**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

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

 

| **For  the quarterly period ended March 30, 2003** |
|----------------------------------------------------|
|                                               |
| **OR**                                             |

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

 

| **For  the transition period  from                  to                  ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                           |
| **COMMISSION  FILE NUMBER: 001-15883**                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                           |
| **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**                                                                   |
| **(978)  287-5630**                                                                                                              |
| (ADDRESS,  INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT’S  PRINCIPAL EXECUTIVE OFFICES) |
|                                                                                                                             |
| **NOT  APPLICABLE.**                                                                                                             |
| (Former Name,  Former Address and Former Fiscal Year, if Changed Since Last Report)                                              |

 

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act). Yes  o       No  ý

 

At April 28, 2003, therewere 33,583,250 shares of Common Stock, $0.001 par value, outstanding.

 

 

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MANUFACTURERS’SERVICES LIMITED

INDEX

 
| PART I. FINANCIAL  INFORMATION |
|--------------------------------|
|                           |   |
|                           |   |
| Item 1.                        | Consolidated Financial  Statements |
|                           | Consolidated Balance  Sheets (Unaudited) — March 30, 2003 and December 31, 2002 |
|                           | Consolidated  Statements of Operations (Unaudited) — Three Months Ended March 30, 2003 and  March 31, 2002 |
|                           | Consolidated  Statements of Cash Flows (Unaudited) — Three Months Ended March 30, 2003 and  March 31, 2002 |
|                           | 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 8K |
|                           |   |
|                           | Signatures |
|                           |   |
|                           | Certifications |

 

2

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PART I. FINANCIALINFORMATION

Item 1.    FinancialStatements

MANUFACTURERS’SERVICES LIMITED

CONSOLIDATED BALANCESHEETS - UNAUDITED

(IN THOUSANDS,EXCEPT SHARE DATA)

 
|                                                                                                                                                                                                                    |   | **March 30,** |    | **December  31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|---------|-------------------|--------|
|                                                                                                                                                                                                                    |   | **2003**      |    | **2002**          |   |
| ASSETS                                                                                                                                                                                                                  |   |          |    |              |   |
| Current  assets:                                                                                                                                                                                                        |   |          |    |              |   |
| Cash  and cash equivalents                                                                                                                                                                                              |   | $             | 45,023  |              | $      | 48,955 |   |
| Accounts  receivable, less allowance for doubtful accounts of $2,448 and $2,753 at  March 30, 2003 and December 31, 2002, respectively                                                                                  |   | 85,805        |    | 109,083           |   |
| Inventories                                                                                                                                                                                                             |   | 97,994        |    | 98,827            |   |
| Prepaid  expenses and other current assets                                                                                                                                                                              |   | 21,872        |    | 21,945            |   |
| Total  current assets                                                                                                                                                                                                   |   | 250,694       |    | 278,810           |   |
|                                                                                                                                                                                                                    |   |          |    |              |   |
| Property  and equipment, net                                                                                                                                                                                            |   | 38,966        |    | 34,659            |   |
| Goodwill                                                                                                                                                                                                                |   | 8,477         |    | 8,441             |   |
| Other  assets                                                                                                                                                                                                           |   | 11,316        |    | 9,497             |   |
| Total  assets                                                                                                                                                                                                           |   | $             | 309,453 |              | $      | 331,407 |   |
|                                                                                                                                                                                                                    |   |          |    |              |   |
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND  STOCKHOLDERS’ EQUITY                                                                                                                                                 |   |          |    |              |   |
| Current  liabilities:                                                                                                                                                                                                   |   |          |    |              |   |
| Current  portion of long-term debt and capital lease obligations                                                                                                                                                        |   | $             | 6,012   |              | $      | 5,654 |   |
| Accounts  payable                                                                                                                                                                                                       |   | 103,166       |    | 127,085           |   |
| Accrued  expenses and other current liabilities                                                                                                                                                                         |   | 30,612        |    | 39,157            |   |
| Total  current liabilities                                                                                                                                                                                              |   | 139,790       |    | 171,896           |   |
|                                                                                                                                                                                                                    |   |          |    |              |   |
| Long-term  debt and capital lease obligations                                                                                                                                                                           |   | 24,729        |    | 18,003            |   |
| Other  liabilities                                                                                                                                                                                                      |   | 4,380         |    | 5,260             |   |
| Total  liabilities                                                                                                                                                                                                      |   | 168,899       |    | 195,159           |   |
|                                                                                                                                                                                                                    |   |          |    |              |   |
| Commitments  and contingencies (Note 10)                                                                                                                                                                                |   |          |    |              |   |
|                                                                                                                                                                                                                    |   |          |    |              |   |
| Convertible  preferred stock, $0.001 par value, 830,000 shares authorized; 830,000 shares  issued and outstanding at March 30, 2003 and December 31, 2002, respectively  (Liquidation value of $50 per share)           |   | 36,426        |    | 35,551            |   |
|                                                                                                                                                                                                                    |   |          |    |              |   |
| Stockholders’  equity:                                                                                                                                                                                             |   |          |    |              |   |
| Preferred  stock, $0.001 par value, 4,170,000 shares authorized; no shares issued and  outstanding                                                                                                                      |   | —        |    | —            |   |
| Common  stock, $0.001 par value; 150,000,000 shares authorized**;**35,019,086 shares issued  and 33,467,866 outstanding at March 30, 2003 and 34,725,397 shares issued and  33,174,177 outstanding at December 31, 2002 |   | 35            |    | 35                |   |
| Additional  paid in capital                                                                                                                                                                                             |   | 266,154       |    | 264,809           |   |
| Accumulated  deficit                                                                                                                                                                                                    |   | (149,435      | )       | (150,264          | )      |
| Accumulated  other comprehensive loss                                                                                                                                                                                   |   | (5,879        | )       | (7,136            | )      |
| Treasury  stock, at cost; 1,551,220 shares at March 30, 2003 and December 31, 2002                                                                                                                                      |   | (6,747        | )       | (6,747            | )      |
| Total  stockholders’ equity                                                                                                                                                                                        |   | 104,128       |    | 100,697           |   |
| Total  liabilities, convertible preferred stock and stockholders’ equity                                                                                                                                           |   | $             | 309,453 |              | $      | 331,407 |   |

 

See accompanyingnotes to the interim consolidated financial statements.

 

3

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MANUFACTURERS’SERVICES LIMITED

CONSOLIDATED STATEMENTSOF OPERATIONS — UNAUDITED

(IN THOUSANDS,EXCEPT PER SHARE DATA)

 
|                                             |   | **Three  months ended** |    |
|--------------------------------------------------|--------|-------------------------|---------|
|                                             |   | **March 30,  2003**     |    | **March 31,  2002** |   |
| Net  sales                                       |   | $                       | 161,373 |   | $ | 215,366 |   |
| Cost  of goods sold                              |   | 148,356                 |    | 197,086 |   |
| Gross  profit                                    |   | 13,017                  |    | 18,280 |   |
|                                             |   |                    |    |   |   |
| Operating  expenses:                             |   |                    |    |   |   |
| Selling,  general and administrative             |   | 12,112                  |    | 15,572 |   |
| Amortization  expense                            |   | —                  |    | 1,853 |   |
| Restructuring  and asset write-downs             |   | (249                    | )       | 5,457 |   |
| Other  operating income                          |   | —                  |    | (800 | ) |
|                                             |   |                    |    |   |   |
| Operating  income (loss)                         |   | 1,154                   |    | (3,802 | ) |
|                                             |   |                    |    |   |   |
| Interest  expense, net                           |   | (1,000                  | )       | (2,994 | ) |
| Gain  on change in fair value of derivative      |   | 520                     |    | — |   |
| Foreign  exchange gain                           |   | 319                     |    | 17 |   |
|                                             |   |                    |    |   |   |
| Income  (loss) before provision for income taxes |   | 993                     |    | (6,779 | ) |
| Provision  for income taxes                      |   | 164                     |    | 407 |   |
| Net  income (loss)                               |   | $                       | 829     |   | $ | (7,186 | ) |
| Net  loss applicable to common stockholders      |   | $                       | (46     | ) | $ | (7,329 | ) |
|                                             |   |                    |    |   |   |
| Basic  loss per share:                           |   |                    |    |   |   |
| Net  loss                                        |   | $                       | (0.00   | ) | $ | (0.23 | ) |
| Weighted  average shares outstanding             |   | 33,313                  |    | 32,379 |   |
|                                             |   |                    |    |   |   |
| Diluted  loss per share:                         |   |                    |    |   |   |
| Net  loss                                        |   | $                       | (0.00   | ) | $ | (0.23 | ) |
| Weighted  average shares outstanding             |   | 33,313                  |    | 32,379 |   |

 

See accompanyingnotes to the interim consolidated financial statements.

