the Insight Bowl game and related activities. During 2006, we paid the Valley of the Sun Bowl Foundation and
related entities approximately $1,196,000 for sponsorship arrangements, ticket purchases and miscellaneous expenses.
Stanley Laybourne, a member of our Board and our Chief Financial Officer, Secretary and Treasurer, serves as the Chief
Financial Officer of these organizations and receives nominal compensation from the organizations for that service. We
believe we obtain important local and national public relations benefits from our sponsorship and participation in these
events, and we use the Insight Bowl game and related events to entertain customers, suppliers and employees. We also
believe the terms of the sponsorship agreement are as advantageous to us as we would obtain in an arm’s length transaction.
The final sponsorship agreement was approved by our Board with Mr. Laybourne abstaining from the vote.
Director Independence
The Board of Directors has determined that the following directors meet the independence requirements of the
Marketplace Rules of the NASDAQ Stock Market: Mr. Dorrance; Mr. Fisher; Mr. Gunning; Mr. Jones; Ms. Pushor; and Mr.
Robino. The independent directors hold executive sessions without management present on a quarterly basis and more often
as they determine appropriate.
Item 14. Principal Accountant Fees and Services
Our independent registered public accounting firm during the year ended December 31, 2006 was KPMG. KPMG has
audited our consolidated financial statements since 1988.
Fees and Independence
Audit Fees. KPMG billed us an aggregate of $5,026,000 and $1,560,000 for professional services rendered for the audit of
our consolidated financial statements, reviews of our consolidated financial statements included in our quarterly reports on Form
10-Q and statutory audits for foreign subsidiaries for the years ended December 31, 2006 and 2005, respectively.
Audit-Related Fees. KPMG billed us an aggregate of $0 and $0 for assurance and services related to employee benefit plan
audits, accounting consultations, due diligence related to mergers and acquisitions and additional attest services for the years
ended December 31, 2006 and 2005, respectively.
Tax Fees. Tax fees billed by KPMG for the years ended December 31, 2006 and 2005 of $95,000 and $123,000,
respectively, include fees for services relating to tax compliance, unclaimed property, expatriates and tax planning and advice,
including assistance with tax audits.
All Other Fees. There were no other fees paid to KPMG for the years ended December 31, 2006 and 2005.
The Audit Committee has determined that the provision of services by KPMG described in the preceding paragraphs is
compatible with maintaining KPMG’s independence. All permissible non-audit services provided by KPMG in 2006 were pre-
approved by the Audit Committee. In addition, no audit engagement hours were spent by people other than KPMG’s full-time,
permanent employees.
142
INSIGHT ENTERPRISES, INC.
Pursuant to Section 202 of the Sarbanes-Oxley Act of 2002, our Audit Committee has approved all auditing and non-audit
services performed to date and currently planned to be provided related to the fiscal year 2006 by our independent registered
public accounting firm, KPMG. The services include the annual audit, quarterly reviews, statutory audits for foreign
subsidiaries, issuances of consents related to SEC filings and certain tax compliance services.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Schedules
The Consolidated Financial Statements of Insight Enterprises, Inc. and subsidiaries and the Reports of Independent
Registered Public Accounting Firm are filed herein as set forth under Item 8 of this report.
Financial statement schedules have been omitted since they are either not required, not applicable, or the information is
otherwise included in the consolidated financial statements or notes thereto.
(b) Exhibits
The exhibits list in the Index to Exhibits immediately following the signature page is incorporated herein by reference as
the list of exhibits required as part of this report.
143
INSIGHT ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Tempe, State of
Arizona, on this 5th day of October, 2007.
INSIGHT ENTERPRISES, INC.
