**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

**(MARK ONE)**

 

| **ý**                                             | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.**  |
|--------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                                                   |                                                                                            |
| **For  the quarterly period ended September 29, 2002** |
|                                                   |
| **OR**                                                 |
|                                                   |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |

 

**For thetransition period from        to        **

 

**COMMISSIONFILE NUMBER:  001-15883**

 

| **MANUFACTURERS’ SERVICES LIMITED**                                            |
|-------------------------------------------------------------------------------------|
| (EXACT NAME OF  REGISTRANT 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** |
| (ADDRESS OF PRINCIPAL  EXECUTIVE OFFICES)                                           |   | (ZIP CODE) |
|                                                                                |
| **(978)  287-5630**                                                                 |
| (REGISTRANT’S TELEPHONE  NUMBER, INCLUDING AREA CODE)                          |
|                                                                                |
| **NOT  APPLICABLE**                                                                 |
| (Former Name, Former  Address and Former Fiscal Year, if Changed Since Last Report) |

 

Indicate by check mark whether the Registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No  o

 

At November 7, 2002, there were 33,058,699 shares of Common Stock,$0.001 par value, outstanding.

 

 

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MANUFACTURERS’ SERVICESLIMITED

INDEX

 
| PART I.  FINANCIAL INFORMATION |
|-------------------------------------|
|                                |
| Item 1.                             | Financial Statements |
|                                |   |
|                                | Consolidated Balance Sheets  – September 29, 2002 (Unaudited) and December 31, 2001 |
|                                |   |
|                                | Consolidated  Statements of Operations (Unaudited) – Three and Nine Months Ended September  29, 2002 and September 30, 2001 |
|                                |   |
|                                | Consolidated  Statements of Cash Flows (Unaudited) – Three and Nine Months Ended September  29, 2002 and September 30, 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 |
|                                |   |
| Item 4.                             | Controls and  Procedures |
|                                |   |
| PART II.  OTHER INFORMATION    |
|                                |   |
| Item 1.                             | Legal Proceedings |
|                                |   |
| Item 6.                             | Exhibits and  Reports on Form 8-K |
|                                |   |
|                                | Signatures |

 

2

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MANUFACTURERS’ SERVICESLIMITED

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPTSHARE DATA)

 
|                                                                                                                                                                                                                        |   | **September  29,  2002** |    | **December  31,  2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                                        |   | **(UNAUDITED)**          |    |                    |   |
| ASSETS                                                                                                                                                                                                                      |   |                     |    |                    |   |
| Current assets:                                                                                                                                                                                                             |   |                     |    |                    |   |
| Cash and cash  equivalents                                                                                                                                                                                                  |   | $                        | 43,396  |                    | $      | 30,906 |   |
| Accounts  receivable, less allowance for doubtful accounts of $2,556 and $11,440 at  September 29, 2002 and December 31, 2001, respectively                                                                                 |   | 107,765                  |    | 172,822                 |   |
| Note receivable,  net of allowance of $4,049 at September 29, 2002                                                                                                                                                          |   | 7,831                    |    | —                  |   |
| Inventories                                                                                                                                                                                                                 |   | 97,517                   |    | 126,328                 |   |
| Prepaid expenses  and other current assets                                                                                                                                                                                  |   | 22,461                   |    | 27,860                  |   |
| Total current  assets                                                                                                                                                                                                       |   | 278,970                  |    | 357,916                 |   |
|                                                                                                                                                                                                                        |   |                     |    |                    |   |
| Property and  equipment, net                                                                                                                                                                                                |   | 35,016                   |    | 52,681                  |   |
| Goodwill, net                                                                                                                                                                                                               |   | 8,354                    |    | 8,241                   |   |
| Other intangible  assets, net                                                                                                                                                                                               |   | —                   |    | 3,706                   |   |
| Other assets                                                                                                                                                                                                                |   | 10,781                   |    | 14,276                  |   |
| Total assets                                                                                                                                                                                                                |   | $                        | 333,121 |                    | $      | 436,820 |   |
|                                                                                                                                                                                                                        |   |                     |    |                    |   |
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’  EQUITY                                                                                                                                                     |   |                     |    |                    |   |
| Current  liabilities                                                                                                                                                                                                        |   |                     |    |                    |   |
| Current portion  of long-term debt and capital lease obligations                                                                                                                                                            |   | $                        | 5,225   |                    | $      | 6,477 |   |
| Accounts payable                                                                                                                                                                                                            |   | 125,649                  |    | 150,216                 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                             |   | 42,174                   |    | 49,224                  |   |
| Total current  liabilities                                                                                                                                                                                                  |   | 173,048                  |    | 205,917                 |   |
|                                                                                                                                                                                                                        |   |                     |    |                    |   |
| Long-term debt  and capital lease obligations                                                                                                                                                                               |   | 18,018                   |    | 114,083                 |   |
| Other  liabilities                                                                                                                                                                                                          |   | 3,732                    |    | 3,114                   |   |
| Total  liabilities                                                                                                                                                                                                          |   | 194,798                  |    | 323,114                 |   |
|                                                                                                                                                                                                                        |   |                     |    |                    |   |
| Commitments and  contingencies (Note 14)                                                                                                                                                                                    |   |                     |    |                    |   |
|                                                                                                                                                                                                                        |   |                     |    |                    |   |
| Convertible  preferred stock, 830,000 shares authorized; 830,000 and 0 shares issued and  outstanding at September 29, 2002 and December 31, 2001, respectively  (liquidation value of $51 per share at September 29, 2002) |   | 36,258                   |    | —                  |   |
|                                                                                                                                                                                                                        |   |                     |    |                    |   |
| Stockholders’ equity                                                                                                                                                                                                   |   |                     |    |                    |   |
| Preferred stock,  $0.001 par value, 5,000,000 shares authorized; no shares issued and  outstanding                                                                                                                          |   | —                   |    | —                  |   |
|                                                                                                                                                                                                                        |   |                     |    |                    |   |
| Common stock,  $0.001 par value; 150,000,000 shares authorized; 34,211,195 shares issued and  32,659,975 outstanding at September 29, 2002 and 33,829,127 shares issued and  32,277,907 outstanding at December 31, 2001    |   | 34                       |    | 34                      |   |
| Additional paid  in capital                                                                                                                                                                                                 |   | 264,013                  |    | 264,359                 |   |
| Accumulated  deficit                                                                                                                                                                                                        |   | (144,915                 | )       | (129,536                | )      |
| Accumulated  other comprehensive loss                                                                                                                                                                                       |   | (10,320                  | )       | (14,404                 | )      |
| Treasury stock,  at cost; 1,551,220 shares at September 29, 2002 and December 31, 2001                                                                                                                                      |   | (6,747                   | )       | (6,747                  | )      |
| Total  stockholders’ equity                                                                                                                                                                                            |   | 102,065                  |    | 113,706                 |   |
| Total  liabilities, convertible preferred stock and stockholders’ equity                                                                                                                                               |   | $                        | 333,121 |                    | $      | 436,820 |   |

 

See accompanying notes tothe interim consolidated financial statements.

 

3

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MANUFACTURERS’ SERVICESLIMITED

CONSOLIDATED STATEMENTSOF OPERATIONS - UNAUDITED

(IN THOUSANDS, EXCEPT PERSHARE DATA)

 
|                                                           |   | **Three  months ended** |    | **Nine  months ended**  |   |
|----------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
|                                                           |   | **September  29, 2002** |    | **September  30, 2001** |   | **September  29, 2002** |   | **September  30, 2001** |   |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Net sales                                                      |   | $                       | 201,593 |                    | $      | 318,247 |   | $ | 644,790 |   | $ | 1,250,460 |   |
| Cost of goods  sold                                            |   | 184,452                 |    | 294,419                 |   | 586,558 |   | 1,160,279 |   |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Gross profit                                                   |   | 17,141                  |    | 23,828                  |   | 58,232 |   | 90,181 |   |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Operating  expenses:                                           |   |                    |    |                    |   |   |   |   |   |
| Selling, general  and administrative                           |   | 15,510                  |    | 25,161                  |   | 46,535 |   | 68,495 |   |
| Amortization of  goodwill and intangibles                      |   | —                  |    | 2,133                   |   | 3,706 |   | 6,362 |   |
| Restructurings  and asset writedowns                           |   | 9,763                   |    | 66,757                  |   | 14,651 |   | 79,699 |   |
| Other operating  income                                        |   | —                  |    | —                  |   | (800 | ) | — |   |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Operating loss                                                 |   | (8,132                  | )       | (70,223                 | )      | (5,860 | ) | (64,375 | ) |
| Interest  expense, net                                         |   | (1,059                  | )       | (4,816                  | )      | (6,196 | ) | (16,366 | ) |
| Change in fair  value of derivatives                           |   | 1,260                   |    | —                  |   | 2,170 |   | — |   |
| Foreign exchange  gain (loss)                                  |   | (21                     | )       | (129                    | )      | 35 |   | 63 |   |
| Other income                                                   |   | —                  |    | 11,255                  |   | — |   | 11,255 |   |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Loss before  provision for income taxes and extraordinary loss |   | (7,952                  | )       | (63,913                 | )      | (9,851 | ) | (69,423 | ) |
| Provision for  income taxes                                    |   | 480                     |    | 586                     |   | 1,498 |   | 1,622 |   |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Loss before  extraordinary loss                                |   |                    | (8,432  | )                  |   | (64,499 | ) |   | (11,349 | ) |   | (71,045 | ) |
| Extraordinary  loss                                            |   | —                  |    | —                  |   | (4,031 | ) | — |   |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Net loss                                                       |   | $                       | (8,432  | )                       | $      | (64,499 | ) | $ | (15,380 | ) | $ | (71,045 | ) |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Net loss  applicable to common stockholders                    |   | $                       | (9,150  | )                       | $      | (64,499 | ) | $ | (17,101 | ) | $ | (71,045 | ) |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Basic loss per  share:                                         |   |                    |    |                    |   |   |   |   |   |
| Loss before  extraordinary loss                                |   | $                       | (0.28   | )                       | $      | (1.92 | ) | $ | (0.40 | ) | $ | (2.12 | ) |
| Extraordinary  loss                                            |   |                    |    | —                  |   | (0.12 | ) | — |   |
| Net loss  applicable to common stockholders                    |   | $                       | (0.28   | )                       | $      | (1.92 | ) | $ | (0.52 | ) | $ | (2.12 | ) |
| Weighted average  shares outstanding                           |   | 32,584                  |    | 33,647                  |   | 32,474 |   | 33,548 |   |
|                                                           |   |                    |    |                    |   |   |   |   |   |
| Diluted loss per  share:                                       |   |                    |    |                    |   |   |   |   |   |
| Loss before  extraordinary loss                                |   | $                       | (0.28   | )                       | $      | (1.92 | ) | $ | (0.40 | ) | $ | (2.12 | ) |
| Extraordinary  loss                                            |   |                    |    | —                  |   | (0.12 | ) | — |   |
| Net loss  applicable to common stockholders                    |   | $                       | (0.28   | )                  | $      | (1.92 | ) | $ | (0.52 | ) | $ | (2.12 | ) |
| Weighted average  shares outstanding                           |   | 32,584                  |    | 33,647                  |   | 32,474 |   | 33,548 |   |
|                                                                |        |                         |         |                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes tothe interim consolidated financial statements.

 

4

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MANUFACTURERS’ SERVICESLIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(IN THOUSANDS)