 

4

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MANUFACTURERS’SERVICES LIMITED

CONSOLIDATED STATEMENTSOF CASH FLOWS — UNAUDITED

(IN THOUSANDS)

 
|                                                                                                 |   | **THREE  MONTHS ENDED** |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                 |   | **March 30,  2003**     |   | **March 31,  2002** |   |
|                                                                                                 |   |                    |   |   |   |
| CASH  FLOWS RELATING TO OPERATING ACTIVITIES:                                                        |   |                    |   |   |   |
| Net  income (loss)                                                                                   |   | $                       | 829    |   | $ | (7,186 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                    |   |   |   |
| Depreciation  and amortization                                                                       |   | 3,569                   |   | 6,740 |   |
| Amortization  of capitalized finance fees                                                            |   | 364                     |   | 913 |   |
| Change  in fair value of derivatives                                                                 |   | (520                    | )      | — |   |
| Changes  in allowance for doubtful accounts                                                          |   | (180                    | )      | 154 |   |
| Non  cash charge for stock compensation                                                              |   | 357                     |   | 213 |   |
| Foreign  exchange loss                                                                               |   | (114                    | )      | 58 |   |
| Deferred  taxes                                                                                      |   | (58                     | )      | 382 |   |
| Writedown  and loss on disposal of fixed assets                                                      |   | 27                      |   | 3,884 |   |
| Changes  in operating assets and liabilities:                                                        |   |                    |   |   |   |
| Accounts  receivable                                                                                 |   | 24,209                  |   | 54,241 |   |
| Inventories                                                                                          |   | 674                     |   | 20,351 |   |
| Prepaid  expenses and other assets                                                                   |   | (1,069                  | )      | 605 |   |
| Accounts  payable                                                                                    |   | (25,026                 | )      | (38,118 | ) |
| Accrued  expenses and other liabilities                                                              |   | (8,285                  | )      | (13,198 | ) |
| Net  cash provided by (used in) operating activities                                                 |   | (5,223                  | )      | 29,039 |   |
|                                                                                                 |   |                    |   |   |   |
| CASH  FLOWS RELATING TO INVESTING ACTIVITIES:                                                        |   |                    |   |   |   |
| Proceeds  from sale of fixed assets                                                                  |   | 4,810                   |   | 4 |   |
| Purchases  of property and equipment                                                                 |   | (6,568                  | )      | (677 | ) |
| Cost  of internal use software                                                                       |   | (25                     | )      | (273 | ) |
| Net  cash used in investing activities                                                               |   | (1,783                  | )      | (946 | ) |
|                                                                                                 |   |                    |   |   |   |
| CASH  FLOWS RELATING TO FINANCING ACTIVITIES:                                                        |   |                    |   |   |   |
| Proceeds  from issuance of convertible preferred stock and warrants net of issuance  costs           |   | —                  |   | 37,832 |   |
| Net  proceeds from (payments on) revolving line-of-credit                                            |   | —                  |   | (28,726 | ) |
| Net  proceeds from new credit facilities                                                             |   | 3,822                   |   | — |   |
| Payments  on term loan                                                                               |   | (333                    | )      | — |   |
| Repayments  of long-term debt and capital lease obligations                                          |   | (1,838                  | )      | (1,992 | ) |
| Debt  issuance and amendment costs                                                                   |   | (150                    | )      | (237 | ) |
| Proceeds  from exercise of stock options                                                             |   | 658                     |   | 99 |   |
| Proceeds  from employee stock purchase plan                                                          |   | 458                     |   | 586 |   |
| Net  cash provided by financing activities                                                           |   | 2,617                   |   | 7,562 |   |
| Effect  of foreign exchange rates on cash                                                            |   | 457                     |   | (199 | ) |
| Net  increase (decrease) in cash                                                                     |   | (3,932                  | )      | 35,456 |   |
| Cash  and cash equivalents at beginning of period                                                    |   | $                       | 48,955 |   | $ | 30,906 |   |
| Cash  and cash equivalents at end of period                                                          |   | $                       | 45,023 |   | $ | 66,362 |   |

 

See accompanyingnotes to the interim consolidated financial statements.

 

5

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MANUFACTURERS’SERVICES LIMITED

NOTES TO INTERIMCONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(IN THOUSANDS,EXCEPT SHARE DATA)

 

1.  BASIS OF PRESENTATION

 

The accompanying consolidated financial statements ofManufacturers’ Services Limited (the “Company”) are unaudited, and certaininformation and footnote disclosure related thereto, normally included infinancial statements prepared in accordance with generally accepted accountingprinciples, has been omitted in accordance with Rule 10-01 of Regulation S-X.Accordingly, these statements should be read in conjunction with the auditedfinancial statements and notes thereto for the year ended December 31, 2002included in the Company’s Annual Report on Form 10-K. In the opinion ofmanagement, the accompanying unaudited consolidated financial statements wereprepared following the same policies and procedures used in the preparation ofthe audited financial statements and reflect all adjustments (consisting ofnormal recurring adjustments) considered necessary to present fairly thefinancial position and results of operations of the Company. The results ofoperations for the interim periods are not necessarily indicative of theresults for the entire fiscal year. Certain amounts in prior year financial statements have beenreclassified to conform to the current year presentation.

 

Borrowings under the Company’s credit agreement, whichwas entered into in June 2002 (the “2002 Credit Agreement”) are dependent upona borrowing base calculation derived from accounts receivable and inventory.Availability of borrowings fluctuates according to the quantity and quality ofthe Company’s receivables and inventory and the legal jurisdiction of theCompany’s receivables and inventory.  Borrowings under our 2002 Credit Agreement could be limited by a numberof 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.

 

The Company is currently in compliance with allcovenants under the 2002 Credit Agreement. In the event it does not have adequate funding from its existing creditfacilities, the Company would work with its lending institutions to modify the2002 Credit Agreement or identify other potential sources of capital to obtainnecessary debt or equity financing.  In such a circumstance, there is no assurance theCompany would be able to modify the 2002 Credit Agreement with existing lendersor obtain alternative debt or equity financing to satisfy its funding needs.

 

2.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In December 2002, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 148,Accounting for Stock-Based Compensation- Transition and Disclosure” (“SFAS148”).  This statement amends SFAS 123to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  Under the provisions of SFAS 148, companiesthat choose to adopt the accounting provisions of SFAS 123 will be permitted toselect from three transition methods: the prospective method, the modifiedprospective method and the retroactive restatement method. The prospectivemethod, however, may no longer be applied for adoptions of the accountingprovisions of SFAS 123 for periods beginning after December 15, 2003. SFAS148 requires certain new disclosures that are incremental to those required bySFAS 123, which must also be made in interim financial statements. Thetransition and annual disclosure provisions of SFAS 148 are effective forfiscal years ending after December 31, 2002. The Company has adopted thenew interim

 

6

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disclosure provisions.  TheCompany has decided not to voluntarily adopt the accounting provisions of SFAS123 as permitted under the provisions of SFAS 148.

 

In November 2002, the FASB issued FIN No. 45“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others, an interpretation of FASBStatements No. 5, 57, and 107 and rescission of FASB Interpretation No.34.”  The Interpretation requires that aguarantor recognize, at the inception of a guarantee, a liability for the fairvalue of the obligation undertaken by issuing the guarantee. The Interpretationalso requires additional disclosures to be made by a guarantor in its interimand annual financial statements about its obligations under certain guaranteesit has issued. The accounting requirements for the initial recognition ofguarantees are applicable on a prospective basis for guarantees issued ormodified after December 31, 2002. The disclosure requirements are effective forall guarantees outstanding, regardless of when they were issued or modified,for financial statements issued after December 15, 2002.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Exit or Disposal Activities”. SFAS No. 146 addresses significant issues regarding therecognition, measurement and reporting of costs that are associated with exitand disposal activities, including restructuring activities that were accountedfor under EITF No. 94-3.  TheCompany will adopt the provisions of SFAS No. 146 effective for exit ordisposal activities initiated after December 31, 2002.  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 is incurred.

 

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”.  The Company does not believe that the extinguishment of debt willqualify as an extraordinary item as defined in APB 30, and therefore the Companywill be required to classify these charges as operating expenses.  The Company has adopted SFAS No. 145 onJanuary 1, 2003, and will reclassify the extraordinary loss to a non-operatingloss in all applicable comparative periods.

 

In June 2001, the FASBissued SFAS No. 143, “Accounting for Asset Retirement Obligations” to beeffective for all fiscal years beginning after June 15, 2002, with earlyadoption permitted.  SFAS No. 143establishes accounting standards for the recognition and measurement of an assetretirement obligation and its associated asset retirement cost. It alsoprovides accounting guidance for legal obligations associated with theretirement of tangible long-lived assets. The Company has adopted SFASNo. 143 in the first quarter of 2003 and the adoption did not impact itsfinancial position, results of operations or cash flows.

 

3.  INVENTORY

 

Inventories are comprisedof the following:

 
|                                   |   | **March 30,  2003** |   | **December  31,  2002** |   |
|----------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Raw materials and  purchased inventory |   | $                   | 78,917 |                    | $      | 82,532 |   |
| Work-in-process                        |   | 13,001              |   | 10,559                  |   |
| Finished  goods                        |   | 6,076               |   | 5,736                   |   |
|                                   |   | $                   | 97,994 |                    | $      | 98,827 |   |

 

7

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4.  BUSINESS SEGMENT 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** |    |
|--------------------------|--------|-------------------------|---------|
|                     |   | **March 30,  2003**     |    | **March 31,  2002** |   |
| Geographic  net sales    |   |                    |    |   |   |
| United  States           |   | $                       | 81,363  |   | $ | 149,482 |   |
| Spain                    |   | 37,497                  |    | 41,019 |   |
| Other  foreign countries |   | 42,513                  |    | 24,865 |   |
|                     |   | $                       | 161,373 |   | $ | 215,366 |   |

 
|                     |   | **March 30,  2003** |   | **December  31,  2002** | ** ** |
|--------------------------|--------|---------------------|--------|-------------------------|------------|
| Long-lived  assets       |   |                |   |                    |       |
| United  States           |   | $                   | 18,730 |                    | $          | 20,042 |   |
| Spain                    |   | 19,806              |   | 13,009                  |       |
| Other  foreign countries |   | 11,746              |   | 11,105                  |       |
|                     |   | $                   | 50,282 |                    | $          | 44,156 |   |

 

5. STOCK-BASED COMPENSATION

 

The Company’s employee stockcompensation plans are accounted for in accordance with Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB25”) and related interpretations. Under this method, no compensation expense isrecognized as long as the exercise price equals or exceeds the market price ofthe underlying stock on the date of grant. The Company elected thedisclosure-only alternative permitted under SFAS No. 123, “Accounting forStock-Based Compensation,” (“SFAS 123”) for fixed stock-basedawards to employees. All non-employee stock-based awards are accountedfor in accordance with SFAS 123.

