**UNITED STATESSECURITIES 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 June 29,  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 mark whether the Registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý      No  o

 

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

 

At July 29, 2003, there were 34,110,842 shares of Common Stock, $0.001par value, outstanding.

 

 

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MANUFACTURERS’ SERVICES LIMITED

INDEX

 
| PART I. FINANCIAL INFORMATION |
|-------------------------------|
|                          |   |
| Item 1.                       | Consolidated Financial Statements |
|                          | Consolidated Balance Sheets (Unaudited) —  June 29, 2003 and December 31, 2002 |
|                          | Consolidated Statements of Operations  (Unaudited) — Three and Six Months Ended June 29, 2003 and June 30, 2002 |
|                          | Consolidated Statements of Cash Flows  (Unaudited) — Three and Six Months Ended June 29, 2003 and June 30, 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 4.                       | Submission of Matters to a Vote of Security  Holders |
| Item 6.                       | Exhibits and Reports on Form 8K |
|                          |   |
|                          | Signatures |
|                          |   |
|                          | Certifications |

 

2

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

MANUFACTURERS’ SERVICES LIMITED

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(IN THOUSANDS, EXCEPT SHARE DATA)

 
|                                                                                                                                                                                                                   |   | **June 29,  2003** |    | **December  31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
| ASSETS                                                                                                                                                                                                                 |   |               |    |                    |   |
| Current assets:                                                                                                                                                                                                        |   |               |    |                    |   |
| Cash and cash equivalents                                                                                                                                                                                              |   | $                  | 44,665  |                    | $      | 48,955 |   |
| Accounts receivable, less allowance for  doubtful accounts of $466 and $2,753 at  June 29, 2003 and December 31,  2002, respectively                                                                              |   | 95,006             |    | 109,083                 |   |
| Inventories                                                                                                                                                                                                            |   | 96,000             |    | 98,827                  |   |
| Prepaid expenses and other current assets                                                                                                                                                                              |   | 18,105             |    | 21,945                  |   |
| Total current assets                                                                                                                                                                                                   |   | 253,776            |    | 278,810                 |   |
|                                                                                                                                                                                                                   |   |               |    |                    |   |
| Property and equipment, net                                                                                                                                                                                            |   | 39,784             |    | 34,659                  |   |
| Goodwill                                                                                                                                                                                                               |   | 8,559              |    | 8,441                   |   |
| Other assets                                                                                                                                                                                                           |   | 10,072             |    | 9,497                   |   |
| Total assets                                                                                                                                                                                                           |   | $                  | 312,191 |                    | $      | 331,407 |   |
|                                                                                                                                                                                                                   |   |               |    |                    |   |
| LIABILITIES, CONVERTIBLE PREFERRED STOCK  AND STOCKHOLDERS’ EQUITY                                                                                                                                                |   |               |    |                    |   |
| Current liabilities:                                                                                                                                                                                                   |   |               |    |                    |   |
| Current portion of long-term debt and  capital lease obligations                                                                                                                                                       |   | $                  | 4,626   |                    | $      | 5,654 |   |
| Accounts payable                                                                                                                                                                                                       |   | 106,253            |    | 127,085                 |   |
| Accrued expenses and other current  liabilities                                                                                                                                                                        |   | 32,255             |    | 39,157                  |   |
| Total current liabilities                                                                                                                                                                                              |   | 143,134            |    | 171,896                 |   |
|                                                                                                                                                                                                                   |   |               |    |                    |   |
| Long-term debt and capital lease  obligations                                                                                                                                                                          |   | 20,867             |    | 18,003                  |   |
| Other liabilities                                                                                                                                                                                                      |   | 5,108              |    | 5,260                   |   |
| Total liabilities                                                                                                                                                                                                      |   | 169,109            |    | 195,159                 |   |
|                                                                                                                                                                                                                   |   |               |    |                    |   |
| Commitments and contingencies (Note 11)                                                                                                                                                                                |   |               |    |                    |   |
|                                                                                                                                                                                                                   |   |               |    |                    |   |
| Series A convertible preferred stock,  $0.001 par value, 830,000 shares authorized; 830,000 shares issued and  outstanding at June 29, 2003 and December 31, 2002, respectively (Liquidation  value of $50 per share)  |   | 36,755             |    | 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**;**35,172,678 shares issued and 33,621,458  outstanding at June 29, 2003 and 34,725,397 shares issued and 33,174,177  outstanding at December 31, 2002 |   | 35                 |    | 35                      |   |
| Additional paid in capital                                                                                                                                                                                             |   | 265,887            |    | 264,809                 |   |
| Accumulated deficit                                                                                                                                                                                                    |   | (150,148           | )       | (150,264                | )      |
| Accumulated other comprehensive loss                                                                                                                                                                                   |   | (2,700             | )       | (7,136                  | )      |
| Treasury stock, at cost; 1,551,220 shares  at June 29, 2003 and December 31, 2002                                                                                                                                      |   | (6,747             | )       | (6,747                  | )      |
| Total stockholders’ equity                                                                                                                                                                                        |   | 106,327            |    | 100,697                 |   |
| Total liabilities, convertible preferred  stock and stockholders’ equity                                                                                                                                          |   | $                  | 312,191 |                    | $      | 331,407 |   |