 
|                                                                                       |   | **Nine  Months Ended**   |    |
|--------------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                       |   | **September  29,  2002** |    | **September  30,  2001** |   |
|                                                                                       |   |                     |    |   |   |
| CASH FLOWS  RELATING TO OPERATING ACTIVITIES:                                              |   |                     |    |   |   |
| Net loss                                                                                   |   | $                        | (15,380 | ) | $ | (71,045 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities:           |   |                     |    |   |   |
| Depreciation and  amortization                                                             |   | 17,763                   |    | 27,289 |   |
| Amortization of  capitalized finance fees                                                  |   | 2,135                    |    | 1,983 |   |
| Write-off of  capitalized bank fees                                                        |   | 4,031                    |    | — |   |
| Change in fair  value of derivatives                                                       |   | (2,170                   | )       | — |   |
| Additions to  allowance for doubtful accounts                                              |   | 402                      |    | 10,753 |   |
| Non cash charge  for equity awards                                                         |   | 476                      |    | 779 |   |
| Foreign exchange  loss                                                                     |   | (53                      | )       | 538 |   |
| Deferred taxes                                                                             |   | 453                      |    | (1,391 | ) |
| Write down on  disposal and impairment of capitalized assets                               |   | 6,710                    |    | 59,402 |   |
| Gain on stock  return by customer                                                          |   | —                   |    | (6,747 | ) |
| Changes in  operating assets and liabilities:                                              |   |                     |    |   |   |
| Accounts  receivable                                                                       |   | 66,898                   |    | 141,971 |   |
| Inventories                                                                                |   | 34,588                   |    | 194,537 |   |
| Prepaid expenses  and other assets                                                         |   | 122                      |    | 9,311 |   |
| Accounts payable                                                                           |   | (27,754                  | )       | (294,646 | ) |
| Accrued expenses  and other liabilities                                                    |   | (8,685                   | )       | (395 | ) |
| Net cash  provided by operating activities                                                 |   | 79,536                   |    | 72,339 |   |
|                                                                                       |   |                     |    |   |   |
| CASH FLOWS  RELATING TO INVESTING ACTIVITIES:                                              |   |                     |    |   |   |
| Acquisition of  business, net of cash acquired                                             |   | (5,250                   | )       | — |   |
| Purchase of  intangible assets                                                             |   | —                   |    | (1,393 | ) |
| Proceeds from  sale of fixed assets                                                        |   | 4,025                    |    | 226 |   |
| Purchases of  property and equipment                                                       |   | (2,648                   | )       | (13,261 | ) |
| Cost of internal  use software                                                             |   | (353                     | )       | (1,262 | ) |
| Net cash used in  investing activities                                                     |   | (4,226                   | )  | (15,650 | ) |
|                                                                                       |   |                     |    |   |   |
| CASH FLOWS  RELATING TO FINANCING ACTIVITIES:                                              |   |                     |    |   |   |
| Proceeds from  issuance of convertible preferred stock and warrants, net of issuance costs |   | 37,720                   |    | — |   |
| Proceeds from  long term debt                                                              |   | 9,189                    |    | — |   |
| Net proceeds  from new credit facilities                                                   |   | 9,421                    |    | — |   |
| Net payments on  previous revolving line-of-credit                                         |   | (111,811                 | )       | (40,800 | ) |
| Repayments of long-term  debt and capital lease obligations                                |   | (5,620                   | )       | (5,671 | ) |
| Debt issuance  and amendment costs                                                         |   | (4,605                   | )       | (373 | ) |
| Proceeds from  exercise of stock options                                                   |   | 795                      |    | 193 |   |
| Proceeds from  employee stock purchase plan                                                |   | 586                      |    | 2,140 |   |
| Net cash used in  financing activities                                                     |   | (64,325                  | )       | (44,511 | ) |
| Effect of  foreign exchange rates on cash                                                  |   | 1,505                    |    | (792 | ) |
|                                                                                       |   |                     |    |   |   |
| Net increase in  cash                                                                      |   | 12,490                   |    | 11,386 |   |
| Cash and cash  equivalents at beginning of period                                          |   | $                        | 30,906  |   | $ | 10,388 |   |
| Cash and cash  equivalents at end of period                                                |   | $                        | 43,396  |   | $ | 21,774 |   |

 

See accompanying notes tothe interim consolidated financial statements.

 

5

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MANUFACTURERS’ SERVICESLIMITED

NOTES TO INTERIMCONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(IN THOUSANDS, EXCEPTSHARE DATA)

 

1.             BASISOF PRESENTATION

 

The accompanying consolidated financial statements ofManufacturers’ Services Limited (the “Company”) are unaudited, and certaininformation and footnote disclosures related thereto normally included in financialstatements prepared in accordance with generally accepted accounting principleshave been omitted in accordance with Rule 10-01 of Regulation S-X. Accordingly,these statements should be read in conjunction with the audited financialstatements and notes thereto for the year ended December 31, 2001 included inthe Company’s Annual Report on Form 10-K. In the opinion of management, theaccompanying unaudited consolidated financial statements were preparedfollowing the same policies and procedures used in the preparation of theaudited financial statements and reflect all adjustments (consisting of normalrecurring adjustments) considered necessary to present fairly the financialposition and results of operations of the Company. The results of operationsfor the interim periods are not necessarily indicative of the results to beexpected for the entire fiscal year. Certain amounts in prior year financial statements have beenreclassified to conform to the current year presentation.

 

In response to the economic downturn experienced in2001 and 2002 and the related weakening in demand from customers, the Companyevaluated its worldwide workforce and manufacturing capacity and realigned itscost structure (Note 9) with the lower demand requirements and its ongoingcapital and liquidity requirements.  InJune 2002, the Company entered into a new three year $110,500 credit facilityconsisting of a $100,000 senior secured revolving credit facility and a $10,500three year term loan (the “2002 Credit Agreement”).  In August 2002, the 2002 Credit Agreement was amended to increasethe senior secured revolving credit facility to $120,000 in connection with thefinal syndication of the facility. Borrowings under the 2002 Credit Agreement are determined by a borrowingbase calculation derived from accounts receivable and inventory from its USoperations.  Borrowing under the 2002Credit Agreement could be limited by the following factors:

 

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

 

•                    alower percentage of business conducted in the US and Mexico, 

 

•                    deteriorationin the value of the assets comprising the borrowing base, or

 

•                    failure tocomply with the Credit Agreement’s covenants

 

At September 29, 2002, the Company was in compliance with all covenantsunder the 2002 Credit Agreement..

 

2.             RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 146, “Accounting for Exit or Disposal Activities”.  SFAS No. 146 addresses significantissues regarding the recognition, measurement and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring)”.  The Company is requiredto adopt the provisions of SFAS No. 146 effective for exit or disposalactivities initiated after December 31, 2002.  The provisions of EITF No. 94-3 shall continue to apply foran exit activity initiated under an exit plan that met the criteria of EITFNo. 94-3 prior to the adoption of SFAS No. 146.  The effect-on-adoption of SFAS No. 146will change on a prospective basis the timing of when restructuring charges arerecorded from a commitment date approach to when the liability isincurred.  The Company does notanticipate that the adoption of this statement will have a material impact onits consolidated balance sheet or statement of operations.

 

In April 2002, the FASB issued SFAS No. 145“Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB StatementNo.13, and Technical Corrections as of April 2002”.  SFAS No. 145 eliminates SFAS No. 4 “Reporting Gains and Lossesfrom Extinguishment of Debt”, which required companies to classify gains orlosses from the extinguishment of debt as an extraordinary item, net of tax. Asa result of this new FASB, gains and losses from extinguishment of debt shouldbe classified as extraordinary items only if they meet the criteria in APBOpinion No.30 “Reporting the Results of Operations-Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions”.  The Company does not believe that its extinguishment of debt willqualify as an extraordinary item as defined in APB 30, and therefore theCompany will be required to classify these charges as operating expenses.  The Company will adopt SFAS No. 145 onJanuary 1, 2003, as allowed by the Statement, and will restate all priorperiods for comparative purposes.

 

In October 2001, the FASB issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets”.  SFAS 144 supercedes FASB Statement No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed of”. SFAS 144 applies to all long-lived assets (includingdiscontinued operations) and consequently amends Accounting Principles BoardOpinion No. 30, “Reporting Results of Operations - Reporting the Effects ofDisposal of a Segment 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. The adoption of SFAS No. 144had no impact on the Company’s financial statements.

 

In July 2001, the FASB issued 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.  The new statementalso required the completion of a transitional impairment test within sixmonths of adoption, with any impairment treated as a cumulative effect of achange in accounting principle.  TheCompany completed the transitional impairment test during the second quarter of2002 and determined that no impairment existed as of the date of adoption.

 

 In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations” to be effective for all fiscalyears beginning after June 15, 2002, with early adoption permitted.  SFAS No. 143 establishes accountingstandards for the recognition and measurement of an asset retirement obligationand its associated asset retirement cost. It also provides accounting guidancefor legal obligations associated with the retirement of tangible long-livedassets. The Company will adopt SFAS No. 143 in fiscal 2003. The Companydoes not believe the adoption of SFAS No. 143 will have a material impacton the Company’s financial position, results of operations or cash flows. 

 

6

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3.                                       INVENTORY

 

Inventories are comprised of the following:

 
|                                   |   | **September  29,  2002** |   | **December  31,  2001** |   |
|----------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| Raw materials  and purchased inventory |   | $                        | 82,271 |                    | $      | 107,399 |   |
| Work-in-process.                       |   | 12,188                   |   | 14,543                  |   |
| Finished goods                         |   | 3,058                    |   | 4,386                   |   |
|                                   |   | $                        | 97,517 |                    | $      | 126,328 |   |

 

4.             BUSINESSSEGMENT INFORMATION

 

The Company’s operations comprise a single line ofbusiness, providing electronics design and manufacturing services. Informationabout the Company’s operations in different geographic regions is presented inthe table below:

 
|                            |   | **Three  Months Ended** |    | **Nine  Months Ended**  |    |
|---------------------------------|--------|-------------------------|---------|-------------------------|---------|
|                            |   | **September  29, 2002** |    | **September  30, 2001** |    | **September  29, 2002** |   | **September  30, 2001** |   |
| Net sales                       |   |                    |    |                    |    |   |   |   |   |
| North America -  Corporate      |   | $                       | —  |                    | $       | — |   | $ | — |   | $ | — |   |
|     - Operations |   | 133,456                 |    | 228,007                 |    | 440,534 |   | 925,212 |   |
| Europe                          |   | 61,673                  |    | 82,796                  |    | 178,661 |   | 276,118 |   |
| Asia                            |   | 6,464                   |    | 7,444                   |    | 25,595 |   | 49,130 |   |
|                            |   | $                       | 201,593 |                    | $       | 318,247 |   | $ | 644,790 |   | $ | 1,250,460 |   |
|                            |   |                    |    |                    |    |   |   |   |   |
| Operating income  (loss)        |   |                    |    |                    |    |   |   |   |   |
| North America - Corporate       |   | $                       | (373    | )                       | $       | (6,965 | ) | $ | (7,901 | ) | $ | (21,388 | ) |
|     - Operations |   | (3,499                  | )       | (60,905                 | )  | 11,215 |   | (29,421 | ) |
| Europe                          |   | 1,955                   |    | 3,073                   |    | 4,581 |   | 7,295 |   |
| Asia                            |   | (6,215                  | )       | (5,426                  | )       | (13,755 | ) | (20,859 | ) |
|                            |   | $                       | (8,132  | )                       | $       | (70,223 | ) | $ | (5,860 | ) | $ | (64,375 | ) |

 

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|                 |         | **September  29,  2002** |    | **December  31,  2001** |    |
|----------------------|--------------|--------------------------|---------|-------------------------|---------|
| Identifiable  Assets |         |                     |    |                    |    |
| North America        | - Corporate  |                     | $       | 34,620                  |    | $ | 15,027 |   |
|                 | - Operations |                     | 159,344 |                    | 248,977 |   |
| Europe               |         | 124,415                  |    | 134,308                 |    |
| Asia                 |         | 14,742                   |    | 38,508                  |    |
|                 |         | $                        | 333,121 |                    | $       | 436,820 |   |

 

5.             CREDITFACILITIES

 

On June 20, 2002 the Company replaced its existingCredit Agreement with a $110,500 credit facility consisting of a $100,000senior secured revolving credit facility and a $10,500 three-year term loan(the “2002 Credit Agreement”).  OnAugust 21, 2002, the 2002 Credit Agreement was amended to increase the seniorsecured revolving credit facility to $120,000 in connection with the finalsyndication of the facility.  The 2002Credit Agreement has a final maturity date of June 20, 2005 and is secured bysubstantially all domestic assets and a pledge of 65% of the shares of foreignsubsidiaries.  Restrictive covenants forthe 2002 Credit Agreement include restrictions on leverage ratios as well ascovenants requiring minimum net worth, EBITDA and fixed charge coverageratios.  A weekly borrowing base isdetermined based upon domestic receivables and domestic inventory.  The three-year term loan has a regularquarterly amortizing payment of $333 payable on the first business day of eachquarter, with the remaining outstanding balance due at maturity.

 

The 2002 Credit Agreement includes participation bycertain affiliates of Credit Suisse First Boston Corporation (“CSFB”), theCompany’s major shareholder, holding approximately 49% of the Company’soutstanding common stock.  Theseaffiliates were part of the syndicated lending group and have committed to lendup to $10,000 of the overall 2002 Credit Agreement.

 

In connection with the replacement of the previouscredit facility, an extraordinary loss of $4,031 was recorded in the secondquarter of 2002, net of a $0 tax benefit. This extraordinary loss related to the write-off of deferred financingcosts under the previous credit facility. The Company capitalized $4,352 of debt issuance costs incurred inconnection with the 2002 Credit Agreement, $625 of which was paid to certainaffiliates of CSFB.  The totalcapitalized costs will be amortized over a three-year period on a straight-linebasis, representing approximately $360 per quarter in non-cash charges.

 

Borrowings under the revolving credit facility arelimited to the sum of 85% of all eligible accounts receivable of the U.S. andMexico subsidiaries of the Company and 85% of the orderly liquidation value ofthe eligible inventory of the U.S. domestic subsidiaries.  The revolving credit facility provides foran annual commitment fee of 0.50% on the unused portion of the revolving creditfacility, payable quarterly in arrears. The cost of borrowing under the revolving credit facility is either thebase rate (the bank’s prime rate) or LIBOR, plus the applicable spreadcosts.  The Company has the option ofchoosing either the base rate or LIBOR. In the first year the spread cost is fixed for base rate and LIBORloans.  The spread on the base rateloans is 1.75% over the base rate and the spread on the LIBOR loans is thechosen LIBOR period rate plus 3.25%.  Inthe second and third years the spreads will reset quarterly based on theaverage net availability of borrowings for the preceding quarter.  The spread on the base rate loans will bebetween 1.25% and 2.25% and the spread on the LIBOR loans will be between 2.5%and 3.5%.  The interest rate under theterm note is 

 

8

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equal to the sum of the Cash Interest Rate (which is the greater of (i)the base rate in effect plus 6.0% or (ii) 11.0%) plus the Deferred InterestRate (which is equal to 3.0%).  Theinterest rate on the term loan at September 29, 2002 was 14.0%.

