SYNNEX Corporation
SYNNEX CORP (Form: 10-Q, Received: 07/10/2006 15:01:51)
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2006

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-31892

 


SYNNEX CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware   94-2703333

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

44201 Nobel Drive

Fremont, California

  94538
(Address of principal executive offices)   (Zip Code)

(510) 656-3333

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

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   ¨      Accelerated filer   x     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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at July 5, 2006

Common Stock, $0.001 par value

  29,828,488

 



Table of Contents

SYNNEX CORPORATION

FORM 10-Q

INDEX

 

              Page
PART I.    FINANCIAL INFORMATION    3
  Item 1.    Financial Statements    3
     Condensed Consolidated Balance Sheets (unaudited) as of May 31, 2006 and November 30, 2005    3
     Condensed Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended May 31, 2006 and 2005    4
     Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended May 31, 2006 and 2005    5
     Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended May 31, 2006 and 2005    6
     Notes to Condensed Consolidated Financial Statements (unaudited)    7
  Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    24
  Item 3.    Quantitative and Qualitative Disclosures about Market Risk    37
  Item 4.    Controls and Procedures    37
PART II.    OTHER INFORMATION    38
  Item 1A    Risk Factors    38
  Item 4    Submission of Matters to a Vote of Security Holders    51
  Item 6.    Exhibits    52
Signatures    53
Exhibit Index    54

 

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PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

SYNNEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par values)

(unaudited)

 

     May 31,
2006
   November 30,
2005

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 18,969    $ 13,636

Short-term investments

     8,699      27,985

Accounts receivable, net

     277,892      342,322

Receivable from vendors, net

     83,216      82,721

Receivable from affiliates

     2,188      5,177

Inventories

     502,652      494,617

Deferred income taxes

     15,448      15,445

Current deferred assets

     12,983      —  

Other current assets

     10,198      10,908
             

Total current assets

     932,245      992,811

Property and equipment, net

     36,185      33,713

Goodwill and intangible assets, net

     42,289      43,004

Deferred income taxes

     3,520      4,781

Long-term deferred assets

     151,232      —  

Other assets

     5,974      8,179
             

Total assets

   $ 1,171,445    $ 1,082,488
             

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Borrowings under term loans and lines of credit

   $ 5,421    $ 28,548

Accounts payable

     389,489      448,339

Payable to affiliates

     78,196      85,871

Accrued liabilities

     63,563      68,619

Other current liabilities

     6,367      6,085

Current deferred liabilities

     28,384      —  

Income taxes payable

     10,454      4,820
             

Total current liabilities

     581,874      642,282

Long-term borrowings

     16,444      1,153

Long-term liabilities

     1,928      840

Long-term deferred liabilities

     101,152      —  

Deferred income taxes

     990      988
             

Total liabilities

     702,388      645,263
             

Commitments and contingencies (Note 13)

     —        —  

Stockholders’ equity:

     

Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued or outstanding

     —        —  

Common stock, $0.001 par value, 100,000 shares authorized, 29,619 and 28,948 shares issued and outstanding

     30      29

Additional paid-in capital

     166,012      159,551

Accumulated other comprehensive income

     16,071      12,701

Retained earnings

     286,944      264,944
             

Total stockholders’ equity

     469,057      437,225
             

Total liabilities and stockholders’ equity

   $ 1,171,445    $ 1,082,488
             

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

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SYNNEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(unaudited)

 

     Three Months Ended     Six Months Ended  
    

May 31,

2006

   

May 31,

2005

   

May 31,

2006

   

May 31,

2005

 

Revenue

   $ 1,511,701     $ 1,346,328     $ 3,013,436     $ 2,656,091  

Cost of revenue

     (1,443,353 )     (1,289,772 )     (2,880,078 )     (2,543,401 )
                                

Gross profit

     68,348       56,556       133,358       112,690  

Selling, general and administrative expenses

     (45,952 )     (38,159 )     (88,715 )     (77,871 )
                                

Income from continuing operations before non-operating items, income taxes and minority interest

     22,396       18,397       44,643       34,819  

Interest expense and finance charges, net

     (4,340 )     (3,521 )     (10,192 )     (7,333 )

Other income (expense), net

     (482 )     949       (209 )     1,658  
                                

Income from continuing operations before income taxes and minority interest

     17,574       15,825       34,242       29,144  

Provision for income taxes

     (6,257 )     (6,006 )     (12,242 )     (11,048 )

Minority interest in subsidiary

     —         32       —         58  
                                

Income from continuing operations

     11,317       9,851       22,000       18,154  

Income from discontinued operations, net of tax

     —         207       —         511  

Gain on sale of discontinued operations, net of tax

     —         12,323       —         12,323  
                                

Net income

   $ 11,317     $ 22,381     $ 22,000     $ 30,988  
                                

Earnings per share:

        

Basic

        

Income from continuing operations

   $ 0.38     $ 0.35     $ 0.75     $ 0.64  

Discontinued operations

   $ —       $ 0.43     $ —       $ 0.46  
                                

Net income per common share - basic

   $ 0.38     $ 0.78     $ 0.75     $ 1.10  
                                

Diluted

        

Income from continuing operations

   $ 0.36     $ 0.32     $ 0.70     $ 0.58  

Discontinued operations

   $ —       $ 0.40     $ —       $ 0.41  
                                

Net income per common share - diluted

   $ 0.36     $ 0.72     $ 0.70     $ 0.99  
                                

Weighted average common shares outstanding - basic

     29,499       28,539       29,280       28,275  
                                

Weighted average common shares outstanding - diluted

     31,600       30,900       31,477       31,201  
                                

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

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SYNNEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended  
     May 31,
2006
    May 31,
2005
 

Cash flows from operating activities:

    

Net income

     22,000       30,988  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation expense

     2,550       2,424  

Amortization of intangible assets

     2,006       1,964  

Stock-based compensation

     1,660       —    

Provision for doubtful accounts

     4,559       2,294  

Tax benefits from employee stock plan

     —         2,227  

Unrealized (gain) loss on trading securities

     (169 )     266  

Realized gain on investment

     (88 )     (1,751 )

Stock received from sale of business

     —         (20,478 )

Unrealized (gain) loss on short term investments

     2,736       (917 )

Loss on disposal of fixed assets

     36       652  

Minority interest in subsidiary

     —         (58 )

Changes in assets and liabilities, net of acquisition of businesses:

    

Accounts receivable

     63,363       11,036  

Receivable from vendors

     (458 )     6,414  

Receivable from affiliates

     2,990       (5,198 )

Inventories

     (2,519 )     13,379  

Other current assets

     (494 )     (1,045 )

Deferred assets

     (167,884 )     —    

Payable to affiliates

     (7,669 )     4,543  

Accounts payable

     (32,152 )     (70,136 )

Accrued liabilities

     (919 )     13,422  

Deferred liabilities

     134,148       —    
                

Net cash provided by (used in ) operating activities

     23,696       (9,974 )
                

Cash flows from investing activities:

    

Purchases of short-term investments

     (7,329 )     (373 )

Proceeds from sale of short-term investments

     24,166       2,561  

Acquisition of businesses

     (2,857 )     (4,769 )

Minority investment

     —         (3,000 )

Purchase of property and equipment

     (4,661 )     (3,553 )

Decrease in restricted cash

     —         2,021  
                

Net cash provided by (used in) investing activities

     9,319       (7,113 )
                

Cash flows from financing activities:

    

Cash overdraft

     (24,176 )     (4,559 )

Proceeds from term loan

     212,769       521,621  

Payment of term loan

     (192,286 )     (529,577 )

Proceeds from revolving line of credit

     —         1,613  

Payments on revolving line of credit

     (939 )     —    

Net (payments) proceeds under other lines of credit

     (26,765 )     4,647  

Payments of bonds and other long-term liabilities

     —         (5,917 )

Dividend payment to minority shareholders

     —         (1,133 )

Net proceeds from issuance of common stock

     4,820       6,458  
                

Net cash used in financing activities

     (26,577 )     (6,847 )
                

Effect of exchange rate changes on cash and cash equivalents

     (1,105 )     159  
                

Net increase (decrease) in cash and cash equivalents

     5,333       (23,775 )

Cash and cash equivalents at beginning of period

     13,636       28,726  
                

Cash and cash equivalents at end of period

   $ 18,969     $ 4,951  
                

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 769     $ 2,242  
                

Income taxes paid

   $ 5,042     $ 6,169  
                

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

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SYNNEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     May 31,
2006
    May 31,
2005
    May 31,
2006
   May 31,
2005
 

Net income

   $ 11,317     $ 22,381     $ 22,000    $ 30,988  

Other comprehensive income:

         

Changes in unrealized gains on available-for-sale securities

     1,265       15       1,358      7  

Foreign currency translation adjustment

     (40 )     (1,762 )     2,012      (3,758 )
                               

Total comprehensive income

   $ 12,542     $ 20,634     $ 25,370    $ 27,237  
                               

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION:

SYNNEX Corporation (together with its subsidiaries, herein referred to as “SYNNEX” or the “Company”) is an information technology products supply chain services company. The Company’s supply chain outsourcing services include distribution, contract assembly, logistics and demand generation marketing. SYNNEX is headquartered in Fremont, California and has operations in North America, Asia and Europe.

The accompanying interim unaudited condensed consolidated financial statements as of May 31, 2006 and 2005 and for the three and six months then ended have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The amounts as of November 30, 2005 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended November 30, 2005, included in the Company’s Annual Report on Form 10-K for the fiscal year then ended.

The results of operations for the six months ended May 31, 2006 are not necessarily indicative of the results that may be expected for the year ending November 30, 2006, or any future period and the Company makes no representations related thereto.

The Company is an affiliate of MiTAC International Corporation, a publicly traded corporation in Taiwan. At May 31, 2006, MiTAC International Corporation and its affiliates had a combined ownership of approximately 55% of the Company’s outstanding common stock.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenue and expense during the reporting period. We evaluate our estimates on a regular basis. Our estimates are based on historical experience and on various assumptions that the Company believes are reasonable. Actual results could differ from those estimates.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and majority owned subsidiaries in which no substantive participating rights are held by minority stockholders. All significant intercompany accounts and transactions have been eliminated.

The consolidated financial statements include 100% of the assets and liabilities of these majority owned subsidiaries and the ownership interest of minority investors are recorded as minority interest. Investments in 20% through 50% owned affiliated companies are included under the equity method of accounting where the Company exercises significant influence over operating and financial affairs of the investee. Investments in less than 20% owned companies or investments in 20% through 50% owned companies where the Company does not exercise significant influence over operating and financial affairs of the investee are recorded under the cost method.

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

Cash and cash equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity or remaining maturity at date of purchase of three months or less to be cash equivalents. Cash equivalents consist principally of money market deposit accounts that are stated at cost, which approximates fair value. The Company is exposed to credit risk in the event of default by financial institutions to the extent that cash balances with financial institutions are in excess of amounts that are insured by the Federal Deposit Insurance Corporation.

Investments

The Company classifies its investments in marketable securities as trading and available-for-sale. All securities related to its deferred compensation plan are classified as trading and are recorded at fair value, based on quoted market prices, and unrealized gains and losses are included in “Other income (expense), net” in the Company’s financial statements. All other securities are classified as available-for-sale and are recorded at fair market value, based on quoted market prices, and unrealized gains and losses are included in “Accumulated other comprehensive income”, a component of stockholders’ equity. Realized gains and losses, which are calculated based on the specific identification method, and declines in value judged to be other-than-temporary, if any, are recorded in operations as incurred.

To determine whether a decline in value is other-than-temporary, the Company evaluates several factors, including current economic environment, market conditions, operational and financial performance of the investee, and other specific factors relating to the business underlying the investment, including business outlook of the investee, future trends in the investee’s industry and the Company’s intent to carry the investment for a sufficient period of time for any recovery in fair value. If a decline in value is deemed to be other-than-temporary, the Company records reductions in carrying values to estimated fair values, which are determined based on quoted market prices if available or on one or more of the valuation methods such as pricing models using historical and projected financial information, liquidation values, and values of other comparable public companies.

Long-term investments include instruments that the Company has the ability and intent to hold for more than twelve months. The Company classifies its long-term investments as available-for-sale.

The Company has investments in equity instruments of privately held companies. These investments are included in “Other assets” and are accounted for under the cost method, as the Company does not have the ability to exercise significant influence over their operations. The Company monitors its investments for impairment by considering current factors, including economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, and records reductions in carrying values when necessary.

Allowance for doubtful accounts

The allowance for doubtful accounts is estimated to cover the losses resulting from the inability of customers to make payments for outstanding balances. In estimating the required allowance, the Company takes into consideration the overall quality and aging of the accounts receivable, credit evaluations of customers’ financial condition and existence of credit insurance. The Company also evaluates the collectability of accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections and any value and adequacy of collateral received from the customers.

Inventories

Inventories are stated at the lower of cost or market. Cost is computed based on the weighted average method. Inventories consist of finished goods purchased from various manufacturers for distribution resale and components used for contract assembly. The Company records estimated inventory reserves for quantities in excess of demand, cost in excess of market value and product obsolescence.

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

Property and equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization are computed using the straight-line method based upon the shorter of the estimated useful lives of the assets, or the lease term of the respective assets, if applicable. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized. The depreciation and amortization periods for property and equipment categories are as follows:

 

Equipment and Furniture

   3 - 7 years

Software

   3 years

Leasehold Improvements

   3 -10 years

Buildings

   39 years

Goodwill

The Company has adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which revised the standards of accounting for goodwill, by replacing the amortization of these assets with the requirement that they are reviewed annually for impairment, or more frequently if impairment indicators exist. No goodwill impairment was recorded for the periods presented.

Intangible assets

Intangible assets consist of vendor lists, customer lists, trade names and land rights, which are amortized on a straight-line basis over their estimated lives. Intangible assets are amortized as follows:

 

Vendor lists

   4 - 10 years

Customer lists

   5 -8 years

Other intangible assets

   3 -5 years

Software costs

The Company develops software for internal use only. The payroll and other costs related to the development of software have been expensed as incurred. Excluding the costs of support, maintenance and training functions that are not subject to capitalization, the costs of the software department were not material for the periods presented. If the internal software development costs become material, the Company will capitalize the costs based on the defined criteria for capitalization in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”.

Impairment of long-lived assets

The Company reviews the recoverability of its long-lived assets, such as property and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows, undiscounted and without interest charges, of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets.

Long-term deferred assets and long-term deferred liabilities

The Company’s Mexico operation has entered into a multi-year contract to sell equipment to an independent third party contractor that provides equipment and services to the Mexican government. The payments by the Mexican government are generally due on a monthly basis and are contingent upon the contractor continuing to provide services to the Mexican government. The Company recognizes product revenue and cost of revenue on a straight-line basis over the term of the contract. All long-term accounts receivable and deferred cost of revenue associated with this contract are included in the consolidated balance sheet under the caption “Long-term deferred assets”. According to contract terms, the Company will also hold back a certain amount of accounts payable for a certain period of time. All long-term accounts payable from contractual obligations associated with this contract and long-term deferred revenues are included in the consolidated balance sheet under the caption “Long-term deferred liabilities”.

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company’s cash and cash equivalents are maintained with high quality institutions, the compositions and maturities of which are regularly monitored by management. Through May 31, 2006, the Company had not experienced any losses on such deposits.

Accounts receivable include amounts due from customers primarily in the technology industry. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. The Company also maintains allowances for potential credit losses. In estimating the required allowances, the Company takes into consideration the overall quality and aging of the accounts receivable portfolio, the existence of a limited amount of credit insurance and specifically identified customer risks. Through May 31, 2006, such losses have been within management’s expectations.

In the three months ended May 31, 2006, sales to one customer accounted for 10% of the Company’s total revenue. In the three months ended May 31, 2005 and six months ended May 31, 2006 and 2005, no single customer exceeded 10% of the Company’s total revenue. At November 30, 2005, one customer accounted for approximately 18% of the total consolidated accounts receivable balance. At May 31, 2006 no customer exceeded 10% of the total consolidated accounts receivable balance.

Revenue recognition

The Company recognizes revenue as products are shipped, if a purchase order exists, the sale price is fixed or determinable, collection of resulting receivables is reasonably assured, risk of loss and title have transferred and product returns are reasonably estimable. Shipping terms are typically F.O.B. the Company’s warehouse. Provisions for sales returns are estimated based on historical data and are recorded concurrently with the recognition of revenue. These provisions are reviewed and adjusted periodically by the Company. Revenue is reduced for early payment discounts and volume incentive rebates offered to customers.

The Company purchases licensed software products from original equipment manufacturer (“OEM”) vendors and distributes them to customers. Revenue is recognized upon shipment of software products when a purchase order exists, the sales price is fixed or determinable and collection of resulting receivables is reasonably assured. Subsequent to the sale of software products, the Company generally has no obligation to provide any modification, customization, upgrades, enhancements, or any other post-contract customer support.

The Company’s Mexico operation has entered into a multi-year contract to sell equipment to a contractor that provides equipment and services to the Mexican government. Under the agreement, the Mexican government makes payments into the Company’s account. The payments on this contract by the Mexican government are generally due on a monthly basis and are contingent upon the contractor continuing to provide services to the government. The Company recognizes product revenue and cost of revenue on a straight-line basis over the term of the contract.

OEM supplier programs

Funds received from OEM suppliers for inventory volume promotion programs, price protection and product rebates are recorded as adjustments to cost of revenue. The Company tracks vendor promotional programs for volume discounts on a program-by-program basis. The Company monitors the balances of receivables from vendors on a quarterly basis and adjusts the balance due for differences between expected and actual sales volume. Receivables from vendors are generally collected through reductions authorized by the vendor, to accounts payable. For price protection programs and product rebates, the Company records a reduction of cost of revenue. Funds received for specific marketing and infrastructure reimbursements, net of direct costs, are recorded as adjustments to selling, general and administrative expenses, and any excess reimbursement amount is recorded as an adjustment to cost of revenue.

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

Royalties

The Company purchases licensed software products from OEM vendors, which it subsequently distributes to resellers. Royalties to OEM vendors are accrued for and recorded in cost of revenue when software products are shipped and revenue is recognized.

Warranties

The Company’s OEM suppliers generally warrant the products distributed by the Company and allow returns of defective products. The Company generally does not independently warrant the products it distributes; however, the Company does warrant the following: (1) its services with regard to products that it assembles for its customers, and (2) products that it builds to order from components purchased from other sources. To date neither warranty expense nor the accrual for warranty costs has been material to the Company’s consolidated financial statements.

Advertising

Costs related to product advertising and promotion expenditures are charged to selling, general and administrative expense as incurred. To date, costs related to advertising and promotion expenditures have not been material.

Income taxes

The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse. Valuation allowances are provided against assets that are not likely to be realized.

Fair value of financial instruments

For certain of the Company’s financial instruments, including cash, short-term investments, forward contracts, accounts receivable and accounts payable, the carrying amounts approximate fair value due to the short maturities. The amount shown for borrowings also approximates fair value since current interest rates offered to the Company for debt of similar maturities are approximately the same. The estimated fair values of foreign exchange forward contracts are based on market prices or current rates offered for contracts with similar terms and maturities. The ultimate amounts paid or received under these foreign exchange contracts, however, depend on future exchange rates. The gains or losses are recognized as “Other income (expense), net” based on changes in the fair value of the contracts, which generally occur as a result of changes in foreign currency exchange rates.