 

See accompanying notes to the interimconsolidated financial statements.

 

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MANUFACTURERS’ SERVICES LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

(IN THOUSANDS, EXCEPT PER SHARE DATA)

 
|                                             |   | **Three  months ended** |    | **Six months  ended** |   |
|--------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                                             |   | **June 29,  2003**      |    | **June 30,  2002**    |   | **June 29,  2003** |   | **June 30,  2002** |   |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Net sales                                        |   | $                       | 182,203 |                  | $      | 227,831 |   | $ | 343,576 |   | $ | 443,197 |   |
| Cost of goods sold                               |   | 166,966                 |    | 205,020               |   | 315,322 |   | 402,106 |   |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Gross profit                                     |   | 15,237                  |    | 22,811                |   | 28,254 |   | 41,091 |   |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Operating expenses:                              |   |                    |    |                  |   |   |   |   |   |
| Selling, general and administrative              |   | 13,438                  |    | 15,453                |   | 25,550 |   | 31,025 |   |
| Amortization of intangibles                      |   | —                  |    | 1,853                 |   | — |   | 3,706 |   |
| Restructuring and asset writedowns               |   | 954                     |    | (569                  | )      | 705 |   | 4,888 |   |
| Other operating expense (income)                 |   | —                  |    | —                |   | — |   | (800 | ) |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Operating income                                 |   | 845                     |    | 6,074                 |   | 1,999 |   | 2,272 |   |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Interest expense, net                            |   | (1,102                  | )       | (2,143                | )      | (2,102 | ) | (5,137 | ) |
| Change in fair value of derivatives              |   | (200                    | )       | 910                   |   | 320 |   | 910 |   |
| Foreign exchange gain                            |   | 87                      |    | 39                    |   | 406 |   | 56 |   |
| Loss from extinguishment of debt                 |   | —                  |    | (4,031                | )      | — |   | (4,031 | ) |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Income (loss) before provision for income  taxes |   | (370                    | )       | 849                   |   | 623 |   | (5,930 | ) |
| Provision for income taxes                       |   | 343                     |    | 611                   |   | 507 |   | 1,018 |   |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Net income (loss)                                |   | $                       | (713    | )                     | $      | 238 |   | $ | 116 |   | $ | (6,948 | ) |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Net loss applicable to common stockholders       |   | $                       | (1,589  | )                     | $      | (628 | ) | $ | (1,635 | ) | $ | (7,957 | ) |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Basic income (loss) per share:                   |   |                    |    |                  |   |   |   |   |   |
| Net loss applicable to common stockholders       |   | $                       | (0.05   | )                     | $      | (0.02 | ) | $ | (0.05 | ) | $ | (0.25 | ) |
| Weighted average shares outstanding              |   | 33,581                  |    | 32,450                |   | 33,449 |   | 32,415 |   |
|                                             |   |                    |    |                  |   |   |   |   |   |
| Diluted income (loss) per share:                 |   |                    |    |                  |   |   |   |   |   |
| Net loss applicable to common stockholders       |   | $                       | (0.05   | )                     | $      | (0.02 | ) | $ | (0.05 | ) | $ | (0.25 | ) |
| Weighted average shares outstanding              |   | 33,581                  |    | 32,450                |   | 33,449 |   | 32,415 |   |