 

The Company uses theBlack-Scholes option pricing model to estimate the fair value of optionsgranted.  The Black-Scholes model wasdeveloped for use in estimating the value of traded options that have novesting restrictions and are fully transferable.  The Company’s employee stock options have characteristicssignificantly different from those of traded options; therefore, theBlack-Scholes option pricing model may not provide a reliable measure of thefair value of the Company’s options

 

The following table illustratesthe effect on net income(loss) and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123. 

 
|                                                                                       |   | **Three  Months Ended** |   |
|--------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                       |   | **March 30,  2003**     |   | **March 31,  2002** |   |
|                                                                                       |   |                    |   |   |   |
| Net loss available to common  stockholders, as reported                                    |   | $                       | (46    | ) | $ | (7,329 | ) |
| Deduct : Stock-based employee  compensation expense determined under the fair value method |   | (254                    | )      | (1,437 | ) |
| Pro forma net loss available to  common stockholders                                       |   | $                       | (300   | ) | $ | (8,766 | ) |
|                                                                                       |   |                    |   |   |   |
| Basis and Diluted net loss per  share:                                                     |   |                    |   |   |   |
| As reported                                                                                |   | $                       | (0.00  | ) | $ | (0.23 | ) |
| Pro forma                                                                                  |   | $                       | (0.01  | ) | $ | (0.27 | ) |

 

8

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6.  EARNINGS PER 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** |   |
|--------------------------------------------------------------|--------|-------------------------|--------|
|                                                         |   | **March 30,  2003**     |   | **March 31,  2002** |   |
| Numerator—basic and  diluted earnings per share:        |   |                    |   |   |   |
| Income  (loss)                                               |   | $                       | 829    |   | $ | (7,186 | ) |
| Dividends  on convertible preferred stock                    |   | (547                    | )      | (91 | ) |
| Accretion  of convertible preferred stock                    |   | (328                    | )      | (52 | ) |
| Loss  available to common stockholders                       |   | $                       | (46    | ) | $ | (7,329 | ) |
|                                                         |   |                    |   |   |   |
| Denominator:                                                 |   |                    |   |   |   |
| Basic  and diluted —weighted average shares outstanding |   | 33,313                  |   | 32,379 |   |
|                                                         |   |                    |   |   |   |
| Basic  and diluted loss per share                            |   | $                       | (0.00  | ) | $ | (0.23 | ) |

 

For the three months ended March 30, 2003 and March31, 2002, 8,422 and 8,807, respectively, of anti-dilutive options and warrantsand 6,449 shares of convertible preferred stock have been excluded from thecalculation of earnings per share, as the Company had a net loss available tocommon stockholders.

 

7.  COMPREHENSIVE INCOME (LOSS)

 

The following table illustrates the components ofcomprehensive income (loss) as required by SFAS 130:

 
|                                                                        |   | **Three  Months Ended** |   |
|-----------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                        |   | **March 30,  2003**     |   | **March 31,  2002** |   |
| Net  income (loss)                                                          |   | $                       | 829    |   | $ | (7,186 | ) |
| Other  comprehensive income (loss) Foreign currency translation adjustments |   | 1,257                   |   | (943 | ) |
| Comprehensive  income (loss)                                                |   | $                       | 2,086  |   | $ | (8,129 | ) |

 

8. RESTUCTURING

 

In the first quarter of 2003, the Company reversed$249 of restructuring reserves related mainly to severance expenses which areno longer expected to be incurred.

 

In the firstquarter of 2002, the Company implemented a plan to restructure certainoperations, primarily related to closing its facility in China and a workforcereduction at its corporate headquarters. The China facility, which ceased operations during the third quarter of2002, was closed as the site did not meet the Company’s long-term strategicgoals.  The total charge recorded forthis plan was $5,457, which was comprised of asset write-downs of $3,069, leasetermination costs of $548 and severance of $1,840 related to the reduction of371 manufacturing and 24 managerial employees. This plan is expected to be substantially complete by the end of the secondquarter of 2003.

 

During the full year 2002, the Company implementedvarious restructuring plans throughout its organization to align its coststructure with the reduced revenue stream as a result of the economic downturnin the EMS industry.  In total for all2002, the Company incurred restructuring charges of $13,488 consisting of assetwrite-downs of $4,315, employee severance of $5,343 and lease termination costsof $3,830.

 

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Thefollowing table sets forth the activity in the restructuring reserves fromDecember 31, 2002 to March 30, 2003:

 
|                          |   | **Employee  Severance and  Related  Expenses** |   | **Lease  Payments on   Facilities and  Equipment** |   | **Total** |   |
|-------------------------------|--------|------------------------------------------------|--------|----------------------------------------------------|--------|-----------|--------|
| Balance  at December 31, 2002 |   | $                                              | 1,973  |                                               | $      | 3,572     |   | $ | 5,545 |   |
| Charges  utilized             |   | (1,416)                                        |   | (865)                                              |   | (2,281)   |   |
| Provision adjustments         |   | (249                                           | )      | —                                             |   | (249      | )      |
| Balance at March 30, 2003     |   | $                                              | 308    |                                               | $      | 2,707     |   | $ | 3,015 |   |

 

Reserves remainingat March 30, 2003 mainly represent lease termination payments inSingapore.  Substantially all severancerelated restructuring reserves at March 30, 2003 will be paid by the end of thesecond quarter of 2003, while the lease payments in Singapore may continueuntil the lease expires in 2010.

 

 

9. GUARANTEES ANDINDEMNIFICATION OBLIGATIONS

 

As permitted under Delaware law,we have agreements whereby we indemnify our officers and directors for certainevents or occurrences while the officer or director is, or was, serving at ourrequest in such capacity. The term of the indemnification period is for the officer’sor director’s lifetime. The maximum potential amount of future payments wecould be required to make under these indemnification agreements is unlimited;however, we have Directors and Officers Liability insurance policies that limitour exposure for events covered under the policies and enable us to recover aportion of any future amounts paid. As a result of the coverage under ourinsurance policies, we believe the estimated fair value of theseindemnification agreements is minimal. All of these indemnification agreementswere grandfathered under the provisions of FIN No. 45 as they were ineffect prior to December 31, 2002. Accordingly, we have no liabilitiesrecorded for these agreements as of March 30, 2003.

 

In conjunction with our initialpublic offering in June 2000, we entered into an Underwriting Agreement withseveral underwriters in which we agreed to indemnify the underwriters forlosses, claims or damages caused by an untrue statement or alleged untruestatement or omission or alleged omission of a material fact contained in oromitted from our Registration Statement. The term and maximum potential amountsof this indemnification is not limited. However, we have Directors and OfficersLiability Insurance policy that limits our expense for events covered by suchpolicies. Accordingly, we believe the estimated fair value of thisindemnification obligation is minimal. Accordingly, we have no liabilitiesrecorded from the agreement as of March 30, 2003.

 

In June 2002, we entered into aCredit Agreement in which we agreed to indemnify each lender party thereto,from any taxes or incurred lending costs paid by such lenders in connectionwith the Credit Agreement, including as a result of any change in the tax lawsor other regulations. This indemnification obligation is unlimited as to timeand amount. We have never been required to make any payments pursuant to thisindemnification. As a result, we believe the estimated fair value of thisindemnification agreement is minimal. Accordingly, we have no liabilitiesrecorded for those agreements as of March 30, 2003.

 

The Company provides for theestimated cost of product warranties, primarily from historical information, atthe time product revenue is recognized. While the Company engages in extensive productquality programs and processes, the Company’s warranty obligation is affectedby product failure rates, utilization levels, material usage, service deliverycosts incurred in correcting a product failure, and supplier warranties onparts delivered to the Company.  Shouldactual product failure rates, utilization levels, material usage, servicedelivery costs or supplier warranties on parts differ from the Company’sestimates, revisions to the estimated warranty liability would be required.

 

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| Balance at December 31, 2002                      |   | $      | 1,359  |   |
|---------------------------------------------------|--------|--------|--------|--------|
| Accruals for warranties during  the first quarter |   | 187    |   |
| Settlements made during the  quarter              |   | (121   | )      |
|                                              |   |   |   |
| Balance at March 30, 2003                         |   | $      | 1,425  |   |

 

 

10.  COMMITMENTS AND CONTINGENCIES

 

A class action complaint filed onDecember 6, 2000, alleging violations of federal securities laws has beenpending in the United States District Court, Southern District of New Yorkagainst the Company, certain of its former officers and the underwriters thatparticipated in the Company’s initial public offering (“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, whichseeks unspecified damages among other things, alleges that the prospectus filedby the Company relating to stock sold in its initial public offering containedfalse and misleading statements with respect to the commission arrangementsbetween the underwriters and their customers. The Company believes that thisclaim against the Company lacks merit.

 

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.  On October 9, 2002, the court approved a stipulation betweenthe plaintiffs and the individual defendants providing for the dismissal of theindividual defendants without prejudice. In February 2003, that motion was denied with respect to mostissuers, including the Company. While the Company can make no assurancesregarding the outcome of this action, the Company believes that the finalresult will have no material effect on its consolidated financial condition orresult of operations.

 

In addition, the Company is fromtime to time subject to legal proceedings and claims which arise in the normalcourse of its business. In the opinion of management, the amount of ultimateliability with respect to these actions will not have a material adverse effecton the Company’s financial position or its results of operations.

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD LOOKINGSTATEMENTS

 

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 forforward-looking statements. These forward-looking statements (such as when wedescribe what we “believe,” “expect” or “anticipate” will occur, and othersimilar statements) include, but are not limited to, statements regardingfuture sales and operating results, future prospects, anticipated benefits ofproposed (or future) acquisitions and new facilities, growth, the capabilitiesand capacities 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 implied inour forward-looking statements.

 

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All forward-lookingstatements included in this Report on Form 10-Q are made only as of thedate of this Report on Form 10-Q. We anticipate that subsequent events anddevelopments will cause our views to change. However, while we may elect to update forward-looking statements at somepoint in the future, 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 global electronicmanufacturing and supply chain services company providing a portfolio ofintegrated capabilities that allows our customers to get their products tomarket faster, reduce their total costs and improve their operatingperformance.  Our customers includeleading OEMs who have chosen outsourcing as a core manufacturing strategy.We have developed relationships with OEMs in a diverse range ofindustries, including industrial equipment, commercial avionics, retailinfrastructure, medical products, voice and data communications, networkstorage, office equipment, computers, computer peripherals and consumerelectronics.  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 a superior customer experience throughopen and active communication, personalized service, a deep understanding ofour customers’ needs, attention to each customers unique operatingrequirements, customized and flexible supply chain solutions and rapidresponse.

