**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

 

| **(MARK ONE)** |
|----------------|
|           |
| **ý**     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |

 

**Forthe quarterly period ended March 31, 2002**

 

**OR**

 

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |
|-------|-------------------------------------------------------------------------------------------------|

 

**Forthe transition periodfrom                  to                  **

 

**COMMISSIONFILE NUMBER: 001-15883**

 

**MANUFACTURERS’ SERVICES LIMITED**

(EXACT NAME OFREGISTRANT AS SPECIFIED IN ITS CHARTER)

 

| **DELAWARE**                                                                                                                     |   | **04-3258036**                        |
|----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (STATE OR OTHER  JURISDICTION OF   INCORPORATION OR ORGANIZATION)                                                                |   | (I.R.S. EMPLOYER  IDENTIFICATION NO.) |
|                                                                                                                             |   |                                  |
| **300  BAKER AVENUE, SUITE 106, CONCORD, MASSACHUSETTS 01742**                                                                   |
| **(978)  287-5630**                                                                                                              |
| (ADDRESS, INCLUDING ZIP  CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT’S  PRINCIPAL EXECUTIVE OFFICES) |
|                                                                                                                             |
| **NOT  APPLICABLE.**                                                                                                             |
| (Former Name, Former  Address and Former Fiscal Year, if Changed Since Last Report)                                              |

 

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Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  ý     No o

 

At May 13, 2002,there were 32,446,112 shares of Common Stock, $0.001 par value, outstanding.

 

 

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MANUFACTURERS’SERVICES LIMITED

INDEX

 
| PART I. FINANCIAL  INFORMATION |
|--------------------------------|
|                           |   |
| Item 1.                        | Financial Statements |
|                           | Consolidated Balance Sheets — March 31, 2002  (Unaudited) and December 31, 2001 |
|                           | Consolidated Statements of Operations (Unaudited) —  Three Months Ended March 31, 2002 and April 1, 2001 |
|                           | Consolidated Statements of Cash Flows (Unaudited) —  Three Months Ended March 31, 2002 and April 1, 2001 |
|                           | Notes to Consolidated Financial Statements |
| Item 2.                        | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |
| Item 3.                        | Quantitative and Qualitative Disclosure about Market  Risk. |
|                           |   |
| PART II - OTHER  INFORMATION   |
|                           |
| Item 2.                        | Changes in Securities and use of Proceeds |
| Item 6.                        | Exhibits and Reports on Form 8K |
|                           |   |
|                           | Signatures |

 

2

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PART I. FINANCIAL INFORMATION

 

Item 1.    FinancialStatements

 

MANUFACTURERS’SERVICES LIMITED

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS,EXCEPT SHARE DATA)

 
|                                                                                                                                                                                                                 |   | **March 31,**   |          | **December  31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|---------------|-------------------|--------|
|                                                                                                                                                                                                                 |   | **2002**        |          | **2001**          |   |
|                                                                                                                                                                                                                 |   | **(UNAUDITED)** |          |              |   |
| ASSETS                                                                                                                                                                                                               |   |            |          |              |   |
|                                                                                                                                                                                                                 |   |            |          |              |   |
| Current assets:                                                                                                                                                                                                      |   |            |          |              |   |
| Cash and cash  equivalents                                                                                                                                                                                           |   | $               |  66,362  |              | $      |  30,906 |   |
| Accounts  receivable, less allowance for doubtful accounts of $10,644 and $11,440 at  March 31, 2002 and December 31, 2001, respectively                                                                             |   | 117,682         |          | 172,822           |   |
| Inventories                                                                                                                                                                                                          |   | 105,297         |          | 126,328           |   |
| Prepaid expenses  and other current assets                                                                                                                                                                           |   | 26,711          |          | 27,860            |   |
| Total current  assets                                                                                                                                                                                                |   | 316,052         |          | 357,916           |   |
|                                                                                                                                                                                                                 |   |            |          |              |   |
| Property and  equipment, net                                                                                                                                                                                         |   | 44,953          |          | 52,681            |   |
| Goodwill,net                                                                                                                                                                                                         |   | 8,216           |          | 8,241             |   |
| Other  intangibles assets, net                                                                                                                                                                                       |   | 1,853           |          | 3,706             |   |
| Other assets                                                                                                                                                                                                         |   | 12,944          |          | 14,276            |   |
| Total assets                                                                                                                                                                                                         |   | $               |  384,018 |              | $      |  436,820 |   |
|                                                                                                                                                                                                                 |   |            |          |              |   |
| LIABILITIES,  CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY                                                                                                                                              |   |            |          |              |   |
|                                                                                                                                                                                                                 |   |            |          |              |   |
| Current  liabilities                                                                                                                                                                                                 |   |            |          |              |   |
| Current portion  of long-term debt and capital lease obligations                                                                                                                                                     |   | $               |  5,531   |              | $      |  6,477 |   |
| Accounts payable                                                                                                                                                                                                     |   | 111,144         |          | 150,216           |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                      |   | 35,949          |          | 49,224            |   |
| Total current  liabilities                                                                                                                                                                                           |   | 152,624         |          | 205,917           |   |
|                                                                                                                                                                                                                 |   |            |          |              |   |
| Long-term debt  and capital lease obligations                                                                                                                                                                        |   | 84,356          |          | 114,083           |   |
| Other  liabilities                                                                                                                                                                                                   |   | 6,132           |          | 3,114             |   |
| Total  liabilities                                                                                                                                                                                                   |   | 243,112         |          | 323,114           |   |
|                                                                                                                                                                                                                 |   |            |          |              |   |
| Commitments and  contingencies (Note 12)                                                                                                                                                                             |   |            |          |              |   |
|                                                                                                                                                                                                                 |   |            |          |              |   |
| Convertible  preferred stock, 830,000 shares authorized; 830,000 and 0 shares issued and  outstanding at March 31, 2002 and December 31, 2001, respectively;                                                         |   | 34,786          |          | —            |   |
| (Liquidation  value of $50 per share)                                                                                                                                                                                |   |            |          |              |   |
|                                                                                                                                                                                                                 |   |            |          |              |   |
| Stockholders’  equity                                                                                                                                                                                           |   |            |          |              |   |
| Preferred stock,  $0.001 par value, 3,000,000 shares authorized; no shares issued and  outstanding                                                                                                                   |   | —          |          | —            |   |
| Common stock,  $0.001 par value; 150,000,000 shares authorized; 33,992,678 shares issued and  32,441,458 outstanding at March 31, 2002 and 33,829,127 shares issued and  32,277,907 outstanding at December 31, 2001 |   | 34              |          | 34                |   |
| Additional paid  in capital                                                                                                                                                                                          |   | 264,905         |          | 264,359           |   |
| Accumulated  deficit                                                                                                                                                                                                 |   | (136,724        | )             | (129,536          | )      |
| Accumulated  other comprehensive loss                                                                                                                                                                                |   | (15,348         | )             | (14,404           | )      |
| Treasury stock,  at cost; 1,551,220 shares at March 31, 2002 and December 31, 2001                                                                                                                                   |   | (6,747          | )             | (6,747            | )      |
| Total  stockholders’ equity                                                                                                                                                                                     |   | 106,120         |          | 113,706           |   |
| Total  liabilities, convertible preferred stock and stockholders’ equity                                                                                                                                        |   | $               |  384,018 |              | $      |  436,820 |   |

 

See accompanyingnotes to the interim consolidated financial statements.

 

3

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MANUFACTURERS’SERVICES LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

(IN THOUSANDS,EXCEPT PER SHARE DATA)

 
|                                             |   | **Three  months ended** |    |
|--------------------------------------------------|--------|-------------------------|---------|
|                                             |   | **March 31, 2002**      |    | **April 1,  2001** |   |
| Net sales                                        |   | $                       | 215,366 |   | $ | 528,708 |   |
| Cost of goods  sold                              |   | 197,086                 |    | 494,572 |   |
| Gross profit                                     |   | 18,280                  |    | 34,136 |   |
|                                             |   |                    |    |   |   |
| Operating  expenses:                             |   |                    |    |   |   |
| Selling, general  and administrative             |   | 21,029                  |    | 24,570 |   |
| Amortization  expense                            |   | 1,853                   |    | 2,150 |   |
| Other operating  income                          |   | (800                    | )       | — |   |
|                                             |   |                    |    |   |   |
| Operating income  (loss)                         |   | (3,802                  | )       | 7,416 |   |
| Interest  expense, net                           |   | (2,994                  | )       | (5,724 | ) |
| Foreign exchange  gain (loss)                    |   | 17                      |    | (37 | ) |
|                                             |   |                    |    |   |   |
| Income (loss)  before provision for income taxes |   | (6,779                  | )       | 1,655 |   |
| Provision for  income taxes                      |   | 407                     |    | 573 |   |
| Net income  (loss)                               |   | $                       | (7,186  | ) | $ | 1,082 |   |
| Net income  (loss) applicable to common stock    |   | $                       | (7,329  | ) | $ | 1,082 |   |
|                                             |   |                    |    |   |   |
| Basic income  (loss) per share:                  |   |                    |    |   |   |
| Net income  (loss)                               |   | $                       | (0.23   | ) | $ | 0.03 |   |
| Weighted average  shares outstanding             |   | 32,379                  |    | 33,442 |   |
|                                             |   |                    |    |   |   |
| Diluted income  (loss) per share:                |   |                    |    |   |   |
| Net income  (loss)                               |   | $                       | (0.23   | ) | $ | 0.03 |   |
| Weighted average  shares outstanding             |   | 32,379                  |    | 33,673 |   |

 

See accompanyingnotes to the interim consolidated financial statements.