By /s/ Richard A. Fennessy
Richard A. Fennessy
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Richard A. Fennessy
Richard A. Fennessy
President, Chief Executive Officer and
Director
October 5, 2007
/s/ Stanley Laybourne
Stanley Laybourne
/s/ Timothy A. Crown
Timothy A Crown
/s/ Eric J. Crown
Eric J. Crown
/s/ Bennett Dorrance
Bennett Dorrance
/s/ Michael M. Fisher
Michael M. Fisher
/s/ Larry A. Gunning
Larry A. Gunning
/s/ Robertson C. Jones
Robertson C. Jones
/s/ Kathleen S. Pushor
Kathleen S. Pushor
/s/ David J. Robino
David J. Robino
Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial Officer)
October 5, 2007
Chairman of the Board
October 5, 2007
Director (Chairman Emeritus)
October 5, 2007
October 5, 2007
October 5, 2007
October 5, 2007
October 5, 2007
October 5, 2007
October 5, 2007
Director
Director
Director
Director
Director
Director
144
INSIGHT ENTERPRISES, INC.
EXHIBITS TO FORM 10-K
YEAR ENDED DECEMBER 31, 2006
Commission File No. 000-25092
(Unless otherwise noted, exhibits are filed herewith.)
Exhibit
No.
3.1
3.2
3.3
4.1
4.2
10.1
10.2
10.3
10.4
10.5
*(1)
(2)
(2)
(2)
(2)
Description
— Composite Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of
our annual report on Form 10-K filed on February 17, 2006).
— Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 of our
current report on Form 8-K filed on May 7, 2007).
— Form of Certificate of Designation of Series A Preferred Stock (incorporated by reference to
Exhibit 5 of our Registration Statement on Form 8-A (no. 00-25092) filed on March 17, 1999).
— Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of our
Registration Statement on Form S-1 (No. 33-86142) declared effective January 24, 1995).
— Stockholder Rights Agreement and Exhibits A and B (incorporated by reference to Exhibit 4.1 of
our current report on Form 8-K filed on March 17, 1999).
— Form of Indemnification Agreement.
— 1998 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 of our Registration
Statement on Form S-8 (No. 333-110915) declared effective December 4, 2004).
— 1998 Employee Restricted Stock Plan (incorporated by reference to Exhibit 99.3 of our Form S-
8 (No. 333-69113) filed on December 17, 1998).
— 1998 Officer Restricted Stock Plan (incorporated by reference to Exhibit 99.2 of our Form S-8
(No. 333-69113) filed on December 17, 1998).
— 1999 Broad Based Employee Stock Option Plan (incorporated by reference to Exhibit 10.14 of
our annual report on Form 10-K for the year ended December 31, 1999 filed on March 30,
2000).
10.6
(2)
— Executive Service Agreement between Insight Direct UK Limited and Stuart Fenton dated
10.7
(3)
— Receivables Purchase Agreement dated as of December 31, 2002 among Insight Receivables,
September 12, 2002 (incorporated by reference to Exhibit 10.31 of our annual report on Form
10-K for the year ended December 31, 2002 filed on March 27, 2003).
10.8
10.9
LLC, Insight Enterprises, Inc., Jupiter Securitization Corporation, Bank One NA (main office –
Chicago), and the entities party thereto from time to time as financial institutions (incorporated
by reference to Exhibit 10.38 of our annual report on Form 10-K for the year ended December
31, 2002 filed on March 27, 2003).
— Amended and Restated Receivables Sale Agreement dated as of September 3, 2003 by and
among Insight Direct USA, Inc. and Insight Public Sector, Inc. as originators, and Insight
Receivables, LLC, as buyer (incorporated by reference to Exhibit 10.1 of our quarterly report on
Form 10-Q for the quarter ended September 30, 2003 filed November 13, 2003).
— Amendment No. 1 to Receivables Purchase Agreement dated as of September 3, 2003 among
Insight Receivables, LLC, Insight Enterprises, Inc. and Jupiter Securitization Corporation, Bank
One NA (incorporated by reference to Exhibit 10.2 of our quarterly report on Form 10-Q for the
quarter ended September 30, 2003 filed November 13, 2003).