Foreign currency translations

The functional currencies of the Company’s foreign subsidiaries are their respective local currencies, with the exception of the Company’s UK operation, for which the functional currency is the U.S. dollar. The financial statements of the foreign subsidiaries, other than the UK operations, are translated into U.S. dollars for consolidation as follows: assets and liabilities at the exchange rate as of the balance sheet date, stockholders’ equity at the historical rates of exchange, and income and expense amounts at the average exchange rate for the quarter. Translation adjustments resulting from the translation of the subsidiaries’ accounts are included in “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions are included within “Other income (expense), net”.

Comprehensive income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The primary components of comprehensive income for the Company include net income, foreign currency translation adjustments arising from the consolidation of the Company’s foreign subsidiaries and unrealized gains and losses on the Company’s available-for-sale securities.

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

Net income per common share

Net income per common share-basic is computed by dividing the net income for the period by the weighted average number of shares of common stock outstanding during the period. Net income per common share-diluted reflects the potential dilution from stock options and restricted stock. The calculations of net income per common share are presented in Note 9.

Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share” requires that employee stock options, nonvested shares and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additional paid-in-capital when the award becomes deductible are assumed to be used to repurchase shares.

Recently issued accounting pronouncements

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Company does not expect the adoption of SFAS No. 154 on December 1, 2006 to have any material impact on its consolidated financial statements.

In November 2005, the FASB issued FSP FAS No. 115-1 and FAS No. 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1 and 124-1”), which clarify when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 and 124-1 are effective for all reporting periods beginning after December 15, 2005. At May 31, 2006, the Company had no unrealized investment losses that had not been recognized as other-than-temporary impairments in its available-for-sale securities. The Company does not anticipate that the implementation of these statements will have a significant impact on its financial position or results of operations.

NOTE 3 – SHARE-BASED COMPENSATION:

Effective December 1, 2005, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases, based on estimated fair values. The Company previously applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related Interpretations and provided the required pro forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation” (‘SFAS No. 123”), which was superseded by SFAS No. 123(R). The Company has also applied the provisions of Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS No. 123(R).

Prior to the Adoption of SFAS No. 123(R)

Prior to the adoption of SFAS No. 123(R), the Company provided the disclosures required under SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. No employee stock-based compensation was reflected in net income for the periods ended May 31, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

The pro forma information for the three and six months ended May 31, 2005 was as follows:

 

     Three Months Ended
May 31, 2005
    Six Months Ended
May 31, 2005
 

Net income - as reported

   $ 22,381     $ 30,988  

Less: Stock-based employee compensation expense determined under fair value based method related to the employee stock purchase plan

     (60 )     (306 )

Less: Stock-based employee compensation expense determined under fair value based method related to stock options

     (791 )     (1,770 )
                

Net income - pro forma

   $ 21,530     $ 28,912  
                

Net earnings per share - basic:

    

As reported

   $ 0.78     $ 1.10  

Pro forma

   $ 0.75     $ 1.02  

Net earnings per share - diluted:

    

As reported

   $ 0.72     $ 0.99  

Pro forma

   $ 0.71     $ 0.94  

Shares used in computing net income per share - basic:

    

As reported

     28,539       28,275  

Pro forma

     28,539       28,275  

Shares used in computing net income per share - diluted:

    

As reported

     30,900       31,201  

Pro forma

     30,306       30,693  

Impact of the Adoption of SFAS No. 123(R)

The Company elected to adopt the modified prospective application transition method as provided by SFAS No. 123(R). Accordingly, during the six months ended May 31, 2006, the Company recorded share-based compensation cost totaling the amount that would have been recognized had the fair value method been applied since the effective date of SFAS No. 123. Previously reported amounts have not been restated. The effect of recording share-based compensation for the three and six months ended May 31, 2006 were as follows:

 

     Three Months Ended
May 31, 2006
    Six Months Ended
May 31, 2006
 

Share-based compensation expense by type of award:

    

Employee stock options

   $ 544     $ 1,087  

Restricted stock

     367       543  

Employee stock purchase plan

     14       30  
                

Total share-based compensation

     925       1,660  

Tax effect on share-based compensation

     (329 )     (594 )
                

Net effect on net income

   $ 596     $ 1,066  
                

Tax effect on:

    

Cash flows from operations

   $ —       $ (8 )

Cash flows from financing activities

   $ —       $ 8  

Effect on earnings per share:

    

Basic

   $ 0.02     $ 0.04  

Diluted

   $ 0.02     $ 0.03  

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

Share-based compensation expense of $367 and $543 related to restricted stock would have been recorded under the provisions of APB No. 25 for the three and six months ended May 31, 2006, respectively.

As of December 1, 2005, the Company had an unrecorded deferred share-based compensation balance related to stock options of $9,307 before estimated forfeitures. In the Company’s pro forma disclosures prior to the adoption of SFAS No. 123(R), the Company accounted for forfeitures upon occurrence. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Accordingly, as of December 1, 2005, the Company estimated that the share-based compensation for the awards not expected to vest was $310, and therefore, the unrecorded deferred share-based compensation balance related to stock options was adjusted to $8,997 after estimated forfeitures.

During the three and six months ended May 31, 2006, the Company granted approximately 20 and 38 stock options, respectively, with an estimated total grant-date fair value of $162 and $298, respectively. Of this amount, the Company estimated that the share-based compensation for the awards not expected to vest was $5 and $10, respectively, for the three and six months ended May 31, 2006. During the three and six months ended May 31, 2006, the Company recorded share-based compensation related to stock options of $544 and $1,087, respectively.

As of May 31, 2006, the unrecorded deferred share-based compensation balance related to stock options was $7,875 and will be recognized over an estimated weighted average amortization period of 3.7 years.

No share-based compensation was capitalized as inventory at May 31, 2006. The Company did not capitalize any share-based compensation to inventory at December 1, 2005 when the provisions of SFAS No. 123(R) were initially adopted.

Valuation Assumptions

SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s financial statements. Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. In connection with the adoption of SFAS No. 123(R), the Company reassessed its valuation technique and related assumptions.

The Company estimates the fair value of stock options using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123(R), SAB 107 and the Company’s prior period pro forma disclosures of net earnings, including share-based compensation (determined under a fair value method as prescribed by SFAS No. 123). The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility assumption was determined using historical volatility of the Company’s common stock. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following weighted average assumptions:

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     May 31,
2006
    May 31,
2005
    May 31,
2006
    May 31,
2005
 

Stock option plan:

        

Expected life (years)

   6.3     5.0     6.3     5.0  

Risk-free interest rate

   4.7 %   4.3 %   4.6 %   4.3 %

Expected volatility

   35 %   40 %   36 %   40 %

Dividend yield

   0 %   0 %   0 %   0 %

Stock purchase plan:

        

Expected life (years)

   0.3     1.4     0.3     1.4  

Risk-free interest rate

   4.2 %   1.6 %   3.9 %   1.6 %

Expected volatility

   33 %   51 %   33 %   51 %

Dividend yield

   0 %   0 %   0 %   0 %

Prior to the adoption of SFAS No. 123(R), the Company used historical volatility in deriving its expected volatility assumption.

The following table summarizes the combined activity under the equity incentive plans for the indicated periods:

 

     Shares
Available For
Grant
    Options Outstanding
       Number of Shares     Weighted
Average
Exercise Price

Balances, November 30, 2003

   5,430     8,682     $ 7.57

Options granted

   (1,142 )   1,142       16.50

Options exercised

   —       (1,669 )     5.45

Options cancelled

   140     (140 )     12.76
              

Balances, November 30, 2004

   4,428     8,015     $ 9.12

Restricted stock granted

   (97 )   —         —  

Restricted stock cancelled

   1     —         —  

Options granted

   (555 )   555       17.39

Options exercised

   —       (1,067 )     6.54

Options cancelled

   116     (116 )     14.36
              

Balances, November 30, 2005

   3,893     7,387     $ 10.03

Restricted stock granted

   (252 )   —         —  

Restricted stock cancelled

   1     —         —  

Options granted

   (18 )   18       16.51

Options exercised

   —       (338 )     7.75

Options cancelled

   67     (67 )     16.48
              

Balances, February 28, 2006

   3,691     7,000     $ 10.10

Restricted stock cancelled

   2     —         —  

Options granted

   (20 )   20       18.48

Options exercised

   —       (301 )     5.73

Options cancelled

   24     (24 )     8.50
              

Balances, May 31, 2006

   3,697     6,695     $ 10.29
              

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

The options outstanding and exercisable at May 31, 2006 were in the following exercise price ranges:

 

     Options Outstanding    Options Vested and Exercisable

Range of Exercise Prices

   Shares    Weighted
Average
Life
(Years)
   Weighted
Average
Exercise
Price
   Aggregate
Intrinsic
Value
   Shares    Weighted
Average
Life
(Years)
   Weighted
Average
Exercise
Price
   Aggregate
Intrinsic
Value

$3.00 - $4.50

   1,660    2.84    $ 4.39    $ 22,485    1,660    2.84    $ 4.39    $ 22,485

$7.00 - $10.00

   2,479    4.66    $ 9.38    $ 21,227    2,295    4.57    $ 9.33    $ 19,768

$12.00 - $15.54

   968    6.90    $ 12.13    $ 5,624    537    6.62    $ 12.09    $ 3,140

$16.10 - $19.58

   1,588    8.62    $ 16.76    $ 1,964    349    8.23    $ 16.50    $ 522
                                               

$3.00 - $19.58

   6,695    5.47    $ 10.29    $ 51,300    4,841    4.47    $ 8.46    $ 45,915
                                               

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $17.94 as of May 31, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of May 31, 2006 was 4,803.

The weighted average grant-date fair value of options, as determined under SFAS No. 123(R), granted during the three and six months ended May 31, 2006 was $8.08 and $7.80 per share, respectively. The total fair value of shares vested during the three and six months ended May 31, 2006 was $595 and $1,296, respectively. The total intrinsic value of options exercised during the three and six months ended May 31, 2006 was $3,869 and $7,484, respectively. The total cash received from employees as a result of employee stock option exercises during the three and six months ended May 31, 2006 was $1,728 and $4,350, respectively. In connection with these exercises, the tax benefits realized by the Company for the three and six months ended May 31, 2006 were $1,482 and $2,815, respectively.

The Company settles employee stock option exercises with newly issued common shares.

A summary of the status of the Company’s nonvested restricted stock as of May 31, 2006 and changes during the six months ended May 31, 2006, is presented below:

 

     Restricted Stock
     Number of
Shares
    Weighted
average
grant-date
fair value

Nonvested at November 30, 2005

   97     $ 17.17

Awards granted

   252       19.03

Awards cancelled/expired/forfeited

   (1 )     17.17
            

Nonvested at February 28, 2006

   348     $ 18.52

Awards cancelled/expired/forfeited

   (2 )     17.11
            

Nonvested at May 31, 2006

   346     $ 18.52
            

Restricted Stock

During the six months ended May 31, 2006, the Company’s Compensation Committee approved the grant of 250 shares of restricted stock units to Robert Huang, the Company’s President and Chief Executive Officer. These restricted stock units will vest with respect to 25% of the shares on the date that is 13 months after the date of grant, and an additional 25% of the shares on the second, third and fourth anniversaries of the date of grant. The Company recorded the $4,763 value of these restricted stock units and will amortize that amount over the service period. The value of the restricted stock units was based on the closing market price of the Company’s common stock on the date of award. Amortization cost for all restricted stock awards for the three and six months ended May 31, 2006 was $367 and $543, respectively.

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

As of May 31, 2006, there was $5,834 of total deferred share-based compensation related to nonvested restricted stock granted under the Amended and Restated 2003 Stock Incentive Plan. That cost is expected to be recognized over an estimated weighted average amortization period of 3.9 years.

NOTE 4 – DISCONTINUED OPERATIONS:

During the second quarter of fiscal 2005 the Company sold approximately 93% of the equity it held in its subsidiary, SYNNEX K.K., to MCJ Company Limited (“MCJ”), in exchange for approximately 26 shares of MCJ. The Company recorded a gain of $12,708, net of tax, as a result of this sale. Accordingly, the Company has reported the results of operations and financial position of this business in discontinued operations within the condensed consolidated statements of operations for all periods presented.

The results from the operations of SYNNEX K.K., prior to the sale, were as follows:

 

     Three Months Ended  
     May 31,
2005
    February 28,
2005
    November 30,
2004
    August 31,
2004
    May 31,
2004
    February 29,
2004
 

Revenue

   $ 24,815     $ 39,662     $ 37,783     $ 36,440     $ 41,853     $ 47,468  

Cost of revenue

     (23,143 )     (36,773 )     (35,451 )     (34,401 )     (39,338 )     (44,748 )
                                                

Gross profit

     1,672       2,889       2,332       2,039       2,515       2,720  

Selling, general and administrative expenses

     (1,187 )     (1,983 )     (1,926 )     (1,938 )     (2,192 )     (2,230 )
                                                

Income from operations before non-operating items, income taxes and minority interest

     485       906       406       101       323       490  

Interest expense and finance charges, net

     (42 )     (98 )     (94 )     (111 )     (130 )     (129 )

Other income (expense), net

     (79 )     (166 )     125       16       94       (77 )
                                                

Income before income taxes and minority interest

     364       642       437       6       287       284  

Provision for income taxes

     (144 )     (290 )     (200 )     (2 )     (132 )     (125 )

Minority interest

     (13 )     (48 )     (32 )     (1 )     (21 )     (22 )
                                                

Net income

   $ 207     $ 304     $ 205     $ 3     $ 134     $ 137  
                                                

NOTE 5 – BALANCE SHEET COMPONENTS:

Accounts receivable, net:

 

     May 31,
2006
    November 30,
2005
 

Trade accounts receivable

   $ 306,603     $ 364,856  

Less: Allowance for doubtful accounts

     (17,716 )     (12,688 )

Less: Allowance for sales returns

     (10,995 )     (9,846 )
                
   $ 277,892     $ 342,322  
                

Inventories:

 

     May 31,
2006
   November 30,
2005

Components

   $ 53,780    $ 47,114

Finished goods

     448,872      447,503
             
   $ 502,652    $ 494,617
             

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

Intangible assets:

 

     May 31, 2006    November 30, 2005
     Gross
Amount
   Accumulated
Amortization
    Net
Amount
   Gross
Amount
   Accumulated
Amortization
    Net
Amount

Goodwill

   $ 25,256    $ —       $ 25,256    $ 24,840    $ —       $ 24,840

Vendor lists

     22,062      (15,231 )     6,831      22,062      (14,155 )     7,907

Customer lists

     13,652      (3,936 )     9,716      12,715      (3,130 )     9,585

Other intangible assets

     1,164      (678 )     486      1,086      (414 )     672
                                           
   $ 62,134    $ (19,845 )   $ 42,289    $ 60,703    $ (17,699 )   $ 43,004
                                           

Amortization expense was $1,006, $981, $2,004 and $1,964 for the three and six months ended May 31, 2006 and 2005, respectively.

Deferred assets:

 

     May 31,
2006
    November 30,
2005

Deferred assets

   $ 164,215     $ —  

Less: Current portion

     (12,983 )     —  
              

Non-current portion

   $ 151,232     $ —  
              

Deferred assets are related to a long-term contract from the Company’s Mexico operation.

Deferred liabilities:

 

     May 31,
2006
    November 30,
2005

Deferred liabilities

   $ 129,536     $ —  

Less: Current portion

     (28,384 )     —  
              

Non-current portion

   $ 101,152     $ —  
              

Deferred liabilities are related to a long-term contract from the Company’s Mexico operation.

NOTE 6 - ACCOUNTS RECEIVABLE ARRANGEMENTS:

The Company has established a six-year revolving arrangement (the “U.S. Arrangement”) through a consolidated wholly owned subsidiary to sell up to $275,000 of U.S. trade accounts receivables (the “U.S. Receivables”) to two financial institutions. The U.S. Arrangement expires in August 2008. In connection with the U.S. Arrangement, the Company sells its U.S. Receivables to its wholly-owned subsidiary on a continuing basis, which will in turn sell an undivided interest in the U.S. Receivables to the financial institutions without recourse, at market value, calculated as the gross receivable amount, less a facility fee. The fee is based on the prevailing commercial paper interest rates plus 0.75%. A separate fee based on the unused portion of the facility, at 0.30% per annum, is also charged by the financial institutions. The Company has also established a one-year revolving accounts receivable arrangement (the “Canadian Arrangement”) through SYNNEX Canada Limited, or

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

SYNNEX Canada, to sell up to C$100,000 of U.S. and Canadian trade receivables (the “Canadian Receivables”) to a financial institution. The Canadian Arrangement expires in November 2006. In connection with the Canadian Arrangement, SYNNEX Canada sells its Canadian Receivables to the financial institution on a fully serviced basis. The effective discount rate of the Canadian Arrangement is the prevailing bankers’ acceptance rate or prime rate plus 0.45% per annum. The amount of U.S. and Canadian Receivables sold to the financial institutions and not yet collected from customers at May 31, 2006 and November 30, 2005 was $289,657 and $274,751, respectively. The remaining balance of unsold U.S. and Canadian Receivables at May 31, 2006 and November 30, 2005 of $242,008 and $253,488, respectively, are included within “Accounts receivable, net”.

The gross proceeds resulting from the sale of the U.S. and Canadian Receivables totaled approximately $468,591, $258,300, $986,559 and $506,400 in the three and six months ended May 31, 2006 and 2005, respectively. The gross payments to the financial institutions under the U.S. and Canadian Arrangements totaled approximately $468,783, $236,700, $971,653 and $562,500 in the three and six months ended May 31, 2006 and 2005, respectively, which arose from the subsequent collection of U.S. and Canadian Receivables. The proceeds (net of the facility fee) are reflected in the consolidated statements of cash flows in operating activities within changes in accounts receivable.

The Company continues to collect the U.S. and Canadian Receivables on behalf of the financial institutions, for which it receives a service fee from the financial institutions for the U.S. Receivables, and remits collections to the financial institutions. The Company estimates that the service fee it receives for the U.S. Receivables approximates the market rate for such services, and as a result, has recognized no servicing assets or liabilities in its consolidated balance sheet. Facility fees (net of service fees) charged by the financial institutions totaled $3,396, $1,092, $6,136 and $2,254 in the three and six months ended May 31, 2006 and 2005, respectively, and were recorded within “Interest expense and finance charges, net”.

Under the U.S. and Canadian Arrangements the Company is required to maintain certain financial covenants to maintain its eligibility to sell additional U.S. and Canadian Receivables under the facilities. These covenants include minimum net worth, minimum fixed charge ratio, and net worth percentage. The Company was in compliance with the covenants at May 31, 2006 and November 30, 2005.

As is customary in trade accounts receivable securitization arrangements, a credit rating agency’s downgrade of the third party issuer of commercial paper or of a back-up liquidity provider (which provides a source of funding if the commercial paper market cannot be accessed) could result in an adverse change or loss of the Company’s financing capacity under these programs if the commercial paper issuer or liquidity back-up provider is not replaced. Loss of such financing capacity could have a material adverse effect on the Company’s financial condition and results of operations.