 

4

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MANUFACTURERS’SERVICES LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(IN THOUSANDS)

 
|                                                                                                 |   | **THREE  MONTHS ENDED** |          |
|------------------------------------------------------------------------------------------------------|--------|-------------------------|---------------|
|                                                                                                 |   | **March 31,   2002**    |          | **April 1,   2001** |
|                                                                                                 |   |                    |
| CASH FLOWS  RELATING TO OPERATING ACTIVITIES:                                                        |   |                    |          |   |   |
| Net income  (loss)                                                                                   |   | $                       |   (7,186 | ) | $ |   1,082 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                    |          |   |   |
| Depreciation and  amortization                                                                       |   | 6,740                   |          | 9,332 |   |
| Amortization of  capitalized finance fees                                                            |   | 913                     |          | 632 |   |
| Additions to  allowance for doubtful accounts                                                        |   | 154                     |          | 520 |   |
| Non cash charge  for equity awards                                                                   |   | 213                     |          | 185 |   |
| Foreign exchange  loss                                                                               |   | 58                      |          | 419 |   |
| Deferred taxes                                                                                       |   | 382                     |          | (132 | ) |
| Writedown and  loss on disposal of fixed assets                                                      |   | 3,884                   |          | — |   |
| Changes in  operating assets and liabilities:                                                        |   |                    |          |   |   |
| Accounts  receivable                                                                                 |   | 54,241                  |          | 36,432 |   |
| Inventories                                                                                          |   | 20,351                  |          | 43,555 |   |
| Prepaid expenses  and other assets                                                                   |   | 605                     |          | (15,620 | ) |
| Accounts payable                                                                                     |   | (38,118                 | )             | (58,038 | ) |
| Accrued expenses  and other liabilities                                                              |   | (13,198                 | )             | (8,655 | ) |
| Net cash  provided by operating activities                                                           |   | 29,039                  |          | 9,712 |   |
|                                                                                                 |   |                    |          |   |   |
| CASH FLOWS  RELATING TO INVESTING ACTIVITIES:                                                        |   |                    |          |   |   |
| Purchase of  intangible assets                                                                       |   | —                  |          | (1,393 | ) |
| Proceeds from  sale of fixed assets                                                                  |   | 4                       |          | 99 |   |
| Purchases of  property and equipment                                                                 |   | (677                    | )             | (8,149 | ) |
| Cost of internal  use software                                                                       |   | (273                    | )             | (530 | ) |
| Net cash used in  investing activities                                                               |   | (946                    | )             | (9,973 | ) |
|                                                                                                 |   |                    |          |   |   |
| CASH FLOWS  RELATING TO FINANCING ACTIVITIES:                                                        |   |                    |          |   |   |
| Proceeds from  issuance of convertable preferred stock and warrants net of issuance costs            |   | 37,832                  |          | — |   |
| Net proceeds  from (payments on) revolving line-of-credit                                            |   | (28,726                 | )             | 18,735 |   |
| Repayments of  long-term debt and capital lease obligations                                          |   | (1,992                  | )             | (1,932 | ) |
| Debt issuance  and amendment costs                                                                   |   | (237                    | )             | (34 | ) |
| Proceeds from  exercise of stock options                                                             |   | 99                      |          | 67 |   |
| Proceeds from  employee stock purchase plan                                                          |   | 586                     |          | 1,063 |   |
| Net cash  provided by financing activities                                                           |   | 7,562                   |          | 17,899 |   |
| Effect of  foreign exchange rates on cash                                                            |   | (199                    | )             | (1,127 | ) |
| Net increase in  cash                                                                                |   | 35,456                  |          | 16,511 |   |
| Cash and cash  equivalents at beginning of period                                                    |   | $                       | 30,906        |   | $ | 10,388 |   |
| Cash and cash  equivalents at end of period                                                          |   | $                       | 66,362        |   | $ | 26,899 |   |

 

See accompanyingnotes to the interim consolidated financial statements.

 

5

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MANUFACTURERS’ SERVICESLIMITED

NOTES TO INTERIMCONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(IN THOUSANDS, EXCEPT SHAREDATA)

 

1.  BASIS OF PRESENTATION

 

The accompanyingconsolidated financial statements of Manufacturers’ Services Limited (the“Company”) are unaudited, and certain information and footnote disclosurerelated thereto normally included in financial statements prepared inaccordance with generally accepted accounting principles has been omitted inaccordance with Rule 10-01 of Regulation S-X. Accordingly, these statementsshould be read in conjunction with the audited financial statements and notesthereto for the year ended December 31, 2001 included in the Company’s AnnualReport on Form 10-K. In the opinion of management, the accompanying unauditedconsolidated financial statements were prepared following the same policies andprocedures used in the preparation of the audited financial statements andreflect all adjustments (consisting of normal recurring adjustments) considerednecessary to present fairly the financial position and results of operations ofthe Company. The results of operations for the interim periods are notnecessarily indicative of the results for the entire fiscal year.  Certain amounts in prior year financialstatements have been reclassified to conform to the current year presentation.

 

In response to theeconomic downturn experienced in 2001 and the related weakening in demand fromcustomers, the Company evaluated its worldwide workforce and manufacturingcapacity and realigned its cost structure (Note 8) with the lower demandrequirements and its ongoing capital and liquidity requirements.  Borrowings under the Company's creditfacilities are dependent upon a borrowing base calculation derived fromaccounts receivable and inventory, the legal jurisdiction of the Company'sreceivables and inventory, and the Company's total debt-to-EBITDA ratio.  EBITDA is defined as earnings beforeinterest, taxes, depreciation, amortization and certain other charges andexpenses.  Borrowing under the Company'scurrent credit facility could be limited by the following factors:

 

**•**      revenue reductions from decreased customer demandor lost customers causing lower borrowing assets, particularly accountsreceivable,

 

**•     **ahigher percentage of business conducted in foreign jurisdictions,

 

•      diminishedcredit worthiness within the Company's customer base, or

 

•      EBITDAdeclining at a faster rate than the Company could reduce its borrowings,causing its debt-to-EBITDA ratio to be such that the Company's borrowing baseis reduced, or that the Company was unable to meet the financial covenants ofits bank credit facility, potentially resulting in the maturity of the Creditfacility prior to scheduled maturity dates.

 

                The Company is currently incompliance with all covenants under its credit facilities.  In the event it does not have adequatefunding from its existing credit facility, the Company would work with itssenior lenders to modify the existing credit facility or identify otherpotential sources of capital to obtain necessary debt or equity financing.  There is no assurance the Company would beable to modify its credit facilities with existing lenders or obtainalternative debt or equity financing to satisfy its funding needs.

** **

 

2.  RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS

 

In July 2001, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwilland Other Intangible Assets.  TheCompany has adopted SFAS 142 as of January 1, 2002. SFAS 142 requires goodwilland intangible assets with indefinite useful lives to no longer be amortized,but instead be tested for impairment at least annually.  With the adoption of SFAS 142, the Companyreassessed the useful lives and residual values of all acquired intangibleassets to make any necessary amortization period adjustments. Based on thatassessment, only goodwill was determined to have an indefinite useful life andno adjustments were made to the amortization period or residual values of otherintangible assets.

 

In October 2001, the FASB issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”).FAS 144 supercedes FASB Statement No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of”. FAS 144 appliesto all long-lived assets (including discontinued operations) and consequentlyamends Accounting Principles Board Opinion No. 30, “Reporting Results ofOperations – Reporting the Effects of Disposal of a Segment of aBusiness”. SFAS No. 144 is effective for financial statements issued for fiscalyears beginning after December 31, 2001, and has been adopted by the Company,as required, on January 1, 2002. SFAS No. 144 had no impact on the Company’sfinancial statements.

 

3.  INVENTORY

 

Inventories arecomprised of the following:

 
|                                   |   | **March 31,   2002** |    | **December  31,   2001** |   |
|----------------------------------------|--------|----------------------|---------|--------------------------|--------|
| Raw materials  and purchased inventory |   | $                    | 93,423  |                     | $      | 107,399 |   |
| Work-in-process                        |   | 10,034               |    | 14,543                   |   |
| Finished goods                         |   | 1,840                |    | 4,386                    |   |
|                                   |   | $                    | 105,297 |                     | $      | 126,328 |   |

 

6

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4.  BUSINESS SEGMENT INFORMATION

 

The Company’soperations comprise a single line of business, providing electronics design andmanufacturing services. Information about the Company’s operations in differentgeographic regions is presented in the table below:

 
|                            |   | **Three  Months Ended** |    |
|---------------------------------|--------|-------------------------|---------|
|                            |   | **March 31,   2002**    |    | **April 1,   2001** |   |
| Net sales                       |   |                    |    |   |   |
| United States —  Corporate |   | $                       | —  |   | $ | — |   |
| — Operations               |   | 149,480                 |    | 390,760 |   |
| Europe                          |   | 57,100                  |    | 108,805 |   |
| Asia                            |   | 8,786                   |    | 29,143 |   |
|                            |   | $                       | 215,366 |   | $ | 528,708 |   |
|                            |   |                    |    |   |   |
| Operating income  (loss)        |   |                    |    |   |   |
| United States —  Corporate |   | $                       | (2,963  | ) | $ | (8,033 | ) |
| — Operations               |   | 3,243                   |    | 16,764 |   |
| Europe                          |   | 903                     |    | 3,421 |   |
| Asia                            |   | (4,985                  | )       | (4,736 | ) |
|                            |   | $                       | (3,802  | ) | $ | 7,416 |   |

 
|                            |   | **March 31,   2002** |    | **December 31,   2001** |   |
|---------------------------------|--------|----------------------|---------|-------------------------|--------|
| Identifiable  Assets            |   |                 |    |                    |   |
| United States —  Corporate |   | $                    | 58,521  |                    | $      | 15,027 |   |
| — Operations               |   | 183,650              |    | 248,977                 |   |
| Europe                          |   | 111,822              |    | 134,308                 |   |
| Asia                            |   | 30,025               |    | 38,508                  |   |
|                            |   | $                    | 384,018 |                    | $      | 436,820 |   |

 

5.  CONVERTIBLE PREFERRED STOCK

 

In March 2002, the Company issued$41,500 of convertible preferred stock and warrants to purchase 1,612,281shares of common stock in a private placement to qualified accredited investors(the “Offering”). Proceeds of the Offering, net of costs of the Offering, were$37,832. The convertible preferred stock is recorded as temporary equity, andthe warrants are recorded as liabilities.

 

The convertible preferred stock accruesdividends quarterly at the rate of 5.25% per annum, payable quarterly in commonstock or cash, at the Company’s option. The convertible preferred stock isconvertible to common stock at any time by holders based on a conversion priceof $6.44 per share. The Company may require holders to convert to common stockprovided the price of its common stock has traded at 150% of the conversionprice, or $9.65 per share, for a specified period.  The preferred stock has a scheduled maturity of March 14,2007, unless converted earlier, and is redeemable for the Company’s commonstock or cash, at the Company’s option. If the Company chooses to pay dividends in common stock or to redeem theconvertible preferred stock with common stock, the number of shares of commonstock issued will be computed using 95% of the market value of the commonstock. The warrants are exercisable at any time through March 14, 2007 atthe exercise price of $7.02 per share. The Company has the right to require theexercise of the warrants after March 14, 2003 if the common stock tradesfor 175% higher than the exercise price of the warrants for a specified period.

 

A portion of the total considerationreceived was allocated to the warrants based on their fair value of $3,189 andthe residual proceeds were allocated to the preferred stock.  The resulting initial preferred stockbalance will be accreted to the liquidation value of $50 per convertiblepreferred share, subject to certain adjustments over the life of the preferredstock.  The discount on the preferredstock resulting from allocation of proceeds to the warrants will be accreted,using the interest method, through the scheduled maturity date and will berecorded as a charge against additional paid in capital.  In the event the Company elects to call thepreferred stock in advance of the maturity date, accretion of the remainingdiscount will occur.  All such amountsfor accretion will be deducted from the net income available to common stockholders,for purposes of earnings per share calculations.