 

The 2002 Credit Facility requires the Company toobtain within 180 days of the closing (and maintain at all times), interestrate hedging agreements covering a notional amount of not less than $10,000 ofthe revolving credit facility, provided, that upon the request of theadministrative agent, the Company must increase the amount covered by the hedgeagreements up to an aggregate amount equal to 25% of the aggregate outstandingbalance of the revolving loans at such time. However, in no event shall the aggregate amount covered by such hedgeagreements at any time exceed $20,000. The Company had not entered into any interest rate hedge agreements atSeptember 29, 2002.

 

On June 26, 2002 the Company entered into a ten-yearmortgage loan of 10,000 Euros in Valencia, Spain.  The loan is secured by the property and buildings of GlobalManufacturers’ Services Valencia, S.A., the Company’s Spanish subsidiary, andhas a monthly amortizing repayment schedule. The cost of borrowing under the mortgage is three-month Euro LIBOR plus0.85%.

 

On June 28, 2002 the Company entered into a 3,000 Eurorevolving credit facility in Valencia, Spain. The credit agreement has a final maturity of June 26, 2003 and issecured by named receivables of Global Manufacturers’ Services Valencia,S.A.  The cost of borrowing under thecredit facility is variable spread starting at 0.49% over the Madrid InterbankMarket rate.

 

6.             CONVERTIBLEPREFERRED STOCK

 

In March 2002, the Companyissued $41,500 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 $37,720. The convertible preferred stock is recorded astemporary equity, and the warrants are recorded as liabilities.

 

The convertible preferred stockaccrues dividends quarterly at the rate of 5.25% per annum, payable quarterlyin common stock or cash, at the Company’s option. The convertible preferredstock is convertible to common stock at any time by holders based on aconversion price of $6.44 per share. The Company may require holders to convertto common stock provided the price of its common stock has traded at 150% ofthe conversion price, or $9.65 per share, for a specified period.  The preferred stock has a scheduled maturityof March 14, 2007, unless converted earlier, and is redeemable for theCompany’s common stock or cash, at the Company’s option.  If the Company chooses to pay dividends incommon stock or to redeem the convertible preferred stock with common stock,the number of shares of common stock issued will be computed using 95% of themarket value of the common stock. The warrants are exercisable at any timethrough March 14, 2007 at the exercise price of $7.02 per share. TheCompany has the right to require the exercise of the warrants after March 14,2003 if the common stock trades for 175% of the exercise price of the warrantsfor a specified period.

 

A portion of the totalconsideration received was allocated to the warrants based on their fair valueof $3,189 and the 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 are deducted from the net income available to commonstockholders, for purposes of basic earnings per share calculations.

 

The Offering included participation by certainaffiliates of CSFB, the Company’s major shareholder.  These affiliates purchased 300,000 shares of the convertiblepreferred stock, which is convertible into 2,331,003 shares of common stock,and warrants to purchase 582,751 shares of common stock. In connection withthis investment, the Company paid an affiliate of CSFB an advisory fee of1.446% on the total amount invested in the Offering (an aggregate of $600) inreturn for (i) CSFB’s services in helping to structure and arrange thetransaction, (ii) the agreement by the CSFB affiliates not to sell orotherwise transfer any of the Company’s securities for six months 

 

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(other than as part of an underwritten offering the Company initiates),and (iii) the agreement by the CSFB affiliates to accept piggybackregistration rights instead of having the common stock issuable upon theconversion 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 registrationstatement, covering 5,937,461 shares, became effective on April 23, 2002.

 

On September 30, 2002, the Company paid a dividend onthe preferred stock by issuing 382,351 shares of its common stock at a marketvalue of $2.70 per share.  The number ofshares to be issued was calculated based upon a per share price of $3.13.  This dividend covered the period of accruedinterest from March through September 2002.

 

7.             EARNINGSPER SHARE

 

The following table illustrates the reconciliation ofthe numerator and denominator of basic and diluted income (loss) per share asrequired by SFAS 128:

 
|                                                             |   | **Three  Months Ended**  |    | **Nine  Months Ended**   |   |
|------------------------------------------------------------------|--------|--------------------------|---------|--------------------------|--------|
|                                                             |   | **September  29,  2002** |    | **September  30,  2001** |   | **September  29,  2002** |   | **September  30,  2001** |   |
| Numerator -  basic and diluted earnings per share:               |   |                     |    |                     |   |   |   |   |   |
| Loss before  extraordinary loss                                  |   | $                        | (8,432  | )                        | $      | (64,499 | ) | $ | (11,349 | ) | $ | (71,045 | ) |
| Dividends on  convertible preferred stock                        |   | (396                     | )       | —                   |   | (1,032 | ) | — |   |
| Accretion of  convertible preferred stock                        |   |                     | (322    | )                        |   | — |   |   | (689 | ) |   | — |   |
| Loss available  to common stockholders before extraordinary loss |   | (9,150                   | )  | (64,499                  | )      | (13,070 | ) | (71,045 | ) |
| Extraordinary  loss                                              |   |                     | —  |                     |   | — |   |   | (4,031 | ) |   | — |   |
| Net loss  available to common stockholders                       |   | $                        | (9,150  | )                        | $      | (64,499 | ) | $ | (17,101 | ) | $ | (71,045 | ) |
|                                                             |   |                     |    |                     |   |   |   |   |   |
| Denominator:                                                     |   |                     |    |                     |   |   |   |   |   |
| Basic and  diluted weighted average shares outstanding           |   | 32,584                   |    | 33,647                   |   | 32,474 |   | 33,548 |   |
| Basic and  diluted loss per share                                |   | $                        | (0.28   | )                        | $      | (1.92 | ) | $ | (0.52 | ) | $ | (2.12 | ) |

 

10

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For the three and nine months ended September 29, 2002, 8,681anti-dilutive option and warrant shares, and for the three and nine monthsended September 30, 2001, 5,353 anti-dilutive option and warrant shares, havebeen excluded from the calculation of dilutive EPS as the Company had a netloss available to common stockholders for these periods.  The effect of the if-converted method forthe 5.25% Convertible Preferred Stock is antidilutive and approximately 6,831of potential common shares have not been considered in computing dilutedearnings per share for the three and nine-month periods ended September 29,2002.

 

8.             COMPREHENSIVELOSS

 

The following table illustrates the components of comprehensive loss asrequired by SFAS 130:

 
|                                      |   | **Three  Months Ended**  |   | **Nine  Months Ended**   |   |
|-------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                      |   | **September  29,  2002** |   | **September  30,  2001** |   | **September  29,  2002** |   | **September  30,  2001** |   |
| Net loss                                  |   | $                        | (8,432 | )                        | $      | (64,499 | ) | $ | (15,380 | ) | $ | (71,045 | ) |
| Other  comprehensive loss                 |   |                     |   |                     |   |   |   |   |   |
| Foreign currency  translation adjustments |   | 30                       |   | 3,066                    |   | 4,084 |   | (1,102 | ) |
|                                      |   |                     |   |                     |   |   |   |   |   |
| Comprehensive  loss                       |   | $                        | (8,402 | )                   | $      | (61,433 | ) | $ | (11,296 | ) | $ | (72,147 | ) |

 

9.             RESTRUCTURINGAND OTHER ASSET WRITEDOWNS

 

In the third quarter of 2002, in response to thecontinued slowdown in the Electronics Manufacturing Services (“EMS”) industryand economy worldwide, the Company recorded restructuring and asset writedowncharges of $9,763, primarily related to closing its facility in Mt. Prospect,Illinois and restructuring of certain manufacturing space in Singapore.  The total cost is comprised of severance of$3,696 related to the termination of approximately 313 manufacturing andmanagerial employees, asset write downs of $2,107 and lease termination andfacility costs of $3,960.  This plan isexpected to be complete by the end of the second quarter of 2003, except forlease payments in Singapore which may continue until the lease expires in 2010.

 

In the second quarter of 2002, the Company recorded again of $569 from the sale of its Salt Lake City building.  An impairment charge for the building waspreviously recorded as part of a restructuring charge taken in the thirdquarter of 2001 when the Company wrote down the building to its estimated fairmarket value.

 

In the first quarter of 2002, the Company approved aplan to restructure certain operations, primarily related to closing itsfacility in China and a workforce reduction at its corporate headquarters.  The China facility ceased operations duringthe third quarter of 2002.  The totalcharge recorded for this plan was $5,457, which was comprised of asset writedowns of $3,069, lease termination costs of $548 and severance of $1,840 relatedto the reduction of 371 manufacturing and 24 managerial employees.  This plan is expected to be substantiallycomplete by the end of the fourth quarter of 2002.

 

During the first nine months of 2001, the Companyimplemented various restructuring plans throughout its organization to alignits cost structure with its reduced revenue stream as a result of the severeeconomic downturn in the EMS industry. These restructuring activities included closing the Company’s Salt LakeCity facility and reducing its operations in Asia, Spain, Ireland and certainUnited States locations.  The totalrestructuring charge through September 30, 2001 of $79,699 consisted of assetwrite-downs of $59,402, employee severance of $15,897 and lease termination andfacility costs of  $4,400.

 

The following table sets forth the activity in therestructuring reserves through September 29, 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  |   |
| Cash payments                  |   | (2,394 | )      |
| Balance at June  30, 2002      |   |   | 5,856  |   |
| Restructuring provision        |   | 9,763  |   |
| Asset write  downs             |   | (2,107 | )      |
| Cash payments                  |   | (1,797 | )      |
| Balance at  September 29, 2002 |   | $      | 11,175 |   |

 

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Reserves remaining at September 29, 2002 represent liabilities forseverance and lease termination payments and are expected to be substantiallypaid by June 30, 2003, except for certain lease payments that may continuethrough 2010.

 

10.           OTHEROPERATING INCOME

 

During the first quarter of 2002, the Company receiveda $1,100 fee related to costs incurred in pursuing an unsuccessful acquisitionopportunity in the fourth quarter of 2001. This amount was netted against $300 of expenses incurred in the firstquarter related to this acquisition opportunity.

 

11.           GOODWILLAND OTHER INTANGIBLE ASSETS

 

As described in Note 2, the Company adopted SFAS 142on January 1, 2002.  SFAS 142 requiresgoodwill and intangible assets with indefinite useful lives to no longer beamortized, but instead be tested for impairment at least annually.  As a result, the Company ceased all goodwillamortization and did not recognize approximately $273 and $820 of goodwillamortization expense that would have been recognized in the three and ninemonths ended September 29, 2002, respectively, under the previous accountingstandard.

 

The new statement also 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.  The Company completed the transitionalimpairment test during the second quarter of 2002 and determined that noimpairment existed as of the date of adoption. The Company is also required toperform goodwill impairment tests on an annual basis, which it did as of July1, 2002, and determined that no impairment existed.  Future annual goodwill impairment tests may result in a charge toearnings.

 

The following table gives effect to the adoption of SFAS142 as if the provisions had been adopted as of January 1, 2001.  The net loss for the three and nine monthperiods ended September 29, 2002 are presented for comparison purposes as theeffect of adoption is reflected in the Company’s actual results of operationsfor these periods.

 
|                                       |   | **Three  Months ended**         |   | **Nine  months Ended**   |   |
|--------------------------------------------|--------|---------------------------------|--------|--------------------------|--------|
|                                       |   | **September  29,  2002**        |   | **September  30,  2001** |   | **September  29,  2002** |   | **September  30,  2001** |   |
| NET LOSS                                   |   |                            |   |                     |   |   |   |   |   |
|                                       |   |                            |   |                     |   |   |   |   |   |
| Reported net  loss                         |   | $                               | (8,432 | )                   | $      | (64,499 | ) | $ | (15,380 | ) | $ | (71,045 | ) |
| Add back:  goodwill amortization after tax |   | —                          |   | 257                      |   | — |   | 771 |   |
| Adjusted net  loss                         |   | $                               | (8,432 | )                        | $      | (64,242 | ) | $ | (15,380 | ) | $ | (70,274 | ) |
|                                       |   |                            |   |                     |   |   |   |   |   |
| BASIC EARNINGS  PER SHARE                  |   |                            |   |                     |   |   |   |   |   |
|                                       |   |                            |   |                     |   |   |   |   |   |
| Reported net  loss per share               |   | $                               | (0.28  | )                        | $      | (1.92 | ) | $ | (0.52 | ) | $ | (2.12 | ) |
| Goodwill  amortization after tax           |   | —                          |   | .01                      |   | — |   | 0.02 |   |
| Adjusted net  loss per share               |   | $                               | (0.28  | )                        | $      | (1.91 | ) | $ | (0.52 | ) | $ | (2.10 | ) |
|                                       |   |                            |   |                     |   |   |   |   |   |
| DILUTED EARNINGS  PER SHARE                |   |                            |   |                     |   |   |   |   |   |
|                                       |   |                            |   |                     |   |   |   |   |   |
| Reported net  loss per share               |   | $                               | (0.28  | )                   | $      | (1.92 | ) | $ | (0.52 | ) | $ | (2.12 | ) |
| Goodwill  amortization after tax           |   | —                          |   | .01                      |   | — |   | 0.02 |   |
| Adjusted net  loss per share               |   | $      | (0.28  | )                   | $      | (1.91 | ) | $ | (0.52 | ) | $ | (2.10 | ) |
|                                            |        |                                 |        |                          |        |  |  |  |  |  |  |  |  |  |  |  |

 

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Changes in the net carrying amount of goodwill for the nine monthsended September 29, 2002 were as follows:

 
| Balance at December 31,  2001            |   | $      | 8,241  |   |
|------------------------------------------|--------|--------|--------|--------|
| Foreign currency  translation adjustment |   | 113    |   |
|                                     |   |   |   |
| Balance at  September 29, 2002           |   | $      | 8,354  |   |

 

Other intangible assets amounted to $0 (net of accumulatedamortization of $6,949) and $3,706 (net of accumulated amortization of $3,243)at September 29, 2002 and December 31, 2001, respectively.  Amortization expense of other intangibleswas $0 and $3,706 for the three months and nine months ended September 29, 2002and $1,859 and $5,542 for the three and nine months ended September 30, 2001,respectively.  The other intangibleassets related to the Company’s asset acquisition from 3Com in September 2000,consisted mainly of customer relationships. These assets were amortized on a straight-line basis over the term ofthe Company’s supply agreement with 3Com, which expired on June 30, 2002.