10.10
— Amendment No. 2 to Receivables Purchase Agreement dated as of December 23, 2003 among
Insight Receivables, LLC, Insight Enterprises, Inc. and Jupiter Securitization Corporation, Bank
One NA (incorporated by reference to Exhibit 10.42 of our annual report on Form 10-K for the
year ended December 31, 2003 filed March 11, 2004).
10.11
(2)
— Employment Agreement between Insight Enterprises, Inc. and Karen K. McGinnis dated as of
and effective October 15, 2004 (incorporated by reference to Exhibit 10.2 of our quarterly report
on Form 10-Q for the quarter ended September 30, 2004 filed November 8, 2004).
145
INSIGHT ENTERPRISES, INC.
EXHIBITS TO FORM 10-K
YEAR ENDED DECEMBER 31, 2006
Commission File No. 000-25092
Exhibit
No.
10.12
(2)
Description
— Employment Agreement between Insight Enterprises, Inc. and Richard A. Fennessy dated as of
October 24, 2004, effective November 15, 2004 (incorporated by reference to Exhibit 99.1 of our
current report on Form 8-K filed October 28, 2004).
10.13
(2)
— Employment Agreement between Insight Enterprises, Inc. and Stanley Laybourne dated as of
10.14
(2)
November 23, 2004, effective November 1, 2004 (incorporated by reference to Exhibit 10.21 of
our annual report on Form 10-K filed March 7, 2005.
— First Amendment to Employment Agreement between Insight Enterprises, Inc. and Timothy A.
Crown dated as of March 4, 2005 and effective March 1, 2005 (incorporated by reference to
Items 1.01 & 1.02 of our current report on Form 8-K filed March 10, 2005).
10.15
(2)
— Employment Agreement between Insight Enterprises, Inc. and Gary M. Glandon dated as of
10.16
(2)
— Grants of options and restricted stock for certain executives (incorporated by reference to Item
February 9, 2005 and effective February 21, 2005 (incorporated by reference to Exhibit 10.1 of
our quarterly report on Form 10-Q filed May 9, 2005).
1.01 of our current report on Form 8-K filed May 12, 2005).
10.17
(2)
— Amendment to Executive Service Agreement between Insight Direct (UK) and Stuart Fenton
dated as of March 1, 2005 and effective July 1, 2004 (incorporated by reference to Exhibit 10.25
of our annual report on Form 10-K, filed March 7, 2005).
10.18
(2)
— First Amendment to Employment Agreement between Insight Enterprises, Inc. and Karen K.
McGinnis dated as of April 26, 2005 and effective January 1, 2005 (incorporated by reference to
Exhibit 10.3 of our quarterly report on Form 10-Q filed May 9, 2005).
10.19
— Amendment No. 5 to Receivables Purchase Agreement dated as of March 25, 2005 among
Insight Receivables, LLC (the “Seller”), Insight Enterprises, Inc. (the “Servicer”), JP Morgan
Chase Bank N.A. (successor by merger to Bank One, NA (Main Office Chicago)), as a Financial
Institution and as Agent (in its capacity as Agent, the “Agent”), and Jupiter Securitization
Corporation (“Jupiter”) (incorporated by reference to Exhibit 10.4 of our quarterly report on
Form 10-Q filed May 9, 2005).
— Employment Agreement between Insight Direct USA, Inc. and Mark McGrath dated as of May
15, 2005 to be effective May 23, 2005 (incorporated by reference to Exhibit 10.1 of our current
report on Form 8-K filed May 19, 2005).
10.20
(2)
10.21
(2)
— Summary description of 2006 incentive compensation plans for certain executives (incorporated
10.22
10.23
(2)
10.24
10.25
by reference to Item 1.01 of our current report on Form 8-K filed December 20, 2005).