 

7

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The Offering includedparticipation by certain affiliates of Credit Suisse First Boston Corporation(“CSFB”), the Company’s major shareholder, holding approximately 49% of theCompany's common stock. These affiliates purchased 300,000 shares of theconvertible preferred stock, which is convertible into 2,331,003 shares of ourcommon stock, and warrants to purchase 582,751 shares of common stock. Inconnection with this investment, the Company paid an affiliate of CSFB anadvisory fee of 1.446% on the total amount invested in the Offering (anaggregate of $600) in return for (i) CSFB’s services in helping tostructure and arrange the transaction, (ii) the agreement by the CSFBaffiliates not to sell or otherwise transfer any of the Company’s securitiesfor six months (other than as part of an underwritten offering the Companyinitiates), and (iii) the agreement by the CSFB affiliates to acceptpiggyback registration rights instead of having the common stock issuable uponthe conversion or exercise of its securities included in the shelf registrationstatement which was filed with the SEC to register the resale of the commonstock underlying the preferred stock and warrants sold to other investors inthe Offering.  The registration statementbecame effective on April 23, 2002, in which 5,937,461 shares were registered.

 

6.  EARNINGS PER SHARE

 

The followingtable illustrates the reconciliation of the numerator and denominator of basicand diluted income (loss) per share as required by SFAS 128:

 
|                                                                      |   | **Three  Months Ended** |   |
|---------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                      |   | **March 31,   2002**    |   | **April 1,   2001** |   |
| Numerator—basic  and diluted earnings per share:                     |   |                    |   |   |   |
| Income (loss)                                                             |   | $                       | (7,186 | ) | $ | 1,082 |   |
| Dividends on  convertible preferred stock                                 |   | (91                     | )      | — |   |
| Accretion of  convertible preferred stock                                 |   | (52                     | )      | — |   |
| Income (loss)  available to common stockholders                           |   | $                       | (7,329 | ) | $ | 1,082 |   |
|                                                                      |   |                    |   |   |   |
| Denominator:                                                              |   |                    |   |   |   |
| Basic income  (loss) per share—weighted average shares outstanding   |   | 32,379                  |   | 33,442 |   |
| Effect of  dilutive securities—stock options and warrants            |   | —                  |   | 232 |   |
|                                                                      |   |                    |   |   |   |
| Diluted income  (loss) per share—weighted average shares outstanding |   | 32,379                  |   | 33,674 |   |
|                                                                      |   |                    |   |   |   |
| Basic income  (loss) per share                                            |   | $                       | (0.23  | ) | $ | 0.03 |   |
| Diluted income  (loss) per share                                          |   | $                       | (0.23  | ) | $ | 0.03 |   |

 

For the threemonths ended March 31, 2002, 8,807 anti-dilutive options and warrants and 6,449shares of convertible preferred stock have been excluded from the calculationof EPS, as the Company had a net loss available to common stockholders.

For the threemonths ended April 1, 2001, 3,228 anti-dilutive options and warrants  have been excluded from the calculation ofEPS as the exercise price was greater than the estimated fair market price ofthe common stock and their inclusion would have been anti-dilutive.

 

8

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7.  COMPREHENSIVE INCOME (LOSS)

 

The followingtable illustrates the components of comprehensive income (loss) as required bySFAS 130:

 
|                                      |   | **Three  Months Ended** |   |
|-------------------------------------------|--------|-------------------------|--------|
|                                      |   | **March 31,   2002**    |   | **April 1,   2001** |   |
| Net income  (loss)                        |   | $                       | (7,186 | ) | $ | 1,082 |   |
| Other  comprehensive income (loss)        |   |                    |   |   |   |
| Foreign currency  translation adjustments |   | (943                    | )      | (2,947 | ) |
| Comprehensive(loss)                       |   | $                       | (8,129 | ) | $ | (1,865 | ) |

 

8.  RESTRUCTURING

 

Inthe first quarter of 2002, the Company approved a plan to restructure certainoperations, primarily related to closing its facility in China and a workforcereduction at its corporate headquarters. The total charge recorded for this plan was $5,457, which is comprisedof asset writedowns of $3,069, lease termination costs of $548 and severance of$1,840 related to the reduction of 371 manufacturing and 24 managerialemployees.  This plan is expected to besubstantially complete by the end of the fourth quarter of 2002.

 

Duringthe full year 2001, the Company implemented various restructuring plansthroughout its organization to align its cost structure with its reducedrevenue stream as a result of the severe economic downturn in the EMS industry.In total for all 2001, it incurred restructuring charges of $91,939 consistingof asset write-downs of $61,777, employee severance of $24,912 and leasetermination costs of $5,250.

 

The following table sets forth the activity in the restructuringreserves through March 31, 2002:

 
| Balance at December 31, 2001 |   | $      | 12,521 |   |
|------------------------------|--------|--------|--------|--------|
|                         |   |   |   |
| Restructuring provision      |   | 5,457  |   |
| Asset write-downs            |   | (3,069 | )      |
| Cash payments                |   | (6,659 | )      |
| Balance at March 31, 2002    |   | $      | 8,250  |   |

 

Reservesremaining at March 31, 2002 represent liabilities for severance and leasetermination payments and are expected to be paid by December 31, 2002.

 

9.  OTHER OPERATING INCOME

 

During the first quarterof 2002, the Company received a $1,100 fee related to costs incurred inpursuing an unsuccessful acquisition opportunity in the fourth quarter of2001.  This amount was netted against$300 of expenses incurred in the current quarter related to this acquisitionopportunity.

 

10.  GOODWILL AND OTHER INTANGIBLE ASSETS

 

Asdescribed in Note 2, the Company adopted SFAS 142 on January 1, 2002.  SFAS 142 requires goodwill and intangibleassets with indefinite useful lives to no longer be amortized, but instead betested for impairment at least annually. The statement requires the completion of a transitional impairment testwithin six months of adoption, with any impairment treated as a cumulativeeffect of a change in accounting principle. We anticipate completing our initial assessment of goodwill impairmentby June 30, 2002.  We have notdetermined whether there is any indication that the goodwill balance of $8,216(net of accumulated amortization of $5,519) at March 31, 2002, is impaired orestimated the amount of any potential impairment.  Should an indication of impairment exist, the Company willperform the second test under SFAS 142 to measure and record the amount ofimpairment, if any.

 

9

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The followingtable gives effect to the adoption of FAS 142 as if the provisions had beenadopted as of January 1, 2001.  Thecurrent quarter net income (loss) is presented for comparison purposes as theeffect of adoption is reflected in the Company’s actual results of operationsfor that period.

 
|                                                   |   | **March 31,   2002** |   | **April 1,   2001** |   |
|--------------------------------------------------------|--------|----------------------|--------|---------------------|--------|
| NET INCOME  (LOSS)                                     |   |                 |   |                |   |
|                                                   |   |                 |   |                |   |
| Net income  (loss) applicable to common stock          |   | $                    | (7,329 | )                   | $      | 1,082 |   |
| Add back:  goodwill amortization after tax             |   | —               |   | 244                 |   |
| Adjusted net  income (loss) applicable to common stock |   | $                    | (7,329 | )                   | $      | 1,326 |   |
|                                                   |   |                 |   |                |   |
| BASIC EARNINGS  PER SHARE                              |   |                 |   |                |   |
|                                                   |   |                 |   |                |   |
| Reported net  income (loss) per share                  |   | $                    | (0.23  | )                   | $      | 0.03 |   |
| Goodwill  amortization after tax                       |   | —               |   | 0.01                |   |
| Adjusted net  income (loss) per share                  |   | $                    | (0.23  | )                   | $      | 0.04 |   |
|                                                   |   |                 |   |                |   |
| DILUTED EARNINGS  PER SHARE                            |   |                 |   |                |   |
|                                                   |   |                 |   |                |   |
| Reported net  income (loss) per share                  |   | $                    | (0.23  | )                   | $      | 0.03 |   |
| Goodwill  amortization after tax                       |   | —               |   | 0.01                |   |
| Adjusted net  income (loss) per share                  |   | $                    | (0.23  | )                   | $      | 0.04 |   |

 

Changes in the net carrying amount of goodwill for thethree months ended March 31, 2002 were as follows:

 
| Balance at  December 31, 2001 |   | $   | 8,241 |   |
|-------------------------------|--------|-----|-------|--------|
| Foreign currency  translation |   | (25 | )     |
| Balance at March  31, 2002    |   | $   | 8,216 |   |

 

Other intangibleassets amounted to $1,853 (net of accumulated amortization of $5,096) and$3,706 (net of accumulated amortization of $3,243) at March 31, 2002 andDecember 31, 2001, respectively. Amortization expense of other intangibles was $1,853 and $1,896 for thethree months ended March 31, 2002 and April 1, 2001, respectively.  The other intangible assets at March 31,2002 relate to the Company’s asset acquisition from 3Com in September 2000,consisting mainly of customer relationships. These assets are being amortized on a straight-line basis over theremaining term of the Company’s supply agreement with 3Com, which expires onJune 30, 2002.

 

11.  DERIVATIVE INSTRUMENTS

 

The Company’sconvertible preferred stock, as described in Note 5, contains two derivativeinstruments as defined in SFAS No. 133, Accounting for Derivative Instrumentsand Certain Hedging Activities.  Theyare described as follows:

 

1.               Change in ControlDerivative - In the event of a change in control as defined, the preferredstockholder is entitled to receive in cash, the greater of the if convertedvalue of the preferred stock or the liquidation amount of the preferred stock(principal plus accrued but unpaid dividends).

 

2.               The warrants issuedwith the convertible preferred stock.

 

As of March 31,2002, the Company has valued the warrants at $3,189 and included them inliabilities and determined the value of the change in control derivatives tonot be material.

 

10

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12.  COMMITMENTS AND CONTINGENCIES

 

As of March 31, 2002, the Company had approximately$15.6 million of net current assets associated with a customer that isdisputing its obligation to pay for a portion of these assets.  Of these total assets, $8.7 million isoutstanding receivables (net of $10.7 million accounts payable due thecustomer) and $6.9 million is inventory purchased specifically for thecustomer.  The Company currentlymaintains a $10.9 million reserve related to these assets.  In January 2002, the Company signed anagreement with the customer to resolve the dispute through a process ofreconciliation and ultimately binding arbitration, as well as scheduledperiodic payments during this process and the prospect of shipments to thecustomer on a prepaid basis.  Thecustomer continues to make scheduled payments under the terms of the agreement,and the Company believes it will realize, at a minimum, an amount equal to theamount of unreserved net current assets at March 31, 2002.  The Company is currently deferring revenuerecognition on all new shipments to the customer until receipt of payment.

 

ITEM 2.     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

We are a leading global provider of advancedelectronics manufacturing and supply chain services to original equipmentmanufacturers (OEMs). Our customers include leading OEMs who have chosenoutsourcing as a core manufacturing strategy. We have developed relationshipswith OEMs in a diverse range of industries, including computer systems andperipherals, wired and wireless communications, networking and storageequipment, consumer electronics, industrial equipment, medical devices andcommercial avionics. By efficiently and aggressively managing our business,costs and asset base, we are able to offer our customers an outsourcingsolution that represents a lower total cost of ownership than that typicallyprovided by their internal operations. We seek to differentiate ourselves byproviding advanced manufacturing methodologies and capabilities and exceptionalcustomer focus and by integrating our services into our customers' operations.

 

We provide integrated supply chain solutions thataddress all stages of our customer's product life cycle, including engineeringand design, new product introduction, global supply chain management, printedcircuit board assembly, product assembly and system integration, testing,logistics and distribution, and after-market services. We believe thiscomprehensive range of services promotes our growth by attracting new customersand capturing additional outsourcing opportunities within our existing customerbase.