 

We provide integrated supplychain solutions that address all stages of our customer’s product life cycle,including engineering and design, new product introduction, global supply chainmanagement, printed circuit board assembly, high speed automated manufacturing,final product assembly including configure-to-order and build-to-order,integration and testing of complex systems, fulfillment and distribution andafter-market services.  We believethis comprehensive range of services promotes our growth by attracting newcustomers and capturing additional outsourcing opportunities with our existingcustomers.

 

We have a global networkconsisting of 13 manufacturing, design and fulfillment facilities in theworld’s major electronics markets—North America, Europe and Asia—to serve theincreasing outsourcing needs of both multinational and regional OEMs.  Ourmanufacturing facilities are strategically located near our customers and theirend-markets, which benefits our customers by reducing the time required to gettheir products to market and by increasing their flexibility to respond quicklyto changing market conditions. We believe that the combination of our servicesand our global manufacturing network has enabled us to become an integral partof our customers’ product development and manufacturing strategies.

 

Since our founding in 1994through 2000, our growth had been driven primarily by acquisitions of existingOEM manufacturing facilities and by the increasing number of OEMs who hadoutsourced their manufacturing requirements. During the past two years, we haveclosed certain facilities and reduced our workforce to reflect our reducedrevenue stream resulting from adverse economic conditions affecting demand forour customers’ end-market products. Despite this recent downsizing, we intend to continue to actively pursuestrategic acquisitions and to continue to benefit from expected increases inthe number of OEMs that outsource their manufacturing requirements.

 

We work closely with ourcustomers to anticipate and forecast their future volume of orders and deliverydates. We derive most of our net sales under purchase orders from ourcustomers. We recognize sales, net of expected product return and warrantycosts, typically at the time of product shipment or as services are rendered,provided no post-delivery obligations remain and collection is reasonablyassured. Our cost of goods sold usually includes the cost of components andmaterials, labor costs and manufacturing overhead.  Under some contracts, our customers will own thecomponents and consign the inventory to us. In these situations, we may recognize revenue (and related cost ofsales) only on the labor and overhead used to assemble the product.  Theprocurement of raw materials and components requires us to commit significantworking capital to our operations and to manage the purchasing, receiving,inspection and stocking of these items. Our typical customer contract containsprovisions which specify that we may recover from the customer inventory costsand material acquisition costs for raw material which becomes excess orobsolete due to customer reschedules, cancellations or product changes.

 

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Our operating results areaffected by the level of capacity utilization in our manufacturing facilities,indirect labor costs and selling, general and administrative expenses. Grossmargins and operating income generally improve during periods of high-volumeand high-capacity utilization in our manufacturing facilities and declineduring periods of low-volume and low-capacity utilization. However, certain ofour customer contracts contained guaranteed minimum commitments, requiring thecustomer to either purchase certain contractual minimum quantities or pay foramounts less than the minimum purchase commitment.  Such contracts helped offset the negative impact of low-capacityutilization on gross margins and operating income.  Currently we have only one customer contract containing aguaranteed minimum commitment.

 

Our business strategy includes the continued expansionof our global manufacturing network. Currently, approximately 72% of our netsales worldwide are denominated in US dollars, while our labor and utilitycosts in facilities outside of the United States are denominated in localcurrencies. Foreign currency gains and losses are the result of transactingbusiness in a currency that is different from the functional currency of ouroperating entity and the movements in those currencies between the time atransaction is recorded for financial reporting purposes and the time paymentis made or received. We currently use forward foreign exchange contracts on alimited basis to minimize our foreign currency risk but not for tradingpurposes. We expect to continue to utilize forward foreign exchange contractsonly to the extent that these contracts minimize exposure and reduce risk fromexchange rate fluctuations on specific underlying transactions that createforeign currency exchange rate risk for us. Any increase or decrease in our useof derivative financial instruments will likely be as a result of thesecontracts.

 

 

RESTUCTURING

 

In the first quarter of 2003, we reversed $0.2 millionof restructuring reserves related mainly to severance expenses which are nolonger expected to be incurred.

 

In the firstquarter of 2002, we implemented a plan to restructure certain operations,primarily related to closing our facility in China and a workforce reduction atour corporate headquarters.  The Chinafacility, which ceased operations during the third quarter of 2002, was closedas the site did not meet our long-term strategic goals.  The total charge recorded for this plan was$5.5 million, which was comprised of asset write-downs of $3.1 million, leasetermination costs of $0.6 million and severance of $1.8 million related to thereduction of 371 manufacturing and 24 managerial employees.  This plan is expected to be substantiallycomplete by the end of the second quarter of 2003.

 

During the full year2002, we implemented various restructuring plans throughout our organization toalign our cost structure with the reduced revenue stream as a result of theeconomic downturn in the EMS industry. In total for all 2002, we incurred restructuringcharges of $13.4 million consisting of asset write-downs of $4.3 million,employee severance of $5.3 million and lease termination costs of $3.8 million.

 

Thefollowing table sets forth the activity in the restructuring reserves fromDecember 31, 2002 to March 30, 2003:

                
|                         |   | **Employee  Severance and  Related  Expenses** |   | **Lease  Payments on  Facilities and  Equipment** |   | **Total** |   |
|------------------------------|--------|------------------------------------------------|--------|---------------------------------------------------|--------|-----------|--------|
| Balance at December 31, 2002 |   | $                                              | 1.9    |                                              | $      | 3.6       |   | $ | 5.5 |   |
| Charges utilized             |   | (1.4                                           | )      | (0.9                                              | )      | (2.3      | )      |
| Provision adjustments        |   | (0.2                                           | )      | —                                            |   | (0.2      | )      |
| Balance at March 30, 2003    |   | $                                              | 0.3    |                                              | $      | 2.7       |   | $ | 3.0 |   |

 

Reservesremaining at March 30, 2003 mainly represent lease termination payments inSingapore.  Substantially all severancerelated restructuring reserves at March 30, 2003 will be paid by the end of thesecond quarter of 2003, while the lease payments in Singapore may continueuntil the lease expires in 2010.

 

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We do not currently have plans tofurther restructure our operations. However, in light of the continued weak economy, particularly in theelectronics and manufacturing sectors, we may be required to implement costsavings plans in the future. Such plans may include further headcountreductions, lease terminations, and disposal of underutilized manufacturingassets, as well as shutdowns or consolidations of facilities. If we were toimplement such plans, it may result in significant further costs related toseverance payments and lease termination costs, as well as write downs ofcertain long-lived assets. We cannot currently estimate the cost of such plans,if any.

 

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 Ended**    |    |
|--------------------------------------------------|--------|----------------------------|---------|
|                                             |   | **March 30,  2003**        |    | **March 31,  2002** |   |
|                                             |   | **(Dollars in thousands)** |    |
|                                             |   |                       |    |   |   |   |   |   |   |
| Net  sales                                       |   | $                          | 161,373 |   | 100.0 | % | $ | 215,366 |   | 100.0 | % |
| Cost  of goods sold                              |   | 148,356                    |    | 91.9 |   | 197,086 |   | 91.5 |   |
| Gross  profit                                    |   | 13,017                     |    | 8.1 |   | 18,280 |   | 8.5 |   |
| Selling,  general and administrative             |   | 12,112                     |    | 7.5 |   | 15,572 |   | 7.2 |   |
| Amortization  expense                            |   | —                     |    | — |   | 1,853 |   | 0.9 |   |
| Restructuring  and asset writedowns              |   | (249                       | )       | (0.1 | ) | 5,457 |   | 2.5 |   |
| Other  operating income                          |   | —                     |    | — |   | (800 | ) | (0.4 | ) |
| Operating  income (loss)                         |   | 1,154                      |    | 0.7 |   | (3,802 | ) | (1.7 | ) |
| Interest  expense, net                           |   | (1,000                     | )       | (0.6 | ) | (2,994 | ) | (1.4 | ) |
| Gain  on change in fair value of derivative      |   | 520                        |    | 0.3 |   | — |   | — |   |
| Foreign  exchange gain                           |   | 319                        |    | 0.2 |   | 17 |   | 0.0 |   |
| Income  (loss) before provision for income taxes |   | 993                        |    | 0.6 |   | (6,779 | ) | (3.1 | ) |
| Provision  for income taxes                      |   | 164                        |    | 0.1 |   | 407 |   | 0.2 |   |
| Net  income (loss)                               |   | $                          | 829     |   | 0.5 | % | $ | (7,186 | ) | (3.3 | )% |
|                                             |   |                       |    |   |   |   |   |   |   |
| Net  loss applicable to common stockholders      |   | $                          | (46     | ) | (0.0 | )% | $ | (7,329 | ) | (3.4 | )% |
|                                                  |        |                            |         |  |  |  |  |  |  |  |  |  |

 

FISCAL QUARTER ENDEDMARCH 30, 2003 COMPARED TO FISCAL QUARTER ENDED MARCH 31, 2002

 

NET SALES

 

Net sales for the quarter ended March 30, 2003decreased $54.0 million, or 25%, to $161.4 million from $215.4 million for thequarter ended March 31, 2002.  A portionof this decrease relates to the closing of the Company’s Mt. Prospect, Il.facility in the third quarter of 2002, which had revenues in the first quarterof 2002 of $43.0 million.  Of the MtProspect revenues, $18.4 million related to business with 3Com which ended inthe third quarter of 2002, with the remaining revenue of $24.6 million fromthis facility being transferred to our other manufacturing sites**.  **The balance of the decrease ofapproximately $35.6 million consists of $25.8 million from two customers whomwe no longer do business with in 2003 and $20.9 million due to the overalldecline in the economy, which was partially offset by $11.0 million in revenuefrom two new customers.