The Company has also entered into financing agreements with various financial institutions (“Flooring Companies”) to allow certain customers of the Company to finance their purchases directly with the Flooring Companies. Under these agreements, the Flooring Companies pay to the Company the selling price of products sold to various customers, less a discount, within approximately 15 to 30 business days from the date of sale. The Company is contingently liable to repurchase inventory sold under flooring agreements in the event of any default by its customers and such inventory being repossessed by the Flooring Companies. See Note 13, “Commitments and Contingencies” for additional information. Approximately $240,627, $298,903, $486,124 and $584,134 of the Company’s net sales were financed under these programs in the three and six months ended May 31, 2006 and 2005, respectively. Approximately $32,080 and $40,914 of accounts receivable at May 31, 2006 and November 30, 2005, respectively, were subject to flooring agreements. Flooring fees were approximately $1,411, $1,409, $2,887 and $2,551 in the three and six months ended May 31, 2006 and 2005, respectively, and are included within “Interest expense and finance charges, net”.

NOTE 7 – RESTRUCTURING CHARGES:

In the first quarter of fiscal 2005, the Company announced a restructuring program in its distribution segment that impacted approximately 35 employees across multiple business functions in SYNNEX Canada and closed its facilities in Richmond, British Columbia, Calgary, Alberta and Saint-Laurent, Quebec. All terminations were completed by May 31, 2005. In the third quarter of fiscal 2005, the Company closed its facility in Markham, Ontario. This restructuring resulted in a total expense of $2,513, which consists of employee termination benefits

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

of $711, estimated facilities exit expenses of $1,681 and other expenses in the amount of $121. The following table summarizes the activity related to the liability for restructuring charges through May 31, 2006:

 

     Severance
and Benefits
    Facility and
Exit Costs
    Other     Total  

Balance of accrual at November 30, 2004

   $ —       $ —       $ —       $ —    

Restructuring charges expensed in the year ended November 30, 2005

     711       1,681       121       2,513  

Cash payments

     (690 )     (293 )     (17 )     (1,000 )

Adjustments

     —         157       —         157  

Non-cash charges

     —         (636 )     —         (636 )
                                

Balance accrued at November 30, 2005

     21       909       104       1,034  

Cash payments

     (21 )     (152 )     —         (173 )

Non-cash charges

     —         (17 )     —         (17 )
                                

Balance accrued at February 28, 2006

     —         740       104       844  

Cash payments

     —         (142 )     (11 )     (153 )

Non-cash charges

     —         (14 )     (93 )     (107 )
                                

Balance accrued at May 31, 2006

   $ —       $ 584     $ —       $ 584  
                                

The unpaid portion of the restructuring charges is included in the condensed consolidated balance sheets under the caption “Accrued liabilities”.

NOTE 8 – BORROWINGS:

Borrowings consist of the following:

 

     May 31,
2006
    November 30,
2005
 

SYNNEX Mexico term loan

   $ 19,596     $ —    

SYNNEX Canada revolving accounts receivable securitization program

     —         26,391  

SYNNEX Canada term loan

     1,416       1,518  

SYNNEX UK line of credit

     853       1,792  
                
     21,865       29,701  

Less: Current portion

     (5,421 )     (28,548 )
                

Non-current portion

   $ 16,444     $ 1,153  
                

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

NOTE 9 - NET INCOME PER COMMON SHARE:

The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data):

 

     Three Months Ended    Six Months Ended
     May 31,
2006
   May 31,
2005
   May 31,
2006
   May 31,
2005

Income from continuing operations

   $ 11,317    $ 9,851    $ 22,000    $ 18,154

Income from discontinued operations, net of tax

     —        207      —        511

Gain on sale of discontinued operations, net of tax

     —        12,323      —        12,323
                           

Net income

   $ 11,317    $ 22,381    $ 22,000    $ 30,988
                           

Weighted average common shares – basic

     29,499      28,539      29,280      28,275

Effect of dilutive securities:

           

Stock options and restricted stock

     2,101      2,361      2,197      2,926
                           

Weighted average common shares – diluted

     31,600      30,900      31,477      31,201
                           

Earnings per share:

           

Basic

           

Income from continuing operations

   $ 0.38    $ 0.35    $ 0.75    $ 0.64

Discontinued operations

   $ —      $ 0.43    $ —      $ 0.46
                           

Net income per common share – basic

   $ 0.38    $ 0.78    $ 0.75    $ 1.10
                           

Diluted

           

Income from continuing operations

   $ 0.36    $ 0.32    $ 0.70    $ 0.58

Discontinued operations

   $ —      $ 0.40    $ —      $ 0.41
                           

Net income per common share – diluted

   $ 0.36    $ 0.72    $ 0.70    $ 0.99
                           

Net income for the three and six months ended May 31, 2006 includes $596 and $1,066, respectively, of share-based compensation expense, net of tax. The effect of recording share-based compensation expense on basic and diluted earnings per share was $0.02 per share in the three months ended May 31, 2006 and $0.04 and $0.03 per share for basic and diluted earnings per share, respectively, in the six months ended May 31, 2006.

Options to purchase 1,603, 304 and 1,603 shares of common stock for the three months ended May 31, 2006 and 2005 and the six months ended May 31, 2006, respectively, have not been included in the computation of diluted net income per share as their effect would have been anti-dilutive. There were no anti-dilutive shares during the six months ended May 31, 2005.

NOTE 10 - RELATED PARTY TRANSACTIONS:

Purchases of inventories from MiTAC International Corporation and its affiliates (principally motherboards and other peripherals) were approximately $107,098, $102,725, $215,009 and $203,040 during the three and six months ended May 31, 2006 and 2005, respectively. Sales to MiTAC International Corporation and its affiliates during the three and six months ended May 31, 2006 and 2005 were approximately $360, $435, $920 and $893 respectively. The Company’s relationship with MiTAC International Corporation has been informal and is not governed by long-term commitments or arrangements with respect to pricing terms, revenue, or capacity commitments. Accordingly, the Company negotiates manufacturing and pricing terms, including customer revenue, on a case-by-case basis with MiTAC International Corporation.

NOTE 11 - SEGMENT INFORMATION:

Segments were determined based on products and services provided by each segment. Accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company has identified the following two reportable business segments:

The Distribution segment distributes computer systems and complementary products to a variety of customers, including value-added resellers, system integrators, retailers and direct resellers.

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

The Contract Assembly segment provides electronics assembly services to OEMs, including integrated supply chain management, build-to-order and configure-to-order system configurations, materials management and logistics.

Summarized financial information related to the Company’s reportable business segments as of May 31, 2006 and 2005, and for each of the periods then ended, is shown below:

 

     Distribution    Contract
Assembly
   Consolidated

Three Months Ended May 31, 2006:

        

Revenue

   $ 1,358,406    $ 153,295    $ 1,511,701

Income from continuing operations before non-operating items, income taxes and minority interest

     19,593      2,803      22,396

Total assets

     917,502      253,943      1,171,445

Three Months Ended May 31, 2005:

        

Revenue

   $ 1,210,996    $ 135,332    $ 1,346,328

Income from continuing operations before non-operating items, income taxes and minority interest

     14,429      3,968      18,397

Total assets

     699,900      216,453      916,353

Six Months Ended May 31, 2006:

        

Revenue

   $ 2,749,217    $ 264,219    $ 3,013,436

Income from continuing operations before non-operating items, income taxes and minority interest

     39,850      4,793      44,643

Total assets

     917,502      253,943      1,171,445

Six Months Ended May 31, 2005:

        

Revenue

   $ 2,391,262    $ 264,829    $ 2,656,091

Income from continuing operations before non-operating items, income taxes and minority interest

     27,445      7,374      34,819

Total assets

     699,900      216,453      916,353

 

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SYNNEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the three and six months ended May 31, 2006 and 2005

(amounts in thousands, except for per share amounts)

(unaudited)

 

Summarized financial information related to the geographic areas in which the Company operated as of May 31, 2006 and 2005 and for each of the periods then ended is shown below:

 

     North
America
   Other    Consolidation
Adjustments
    Consolidated

Three Months Ended May 31, 2006:

          

Revenue

   $ 1,456,152    $ 66,643    $ (11,094 )   $ 1,511,701

Income from continuing operations

     10,190      1,192      (65 )     11,317

Other long-lived assets

     26,264      15,895      —         42,159

Three Months Ended May 31, 2005:

          

Revenue

   $ 1,297,365    $ 59,349    $ (10,386 )   $ 1,346,328

Income from continuing operations

     8,725      925      201       9,851

Other long-lived assets

     22,631      15,445      —         38,076

Six Months Ended May 31, 2006:

          

Revenue

   $ 2,907,965    $ 127,627    $ (22,156 )   $ 3,013,436

Income from continuing operations

     20,181      1,864      (45 )     22,000

Other long-lived assets

     26,264      15,895      —         42,159

Six Months Ended May 31, 2005:

          

Revenue

   $ 2,551,965    $ 123,710    $ (19,584 )   $ 2,656,091

Income from continuing operations

     15,918      2,116      120       18,154

Other long-lived assets

     22,631      15,445      —         38,076

Revenue in the U.S. was approximately 78%, 80%, 78% and 80% of total revenue for the three and six months ended May 31, 2006 and 2005, respectively.

NOTE 12 - ACQUISITION:

On April 28, 2006, the Company acquired the assets of the Telpar distribution segment of Peak Technologies, Inc. (“Telpar”) for approximately $3,309. Telpar sold automatic identification and data capture and point of sales products and services. Revenue from the Telpar business unit was less than $20,000 for the twelve months ended March 31, 2006. The Company does not expect to retain the entire revenue run rate of Telpar after the close of the acquisition.

NOTE 13 - COMMITMENTS AND CONTINGENCIES:

The Company was contingently liable at May 31, 2006, under agreements to repurchase repossessed inventory acquired by Flooring Companies as a result of default on floor plan financing arrangements by the Company’s customers. These arrangements are described in Note 6. Losses, if any, would be the difference between repossession cost and the resale value of the inventory. There have been no repurchases through May 31, 2006 under these agreements, nor is the Company aware of any pending customer defaults or repossession obligations.

NOTE 14 - SUBSEQUENT EVENT:

On June 9, 2006 the Company acquired substantially all of the assets of Azerty United Canada’s ink and toner business from United Stationers Supply Company (“Azerty”) for approximately $14,174. In the twelve months ended March 31, 2006, revenue from Azerty’s ink and toner business was approximately $100,000. The Company does not expect to retain the entire revenue run rate of Azerty after the close of the acquisition.

 

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q (the “Report”), the words “believes,” “plans,” “estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “will” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements relating to our services, our relationships with and the value we provide to our OEM suppliers and reseller customers, our recent acquisitions, our relationship with MiTAC International and Sun Microsystems, our strategy with respect to international operations, gross margin, selling, general and administrative expenses, interest expense and finance charges, net, fluctuations in future revenues and operating results and future expenses, fluctuations in inventory, our estimates regarding our capital requirements and our needs for additional financing, our infrastructure needs and growth, strategic acquisitions or investments, use of our working capital, expansion of our operations and related costs, impact of accounting pronouncements, impact of new rules and regulations affecting public companies, the adequacy of our cash resources to meet our capital needs, statements regarding our securitization programs, sources of revenue and the adequacy of our disclosure controls and procedures. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below in Part II, Item 1A “Risk Factors”, as well as the seasonality of the buying patterns of our customers, the concentration of sales to large customers, dependence upon and trends in capital spending budgets in the IT industry, fluctuations in general economic conditions, increased competition and costs related to expansion of our operations. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview

We are a global information technology, or IT, supply chain services company. We offer a comprehensive range of services to IT original equipment manufacturers and software publishers, collectively OEMs, and reseller customers worldwide. The supply chain services that we offer include product distribution, related logistics and support services, contract assembly and demand generation marketing.

We have been in the IT distribution business since 1980 and are one of the largest IT product distributors based on 2005 reported revenue. We focus our core wholesale distribution business on a limited number of leading IT OEMs, which allows us to enhance and increase the value we provide to our OEM suppliers and reseller customers. In each of the three and six months ended May 31, 2006 our largest OEM supplier, HP, accounted for approximately 26% of our total revenue.

Because we offer distribution, contract assembly, demand generation marketing, IT solution and complementary supply chain services, OEM suppliers and resellers can outsource to us multiple areas of their business outside of their core competencies. This model allows us to provide services at several points along the IT product supply chain.

We believe that the combination of our broad range of supply chain capabilities, our focus on serving the leading IT OEMs and our efficient operations enables us to realize strong relationships with our OEM suppliers and reseller customers. We are headquartered in Fremont, California and have distribution, sales and assembly facilities in Asia, Europe and North America.

We manage our business in two segments – distribution and contract assembly. Our revenue is currently approximately 90% from distribution and 10% from contract assembly. In addition, from a geographic segment perspective, approximately 96% of our total revenue is from North America and the remaining 4% is from outside North America.

The IT product distribution and contract assembly industries in which we operate are characterized by low gross profit as a percentage of revenue, or gross margin, and low income from operations as a percentage of

 

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revenue, or operating margin. As well, the market for IT products is generally characterized by declining unit prices and short product life cycles. Our distribution business is also highly competitive on the basis of price. We set our sales price based on the market supply and demand characteristics for each particular product or bundle of products we distribute.

Our revenue is highly dependent on the end-market demand for the IT products that we distribute and assemble. This end-market demand is influenced by many factors including the introduction of new IT products and software by OEMs, replacement cycles for existing IT products and overall economic growth and general business activity. A difficult and challenging economic environment may also lead to consolidation or decline in the IT distribution industry and increased price-based competition.

Recent Acquisitions and Divestitures

We seek to augment our organic growth with strategic acquisitions of businesses and assets that complement and expand our supply chain service capabilities. We also divest businesses that we deem not strategic to our ongoing operations. Our historical acquisitions have brought us new reseller customers and OEM suppliers, extended the geographic reach of our operations, particularly in international markets, and expanded the services we provide to our OEM suppliers and customers. We account for acquisitions using the purchase method of accounting and include acquired entities within our consolidated financial statements from the closing date of the acquisition.

During 2006 we made the following acquisitions:

On June 9, 2006 we acquired substantially all of the assets of Azerty United Canada’s ink and toner business from United Stationers Supply Company (“Azerty”) for approximately $14.2 million. In the twelve months ended March 31, 2006, revenue from Azerty’s ink and toner business was approximately $100 million. We do not expect to retain the entire revenue run rate of Azerty after the close of the acquisition.

On April 28, 2006, we acquired the assets of the Telpar distribution segment of Peak Technologies, Inc. (“Telpar”) for approximately $3.3 million. Telpar sold automatic identification and data capture and point of sales products and services. Revenue from the Telpar business unit was less than $20.0 million for the twelve months ended March 31, 2006. We do not expect to retain the entire revenue run rate of Telpar after the close of the acquisition.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies and estimates for the three and six-month periods ended May 31, 2006 from our disclosure in our Annual Report on Form 10-K for the year ended November 30, 2005. For a discussion of the critical accounting policies, please see the discussion in our Annual Report on Form 10-K for the fiscal year ended November 30, 2005.

 

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Results of Operations

The following table sets forth, for the indicated periods, data as percentages of revenue:

 

     Three Months Ended     Six Months Ended  
     May 31,
2006
    May 31,
2005
    May 31,
2006
    May 31,
2005
 

Statements of Operations Data:

        

Revenue

   100.00 %   100.00 %   100.00 %   100.00 %

Cost of revenue

   (95.48 )   (95.80 )   (95.58 )   (95.76 )
                        

Gross profit

   4.52     4.20     4.42     4.24  

Selling, general and administrative expenses

   (3.04 )   (2.83 )   (2.94 )   (2.93 )
                        

Income from continuing operations before non-operating items, income taxes and minority interest

   1.48     1.37     1.48     1.31  

Interest expense and finance charges, net

   (0.29 )   (0.26 )   (0.34 )   (0.27 )

Other income (expense), net

   (0.03 )   0.07     (0.01 )   0.06  
                        

Income from continuing operations before income taxes and minority interest

   1.16     1.18     1.13     1.10  

Provision for income taxes

   (0.41 )   (0.45 )   (0.40 )   (0.42 )

Minority interest in subsidiary

   —       0.00     —       0.00  
                        

Income from continuing operations

   0.75     0.73     0.73     0.68  

Income from discontinued operations, net of tax

   —       0.02     —       0.02  

Gain on sale of discontinued operations, net of tax

   —       0.91     —       0.47  
                        

Net income

   0.75 %   1.66 %   0.73 %   1.17 %
                        

Three Months Ended May 31, 2006 and 2005

Revenue:

 

     Three Months Ended
May 31, 2006
   Three Months Ended
May 31, 2005
   % Change  
     (in thousands)    (in thousands)       

Revenue

   $ 1,511,701    $ 1,346,328    12.3 %

Distribution revenue

   $ 1,358,406    $ 1,210,996    12.2 %

Contract assembly revenue

   $ 153,295    $ 135,332    13.3 %

The increase in our distribution revenue was primarily attributable to continued growth in our business in the United States and Canada, including increased business from our larger customers, improvement in our Canadian retail distribution business and overall increased demand for products through the IT distribution channel. The increase in contract assembly revenue was the result of increased demand from our primary contract assembly customer, Sun Microsystems.

The increase in our revenue was somewhat mitigated by continued significant competition in the IT distribution marketplace, our desire to focus on operating income growth before revenue growth and gradual declines in the average selling price of the products we sell.

 

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Gross Profit:

 

     Three Months Ended
May 31, 2006
    Three Months Ended
May 31, 2005
    % Change  
     (in thousands)     (in thousands)        

Gross profit

   $ 68,348     $ 56,556     20.9 %

Percentage of revenue

     4.52 %     4.20 %   7.6 %

Our gross profit has been affected by a variety of factors, including competition, the mix and average selling prices of products we sell and the mix of customers to whom we sell, rebate and discount programs from our suppliers, freight costs and reserves for inventory losses.

The increase in gross margin percentage was a result of higher margins in our distribution segment, mainly due to ongoing improvements in our pricing initiatives as well as customer and product mix.

Our contract assembly gross margin percentage decreased due to changes in product mix and pricing with our largest contract assembly customer, Sun Microsystems.

While we currently expect that our total gross margin percentage will be relatively stable from second quarter 2006 levels, our gross margins may decrease in future periods as a result of the relative mix of our distribution and contract assembly revenue, distribution customer mix, potential increased competition, softness in the overall economy or changes to the terms and conditions in which we do business with our OEMs.

Selling, General and Administrative Expenses:

 

     Three Months Ended
May 31, 2006
    Three Months Ended
May 31, 2005
    % Change  
     (in thousands)     (in thousands)        

Selling, general and administrative expenses

   $ 45,952     $ 38,159     20.4 %

Percentage of revenue

     3.04 %     2.83 %   7.4 %

Our selling, general and administrative expenses consist primarily of salaries, commissions, bonuses, and related expenses for personnel engaged in sales, product marketing, distribution and contract assembly operations and administration. Selling, general and administrative expenses also include share-based compensation expense, deferred compensation expense or income, temporary personnel fees, the costs of our facilities, utility expense, professional fees, depreciation expense on our capital equipment and amortization expense on our intangible assets, offset by reimbursements from OEM suppliers.