 

We have established a global network consisting of 15manufacturing and logistics facilities in the world's major electronicsmarkets—North America, Europe and Asia—to serve the increasing outsourcingneeds of both multinational and regional OEMs. Our manufacturing facilities arestrategically located near our customers and their end-markets, which benefitsour customers by reducing the time required to get their products to market andby increasing their flexibility to respond quickly to changing marketconditions. We believe that the combination of our services and our globalmanufacturing network has enabled us to become an integral part of ourcustomers' product development and manufacturing strategies.

 

Sinceour founding in 1994, we have experienced substantial growth driven primarily byacquisitions of existing OEM manufacturing facilities and by the increasingnumber of OEMs who are outsourcing their manufacturing requirements. Over thenext several years we intend to continue to actively pursue strategicacquisitions and to benefit from this increasing trend by OEMs to outsourcetheir manufacturing and supply chain requirements.

 

We work closely with our customers to anticipate andforecast their future volume of orders and delivery dates. We derive most ofour net sales under purchase orders from our customers. We recognize sales, netof product return and warranty costs, typically at the time of product shipmentor as services are rendered provided no post-delivery obligations remain andcollection is reasonably assured. Our cost of goods sold includes the cost ofelectronic components and materials, labor costs and manufacturing overhead.The procurement of raw materials and components requires us to commitsignificant working capital to our operations and to manage the purchasing, receiving,inspection and stocking of these items. Our typical customer contract containsprovisions which specify that we may recover from the customer inventory costsand material acquisition costs for raw material which becomes excess orobsolete due to customer reschedules, cancellations or product changes.

 

Our operating results are affected by the level ofcapacity utilization in our manufacturing facilities, indirect labor costs andselling, general and administrative expenses. Gross margins and operatingincome generally improve during periods of high-volume and high-capacityutilization in our manufacturing facilities and decline during periods oflow-volume and low-capacity utilization. However, certain of our customer contracts contain guaranteed minimumcommitments, requiring the customer to either purchase certain contractualminimum quantities or pay for amounts in deficit of the minimum purchasecommitment.  Such contracts, includingour contract with 3Com related to manufacturing services provided in Mt.Prospect, Illinois, help offset the negative impact of low-capacity utilizationon gross margins and operating income.

 

11

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As of March 31, 2002, we had approximately $15.6million of net current assets associated with a customer that is disputing itsobligation to pay for a portion of these assets.  Of these total assets, $8.7 million is outstanding receivables(net of $10.7 million accounts payable due the customer) and $6.9 million isinventory purchased specifically for the customer.  We currently maintain a $10.9 million reserve related to theseassets.  In January 2002, we signed anagreement with the customer to resolve the dispute through a process ofreconciliation and ultimately binding arbitration, as well as scheduledperiodic payments during this process and the prospect of shipments to thecustomer on a prepaid basis.  Thecustomer continues to make scheduled payments under the terms of the agreement,and we believe we will realize, at a minimum, an amount equal to the amount ofunreserved net current assets at March 31, 2002.  While we believe the customer currently has sufficientunencumbered assets to satisfy the full amounts we believe we are owed, thecustomer’s ability to pay, or the timing within which the customer will pay us,could be adversely impacted by certain restrictions on the disposition of itsintangible assets or a weakening in the customer’s overall financialperformance. We are currently deferring revenue recognition on all newshipments to the customer until receipt of payment.

 

Our business strategy includes the continued expansionof our global manufacturing network. Currently, approximately 78% of our netsales worldwide are denominated in US dollars, while our labor and utilitycosts in facilities outside of the United States are denominated in localcurrencies. Foreign currency gains and losses are the result of transactingbusiness in a currency that is different from the functional currency of ouroperating entity and the movements in those currencies between the time atransaction is recorded for financial reporting purposes and the time paymentis made or received. We currently use forward foreign exchange contracts on alimited basis to minimize our foreign currency risk but not for tradingpurposes. We expect to continue to utilize forward foreign exchange contractsonly to the extent that these contracts minimize exposure and reduce risk fromexchange rate fluctuations on specific underlying transactions that createforeign currency exchange rate risk for us. Any increase or decrease in our useof derivative financial instruments will likely be as a result of thesecontracts.

 

ACQUISITIONS

 

In January 2001,we acquired selected fixed assets and intangible assets from Oce, an existingcustomer and a leading Netherlands-based OEM, for $5.9 million in cash andassumed liabilities.  As part of thetransaction, we acquired a 130,000 square foot manufacturing facility inGuerande, France.  In connection withthis acquisition, we entered into a three-year supply agreement to manufacturecomplex printer systems for Oce.  Wealso retained the facility employees. The acquisition of the Guerande facility expanded our relationship with Oceand provided us with our operations in France.

 

RESTUCTURING

 

In the first quarter of 2002, we approved a plan to restructurecertain operations, primarily related to closing our facility in China and aworkforce reduction at our corporate headquarters.  The total charge recorded for this plan was $5.4 million, whichis comprised of asset writedowns of $3.1 million, lease termination costs of$0.5 million and severance of $1.8 million related to the reduction of 371manufacturing and 24 managerial employees. This plan is expected to be substantially complete by the end of thefourth quarter of 2002 and the expected annual savings from the implementationof this plan are estimated to be approximately $6.4 million.

 

Also in the quarter ended March 31, 2002, we incurred anadditional $3.5 million of losses related to the Salt Lake City facility,subsequent to the Company’s decision to close the facility in the fourthquarter of 2001.  Of this amount, $2.1million were charged to cost of sales and $1.4 million were selling, generaland administration expenses.

 

Duringthe quarter ended April 1, 2001, we implemented a plan to restructurecertain operations in Asia. The total restructuring charge recorded for thisplan was $2.8 million, which was comprised of lease termination costs of$1.8 million and severance of $1.0 million related to personnelreductions of approximately 333 managerial and manufacturing employees. Therestructuring plan was substantially complete at the end of the second quarterof 2001.

 

12

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Duringthe full year 2001, we implemented various restructuring plans throughout ourorganization to align our cost structure with the reduced revenue stream as aresult of the economic downturn in the EMS industry. In total for all 2001, weincurred restructuring charges of $91.9 million consisting of asset write-downsof $61.8 million, employee severance of $24.9 million and lease terminationcosts of $5.2 million.

 

The following table sets forth the activity in the restructuringreserves from December 31, 2001 to March 31, 2002 (in thousands):

 
| Balance at December 31, 2001 |   | $      | 12,521 |   |
|------------------------------|--------|--------|--------|--------|
|                         |   |   |   |
| Restructuring provision      |   | 5,457  |   |
| Asset write-downs            |   | (3,069 | )      |
| Cash payments                |   | (6,659 | )      |
| Balance at March 31, 2002    |   | $      | 8,250  |   |

 

Reservesremaining at March 31, 2002 represent liabilities for severance and leasetermination payments and are expected to be paid by December 31, 2002.

 

RESULTS OFOPERATIONS

 

The followingtable sets forth specified operating data, in dollars and as a percentage ofnet sales, for the periods indicated:

 
|                                             |   | **Three  Months Ended**    |    |
|--------------------------------------------------|--------|----------------------------|---------|
|                                             |   | **March 31,  2002**        |    | **April 1,  2001** |   |
|                                             |   | **(Dollars in thousands)** |    |
|                                             |   |                       |    |
| Net sales                                        |   | $                          | 215,366 |   | 100.0 | % | $ | 528,708 |   | 100.0 | % |
| Cost of goods  sold (b)                          |   | 197,086                    |    | 91.5 |   | 494,572 |   | 93.5 |   |
| Gross profit                                     |   | 18,280                     |    | 8.5 |   | 34,136 |   | 6.5 |   |
| Selling, general  and administrative (a) (b)     |   | 21,029                     |    | 9.8 |   | 24,570 |   | 4.7 |   |
| Amortization  expense                            |   | 1,853                      |    | 0.8 |   | 2,150 |   | 0.4 |   |
| Other operating  income                          |   | (800                       | )       | (.4 | ) | — |   | — |   |
| Operating income  (loss)                         |   | (3,802                     | )       | (1.7 | ) | 7,416 |   | 1.4 |   |
| Interest  expense, net                           |   | (2,994                     | )       | (1.4 | ) | (5,724 | ) | (1.1 | ) |
| Foreign exchange  gain (loss)                    |   | 17                         |    | (0.0 | ) | (37 | ) | (0.0 | ) |
| Income (loss)  before provision for income taxes |   | (6,779                     | )       | (3.1 | ) | 1,655 |   | 0.3 |   |
| Provision for  income taxes                      |   | 407                        |    | 0.2 |   | 573 |   | 0.1 |   |
| Net income  (loss)                               |   | (7,186                     | )       | (3.3 | )% | 1,082 |   | 0.2 | % |

 

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(a)               Includes chargesrelated to restructuring and asset write-downs of $5,457 and $2,791 for thethree months ended March 31, 2002 and April 1, 2001, respectively.  Additionally, includes $213 and $185 ofnon-cash charges related to stock-based compensation in the three months endedMarch 31, 2002 and April 1, 2001, respectively.

 

(b)     Includes $3,474 of losses in the threemonths ended March 31, 2002 associated with the Salt Lake City facility whichwas closed as part of the fourth quarter 2001 restructuring. These costsinclude $2,057 of costs of goods sold and $1,417 of selling, general andadministration.

 

13

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FISCAL QUARTERENDED MARCH 31, 2002 COMPARED TO FISCAL QUARTER ENDED APRIL 1, 2001

 

NET SALES

 

Net sales for thequarter ended March 31, 2002 decreased $313.3 million, or 59.3%, to $215.4million from $528.7 million for the quarter ended April 1, 2001. A largeportion of this decrease relates to the closing of the Company’s Salt Lake Cityfacility in the fourth quarter of 2001, which had revenues in the first quarterof 2001 of $158.8 million, of which approximately $28.3 million of quarterlysales from this facility were transferred to our other manufacturingsites.  Other decreases includeapproximately $95.0 million from one customer, $57.0 million of which resultedfrom the customer discontinuing a certain product line, $86.2 million from fivecustomers due to the overall decline in the economy, and $22.4 million from twocustomers whom we no longer do business with in 2002.  These decreases were offset by additional revenue of $14.6million from two new customers where volumes are starting to ramp up.

 

GROSS PROFIT

 

Gross profitincreased to 8.5% of net sales for the quarter ended March 31, 2002 from 6.5%of net sales for the quarter ended April 1, 2001. This increase resultedprimarily from the positive effects of our Mt. Prospect and Guerandefacilities, which operate under customer contracts with guaranteed minimumpurchase commitments. Our contract with 3Com related to our Mt. Prospectfacility provided the majority of this contribution. The mix of customerprograms also positively impacted gross profit in the first quarter of 2002versus 2001 due to a lower percentage of net sales from high-volume, low mixprograms, which typically earn lower gross margins.  In addition, we had a higher percentage of our revenue from ourvalue-add business, which generates higher margins.   These increases were partially offset by the decrease inutilization of our manufacturing capacity due to the revenue decline from thefirst quarter of 2001 to first quarter of 2002.