 

See accompanying notes to the interim consolidated financial statements.

 

4

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MANUFACTURERS’ SERVICES LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(IN THOUSANDS)

 
|                                                                                      |   | **Six months  ended** |       |
|-------------------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                                      |   | **June 29,  2003**    |       | **June 30,  2002** |   |
|                                                                                      |   |                  | ** ** |   | ** ** |
| CASH FLOWS RELATING TO OPERATING  ACTIVITIES:                                             |   |                  |       |   |   |
| Net income (loss)                                                                         |   | $                     | 116        |   | $ | (6,948 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                  |       |   |   |
| Depreciation and amortization                                                             |   | 7,291                 |       | 13,269 |   |
| Amortization of capitalized finance fees                                                  |   | 745                   |       | 1,774 |   |
| Write-off of capitalized bank fees                                                        |   | —                |       | 4,031 |   |
| Change in fair value of derivative                                                        |   | (320                  | )          | (910 | ) |
| Changes in allowance for doubtful accounts                                                |   | (91                   | )          | 181 |   |
| Non cash charge for stock compensation                                                    |   | 449                   |       | 333 |   |
| Foreign exchange gain(loss)                                                               |   | (216                  | )          | (72 | ) |
| Deferred taxes                                                                            |   | (97                   | )          | 534 |   |
| Writedown and (gain)loss on disposal of  fixed assets                                     |   | (112                  | )          | 3,961 |   |
| Changes in operating assets and  liabilities:                                             |   |                  |       |   |   |
| Accounts receivable                                                                       |   | 16,269                |       | 37,472 |   |
| Inventories                                                                               |   | 4,503                 |       | 31,046 |   |
| Prepaid expenses and other assets                                                         |   | 3,927                 |       | 5,750 |   |
| Accounts payable                                                                          |   | (23,749               | )          | (17,670 | ) |
| Accrued expenses and other liabilities                                                    |   | (6,846                | )          | (11,949 | ) |
| Net cash provided by operating activities                                                 |   | 1,869                 |       | 60,802 |   |
|                                                                                      |   |                  |       |   |   |
| CASH FLOWS RELATING TO INVESTING  ACTIVITIES:                                             |   |                  |       |   |   |
| Proceeds from sale of fixed assets                                                        |   | 5,160                 |       | 4,025 |   |
| Purchases of property and equipment                                                       |   | (8,092                | )          | (1,304 | ) |
| Cost of internal use software                                                             |   | (268                  | )          | (320 | ) |
| Net cash used in (provided by) investing  activities                                      |   | (3,200                | )          | 2,401 |   |
|                                                                                      |   |                  |       |   |   |
| CASH FLOWS RELATING TO FINANCING  ACTIVITIES:                                             |   |                  |       |   |   |
| Proceeds from issuance of convertible  preferred stock and warrants net of issuance costs |   | —                |       | 37,720 |   |
| Proceeds from long-term debt                                                              |   | —                |       | 9,189 |   |
| Net payments on previous revolving  line-of-credit                                        |   | —                |       | (111,811 | ) |
| Net proceeds from new credit facilities                                                   |   | 150                   |       | 29,120 |   |
| Payments on term loan                                                                     |   | (666                  | )          | — |   |
| Repayments of long-term debt and capital  lease obligations                               |   | (4,292                | )          | (4,427 | ) |
| Debt issuance and amendment costs                                                         |   | (150                  | )          | (4,493 | ) |
| Proceeds from exercise of stock options                                                   |   | 720                   |       | 181 |   |
| Proceeds from employee stock purchase plan                                                |   | 458                   |       | 586 |   |
| Net cash used in financing activities                                                     |   | (3,780                | )          | (43,935 | ) |
| Effect of foreign exchange rates on cash                                                  |   | 821                   |       | 1,596 |   |
| Net (decrease) increase in cash                                                           |   | (4,290                | )          | 20,864 |   |
| Cash and cash equivalents at beginning of  period                                         |   | $                     | 48,955     |   | $ | 30,906 |   |
| Cash and cash equivalents at end of period                                                |   | $                     | 44,665     |   | $ | 51,770 |   |