 

12.           DERIVATIVEINSTRUMENTS

 

The Company’s convertible preferred stock, asdescribed in Note 6, contains two derivative instruments as defined in SFAS No.133, “Accounting for Derivative Instruments and Certain HedgingActivities”.  They are described asfollows:

 

1.               Preferred Stock -Change in Control Derivative: In the event of a change in control of theCompany as defined, the preferred stockholder is entitled to receive in cash,the greater of the as converted value of the preferred stock or the liquidationamount of the preferred stock (principal plus accrued but unpaid dividends).

 

2.               The warrants issuedwith the convertible preferred stock.

 

As of September 29, 2002, the Company has calculatedthe fair value of the warrants at $1,019, a decrease of $1,260 from its valueat June 30, 2002 and a decrease of $2,170 from its initial value of $3,189 inMarch 2002.  This gain on the change infair value of the warrants is included as non-operating income.  The fair value of the change in controlderivative is not material.

 

13.           ACQUISITIONS

 

On July 1, 2002, the Company acquired all of thecapital stock and certain assets of Lexmark Electronics S.A. de C.V., asubsidiary of Lexmark International, Inc. located in Reynosa, Mexico, thatprovides printed circuit board assemblies for laser printers, for approximately$6,002 in cash and assumed liabilities. Included in the purchase price is$3,200 of inventory that the Company had agreed to purchase within 60 daysafter the closing.  The acquired assetsconsist of cash of $752, manufacturing assets and working capital related tothe operations, while the liabilities consist of accounts payable and accruedliabilities. The transaction was accounted for as a purchase of a business, andthe purchase price was allocated to the assets and liabilities based upon theirrelative fair values at the date of acquisition.  The excess of the fair value of assets acquired over the purchaseprice was allocated to the acquired fixed assets, which reduced their recordedfair values.  As part of thetransaction, the Company retained approximately 230 facility employees, enteredinto a lease for a 156,000 square foot manufacturing facility in Reynosa andentered into an eighteen-month supply agreement to provide printed circuitboard assemblies to Lexmark.

 

14.           CONTINGENCIES

 

On July 24, 2002, the Company entered into asettlement agreement with a customer that had been disputing its obligation topay $21,560 to the Company.  Theagreement settles the disputed outstanding accounts receivable, inventory andaccounts payable between the two parties. The Company had established reserves against these current assets of$10,523, for a net exposure from the customer of $11,037.  As part of the total settlement amount of$15,087, the Company received an immediate payment of $1,509, a securedpromissory note in the amount of $13,578 with interest accruing at 7% per year,and an agreement to complete the purchase of an additional $2,600 of inventoryas part of ongoing orders, which the customer did subsequently purchase.  The promissory note is secured by restrictedshares (until January 2004) held by the customer in a Taiwan-based publiclylisted company.   Payment on the notewill be received weekly at $170 per week, ending in January 2004.   In addition, the customer is paying theaccrued interest amounts on a monthly basis. The balance on the promissory note at September 29, 2002 is $11,880 andthe Company has established a reserve of $4,049 against this balance.

 

While the Company believes the customer currently hassufficient unencumbered assets to satisfy the agreed settlement amounts, thecustomer’s ability to pay, or the timing within which the customer will pay theCompany, could be adversely impacted by a weakening in the customer’s overallfinancial performance. Therefore, the Company will not adjust the reservesprovided until such time that the Company receives the remaining net exposureamount of $7,831.  The customer has notmissed any of the scheduled weekly principal payments or monthly interestpayments.

 

ITEM 2.                         MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

References in this report to “the Company”, “MSL”,“we”, “our”, or “us” mean Manufacturers Services Limited together with itssubsidiaries, except where the context otherwise requires. This QuarterlyReport on Form 10-Q contains certain statements that are, or may be deemedto be, forward-looking statements within the meaning of section 27A of theSecurities Act of 1933 and section 21E of the Securities Exchange Act of 1934,and are made in reliance upon the protections provided by such acts for forward-lookingstatements. These forward-looking statements (such as when we describe what we“believe,” “expect” or “anticipate” will occur, and other similar statements)include, but are not limited to, statements regarding future sales andoperating results, future prospects, anticipated benefits of proposed (orfuture) acquisitions and new facilities, growth, the capabilities andcapacities of business operations, any financial or other guidance and allstatements that are not based on historical fact, but rather reflect ourcurrent expectations concerning future results and events. The ultimatecorrectness of these forward-looking statements is dependent upon a number ofknown and unknown risks and events, and is subject to various uncertainties andother factors that may cause our actual results, performance or achievements tobe different from any future results, performance or achievements expressed orimplied by these statements. The factors described under “Risk Factors” beloware among the factors that could affect future results and events, causingthose results and events to differ materially from those expressed or impliedin our forward-looking statements. 

 

All forward-looking statements included in this Reporton Form 10-Q are made only as of the date of this Report onForm 10-Q. We anticipate that subsequent events and developments willcause our views to change.  However,while we may elect to update forward-looking statements at some point in thefuture, we specifically disclaim any obligation to do so.  The forward looking information contained inthis report should not be relied upon as representing our views as of any datesubsequent to the date of this report. 

 

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, industrial equipment, communications and networking, consumerelectronics, commercial avionics and medical devices. By efficiently andaggressively managing our business, costs and asset base, we are able to offerour customers an outsourcing solution that represents a lower total cost ofownership than that typically provided by their internal operations. We seek todifferentiate ourselves by providing advanced manufacturing methodologies,capabilities, fulfillment solutions and exceptional customer focus and byintegrating our services into our customers’ operations.

 

We provide integrated supply chain solutions thataddress all stages of our customers’ 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, fulfillment and after-market services. We believethis comprehensive range of 

 

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services promotes our growth by attracting new customers and capturingadditional outsourcing opportunities within our existing customer base.

 

We have established a global network consisting of 13manufacturing, design and fulfillment facilities in the world’s majorelectronics markets–North America, Europe and Asia–to serve the increasingoutsourcing needs of both multinational and regional OEMs. Our manufacturingfacilities are strategically located near our customers and their end-markets,which benefits our customers by reducing the time required to get theirproducts to market and by increasing their flexibility to respond quickly tochanging market conditions. We believe that the combination of our services andour global manufacturing network has enabled us to become an integral part ofour customers’ product development and manufacturing strategies.

 

From our founding in 1994 until 2000, we experiencedgrowth driven primarily by acquisitions of existing OEM manufacturing facilitiesand by the increasing number of OEMs who are outsourcing their manufacturingrequirements. During the past two years, we have closed certain facilities andreduced our workforce to reflect our reduced revenue stream resulting fromadverse economic conditions.  Despitethis recent downsizing, we intend to grow in the future by actively pursuingstrategic acquisitions and by benefiting from expected increases in OEMs thatoutsource their manufacturing 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. Our cost of goods sold usually includes the costof components and materials, labor costs and manufacturing overhead.  Under some contracts our customers will ownthe components and consign the inventory to us.  In these situations, we recognize revenue (and related cost ofsales) only on the labor and overhead used to assemble the product.  The procurement of raw materials andcomponents requires us to commit significant working capital to our operationsand to manage the purchasing, receiving, inspection and stocking of theseitems. Our typical customer contract contains provisions which specify that wemay recover from the customer inventory costs and material acquisition costsfor raw material which becomes excess or obsolete 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 customercontracts contain guarantee minimum commitments, requiring the customer toeither purchase certain contractual minimum quantities or pay for amounts indeficit of the minimum purchase commitment. Such contracts have helped offset the negative impact of low-capacityutilization on gross margins and operating income.  One such contract with 3Com, which expired as of June 30, 2002,had contributed $21.5 million in revenue during the first six months of 2002.

 

Our business strategy includes the expansion of ourglobal manufacturing network. For the nine months ended September 29, 2002,approximately 77% of our net sales worldwide were denominated in US dollars,while our labor and utility costs in facilities outside of the United Statesare denominated in local currencies. Foreign currency gains and losses are theresult of transacting business in a currency that is different from thefunctional currency of our operating entity and the movements in thosecurrencies between the time a transaction is recorded for financial reportingpurposes and the time payment is made or received. We currently use forwardforeign exchange contracts on a limited basis to minimize our foreign currencyrisk but not for trading or speculative purposes. We expect to continue toutilize forward foreign exchange contracts only to the extent that thesecontracts minimize exposure and reduce risk from exchange rate fluctuations onspecific underlying transactions that create foreign currency exchange raterisk for us. Any increase or decrease in our use of derivative financialinstruments will likely be as a result of these contracts.

 

On July 24, 2002, we entered into a settlementagreement with a customer that had been disputing its obligation to pay $21.5million to us.  The agreement settlesthe disputed outstanding accounts receivable, inventory and accounts payablebetween the two parties.  We hadestablished reserves against these current assets of $10.5 million, for a netexposure from the customer of $11.0 million. As part of the total settlement amount of $15.1 million, we received animmediate payment of $1.5 million, a secured promissory note in the amount of$13.6 million with interest accruing at 7% per year, and an agreement tocomplete the purchase of an additional $2.6 million of inventory as part ofongoing orders, which the customer did subsequently purchase.  The promissory note is secured by restrictedshares (until January 2004) held by the customer in a Taiwan-based  publicly listed company.   Payment on the note will be received weeklyat $0.2 million per week, ending in January 2004.   In addition, the customer is paying the accrued interest amountson a monthly basis.  The balance on thepromissory note at September 29, 2002 is $11.9 million and we have establisheda reserve of $4.0 million against this balance.  While we believe the customer currently has sufficientunencumbered assets to satisfy the agreed settlement amounts, the customer’sability to pay, or the timing within which the customer will pay us, could beadversely impacted by a weakening in the customer’s overall financialperformance. Therefore, we will not adjust the reserves provided until suchtime that we receive the remaining net exposure amount of $7.8 million.  The customer has not missed any of thescheduled weekly principal or monthly interest payments.

 

ACQUISITIONS

 

On July 1, 2002, we acquired all of the capital stockand certain assets of Lexmark Electronics S.A. de C.V., a subsidiary of LexmarkInternational, Inc. located in Reynosa, Mexico, that provides printed circuitboard assemblies for laser printers, for approximately $6.0 million in cash andassumed liabilities.  Included in thepurchase price is $3.2 million of inventory that we agreed to purchase within60 days after the closing date.  Theacquired assets consist of cash of $0.8 million, manufacturing assets andworking capital related to the operations, while the liabilities consist ofaccounts payable and accrued liabilities. The transaction was accounted for as a purchase of a business, and thepurchase price was allocated to the assets and liabilities based upon theirrelative fair values at the date of acquisition.  The excess of the fair value of assets acquired over the purchaseprice was allocated to the acquired fixed assets, which reduced their recordedfair values.  As part of thetransaction, we retained approximately 230 facility employees, entered into alease for a 156,000 square foot manufacturing facility in Reynosa and enteredinto an eighteen-month supply agreement to provide printed circuit boardassemblies to Lexmark.

 

RESTUCTURING AND OTHER ASSET WRITEDOWNS

 

In the third quarter of 2002, in response to thecontinued slowdown in the EMS industry and economy worldwide, we recordedrestructuring and asset writedown charges of $9.8 million, primarily related toclosing our facility in Mt. Prospect, Illinois and restructuring of certainmanufacturing space in Singapore.  Forthe nine months ended September 29, 2002, the Mt Prospect facility generated netsales of $95.4 million (principally from 3 customers) and net income of $10.7million.  However, the net income amountincluded approximately $21.5 million in additional revenue from a guaranteedminimum contract with 3Com that expired on June 30, 2002.  We have disengaged from activities with 3Comas of September 29, 2002, and all other customers have been transferred toother facilities.  The totalrestructuring charge is comprised of severance of $3.7 million related to thetermination of approximately 313 manufacturing and managerial employees, assetwrite downs of $2.1 million and lease termination and facility costs of $4.0million.  This plan is expected to becomplete by the end of the second quarter of 2003, except for lease payments inSingapore which may continue until the lease expires in 2010, and we estimateannual cost savings of approximately $23 million from these restructuringactivities.