 

SELLING, GENERALAND ADMINISTRATIVE

 

Selling, generaland administrative expense for the quarter ended March 31, 2002 decreased to$21.0 million, or 9.8% of net sales, from $24.6 million, or 4.7% of net sales,for the quarter ended April 1, 2001. This decrease related mainly to thevarious restructuring activities the Company executed throughout 2001.  The closure of the Salt Lake City facilityin the fourth quarter of 2001 contributed $2.8 million to this overalldecrease, and labor costs were down $2.4 million as a result of the 2001restructurings. Additional decreases included consulting services of $1.1million and  travel & entertainmentand relocation expenses of $0.6 million. These decreases were partically offsetby a $3.1 million asset write-down charge in the announced first quarter of2002 related to the announced closing of the Company’s China facility.

 

AMORTIZATIONEXPENSE

 

Amortizationexpense decreased to $1.9 million in the quarter ended March 31, 2002 comparedto $2.1 million in the quarter ended April 1, 2001.  We adopted the Statement of Financial Accounting Standards(“SFAS”) No. 142, Goodwill and Other Intangible Assets on January 1, 2002.  In accordance with SFAS 142, we ceasedamortizing goodwill in 2002.  In thefirst quarter of 2001, we amortized $0.2 million of goodwill expense.  The amortization expense in the firstquarter of 2002 relates to our asset acquisition from 3Com in September 2000,which consist mainly of customer relationships.  These assets are being amortized over the remaining term of oursupply agreement with 3Com, which expires on June 30, 2002.

 

SFAS 142 requiresgoodwill and intangible assets with indefinite useful lives to no longer beamortized, but instead be tested for impairment at least annually.  The statement requires the completion of atransitional impairment test within six months of adoption, with any impairmenttreated as a cumulative effect of a change in accounting principle.  We anticipate completing our initialassessment of goodwill impairment by June 30, 2002.  We have not yet determined whether there is any indication thatthe net goodwill balance of $8.2 million at March 31, 2002, is impaired orestimated the amount of any potential impairment.

 

14

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OTHER OPERATINGINCOME

 

During the firstquarter of 2002, the Company received a $1.1 million fee related to costsincurred in pursuing an unsuccessful acquisition opportunity in the fourthquarter of 2001.  This amount was nettedagainst $0.3 million of expenses incurred in the current quarter related tothis acquisition opportunity.  TheCompany had incurred approximately $0.8 million of acquisition related expensesin the fourth quarter of 2001 that were included in S,G&A expenses.

 

INTEREST EXPENSE,NET

 

Net interestexpense decreased to $3.0 million for the quarter ended March 31, 2002 from$5.7 million for the quarter ended April 1, 2001, reflecting lower averageborrowings in addition to the impact of decreasing interest rates.

 

FOREIGN EXCHANGEGAINS/LOSSES

 

There were nosignificant foreign exchange gains or losses for either of the three monthsended March 31, 2002 or April 1, 2001.

 

PROVISION FORINCOME TAXES

 

Provision forincome taxes was $0.4 million for the quarter ended March 31, 2002 and $0.6million for the quarter ended April 1, 2001. Our tax provisions in bothquarters resulted from the mix of profits and losses experienced by us acrossthe jurisdictions within which we operate. For the quarter ended March 31,2002, losses in the United States and Asia provided us with no income taxbenefit because we do not believe it is more likely than not that we will beable to utilize these taxable losses in the future, while profits in Spain andFrance required us to record tax provisions.

 

LIQUIDITY ANDCAPITAL RESOURCES

 

At March 31, 2002,we had cash and cash equivalents of $66.4 million, total bank and other debt of$89.9 million and $9.5 million of unused borrowing capacity under our revolvingbank credit facility.  During thequarter ended March 31, 2002, our operations were funded by cash generated fromoperating activities.

 

Net cash providedby operating activities of $29.0 million for the three months ended March 31,2002 resulted from a decrease in operating assets of $75.2 million anddepreciation and amortization of $6.7 million, offset in part by a decrease inoperating liabilities of $51.3 million and a net loss of $7.2 million.  The decrease in operating assets included a$54.2 million reduction in accounts receivable, of which approximately $48million was a direct result of the reduction in revenue, and $20.3 million ininventory reductions, caused by the reduced volume through the manufacturingsites.  Other non-cash items includewrite-downs and loss on disposal of fixed assets of $3.9 million related mainlyto the announced closing of the China facility in the first quarter of2002.  Net cash provided by operatingactivities of $9.7 million for the three months ended April 1, 2001 resultedfrom net income of $1.1 million, a decrease in operating assets of $64.4million, and depreciation and amortization of $9.3 million, offset in part by adecrease in operating liabilities of $66.7 million.  The decrease in operating assets included a $47.0 millionreduction in inventory attributable to the sale of excess inventory under theprovisions of our customer contracts. Of the $47.0 million of excess inventory sales recorded during thequarter, $22.9 million remaining to be collected were recorded in prepaidexpenses and other current assets at April 1, 2001.

 

Net cash used in investingactivities for the quarter ended March 31, 2002 was $0.9 million, consisting of$0.7 million of capital expenditures and $0.2 million of internal usesoftware.  Net cash used in investingactivities for the quarter ended April 1, 2001 was $10.0 million, consisting of$8.1 million of net capital expenditures, $0.5 million of internal usesoftware, and $1.4 million for the acquisition of intangible assets related toour Guerande facility.  Capitalexpenditures include $3.9 million related to the purchase of our Guerandefacility and computer software for our Mt. Prospect facility.

 

Net cash providedby financing activities for the quarter ended March 31, 2002 was $7.6 million,consisting of net proceeds of $37.8 million from the issuance of convertiblepreferred stock and warrants, offset in part by net payments of $30.7 millionunder our bank credit facility.  Netcash provided by financing activities for the quarter ended April 1, 2001 was$17.9 million, consisting of net borrowings under our bank credit facility of$16.8 million and proceeds from the issuance of stock under our employee stockpurchase plan of $1.1 million.

 

 

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In March 2002, we issued$41.5 million of convertible preferred stock and warrants to purchase1,612,281 shares of common stock in a private placement to qualified accreditedinvestors (the “Offering”). Proceeds of the Offering, net of costs of theOffering, were $37.8 million. We will use the proceeds of the Offering to paydown a portion of our bank credit facility, to fund operating expenses andworking capital and potentially fund acquisitions. The convertible preferredstock accrues dividends quarterly at the rate of 5.25% per annum, payablequarterly in common stock or cash, at our option. The convertible preferred stockis convertible to common shares based on a conversion price of $6.44 per share.We may require holders to convert to common stock provided the price of ourcommon stock has traded at 150% of the conversion price for a specified period.  The preferred stock has a scheduled maturityof March 14, 2007, unless converted earlier, and is redeemable for ourcommon stock or cash, at our option. If we choose to pay dividends in commonstock or to redeem the convertible preferred stock with common stock, the sharesof common stock issued will be computed using 95% of the market value of thecommon stock. The warrants are exercisable at any time through March 14,2007. We have the right to require the exercise of the warrants afterMarch 14, 2003 if our common stock trades for 175% higher than theexercise price of the warrants for a specified period.

 

The Offering included participation bycertain affiliates of Credit Suisse First Boston Corporation (“CSFB”), ourmajor shareholder, holding approximately 49% of the Company's Common Stock.These affiliates purchased 300,000 shares of the convertible preferred stock,which is convertible into 2,331,003 shares of our common stock, and warrants topurchase 582,751 shares of common stock. In connection with this investment, wepaid an affiliate of CSFB an advisory fee of 1.446% on the total amountinvested in the Offering (an aggregate of $0.6 million) in return for(i) CSFB’s services in helping to structure and arrange the transaction,(ii) the agreement by the CSFB affiliates not to sell or otherwisetransfer any of our securities for six months (other than as part of anunderwritten offering we initiate), and (iii) the agreement by the CSFBaffiliates to accept piggyback registration rights instead of having the commonstock issuable upon the conversion or exercise of its securities included inthe shelf registration statement which was filed with the SEC to register theresale of the common stock underlying the preferred stock and warrants sold toother investors in the Offering.  Theregistration statement became effective on April 23, 2002, in which 5,937,461shares were registered.

 

Our amended bankcredit facility is composed of a $175.0 million revolving credit facility thatexpires September 2003 and a term loan that matures in September 2005. At March31, 2002, we had zero outstanding borrowings under our revolving creditfacility and $85.2 million outstanding borrowings under our term loan facility.The interest rate on our revolving credit facility is, at our option, either:

 

•  2.2% per annumplus the base rate, which is the higher of:

 

    —the rate as publicly announced from timeto time by Bank of America as its "reference rate", or

 

    —the federal funds effective rate plus0.50% per annum; or

 

•  the reserve-adjustedLondon interbank offered rate, or Adjusted LIBOR, plus 3.25% per annum.

 

The interest rateon our term loan faciltiy is, at our option, either:

 

•  the base rateplus 4.00% per annum; or

 

•  the sum ofAdjusted LIBOR plus 5.00% per annum.

 

The applicableinterest rates for our bank credit facility are subject to adjustment, plus orminus 0.50%, based on the ratio of our consolidated total debt to consolidatedEBITDA and our corporate credit rating. EBITDA is defined as earnings before interest, taxes, depreciation,amortization and certain other charges and expenses.

 

The amended bankcredit facility also includes provisions requiring us to receive approval fromour lenders for acquisitions having a cost greater than $2.5 million and foradditional term loan borrowings under the bank credit facility.

 

 

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Our principalsources of funding our operating expenses, capital expenditures and debtobligations are expected to be our current cash and cash equivalents (includingfunds generated from our convertible preferred stock offering), cash generatedfrom operations and borrowings under our credit facilities. The amount of cashgenerated from operations will be dependent upon such factors as the successfulexecution of our business plan and worldwide economic conditions. Borrowingsunder our credit facilities are dependent upon a borrowing base calculationderived from our accounts receivable and inventory. Availability fluctuatesaccording to the quantity and quality of our receivables and inventory, thelegal jurisdiction of our receivables and inventory, and our totaldebt-to-EBITDA ratio. Borrowings under our credit facilities could be limitedby the following factors:

 

•  revenuereductions from decreased customer demand or lost customers causing lowerborrowing assets, particularly accounts receivable,

 

•  a higher percentage of our business beingconducted in foreign jurisdictions,

 

•  diminishedcredit worthiness within our customer base, or

 

•  EBITDAdeclining at a faster rate than we could reduce our borrowings, causing ourdebt-to-EBITDA ratio to be such that our borrowing base is reduced, and if wewere unable to meet the financial covenants of our credit facilities it couldresult in their maturity prior to their scheduled maturity dates.

 

We are incompliance with all covenants under our existing credit facilities as of March31, 2002. In the event we do not have adequate funding from our existing creditfacility, we would work with our senior lenders to modify the existing creditfacilities or identify other sources of capital to obtain necessary debt orequity financing. There is no assurance we would be able to modify our currentcredit facility with existing lenders or obtain alternative debt or equityfinancing to satisfy our funding needs. While there can be no assurance we willhave sufficient funds to meet our cash requirements over the next twelvemonths,  we believe that funds generatedfrom operations, proceeds from the convertible preferred stock offering andborrowings under our credit facility will be adequate to meet our anticipatedfuture operating expenses, capital expenditures and debt obligations for atleast the next twelve months.