 

See accompanying notes to the interimconsolidated financial statements.

 

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MANUFACTURERS’ SERVICES LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(IN THOUSANDS, EXCEPT SHARE DATA)

 

1.  BASIS OF PRESENTATION

 

Theaccompanying consolidated financial statements of Manufacturers’ ServicesLimited (the “Company”) are unaudited, and certain information and footnotedisclosure related thereto, normally included in financial statements preparedin accordance with generally accepted accounting principles, has been omittedin accordance with Rule 10-01 of Regulation S-X. Accordingly, these statementsshould be read in conjunction with the audited financial statements and notesthereto for the year ended December 31, 2002 included in the Company’s AnnualReport on Form 10-K. In the opinion of management, the accompanying unauditedconsolidated financial statements were prepared following the same policies andprocedures used in the preparation of the audited financial statements andreflect all adjustments (consisting of normal recurring adjustments) considerednecessary to present fairly the financial position and results of operations ofthe Company. The results of operations for the interim periods are notnecessarily indicative of the results for the entire fiscal year.  Certain amounts in prior year financialstatements have been reclassified to conform to the current year presentation.

 

Borrowingsunder the Company’s credit agreement, which was entered into in June 2002 (the“2002 Credit Agreement”) are dependent upon a borrowing base calculationderived from accounts receivable and inventory. Availability of borrowingsfluctuates according to the quantity and quality of the Company’s receivablesand inventory and the legal jurisdiction of the Company’s receivables andinventory.   Borrowings under our 2002Credit Agreement could be limited by a number of factors, including thefollowing:

 

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

 

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

 

•                  deterioration inthe value of the assets comprising the borrowing base, or

 

•                  failure tocomply with Credit Agreement covenants.

 

The Company iscurrently in compliance with all covenants under the 2002 CreditAgreement.  In the event it does nothave adequate funding from its existing credit facilities, the Company wouldwork with its lending institutions to modify the 2002 Credit Agreement oridentify other potential sources of capital to obtain necessary debt or equityfinancing.  In such a circumstance,there is no assurance the Company would be able to modify the 2002 CreditAgreement with existing lenders or obtain alternative debt or equity financingto satisfy its funding needs.

 

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In May 2003, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity,” which establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. Financial instruments that are within the scope of the statement, whichpreviously were often classified as equity, must now be classified asliabilities. This statement is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise shall be effective at thebeginning of the first interim period beginning after June 15, 2003. TheCompany has determined that the adoption of SFAS No. 150 will not have amaterial impact on its consolidated financial statements.

 

In April 2003, the FASBissued SFAS No. 149, “Amendments of Statement 133 on DerivativeInstruments and Hedging Activities,” which amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts and for hedging activitiesunder SFAS No. 133. This statement is effective for contracts entered intoor modified after June 30, 2003, with certain exceptions, and for hedgingrelationships designated after June 30, 2003. The Company does not expectadoption of SFAS No. 149 to have a material impact on its condensedconsolidated financial statements.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation- Transition and Disclosure” (“SFAS 148”).  This statement amends SFAS No. 123,“Accounting for Stock-Based Compensation,” (“SFAS 123”) to providealternative methods of transition for a voluntary change to the fair valuebased 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

 

6

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SFAS 123 for periods beginningafter December 15, 2003. SFAS 148 requires certain new disclosures thatare incremental to those required by SFAS 123, which must also be made ininterim financial statements. The transition and annual disclosure provisionsof SFAS 148 are effective for fiscal years ending after December 31, 2002.The Company has adopted the new interim disclosure provisions.  The Company has decided not to voluntarilyadopt the accounting provisions of SFAS 123 as permitted under the provisionsof SFAS 148.