Selling, general and administrative expenses increased in the second quarter of fiscal 2006 from the prior year due to our continued investments in our business, the incremental costs associated with increased revenues, a $1.7 million increase in bad debt expense, primarily a result of increased collection risk from one customer and an eleven percent increase in headcount from May 31, 2005 to May 31, 2006. In addition, we recorded $0.9 million in share-based compensation expense, primarily as a result of the adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, or SFAS No. 123(R), on December 1, 2005. This was partially offset by a $0.3 million decrease in deferred compensation expense. As a percentage of revenue, selling, general and administrative expenses increased in the three months ended May 31, 2006 to 3.04% from 2.83% in the prior year primarily due to the increase in bad debt expense and share-based compensation expense.

Netted against selling, general and administrative expenses are reimbursements from OEM suppliers of $6.1 million for the three months ended May 31, 2006, compared to $4.8 million in the prior year. The reimbursements relate to marketing, infrastructure and promotion programs such as advertisements in trade publications, direct marketing campaigns through mail and e-mail and product demonstrations at trade shows. We make the arrangements and pay for the advertising, facility fees and other costs of the programs, which feature the OEM suppliers’ products.

 

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While we continually strive to maintain the lowest possible cost structure in running our operations, without sacrificing customer and vendor service and satisfaction, we do expect that our selling, general and administrative expense will increase in future periods as we invest in our infrastructure to improve processes and productivity and to grow our business.

Income from Continuing Operations before Non-Operating Items, Income Taxes and Minority Interest:

 

     Three Months Ended
May 31, 2006
   Three Months Ended
May 31, 2005
   % Change  
     (in thousands)    (in thousands)       

Income from continuing operations before non-operating items, income taxes and minority interest

   $ 22,396    $ 18,397    21.7 %

Distribution income from continuing operations before non-operating items, income taxes and minority interest

   $ 19,593    $ 14,429    35.8 %

Contract assembly income from continuing operations before non-operating items, income taxes and minority interest

   $ 2,803    $ 3,968    (29.4 )%

Income from continuing operations before non-operating items, income taxes and minority interest as a percentage of revenue for the three months ended May 31, 2006 increased to 1.48% from 1.37% in the prior year primarily due to the aforementioned improvements in gross profit, a $0.5 million improvement in operating income at our Mexico operation and the decrease in deferred compensation expense, partially offset by the $1.7 million increase in bad debt expense, share-based compensation expense of $0.9 million and the eleven percent increase in headcount.

By segment, our distribution margin increased to 1.44% of distribution revenue from 1.19% in the prior year primarily for the same reasons noted above regarding our overall increase in income from continuing operations. Our contract assembly margin decreased to 1.83% in the three months ended May 31, 2006 from 2.93% in the prior year primarily due to product and pricing changes from the second quarter of 2005.

While the decrease in deferred compensation expense had an effect on operating income, there was no effect on net income, as deferred compensation expense was offset by an investment gain recorded in other income and expense, net.

Interest Expense and Finance Charges, net:

 

     Three Months Ended
May 31, 2006
   Three Months Ended
May 31, 2005
   % Change  
     (in thousands)    (in thousands)       

Interest expense and finance charges, net

   $ 4,340    $ 3,521    23.3 %

Amounts recorded in interest expense and finance charges, net, are primarily interest expense paid on our lines of credit, long-term debt and deferred compensation liability, fees associated with third party accounts receivable flooring arrangements and the sale of accounts receivable through our securitization facilities, offset by income earned on our excess cash investments.

 

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The increase in interest expense and finance charges, net was primarily a result of higher finance charges due to higher interest rates as compared to those in 2005 and higher debt levels due to our increase in business. We expect our interest expense and finance charges, net will increase in future periods if our borrowings increase due to growth in our business and if short-term interest rates continue to rise in North America.

Other Income (Expense), net:

 

     Three Months Ended
May 31, 2006
    Three Months Ended
May 31, 2005
   % Change  
     (in thousands)     (in thousands)       

Other income (expense), net

   $ (482 )   $ 949    (150.8 )%

Amounts recorded in other income (expense), net, include investment gains and losses related to deferred compensation, foreign currency transaction gains and losses, investment gains and losses, including those in our deferred compensation plan and other non-operating gains and losses.

The decrease in other income (expense), net was primarily due to a $0.9 million mark-to-market gain from the increase in value of shares of MCJ Company Limited, or MCJ, stock we acquired as a result of the sale of our Japanese subsidiary which was recorded in the three months ended May 31, 2005 and a $0.3 million decrease in deferred compensation income.

Provision for Income Taxes . Income taxes consist of our current and deferred tax expense resulting from our income earned in domestic and foreign jurisdictions. Our effective tax rate was 35.6% in the three months ended May 31, 2006 as compared with an effective tax rate of 38.0% in the prior year. The decrease in our effective tax rate from the second quarter of fiscal 2005 was primarily a result of higher profit in lower tax jurisdictions and continued improvements in our tax structure.

Minority Interest . Minority interest is the portion of earnings from operations from our subsidiary in Mexico attributable to others. Minority interest benefit decreased to zero in the three months ended May 31, 2006 from $32,000 in the three months ended May 31, 2005 due to the losses at our Mexico subsidiary exceeding the minority investment amount.

Discontinued Operations . During the second quarter of fiscal 2005, we sold approximately 93% of our Japanese subsidiary, SYNNEX K.K., to MCJ, in exchange for 25,809 shares of MCJ. We have reported the results of operations of this business in discontinued operations within the condensed consolidated statements of operations for all periods presented.

 

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The results from the operations of SYNNEX K.K., prior to the sale, were as follows (in thousands):

 

     Three Months Ended  
     May 31,
2006
   May 31,
2005
 

Revenue

   $ —      $ 24,815  

Cost of revenue

     —        (23,143 )
               

Gross profit

     —        1,672  

Selling, general and administrative expenses

     —        (1,187 )
               

Income from operations before non-operating items, income taxes and minority interest

     —        485  

Interest expense and finance charges, net

     —        (42 )

Other income (expense), net

     —        (79 )
               

Income before income taxes and minority interest

     —        364  

Provision for income taxes

     —        (144 )

Minority interest

     —        (13 )
               

Net income

   $ —      $ 207  
               

Six Months Ended May 31, 2006 and 2005

Revenue:

 

     Six Months Ended
May 31, 2006
   Six Months Ended
May 31, 2005
   % Change  
     (in thousands)    (in thousands)       

Revenue

   $ 3,013,436    $ 2,656,091    13.5 %

Distribution revenue

   $ 2,749,217    $ 2,391,262    15.0 %

Contract assembly revenue

   $ 264,219    $ 264,829    (0.2 %)

The increase in our distribution revenue was primarily attributable to continued growth in our business, primarily in the United States and Canada, increased business from our larger customers, improvement in our Canadian retail distribution business and overall increased demand for products through the IT distribution channel. The increase in our distribution revenue was somewhat mitigated by continued significant competition in the IT distribution marketplace, our desire to focus on operating income growth before revenue growth and gradual declines in the average selling price of the products we sell.

The slight decrease in contract assembly revenue was the result of a decrease in the average selling prices to our largest contract assembly customer, Sun Microsystems, partially offset by an increase in the number of units sold during the six months ended May 31, 2006 compared to the six months ended May 31, 2005.

 

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Gross Profit:

 

     Six Months Ended
May 31, 2006
    Six Months Ended
May 31, 2005
    % Change  
     (in thousands)     (in thousands)        

Gross profit

   $ 133,358     $ 112,690     18.3 %

Percentage of revenue

     4.42 %     4.24 %   4.2 %

The increase in gross margin percentage was a result of higher margins in our distribution segment, mainly due to ongoing improvements in our pricing initiatives as well as customer and product mix.

Our contract assembly gross margin percentage decreased due to changes in product mix and pricing with our largest contract assembly customer, Sun Microsystems.

Selling, General and Administrative Expenses:

 

     Six Months Ended
May 31, 2006
    Six Months Ended
May 31, 2005
    % Change  
     (in thousands)     (in thousands)        

Selling, general and administrative expenses

   $ 88,715     $ 77,871     13.9 %

Percentage of revenue

     2.94 %     2.93 %   0.3 %

Selling, general and administrative expenses increased in the first six months of fiscal 2006 from the prior year due to our continued investments in our business, the incremental costs associated with increased revenues, $1.7 million in share-based compensation expense in the first six months of fiscal 2006, primarily as a result of the adoption of SFAS No. 123(R) on December 1, 2005, an eleven percent increase in headcount from May 31, 2005 to May 31, 2006 and a $2.3 million increase in bad debt expense, primarily due to increased collection risk from one customer. These increases were partially offset by a $1.2 million decrease in deferred compensation expense and a $1.6 million restructuring charge incurred in the six months ended May 31, 2005. As a percentage of revenue, selling, general and administrative expenses slightly increased in the six months ended May 31, 2006 to 2.94% from 2.93% in the prior year. Netted against selling, general and administrative expenses are reimbursements from OEM suppliers of $10.9 million for the six months ended May 31, 2006, compared to $9.4 million in the prior year.

The restructuring charge was primarily incurred to eliminate duplicate personnel and excess facilities that occurred as a result of our acquisition of EMJ Data Systems Limited or EMJ. The restructuring resulted in employee termination benefits of $0.7 million, estimated facilities exit expenses of $0.8 million and other costs of $0.1 million. All restructuring activities were within our distribution segment. The unpaid portion of the restructuring charge is included in the condensed consolidated balance sheets under the caption “Accrued liabilities”.

Income from Continuing Operations before Non-Operating Items, Income Taxes and Minority Interest:

 

     Six Months Ended
May 31, 2006
   Six Months Ended
May 31, 2005
   % Change  
     (in thousands)    (in thousands)       

Income from continuing operations before non-operating items, income taxes and minority interest

   $ 44,643    $ 34,819    28.2 %

Distribution income from continuing operations before non-operating items, income taxes and minority interest

   $ 39,850    $ 27,445    45.2 %

Contract assembly income from continuing operations before non-operating items, income taxes and minority interest

   $ 4,793    $ 7,374    (35.0 )%

 

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Income from continuing operations before non-operating items, income taxes and minority interest as a percentage of revenue for the six months ended May 31, 2006 increased to 1.48% from 1.31% in the prior year primarily due to the aforementioned improvements in gross profit and the $1.2 million decrease in deferred compensation expense, partially offset by share-based compensation expense of $1.7 million, the eleven percent increase in personnel over the prior year and the $2.3 million increase in bad debt expense.

By segment, our distribution margin increased to 1.45% of distribution revenue from 1.15% in the prior year primarily for the same reasons noted above regarding our overall increase in income from continuing operations. Our contract assembly margin decreased to 1.81% in the six months ended May 31, 2006 from 2.78% in the prior year primarily due to the aforementioned product and pricing changes.

Interest Expense and Finance Charges, net:

 

     Six Months Ended
May 31, 2006
   Six Months Ended
May 31, 2005
   % Change  
     (in thousands)    (in thousands)       

Interest expense and finance charges, net

   $ 10,192    $ 7,333    39.0 %

The increase in interest expense and finance charges, net was primarily a result of higher finance charges due to higher interest rates as compared to those in 2005 and higher debt levels due to our increase in business.

Other Income (Expense), net:

 

     Six Months Ended
May 31, 2006
    Six Months Ended
May 31, 2005
   % Change  
     (in thousands)     (in thousands)       

Other income (expense), net

   $ (209 )   $ 1,658    (112.6 )%

The decrease in other income (expense), net was primarily due to a $1.2 million decrease in deferred compensation income, a $0.9 million gain associated with our investment in MCJ, which occurred in the six months ended May 31, 2005, and $0.5 million related to the repayment of debt resulting from the acquisition of EMJ also in the six months ended May 31, 2005.

Provision for Income Taxes . Our effective tax rate was 35.8% in the six months ended May 31, 2006 as compared with an effective tax rate of 37.9% in the prior year. The decrease in our effective tax rate from the first six months of fiscal 2005 was primarily a result of higher profit in lower tax jurisdictions and continued improvements in our tax structure.

Minority Interest . Minority interest benefit decreased to zero in the six months ended May 31, 2006 from $58,000 in the six months ended May 31, 2005 due to the losses at our Mexico subsidiary exceeding the minority investment amount.

 

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Discontinued Operations.

The results from the operations of SYNNEX K.K., prior to the sale, were as follows (in thousands):

 

     Six Months Ended  
     May 31,
2006
   May 31,
2005
 

Revenue

   $ —      $ 64,477  

Cost of revenue

     —        (59,916 )
               

Gross profit

     —        4,561  

Selling, general and administrative expenses

     —        (3,170 )
               

Income from operations before non-operating items, income taxes and minority interest

     —        1,391  

Interest expense and finance charges, net

     —        (140 )

Other income (expense), net

     —        (245 )
               

Income before income taxes and minority interest

     —        1,006  

Provision for income taxes

     —        (434 )

Minority interest

     —        (61 )
               

Net income

   $ —      $ 511  
               

Liquidity and Capital Resources

Cash Flows

Our business is working capital intensive. Our working capital needs are primarily to finance accounts receivable and inventory. We rely heavily on debt, accounts receivable flooring programs and the sale of our accounts receivable under our securitization programs for our working capital needs.

We have financed our growth and cash needs to date primarily through working capital financing facilities, bank credit lines and cash generated from operations. The primary uses of cash have been to fund increases in inventory and accounts receivable resulting from increased sales, and for acquisitions.

We had positive net working capital of $350.4 and $350.5 million at May 31, 2006 and November 30, 2005, respectively. We believe that cash flows from operations, our current cash balance and funds available under our working capital and credit facilities will be sufficient to meet our working capital needs and planned capital expenditures for the next 12 months.

To increase our market share and better serve our customers, we may further expand our operations through investments or acquisitions. We expect that this expansion would require an initial investment in personnel, facilities and operations, which may be more costly than similar investments in current operations. As a result of these investments, we may experience an increase in cost of sales and operating expenses that is disproportionate to revenue from those operations. These investments or acquisitions would likely be funded primarily by incurring additional debt or issuing common stock.

Net cash provided by operating activities was $23.7 million in the six months ended May 31, 2006. Cash provided by operating activities in the six months ended May 31, 2006 was primarily attributable to net income of $22.0 million and depreciation and amortization of $4.6 million offset by the use of cash for working capital of $11.6 million. The cash used for working capital in the six months ended May 31, 2006 was primarily due to an increase in net deferred assets as a result of our multi-year contract from our Mexico operation and a decrease in accounts payable, partially offset by a decrease in accounts receivable . The fluctuations in these working capital balances were primarily related to overall higher revenue levels and a net increase in sales of accounts receivable under our securitization programs of $14.9 million.

 

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Net cash provided by investing activities was $9.3 million in the six months ended May 31, 2006. Cash provided by investing activities was primarily the result of net proceeds from investments of $16.8 million, offset by capital expenditures of $4.7 million.

Net cash used in financing activities was $26.6 million in the six months ended May 31, 2006 and was primarily related to a decrease in cash overdraft of $24.2 million and net debt payments of $7.2 million, offset by proceeds from issuances of common stock of $4.8 million.

Capital Resources

Our cash and cash equivalents totaled $19.0 million and $13.6 million at May 31, 2006 and November 30, 2005, respectively.

Off-Balance Sheet Arrangements

We have a six-year revolving accounts receivable securitization program in the United States, which provides for the sale of up to $275.0 million of U.S. trade accounts receivable to two financial institutions. The program expires in August 2008. In connection with this program substantially all of our U.S. trade accounts receivable are transferred without recourse to our wholly owned subsidiary, which, in turn, sells the accounts receivable to the financial institutions. Sales of the accounts receivable to the financial institutions under this program result in a reduction of total accounts receivable in our consolidated balance sheet. The remaining accounts receivable not sold to the financial institutions are carried at their net realizable value, including an allowance for doubtful accounts. Our effective borrowing cost under the program is the prevailing commercial paper rate of return plus 0.75% per annum. At May 31, 2006 and November 30, 2005, the amount of our accounts receivable sold to and held by the financial institutions under this accounts receivable securitization program totaled $241.0 million and $229.2 million, respectively. The program contains customary financial covenants, including, but not limited to, requiring us to maintain on a consolidated basis:

 

    a minimum net worth at the end of each fiscal quarter in each fiscal year ending on or after November 30, 2003 of not less than (i) the minimum net worth required under the arrangement for the immediately preceding fiscal year plus (ii) an amount equal to 50% of the positive net income of us and our subsidiaries on a consolidated basis for the immediately preceding fiscal year plus (iii) an amount equal to 100% of the amount of any equity raised by or capital contributed to us during the immediately preceding fiscal year;

 

    a fixed charge ratio for each rolling period from and after the closing of the arrangement of not less than 1.70 to 1.00. The fixed charge ratio is the ratio of EBITDA for the rolling period ending on such date to “fixed charges” for such period. Fixed charges means, with respect to any of our fiscal periods (a) cash interest expense during such period, plus (b) regularly scheduled payments of principal on our debt (other than debt owing under the amended arrangement, as defined) paid during such period, plus (c) the aggregate amount of all capital expenditures made by us during such period, plus (d) income tax expense during such period, plus (e) any dividend, return of capital or any other distribution in connection with our capital stock. Rolling period means as of the end of any or our fiscal quarters, the immediately preceding four fiscal quarters (including the fiscal quarter then ending); and

 

    with respect to our wholly owned subsidiary, a net worth percentage of not less than 5.0%.

We also entered into a one-year revolving accounts receivable securitization program in Canada through SYNNEX Canada Limited in November 2005, which provides for the sale of up to C$100.0 million of U.S. and Canadian trade accounts receivable to a financial institution. The program expires in November 2006. In connection with this program all of SYNNEX Canada Limited’s U.S. and Canadian trade accounts receivable will be sold to the financial institution on a fully serviced basis. Sales of the accounts receivable to the financial institution under this program result in a reduction of total accounts receivable in our consolidated balance sheet. Our effective discount rate under the program is the prevailing bankers’ acceptance rate of return or prime rate in Canada plus 0.45% per annum. At May 31, 2006 and November 30, 2005 the amount of our accounts receivable sold to and held by the financial institutions under this accounts receivable securitization program totaled $48.7

 

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and $45.6 million, respectively. The program contains customary financial covenants, including, but not limited to, requiring us to maintain on a consolidated basis:

 

    a minimum net worth at the end of each fiscal quarter in each fiscal year ending on or after November 30, 2005 of not less than (i) the minimum net worth required under the arrangement for the immediately preceding fiscal year plus (ii) an amount equal to 50% of the positive net income of us and our subsidiaries on a consolidated basis for the immediately preceding fiscal year plus (iii) an amount equal to 100% of the amount of any equity raised by or capital contributed to us during the immediately preceding fiscal year.

We believe that available funding under our accounts receivable financing programs provides us increased flexibility to make incremental investments in strategic growth initiatives and to manage working capital requirements, and that there are sufficient trade accounts receivable to support the U.S. and Canadian financing programs. As we have in prior periods, we expect we will increase these programs if our revenue levels continue to increase. Under these programs, we continue to service the accounts receivable, and receive a service fee from the financial institutions for the U.S. financing program.

We are also obligated to provide periodic financial statements and investment reports, notices of material litigation and any other information relating to our U.S. and Canadian trade accounts receivable as requested by the financial institutions.

As is customary in trade accounts receivable securitization arrangements, a credit rating agency’s downgrade of the third party issuer of commercial paper or of a back-up liquidity provider (which provides a source of funding if the commercial paper market cannot be accessed) could result in an adverse change or loss of our financing capacity under these programs if the commercial paper issuer or liquidity back-up provider is not replaced. Loss of such financing capacity could have a material adverse effect on our financial condition and results of operations.