 

RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS

 

In July 2001, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwilland Other Intangible Assets.  We haveadopted SFAS 142 as of January 1, 2002. SFAS 142 requires goodwill andintangible assets with indefinite useful lives to no longer be amortized, butinstead be tested for impairment at least annually.  With the adoption of SFAS 142, we reassessed the useful lives andresidual values of all acquired intangible assets to make any necessaryamortization period adjustments. Based on that assessment, only goodwill wasdetermined to have an indefinite useful life and no adjustments were made tothe amortization period or residual values of other intangible assets.

 

In October 2001,the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“FAS 144”). FAS 144 supercedes FASB Statement No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed of”. FAS 144 applies to all long-lived assets (including discontinuedoperations) and consequently amends Accounting Principles Board Opinion No. 30,“Reporting Results of Operations – Reporting the Effects of Disposal of aSegment of a Business”. SFAS No. 144 is effective for financial statementsissued for fiscal years beginning after December 31, 2001, and has been adoptedby the Company, as required, on January 1, 2002. SFAS No. 144 had no impact onour financial statements.

 

FORWARD LOOKINGSTATEMENTS

 

This Form 10-Qincludes forward-looking statements. Some of the forward-looking statements canbe identified by the use of forward-looking words such as “believes,”“expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,”“plans,” “estimates” or “anticipates” or the negative of those words or othercomparable terminology. Forward-looking statements involve risks anduncertainties. A number of important factors could cause actual results todiffer materially from those in the forward-looking statements. These factorsinclude systems failures, technological changes, volatility of securitiesmarkets, government regulations and economic conditions and competition in theareas in which we conduct our operations. For a discussion of factors thatcould cause actual results to differ, please see the discussion under “RiskFactors” included below in this Form 10-Q. The forward-looking statements madein this Form 10-Q represent our views only as of the date of this Report, andwe disclaim any duty to update these statements, even if subsequent eventscause our views to change.

 

### RISK FACTORS

 

YOU SHOULDCAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENTDECISION. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEMIMMATERIAL MAY ALSO IMPAIR OUR BUSINESS. ANY OF THESE RISKS COULD HAVE AMATERIAL AND NEGATIVE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OFOPERATIONS.

 

BECAUSE A SIGNIFICANT PORTION OF OUR SALES CURRENTLY COMES FROM A SMALLNUMBER OF CUSTOMERS, ANY DECREASE IN SALES FROM THESE CUSTOMERS COULD HARM OUROPERATING RESULTS.

 

We depend on asmall number of customers for a large portion of our business. Our ten largestcustomers accounted for approximately 84% of net sales in the quarter endedMarch 31, 2002 and approximately 87% of net sales for fiscal 2001.  Changes in our customers’ orders have, inthe past, had a significant impact on our operating results. If a majorcustomer significantly reduces the amount of business it does with us, therewould be an adverse impact on our operating results.

 

We expect to continueto depend on sales to our major customers. Because it is not always possible toreplace lost business on a timely basis, it is likely that our operatingresults would be adversely affected if one or more of our major customers wereto cancel, delay or reduce a large amount of business with us. Our customeragreements typically permit the customer to terminate the agreement on three tosix month’s notice. Were a customer to terminate its agreement with us, it islikely that our operating results would be adversely affected.  Moreover, our operating results have been positively affected byseveral customer contracts containing guaranteed minimum commitments, includingour contract with 3Com at our Mt. Prospect, Illinois facility.  While those contracts generally have fixedterms and may not be terminated (absent a breach) prior to their statedexpiration, the favorable effects of the contracts are unlikely to bereplicated after these contracts expire or otherwise terminate.

 

In addition, wegenerate significant accounts receivable in connection with providing servicesto our major customers. If one or more of our customers were to becomeinsolvent or otherwise be unable to pay for our services or were to becomeunwilling to make payments in a timely fashion, our operating results andfinancial condition could be adversely affected.

 

WE HAVE MADE SEVERAL RECENT STRATEGIC ACQUISITIONS OF MANUFACTURINGFACILITIES AND BUSINESSES AND MAY MAKE MORE ACQUISITIONS IN THE FUTURE, AND THEFAILURE TO SUCCESSFULLY INTEGRATE ACQUIRED FACILITIES AND BUSINESSES MAYADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.

 

We have madeseveral significant acquisitions since the beginning of fiscal 1999, andselectively pursuing strategic acquisitions remains an important part of our overallbusiness strategy. However, any acquisitions we make could result in:

 

-  difficulty integrating our operations,technologies, financial controls and information systems, products and serviceswith those of the acquired facility;

 

-  difficulty in managing and operatinggeographically dispersed businesses,

 

17

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   including some located in foreigncountries;

 

-  diversion of our capital and ourmanagement’s attention away from other business issues;

 

-  an increase in our expenses and our workingcapital requirements;

 

-  potential loss of key employees andcustomers of facilities or businesses we acquire; and

 

-  financial risks, such as:

 

-  potential liabilities of the facilities andbusinesses we acquire;

 

-  our need to incur additional indebtedness;and

 

-  dilution if we issue additional equitysecurities.

 

We may not successfully integrate any operations,technologies, systems, products or services that we acquire, and we cannotassure you that any of our recent or future acquisitions will be successful. Ifany of our recent or future acquisitions are not successful, it is likely thatour financial performance will be adversely affected.

 

OUR GROWTH MAY BE LIMITED AND OUR COMPETITIVE POSITION MAY BE HARMED IFWE ARE UNABLE TO IDENTIFY, FINANCE AND COMPLETE FUTURE ACQUISITIONS.

 

We expect to selectively pursue strategic acquisitionsas part of our overall business strategy. Competition for acquiring attractivefacilities and businesses in our industry is substantial. In executing thispart of our business strategy, we may experience difficulty in identifyingsuitable acquisition candidates or in completing selected transactions. Inaddition, our existing bank credit facilities limit our ability to acquire theassets or businesses of other companies. If we are able to identify acquisitioncandidates, such acquisitions may be financed with substantial debt or withpotentially dilutive issuances of equity securities. Our ability tosuccessfully complete acquisitions in the future will depend upon severalfactors, including the continued availability of financing. We cannot assureyou that financing for acquisitions will be available on terms acceptable tous, if at all.

 

THE INCURRENCE OF INDEBTEDNESS COULD HARM OUR OPERATING RESULTS ANDFINANCIAL CONDITION. WE DEPEND ON OUR CREDIT FACILITIES TO FINANCE OUROPERATIONS AND THE MODIFICATION OR TERMINATION OF THESE FACILITIES COULD HARMOUR OPERATING RESULTS AND FINANCIAL CONDITION.

 

Our growth and acquisition strategy could require usto incur substantial amounts of indebtedness. As of March 31, 2002, our totaldebt was $89.9 million and our interest expense for the quarter then ended was$3.0 million. In addition, we may incur additional indebtedness in thefuture.  Our future level ofindebtedness could have adverse consequences for our business, including:

 

-  vulnerability to the effects of pooreconomic and industry conditions affecting our business;

 

-  dedication of a substantial portion of ourcash flow from operations to repayment of debt and interest expense, limitingthe availability of cash for working capital, capital expenditures oracquisitions which may be attractive to us;

 

-  reduced flexibility in planning for, orreacting to, changes in our business and industry, due to the debt repaymentobligations and restrictive covenants contained in our debt instruments; and

 

-  failure to comply with the financialcovenants under the agreements governing our indebtedness relating to matterssuch as interest coverage, leverage, consolidated EBITDA and net worthresulting in an event of default, which if not cured or waived, could causesubstantially all of our indebtedness to become immediately due and payable.

 

18

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We have financial instruments that are subject tointerest rate risk, principally debt obligations under our bank creditfacility. An increase in the base rates upon which our interest rates aredetermined could have an adverse effect on our operating results and financialcondition.

 

COMPETITION FROM EXISTING OR NEW COMPANIES IN THE EMS INDUSTRY COULDCAUSE US TO EXPERIENCE DOWNWARD PRESSURE ON PRICES, FEWER CUSTOMER ORDERS,REDUCED MARGINS, THE INABILITY TO TAKE ADVANTAGE OF NEW BUSINESS OPPORTUNITIESAND THE LOSS OF MARKET SHARE.

 

We operate in a highly competitive industry. We competeagainst many domestic and foreign companies, some of which have substantiallygreater manufacturing, financial, research and development and marketingresources than we do. Some of our competitors have broader geographic breadthand range of services than we do. In addition, some of our competitors may havemore developed relationships with our existing customers than we do. We alsoface competition from the manufacturing operations of our current and potentialcustomers, who continually evaluate the benefits of internal manufacturingversus outsourcing. As more OEMs dispose of their manufacturing assets andincrease the outsourcing of their products, we will face increasing competitivepressures to grow our business in order to maintain our competitive position.

 

LONG-TERM CONTRACTS ARE NOT TYPICAL IN OUR INDUSTRY, AND REDUCTIONS,CANCELLATIONS OR DELAYS IN CUSTOMER ORDERS WOULD ADVERSELY AFFECT OUR OPERATINGRESULTS.

 

As is typical in the EMS industry, we do not usuallyobtain long-term purchase orders or commitments from our customers. Instead, wework closely with our customers to develop non-binding forecasts of the futurevolume of orders.  Customers may canceltheir orders, change production quantities from forecasted volumes or delayproduction for a number of reasons beyond our control.  Significant or numerous cancellations,reductions or delays in orders by our customers would reduce our net sales. Inaddition, because many of our costs are fixed, a reduction in net sales couldhave a disproportionate adverse effect on our operating results. From time totime we make capital investments in anticipation of future businessopportunities. There can be no assurance that we will receive the anticipatedbusiness. If we are unable to obtain the anticipated business, our operatingresults and financial condition may be harmed.

 

WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE THE SOLE SOURCE FOR OURCOMPONENTS, AND OUR PRODUCTION WOULD BE SUBSTANTIALLY CURTAILED IF THESESUPPLIERS ARE NOT ABLE TO MEET OUR DEMANDS AND ALTERNATIVE SOURCES ARE NOTAVAILABLE.

 

We order raw materials and components to complete ourcustomers’ orders, and some of these raw materials and components are orderedfrom sole-source suppliers. Although we work with our customers and suppliersto minimize the impact of shortages in raw materials and components, wesometimes experience short-term adverse effects due to price fluctuations,extended lead times and delayed shipments. In the past, there have beenindustry-wide shortages of electronic components, particularly memory and logicdevices. If a significant shortage of raw materials or components were tooccur, we may have to delay shipments to customers and our operating resultswould be adversely affected. In some cases, supply shortages of particularcomponents will substantially curtail production of products using thesecomponents. While most of our significant customer contracts permit quarterlyor other periodic reviews of pricing based on decreases and increases in theprices of raw materials and components, we are not always able to pass on priceincreases to our customers. Accordingly, some raw material and component priceincreases could adversely affect our operating results. We also depend on asmall number of suppliers for many of the other raw materials and componentsthat we use in our business. If we were unable to continue to purchase theseraw materials and components from our suppliers, our operating results would beadversely affected. Because many of our costs are fixed, our margins depend onour volume of output at our facilities and a reduction in volume will adverselyaffect our margins.