— Amendment No. 6 to Receivables Purchase Agreement dated as of December 19, 2005 among
Insight Receivables, LLC (the “Seller”), Insight Enterprises, Inc. (the “Servicer”), JP Morgan
Chase Bank N.A. (successor by merger to Bank One, NA (Main Office Chicago)), as a Financial
Institution and as Agent (in its capacity as Agent, the “Agent”), and Jupiter Securitization
Corporation (“Jupiter”) (incorporated by reference to Exhibit 10.1 of our current report on Form
8-K filed December 22, 2005).
— Grants of restricted stock units under 2006 incentive compensation plan for certain executives
(incorporated by reference to Item 1.01 of our current report on Form 8-K filed January 23,
2006).
— Stock Purchase Agreement, dated as of June 14, 2006, by and among Teletech Holdings, Inc.,
Insight Enterprises, Inc. and Direct Alliance Corporation (incorporated by reference to Exhibit
10.1 of our current report on Form 8-K filed on June 15, 2006).
— Stock Purchase Agreement, dated as of July 20, 2006, by and among Insight Enterprises, Inc.,
Level 3 Communications, Inc. and Technology Spectrum Inc. (incorporated by reference to
Exhibit 10.1 of our current report on Form 8-K filed on July 21, 2006).
146
INSIGHT ENTERPRISES, INC.
EXHIBITS TO FORM 10-K
YEAR ENDED DECEMBER 31, 2006
Commission File No. 000-25092
Exhibit
No.
10.26
10.27
10.28
(2)
Description
— Amended and Restated Credit Agreement, dated as of September 7, 2006, among Insight
Enterprises, Inc., the European borrowers, the lenders party thereto, J.P. Morgan Europe Limited,
as European agent, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by
reference to Exhibit 10.1 of our current report on Form 8-K filed on September 8, 2006).
— Amendment No. 7 to Receivables Purchase Agreement, dated as of September 7, 2006, among
Insight Receivables, LLC, Insight Enterprises, Inc., JPMorgan Chase Bank, N.A. (successor by
merger to Bank One, NA (Main Office Chicago)), as a Financial Institution and as Agent, and
Jupiter Securitization Company LLC (formerly Jupiter Securitization Corporation) (incorporated
by reference to Exhibit 10.2 of our current report on Form 8-K filed on September 8, 2006).
— Summary description of 2007 incentive compensation plans for certain executives (incorporated
by reference to Item 5.02 of our current report on Form 8-K filed January 30, 2007).
10.29
(2)
— Approval of discretionary cash bonuses for certain executives (incorporated by reference to Item
10.30
21
23.1
31.1
31.2
32.1
5.02 of our current report on Form 8-K filed February 21, 2007).
*(2)
*
— Stanley Laybourne Retirement Termination Program - Summary of Key Terms.
— Subsidiaries of the Registrant.
— Consent of KPMG LLP.
— Certification of Chief Executive Officer Pursuant to Securities and Exchange Act Rule 13a-14,
as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
— Certification of Chief Financial Officer Pursuant to Securities and Exchange Act Rule 13a-14, as
Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
— Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
*
(1)
Previously filed.
We have entered into a separate indemnification agreement with each of the following directors and executive
officers that differ only in party names and dates: Eric J. Crown, Timothy A. Crown, Bennett Dorrance, Richard A.
Fennessy, Michael M. Fisher, Larry A. Gunning, Robertson C. Jones, Stanley Laybourne, Kathleen S. Pushor, David
J. Robino and Karen K. McGinnis. Pursuant to the instructions accompanying Item 601 of Regulation S-K, the
Registrant is filing the form of such indemnification agreement.
(2) Management contract or compensatory plan or arrangement.
147
INSIGHT ENTERPRISES, INC.
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Exhibit 31.1
CERTIFICATION
I, Richard A. Fennessy, certify that:
1.
I have reviewed this Annual Report on Form 10-K/A of Insight Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: October 5, 2007
By: /s/ Richard A Fennessy
Richard A. Fennessy
Chief Executive Officer
148
INSIGHT ENTERPRISES, INC.
CERTIFICATION
Exhibit 31.2
I, Stanley Laybourne, certify that:
1.