 

In the second quarter of 2002, we recorded a gain of$0.6 million from the sale of our Salt Lake City building.  An impairment charge for the building waspreviously recorded as part of a restructuring charge taken in the thirdquarter of 2001 when we wrote down the building to its estimated fair marketvalue.

 

In the first quarter of 2002, we approved a plan torestructure certain operations, primarily related to closing our facility inChina and a workforce reduction at our corporate headquarters.  The China facility ceased operations duringthe third quarter of 2002.  The totalcharge recorded for this plan was $5.5 million, which was comprised of assetwrite downs of $3.1 million, lease termination costs of $0.6 million andseverance of $1.8 million related to the reduction of 371 manufacturing and 24managerial employees.  This plan isexpected to be substantially complete by the end of the fourth quarter of 2002.

 

During the first nine months of 2001, we implementedvarious restructuring plans throughout our organization to align our coststructure with our reduced revenue stream as a result of the severe economicdownturn in the EMS industry.  Theserestructuring activities included closing our Salt Lake City facility andreducing operations in Asia, Spain, Ireland and certain United Stateslocations.  The total restructuringcharge for the nine months ended September 30, 2001 of $79.7 million consistedof asset write-downs of $59.4 million, employee severance of $15.9 million andlease termination and facility costs of $4.4 million.  

 

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The following table sets forth the activity in the restructuringreserves through September 29, 2002 (dollars 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  |   |
| Cash payments                 |   | (2,394 | )      |
| Balance at June  30, 2002     |   | 5,856  |   |
| Restructuring provision       |   | 9,763  |   |
| Asset write  downs            |   | (2,107 | )      |
| Cash payments                 |   | (1,797 | )      |
| Balance at September 29, 2002 |   | $      | 11,175 |   |

 

Reserves remaining at September 29, 2002 primarily representliabilities for severance and lease termination payments and are expected to besubstantially paid by June 30, 2003, except for certain lease payments that maycontinue through 2010.

 

We currently do not have any further plans torestructure operations.  However, iffuture economic conditions do not meet expectations, we may implement furtherrestructuring plans in the future.  Suchplans may include further headcount reductions, lease terminations, anddisposal of underutilized manufacturing assets, as well as shutdowns orconsolidations of facilities.  If wewere to implement such plans, it may result in significant furtherrestructuring costs related to severance payments and lease termination costs,as well as write downs of certain long-lived assets.

 

RESULTS OF OPERATIONS

 

The following table sets forth specified operatingdata, in dollars and as a percentage of net sales, for the periods indicated:

 
|                                                          |   | **Three  Months Ending**   |    | **Nine  Months Ending** |   |
|---------------------------------------------------------------|--------|----------------------------|---------|-------------------------|--------|
|                                                          |   | **September  29, 2002**    |    | **September  30, 2001** |   | **September  29, 2002** |   | **September  30, 2001** |   |
|                                                          |   | **(Dollars in thousands)** |    |
| Net sales                                                     |   | $                          | 201,593 |                    | 100.0  | % | $ | 318,247 |   | 100.0 | % | $ | 644,790 |   | 100.0 | % | $ | 1,250,460 |   | 100.0 | % |
| Cost of goods sold                                            |   | 184,452                    |    | 91.5                    |   | 294,419 |   | 92.5 |   | 586,558 |   | 91.0 |   | 1,160,279 |   | 92.8 |   |
| Gross profit                                                  |   | 17,141                     |    | 8.5                     |   | 23,828 |   | 7.5 |   | 58,232 |   | 9.0 |   | 90,181 |   | 7.2 |   |
| Selling, general and administrative                           |   | 15,510                     |    | 7.7                     |   | 25,161 |   | 7.9 |   | 46,535 |   | 7.2 |   | 68,495 |   | 5.5 |   |
| Restructuring and asset writedown                             |   | 9,763                      |    | 4.8                     |   | 66,757 |   | 21.0 |   | 14,651 |   | 2.3 |   | 79,699 |   | 6.4 |   |
| Amortization expense                                          |   | —                     |    | —                  |   | 2,133 |   | 0.7 |   | 3,706 |   | 0.6 |   | 6,362 |   | 0.5 |   |
| Other operating income                                        |   | —                     |    | —                  |   | — |   | — |   | (800 | ) | (0.1 | ) | — |   | — |   |
|                                                          |   |                       |    |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                                |   | (8,132                     | )       | (4.0                    | )      | (70,223 | ) | (22.1 | ) | (5,860 | ) | (0.9 | ) | (64,375 | ) | (5.1 | ) |
| Interest expense, net                                         |   | (1,059                     | )       | (0.5                    | )      | (4,816 | ) | (1.5 | ) | (6,196 | ) | (0.9 | ) | (16,366 | ) | (1.3 | ) |
| Gain on Change in derivatives                                 |   | 1,260                      |    | 0.6                     |   | — |   | — |   | 2,170 |   | 0.3 |   | — |   | — |   |
| Other income                                                  |   | —                     |    | —                  |   | 11,255 |   | 3.5 |   | — |   | 0.0 |   | 11,255 |   | 0.9 |   |
| Foreign exchange gain (loss)                                  |   | (21                        | )       | 0.0                     |   | (129 | ) | 0.0 |   | 35 |   | (0.0 | ) | 63 |   | (0.0 | ) |
|                                                          |   |                       |    |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss before provision for income taxes and extraordinary loss |   | (7,952                     | )       | (3.9                    | )      | (63,913 | ) | (20.1 | ) | (9,851 | ) | (1.5 | ) | (69,423 | ) | (5.6 | ) |
| Provision for income taxes                                    |   | 480                        |    | 0.2                     |   | 586 |   | 0.2 |   | 1,498 |   | 0.2 |   | 1,622 |   | 0.1 |   |
|                                                          |   |                       |    |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss before extraordinary loss                                |   | (8,432                     | )       | (4.1                    | )      | (64,499 | ) | (20.3 | ) | (11,349 | ) | (1.7 | ) | (71,045 | ) | (5.7 | ) |
| Extraordinary loss                                            |   | —                     |    | —                  |   | — |   | (4,031 | ) | (0.7 | ) | — |   | — |   | — |   |
|                                                          |   |                       |    |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                      |   | $                          | (8,432  | )                       | (4.1   | )% | $ | (64,499 | ) | (20.3 | )% | $ | (15,380 | ) | (2.4 | )% | $ | (71,045 | ) | (5.7 | )% |

 

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FISCAL QUARTER ENDED SEPTEMBER 29, 2002 COMPARED TO FISCAL QUARTERENDED SEPTEMBER 30, 2001

 

NET SALES

 

Net sales for the quarter ended September 29, 2002decreased $116.6 million, or 37%, to $201.6 million from $318.2 million for thequarter ended September 30, 2001. The decrease mainly relates to the closing ofthe Salt Lake City facility in the fourth quarter of 2001, which had revenuesin the third quarter of 2001 of $42.8 million, of which $20.9 million wastransferred to our other manufacturing sites. Other decreases include approximately $79.3 million from one customer(3Com) that the Company has disengaged with at the end of September 2002, and$25.5 million from two other customers due to the overall economy.  These decreases were partially offset by theaddition of $9.5 million in sales during the quarter from the Company’s Mexicoacquisition.

 

GROSS PROFIT

 

Gross profit increased to 8.5% of net sales for thequarter ended September 29, 2002 from 7.5% of net sales for the quarter endedSeptember 30, 2001. This increase resulted primarily from the positive effectsof our restructuring activities and cost reductions implemented throughout 2001and 2002 which improved our gross margins through reductions in direct andtemporary labor, and an increase in the direct margin percentage realized onour mix of revenue streams.   Also, inthe third quarter of 2001, our inventory provision was $4.9 million compared to$1.1 million in the third quarter of 2002, mainly related to closing our SaltLake City facility.  These increaseswere partially offset by the expiration in June 2002, of our take or paycontract with 3Com which had increased our gross margins in the third quarterof 2001, and a decrease in utilization of our manufacturing capacity related tothe continued economic downturn experienced during 2002.

 

SELLING, GENERAL AND ADMINISTRATIVE

 

Selling, general and administrative expense for thequarter ended September 29, 2002 decreased to $15.5 million, or 7.7% of netsales, from $25.2 million, or 7.9% of net sales, for the quarter endedSeptember 30, 2001.  This decrease of$9.7 million related mainly to the expense savings from the variousrestructuring activities the Company executed throughout 2001 and the firstquarter of 2002.  The closure of theSalt Lake City facility in the fourth quarter of 2001 contributed $9.8 millionto this overall decrease, of which $7.4 million related to increased bad debtreserves.  In addition, increases inbonuses and fringe benefits of $0.7 million and telecommunication expensesof  $0.4 million were partially offsetby decreases in subcontracted services of $0.4 million and consulting servicesof $0.4 million.

 

AMORTIZATION EXPENSE

 

Amortization expense was $0 in the quarter endedSeptember 29, 2002 compared to $2.1 million in the quarter ended September 30,2001.  We adopted the Statement ofFinancial Accounting Standards (“SFAS”) No. 142, Goodwill and Other IntangibleAssets, on January 1, 2002.  Inaccordance with SFAS 142, we ceased amortizing goodwill as of January 1,2002.  In the third quarter of 2001, weamortized $0.3 million of goodwill expense. Also in the third quarter of 2001, we had $1.5 million of amortization ofintangible assets related to our Salt Lake City facility, which were writtenoff during the third quarter of 2001, and $0.3 million of amortization expenserelated to our asset acquisition from 3Com in September 2000, which relatedmainly to customer relationships.  Theseremaining assets were amortized over the term of our supply agreement with3Com, which expired on June 30, 2002.

 

SFAS 142 requires goodwill and intangible assets withindefinite useful lives to no longer be amortized, but instead be tested forimpairment at least annually.  Thestatement requires the completion of a transitional impairment test within sixmonths of adoption, with any impairment treated as a cumulative effect of achange in accounting principle.  Wecompleted the transitional impairment test during the second quarter of 2002and determined that no impairment existed as of the date of adoption. We arealso required to perform a goodwill impairment tests on an annual basis, whichwe completed as of July 1, 2002, and determined that no impairmentexisted.  It is possible that futureannual goodwill impairment tests will result in a charge to earnings.

 

INTEREST EXPENSE, NET

 

Net interest expense decreased to $1.1 million for thequarter ended September 29, 2002 from $4.8 million for the quarter endedSeptember 30, 2001, reflecting lower average borrowings and decreasing interestrates.  We decreased the amount of ourinterest bearing debt from $142.3 million at September 30, 2001 to $23.2million at September 29, 2002.

 

CHANGE IN FAIR VALUE OF DERIVATIVE

 

During the third quarter of 2002, we recorded areduction in the fair value of our warrant derivative.  The warrant was issued as part of ourpreferred stock offering in the first quarter of 2002, and was originally fairvalued at $3.2 million.  During thethird quarter of 2002, the warrant’s fair value decreased by $1.3 million fromits fair value of  $2.3 million at June30, 2002.  The reduction in the value ofthis liability was recorded as a non-operating gain in the third quarter.

 

OTHER INCOME

 

During the three months ended September 30, 2001, werecorded $4.5 million in income on an insurance claim received in the quarterrelated to business interruption losses in 2000 and  $6.7 million in income during the same period related to1,551,220 shares of our common stock returned from 3Com in connection with theamendment of our supply agreement with 3Com at our Mt. Prospect facility.

 

FOREIGN EXCHANGE TRANSACTION GAINS/LOSSES

 

There were no significant foreign exchange gains orlosses for either of the three-month periods ended September 29, 2002 orSeptember 30, 2001.

 

PROVISION FOR INCOME TAXES

 

Provision for income taxes was $0.5 million for thequarter ended September 29, 2002 as compared to $0.6 million for the quarterended September 30, 2001. Our tax provisions in both quarters resulted from themix of profits and losses experienced by us across the jurisdictions withinwhich we operate. For the three month periods ended September 29, 2002 andSeptember 30, 2001, pretax losses in the United States and Asia provided uswith no income tax benefit because we do not believe it is more likely than notthat we will be able to utilize these taxable losses in the future.  Taxable income in Spain, France, Mexico andPuerto Rico required us to record tax provisions for the three months endedSeptember 29, 2002, while taxable income in Spain and France required us torecord tax provisions for the three months ended September 30, 2001.

 

NINE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO NINE MONTHS ENDEDSEPTEMBER 30, 2001

 

NET SALES

 

Net sales for the nine months ended September 29, 2002decreased $605.7 million, or 48%, to $644.8 million from $1,250.5 million forthe nine months ended September 30, 2001. The decrease mainly relates to theclosing of the Salt Lake City facility in the fourth quarter of 2001, which hadrevenues for the nine months ended September 30, 2001 of $323.9 million, ofwhich $121.9 million were transferred to our other manufacturing sites.  Other decreases include approximately $230.9million from one customer, 3Com, with whom our agreement expired at the end ofSeptember 2002, $155.0 million from four customers due to the overall economyand $37.7 million from three customers whom we no longer did business with in 2002.These decreases were offset by additional revenues of $34.7 million from twocustomers, from which sales volumes were ramping up in 2002, and $9.5 millionfrom the Company’s acquisition in Mexico during the third quarter of 2002.