 

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GROSS PROFIT

 

Gross profit decreased from 8.5% of net sales for thequarter ended March 31, 2002 to 8.1% of net sales for the quarter ended March30, 2003. Our gross margin in the first quarter of 2003 was impacted by theloss of our take or pay contracts with two customers, each of which expiredduring 2002 but had positively contributed to our gross profit in the firstquarter of 2002, and by the decrease in utilization of our manufacturingcapacity due to the revenue decline in the first quarter of 2003 compared tofirst quarter of 2002.  This decreasewas partially offset by the positive impact of lower inventory provisions inthe first quarter of 2003 compared to 2002 and a favorable change in customermix, with a large portion of our revenue decrease coming from products withlower gross margins.

 

SELLING, GENERAL ANDADMINISTRATIVE

 

Selling, general and administrative expense for thequarter ended March 30, 2003 decreased to $12.1 million, or 7.5% of net sales,from $15.6 million, or 7.2% of net sales, for the quarter ended March 31, 2002.This decrease of $3.5 million related mainly to the restructuring activitiesthe Company executed in 2002 and 2001**. **Includedin the first quarter 2002 expenses were $1.4 million related to the closing ofour Salt Lake City facility in the fourth quarter of 2001 that carried overinto 2002, and $0.7 million of expenses related to our Mt Prospect facilitywhich was closed in the third quarter of 2002. No expenses were incurred in the first quarter of 2003 related to eitherof these facilities.

 

The remaining decrease of$1.4 million consists mainly of lower bad debt expense of $0.4 million, whichhad been incurred mostly in Asia in the first quarter of 2002, lower laborcosts of $0.3 million from the various restructuring activities and other costreductions to offset our reduced revenue amounts.

 

AMORTIZATION EXPENSE

 

Amortization expense waszero in the quarter ended March 30, 2003 compared to $1.9 million in thequarter ended March 31, 2002.  Theamortization expense in the first quarter of 2002 related to our assetacquisition from 3Com in September 2000, which consisted mainly of customerrelationships.  These assets wereamortized over the term of our supply agreement with 3Com, which expired onJune 30, 2002.

 

RESTRUCTURING AND ASSET WRITEDOWNS

 

See the previous discussion inthe section titled “Restructuring and Asset Writedowns”.

 

OTHER OPERATING INCOME

 

During the first quarter of 2002, the Company receiveda $1.1 million fee related to costs incurred in pursuing an unsuccessfulacquisition opportunity in the fourth quarter of 2001.  This amount was netted against $0.3 millionof expenses incurred in the first quarter of 2002 related to the acquisitionopportunity.  The Company had incurredapproximately $0.8 million of acquisition related expenses in the fourthquarter of 2001 that were included in selling, general and administrativeexpenses.

 

INTEREST EXPENSE, NET

 

Net interest expensedecreased to $1.0 million for the quarter ended March 30, 2003 from $3.0million for the quarter ended March 31, 2002, reflecting lower averageborrowings in addition to the impact of decreasing interest rates.

 

CHANGE IN FAIR VALUE OFDERIVATIVE

 

During the first quarterof 2003, we recorded a reduction in the fair value of our warrantderivative.  The warrants were issued aspart of our preferred stock offering in the first quarter of 2002, and wereoriginally fair valued at $3.2 million. There was no change in the fair value of the warrants during the firstquarter of 2002.  However, during thefirst quarter of 2003, the warrants’ fair value decreased by $0.5 million fromtheir fair value of $2.7 million at December 31, 2002.  The reduction in the value of this liabilitywas recorded as a non-operating gain in the first quarter of 2003.

 

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FOREIGN EXCHANGEGAINS/LOSSES

 

Foreign exchange gainsfor the quarter ended March 30, 2003 were $0.3 million compared to effectivelyno foreign exchange gains or losses for quarter ended March 31, 2002.  The gain in 2003 related primarily to the weakeningof the US Dollar against the EURO for activities in our Valencia, Spainsubsidiary.

 

PROVISION FOR INCOMETAXES

 

Provision for incometaxes was $0.2 million for the quarter ended March 30, 2003 and $0.4 millionfor the quarter ended March 31, 2002. Our tax provisions in both quartersresulted from the mix of profits and losses experienced by us across thejurisdictions within which we operate. For the quarter ended March 30, 2003, losses in Asia provided us with noincome tax benefit because we do not believe it is more likely than not that wewill be able to utilize these taxable losses in the future, while profits inMexico and France required us to record tax provisions.  For the quarter March 31, 2002, losses inthe United States and Asia provided us with no income tax benefit because we donot believe it is more likely than not that we will be able to utilize thesetaxable losses in the future, while profits in Spain and France required us torecord tax provisions.

 

LIQUIDITY AND CAPITALRESOURCES

 

At March 30, 2003, we hadcash and cash equivalents of $45.0 million, total bank and other debt of $30.7million and $29.0 million of unused borrowing capacity under the creditagreement we entered into in the 2002 Credit Agreement.  In addition, we had $3.0 million of unusedborrowing capacity under a revolving credit facility in Spain.  During the quarter ended March 30, 2003, ouroperations were funded primarily with borrowings under our 2002 CreditAgreement and available cash.

 

Net cash used inoperating activities of $5.2 million for the three months ended March 30, 2003resulted from a decrease in operating liabilities of $33.3 million, offset inpart by a decrease in operating assets of $23.8 million, net income of $0.8million and depreciation and amortization of $3.9 million.  The decrease in operating liabilitiesconsists of a reduction in accounts payable of $25.0 million, mainly from thereduction in volume, and a reduction in accrued expenses of $8.3 million,consisting mainly of a reduction in our restructuring reserves and salary, wageand bonus accruals.   The decrease inoperating assets included a $24.2 million reduction in accounts receivable as adirect result of the decrease in revenue.

 

Net cash provided byoperating activities of $29.0 million for the three months ended March 31, 2002resulted from a decrease in operating assets of $75.2 million and depreciationand amortization of $6.7 million, offset in part by a decrease in operatingliabilities of $51.3 million and a net loss of $7.2 million.  The decrease in operating assets included a$54.2 million reduction in accounts receivable, of which approximately $48million was a direct result of the reduction in revenue, and $20.3 million ininventory reductions, caused by the reduced volume through the manufacturingsites.  Other non-cash items includewrite-downs and loss on disposal of fixed assets of $3.9 million related mainlyto the announced closing of the China facility in the first quarter of 2002.

 

Net cash used ininvesting activities for the quarter ended March 30, 2003 was $1.8 million,consisting of $6.6 million of capital expenditures, mainly from the purchase ofa previously leased Surface Mount Technology (“SMT”) line of $4.8 million,offset by $4.8 million in proceeds from the sale of the same SMT line, whichwas subsequently leased back in a sales/leaseback transaction that has beentreated as a capital lease. This sales/leaseback transaction required us torestrict $2.1 million in cash over the four year term of the lease. Thiscash has been reclassified to other assets at March 30, 2003. Net cashused in investing activities for the quarter ended March 31, 2002 was $0.9million, consisting of $0.7 million of capital expenditures and $0.2 millionfor internal use software.

 

Net cash provided by financing activities for thequarter ended March 30, 2003 was $2.6 million, consisting mainly of $3.8million in borrowings under our revolving credit facilities and $1.1 million ofproceeds from the issuance of stock options and our stock purchase plan,partially offset by $2.2 million of payments on long term debt and termloan.  Net cash provided by financingactivities for the quarter ended March 31, 2002 was $7.6 million, consisting ofnet proceeds of $37.8 million from the issuance of convertible preferred stockand warrants, offset in part by net repayments of $30.7 million under our bankcredit facility.

 

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InMarch 2002, we issued $41.5 million of convertible preferred stockand warrants to purchase 1,612,281 shares of common stock in a privateplacement to qualified accredited investors (the “Offering”). Proceeds of theOffering, net of costs of the Offering, were $37.7 million.  The convertible preferred stock accruesdividends quarterly at the rate of 5.25% per annum, payable quarterly in commonstock or cash, at our option.  If we choose to pay dividends in common stock orto redeem the convertible preferred stock with common stock, the shares ofcommon stock issued will be computed using 95% of the market value of thecommon stock over a prescribed measurement period.

 

The convertible preferred stockis convertible to common stock 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. The warrants areexercisable at any time through March 14, 2007. We have the right torequire the exercise of the warrants after March 14, 2003 if our commonstock trades for 175% of the warrant exercise price for a specified period.

 

We have a $130.5 million credit facility consisting ofa $120 million senior secured revolving credit facility and a $10.5 millionthree-year term loan (the “2002 Credit Agreement”).  The 2002 Credit Agreement is secured by substantially all domesticassets and a pledge of 65% of the shares of certain foreign subsidiaries.  Restrictive covenants for the 2002 CreditAgreement include restrictions on leverage ratios as well as covenantsrequiring minimum net worth, domestic adjusted EBITDA and fixed charge coverageratios.  The three-year term loan has aregular quarterly payment of $0.3 million payable on the first business day ofeach quarter, with the remaining outstanding balance due at maturity.

 

Also in June 2002, we entered into a ten-year mortgageloan for 10 million Euros ($9.2 million) and a 3 million Euro ($2.7 million)revolving credit facility in Valencia, Spain. There were no borrowings under the revolving credit facility atMarch 30, 2003.