 

InJune 2002, the FASB issued SFAS No. 146, “Accounting for Exit orDisposal Activities”.  SFAS No. 146addresses significant issues regarding the recognition, measurement andreporting of costs that are associated with exit and disposal activities,including restructuring activities that were accounted for under EITFNo. 94-3.  The Company adopted theprovisions of SFAS No. 146 effective for exit or disposal activitiesinitiated after December 31, 2002. The effect-on-adoption of SFAS No. 146 changed the timing of whenrestructuring charges are recorded from a commitment date approach to when theliability is incurred.

 

In April 2002,the FASB issued SFAS No. 145 “Rescission of FASB Statements No.4, 44 and 64,Amendment of FASB Statement No.13, and Technical Corrections as of April2002”.  FASB No. 145 eliminates FASB No.4 “Reporting Gains and Losses from Extinguishment of Debt”, which requiredcompanies to classify gains or losses from the extinguishment of debt as anextraordinary item, net of tax. As a result of this new FASB, gains and lossesfrom extinguishment of debt should be classified as extraordinary items only ifthey meet the criteria in APB Opinion No. 30 “Reporting the Results ofOperations-Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events andTransactions”.  The Company does notbelieve that the extinguishment of debt will qualify as an extraordinary itemas defined in APB 30, and therefore the Company will be required to classifythese charges as non-operating expenses. The Company has adopted SFAS No. 145 on January 1, 2003, and hasreclassified the extraordinary loss to a non-operating loss in all applicablecomparative periods.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations” to be effective for all fiscal years beginning afterJune 15, 2002, with early adoption permitted.  SFAS No. 143 establishes accounting standards for therecognition and measurement of an asset retirement obligation and itsassociated asset retirement cost. It also provides accounting guidance forlegal obligations associated with the retirement of tangible long-lived assets.The Company adopted SFAS No. 143 in the first quarter of 2003 and theadoption did not impact its financial position, results of operations or cashflows.

 

3.  INVENTORY

 

Inventories are comprised of the following:

 
|                                   |   | **June 29,  2003** |   | **December  31,  2002** |   |
|----------------------------------------|--------|--------------------|--------|-------------------------|--------|
| Raw  materials and purchased inventory |   | $                  | 79,846 |                    | $      | 82,532 |   |
| Work-in-process                        |   | 10,616             |   | 10,559                  |   |
| Finished goods                         |   | 5,538              |   | 5,736                   |   |
|                                   |   | $                  | 96,000 |                    | $      | 98,827 |   |

 

4.  BUSINESS SEGMENT INFORMATION

 

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

 
|                    |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|-------------------------|--------|-------------------------|---------|-----------------------|--------|
|                    |   | **June 29,  2003**      |    | **June 30,  2002**    |   | **June 29,  2003** |   | **June 30,  2002** |   |
| Geographic net sales    |   |                    |    |                  |   |   |   |   |   |
| United States           |   | $                       | 101,061 |                  | $      | 157,598 |   | $ | 182,423 |   | $ | 307,077 |   |
| Spain                   |   | 42,184                  |    | 43,298                |   | 79,680 |   | 84,316 |   |
| Other foreign countries |   | 38,958                  |    | 26,935                |   | 81,473 |   | 51,804 |   |
|                    |   | $                       | 182,203 |                  | $      | 227,831 |   | $ | 343,576 |   | $ | 443,197 |   |

 
|                    |   | **June 29,  2003** |   | **December  31,  2002** | ** ** |
|-------------------------|--------|--------------------|--------|-------------------------|------------|
| Long-lived assets       |   |               |   |                    |       |
| United States           |   | $                  | 17,499 |                    | $          | 20,042 |   |
| Spain                   |   | 19,405             |   | 13,009                  |       |
| Other foreign countries |   | 12,952             |   | 11,105                  |       |
|                    |   | $                  | 49,856 |                    | $          | 44,156 |   |