 

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GROSS PROFIT

 

Gross profit increased to 9.0% of net sales for thenine months ended September 29, 2002 from 7.2 % of net sales for the ninemonths ended September 30, 2001. This increase resulted primarily from thepositive effects of closing down our Salt Lake City Facility in the fourthquarter of 2001, which had been operating at a 2.6% gross margin on sales of$323.9 million. The increased margin is also due to the positive effects ofother restructuring activities and cost reductions implemented throughout 2001and 2002, which improved our gross margins through reductions in labor andvariable direct costs, and an increase in the direct margin percentage realizedon our mix of revenue streams.  Theseincreases were partially offset by the decrease in utilization of ourmanufacturing capacity related to the continued economic downturn experiencedthroughout 2002.

 

SELLING, GENERAL AND ADMINISTRATIVE

 

Selling, general and administrative expense for thenine months ended September 29, 2002 decreased to $46.5 million, or 7.2% of netsales, from $68.5 million, or 5.5% of net sales, for the nine months endedSeptember 30, 2001.  The decrease of$22.0 million related mainly to the various restructuring activities theCompany executed throughout 2001 and the first quarter of 2002.  The closure of the Salt Lake City facilityin the fourth quarter of 2001 contributed $17.6 million to this overalldecrease, of which $8.5 million relates to additional bad debt charges.   In addition, we had decreases in laborcosts of $0.9 million from a 5-10% wage cut at all US subsidiaries in the thirdquarter of 2001, consulting services of $1.5 million, primarily associated with integrating information systemsin 2001, subcontracted services of $1.0 million, sales & rep commissions of$0.9 million, due to lower sales revenue, and travel expense reductions of $0.6million.  These decreases were offset byincreases in telecommunication expenses of $0.7 million and equipment rental,repair and maintenance of  $0.5 million.

 

AMORTIZATION EXPENSE

 

Amortization expense decreased to $3.7 million in thenine months ended September 29, 2002 compared to $6.4 million in the ninemonths ended September 30, 2001.  In thefirst nine months of 2001, we amortized $0.8 million of goodwill expense and$5.6 million of intangible asset amortization, $4.5 of which related to theCompany’s Salt Lake City intangible assets, which were later written off in thethird quarter 2001 restructuring.  Totalamortization expense in the first nine months of 2002 related to the Company’sasset acquisition from 3Com in September 2000, and related mainly to customerrelationships.  These assets wereamortized over the term of our supply agreement with 3Com, which expired onJune 30, 2002.

 

OTHER OPERATING INCOME

 

During the first nine months of 2002, the Companyreceived a $1.1 million fee related to costs incurred in pursuing anunsuccessful acquisition opportunity in the fourth quarter of 2001.  This amount was netted against $0.3 millionof expenses incurred during the period related to this acquisition opportunity.

 

INTEREST EXPENSE, NET

 

Net interest expense decreased to $6.2 million for thenine months ended September 29, 2002, from $16.4 million for the nine monthsended September 30, 2001, reflecting lower average borrowings and decreasedinterest rates.

 

CHANGE IN FAIR VALUE OF DERIVATIVE

 

During the nine months ended September 29, 2002, werecorded a reduction in the fair value of our warrant derivative.  The warrant was issued as part of ourpreferred stock offering in the first quarter of 2002, and was originally fairvalued at $3.2 million.  At September29, 2002, the warrant’s fair 

 

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value was $1.0 million as a result of the change in our common stockvalue.  The reduction in the value ofthis liability was recorded  as anon-operating gain.

 

FOREIGN EXCHANGE TRANSACTION GAINS/LOSSES

 

There were no significant foreign exchange gains orlosses for either of the nine-month periods ended September 29, 2002 orSeptember 30, 2001.

 

PROVISION FOR INCOME TAXES

 

Provision for income taxes was $1.5 million and $1.6million for the nine-month periods ended September 29, 2002 and September 30,2001, respectively.  Our tax provisionsin both periods resulted from the mix of profits and losses experienced by usacross the jurisdictions within which we operate. For the nine months endedSeptember 29, 2002 and September 30, 2001, pretax losses in the United Statesand Asia provided us with no income tax benefit because we do not believe it ismore likely than not that we will be able to utilize these taxable losses inthe future.   Taxable income in Spain,France, Mexico and Puerto Rico required us to record tax provisions for thenine months ended September 29, 2002, while taxable income in Spain and Francerequired us to record tax provisions for the nine months ended September 30,2001.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 29, 2002, we had cash and cashequivalents of $43.4 million, total bank and other debt of $23.2 million and$45.8 million of unused borrowing capacity under our new secured revolvingcredit facility.  During the three andnine months ended September 29, 2002, our operations were funded by cashgenerated from operations.

 

Net cash provided by operating activities of $79.5million for the nine months ended September 29, 2002 resulted primarily from adecrease in operating assets of $101.6 million and depreciation andamortization expenses of $17.8 million, offset in part by a decrease inoperating liabilities of $36.4 million and a net loss of $15.4 million. Thedecrease in operating assets included a $66.9 million reduction in accountsreceivable, which was a direct result of the reduction in revenue and thereclassification of approximately $20.7 million to a note receivable (see Note14), and $34.6 million in inventory reductions, caused by the reduced volumethrough the manufacturing sites and better inventory management.  The decrease in operating liabilities includeda $27.8 million reduction in accounts payable, which is a result of thedecrease in manufacturing activities and the reclassification of  $10.2 million to a note receivable (see Note14).  Other non-cash items include $4.0million for the write-off of capitalized bank fees in connection with theCompany’s refinancing of its credit facility during the second quarter of 2002,and write downs and loss on disposal of fixed assets of $6.7 million relatedmainly to the restructuring charges taken in the first and third quarters of2002.  Net cash provided by operatingactivities of $72.3 million for the nine months ended September 30, 2001resulted primarily from a decrease in operating assets of $345.8 million,depreciation and amortization of $27.3 million and non-cash charges aggregating$65.3 million offset by a net loss of $71.0 million and a decrease in operatingliabilities of $295.0 million.  The mostsignificant non-cash items included in the net loss for the nine months endedSeptember 30, 2001 were $59.4 million of write-downs and losses on assetimpairments and disposals, $10.8 million of additions to the allowance fordoubtful accounts and a $6.7 million non-cash gain related to 1,551,220 sharesof our common stock returned from 3Com in connection with the amendment of oursupply agreement pertaining to our Mt. Prospect facility.  The decrease in operating assets included anapproximately $117.0 million reduction in inventory attributable to the sale ofexcess inventory under the provisions of our customer contracts.  Of the $117.0 million of excess inventorysales recorded during the period, $8.2 million remaining to be collected wererecorded in prepaid expenses and other current assets at September 30, 2001.    

 

Net cash used in investing activities for the ninemonths ended September 29, 2002 was $4.2 million, consisting of $4.0 million ofproceeds from the sale of the Company’s Salt Lake City building during thesecond quarter, offset by $5.3 million of net cash used for the Lexmarkacquisition in Mexico and $2.6 million in capital expenditures.  Net cash used in investing activities forthe nine months ended September 30, 2001 was $15.7 million, consistingprimarily of $13.0 million of net capital expenditures, $1.3 million ofinternal use software, and $1.4 million for the acquisition of intangibleassets related to our Guerande facility. Capital expenditures include $3.9 million related to the purchase of ourGuerande facility.

 

Net cash used in financing activities for the ninemonths ended September 30, 2002 was $64.3 million consisting primarily of$111.8 million of net payments on the Company’s previous credit facility, whichwas replaced by a new secured revolving credit facility during the secondquarter of 2002, debt issuance costs of $4.6 million related to the new creditfacility and payments of $5.6 million of long term debt and capitalleases.  This was offset in part by $9.4million in borrowings under the new credit facility, $9.2 million 

 

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from a mortgage loan on the Company’s Spain facility and $37.7 millionin net proceeds from the issuance of convertible preferred stock andwarrants.  Net cash used in financingactivities for the nine months ended September 30, 2001 was $44.5 million,consisting of net payments under our previous bank credit facility of $46.5million and proceeds from the issuance of stock under our employee stockpurchase plan of $2.1 million.  

 

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 $37.7 million. We used the proceeds of the Offering to pay downa portion of our bank credit facility. The convertible preferred stock accruesdividends quarterly at the rate of 5.25% per annum, payable quarterly in commonstock 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 specifiedperiod.  The preferred stock has ascheduled maturity of March 14, 2007, unless converted earlier, and isredeemable for our common stock or cash, at our option. If we choose to paydividends in common stock or to redeem the convertible preferred stock withcommon stock, the shares of common stock issued will be computed using 95% ofthe market value of the common stock. The warrants are exercisable at any timethrough March 14, 2007. We have the right to require the exercise of thewarrants after March 14, 2003 if our common stock trades for 175% of theexercise price of the warrants for a specified period.

 

The Offering includedparticipation by certain affiliates of Credit Suisse First Boston Corporation(“CSFB”), our major shareholder, holding approximately 49% of our 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, covering 5,937,461 shares, became effective on April23, 2002.

 

On September 30, 2002, we paid a dividend on thepreferred stock by issuing 382,351 shares of our common stock at a market valueof $2.70 per share.  The number ofshares to be issued was calculated based upon a per share price of $3.13.  This dividend covered the period of accruedinterest from March through September 2002.

 

In June 2002, we replaced our existing CreditAgreement with a $110.5 million credit facility consisting of a $100 millionsenior secured revolving credit facility and a $10.5 million three-year termloan (the “2002 Credit Agreement”).  OnAugust 21, 2002, the 2002 Credit Agreement was expanded when the senior securedrevolving credit facility was increased to $120 million in connection with thefinal syndication of the facility.  AtSeptember 29, 2002, we had $10.6 million outstanding under the new creditfacility and $45.8 million available to borrow.  The 2002 Credit Agreement is secured by substantially alldomestic assets and a pledge of 65% of the shares of foreign subsidiaries.  Restrictive covenants for the 2002 CreditAgreement include restrictions on leverage ratios as well as covenantsrequiring minimum net worth, EBITDA and fixed charge coverage ratios.  The three-year term loan has a regularquarterly amortizing payment of $333 payable on the first business day of eachquarter, with the remaining outstanding balance due at maturity.

 

The 2002 Credit Agreement included participation bycertain affiliates of CFSB.  These affiliateswere part of the syndicated lending group and have committed to lend up to $10million of the overall 2002 Credit Agreement.

 

In connection with the replacement of the previouscredit facility, an extraordinary loss of $4.0 million was recorded.  This extraordinary loss related to thewrite-off of deferred financing costs under the previous credit facility.  We capitalized $4.4 million of debt issuancecosts incurred in connection with the 2002 Credit Agreement, of which $0.6million was paid to certain affiliates of CFSB, our major shareholder.  The total capitalized costs will beamortized over a three-year period on a straight-line basis, representingapproximately $0.4 million per quarter in non-cash charges.

 

Borrowings under the revolving facility are limited tothe sum of 85% of all eligible accounts receivable of the U.S. domesticsubsidiaries of the Company and 85% of the orderly liquidation value of theeligible inventory of the U.S. domestic subsidiaries of the Company.  A weekly borrowing base is determined bydomestic receivables and domestic inventory. The revolving facility provides for an annual commitment fee of 0.50% onthe unused portion of the revolving facility, payable in arrears quarterly.  The cost of borrowing under the revolvingfacility is 

 

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either the base rate (the bank’s prime rate) or LIBOR, plus theapplicable spread costs.  The Companyhas the option of choosing either the base rate or LIBOR.  In the first year the spread cost is fixedfor base rate and LIBOR loans.  Thespread on the base rate loans is 1.75% over the base rate and on the LIBORloans is the chosen LIBOR period rate plus 3.25%.  In the second and third years the spreads will reset quarterlybased on the average net availability of borrowings for the precedingquarter.  The spread on the base rateloans will be between 1.25% and 2.25% and on the LIBOR loans will be between2.5% and 3.5%. The interest rate under the term note is equal to the sum of theCash Interest Rate (which is the greater of (i) the base rate in effect plus6.0% or (ii) 11.0%) plus the Deferred Interest Rate (which is equal to3.0%).  The interest rate on the termloan at September 29, 2002 was 14.0%.

 

The 2002 Credit Facility requires us to obtain within180 days of the closing (and maintain at all times), interest rate hedgingagreements covering a notional amount of not less than $10 million of therevolving loans, provided, that upon the request of the administrative agent,we must increase the amount covered by the hedge agreements up to an aggregateamount equal to 25% of the aggregate outstanding balance of the revolving loansat such time.  However, in no eventshall the aggregate amount covered by such hedge agreements at any time exceed$20 million.  We have not entered intoany interest rate hedge agreements at September 29, 2002.

 

Also in June 2002, we entered into a ten-year mortgageloan for 10 million euro and a 3 million euro revolving credit facility inValencia, Spain.  The mortgage loan issecured by the property and buildings of Global Manufacturers’ ServicesValencia, S.A., our Spanish subsidiary, has a monthly amortizing repaymentschedule and the cost of borrowing under the mortgage is three-month Euro LIBORplus 0.85%.   The credit agreement has afinal maturity of June 26, 2003 and is secured by named receivables of GlobalManufacturers’ Services Valencia, S.A. The cost of borrowing under the credit facility is variable spreadstarting at 0.49% over the Madrid Interbank Market rate.