 

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.  Borrowings are limited further by anyoutstanding letters of credit, which were $3.0 million at March 30, 2003.  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 arrearsquarterly.  The cost of borrowing underthe revolving facility is either the base rate (the bank’s prime rate) orLIBOR, plus the applicable spread costs. The Company has the option of choosing either the base rate orLIBOR.  In the first year the spreadcost is fixed for base rate and LIBOR loans. The spread on the base rate loans is 1.75% over the base rate and on theLIBOR loans is the chosen LIBOR period rate plus 3.25%.  In the second and third years the spreadswill reset quarterly based on the average net availability of borrowings forthe preceding quarter.  The spread onthe base rate loans will be between 1.25% and 2.25% and on the LIBOR loans willbe between 2.5% and 3.5%. The interest rate under the term loan is equal to thesum of the Cash Interest Rate (which is the greater of (i) the base rate ineffect plus 6.0% or (ii) 11.0%) plus the Deferred Interest Rate (which is equalto 3.0%).  The interest rate on the termloan at March 30, 2003 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**. **Since we only had$3.7 million of revolving loans outstanding at March 30, 2003, we received atemporary waiver of the interest rate hedge requirement through June 30, 2003and have not entered into any interest rate hedge agreement at March 30, 2003.

 

Our principal sources of funding our operatingexpenses, capital expenditures and debt obligations are expected to be ourcurrent cash and cash equivalents, cash generated from operations and availableborrowings under our 2002 Credit Agreement. The amount of cash generated fromoperations will be dependent upon such factors as the successful execution ofour business plan and worldwide economic conditions. Borrowings under 2002Credit Agreement are dependent upon a borrowing base calculation derived fromour domestic accounts receivable and inventory.  Availability fluctuates according to the quantity and quality ofour receivables and US inventory. Borrowings under our 2002 Credit Agreement could be limited by a numberof factors, including the following:

 

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•  revenue reductions from decreased customerdemand or lost customers causing lower borrowing assets, particularly accountsreceivable,

 

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

 

•deterioration in the value of the assetscomprising the borrowing base, or

 

•failure to comply with Credit Agreement covenants.

 

We are currently in compliance with all covenantsunder our 2002 Credit Agreement.  In theevent we do not have adequate funding from our 2002 Credit Agreement, we wouldwork with our lending institutions to modify the 2002 Credit Agreement oridentify other sources of capital to obtain necessary debt or equity financing.There is no assurance we would be able to modify the 2002 Credit Agreement withexisting lenders or obtain alternative debt or equity financing to satisfy ourfunding needs.

 

Although we believe that funds generated fromoperations and borrowings under the 2002 Credit Agreement will be adequate tomeet our anticipated future operating expenses, capital expenditures and debtobligations for at least the next twelve months, there can be no assurance wewill have sufficient funds to meet our cash requirements over the next twelve monthsand as such we continue to consider financing opportunities that would provideadditional liquidity.

 

 

RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS

 

In December 2002, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 148,Accounting for Stock-Based Compensation- Transition and Disclosure” (“SFAS148”).  This statement amends SFAS 123to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  Under the provisions of SFAS 148, companiesthat choose to adopt the accounting provisions of SFAS 123 will be permitted toselect from three transition methods: the prospective method, the modifiedprospective method and the retroactive restatement method. The prospectivemethod, however, may no longer be applied for adoptions of the accountingprovisions of SFAS 123 for periods beginning after December 15, 2003. SFAS148 requires certain new disclosures that are incremental to those required bySFAS 123, which must also be made in interim financial statements. Thetransition and annual disclosure provisions of SFAS 148 are effective forfiscal years ending after December 31, 2002. We have adopted the newinterim disclosure provisions effective for the interim periods beginning afterDecember 15, 2002.  We have decidednot to voluntarily adopt the accounting provisions of SFAS 123 as permittedunder the provisions of SFAS 148.

 

In November 2002, the FASB issued FIN No. 45“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others an interpretation of FASBStatements No. 5, 57, and 107 and rescission of FASB Interpretation No.34.”  The Interpretation requires that aguarantor recognize, at the inception of a guarantee, a liability for the fairvalue of the obligation undertaken by issuing the guarantee. The Interpretationalso requires additional disclosures to be made by a guarantor in its interimand annual financial statements about its obligations under certain guaranteesit has issued. The accounting requirements for the initial recognition ofguarantees are applicable on a prospective basis for guarantees issued ormodified after December 31, 2002. The disclosure requirements are effective forall guarantees outstanding, regardless of when they were issued or modified, asof December 31, 2002. The adoption of FIN No. 45 will not have a materialeffect on our consolidated financial statements.

 

In June 2002, theFASB issued SFAS No. 146, “Accounting for Exit or DisposalActivities”.  SFAS No. 146addresses significant issues regarding the recognition, measurement andreporting of costs that are associated with exit and disposal activities,including restructuring activities that are currently accounted for under EITFNo. 94-3.  We are required to adoptthe provisions of SFAS No. 146 effective for exit or disposal activitiesinitiated after December 31, 2002. The effect-on-adoption of SFAS No. 146 will change on a prospectivebasis the

 

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timing of when restructuring charges are recorded from a commitmentdate approach to when the liability is incurred.

 

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 or lossesfrom the extinguishment of debt as an extraordinary item, net of tax. As aresult of this new FASB, gains and losses from extinguishment of debt should beclassified as extraordinary items only if they meet the criteria in APB OpinionNo.30 “Reporting the Results of Operations-Reporting the Effects of Disposal ofa Segment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions”.  We do notbelieve that the extinguishment of debt will qualify as an extraordinary itemas defined in APB 30, and therefore we will be required to classify thesecharges as operating expenses.  We haveadopted SFAS No. 145 on January 1, 2003, and will reclassify the extraordinaryloss to a non-operating loss in all applicable periods for comparativepurposes.

 

In June 2001, the FASBissued SFAS No. 143, “Accounting for Asset Retirement Obligations” to beeffective for all fiscal years beginning after June 15, 2002, with earlyadoption permitted.  SFAS No. 143establishes accounting standards for the recognition and measurement of anasset retirement obligation and its associated asset retirement cost. It alsoprovides accounting guidance for legal obligations associated with theretirement of tangible long-lived assets. We have adopted SFAS No. 143 in the first quarter of 2003 anddetermined that it did not impact our financial position, results of operationsor cash flows.

 

RELATED PARTYTRANSACTIONS

 

At March 30, 2003, affiliates ofCredit Suisse First Boston Corporation (“CFSB”) owned approximately 46% of ouroutstanding common stock, not including warrants to purchase 749,797 shares ofthe our common stock, and had one seat on our Board of Directors.  The details of the warrants are mentionedbelow.  Further, CSFB is a member of thebank group under our 2002 Credit Agreement and has committed to lend up to $10million of the overall 2002 Credit Agreement. In connection with structuring this agreement in the second quarter of2002, certain affiliates of CFSB were paid $0.6 million.

 

Affiliates of CFSB participated in our convertiblepreferred stock offering in March 2002. These affiliates purchased 300,000 shares of the convertible preferredstock, which is convertible into 2,331,003 shares of common stock, and warrantsto purchase 582,751 shares of common stock.  In connection with this investment, we paid an affiliate of CSFB anadvisory fee of 1.446% on the total amount invested in the offering (anaggregate of $0.6 million) in return for (i) CSFB’s services in helping tostructure and arrange the transaction, (ii) the agreement by the CSFBaffiliates not to sell or otherwise transfer any of the our securities for sixmonths (other than as part of an underwritten offering we initiate), 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.

 

Affiliates of CFSB alsoparticipated in the issuance of our redeemable preferred stock inNovember 1999, which included warrants to purchased 1,160,542 shares ofcommon stock. The redeemable preferred stock was redeemed and warrants topurchase 937,812 shares were cancelled at the time of our initial publicoffering in June 2000. At March 30, 2003, 167,046 of these warrants werestill outstanding.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any financialpartnerships with unconsolidated entities, such as entities often referred toas structured finance, special purpose entities or variable interest entitieswhich are often established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes. Accordingly, weare not exposed to any financing, liquidity, market or credit risk that couldarise if we had such relationships.

 

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### **RISK FACTORS**

 

YOU SHOULD CAREFULLYCONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION.ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIALMAY ALSO IMPAIR OUR BUSINESS. ANY OF THESE RISKS COULD HAVE A MATERIAL ANDNEGATIVE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.

 

BECAUSE A SIGNIFICANTPORTION OF OUR SALES CURRENTLY COMES FROM A SMALL NUMBER OF CUSTOMERS, ANYDECREASE IN SALES FROM THESE CUSTOMERS COULD HARM OUR OPERATING RESULTS.

 

We depend on a small number of customers for a largeportion of our business. Our ten largest customers accounted for approximately85% of net sales in the quarter ended March 31, 2003 and approximately 80% ofnet sales for fiscal 2002.  Changes inour customers’ orders have, in the past, had a significant impact on ouroperating results. If a major customer significantly reduces the amount ofbusiness it does with us, there would be an adverse impact on our operatingresults.

 

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 acustomer to terminate its agreement with us, it is likely that our operatingresults, through lower revenue and lower fixed cost absorption, would beadversely affected.  Moreover, our operating results inthe past have been positively affected by several customer contracts containingguaranteed minimum commitments.  Whilethose contracts generally have fixed terms and may not be terminated (absent abreach) prior to their stated expiration, the favorable effects of thecontracts are unlikely to be replicated after these contracts expire orotherwise terminate.

 

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.

 

THE INCURRENCE OFINDEBTEDNESS COULD HARM OUR OPERATING RESULTS AND FINANCIAL CONDITION. WEDEPEND ON OUR CREDIT FACILITIES TO FINANCE OUR OPERATIONS AND THE MODIFICATIONOR TERMINATION OF THESE FACILITIES COULD HARM OUR OPERATING RESULTS ANDFINANCIAL CONDITION.

 

Our growth and acquisition strategy could require usto incur substantial amounts of indebtedness. As of March 30, 2003, our totaldebt was $30.7 million and our interest expense for the quarter then ended was$1.0 million. In addition, we may incur additional indebtedness in thefuture.  Our future level ofindebtedness could have adverse consequences for our business, including:

 

• vulnerability to the effects of poor economic and industry conditionsaffecting our business;

 

• dedication of a substantial portion of our cash flow from operations torepayment of debt and interest expense, limiting the availability of cash forworking capital, capital expenditures or acquisitions which may be attractiveto us;

 

• reduced flexibility in planning for, or reacting to, changes in ourbusiness and industry, due to the debt repayment obligations and restrictivecovenants contained in our debt instruments; and

 

• failure to comply with the financialcovenants under the agreements governing our indebtedness relating to matterssuch as fixed charge coverage ratio, minimum adjusted tangible net worth, and minimum domestic

 

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EBITDA,resulting in an event of default, which if not cured or waived, could causesubstantially all of our indebtedness 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.