 

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IF WE ARE LEFT WITH EXCESS INVENTORY, OUR OPERATING RESULTS WILL BEADVERSELY AFFECTED.

 

We typically purchase components and manufactureproducts in anticipation of customer orders based on customer forecasts. For avariety of reasons, such as decreased end-user demand for the products we aremanufacturing, our customers may not purchase all of the products we havemanufactured or for which we have purchased components. In such event, we wouldattempt to recoup our materials and manufacturing costs by means such asreturning components to our vendors, disposing of excess inventory throughother channels or requiring our OEM customers to purchase or otherwisecompensate us for such excess inventory. Some of our significant customeragreements do not give us the ability to require our OEM customers to do so. Tothe extent we are unsuccessful in recouping our material and manufacturingcosts, not only would our net sales be adversely affected, but our operatingresults would be disproportionately adversely affected. Moreover, carryingexcess inventory would reduce the working capital we have available to continueto operate and grow our business.

 

UNCERTAINTIES AND ADVERSE TRENDS AFFECTING THE ELECTRONICS INDUSTRY ORANY OF OUR MAJOR CUSTOMERS MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

 

Our business depends on the electronics industry,which is subject to rapid technological change, short product life cycles andpricing and margin pressure.  Inaddition, the electronics industry has historically been cyclical and subjectto significant downturns characterized by diminished product demand, rapiddeclines in average selling prices and production over-capacity. When thesefactors adversely affect our customers, we may suffer similar effects. Ourcustomers’ markets are also subject to economic cycles and are likely toexperience recessionary periods in the future. The economic conditionsaffecting the electronics industry, in general, or any of our major customers,in particular including the economic slowdown and heightened levels ofuncertainty related to the September 11 terrorist attacks in the United States,may adversely affect our operating results.

 

BECAUSE WE HAVE SIGNIFICANT OPERATIONS OVERSEAS, OUR OPERATING RESULTSCOULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER FACTORS EXISTINGIN FOREIGN COUNTRIES IN WHICH WE OPERATE.

 

We have substantial manufacturing operations in Europeand Asia. Our international operations are subject to inherent risks, which mayadversely affect us, including:

 

-  political and economic instability incountries where we have manufacturing facilities, particularly in Asia where weconduct a significant portion of our business;

 

-  fluctuations in the value of foreigncurrencies;

 

-  high levels of inflation, historically thecase in a number of countries in Asia where we do business;

 

-  changes in labor conditions and difficultiesin staffing and managing our foreign operations;

 

-  greater difficulty in collecting our accountsreceivable and longer payment cycles;

 

-  burdens and costs of our compliance with avariety of foreign laws;

 

-  increases in the duties and taxes we pay;

 

-  imposition of restrictions on currencyconversion or the transfer of funds; and

 

-  expropriation of private enterprises.

 

OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS ANDSEASONALITY AND IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS ORINVESTORS THE PRICE OF OUR SECURITIES MAY DECREASE.

 

Our annual and quarterly results may varysignificantly depending on various factors, many of which are beyond ourcontrol, and may not meet the expectations of

 

20

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securities analysts or investors. If this occurs, the price of ourcommon stock would likely decline. These factors include:

 

-  variations in the timing and volume ofcustomer orders relative to our manufacturing capacity;

 

-  introduction and market acceptance of ourcustomers’ new products;

 

-  changes in demand for our customers’ existingproducts;

 

-  the timing of our expenditures in anticipationof future orders;

 

-  effectiveness in managing our manufacturingprocesses;

 

-  changes in competitive and economic conditionsgenerally or in our customers’ markets;

 

-  the timing of, and the price we pay for,acquisitions and related integration costs;

 

-  changes in the cost or availability ofcomponents or skilled labor; and

 

-  foreign currency exposure.

 

As is the case with many technology companies, wetypically ship a significant portion of our products in the last few weeks of aquarter. As a result, any delay in anticipated sales is likely to result in thedeferral of the associated revenue beyond the end of a particular quarter,which would have a significant effect on our operating results for thatquarter. In addition, most of our operating expenses do not vary directly withnet sales and are difficult to adjust in the short term. As a result, if netsales for a particular quarter were below our expectations, we could notproportionately reduce operating expenses for that quarter, and, therefore,that revenue shortfall would have a disproportionate adverse effect on ouroperating results for that quarter.

 

LOSS OF ANY OF OUR KEY PERSONNEL COULD HURT OUR BUSINESS BECAUSE OFTHEIR EXPERIENCE IN THE EMS INDUSTRY AND THEIR TECHNOLOGICAL EXPERTISE.

 

We operate in the highly competitive EMS industry anddepend on the services of our key senior executives and our technologicalexperts. The loss of the services of one or several of our key employees or aninability to attract, train and retain qualified and skilled employees,specifically engineering, operations and sales personnel, could result in theloss of customers or otherwise inhibit our ability to operate and grow ourbusiness successfully. In addition, our ability to successfully integrateacquired facilities or businesses depends, in part, on our ability to retainand motivate key management and employees hired by us in connection with theacquisition.

 

IF WE ARE UNABLE TO MAINTAIN OUR TECHNOLOGICAL EXPERTISE IN DESIGN ANDMANUFACTURING PROCESSES WE WILL NOT BE ABLE TO SUCCESSFULLY COMPETE.

 

We believe that our future success will depend uponour ability to develop and provide design and manufacturing services that meetthe changing needs of our customers. This requires that we successfullyanticipate and respond to technological changes in design and manufacturingprocesses in a cost-effective and timely manner. As a result, we continuallyevaluate the advantages and feasibility of new product design and manufacturingprocesses. We cannot, however, assure you that our process development effortswill be successful.

 

WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS THAT EXPOSE US TOPOTENTIAL FINANCIAL LIABILITY.

 

Our operations are regulated under a number offederal, state and foreign environmental and safety laws and regulations thatgovern, among other things, the discharge of hazardous materials into the airand water as well as the handling, storage and disposal of these materials.These laws and regulations include the Clean Air Act, the Clean Water Act, theResource, Conservation and Recovery Act, and

 

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the Comprehensive Environmental Response, Compensation and LiabilityAct, as well as analogous state and foreign laws. Compliance with theseenvironmental laws is a major consideration for us because we use hazardousmaterials in our manufacturing process. In addition, because we are a generatorof hazardous wastes, we, along with any other person who arranges for thedisposal of our wastes, may be subject to financial exposure for costsassociated with an investigation and any remediation of sites at which we havearranged for the disposal of hazardous wastes if these sites become contaminated,even if we fully comply with applicable environmental laws. In the event of aviolation of environmental laws, we could be held liable for damages and forthe costs of remedial actions and could also be subject to revocation of oureffluent discharge permits. Any revocation could require us to cease or limitproduction at one or more of our facilities, thereby negatively impacting ourrevenues and results of operations. Environmental laws could also become morestringent over time, imposing greater compliance costs and increasing risks andpenalties associated with any violation, which also could negatively impact ouroperating results.

 

OUR CONTROLLING STOCKHOLDERS AND SOME OF OUR DIRECTORS MAY HAVEINTERESTS THAT DIFFER FROM YOURS.

 

Credit Suisse First Boston, through certain of itsaffiliates, owns approximately 49% of our outstanding common stock and, as aresult, has significant control over our business, policies and affairs,including, effectively, the power to appoint new management, prevent or cause achange of control and approve any action requiring the approval of the holdersof our common stock, such as adopting amendments to our certificate ofincorporation and approving mergers or sales of all or substantially all of ourassets. Circumstances may occur in which the interests of these stockholderscould be in conflict with your interests.

 

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY, DETEROR PREVENT SOMEONE FROM ACQUIRING US, WHICH COULD DECREASE THE VALUE OF OURCOMMON STOCK.

 

Provisions in our charter and bylaws may have theeffect of delaying, deterring or preventing a change of control or changes inour management that investors might consider favorable unless approved by ourstockholders and directors affiliated with Credit Suisse First Boston. Thoseprovisions serve to limit the circumstances in which a premium may be paid forour common stock in proposed transactions or where a proxy contest for controlof our board may be initiated. If a change of control or change in managementis delayed, deterred or prevented, the market price of our common stock couldsuffer.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET RISKS

 

There have been no material changes in our market riskduring the quarter ended March 31, 2002. Market risk information is contained under the caption “Quantitative andQualitative Disclosure Relating to Market Risks” in our Annual Report on Form10-K for the fiscal year ended December 31, 2001.

 

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**EXHIBIT INDEX**

** **

** **

PART II. OTHER INFORMATION

 

ITEM 2. Changes in Securities and Use of Proceeds

 

In March, 2002 the Company issued $41,500,000 of 5.25% Series AConvertible Preferred Stock and warrants to purchase 1,162,281 shares of commonstock to qualified accredited investors. Each of the purchasers is an "accredited investor" as thatterm is defined in Rule 501(a) of Regulation D under the Securities Act, andthe securities were sold in reliance on the registration exemption contained inRegulation D.  The other informationrequired by Item 701 of Regulation S-K is incorporated by reference to theCurrent Report on Form 8-K filed by the Company on March 18, 2002 and in theExhibits included therein.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a)           Exhibits

 

|                    |   |                                                                                                                                                                                                  |
|-------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **EXHIBIT**