We have also issued guarantees to certain vendors and other lenders of our subsidiaries for the total amount of $168.6 million as of May 31, 2006 and $76.4 million as of November 30, 2005. The year over year increase is primarily due to guarantees issued for our Mexico operation. We are obligated under these guarantees to pay amounts due should our subsidiaries not pay valid amounts owed to their vendors or lenders. The vendor guarantees are typically less than one-year arrangements, with 30-day cancellation clauses and the lender guarantees are typically for the term of the loan agreement.

On-Balance Sheet Arrangements

We have a senior secured revolving line of credit arrangement, or the Revolver, with a group of financial institutions, which is secured by our inventory and expires in 2008. The Revolver’s maximum commitment is 40% of eligible inventory valued at the lower of cost or market, less liquidation reserve (as defined) up to a maximum borrowing of $45.0 million. Interest on borrowings under the Revolver is based on the financial institution’s prime rate or LIBOR plus 1.75%. There were no borrowings outstanding under the Revolver at May 31, 2006 or November 30, 2005.

SYNNEX Canada has a one-year revolving accounts receivable securitization program that provides for the sale of up to C$100 million of U.S. and Canadian trade accounts receivable to a financial institution. The program expires in November 2006. The effective discount rate is the prevailing bankers’ acceptance rate or prime rate plus 0.45% per annum. Not all of the assets sold under this securitization program qualified for off-balance sheet treatment. The balance outstanding at May 31, 2006 and November 30, 2005 for assets sold that did not qualify for off-balance sheet treatment was $0 and $26.4 million, respectively.

On May 17, 2006, our Mexican subsidiary, SYNNEX Mexico signed a term loan agreement, or Term Loan, with Deutsche Bank Mexico, S.A. as administrative agent, Bank of America Mexico, S.A. as a lender and certain other lenders who may become parties to the Term Loan, or collectively, the Lenders. Under the Term Loan, the Lenders will provide loans to SYNNEX Mexico through September 30, 2006 of an aggregate commitment amount equaling the lesser of (i) MXP $221.4 million (which amount may be increased as described below) or (ii) the aggregate purchase prices for the purchase by SYNNEX Mexico of certain computer and software related

 

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equipment. The aggregate commitment amount may be increased to an amount not to exceed MXP $830.3 million pursuant to the terms of the Term Loan. The interest rate for any unpaid principal amount will be the Equilibrium Interbank Interest Rate, plus 2.00% per annum. The final maturity date for repayment of any unpaid principal is November 24, 2009. The Term Loan also contains customary financial covenants.

In connection with this program, we issued a guarantee of SYNNEX Mexico’s performance of its obligations.

We have other lines of credit and revolving facilities with financial institutions, which provide for borrowing capacity aggregating approximately $10.3 and $9.5 million at May 31, 2006 and November 30, 2005, respectively. At May 31, 2006 and November 30, 2005, we had borrowings of $0.9 and $1.8 million, respectively, outstanding under these facilities. We have various term loans, short-term borrowings and mortgages with financial institutions totaling approximately $21.0 and $1.5 million at May 31, 2006 and November 30, 2005, respectively. The expiration dates of these facilities range from 2006 to 2013. Future principal payments due under these term loans and mortgages, and payments due under our operating lease arrangements after May 31, 2006 are as follows (in thousands):

 

     Payments Due By Period
     Total    Less than
1 Year
   1 - 3
Years
   3 - 5
Years
   > 5
Years

Contractual Obligations

              

Principal debt payments

   $ 21,012    $ 4,568    $ 12,906    $ 3,538    $ —  

Interest on debt

     1,471      320      903      248      —  

Non-cancelable operating leases

     58,821      10,778      19,717      15,159      13,167
                                  

Total

   $ 81,304    $ 15,666    $ 33,526    $ 18,945    $ 13,167
                                  

We are in compliance with all covenants or other requirements set forth in our accounts receivable financing programs and credit agreements discussed above.

Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. We do not expect the adoption of SFAS No. 154 on December 1, 2006 to have any material impact on our consolidated financial statements.

In November 2005, the FASB issued FSP FAS No. 115-1 and FAS No. 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1 and 124-1”), which clarify when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 and 124-1 are effective for all reporting periods beginning after December 15, 2005. At May 31, 2006, we had no unrealized investment losses that had not been recognized as other-than-temporary impairments in our available-for-sale securities. We do not anticipate that the implementation of these statements will have a significant impact on our financial position or results of operations.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our quantitative and qualitative disclosures about market risk for the three and six-month period ended May 31, 2006 from our Annual Report on Form 10-K for the year ended November 30, 2005. For further discussion of quantitative and qualitative disclosures about market risk, reference is made to our Annual Report on Form 10-K for the year then ended.

ITEM 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed 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 Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with management’s evaluation during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

ITEM 1A Risk Factors

Risks Related to Our Business

We anticipate that our revenue and operating results will fluctuate, which could adversely affect the price of our common stock.

Our operating results have fluctuated and will fluctuate in the future as a result of many factors, including:

 

    general economic conditions and level of IT spending;

 

    the loss or consolidation of one or more of our significant OEM suppliers or customers;

 

    market acceptance, product mix and life of the products we assemble and distribute;

 

    competitive conditions in our industry that impact our margins;

 

    pricing, margin and other terms with our OEM suppliers; and

 

    variations in our levels of excess inventory and doubtful accounts, and changes in the terms of OEM supplier-sponsored programs, such as price protection and return rights.

Although we attempt to control our expense levels, these levels are based, in part, on anticipated revenue. Therefore, we may not be able to control spending in a timely manner to compensate for any unexpected revenue shortfall.

Our operating results also are affected by the seasonality of the IT products industry. We have historically experienced higher sales in our fourth fiscal quarter due to patterns in the capital budgeting, federal government spending and purchasing cycles of end-users. These patterns may not be repeated in subsequent periods.

You should not rely on period-to-period comparisons of our operating results as an indication of future performance. The results of any quarterly period are not indicative of results to be expected for a full fiscal year. In future quarters, our operating results may be below our expectations or those of our public market analysts or investors, which would likely cause our share price to decline. For example, in March 2005, we announced that our revenue and net income for the three months ended February 28, 2005 would be lower than our previously released guidance and, as a result, our share price subsequently declined substantially.

We depend on a small number of OEMs to supply the IT products that we sell and the loss of, or a material change in, our business relationship with a major OEM supplier could adversely affect our business, financial position and operating results.

Our future success is highly dependent on our relationships with a small number of OEM suppliers. Sales of HP products represented approximately 26% of our total revenue in the six months ended May 31, 2006 and approximately 29% of our total revenue in the six months ended May 31, 2005. Our OEM supplier agreements typically are short-term and may be terminated without cause upon short notice. For example, our agreement with HP will expire on May 31, 2007. The loss or deterioration of our relationships with a major OEM supplier, the authorization by OEM suppliers of additional distributors, the sale of products by OEM suppliers directly to our reseller customers and end-users, or our failure to establish relationships with new OEM suppliers or to expand the distribution and supply chain services that we provide OEM suppliers could adversely affect our business, financial position and operating results. In addition, OEM suppliers may face liquidity or solvency issues that in turn could negatively affect our business and operating results.

Our business is also highly dependent on the terms provided by our OEM suppliers. Generally, each OEM supplier has the ability to change the terms and conditions of its sales agreements, such as reducing the amount of price protection and return rights or reducing the level of purchase discounts, rebates and marketing programs available to us. From time to time we may conduct business with a supplier without a formal agreement because the agreement has expired or otherwise. In such case, we are subject to additional risk with respect to products, warranties and returns, and other terms and conditions. If we are unable to pass the impact of these changes through to our reseller customers, our business, financial position and operating results could be adversely affected.

 

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Our gross margins are low, which magnifies the impact of variations in revenue, operating costs and bad debt on our operating results.

As a result of significant price competition in the IT products industry, our gross margins are low, and we expect them to continue to be low in the future. Increased competition arising from industry consolidation and low demand for certain IT products may hinder our ability to maintain or improve our gross margins. These low gross margins magnify the impact of variations in revenue, operating costs and bad debt on our operating results. A portion of our operating expenses is relatively fixed, and planned expenditures are based in part on anticipated orders that are forecasted with limited visibility of future demand. As a result, we may not be able to reduce our operating expenses as a percentage of revenue to mitigate any further reductions in gross margins in the future. If we cannot proportionately decrease our cost structure in response to competitive price pressures, our business and operating results could suffer.

We also receive purchase discounts and rebates from OEM suppliers based on various factors, including sales or purchase volume and breadth of customers. A decrease in net sales could negatively affect the level of volume rebates received from our OEM suppliers and thus, our gross margins. Because some rebates from OEM suppliers are based on percentage increases in sales of products, it may become more difficult for us to achieve the percentage growth in sales required for larger discounts due to the current size of our revenue base. A decrease or elimination of purchase discounts and rebates from our OEM suppliers would adversely affect our business and operating results.

Because we sell on a purchase order basis, we are subject to uncertainties and variability in demand by our reseller and contract assembly customers, which could decrease revenue and adversely affect our operating results.

We sell to our reseller and contract assembly customers on a purchase order basis rather than pursuant to long-term contracts or contracts with minimum purchase requirements. Consequently, our sales are subject to demand variability by our reseller and contract assembly customers. The level and timing of orders placed by our reseller and contract assembly customers vary for a variety of reasons, including seasonal buying by end-users, the introduction of new hardware and software technologies and general economic conditions. Customers submitting a purchase order may cancel, reduce or delay their orders. If we are unable to anticipate and respond to the demands of our reseller and contract assembly customers, we may lose customers because we have an inadequate supply of products, or we may have excess inventory, either of which may harm our business, financial position and operating results.

We are subject to the risk that our inventory value may decline, and protective terms under our OEM supplier agreements may not adequately cover the decline in value, which in turn may harm our business, financial position and operating results.

The IT products industry is subject to rapid technological change, new and enhanced product specification requirements, and evolving industry standards. These changes may cause inventory on hand to decline substantially in value or to rapidly become obsolete. Most of our OEM suppliers offer limited protection from the loss in value of inventory. For example, we can receive a credit from many OEM suppliers for products held in inventory in the event of a supplier price reduction. In addition, we have a limited right to return a certain percentage of purchases to most OEM suppliers. These policies are subject to time restrictions and do not protect us in all cases from declines in inventory value. In addition, our OEM suppliers may become unable or unwilling to fulfill their protection obligations to us. The decrease or elimination of price protection or the inability of our OEM suppliers to fulfill their protection obligations could lower our gross margins and cause us to record inventory write-downs. If we are unable to manage our inventory with our OEM suppliers with a high degree of precision, we may have insufficient product supplies or we may have excess inventory, resulting in inventory write downs, either of which may harm our business, financial position and operating results.

 

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We depend on OEM suppliers to maintain an adequate supply of products to fulfill customer orders on a timely basis, and any supply shortages or delays could cause us to be unable to timely fulfill orders, which in turn could harm our business, financial position and operating results.

Our ability to obtain particular products in the required quantities and to fulfill reseller customer orders on a timely basis is critical to our success. In most cases, we have no guaranteed price or delivery agreements with our OEM suppliers. We occasionally experience a supply shortage of certain products as a result of strong demand or problems experienced by our OEM suppliers. If shortages or delays persist, the price of those products may increase, or the products may not be available at all. In addition, our OEM suppliers may decide to distribute, or to substantially increase their existing distribution business, through other distributors, their own dealer networks, or directly to resellers. Accordingly, if we are not able to secure and maintain an adequate supply of products to fulfill our reseller customer orders on a timely basis, our business, financial position and operating results may be adversely affected.

We may suffer adverse consequences from changing interest rates.

Our short-term borrowings and off-balance sheet arrangements are variable rate obligations that could expose us to interest rate risks. At May 31, 2006, we had approximately $309.3 million in such variable rate obligations. If interest rates increase, our interest expense would increase, which would negatively affect our net income. Additionally, increasing interest rates may increase our future borrowing costs and restrict our access to capital.

A portion of our revenue is financed by floor plan financing companies and any termination or reduction in these financing arrangements could increase our financing costs and harm our business and operating results.

A portion of our distribution revenue is financed by floor plan financing companies. Floor plan financing companies are engaged by our customers to finance, or “floor,” the purchase of products from us. In exchange for a fee, we transfer the risk of loss on the sale of our products to the floor plan companies. We currently receive payment from these financing companies within approximately 15 to 30 business days from the date of the sale, which allows our business to operate at much lower relative working capital levels than if such programs were not available. If these floor plan arrangements are terminated or substantially reduced, the need for more working capital and the increased financing cost could harm our business and operating results. We have not experienced any termination or significant reduction in floor plan arrangements in the past.

We have significant credit exposure to our reseller customers, and negative trends in their businesses could cause us significant credit loss and negatively impact our cash flow and liquidity position.

We extend credit to our reseller customers for a significant portion of our sales to them. Resellers have a period of time, generally 30 days after the date of invoice, to make payment. As a result, we are subject to the risk that our reseller customers will not pay for the products they purchase. For example, our Mexico subsidiary has entered into a contract with a Mexico reseller customer, which involves extended payment terms and could expose us to additional collection risks. In addition, in the three months ended May 31, 2006, we recorded a bad debt provision of approximately $1.5 million due to an increase in collection risk of one of our customers. Our credit exposure risk may increase due to liquidity or solvency issues experienced by our resellers as a result of an economic downturn or a decrease in IT spending by end-users. If we are unable to collect payment for products we ship to our reseller customers or if our reseller customers are unable to timely pay for the products we ship to them, it will be more difficult or costly to utilize receivable-based financing, which could negatively impact our cash flow and liquidity position.

We experienced theft of product from our warehouses and future thefts could harm our operating results.

From time to time we have experienced incidents of theft at various facilities. In fiscal 2003 and fiscal 2005 we experienced theft as a result of break-ins at four of our warehouses in which approximately $12.9 million of inventory was stolen. Based on our investigation, discussions with local law enforcement and meetings with federal authorities, we believe the thefts at our warehouses were part of an organized crime effort that targeted a number of technology equipment warehouses throughout the United States.

As a result of the losses in 2003, we reduced our inventory value by $9.4 million, and recorded estimated proceeds, net of deductibles as a receivable from our insurance company, included within “other current assets” on our balance sheet as of November 30, 2003. In January 2004 we received a final settlement from our insurance company that amounted to substantially all of the receivables recorded as of November 30, 2003.

In March 2005 approximately $4.0 million of inventory was stolen from our facility in the City of Industry, California. We subsequently recovered approximately $0.5 million through law enforcement and federal authorities. We filed a claim with our insurance provider for the amount of the loss, less a small deductible. We have received substantially all of the claimed amount.

 

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These types of incidents may make it more difficult or expensive for us to obtain theft coverage in the future. In the future, incidents of theft may re-occur for which we may not be fully insured.

A significant portion of our contract assembly revenue comes from a single customer, and any decrease in sales from this customer could adversely affect our revenue.

Our revenues from contract assembly fluctuate due to product life cycles, product acceptance, pricing pressures and product demand from our customers. Sun Microsystems accounted for approximately $251 million or 95% of our contract assembly revenue in the six months ended May 31, 2006 and approximately $246 million or 93% in the six months ended May 31, 2005. Our contract assembly business will remain dependent on our relationship with Sun Microsystems in the foreseeable future, subjecting us to risks with respect to the success and life cycle of Sun Microsystems products we assemble and the pricing terms we negotiate with Sun Microsystems and our suppliers. Accordingly, if we are unable to assemble new and successful products for Sun Microsystems on appropriate pricing terms, our business and operating results would be adversely affected.

The future success of our relationship with Sun Microsystems also depends on MiTAC International continuing to work with us to service Sun Microsystems’ requirements at an appropriate cost. We rely on MiTAC International to manufacture and supply subassemblies and components for the computer systems we assemble for Sun Microsystems. As MiTAC International’s ownership interest in us decreases, MiTAC International’s interest in the success of our business and operations may decrease as well. If we are unable to maintain our relationship and appropriate pricing terms with MiTAC International, our relationship with Sun Microsystems could suffer, which in turn could harm our business, financial position and operating results. In addition, if we were unable to obtain assembly contracts for new and successful products our business and operating results would suffer.

We have pursued and intend to continue to pursue strategic acquisitions or investments in new markets and may encounter risks associated with these activities, which could harm our business and operating results.

We have in the past pursued and in the future expect to pursue acquisitions of, or investments in, businesses and assets in new markets, either within or outside the IT products industry, that complement or expand our existing business. Our acquisition strategy involves a number of risks, including:

 

    difficulty in successfully integrating acquired operations, IT systems, customers, OEM supplier and partner relationships, products and businesses with our operations;

 

    loss of key employees of acquired operations or inability to hire key employees necessary for our expansion;

 

    diversion of our capital and management attention away from other business issues;

 

    an increase in our expenses and working capital requirements;

 

    in the case of acquisitions that we may make outside of the United States, difficulty in operating in foreign countries and over significant geographical distances; and

 

    other financial risks, such as potential liabilities of the businesses we acquire.

Our growth may be limited and our competitive position may be harmed if we are unable to identify, finance and complete future acquisitions. We believe that further expansion may be a prerequisite to our long-term success as some of our competitors in the IT product distribution industry have larger international operations, higher revenues and greater financial resources than us. We have incurred costs and encountered difficulties in the past in connection with our acquisitions and investments. For example, our operating margins were initially adversely affected as a result of our acquisition of Merisel Canada Inc. and we have written off substantial investments in the past, one of which was eManage.com, Inc. Also, our acquisition of EMJ, caused an initial negative effect on our operating margins as we integrated EMJ’s systems, operations and personnel. Future acquisitions may result in dilutive issuances of equity securities, the incurrence of additional debt, large write-offs, a decrease in future profitability, or future losses. The incurrence of debt in connection with any future acquisitions could restrict our ability to obtain working capital or other financing necessary to operate our business. Our recent and future acquisitions or investments may not be successful, and if we fail to realize the anticipated benefits of these acquisitions or investments, our business and operating results could be harmed.

 

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We are dependent on a variety of IT and telecommunications systems, and any failure of these systems could adversely impact our business and operating results.

We depend on IT and telecommunications systems for our operations. These systems support a variety of functions, including inventory management, order processing, shipping, shipment tracking and billing.

Failures or significant downtime of our IT or telecommunications systems could prevent us from taking customer orders, printing product pick-lists, shipping products or billing customers. Sales also may be affected if our reseller customers are unable to access our price and product availability information. We also rely on the Internet, and in particular electronic data interchange, or EDI, for a large portion of our orders and information exchanges with our OEM suppliers and reseller customers. The Internet and individual web sites have experienced a number of disruptions and slowdowns, some of which were caused by organized attacks. In addition, some web sites have experienced security breakdowns. If we were to experience a security breakdown, disruption or breach that compromised sensitive information, it could harm our relationship with our OEM suppliers or reseller customers. Disruption of our web site or the Internet in general could impair our order processing or more generally prevent our OEM suppliers or reseller customers from accessing information. The occurrence of any of these events could have an adverse effect on our business and operating results.

We rely on independent shipping companies for delivery of products, and price increases or service interruptions from these carriers could adversely affect our business and operating results.