 

The following summarizes our debtand other contractual obligations at September 29, 2002:

 
|                               |   | **Total**          |   | **Less than  1 year** |   | **1 to 2  years** |   | **2 to 3  years** |   | **After  3 years** |   |
|------------------------------------|--------|--------------------|--------|-----------------------|--------|-------------------|--------|-------------------|--------|--------------------|--------|
|                               |   | **(In thousands)** |   |
|                               |   |               |   |
| Term loan borrowings               |   | $                  | 10,591 |                  | $      | 1,332             |   | $                 | 1,332  |               | $      | 7,927 |   | $ | — |   |
| Revolver borrowings                |   | —             |   | —                |   | —            |   | —            |   | —             |   |
| Mortgage                           |   | 9,704              |   | 981                   |   | 981               |   | 981               |   | 6,761              |   |
| Capital lease obligations          |   | 2,932              |   | 2,844                 |   | 83                |   | 5                 |   |               |   |
| Operating lease obligations        |   | 71,941             |   | 13,932                |   | 12,213            |   | 10,507            |   | 35,289             |   |
| Other borrowings and obligations   |   | 17                 |   | 17                    |   | —            |   | —            |   | —             |   |
| Total contractual cash obligations |   | $                  | 95,185 |                  | $      | 19,106            |   | $                 | 14,609 |               | $      | 19,420 |   | $ | 42,050 |   |
|                                    |        |                    |        |                       |        |                   |        |                   |        |                    |        |  |  |  |  |  |  |

 

Our principal sources of funding our operatingexpenses, capital expenditures and debt obligations are expected to be our currentcash and cash equivalents (including funds generated from our convertiblepreferred stock offering), cash generated from operations and borrowings underour new credit facilities. The amount of cash generated from operations will bedependent upon such factors as the successful execution of our business planand worldwide economic conditions. Borrowings under our new credit facilitiesare dependent upon a borrowing base calculation derived from our domesticaccounts receivable and inventory. Availability fluctuates according to the quantity and quality of ourreceivables and our US inventory. Borrowings under our credit facilities couldbe limited by a number of factors, including the following:

 

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

 

•                  alower percentage of our business being conducted in the US and Mexico,

 

•      deteriorationin the value of the assets comprising the borrowing base, or

 

•                  failureto comply with Credit Agreement covenants.

 

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We were in compliance with all covenants under our newcredit facilities as of September 29, 2002. In the event we do not haveadequate funding from our new credit facility, we would work with our seniorlenders to modify the new credit facilities or identify other sources ofcapital to obtain necessary debt or equity financing. There is no assurance wewould be able to modify our current credit facility with existing lenders orobtain alternative debt or equity financing to satisfy our funding needs. Whilethere can be no assurance we will have sufficient funds to meet our cashrequirements over the next twelve months, we believe that funds generated fromoperations, proceeds from the convertible preferred stock offering andborrowings under our new credit facility will be adequate to meet ouranticipated future operating expenses, capital expenditures and debtobligations for at least the next twelve months.

 

During the nine months ended September 29, 2002, MSLdid not engage in:

 

•                  Materialoff-balance sheet activities, including the use of structured finance orspecial purpose entities, or

 

•                  Tradingactivities in non-exchange traded contracts.

 

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 146, “Accounting for Exit or Disposal Activities”.  SFAS No. 146 addresses significantissues regarding the recognition, measurement and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).  We are required toadopt the provisions of SFAS No. 146 effective for exit or disposalactivities initiated after December 31, 2002.  The provisions of EITF No. 94-3 shall continue to apply foran exit activity initiated under an exit plan that met the criteria of EITFNo. 94-3 prior to the adoption of SFAS No. 146.  The effect-on-adoption of SFAS No. 146will change on a prospective basis the timing of when restructuring charges arerecorded from a commitment date approach to when the liability isincurred.  We do not anticipate that theadoption of this statement will have a material impact on our consolidatedbalance sheet or statement of operations.

 

In April 2002, the FASB issued SFAS No. 145“Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB StatementNo.13, and Technical Corrections as of April 2002”.  FASB No. 145 eliminates FASB No. 4 “Reporting Gains and Lossesfrom Extinguishment of Debt”, which required companies to classify gains orlosses from the extinguishment of debt as an extraordinary item, net of tax. Asa result of this new FASB, gains and losses from extinguishment of debt shouldbe classified as extraordinary items only if they meet the criteria in APBOpinion No.30 “Reporting the Results of Operations-Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions”.  We do not believe that the extinguishment of debt will qualify asan extraordinary item as defined in APB 30, and therefore we will be requiredto classify these charges as operating expenses.  We plan on adopting the SFAS No. 145 on January 1, 2003, as allowedby the Statement, and will restate all prior periods for comparative purposes.

 

In October 2001, the FASB issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets”.   SFAS 144 supercedes FASB Statement No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed of”.  SFAS 144 applies toall long-lived assets (including discontinued operations) and consequentlyamends Accounting Principles Board Opinion No. 30, “Reporting Results ofOperations - Reporting the Effects of 

 

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Disposal of a Segment of a Business”.  SFAS No. 144 is effective for financial statements issued for fiscalyears beginning after December 31, 2001, and has been adopted by us, asrequired, on January 1, 2002. SFAS No. 144 had no impact on our financialstatements.

 

In July 2001, the FASB issued 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.  The statement also requires the completionof a transitional impairment test within six months of adoption, with anyimpairment treated as a cumulative effect of a change in accountingprinciple.  We completed thetransitional impairment test during the second quarter of 2002 and determinedthat no impairment existed as of the date of adoption. We are also required toperform goodwill impairment tests on an annual basis, which we did as of July1, 2002, and determined that no impairment existed.

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations” to be effective for all fiscalyears beginning after June 15, 2002, with early adoption permitted.  SFAS No. 143 establishes accountingstandards for the recognition and measurement of an asset retirement obligationand its associated asset retirement cost. It also provides accounting guidancefor legal obligations associated with the retirement of tangible long-livedassets. We will adopt SFAS No. 143 in fiscal 2003 and do not believe theadoption of SFAS No. 143 will have a material impact on our financialposition, results of operations or cash flows. 

 

RISK FACTORS

 

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBEDBELOW BEFORE MAKING AN INVESTMENT DECISION. ADDITIONAL RISKS NOT PRESENTLYKNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS.ANY OF THESE RISKS COULD HAVE A MATERIAL AND NEGATIVE EFFECT ON OUR BUSINESS,FINANCIAL CONDITION OR RESULTS OF OPERATIONS.

 

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 a small number of customers for a largeportion of our business. Our ten largest customers accounted for approximately82% of net sales in the nine months ended September 29, 2002 and approximately87% of net sales for fiscal 2001. Changes in our customers’ orders have in the past had a significantimpact on our operating results. If a major customer significantly reduces theamount of business it does with us, there would be an adverse impact on ouroperating results.

 

We expect to continue to depend on sales to our majorcustomers. Because it is not always possible to replace lost business on atimely basis, it is likely that our operating results would be adverselyaffected if one or more of our major customers were to cancel, delay or reducea large amount of business with us. Our customer agreements typically permitthe customer to terminate the agreement on three to six month’s notice. Were amajor customer to terminate its agreement with us, it is likely that ouroperating results would be adversely affected. Moreover, our operating results have been positively affected by severalcustomer contracts containing guaranteed minimum commitments, including ourcontract with 3Com at our Mt. Prospect, Illinois facility, which expired onJune 30, 2002.  While those contractsgenerally have fixed terms and may not be terminated (absent a breach) prior totheir stated expiration, the favorable effects of the contracts are unlikely tobe replicated after these contracts expire or terminate.

 

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In addition, we generate significant accountsreceivable in connection with providing services to our major customers. If oneor more of our customers were to become insolvent or otherwise be unable to payfor our services or were to become unwilling to make payments in a timelyfashion, our operating results and financial condition could be adverselyaffected.

 

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 made several significant acquisitions sincethe beginning of fiscal 1999, and selectively pursuing strategic acquisitionsremains an important part of our overall business strategy. However, anyacquisitions we make could result in:

 

•             difficulty integratingour operations, technologies, financial controls and information systems,products and services with those of the acquired facility;

 

•             difficulty inmanaging and operating geographically dispersed businesses, including somelocated in foreign countries;

 

•             diversion of ourcapital and our management’s attention away from other business issues;

 

•             an increase in ourexpenses and our working capital requirements;

 

•             potential loss of keyemployees and customers of facilities or businesses we acquire; and

 

•             financial risks, suchas:

 

•      potentialliabilities of the facilities and businesses we acquire;

 

•      our need toincur additional indebtedness; and

 

•      dilution ifwe issue additional equity securities.

 

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 new secured revolving credit facility limits our ability toacquire the assets or businesses of other companies. If we are able to identifyacquisition candidates, such acquisitions may be financed with substantial debtor with potentially 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 September 29, 2002, ourtotal debt was $23.2 million and our interest expense for 

 

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the nine months ended September 29, 2002 was $6.2 million. In addition,we may incur additional indebtedness in the future.  Our future level of indebtedness could have adverse consequencesfor our business, including:

 

•             vulnerability to theeffects of poor economic and industry conditions affecting our business;

 

•             dedication of asubstantial portion of our cash flow from operations to repayment of debt andinterest expense, limiting the availability of cash for working capital,capital expenditures or acquisitions which may be attractive to us;

 

•             reduced flexibilityin planning for, or reacting to, changes in our business and industry, due tothe debt repayment obligations and restrictive covenants contained in our debtinstruments; and

 

•             failure to complywith the financial covenants under the agreements governing our indebtednessrelating to matters such as fixed charge coverage ratio, minimum adjustedtangible net worth, and minimum domestic EBITDA, resulting in an event ofdefault, which if not cured or waived, could cause substantially all of ourindebtedness to become immediately due and payable.

 

We have financial instruments that are subject tointerest rate risk, principally debt obligations under our 2002 CreditAgreement. 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. Wecompete against many domestic and foreign companies, some of which havesubstantially greater manufacturing, financial, research and development andmarketing resources than we do. Some of our competitors have broader geographicbreadth and range of services than we do. In addition, some of our competitorsmay have more developed relationships with our existing customers than we do.We also face competition from the manufacturing operations of our current andpotential customers, who continually evaluate the benefits of internalmanufacturing versus outsourcing. As more OEMs dispose of their manufacturingassets and increase the outsourcing of their products, we will face increasingcompetitive pressures to grow our business in order to maintain our competitiveposition.

 

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, we 

 

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sometimes experience short-term adverse effects due to pricefluctuations, extended lead times and delayed shipments. In the past, there havebeen industry-wide shortages of electronic components, particularly memory andlogic devices. 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.

 

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 through otherchannels or requiring our OEM customers to purchase or otherwise compensate usfor such excess inventory. Some of our significant customer agreements do notgive us the ability to require our OEM customers to do so. To the extent we areunsuccessful in recouping our material and manufacturing costs, not only wouldour net sales be adversely affected, but our operating results would bedisproportionately adversely affected. Moreover, carrying excess inventorywould reduce the working capital we have available to continue to operate andgrow 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, rapid declinesin average selling prices and production over-capacity. When these factorsadversely affect our customers, we may suffer similar effects. Our customers’markets are also subject to economic cycles and are likely to experiencerecessionary periods in the future. The economic conditions affecting theelectronics industry, in general, or any of our major customers, in particular,including the economic slowdown and heightened levels of uncertainty related tothe September 11, 2001 terrorist attacks in the United States, may continue toadversely 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 inEurope, Asia and Mexico. Our international operations are subject to inherentrisks, which may adversely affect us, including:

 

•             political andeconomic instability in countries where we have manufacturing facilities,particularly in Asia where we conduct a portion of our business;

 

•             fluctuations in thevalue of foreign currencies;

 

•             high levels ofinflation, historically the case in a number of countries in Asia and Mexicowhere we do business;

 

•             changes in laborconditions and difficulties in staffing and managing our  foreign operations;

 

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•             greater difficulty incollecting our accounts receivable and longer payment cycles;

 

•             burdens and costs ofour compliance with a variety of foreign laws;

 

•             increases in theduties and taxes we pay;

 

•             imposition ofrestrictions on currency conversion or the transfer of funds; and

 

•             expropriation ofprivate 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 securities analysts or investors.If this occurs, the price of our common stock would likely decline. Thesefactors include:

 

•             variations in thetiming and volume of customer orders relative to our manufacturing capacity;

 

•             introduction andmarket acceptance of our customers’ new products;

 

•             changes in demand forour customers’ existing products;

 

•             the timing of ourexpenditures in anticipation of future orders;

 

•             effectiveness inmanaging our manufacturing processes;

 

•             changes incompetitive and economic conditions generally or in our customers’ markets

 

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

 

•             changes in the costor availability of components or skilled labor; and

 

•             foreign currencyexposure.

 

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.

 

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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 successfully anticipateand respond to technological changes in design and manufacturing processes in acost-effective and timely manner. As a result, we continually evaluate theadvantages and feasibility of new product design and manufacturing processes.We cannot, however, assure you that our process development efforts will besuccessful.