 

 

WE HAVE MADE SEVERALSTRATEGIC ACQUISITIONS OF MANUFACTURING FACILITIES AND BUSINESSES AND MAY MAKEMORE ACQUISITIONS IN THE FUTURE, AND THE FAILURE TO SUCCESSFULLY INTEGRATEACQUIRED FACILITIES AND BUSINESSES MAY ADVERSELY AFFECT OUR FINANCIALPERFORMANCE.

 

We have made several significant acquisitions in thepast, and selectively pursuing strategic acquisitions remains an important partof our overall business strategy. However, any acquisitions we make couldresult in:

 

• difficulty integrating our operations, technologies, financial controlsand information systems, products and services with those of the acquiredfacility;

 

• difficulty in managing and operating geographically dispersedbusinesses, including some located in foreign countries;

 

• diversion of our capital and our management’s attention away from otherbusiness issues;

 

• an increase in our expenses and our working capital requirements;

 

• potential loss of key employees and customers of facilities orbusinesses we acquire; and

 

• financial risks, such as:

 

• potential liabilities of the facilities and businesses we acquire,including employees;

 

• our need to incur additional indebtedness; and

 

• dilution if we 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 LIMITEDAND OUR COMPETITIVE POSITION MAY BE HARMED IF WE ARE UNABLE TO IDENTIFY,FINANCE AND COMPLETE FUTURE ACQUISITIONS.

 

We expect to selectivelypursue strategic acquisitions as part of our overall business strategy. Competitionfor acquiring attractive facilities and businesses in our industry issubstantial. In executing this part of our business strategy, we may experiencedifficulty in identifying suitable acquisition candidates or in completingselected transactions. In addition, our 2002 Credit Agreement limits ourability to acquire the assets or businesses of other companies. If we are ableto identify acquisition candidates, such acquisitions may be financed withsubstantial debt or with potentially dilutive issuances of equity securities.Our ability to successfully complete acquisitions in the future will dependupon several factors, including the continued availability of financing. Wecannot assure you that financing for acquisitions will be available on termsacceptable to us, if at all.

 

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IF WE ARE LEFT WITHEXCESS INVENTORY, OUR OPERATING RESULTS WILL BE ADVERSELY AFFECTED.

 

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

 

As of March 30,$48.2 million of our net inventory was held under a supply agreement withone major customer. Of this amount, approximately 56% is inventory that exceedsdemand to fulfill forecast requirements at March 30, 2003. Our supply agreementplaces responsibility on our customer for inventory purchased consistent withits forecasts, but requires us to hold such inventory, subject in someinstances to a monthly carrying charge, prior to the time the customer declaresthe product end of life.  At such timeas the product is declared end of life, the customer is required to repurchaseany remaining unmitigated inventory. We believe that we have properly valuedthe inventory that we are responsible for as of March 30, 2003 and believe thecustomer is credit worthy.

 

LONG-TERM PURCHASE ORDERSAND COMMITMENTS ARE NOT TYPICAL IN OUR INDUSTRY, AND REDUCTIONS, CANCELLATIONSOR DELAYS IN CUSTOMER ORDERS WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.

 

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.

 

COMPETITION FROM EXISTINGOR NEW COMPANIES IN THE EMS INDUSTRY COULD CAUSE US TO EXPERIENCE DOWNWARDPRESSURE ON PRICES, FEWER CUSTOMER ORDERS, REDUCED MARGINS, THE INABILITY TOTAKE ADVANTAGE OF NEW BUSINESS OPPORTUNITIES AND 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.

 

WE DEPEND ON OURSUPPLIERS, SOME OF WHICH ARE THE SOLE SOURCE FOR OUR COMPONENTS, AND OURPRODUCTION WOULD BE SUBSTANTIALLY CURTAILED IF THESE SUPPLIERS ARE NOT ABLE TOMEET OUR DEMANDS AND ALTERNATIVE SOURCES ARE NOT AVAILABLE.

 

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

 

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suppliers to minimize the impact of shortages in raw materials andcomponents, we sometimes experience short-term adverse effects due to pricefluctuations, extended lead times and delayed shipments. In the past, therehave been industry-wide shortages of electronic components, particularly memoryand logic devices. If a significant shortage of raw materials or componentswere to occur, we may have to delay shipments to customers and our operatingresults would be adversely affected. In some cases, supply shortages ofparticular components will substantially curtail production of products usingthese components. While most of our significant customer contracts permitquarterly or other periodic reviews of pricing based on decreases and increasesin the prices of raw materials and components, we are not always able to passon price increases to our customers. Accordingly, some raw material andcomponent price increases could adversely affect our operating results. We alsodepend on a small number of suppliers for many of the other raw materials andcomponents that we use in our business. If we were unable to continue topurchase these raw materials and components from our suppliers, our operatingresults would be adversely affected. Because many of our costs are fixed, ourmargins depend on our volume of output at our facilities and a reduction involume will adversely affect our margins.

 

UNCERTAINTIES AND ADVERSETRENDS AFFECTING THE ELECTRONICS INDUSTRY OR ANY OF OUR MAJOR CUSTOMERS MAYADVERSELY AFFECT OUR OPERATING RESULTS.

 

Our business depends on the electronics industry,which is subject to rapid technological change, short product life cycles andpricing and margin pressure.  Inaddition, the electronics industry has historically been cyclical and subjectto significant downturns characterized by diminished product demand, rapiddeclines in average selling prices and production over-capacity. When 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 particularincluding the economic slowdown, may adversely affect our operating results.

 

BECAUSE WE HAVESIGNIFICANT OPERATIONS OVERSEAS, OUR OPERATING RESULTS COULD BE HARMED BYECONOMIC, POLITICAL, REGULATORY AND OTHER FACTORS EXISTING IN FOREIGN COUNTRIESIN WHICH WE OPERATE.

 

We have substantialmanufacturing operations in Europe, Asia and Mexico. Our internationaloperations are subject to inherent risks, which may adversely affect us,including:

 

• politicaland economic instability in countries or geographies where we havemanufacturing facilities, particularly in Asia and Mexico where we conduct aportion of our business;

 

• fluctuationsin the value of foreign currencies;

 

• highlevels of inflation, historically the case in a number of countries in Asia andMexico where we do business;

 

• changesin labor conditions and difficulties in staffing and managing our foreignoperations;

 

• greaterdifficulty in collecting our accounts receivable and longer payment cycles;

 

• burdensand costs of our compliance with a variety of foreign laws;

 

• increasesin the duties and taxes we pay;

 

• impositionof restrictions on currency conversion or the transfer of funds; and

 

• expropriationof private enterprises.

 

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OUR BUSINESS MAY BEIMPACTED BY GEOPOLITICAL EVENTS

 

As a global business, we operate and have customerslocated in many countries.  Geopoliticalevents, such as terrorist acts, the current conflict in Iraq and the outbreakof severe acute respiratory syndrome (SARS) may effect the overall economicenvironment and negatively impact the demand for our customers’ products.  As a result, customer orders may be lowerand our financial results may be adversely affected.

 

OUR QUARTERLY OPERATINGRESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY AND IF WE FAIL TO MEET THEEXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS THE PRICE OF OUR SECURITIESMAY DECREASE.

 

Ourannual and quarterly results may vary significantly depending on variousfactors, many of which are beyond our control, and may not meet theexpectations of securities analysts or investors. If this occurs, the price ofour common stock would likely decline. These factors include:

 

• variationsin the timing and volume of customer orders relative to our manufacturingcapacity;

 

• introductionand market acceptance of our customers’ new products;

 

• changesin demand for our customers’ existing products;

 

• thetiming of our expenditures in anticipation of future orders;

 

• effectivenessin managing our manufacturing processes;

 

• changesin competitive and economic conditions generally or in our customers’ markets;

 

• thetiming of, and the price we pay for, acquisitions and related integrationcosts;

 

• changesin the cost or availability of components or skilled labor; and

 

• foreigncurrency exposure.

 

As is the case with manytechnology companies, we typically ship a significant portion of our productsin the last few weeks of a quarter. As a result, any delay in anticipated salesis likely to result in the deferral of the associated revenue beyond the end ofa particular quarter, which would have a significant effect on our operatingresults for that quarter. In addition, most of our operating expenses do notvary directly with net sales and are difficult to adjust in the short term. Asa result, if net sales for a particular quarter were below our expectations, wecould not proportionately reduce operating expenses for that quarter, and,therefore, that revenue shortfall would have a disproportionate adverse effecton our operating results for that quarter.

 

LOSS OF ANY OF OUR KEYPERSONNEL COULD HURT OUR BUSINESS BECAUSE OF THEIR EXPERIENCE IN THE EMSINDUSTRY AND THEIR TECHNOLOGICAL EXPERTISE.

 

Weoperate in the highly competitive EMS industry and depend on the services ofour key senior executives and our technological experts. The loss of theservices of one or several of our key employees or an inability to attract,train and retain qualified and skilled employees, specifically engineering,operations and sales personnel, could result in the loss of customers orotherwise inhibit our ability to operate and grow our business successfully. Inaddition, our ability to successfully integrate acquired facilities orbusinesses depends, in part, on our ability to retain and motivate keymanagement and employees hired by us in connection with the acquisition.

 

IF WE ARE UNABLE TOMAINTAIN OUR TECHNOLOGICAL EXPERTISE IN DESIGN AND MANUFACTURING PROCESSES WEWILL NOT BE ABLE TO SUCCESSFULLY COMPETE.

 

We believe that ourfuture success will depend upon our ability to develop and provide design andmanufacturing services that meet the changing needs of our customers. Thisrequires that we successfully anticipate and respond to technological changesin design and manufacturing processes in a cost-effective and timely manner.