We rely almost entirely on arrangements with independent shipping companies, such as FedEx and UPS, for the delivery of our products from OEM suppliers and delivery of products to reseller customers. Freight and shipping charges can have a significant impact on our gross margin. As a result, an increase in freight surcharges due to rising fuel cost or general price increases will have an immediate adverse effect on our margins, unless we are able to pass the increased charges to our reseller customers or renegotiate terms with our OEM suppliers. In addition, in the past, UPS has experienced work stoppages due to labor negotiations with management. The termination of our arrangements with one or more of these independent shipping companies, the failure or inability of one or more of these independent shipping companies to deliver products, or the unavailability of their shipping services, even temporarily, could have an adverse effect on our business and operating results.

Because we conduct substantial operations in China, risks associated with economic, political and social events in China could negatively affect our business and operating results.

A substantial portion of our IT systems operations, including our IT systems support and software development operations, is located in China. In addition, we also conduct general and administrative activities from our facility in China. As of May 31, 2006, we had 448 personnel located in China. We expect to increase our operations in China in the future. Our operations in China are subject to a number of risks relating to China’s economic and political systems, including:

 

    a government controlled foreign exchange rate and limitations on the convertibility of the Chinese renminbi;

 

    extensive government regulation;

 

    changing governmental policies relating to tax benefits available to foreign-owned businesses;

 

    the telecommunications infrastructure;

 

    a relatively uncertain legal system; and

 

    uncertainties related to continued economic and social reform.

In addition, external events in Asia, such as the 2003 outbreak of severe acute respiratory syndrome, or SARS, and heightened political tensions in this region may adversely affect our business by disrupting the IT supply chain, restricting travel or interfering with the electronic and communications infrastructure.

 

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Our IT systems are an important part of our global operations. Any significant interruption in service, whether resulting from any of the above uncertainties, natural disasters or otherwise, could result in delays in our inventory purchasing, errors in order fulfillment, reduced levels of customer service and other disruptions in operations, any of which could cause our business and operating results to suffer.

Changes in foreign exchange rates and limitations on the convertibility of foreign currencies could adversely affect our business and operating results.

In the six months ended May 31, 2006 and 2005, approximately 22% and 20%, respectively, of our total revenue was generated outside the United States. Most of our international revenue, cost of revenue and operating expenses are denominated in foreign currencies. We presently 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 make it more expensive in terms of U.S. dollars to purchase inventory or pay expenses with foreign currencies. This could have a negative impact to us if revenue related to these purchases are transacted in U.S. dollars. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency as well as make our products, which are usually purchased by us with U.S. dollars, relatively more expensive than products manufactured locally. We currently conduct only limited hedging activities, which involve the use of currency forward contracts. Hedging foreign currencies can be risky. For example, in fiscal 2003 we incurred $3.7 million of foreign currency transaction losses as a result of purchases of forward contracts not conducted within our normal hedging practices and procedures, combined with a weakening U.S. dollar. There is also additional risk if the currency is not freely or actively traded. Some currencies, such as the Chinese Renminbi, are subject to limitations on conversion into other currencies, which can limit our ability to hedge or to otherwise react to rapid foreign currency devaluations. We cannot predict the impact of future exchange rate fluctuations on our business and operating results.

Because of the experience of our key personnel in the IT products industry and their technological expertise, if we were to lose any of our key personnel, it could inhibit our ability to operate and grow our business successfully.

We operate in the highly competitive IT products industry. We are dependent in large part on our ability to retain the services of our key senior executives and other technical experts and personnel. Our employees and executives do not have employment agreements. Furthermore, we do not carry “key person” insurance coverage for any of our key executives. We compete for qualified senior management and technical personnel. The loss of, or inability to hire, key executives or qualified employees could inhibit our ability to operate and grow our business successfully.

We may become involved in intellectual property or other disputes that could cause us to incur substantial costs, divert the efforts of our management, and require us to pay substantial damages or require us to obtain a license, which may not be available on commercially reasonable terms, if at all.

We may from time to time receive notifications alleging infringements of intellectual property rights allegedly held by others relating to our business or the products we sell or assemble for our OEM suppliers and others. Litigation with respect to patents or other intellectual property matters could result in substantial costs and diversion of management and other resources and could have an adverse effect on our business. Although we generally have various levels of indemnification protection from our OEM suppliers and contract assembly customers, in many cases any indemnification to which we may be entitled is subject to maximum limits or other restrictions. In addition, we have developed proprietary IT systems that play an important role in our business. If any infringement claim is successful against us and if indemnification is not available or sufficient, we may be required to pay substantial damages or we may need to seek and obtain a license of the other party’s intellectual property rights. We may be unable to obtain such a license on commercially reasonable terms, if at all.

We are from time to time involved in other litigation in the ordinary course of business. For example, we are currently defending a trademark infringement action and a civil matter involving third party investors in eManage.com, Inc. We may not be successful in defending these or other claims. Regardless of the outcome, litigation could result in substantial expense and could divert the efforts of our management.

 

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Because of the capital-intensive nature of our business, we need continued access to capital, which, if not available to us or if not available on favorable terms, could harm our ability to operate or expand our business.

Our business requires significant levels of capital to finance accounts receivable and product inventory that is not financed by trade creditors. If cash from available sources is insufficient, proceeds from our accounts receivable securitization program are limited or cash is used for unanticipated needs, we may require additional capital sooner than anticipated. In the event we are required, or elect, to raise additional funds, we may be unable to do so on favorable terms, or at all. Our current and future indebtedness could adversely affect our operating results and severely limit our ability to plan for, or react to, changes in our business or industry. We could also be limited by financial and other restrictive covenants in any credit arrangements, including limitations on our borrowing of additional funds and issuing dividends. Furthermore, the cost of debt financing has increased recently and could significantly increase in the future, making it cost prohibitive to borrow, which could force us to issue new equity securities.

If we issue new equity securities, existing stockholders may experience additional dilution, or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, we may not be able to take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. Any inability to raise additional capital when required could have an adverse effect on our business and operating results.

The terms of our indebtedness agreements impose significant restrictions on our ability to operate which in turn may negatively affect our ability to respond to business and market conditions and therefore have an adverse effect on our business and operating results.

As of May 31, 2006, we had approximately $21.9 million in outstanding short and long-term borrowings under term loans and lines of credit, excluding trade payables. As of May 31, 2006, approximately $289.7 million of our accounts receivable were sold to and held by two financial institutions under our accounts receivable securitization program. The terms of our current indebtedness agreements restrict, among other things, our ability to:

 

    incur additional indebtedness;

 

    pay dividends or make certain other restricted payments;

 

    consummate certain asset sales or acquisitions;

 

    enter into certain transactions with affiliates; and

 

    merge, consolidate or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets.

We are also required to maintain specified financial ratios and satisfy certain financial condition tests, including minimum net worth and fixed charge coverage ratio as outlined in our senior secured revolving line of credit arrangement. We may be unable to meet these ratios and tests, which could result in the acceleration of the repayment of the related debt, the termination of the facility or the increase in our effective cost of funds. As a result, our ability to operate may be restricted and our ability to respond to business and market conditions limited, which could have an adverse effect on our business and operating results.

We have significant operations concentrated in Northern California, South Carolina, Toronto and Beijing and any disruption in the operations of our facilities could harm our business and operating results.

Our worldwide operations could be subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses. We have significant operations in our facilities located in Fremont, California, Greenville, South Carolina, Toronto, Canada and Beijing, China. As a result, any prolonged disruption in the operations of our facilities, whether due to technical difficulties, power failures, break-ins, destruction or damage to the facilities as a result of a natural disaster, fire or any other reason, could harm our operating results. We currently do not have a formal disaster recovery plan and may not have sufficient business interruption insurance to compensate for losses that could occur.

 

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Global health, economic, political and social conditions may harm our ability to do business, increase our costs and negatively affect our stock price.

External factors such as potential terrorist attacks, acts of war, geopolitical and social turmoil or epidemics such as SARS and other similar outbreaks in many parts of the world could prevent or hinder our ability to do business, increase our costs and negatively affect our stock price. For example, increased instability may adversely impact the desire of employees and customers to travel, the reliability and cost of transportation, our ability to obtain adequate insurance at reasonable rates or require us to incur increased costs for security measures for our domestic and international operations. These uncertainties make it difficult for us and our customers to accurately plan future business activities. More generally, these geopolitical social and economic conditions could result in increased volatility in the United States and worldwide financial markets and economy. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

Part of our business is conducted outside of the United States, exposing us to additional risks that may not exist in the United States, which in turn could cause our business and operating results to suffer.

We have international operations in Canada, China, Mexico and the United Kingdom. In the six months ended May 31, 2006 and 2005, approximately 22% and 20%, respectively, of our total revenue was generated outside the United States. In the six months ended May 31, 2006 and 2005, approximately 18% and 16%, respectively, of our total revenue was generated in Canada. No other country or region accounted for more than 10% of our total revenue. Our international operations are subject to risks, including:

 

    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;

 

    difficulties in collecting of accounts receivables on a timely basis or at all;

 

    taxes; and

 

    seasonal reductions in business activity in some parts of the world.

We may continue to expand internationally to respond to competitive pressure and customer and market requirements. Establishing operations in any other foreign country or region presents risks such as those described above as well as risks specific to the particular country or region. In addition, until a payment history is established over time with customers in a new geography or region, the likelihood of collecting receivables generated by such operations could be less than our expectations. As a result, there is a greater risk that reserves set with respect to the collection of such receivables may be inadequate. In addition, our Mexico subsidiary has entered into a contract with a Mexico reseller customer, which involves extended payment terms and could expose us to additional collection risks. Further, if our international expansion efforts in any foreign country are unsuccessful, we may decide to cease operations, which would likely cause us to incur similar additional expenses and loss.

In addition, changes in policies or laws of the United States or foreign governments resulting in, among other things, higher taxation, currency conversion limitations, restrictions on fund transfers or the expropriation of private enterprises, could reduce the anticipated benefits of our international expansion. Furthermore, any actions by countries in which we conduct business to reverse policies that encourage foreign trade or investment could adversely affect our business. If we fail to realize the anticipated revenue growth of our future international operations, our business and operating results could suffer.

 

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Risks Related to Our Relationship with MiTAC International

We rely on MiTAC International for certain manufacturing and assembly services and the loss of these services would require us to seek alternate providers that may charge us more for their services.

We rely on MiTAC International to manufacture and supply subassemblies and components for some of our contract assembly customers, including Sun Microsystems, our primary contract assembly customer, and our reliance on MiTAC International may increase in the future. Our relationship with MiTAC International has been informal and is not governed by long-term commitments or arrangements with respect to pricing terms, revenue or capacity commitments. Accordingly, we negotiate manufacturing and pricing terms on a project-by-project basis, based on manufacturing services rendered by MiTAC International or us. As MiTAC’s ownership interest in us decreases, MiTAC’s interest in the success of our business and operations may decrease as well. In the event MiTAC International no longer provides such services and components to us, we would need to find an alternative source for these services and components. We may be unable to obtain alternative services and components on similar terms, which may in turn increase our manufacturing costs. In addition, we may not find manufacturers with sufficient capacity, which may in turn lead to shortages in our product supplies. Increased costs and products shortages could harm our business and operating results.

Our business relationship with MiTAC International has been and will continue to be negotiated as related parties and therefore may not be the result of arms’-length negotiations between independent parties. Our relationship, including pricing and other material terms with our shared customers or with MiTAC International, may or may not be as advantageous to us as the terms we could have negotiated with unaffiliated third parties. We have a joint sales and marketing agreement with MiTAC International, pursuant to which both parties agree to use their commercially reasonable efforts to promote the other party’s service offerings to their respective customers who are interested in such product offerings. To date, there has not been a significant amount of sales attributable to the joint marketing agreement. This agreement does not provide for the terms upon which we negotiate manufacturing and pricing terms. These negotiations have been on a case-by-case basis. The agreement had an initial term of one year and will automatically renew for subsequent one-year terms unless either party provides written notice of non-renewal within 90 days of the end of any renewal term. The agreement may also be terminated without cause either by the mutual written agreement of both parties or by either party without cause upon 90 days prior written notice of termination to the other party. Either party may immediately terminate the agreement by providing written notice (a) of the other party’s material breach of any provision of the agreement and failure to cure within 30 days, or (b) if the other party becomes bankrupt or insolvent. In addition, we are party to a general agreement with MiTAC International and Sun Microsystems under which we work with MiTAC International to provide contract assembly services to Sun Microsystems.

Some of our customer relationships evolved from relationships between such customers and MiTAC International and the loss of such relationships could harm our business and operating results.

Our relationship with Sun Microsystems and some of our other customers evolved from customer relationships that were initiated by MiTAC International. Our relationship with Sun Microsystems is a joint relationship with MiTAC International and us, and the future success of our relationship with Sun Microsystems depends on MiTAC International continuing to work with us to service Sun Microsystems’ requirements. The original agreement between Sun Microsystems and MiTAC International was signed on August 28, 1999 and we became a party to the agreement on February 12, 2002. Substantially all of our contract assembly services to Sun Microsystems are covered by the general agreement. The agreement continues indefinitely until terminated in accordance with its terms. Sun Microsystems may terminate this agreement for any reason on 60 days written notice. Any party may terminate the agreement with written notice if one of the other parties materially breaches any provision of the agreement and the breach is incapable of being cured or is not cured within 30 days. The agreement may also be terminated on written notice if one of the other parties becomes bankrupt or insolvent. If we are unable to maintain our relationship with MiTAC International, our relationship with Sun Microsystems could suffer and we could lose other customer relationships or referrals, which in turn could harm our business, financial position and operating results.

There could be potential conflicts of interest between us and affiliates of MiTAC International, which could impact our business and operating results.

MiTAC International’s and its affiliates’ continuing beneficial ownership of our common stock could create conflicts of interest with respect to a variety of matters, such as potential acquisitions, competition, issuance or disposition of securities, election of directors, payment of dividends and other business matters. Similar risks could exist as a result of Matthew Miau’s positions as our Chairman, the Chairman of MiTAC International and as a director or officer of MiTAC International’s affiliated companies. For fiscal year 2006, Mr. Miau will receive a

 

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retainer of $225,000 from us. Compensation payable to Mr. Miau is based upon the approval of the Compensation Committee. We also have adopted a policy requiring material transactions in which any of our directors has a potential conflict of interest to be approved by our Audit Committee, which is composed of disinterested members of the Board.

Synnex Technology International Corp., or Synnex Technology International, a publicly traded company based in Taiwan and affiliated with MiTAC International, currently provides distribution and fulfillment services to various markets in Asia and Australia, and is also a potential competitor of ours. Mitac Incorporated, a privately held company based in Taiwan and a separate entity from MiTAC International, directly and indirectly owns approximately 15.3% of Synnex Technology International and approximately 8.7% of MiTAC International. MiTAC International directly and indirectly owns 0.3% of Synnex Technology International and Synnex Technology International directly and indirectly owns approximately 0.4% of MiTAC International. In addition, MiTAC International directly and indirectly owns approximately 8.9% of Mitac Incorporated and Synnex Technology International directly and indirectly owns approximately 14.3% of Mitac Incorporated. Synnex Technology International indirectly through its ownership of Peer Developments Limited owns approximately 17.9% of our outstanding common stock. Neither MiTAC International nor Synnex Technology International is restricted from competing with us. In the future, we may increasingly compete with Synnex Technology International, particularly if our business in Asia expands or Synnex Technology International expands its business into geographies or customers we serve. Although Synnex Technology International is a separate entity from us, it is possible that there will be confusion as a result of the similarity of our names. Moreover, we cannot limit or control the use of the Synnex name by Synnex Technology International or MiTAC International, and our use of the Synnex name may be restricted as a result of registration of the name by Synnex Technology International or the prior use in jurisdictions where they currently operate.

As of May 31, 2006, our executive officers, directors and principal stockholders owned approximately 56% of our common stock and this concentration of ownership allows them to control all matters requiring stockholder approval and could delay or prevent a change in control of SYNNEX.

As of May 31, 2006, our executive officers, directors and principal stockholders owned approximately 56% of our outstanding common stock. In particular, MiTAC International and its affiliates, owned approximately 55% of our common stock.

MiTAC International and its affiliates own a controlling interest in us as of May 31, 2006. As a result, MiTAC International will be able to control the outcome of matters submitted to the stockholders including any acquisition or sale of us. In addition, MiTAC International’s interests and ours may increasingly conflict. For example, we rely on MiTAC International for certain manufacturing and supply services and for relationships with certain key customers. As a result of a decrease in their ownership in us, we may lose these services and relationships, which may lead to increased costs to replace the lost services and the loss of certain key customers. We cannot predict the likelihood that we may incur increased costs or lose customers if MiTAC International’s ownership percentage of us decreases in the future.

Risks Related to Our Industry

Volatility in the IT industry could have a material adverse effect on our business and operating results.

The IT industry in which we operate has experienced decreases in demand. Softening demand for our products and services caused by an ongoing economic downturn and over-capacity were responsible, in part, for a decline in our revenue in fiscal 2001, as well as problems with the saleability of inventory and collection of reseller customer receivables.

The North American economy and market conditions continue to be challenging in the IT industry. As a result, individuals and companies may delay or reduce expenditures, including those for IT products. While in the past we may have benefited from the consolidation in our industry resulting from the slowdown, further delays or reductions in IT spending in particular, and economic weakness generally, could have an adverse effect on our business and operating results.

 

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Our distribution business may be adversely affected by some OEM suppliers’ strategies to increase their direct sales, which in turn could cause our business and operating results to suffer.

Consolidation of OEM suppliers has resulted in fewer sources for some of the products that we distribute. This consolidation has also resulted in larger OEM suppliers that have significant operating and financial resources. Some OEM suppliers, including some of the leading OEM suppliers that we service, have been selling a greater volume of products directly to end-users, thereby limiting our business opportunities. If large OEM suppliers continue the trend to sell directly to our resellers, rather than use us as the distributor of their products, our business and operating results will suffer.

OEMs are limiting the number of supply chain service providers with which they do business, which in turn could negatively impact our business and operating results.

Currently, there is a trend towards reducing the number of authorized distributors used by OEM suppliers. As a smaller market participant in the IT product distribution and contract assembly industries, than some of our competitors, we may be more susceptible to loss of business from further reductions of authorized distributors or contract assemblers by IT product OEMs. For example, the termination of Sun Microsystems’ contract assembly business with us would have a significant negative effect on our revenue and operating results. A determination by any of our primary OEMs to consolidate their business with other distributors or contract assemblers would negatively affect our business and operating results.

The IT industry is subject to rapidly changing technologies and process developments, and we may not be able to adequately adjust our business to these changes, which in turn would harm our business and operating results.

Dynamic changes in the IT industry, including the consolidation of OEM suppliers and reductions in the number of authorized distributors used by OEM suppliers, have resulted in new and increased responsibilities for management personnel and have placed, and continue to place, a significant strain upon our management, operating and financial systems and other resources. We may be unable to successfully respond to and manage our business in light of industry developments and trends. Also crucial to our success in managing our operations will be our ability to achieve additional economies of scale. Our failure to achieve these additional economies of scale or to respond to changes in the IT industry could adversely affect our business and operating results.

We are subject to intense competition in the IT industry, both in the United States and internationally, and if we fail to compete successfully, we will be unable to gain or retain market share.