 

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 the Comprehensive EnvironmentalResponse, Compensation and Liability Act, as well as analogous state andforeign laws. Compliance with these environmental laws is a major considerationfor us because we use hazardous materials in our manufacturing process. Inaddition, because we are a generator of hazardous wastes, we, along with anyother person who arranges for the disposal of our wastes, may be subject tofinancial exposure for costs associated with an investigation and anyremediation of sites at which we have arranged for the disposal of hazardouswastes if these sites become contaminated, even if we fully comply withapplicable environmental laws. In the event of a violation of environmentallaws, we could be held liable for damages and for the costs of remedial actionsand could also be subject to revocation of our effluent discharge permits. Anyrevocation could require us to cease or limit production at one or more of ourfacilities, thereby negatively impacting our revenues and results ofoperations. Environmental laws could also become more stringent over time,imposing greater compliance costs and increasing risks and penalties associatedwith any violation, which also could negatively impact our operating 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. In addition, under the terms of a stockholders agreement between us,certain other parties and those affiliates of Credit Suisse First Boston, thoseaffiliates have the right to elect a majority of our directors if they own 50%or more of our outstanding common stock. Circumstances may occur in which theinterests of these stockholders could 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 could suffer.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET RISKS

 

***Interest Rate Risk***

 

Our exposure to interest raterisk arises from variable rate debt arrangements entered into for other than trading purposes. The interest rate risk onour fixed-rate debt is not material as the amounts outstanding under thesearrangements are not significant.

 

The cost of borrowingunder the revolving facility is contained under the caption Liquidity and CapitalResources in “Management’s Discussion and Analysis of Financial Condition andResults of Operations.

 

The following table summarizesour market risks associated with our variable rate debt in place at September29, 2002 based on current maturities and interest rates:

 
|                       |   | **September 29,**           |    |
|----------------------------|--------|-----------------------------|---------|
|                       |   | **2003**                    |    | **2004** |   | **2005** |   | **2006** |   | **2007** |   |
|                       |   | **(Dollars in  thousands)** |    |
|                       |   |                        |    |   |   |   |   |   |   |   |   |
| Term loan balance          |   | $                           | 9,259   |   | $ | 7,927 |   | — |   | — |   | — |   |
| Effective interest rate    |   | 14.0                        | %       | 14.0 | % | 14.0 | % | — |   | — |   |
| Principal payments         |   | $                           | 1,332   |   | $ | 1,332 |   | $ | 7,927 |   | — |   | — |   |
| Interest expense           |   | $                           | 1,390   |   | $ | 1,203 |   | $ | 555 |   | — |   | — |   |
| Revolving facility balance |   | $                           | —  |   | $ | — |   | — |   | — |   | — |   |
| Unused credit(a)           |   | $                           | 120,000 |   | $ | 120,000 |   | — |   | — |   | — |   |
| Effective interest rate    |   | 6.50                        | %       | 6.50 | % | 6.50 | % | — |   | — |   |
| Fee on unused portion      |   | 0.50                        | %       | 0.50 | % | 0.50 | % | — |   | — |   |
| Interest expense           |   | $                           | 600     |   | $ | 600 |   | 450 |   | — |   | — |   |
| Mortgage Loan              |   | $                           | 8,723   |   | $ | 7,742 |   | $ | 6,761 |   | $ | 5,780 |   | $ | 4,799 |   |
| Effective Interest Rate    |   | 4.19                        | %       | 4.19 | % | 4.19 | % | 4.19 | % | 4.19 | % |
| Principal Payments         |   | $                           | 981     |   | $ | 981 |   | $ | 981 |   | $ | 981 |   | $ | 981 |   |
| Interest Expense           |   | $                           | 386     |   | $ | 345 |   | $ | 304 |   | $ | 263 |   | $ | 222 |   |

 

----

(a)                                  As of September 29, 2002 approximately$45.8 million of the unused credit under our revolving credit facility wasavailable for additional borrowings based on a borrowing base calculationutilizing domestic accounts receivable and domestic inventory.

 

The carrying cost of the above credit facility approximates fair value due tothe variable nature of the interest rates.

 

***Foreign Currency Exchange Rate Risk***

 

We also have exposure to various foreign currencyexchange-rate fluctuations for cash flow received from our foreignsubsidiaries. This risk is mitigated because the functional currency of oursubsidiaries in Ireland, Singapore and Malaysia is the US dollar and most of theirfinancial transactions are denominated in US dollars. The foreign currencyexchange-rate risk for our subsidiaries in Spain and France are mitigatedbecause their functional currency is the Euro and most of their financialtransactions are denominated in Euro. Our exposure to foreign currencyexchange-rate fluctuations is primarily related to intercompany loans payableto the corporate entity, intercompany receivables from the corporate entity andspecific trade receivables and payables, all at our subsidiaries in Spain andFrance, which are denominated in US dollars. Our foreign currency exchange-rateexposure on the intercompany balances and the trade receivables and payables ismitigated by the use of foreign exchange contracts which are effective as ameans of minimizing exposure and reducing risk from exchange rate fluctuationsrelated to these specific transactions. We actively monitor our foreigncurrency exchange-rate exposure and manage our foreign exchange contractpositions to maintain the effectiveness of this risk mitigation process.

 

28

----

 

As of December 31, 2001, we had the followingforeign exchange forward contracts outstanding:

 
|                             |   | **Notional Amount** |   | **Fair Value** |   |
|----------------------------------|--------|---------------------|--------|----------------|--------|
|                             |   | **(In thousands)**  |   |
| Foreign exchange sell contracts: |   |                |   |           |   |
| US Dollars                       |   | $                   | 11,220 |           | $      | (59 | ) |
| Foreign exchange buy contracts:  |   |                |   |           |   |
| US Dollars                       |   | $                   | 22,007 |           | $      | 60 |   |

 

At December 31, 2001, we had$11.1 million in U.S. denominated trade receivables and $22.9 millionin U.S. denominated trade payables at our subsidiary in Spain. The netunrealized gain (loss) on these balances was immaterial as of December 31,2001 due to the use of foreign exchange contracts. A hypothetical 10%fluctuation in the foreign currency exchange rate between the Spanish pesetaand the US dollar would have resulted in a change in unrealized gain, or lossof $1.2 million.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

(a)           *Evaluation ofdisclosure controls and procedures.* Based on their evaluation of the Company's disclosure controls andprocedures (as defined in Rules 13a-14(c) and 15d-14(c) under the SecuritiesExchange Act of 1934) as of a date within 90 days of the filing date of thisQuarterly Report on Form 10-Q, the Company's chief executive officer and chieffinancial officer have concluded that the Company's disclosure controls andprocedures are designed to ensure that information required to be disclosed bythe Company in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC's rules and forms and are operating in an effective manner.

 

(b)           *Changes in internalcontrols.* There were nosignificant changes in the Company's internal controls or in other factors thatcould significantly affect these controls subsequent to the date of their mostrecent evaluation.

 

PART II. OTHERINFORMATION

 

ITEM 1.  LEGALPROCEEDINGS

 

Dan Stearne, etal. v. Manufacturers’ Services Limited, et al. - A classaction complaint filed on December 6, 2000 alleging violations of federalsecurities laws has been pending in the United States District Court, SouthernDistrict of New York against Manufacturers’ Services Limited, certain of itsofficers and the underwriters that participated in the Company’s initial publicoffering (“IPO”).  The Companyunderstands that various other plaintiffs have filed substantially similarclass action cases against approximately 300 other publicly traded companiesand their IPO underwriters, which cases have been consolidated to a singlefederal district court for coordinated case management.  The complaint, which seeks unspecifieddamages among other things, alleges that the prospectus filed by the Companyrelating to stock sold in its initial public offering contained false andmisleading statements with respect to the commission arrangements between theunderwriters and their customers.

 

On July 15, 2002, theCompany together with the other issuers named as defendants in thesecoordinated proceedings filed a collective motion to dismiss the consolidatedcomplaints against them on various legal grounds.  That motion is currently pending.  On October 9, 2002, the court approved a stipulation between theplaintiffs and the individual defendants providing for the dismissal of theindividual defendants without prejudice.

 

While the Company canmake no promises regarding the outcome of this action, the Company believesthat the final result will have no material effect on its consolidatedfinancial condition or result of operations.

 

29

----

 

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.                                                                                 |
| 4.12(11)            |   | Credit Agreement dated as of  June 20, 2002 by and between Manufacturers’ Services Limited and the lenders  named therein.                                                                       |
| 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(10)           |   | Severance Agreement effective  March 29, 2002 by and between Manufacturers’ Services Limited and Rodolfo  Archbold.                                                                              |
| 10.42(11)           |   | Severance Agreement effective  March 29, 2002 by and between Manufacturers’ Services Limited and James N.  Poor.                                                                                 |
| 10.43(11)           |   | 2000 Equity Incentive Plan, as  amended on May 15, 2002.                                                                                                                                              |
| 10.44(11)           |   | 2000 Employee Stock Purchase  Plan, as amended on May 15, 2002.                                                                                                                                       |
| 10.45(11)           |   | 2000 Non-Employee Director  Stock Option Plan, as amended on May 15, 2002                                                                                                                             |
| 10.46(12)           |   | Credit Agreement Dated June 20,  2002 among the Company, Bank of America N.A. and certain other financial  institutions named therein.                                                                |
| 10.47               |   | Accession Agreement dated  August 22, 2002 among Congress Financial Corporation, Bank of America,  Manufacturers' Services Limited, et al.                                                            |
| 10.48               |   | Notice of Assignment and  Acceptance dated August 21, 2002 among HSBC Business Credit (USA) Inc., Bank  of America, N.A. and Manufacturers' Services Limited.                                         |
| 10.49               |   | Notice of Assignment and  Acceptance dated August 20, 2002 among Orix Financial Services, Bank of  America, N.A. and Manufacturers' Services Limited.                                                 |
| 99.1                |   | Certification                                                                                                                                                                                         |

 

----

+                                         Confidential treatment requested as to certainportions which portions have been filed separately with the Securities andExchange Commission.

(1)                                  Filed as an Exhibit to the Registrant’sRegistration Statement on Form S–1, as amended (File No. 333–96227),filed on February 4, 2000

(2)                                  Filed as an Exhibit to the Registrant’s CurrentReport on Form 8-K filed on October 11, 2000

(3)                                  Filed as an Exhibit to the Registrant’s CurrentReport on Form 8-K filed on December 5, 2000

(4)                                  Filed as an Exhibit to the Registrant’s QuarterlyReport on Form 10-Q filed on November 14, 2000

(5)                                  Filed as an Exhibit to the Registrant’s AnnualReport on Form 10-K filed on April 2, 2001

(6)                                  Filed as an Exhibit to the Registrant’s QuarterlyReport on Form 10-Q filed on August 14, 2001

(7)                                  Filed as an Exhibit to the Registrant’s QuarterlyReport on Form 10-Q filed on November 14, 2001

(8)                                  Filedas an Exhibit to the Registrant’s Annual Report on Form 10-K filed on March 29,2002.

(9)                                  Filedas an Exhibit to the Registrant’s Current Report on Form 8-K filed on March 18.

(10)                            Filed as an Exhibit to the Registrant’s QuarterlyReport on Form 10-Q filed on May 15, 2002

(11)                            Filed as an Exhibit to the Registrant’s QuarterlyReport on Form 10-Q filed on August 14, 2002

(12)                            Filed as an Exhibit to the Registrant’s CurrentReport on Form 8-K filed on June 28, 2002

 

 

30

----

 

(b)           Reportson Form 8-K

 

None

 

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: November 13, 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) |   |

 

31

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CERTIFICATIONS PURSUANTTO SECTION 302

OF THE SARBANES-OXLEY ACTOF 2002

 

CERTIFICATION

 

I, Robert C. Bradshaw, certify that:

 
| 1.     | I have reviewed this quarterly report on Form 10-Q  of Manufacturers’ Services Limited;                                                                                                                                                                                                                                                                                                       |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.     | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.     | The registrant’s other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                 | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on our  evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 5.     | The registrant’s other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of registrant’s board of directors (or persons  performing the equivalent function):                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                 | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                 | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 6.     | The registrant’s other certifying officer and I have  indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses. |

 
| Dated: November 13, 2002 | /s/ Robert C. Bradshaw  |   |
|--------------------------|-------------------------|--------|
|                     | Robert C. Bradshaw      |
|                     | Chief Executive Officer |

 

32

----

 

CERTIFICATION

 

I, Albert A. Notini, certify that:

 
| 1.     | I have reviewed this quarterly report on Form 10-Q  of Manufacturers’ Services Limited;                                                                                                                                                                                                                                                                                                       |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.     | Based on my knowledge, this quarterly report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.     | The registrant’s other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |
|   | a.                                                                                                                                                                                                                                                                                                                                                                                                 | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is being  prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b.                                                                                                                                                                                                                                                                                                                                                                                                 | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | c.                                                                                                                                                                                                                                                                                                                                                                                                 | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 5.     | The registrant’s other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of registrant’s board of directors (or persons  performing the equivalent function):                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | a.                                                                                                                                                                                                                                                                                                                                                                                                 | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s ability  to record, process, summarize and report financial data and have identified  for the registrant’s auditors any material weaknesses in internal controls;  and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | b.                                                                                                                                                                                                                                                                                                                                                                                                 | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 6.     | The registrant’s other certifying officer and I have  indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 
| 7.     | Dated:   November 13, 2002 | /s/ Albert A. Notini    |   |
|--------|---------------------------------|-------------------------|--------|
|   |                            | Albert A. Notini        |
|   |                            | Chief Financial Officer |

 

33

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