 

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As a result, we continually evaluate the advantages and feasibility ofnew product design and manufacturing processes. We cannot, however, assure youthat our process development efforts will be successful.

 

WE ARE SUBJECT TO AVARIETY OF ENVIRONMENTAL LAWS THAT EXPOSE US TO POTENTIAL FINANCIAL LIABILITY.

 

Our operations areregulated under a number of federal, state and foreign environmental and safetylaws and regulations that govern, among other things, the discharge ofhazardous materials into the air and water as well as the handling, storage anddisposal of these materials. These laws and regulations include the Clean AirAct, the Clean Water Act, the Resource, Conservation and Recovery Act, and theComprehensive Environmental Response, Compensation and Liability Act, as wellas analogous state and foreign laws. Compliance with these environmental lawsis a major consideration for us because we use hazardous materials in ourmanufacturing process. In addition, because we are a generator of hazardouswastes, we, along with any other person who arranges for the disposal of ourwastes, may be subject to financial exposure for costs associated with aninvestigation and any remediation of sites at which we have arranged for thedisposal of hazardous wastes if these sites become contaminated, even if wefully comply with applicable environmental laws. In the event of a violation ofenvironmental laws, we could be held liable for damages and for the costs ofremedial actions and could also be subject to revocation of our effluentdischarge permits. Any revocation could require us to cease or limit productionat one or more of our facilities, thereby negatively impacting our revenues andresults of operations. Environmental laws could also become more stringent overtime, imposing greater compliance costs and increasing risks and penaltiesassociated with any violation, which also could negatively impact our operatingresults.

 

OUR CONTROLLINGSTOCKHOLDERS AND SOME OF OUR DIRECTORS MAY HAVE INTERESTS THAT DIFFER FROMYOURS.

 

Credit Suisse FirstBoston, through certain of its affiliates, owns approximately 46% of ouroutstanding common stock and, as a result, has significant control over ourbusiness, policies and affairs, including, effectively, the power to appointnew management, prevent or cause a change of control and approve any actionrequiring the approval of the holders of our common stock, such as adoptingamendments to our certificate of incorporation and approving mergers or salesof all or substantially all of our assets. Circumstances may occur in which theinterests of these stockholders could be in conflict with your interests.

 

PROVISIONS IN OUR CHARTERDOCUMENTS AND DELAWARE LAW MAY DELAY, DETER OR PREVENT SOMEONE FROM ACQUIRINGUS, WHICH COULD DECREASE THE VALUE OF OUR COMMON STOCK.

 

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

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET RISKS

 

There has been no material changes in our market riskduring the quarter ended March 30, 2003. Market risk information is contained under the caption “Quantitative andQualitative Disclosure Relating to Market Risks” in our Annual Report on Form10-K for the fiscal year ended December 31, 2002.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

(a)           *Evaluationof disclosure controls and procedures.*  Based on their evaluation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act of 1934) as of a date within 90 days of the filing dateof this Quarterly Report on Form 10-Q, the Company’s chief executive officerand chief financial officer have concluded that the Company’s disclosurecontrols and procedures are

 

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designed to ensure that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms and are operating in aneffective manner.  However, it should benoted that any system of controls, however well designed and operated, canprovide only reasonable, and not absolute, assurance that the objectives of thesystem are met.  In addition, the designof any control system is based in part upon certain assumptions about thelikelihood of future events.  Because ofthese and other inherent limitations of control systems, there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.

 

(b)           *Changesin internal controls.* Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their most recent evaluation.

 

PART II. OTHER INFORMATION

 

ITEM 1.  LEGALPROCEEDINGS

 

Aclass action complaint filed on December 6, 2000, alleging violations offederal securities laws has been pending in the United States District Court,Southern District of New York against us, certain of our former officers andthe underwriters that participated in our initial public offering (“IPO”).  We understand that various other plaintiffshave filed substantially similar class action cases against approximately 300other publicly traded companies and their IPO underwriters, which cases havebeen consolidated to a single federal district court for coordinated casemanagement.  The complaint, which seeksunspecified damages among other things, alleges that the prospectus filed by usrelating to stock sold in our initial public offering contained false andmisleading statements with respect to the commission arrangements between theunderwriters and their customers.  Webelieve that this claim against us lacks merit.

 

OnJuly 15, 2002, we together with the other issuers named as defendants in thesecoordinated proceedings filed a collective motion to dismiss the consolidatedcomplaints on various legal grounds.  InFebruary 2003, that motion was denied with respect to most issuers.  On October 9, 2002, the court approved astipulation between the plaintiffs and the individual defendants providing forthe dismissal of the individual defendants without prejudice.

 

While we can make no promises regarding the outcome ofthis action, we believe that the final result will have no material effect onits consolidated financial condition or result of operations.

 

We are party to other lawsuits in the ordinary courseof business. We do not believe that these other proceedings individually or inthe aggregate will have a material adverse effect on our financial position,results of operations or cash flows.

 

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.                                                         |

 

26

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| 2.5(1)    |   | Asset Purchase Agreement dated as of November 19, 1999 among 3Com  Corporation, MSL and Manufacturers’ Services Salt Lake City Operations, Inc.                                  |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.6(2)    |   | Asset Purchase Agreement dated as of September 26, 2000 among 3Com  Corporation, MSL 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 MSL 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 MSL 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 MSL 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 MSL 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 MSL and the lenders named therein.                                        |
| 4.11(9)   |   | Certificate of Designations of 5.25% Series A Convertible Preferred  Stock of MSL dated March 14, 2002.                                                                               |
| 4.12(11)  |   | Credit Agreement dated as of June 20, 2002 by and between MSL 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.                                                                 |

 

27

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|       |   | 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 MSL and  Rodolfo Archbold.                                                                                                                                 |
| 10.42(11)  |   | Severance Agreement effective March 29, 2002 by and between MSL 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(13)  |   | Accession Agreement dated August 22, 2002 among Congress Financial Corporation,  Bank of America, MSL, et al.                                                                                                          |
| 10.48(13)  |   | Notice of Assignment and Acceptance dated August 21, 2002 among  HSBC Business Credit (USA) Inc., Bank of America, N.A. and MSL.                                                                                  |
| 10.49(13)  |   | Notice of Assignment and Acceptance dated August 20, 2002 among Orix  Financial Services, Bank of America, N.A. and MSL.                                                                                          |
| 10.50 (14) |   | Severance Agreement effective January 2, 2003 by and between MSL  and Kevin C. Melia                                                                                                                              |
| 10.51 (14) |   | Amendment No. 1 dated August 16, 2002 to the Credit Agreement dated  June 20, 2002 by and among the Company, Bank of America, N.A. and  certain other financial institutions named therein.                       |
| 10.52 (14) |   | Amendment and Waiver No. 2 dated as of December 2002 to the Credit  Agreement dated June 20, 2002 by and among the Company, Bank of America,  N.A. and certain other financial institutions named therein.        |
| 10.53 (14) |   | Waiver and Undertaking Agreement No. 3 dated as of February 2003 to  the Credit Agreement dated June 20, 2002 by and among the Company, Bank of  America, N.A. and certain other financial institutions named therein. |
| 10.54 (14) |   | Waiver Agreement No. 4 dated March 21, 2003 to the Credit  Agreement dated June 20, 2002 by and among the Company, Bank of America,  N.A. and certain other financial institutions named therein.            |
| 10.55      |   | Employment Agreement dated April 29, 2003 between MSL and Albert A.  Notini.                                                                                                                                           |
| 99.1       |   | Certification                                                                                                                                                                                                          |

 

28

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----

+              Confidentialtreatment requested as to certain portions which portions have been filedseparately with the Securities and Exchange Commission.

 

(1)           Filed as an Exhibit to the Registrant’s RegistrationStatement on Form S-1, as amended (File No. 333-96227), filed onFebruary 4, 2000.

 

(2)           Filed as an Exhibit to the Registrant’s Current Report onForm 8-K filed on October 11, 2000.

 

(3)           Filed as an Exhibit to the Registrant’s Current Report onForm 8-K filed on December 5, 2000.

 

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

 

(5)           Filed as an Exhibit to the Registrant’s Annual Report onForm 10-K filed on April 2, 2001.

 

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

 

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

 

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

 

(9)           Filed as an Exhibit to the Registrant’s Current Report onForm 8-K filed on March 18, 2002.

 

(10)         Filed as an Exhibit to the Registrant’s Quarterly Report onForm 10-Q filed on May 15, 2002.

 

(11)         Filed as an Exhibit to the Registrant’s Quarterly Report onForm 10-Q filed on August 14, 2002.

 

(12)         Filed as an Exhibit to the Registrant’s Current Report onForm 8-K filed on June 28, 2002.

 

(13)         Filed as an Exhibit to the Registrant’s Quarterly Report onForm 10-Q filed on November 13, 2002.

 

(14)         Filed as an Exhibit to the Registrant’sAnnual Report on Form 10-K filed on March 31, 2003.

 

 

(b)           The registrant did not file anyReports on Form 8-K during the quarterly period ended March 30, 2003.

 

 

29

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SIGNATURES

 

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

 
|   | MANUFACTURERS’ SERVICES  LIMITED |
|--------|---------------------------------------|
|   | (Registrant)                          |   |
|   |                                  |   |   |
|   | Date: April 30, 2003                  |   |
|   |                                  |   |   |
|   | 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) |   |

 

30

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CERTIFICATIONSPURSUANT TO SECTION 302

OF THESARBANES-OXLEY ACT OF 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: April 30, 2003 | /s/ Robert C. Bradshaw  |   |
|-----------------------|-------------------------|--------|
|                  | Robert C. Bradshaw      |
|                  | Chief Executive Officer |

 

31

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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. |

 
|   | Dated:  April 30, 2003 | /s/ Albert A. Notini    |   |
|--------|-----------------------------|-------------------------|--------|
|   |                        | Albert A. Notini        |
|   |                        | Chief Financial Officer |

 

32

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