We operate in a highly competitive environment, both in the United States and internationally. The IT product distribution and contract assembly industries are characterized by intense competition, based primarily on product availability, credit availability, price, speed of delivery, ability to tailor specific solutions to customer needs, quality and depth of product lines, pre-sale and post-sale technical support, flexibility and timely response to design changes, technological capabilities, service and support. We compete with a variety of regional, national and international IT product distributors and contract manufacturers and assemblers. In some instances, we also compete with our own customers, our own OEM suppliers and MiTAC International.

Our primary competitors are substantially larger and have greater financial, operating, manufacturing and marketing resources than us. Some of our competitors may have broader geographic breadth and range of services than us and may have more developed relationships with their existing customers. We may lose market share in the United States or in international markets, or may be forced in the future to reduce our prices in response to the actions of our competitors and thereby experience a reduction in our gross margins.

We may initiate other business activities, including the broadening of our supply chain capabilities, and may face competition from companies with more experience in those new areas. In addition, as we enter new areas of business, we may also encounter increased competition from current competitors or from new competitors, including some who may once have been our OEM suppliers or reseller customers. Increased competition and negative reaction from our OEM suppliers or reseller customers resulting from our expansion into new business areas may harm our business and operating results.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission, or SEC, regulations and New York Stock Exchange rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and

 

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as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our ongoing efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our management’s required assessment of our internal control over financial reporting and our independent registered public accounting firm’s attestation of that assessment has required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from legislation requiring companies to evaluate those internal controls.

Section 404 of the Sarbanes-Oxley Act of 2004 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We completed an evaluation of the effectiveness of our internal control over financial reporting for the fiscal year ended November 30, 2005, and we have an ongoing program to perform the system and process evaluation and testing necessary to continue to comply with these requirements. We expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance. In the event that our chief executive officer, chief financial officer or independent registered public accounting firm determines that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions and our reputation may be adversely affected and the market price of our stock could decline.

Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.

We prepare our financial statements to conform to generally accepted accounting principles, or GAAP. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, accounting policies affecting many aspects of our business, including rules relating to employee stock option grants, have recently been revised or are under review. The FASB and other agencies have finalized changes to GAAP that require us, starting in our quarter ending February 28, 2006, to record a charge to earnings for employee stock option grants and other equity incentives. We may have significant and ongoing accounting charges resulting from option grant and other equity incentive expensing that will reduce our overall net income. In addition, since we historically have used equity-related compensation as a component of our total employee compensation program, the accounting change could make the use of equity-related compensation less attractive to us and therefore make it more difficult to attract and retain employees.

Risks Related to Our Common Stock

Our common stock has been subject to substantial price and volume fluctuations due to a number of factors, some of which are beyond our control.

Share prices and trading volumes for many distribution and contract assembly service related companies fluctuate widely for a number of reasons, including some reasons which may be unrelated to their businesses or results of operations. This market volatility, as well as general domestic or international economic, market and political conditions, could materially adversely affect the price of our common stock without regard to our operating performance. In addition, our operating results may be below the expectations of public market analysts and investors. If this were to occur, the market price of our common stock would likely decrease.

 

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Significant fluctuations in the market price of our common stock could result in securities class action claims against us, which could seriously harm our operating results.

Securities class action claims have been brought against companies in the past where volatility in the market price of that company’s securities has taken place. This kind of litigation could be very costly and divert our management’s attention and resources, and any adverse determination in this litigation could also subject us to significant liabilities, any or all of which could adversely affect our business and operating results.

Anti-takeover provisions in our certificate of incorporation may make it more difficult for someone to acquire us in a hostile takeover.

Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting shares.

In addition, our certificate of incorporation contains certain provisions that, together with the ownership position of our officers, directors and their affiliates, could discourage potential takeover attempts and make attempts by stockholders to change management more difficult, which could adversely affect the market price of our common stock.

If securities or industry analysts do not publish research or reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

We are subject to additional rules and regulations as a public company, which will increase our administration costs which, in turn, could harm our operating results.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, have required changes in corporate governance practices of public companies. In addition to final rules and rule proposals already made by the SEC, the New York Stock Exchange, or NYSE, has adopted revisions to its requirements for companies that are NYSE-listed. These rules and regulations have increased our legal and financial compliance costs, and made some activities more time consuming or costly. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee, and qualified executive officers.

 

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ITEM 4. Submission of Matters to a Vote of Security Holders.

We held an Annual Meeting of our Stockholders on March 22, 2006, at which the following occurred:

ELECTION OF SEVEN DIRECTORS TO THE BOARD OF DIRECTORS: The stockholders elected Matthew Miau, Robert Huang, Fred Breidenbach, Gregory Quesnel, David Rynne, Dwight Steffensen and James Van Horne as Directors. The votes on the matters were as follows:

 

Matthew Miau   FOR   28,580,699
  WITHHELD   113,683
Robert Huang   FOR   28,663,015
  WITHHELD   31,367
Fred Breidenbach   FOR   28,539,978
  WITHHELD   154,404
Gregory Quesnel   FOR   28,645,413
  WITHHELD   48,969
David Rynne   FOR   28,602,528
  WITHHELD   91,854
Dwight Steffensen   FOR   28,597,028
  WITHHELD   97,354
James Van Horne   FOR   28,645,413
  WITHHELD   48,969

RATIFICATION OF THE SELECTION BY THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS: The stockholders ratified the selection by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as our independent registered public accountants for the 2006 fiscal year. The vote on the matter was as follows:

 

FOR

   28,653,500

AGAINST

   40,710

ABSTAIN

   172

 

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ITEM 6. Exhibits

 

10.1      Amendment No. 9 dated May 17, 2006 to Amended and Restated Credit Agreement dated July 9, 2002 by and among the Company, General Electric Capital Corporation and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 22, 2006).
10.2      Amendment No. 5 dated May 17, 2006 to Amended and Restated Receivables Transfer Agreement and Amended and Restated Receivables Purchase and Servicing Agreement each dated August 30, 2002 by and among the Company, SIT Funding Corporation, Manhattan Asset Funding Company LLC, Sumitomo Mitsui Banking Corporation, SMBC Securities, Inc. and General Electric Capital Corporation (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 22, 2006).
10.3#   Amended and Restated 2003 Stock Incentive Plan.
31.1      Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2      Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *   Statement of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

# Indicates management contract or compensatory plan or arrangement.
* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: July 5, 2006

 

SYNNEX Corporation
By:  

/s/ ROBERT T. HUANG

  Robert T. Huang
  Chief Executive Officer
By:  

/s/ DENNIS POLK

  Dennis Polk
  Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Description of Document

10.1      Amendment No. 9 dated May 17, 2006 to Amended and Restated Credit Agreement dated July 9, 2002 by and among the Company, General Electric Capital Corporation and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 22, 2006).
10.2      Amendment No. 5 dated May 17, 2006 to Amended and Restated Receivables Transfer Agreement and Amended and Restated Receivables Purchase and Servicing Agreement each dated August 30, 2002 by and among the Company, SIT Funding Corporation, Manhattan Asset Funding Company LLC, Sumitomo Mitsui Banking Corporation, SMBC Securities, Inc. and General Electric Capital Corporation (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 22, 2006).
10.3#    Amended and Restated 2003 Stock Incentive Plan.
31.1      Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2      Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*    Statement of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

# Indicates management contract or compensatory plan or arrangement.
* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

54

Exhibit 10.3

SYNNEX C ORPORATION

2003 STOCK INCENTIVE PLAN

(Adopted by the Board on September 2, 2003,

and amended and restated by the Board on January 10, 2006 and June 20, 2006.

Reflects 2:1 Reverse Stock Split on November 12, 2003)


TABLE OF CONTENTS

 

         Page

Section 1.

 

ESTABLISHMENT AND PURPOSE

   4

Section 2.

 

DEFINITIONS

   4
 

(a) “Affiliate”

   4
 

(b) “Award”

   4
 

(c) “Board of Directors”

   4
 

(d) “Change in Control”

   4
 

(e) “Code”

   5
 

(f) “Committee”

   5
 

(g) “Company”

   5
 

(h) “Consultant”

   5
 

(i) “Disability”

   6
 

(j) “Employee”

   6
 

(k) “Exchange Act”

   6
 

(l) “Exercise Price”

   6
 

(m) “Fair Market Value”

   6
 

(n) “ISO”

   6
 

(o) “Misconduct”

   6
 

(p) “Nonstatutory Option” or “NSO”

   7
 

(q) “Offeree”

   7
 

(r) “Option”

   7
 

(s) “Optionee”

   7
 

(t) “Outside Director”

   7
 

(u) “Parent”

   7
 

(v) “Participant”

   7
 

(w) “Plan”

   7
 

(x) “Purchase Price”

   7
 

(y) “Restricted Share”

   7
 

(z) “Restricted Share Agreement “

   7
 

(aa) “SAR”

   7
 

(bb) “SAR Agreement”

   7
 

(cc) “Service”

   7
 

(dd) “Share”

   7
 

(ee) “Stock”

   7
 

(ff) “Stock Option Agreement”

   8
 

(gg) “Stock Unit”

   8
 

(hh) “Stock Unit Agreement”

   8
 

(ii) “Subsidiary”

   8

Section 3.

 

ADMINISTRATION

   8
 

(a) Committee Composition

   8
 

(b) Committee for Non-Officer Grants

   8
 

(c) Committee Procedures

   8
 

(d) Committee Responsibilities

   9

 

- i -


Section 4.

 

ELIGIBILITY

   10
 

(a) General Rule

   10
 

(b) Automatic Grants to Outside Directors.

   10
 

(c) Ten-Percent Stockholders

   11
 

(d) Attribution Rules

   11
 

(e) Outstanding Stock

   11

Section 5.

 

STOCK SUBJECT TO PLAN

   12
 

(a) Basic Limitation

   12
 

(b) Additional Shares

   12

Section 6.

 

RESTRICTED SHARES

   12
 

(a) Restricted Stock Agreement

   12
 

(b) Payment for Awards

   12
 

(c) Vesting

   12
 

(d) Voting and Dividend Rights

   13
 

(e) Restrictions on Transfer of Shares

   13

Section 7.

 

TERMS AND CONDITIONS OF OPTIONS

   13
 

(a) Stock Option Agreement

   13
 

(b) Number of Shares

   13
 

(c) Exercise Price

   13
 

(d) Withholding Taxes

   13
 

(e) Exercisability and Term

   14
 

(f) Exercise of Options Upon Termination of Service

   14
 

(g) Effect of Change in Control

   14
 

(h) Leaves of Absence

   14
 

(i) No Rights as a Stockholder

   14
 

(j) Modification, Extension and Renewal of Options

   15
 

(k) Restrictions on Transfer of Shares

   15
 

(l) Buyout Provisions

   15

Section 8.

 

PAYMENT FOR SHARES

   15
 

(a) General Rule

   15
 

(b) Surrender of Stock

   15
 

(c) Services Rendered

   15
 

(d) Cashless Exercise

   15
 

(e) Exercise/Pledge

   15
 

(f) Promissory Note

   16
 

(g) Other Forms of Payment

   16
 

(h) Limitations under Applicable Law

   16

Section 9.

 

STOCK APPRECIATION RIGHTS

   16
 

(a) SAR Agreement

   16
 

(b) Number of Shares

   16

 

- ii -


 

(c) Exercise Price

   16
 

(d) Exercisability and Term

   16
 

(e) Effect of Change in Control

   17
 

(f) Exercise of SARs

   17
 

(g) Modification or Assumption of SARs

   17

Section 10.

 

STOCK UNITS

   17
 

(a) Stock Unit Agreement

   17
 

(b) Payment for Awards

   17
 

(c) Vesting Conditions

   17
 

(d) Voting and Dividend Rights

   17
 

(e) Form and Time of Settlement of Stock Units

   18
 

(f) Death of Recipient

   18
 

(g) Creditors’ Rights

   18

Section 11.

 

ADJUSTMENT OF SHARES

   18
 

(a) Adjustments

   18
 

(b) Dissolution or Liquidation

   19
 

(c) Reorganizations

   19
 

(d) Reservation of Rights

   19

Section 12.

 

LEGAL AND REGULATORY REQUIREMENTS

   19

Section 13.

 

WITHHOLDING TAXES

   20
 

(a) General

   20
 

(b) Share Withholding

   20

Section 14.

 

LIMITATION ON PARACHUTE PAYMENTS

   20
 

(a) Scope of Limitation.

   20
 

(b) Basic Rule

   20
 

(c) Reduction of Payments

   20
 

(d) Related Corporations

   21

Section 15.

 

NO EMPLOYMENT RIGHTS

   21

Section 16.

 

DURATION AND AMENDMENTS

   21
 

(a) Term of the Plan

   21
 

(b) Right to Amend or Terminate the Plan

   21
 

(c) Effect of Amendment or Termination

   21

Section 17.

 

EXECUTION

   21

 

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SYNNEX C ORPORATION

2003 STOCK INCENTIVE PLAN

SECTION 1. ESTABLISHMENT AND PURPOSE.

The Plan was adopted by the Board of Directors on September 2, 2003, effective as of the date of the initial offering of Stock to the public pursuant to a registration statement filed by the Company with the Securities and Exchange Commission, and was amended and restated by the Board of Directors on January 10, 2006. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of restricted shares, stock units, options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights.

SECTION 2. DEFINITIONS.

(a) “Affiliate” shall mean any entity other than a Subsidiary, if the Company and/or one of more Subsidiaries own not less than 50% of such entity.

(b) “Award” shall mean any award of an Option, a SAR, a Restricted Share or a Stock Unit under the Plan.

(c) “Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time.

(d) “Change in Control” shall mean the occurrence of any of the following events:

(i) A change in the composition of the Board of Directors occurs, as a result of which fewer than one-half of the incumbent directors are directors who either:

(A) Had been directors of the Company on the “look-back date” (as defined below) (the “original directors”); or

(B) Were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved (the “continuing directors”); or

(ii) Any “person” (as defined below) who by the acquisition or aggregation of securities, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities

 

-4-


ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the “Base Capital Stock”); except that any change in the relative beneficial ownership of the Company’s securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the Company; or

(iii) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity; or

(iv) The sale, transfer or other disposition of all or substantially all of the Company’s assets.

For purposes of subsection (d)(i) above, the term “look-back” date shall mean the later of (1) September 2, 2003 or (2) the date 24 months prior to the date of the event that may constitute a Change in Control.

For purposes of subsection (d)(ii)) above, the term “person” shall have the same meaning as when used in Sections 13(d) and 14(d) of the Exchange Act but shall exclude (1) a trustee or other fiduciary holding securities under an employee benefit plan maintained by the Company or a Parent or Subsidiary and (2) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the Stock.

Any other provision of this Section 2(d) notwithstanding, a transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction, and a Change in Control shall not be deemed to occur if the Company files a registration statement with the Securities and Exchange Commission for the initial offering of Stock to the public.

(e) “Code” shall mean the Internal Revenue Code of 1986, as amended.

(f) “Committee” shall mean the Compensation Committee as designated by the Board of Directors, which is authorized to administer the Plan, as described in Section 3 hereof.

(g) “Company” shall mean SYNNEX Corporation

(h) “Consultant” shall mean a consultant or advisor who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor or a member of the board of directors of a Parent or a Subsidiary who is not an Employee. Service as a Consultant shall be considered Service for all purposes of the Plan.

 

-5-


(i) “Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment.

(j) “Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.

(k) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(l) “Exercise Price” shall mean, in the case of an Option, the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of a SAR, shall mean an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR.

(m) “Fair Market Value” with respect to a Share, shall mean the market price of one Share of Stock, determined by the Committee as follows:

(i) If the Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Stock is quoted or, if the Stock is not quoted on any such system, by the Pink Sheets LLC;

(ii) If the Stock was traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last reported sale price quoted for such date by The Nasdaq Stock Market;

(iii) If the Stock was traded on a United States stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported for such date by the applicable composite-transactions report; and

(iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.

In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons.

(n) “ISO” shall mean an employee incentive stock option described in Section 422 of the Code.

(o) “Misconduct” shall mean the commission of any act of fraud, embezzlement or dishonesty by the Participant, any unauthorized use or disclosure by the Participant of confidential information or trade secrets of the Company (or any Parent or Subsidiary), or any other intentional misconduct by the Participant adversely affecting the business or affairs of the Company (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of the Participant or any other individual in the Service of the Company (or any Parent or Subsidiary).

 

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(p) “Nonstatutory Option” or “NSO” shall mean an employee stock option that is not an ISO.

(q) “Offeree” shall mean an individual to whom the Committee has offered the right to acquire Shares under the Plan (other than upon exercise of an Option).

(r) “Option” shall mean an ISO or Nonstatutory Option granted under the Plan and entitling the holder to purchase Shares.

(s) “Optionee” shall mean an individual or estate who holds an Option or SAR.

(t) “Outside Director” shall mean a member of the Board of Directors who is not a common-law employee of the Company, a Parent or a Subsidiary. Service as an Outside Director shall be considered Service for all purposes of the Plan, except as provided in the second sentence of Section 4(a).

(u) “Parent” shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be a Parent commencing as of such date.

(v) “Participant” shall mean an individual or estate who holds an Award.

(w) “Plan” shall mean this 2003 Stock Incentive Plan of SYNNEX Corporation, as amended from time to time.

(x) “Purchase Price” shall mean the consideration for which one Share may be acquired under the Plan (other than upon exercise of an Option), as specified by the Committee.

(y) “Restricted Share” shall mean a Share awarded under the Plan.

(z) “Restricted Share Agreement “ shall mean the agreement between the Company and the recipient of a Restricted Share which contains the terms, conditions and restrictions pertaining to such Restricted Shares.

(aa) “SAR” shall mean a stock appreciation right granted under the Plan.

(bb) “SAR Agreement” shall mean the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR.

(cc) “Service” shall mean service as an Employee, Consultant or Outside Director.

(dd) “Share” shall mean one share of Stock, as adjusted in accordance with Section 11 (if applicable).

(ee) “Stock” shall mean the Common Stock of the Company.

 

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(ff) “Stock Option Agreement” shall mean the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to such Option.

(gg) “Stock Unit” shall mean a bookkeeping entry representing the Company’s obligation to deliver one Share (or distribute cash) on a future date in accordance with the terms, conditions and restrictions of a Stock Unit Agreement.

(hh) “Stock Unit Agreement” shall mean the agreement between the Company and the recipient of a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit.

(ii) “Subsidiary” shall mean any corporation, if the Company and/or one or more other Subsidiaries own not less than 50% of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

SECTION 3. ADMINISTRATION.

(a) Committee Composition . The Plan shall be administered by the Committee. The Committee shall consist of two or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy

(i) such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and

(ii) such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under Section 162(m)(4)(C) of the Code.

(b) Committee for Non-Officer Grants . The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not satisfy the requirements of Section 3(a), who may administer the Plan with respect to Employees who are not considered officers or directors of the Company under Section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and may determine all terms of such grants. Within the limitations of the preceding sentence, any reference in the Plan to the Committee shall include such committee or committees appointed pursuant to the preceding sentence. The Board of Directors may also authorize one or more officers of the Company to designate Employees, other than officers under Section 16 of the Exchange Act, to receive Awards and/or to determine the number of such Awards to be received by such persons; provided, however, that the Board of Directors shall specify the total number of Awards that such officers may so award.