I have reviewed this Annual Report on Form 10-K/A of Insight Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5 The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: October 5, 2007
By: /s/ Stanley Laybourne
Stanley Laybourne
Chief Financial Officer
149
INSIGHT ENTERPRISES, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Insight Enterprises, Inc. (the “Company”) on Form 10-K/A for the period
ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we,
Richard A. Fennessy, Chief Executive Officer of the Company, and Stanley Laybourne, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to
the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
By: /s/ Richard A. Fennessy
Richard A. Fennessy
Chief Executive Officer
October 5, 2007
By: /s/ Stanley Laybourne
Stanley Laybourne
Chief Financial Officer
October 5, 2007
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or
otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by
Section 906, has been provided to Insight Enterprises, Inc. and will be retained by Insight Enterprises, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.
150
2006 Financial Results
A Great Year
A Greeting from Richard A. Fennessy,
President and Chief Executive Officer
2006 was a great year for
Insight. Thanks to our valued
teammates, clients and partners,
we had a very exciting and successful
year. I am proud to report that we
achieved record annual net sales, record
net earnings from continuing operations
and record diluted earnings per share from
continuing operations. Specifically, our
consolidated annual net sales were $3.82 billion,
a 20 percent increase over 2005, while net earnings
from continuing operations were $65.7 million, a 37
percent increase year over year. Additionally, diluted
earnings per share from continuing operations also grew
38 percent over 2005 to $1.35.
While I am pleased to report our record financials results, I am
even more pleased to report that we made significant progress
during 2006 in strengthening the foundation of the Company which
positions us for even greater success in the years ahead.
Insight accelerated our Trusted Advisor strategy. In 2005, we
developed our strategic plan and new vision, which is to be a Trusted
Advisor to our clients, helping them enhance their business performance
through innovative technology solutions. With the strategy and direction in
place, the focus of 2006 was on the execution of the plan. One aspect of our
plan was to align the entire Company’s focus on our core business of providing IT
solutions. Therefore, on June 30, 2006, we completed the divesture of Direct Alliance,
our business process outsourcing segment. A second aspect of our plan was to enhance
our capabilities in order to strengthen the trusted advisor relationship with our clients.
To enhance our capabilities, we invested in our new skills development program, Insight
World Class, with an initial deployment in our North American operations. As a result, we
experienced higher productivity, lower attrition and increased attach rates for services during
2006. Due to the success of Insight World Class in North America, we plan to begin deploying the
program globally during 2007. To further support our plan to enhance capabilities, on September 7,
2006, we completed the acquisition of Software Spectrum, one of the world’s leading providers of
business-to-business IT solutions and services with particular expertise in the selection, purchase and
management of business software.
Insight gained market sharethrough a combination of organic growth and the strategic acquisition of
Software Spectrum. While overall market demand continued to be challenging, Insight executed very well in
driving growth during our integration efforts and benefited from seasonally strong results in North America, EMEA
and APAC during the fourth quarter. Based on our fourth quarter experience, we continue to be very excited about
our cross-selling opportunities to leverage Insight’s extensive portfolio of hardware, software and services.
Board of Directors
(Front row, left to right)
Michael M. Fisher, Director and Chairman of the Audit Committee; Richard A. Fennessy, President,
Chief Executive Officer and Director; Kathleen S. Pushor, Director; Bennett Dorrance, Director;
Eric J. Crown, Chairman Emeritus.
(Back row, left to right)
Larry A. Gunning, Director; Timothy A. Crown, Chairman of the Board; Robertson C. Jones, Director
and Chairman of the Nominating and Governance Committee; Stanley Laybourne, Chief Financial
Officer, Secretary, Treasurer and Director.
(Not pictured)
David J. Robino, Director and Chairman of the Compensation Committee.
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Insight Enterprises, Inc.
800.INSIGHT
www.insight.com
INSIGHT ENTERPRISES, INC.
2006 ANNUAL REPORT