**NUMBER** |   | **DESCRIPTION**                                                                                                                                                                                       |
|                    |   |                                                                                                                                                                                                  |
| 2.1(1)                  |   | Securities  Purchase Agreement dated as of January 20, 1995 by and among MSL and the  parties listed therein.                                                                                    |
| 2.2(1)                  |   | Warrant  Agreement dated as of August 31, 1995 by and among MSL, Bank of America  National Trust and Savings Association and the parties listed therein.                                         |
| 2.3(1)                  |   | Preferred  Stock and Warrant Subscription Agreement dated as of November 26, 1999  by and among MSL and the parties listed therein.                                                              |
| 2.4(1)                  |   | Escrow  Agreement dated as of November 26, 1999 by and among MSL and the parties  listed therein.                                                                                                |
| 2.5(1)                  |   | Asset  Purchase Agreement dated as of November 19, 1999 among 3Com Corporation,  Manufacturers' Services Limited and Manufacturers' Services Salt Lake City  Operations, Inc.                    |
| 2.6(2)                  |   | Asset  Purchase Agreement dated as of September 26, 2000 among 3Com  Corporation, Manufacturers' Services Limited and Manufacturers' Services Salt  Lake City Operations, Inc.                   |
| 3.1(1)                  |   | Restated  Certificate of Incorporation of MSL.                                                                                                                                                        |
| 3.2(1)                  |   | Amended  and Restated By–Laws of MSL.                                                                                                                                                            |
| 3.4(5)                  |   | Amended  and Restated Articles of Incorporation of MSL.                                                                                                                                               |
| 3.3(1)                  |   | Form  of certificate representing shares of common stock, $.001 par value per  share.                                                                                                                 |
| 4.1(1)                  |   | Stockholders  Agreement dated as of January 20, 1995 by and among MSL and the  stockholders named therein.                                                                                       |
| 4.2(1)                  |   | Stockholders  Agreement Amendment dated November 26, 1999 by and among MSL and the  stockholders named therein.                                                                                  |
| 4.3(1)                  |   | Credit  Agreement dated August 21, 1998 among MSL, MSL Overseas Finance B.V. and  the lenders named therein.                                                                                     |
| 4.4(1)                  |   | First  Amendment to Credit Agreement and Limited Waiver dated as of  February 26, 1999 by and among MSL, MSL Overseas Finance B.V. and the  lenders named in the Credit Agreement.               |
| 4.5(1)                  |   | Second  Amendment to Credit Agreement and Consent dated as of November 23, 1999  by and among MSL, MSL Overseas Finance B.V. and the lenders named in the  Credit Agreement.                     |
| 4.6(4)                  |   | First  Amended and Restated Credit Agreement dated as of September 29, 2000 by  and between Manufacturers' Services Limited and the lenders named in the  Credit Agreement.                      |
| 4.7(4)                  |   | First  Amendment Agreement and Consent dated as of September 29, 2000 by and  between Manufacturers' Services Limited and the lenders named therein.                                             |
| 4.8(3)                  |   | First  Amendment to First Amended and Restated Credit Agreement dated as of  October 25, 2000 by and between Manufacturers' Services Limited and the  lenders named therein.                     |
| 4.9(5)                  |   | Second  Amendment to First Amended and Restated Credit Agreement dated as of  March 2, 2001 by and between Manufacturers' Services Limited and the  lenders named therein.                       |
| 4.10(7)                 |   | Third  Amendment to First Amended and Restated Credit Agreement dated as of  October 18, 2001 by and between Manufacturers' Services Limited and the  lenders named therein.                     |
| 4.11(9)                 |   | Certificate  of Designations of 5.25% Series A Convertible Preferred Stock of  Manufacturers’ Services, Limited.                                                                                 |
| 10.1(1)                 |   | Employment  Agreement dated as of January 20, 1995 by and between MSL and Kevin C.  Melia.                                                                                                       |
| 10.2(1)                 |   | Employment  Letter dated as of June 20, 1997 by and between MSL and Robert E.  Donahue.                                                                                                          |
| 10.3(1)                 |   | Employment  Letter dated as of September 27, 1995 by and between MSL and Rodolfo  Archbold.                                                                                                      |
| 10.4(1)                 |   | Employment  Letter dated as of January 4, 1996 by and between MSL and Dale R.  Johnson.                                                                                                          |
| 10.5(1)                 |   | Severance  Letter dated June 25, 1996 by and between MSL and Dale R. Johnson.                                                                                                                    |
| 10.6(1)                 |   | Employment  Letter dated as of January 23, 1998 by and between MSL and James N.  Poor.                                                                                                           |
| 10.7(1)                 |   | Second  Amended and Restated Non–Qualified Option Plan.                                                                                                                                          |
| 10.8(1)                 |   | Form  of 2000 Equity Incentive Plan.                                                                                                                                                                  |
| 10.9(1)                 |   | Form  of 2000 Employee Stock Purchase Plan.                                                                                                                                                           |
| 10.10(1)                |   | Form  of Indemnification Agreement.                                                                                                                                                                   |
| 10.11(1)                |   | Office/Warehouse  Lease dated as of April 14, 1997 by and between Amberjack, Ltd. and  Manufacturers' Services Limited—Roseville,  Inc.                                                     |
| 10.12(1)                |   | Lease  dated as of May 5, 1998 by and between International Business Machines  Corporation and Manufacturers' Services Western U.S. Operations, Inc.                                             |
| 10.13(1)+               |   | Supply  Agreement dated as of November 27, 1999 buy and between MSL and 3Com  Corporation.                                                                                                       |
| 10.14(1)+               |   | Outsourcing  Agreement dated as of June 1, 1998 by and between International Business  Machines Corporation and Manufacturers' Services Western US Operations, Inc.                              |
| 10.15(1)+               |   | Manufacturing,  Integration and Fulfillment Contract dated as of June 26, 1998 by and  between International Business Machines S.A. and Global Manufacturers'  Services—Valencia.           |
| 10.16(1)+               |   | Global  Requirements Agreement No. MSL 183G dated as of July 30, 1997 by and  between MSL and Iomega Corporation.                                                                                |
| 10.17(1)+               |   | Supply  Agreement dated as of November 27, 1999 by and between MSL and Palm  Computing, Inc.                                                                                                     |
| 10.18(1)+               |   | Manufacturing  Services Agreement dated as of June 1, 1999 by and between Hewlett–Packard  Singapore Pte Ltd. and Manufacturers' Services Singapore Pte Ltd                                 |
| 10.19(1)                |   | 2000  Cash Incentive Compensation Plan.                                                                                                                                                               |
| 10.20(4)+               |   | Supply  Agreement dated as of September 26, 2000 between Manufacturers' Services  Salt Lake City Operations, Inc. and 3Com Corporation.                                                          |
| 10.21(4)+               |   | Lease  dated as of September 26, 2000 by and between 3Com Corporation and  Manufacturers' Services Salt Lake City Operations, Inc.                                                               |
| 10.22(4)                |   | 2000  Non–employee Director Stock Option Plan, as amended.                                                                                                                                       |
| 10.23(4)                |   | 2000  Non–qualified Stock Option Plan.                                                                                                                                                           |
| 10.24(4)                |   | Second  Amended and Restated Non–qualified Stock Option Plan, as amended.                                                                                                                        |
| 10.25(4)                |   | 2000  Equity Incentive Plan, as amended.                                                                                                                                                              |
| 10.26(5)                |   | Form  of Change in Control Agreement for Kevin Melia, Robert Donahue, Albert  Notini, Rodolfo Archbold, James Poor, Alan Cormier, Richard Gaynor, Francis  Binder, Richard Buckingham and Sam Landol. |
| 10.27(5)+               |   | First  Amendment to Supply Agreement between Manufacturers' Services Salt Lake City  Operations, Inc. and Palm, Inc., effective as of December 1, 2000.                                          |
| 10.28(5)                |   | Amendment  to Employment Letter dated as of September 27, 1995 between MSL and  Rodolfo Archbold.                                                                                                |
| 10.29(5)+               |   | First  Amendment to Supply Agreement between Manufacturers Services Salt Lake City  Operations, Inc. and 3Com Corporation, effective as of January 15, 2001.                                     |
| 10.30(6)                |   | 2000  Equity Incentive Plan, as amended.                                                                                                                                                              |
| 10.31(6)                |   | 2000  Employee Stock Purchase Plan, as amended.                                                                                                                                                       |
| 10.32(6)                |   | 2000  Non–Qualified Stock Option Plan, as amended.                                                                                                                                               |
| 10.33(7)                |   | Amendment  to Supply Agreement between Manufacturers Services Salt Lake City Operations,  Inc. and 3Com Corporation effective as of September 14, 2001.                                               |
| 10.34(8)+               |   | Amendment  to the Outsourcing Agreement dated as of June 1, 1998 by and between  International Business Machines Corporation and Manufacturers' Services  Western US Operations, Inc.            |
| 10.35(8)                |   | Severance  Agreement effective March 29, 2002 by and between MSL and Robert E.  Donahue.                                                                                                         |
| 10.36(8)                |   | Employment  Agreement dated as of January 2, 2002 by and between MSL and Kevin C.  Melia.                                                                                                        |
| 10.37(8)                |   | Employment  Agreement dated as of January 31, 2002 by and between MSL and Albert A.  Notini.                                                                                                     |
| 10.38(8)                |   | Employment  Agreement dated as of December 19, 2002 by and between MSL and Robert C.  Bradshaw.                                                                                                  |
| 10.39(8)                |   | Employment  Agreement dated as of January 30, 2002 by and between MSL and Santosh  Rao.                                                                                                          |
| 10.40(8)                |   | Form  of Change in Control Agreement for Santosh Rao, Bruce Leasure, Dewayne  Rideout.                                                                                                                |
| 10.41                   |   | Severance  Agreement effective March 29, 2002 by and between Manufacturers’ Services  Limited and Rodolfo Archbold.                                                                              |

 

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+              Confidential treatment requestedas to certain portions which portions have been filed separately with theSecurities and Exchange Commission. 

 

(1)           Filed as an Exhibit to theRegistrant's Registration Statement on Form S–1, as amended (File No. 333–96227),filed on February 4, 2000 

 

(2)           Filed as an Exhibit to theRegistrant's Current Report on Form 8–K filed on October 11, 2000 

 

(3)           Filed as an Exhibit to theRegistrant's Current Report on Form 8–K filed on December 5, 2000 

 

(4)           Filed as an Exhibit to theRegistrant's Quarterly Report on Form 10–Q filed on November 14, 2000 

 

(5)           Filed as an Exhibit to theRegistrant's Annual Report on Form 10–K filed on April 2, 2001 

 

(6)           Filed as an Exhibit to theRegistrant's Quarterly Report on Form 10–Q filed on August 14, 2001 

 

(7)           Filed as an Exhibit to theRegistrant's Quarterly Report on Form 10–Q filed on November 14,2001 

 

(8)           Filed as an Exhibit to the Registrant’sAnnual Report on Form 10-K filed on March 29, 2002.

 

(9)           Filed as an Exhibit to theRegistrant’s Current Report on Form 8-K filed on March 18.

 

 

(b)           Reports on Form 8-K

 

On February 8, 2002, theCompany filed a report on Form 8-K furnishing information under Item 9,Regulation FD Disclosure relating to the amendment of an outsourcing agreementwith IBM Corporation.

 

On February 26, 2002, theCompany filed a report on Form 8-K furnishing information under Item 9,Regulation FD Disclosure relating to the Company’s press release announcingfourth quarter and full fiscal year financial results.

 

On March 18, 2002, theCompany filed a report on Form 8-K furnishing information under Item 5, OtherEvents, relating to the Company’s 5.25% Series A Convertible Preferred Stockand warrants.

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized:

 

 
|   | MANUFACTURERS’ SERVICES LIMITED |
|--------|--------------------------------------|
|   | (Registrant)                         |
|   |                                 |
|   | Date: May 15, 2002                   |
|   |                                 |
|   | By:                                  |    /s/ Albert A. Notini |   |
|   |                                 | Albert A. Notini |   |
|   |                                 | Executive Vice  President and |   |
|   |                                 | Chief Financial Officer |   |
|   |                                 | (Principal Financial  Officer) |   |
|   |                                 |   |   |
|   | By:                                  |    /s/  Richard J. Gaynor |   |
|   |                                 |   Richard J.  Gaynor |   |
|   |                                 | Vice President and |   |
|   |                                 | Corporate Controller |   |
|   |                                 | (Principal Accounting  Officer) |   |

 

 

25

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