(c) Committee Procedures . The Board of Directors shall designate one of the members of the Committee as chairman. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee.

 

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(d) Committee Responsibilities . Subject to the provisions of the Plan, the Committee shall have full authority and discretion to take the following actions:

(i) To interpret the Plan and to apply its provisions;

(ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan;

(iii) To authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan;

(iv) To determine when Awards are to be granted under the Plan;

(v) To select the Offerees and Optionees;

(vi) To determine the number of Shares to be made subject to each Award;

(vii) To prescribe the terms and conditions of each Award, including (without limitation) the Exercise Price and Purchas Price, and the vesting or duration of the Award (including accelerating the vesting of Awards, either at the time of the Award or thereafter, without the consent of the Participant), to determine whether an Option is to be classified as an ISO or as a Nonstatutory Option, and to specify the provisions of the agreement relating to such Award;

(viii) To amend any outstanding Award agreement, subject to applicable legal restrictions and to the consent of the Participant if the Participant’s rights or obligations would be adversely affected;

(ix) To prescribe the consideration for the grant of each Award or other right under the Plan and to determine the sufficiency of such consideration;

(x) To determine the disposition of each Award or other right under the Plan in the event of a Participant’s divorce or dissolution of marriage;

(xi) To determine whether Awards under the Plan will be granted in replacement of other grants under an incentive or other compensation plan of an acquired business;

(xii) To correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Award agreement; and

(xiii) To take any other actions deemed necessary or advisable for the administration of the Plan.

Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of Options or other rights under the Plan to persons subject to Section 16 of the Exchange Act. All decisions,

 

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interpretations and other actions of the Committee shall be final and binding on all Offerees, all Optionees, and all persons deriving their rights from an Offeree or Optionee. No member of the Committee shall be liable for any action that he has taken or has failed to take in good faith with respect to the Plan, any Option, or any right to acquire Shares under the Plan.

SECTION 4. ELIGIBILITY.

(a) General Rule . Only Employees shall be eligible for the grant of ISOs. Only Employees, Consultants and Outside Directors shall be eligible for the grant of Restricted Shares, Stock Units, Nonstatutory Options or SARs.

(b) Automatic Grants to Outside Directors.

(i) Each Outside Director who first joins the Board of Directors after the effective date of the Plan, and who was not previously an Employee, shall receive a Nonstatutory Option, subject to approval of the Plan by the Company’s stockholders, to purchase 25,000 Shares (subject to adjustment under Section 11) on the first business day after his or her election to the Board of Directors; provided, however, if the first business day after his or her election falls within a trading black-out period, then the grant date for options granted pursuant to this section shall be upon the expiration of the third trading day after the trading black-out period ends.

(ii) On the first business day following the conclusion of each regular annual meeting of the Company’s stockholders after such Outside Director’s appointment or election to the Board of Directors, commencing with the annual meeting occurring after the adoption of the Plan, each Outside Director who will continue serving as a member of the Board of Directors thereafter shall receive an Option to purchase 5,000 Shares, subject to adjustment under Section 11, provided such Outside Director has served on the Board of Directors for at least six months; provided, further, if the first business day following the conclusion of the regular annual meeting of the Company’s stockholders after such Outside Director’s appointment or election to the Board of Directors falls within a trading black-out period, then the grant date for options granted pursuant to this section shall be upon the expiration of the third trading day after the trading black-out period ends.

(iii) The Exercise Price of all Nonstatutory Options granted to an Outside Director under this Section 4(b) shall be equal to 100% of the Fair Market Value of a Share on the date of grant, payable in one of the forms described in Section 8(a), (b) or (d).

(iv) Twenty percent (20%) of the Shares subject to each Option granted under this Section 4(b) shall vest and become exercisable on the first anniversary of the date of grant. The balance of the Shares subject to each Option ( i.e . the remaining eighty percent (80%)) granted under this Section 4(b) shall vest and become exercisable monthly over a four-year period beginning on the day which is one month after the first anniversary of the date of grant, at a monthly rate of 1.666% of the total number of Shares subject to such Options.

 

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(v) Subject to Sections 4(b)(vi) and (vii), all Nonstatutory Options granted to an Outside Director under this Section 4(e) shall terminate on the day before the tenth anniversary of the date of grant of such Options.

(vi) If an Outside Director’s Service terminates for any reason, then his or her Options granted under this Section 4(b) shall expire on the earliest of the following occasions:

(A) The expiration date determined pursuant to Section 4(b)(v) above;

(B) The date 12 months after the termination of the Outside Director’s Service, if the termination occurs because of his or her death or Disability;

(C) The date of the Outside Director’s termination of Service, if the termination occurs by reason of his or her Misconduct; or

(D) The date three months after the termination of the Outside Director’s Service, if the termination occurs for any reason other than death, Disability or Misconduct.

The Outside Director may exercise all or part of his or her Options at any time before the expiration of such Options under the preceding sentence, but only to the extent that such Options had become vested before his or her Service terminated. The balance of such Options shall lapse when the Outside Director’s Service terminates.

(vii) In the event that the Outside Director dies after the termination of his or her Service but before the expiration of his or her Options granted under this Section 4(b), then his or her Options shall expire on the earlier of the following dates:

(A) The expiration date determined pursuant to Section 4(b)(v) above; or

(B) The date 12 months after his or her death.

(c) Ten-Percent Stockholders . An Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, a Parent or Subsidiary shall not be eligible for the grant of an ISO unless such grant satisfies the requirements of Section 422(c)(5) of the Code.

(d) Attribution Rules . For purposes of Section 4(c) above, in determining stock ownership, an Employee shall be deemed to own the stock owned, directly or indirectly, by or for such Employee’s brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries.

(e) Outstanding Stock . For purposes of Section 4(c) above, “outstanding stock” shall include all stock actually issued and outstanding immediately after the grant. “Outstanding stock” shall not include shares authorized for issuance under outstanding options held by the Employee or by any other person.

 

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SECTION 5. STOCK SUBJECT TO PLAN.

(a) Basic Limitation . Shares offered under the Plan shall be authorized but unissued Shares or treasury Shares. Subject to Section 5(b) below, the maximum aggregate number of Options, SARs and Restricted Shares awarded under the Plan shall not exceed the sum of (i) the number of Shares subject to outstanding options granted under the Company’s 1997 Stock Option/Stock Issuance Plan, Special Executive Stock Option/Stock Issuance Plan and 1993 Stock Option Plan (the “Predecessor Plans”), as of the effective date of the Plan, to the extent those options expire, terminate or are cancelled for any reason prior to exercise in full, plus (ii) 5,506,649 Shares; provided, however, that such sum shall not exceed 14,111,761 Shares. The limitations of this Section 5(a) shall be subject to adjustment pursuant to Section 11. All Share amounts set forth in the Plan have been adjusted to give effect to a 2 for 1 reverse stock split of the Stock which was effected on November 12, 2003. The number of Shares that are subject to Options or other rights outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan.

(b) Additional Shares . If Restricted Shares or Shares issued upon the exercise of Options are forfeited, then such Shares shall again become available for Awards under the Plan. If Stock Units, Options or SARs are forfeited or terminate for any other reason before being exercised or settled, as applicable, then the corresponding Shares shall again become available for Awards under the Plan. If Stock Units are settled, then only the number of Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 5(a) and the balance shall again become available for Awards under the Plan. If SARs are exercised, then only the number of Shares (if any) actually issued in settlement of such SARs shall reduce the number available in Section 5(a) and the balance shall again become available for Awards under the Plan.

SECTION 6. RESTRICTED SHARES

(a) Restricted Stock Agreement . Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical.

(b) Payment for Awards . Subject to the following sentence, Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, full-recourse promissory notes, past services and future services. To the extent that an Award consists of newly issued Restricted Shares, the Award recipient shall furnish consideration with a value not less than the par value of such Restricted Shares in the form of cash, cash equivalents, or past services rendered to the Company (or a Parent or Subsidiary), as the Committee may determine.

(c) Vesting . Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. A Restricted Stock Agreement may provide for accelerated vesting

 

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in the event of the Participant’s death, disability or retirement or other events. The Committee may determine, at the time of granting Restricted Shares of thereafter, that all or part of such Restricted Shares shall become vested in the event that a Change in Control occurs with respect to the Company.

(d) Voting and Dividend Rights . The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other stockholders. A Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid.

(e) Restrictions on Transfer of Shares . Restricted Shares shall be subject to such rights of repurchase, rights of first refusal or other restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Restricted Stock Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares.

SECTION 7. TERMS AND CONDITIONS OF OPTIONS.

(a) Stock Option Agreement . Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee’s other compensation.

(b) Number of Shares . Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 11. Options granted to an Optionee in a single calendar year of the Company shall not cover more than 1,500,000 Shares, except that Options granted to a new Employee or Consultant in the calendar year of the Company in which his or her Service first commences shall not cover more than 2,500,000 Shares (in each case subject to adjustment in accordance with Section 11).

(c) Exercise Price . Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the Fair Market Value of a Share on the date of grant, except as otherwise provided in Section 4(c), and the Exercise Price of an NSO shall not be less 85% of the Fair Market Value of a Share on the date of grant. Notwithstanding the foregoing, a Stock Option Agreement may specify that the exercise price of an NSO may vary in accordance with a predetermined formula. Subject to the foregoing in this Section 7(c), the Exercise Price under any Option shall be determined by the Committee at its sole discretion. The Exercise Price shall be payable in one of the forms described in Section 8.

(d) Withholding Taxes . As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such

 

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exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option.

(e) Exercisability and Term . Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant (five years for Employees described in Section 4(c)). A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability, or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s Service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. Subject to the foregoing in this Section 7(e), the Committee at its sole discretion shall determine when all or any installment of an Option is to become exercisable and when an Option is to expire.

(f) Exercise of Options Upon Termination of Service . Each Stock Option Agreement shall set forth the extent to which the Optionee shall have the right to exercise the Option following termination of the Optionee’s Service with the Company and its Subsidiaries, and the right to exercise the Option of any executors or administrators of the Optionee’s estate or any person who has acquired such Option(s) directly from the Optionee by bequest or inheritance. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.

(g) Effect of Change in Control . The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become exercisable as to all or part of the Shares subject to such Option in the event that a Change in Control occurs with respect to the Company.

(h) Leaves of Absence . An Employee’s Service shall cease when such Employee ceases to be actively employed by, or a Consultant to, the Company (or any subsidiary) as determined in the sole discretion of the Board of Directors. For purposes of Options, Service does not terminate when an Employee goes on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. However, for purposes of determining whether an Option is entitled to ISO status, an Employee’s Service will be treated as terminating 90 days after such Employee went on leave, unless such Employee’s right to return to active work is guaranteed by law or by a contract. Service terminates in any event when the approved leave ends, unless such Employee immediately returns to active work. The Company determines which leaves count toward Service, and when Service terminates for all purposes under the Plan.

(i) No Rights as a Stockholder . An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder with respect to any Shares covered by his Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section 11.

 

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(j) Modification, Extension and Renewal of Options . Within the limitations of the Plan, the Committee may modify, extend or renew outstanding options or may accept the cancellation of outstanding options (to the extent not previously exercised), whether or not granted hereunder, in return for the grant of new Options for the same or a different number of Shares and at the same or a different exercise price, or in return for the grant of the same or a different number of Shares. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, adversely affect his or her rights or obligations under such Option.

(k) Restrictions on Transfer of Shares . Any Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares.

(l) Buyout Provisions . The Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish.

SECTION 8. PAYMENT FOR SHARES.

(a) General Rule . The entire Exercise Price or Purchase Price of Shares issued under the Plan shall be payable in lawful money of the United States of America at the time when such Shares are purchased, except as provided in Section 8(b) through Section 8(g) below.

(b) Surrender of Stock . To the extent that a Stock Option Agreement so provides, payment may be made all or in part by surrendering, or attesting to the ownership of, Shares which have already been owned by the Optionee or his representative. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes.

(c) Services Rendered . At the discretion of the Committee, Shares may be awarded under the Plan in consideration of services rendered to the Company or a Subsidiary prior to the award. If Shares are awarded without the payment of a Purchase Price in cash, the Committee shall make a determination (at the time of the award) of the value of the services rendered by the Offeree and the sufficiency of the consideration to meet the requirements of Section 6(b).

(d) Cashless Exercise. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price.

(e) Exercise/Pledge . To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker or lender to pledge Shares, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of the aggregate Exercise Price.

 

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(f) Promissory Note. To the extent that a Stock Option Agreement or Restricted Stock Agreement so provides, payment may be made all or in part by delivering (on a form prescribed by the Company) a full-recourse promissory note. However, the par value of the Common Shares being purchased under the Plan, if newly issued, shall be paid in cash or cash equivalents.

(g) Other Forms of Payment. To the extent that a Stock Option Agreement or Restricted Stock Agreement so provides, payment may be made in any other form that is consistent with applicable laws, regulations and rules.

(h) Limitations under Applicable Law. Notwithstanding anything herein or in a Stock Option Agreement or Restricted Stock Agreement to the contrary, payment may not be made in any form that is unlawful, as determined by the Committee in its sole discretion.

SECTION 9. STOCK APPRECIATION RIGHTS.

(a) SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee’s other compensation.

(b) Number of Shares. Each SAR Agreement shall specify the number of Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Section 11. SARs granted to any Optionee in a single calendar year shall in no event pertain to more than 1,500,000 Shares, except that SARs granted to a new Employee or Consultant in the calendar year of the Company in which his or her Service first commences shall not pertain to more than 2,500,000 Shares. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Section 11.

(c) Exercise Price. Each SAR Agreement shall specify the Exercise Price. A SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding.

(d) Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. A SAR Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s service. SARs may be awarded in combination with Options, and such an Award may provide that the SARs will not be exercisable unless the related Options are forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. A SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control.

 

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(e) Effect of Change in Control. The Committee may determine, at the time of granting a SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company.

(f) Exercise of SARs. Upon exercise of a SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Shares, (b) cash or (c) a combination of Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Shares subject to the SARs exceeds the Exercise Price.

(g) Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of a SAR shall, without the consent of the holder, may alter or impair his or her rights or obligations under such SAR.

SECTION 10. STOCK UNITS.

(a) Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Company. Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient’s other compensation.

(b) Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients.

(c) Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. The Committee may determine, at the time of granting Stock Units or thereafter, that all or part of such Stock Units shall become vested in the event that a Change in Control occurs with respect to the Company.

(d) Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions (including without limitation, any forfeiture conditions) as the Stock Units to which they attach.

 

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(e) Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Section 11.

(f) Death of Recipient. Any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient’s death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s estate.

(g) Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement.

SECTION 11. ADJUSTMENT OF SHARES.

(a) Adjustments. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of:

(i) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Section 5;

(ii) The limitations set forth in Section 5(a), Section 7(b) and Section 9(b);

(iii) The number of NSOs to be granted to Outside Directors under Section 4(b);

(iv) The number of Shares covered by each outstanding Option and SAR;

(v) The Exercise Price under each outstanding Option and SAR; or

(vi) The number of Stock Units included in any prior Award which has not yet been settled.

 

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Except as provided in this Section 11, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class.

(b) Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company.

(c) Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement shall provide for:

(i) The continuation of the outstanding Awards by the Company, if the Company is a surviving corporation;

(ii) The assumption of the outstanding Awards by the surviving corporation or its parent or subsidiary;

(iii) The substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding Awards;

(iv) Full exercisability or vesting and accelerated expiration of the outstanding Awards; or

(v) Settlement of the full value of the outstanding Awards in cash or cash equivalents followed by cancellation of such Awards.

(d) Reservation of Rights. Except as provided in this Section 11, an Optionee or Offeree shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

SECTION 12. LEGAL AND REGULATORY REQUIREMENTS.

Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on which the Company’s securities may then be listed, and the Company has obtained the approval or favorable ruling from any governmental agency which the Company determines is necessary or advisable.

 

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SECTION 13. WITHHOLDING TAXES.

(a) General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied.

(b) Share Withholding. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Shares that he or she previously acquired. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. In no event may a Participant have Shares withheld that would otherwise be issued to him or her in excess of the number necessary to satisfy the legally required minimum tax withholding.

SECTION 14. LIMITATION ON PARACHUTE PAYMENTS.

(a) Scope of Limitation. . This Section 14 shall apply to an Award only if the independent auditors most recently selected by the Board (the “Auditors”) determine that the after-tax value of such Award to the Optionee or Offeree, taking into account the effect of all federal, state and local income taxes, employment taxes and excise taxes applicable to the Optionee or Offeree (including the excise tax under section 4999 of the Code), will be greater after the application of this Section 14 than it was before application of this Section 14.

(b) Basic Rule. In the event that the Auditors determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a “Payment”) would be nondeductible by the Company for federal income tax purposes because of the provisions concerning “excess parachute payments” in Section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section 14, the “Reduced Amount” shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code.

(c) Reduction of Payments. If the Auditors determine that any Payment would be nondeductible by the Company because of Section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Section 14, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Auditors under this Section 14 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or

 

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transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan.

(d) Related Corporations. For purposes of this Section 14, the term “Company” shall include affiliated corporations to the extent determined by the Auditors in accordance with Section 280G(d)(5) of the Code.

SECTION 15. NO EMPLOYMENT RIGHTS.

No provision of the Plan, nor any right or Option granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee. The Company and its Subsidiaries reserve the right to terminate any person’s Service at any time and for any reason, with or without notice.

SECTION 16. DURATION AND AMENDMENTS.

(a) Term of the Plan. The Plan, as set forth herein, shall terminate automatically on September 1, 2013, and may be terminated on any earlier date pursuant to Subsection (b) below.

(b) Right to Amend or Terminate the Plan. The Board of Directors may amend the Plan at any time and from time to time. Rights and obligations under any Award granted before amendment of the Plan shall not be materially impaired by such amendment, except with consent of the Participant. An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules.

(c) Effect of Amendment or Termination. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect Awards previously granted under the Plan.

SECTION 17. EXECUTION.

To record the amendment and restatement of the Plan by the Board of Directors on June 20, 2006, the Company has caused its authorized officer to execute the same.

 

SYNNEX Corporation
By  

/s/ Simon Leung

  Simon Leung
  General Counsel and Secretary

 

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EXHIBIT 31.1

CERTIFICATION

I, Robert Huang, Chief Executive Officer of Synnex Corporation, certify that:

1. I have reviewed this Form 10-Q of SYNNEX Corporation;

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 the 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: July 5, 2006
By:  

/s/ ROBERT T. HUANG

  Robert T. Huang
  Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

I, Dennis Polk, Chief Financial Officer of Synnex Corporation, certify that:

1. I have reviewed this Form 10-Q of SYNNEX Corporation;

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 the 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: July 5, 2006
By:  

/s/ DENNIS POLK

  Dennis Polk
  Chief Financial Officer

EXHIBIT 32.1

STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER UNDER 18 U.S.C. § 1350

We, Robert Huang, the chief executive officer of SYNNEX Corporation (the “Company”), and Dennis Polk, the chief financial officer of the Company, certify for the purposes of section 1350 of chapter 63 of Title 18 of the United States Code that, to the best of our knowledge,

(i) the Quarterly Report of the Company on Form 10-Q for the period ended May 31, 2006 (the “Report”), fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: July 5, 2006

 

/s/ ROBERT T. HUANG

Robert T. Huang

/s/ DENNIS POLK

Dennis Polk