 

7

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5. STOCK-BASED COMPENSATION

 

The Company’semployee stock compensation plans are accounted for in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” (“APB 25”) and related interpretations. Under this method, nocompensation expense is recognized as long as the exercise price equals orexceeds the market price of the underlying stock on the date of grant. TheCompany elected the disclosure-only alternative permitted under SFASNo. 123 for fixed stock-based awards to employees. All non-employeestock-based awards are accounted for in accordance with SFAS 123.

 

The Companyuses the Black-Scholes option pricing model to estimate the fair value ofoptions granted.  The Black-Scholesmodel was developed for use in estimating the value of traded options that haveno vesting 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 followingtable illustrates the effect on net income(loss) and earnings per share if theCompany had applied the fair value recognition provisions of SFAS No. 123.

 
|                                                                                       |   | **Three Months Ended** |       | **Six Months Ended** |       |
|--------------------------------------------------------------------------------------------|--------|------------------------|------------|----------------------|------------|
|                                                                                       |   | **June 29,  2003**     |       | **June 30,  2002**   |       | **June 29,  2003** |   | **June 30,  2002** |   |
|                                                                                       |   |                   | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| Net loss available to common stockholders,  as reported                                    |   | $                      | (1,589     | )                    | $          | (628 | ) | $ | (1,635 | ) | $ | (7,957 | ) |
| Add : Total stock-based employee  compensation expense included in reported net loss       |   | 92                     |       | 120                  |       | 449 |   | 333 |   |
| Deduct : Stock-based employee compensation  expense determined under the fair value method |   | (2,041                 | )          | $                    | (1,687     | ) | (2,759 | ) | (3,337 | ) |
| Pro forma net loss available to common  stockholders                                       |   | $                      | (3,538     | )                    | $          | (2,195 | ) | $ | (3,945 | ) | $ | (10,961 | ) |
|                                                                                       |   |                   |       |                 |       |   |   |   |   |
| Basis and Diluted net loss per share:                                                      |   |                   |       |                 |       |   |   |   |   |
| As reported                                                                                |   | $                      | (0.05      | )                    | $          | (0.02 | ) | $ | (0.05 | ) | $ | (0.25 | ) |
| Pro forma                                                                                  |   | $                      | (0.11      | )                    | $          | (0.07 | ) | $ | (0.12 | ) | $ | (0.34 | ) |

 

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6.  EARNINGS PER SHARE

 

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

 
|                                                     |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|----------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                     |   | **June 29,  2003**      |   | **June 30,  2002**    |   | **June 29,  2003** |   | **June 30,  2002** |   |
| Numerator - basic and diluted earnings per  share:       |   |                    |   |                  |   |   |   |   |   |
| Income (loss)                                            |   | $                       | (713   | )                     | $      | 238 |   | $ | 116 |   | $ | (6,948 | ) |
| Dividends on convertible preferred stock                 |   | (545                    | )      | (545                  | )      | (1,092 | ) | (636 | ) |
| Accretion of convertible preferred stock                 |   | (331                    | )      | (321                  | )      | (659 | ) | (373 | ) |
| Loss available to common stockholders                    |   | $                       | (1,589 | )                     | $      | (628 | ) | $ | (1,635 | ) | $ | (7,957 | ) |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Denominator:                                             |   |                    |   |                  |   |   |   |   |   |
| Basic and Diluted - weighted average shares  outstanding |   | 33,581                  |   | 32,450                |   | 33,449 |   | 32,415 |   |
|                                                     |   |                    |   |                  |   |   |   |   |   |
| Basic and diluted loss per share                         |   | $                       | (0.05  | )                     | $      | (0.02 | ) | $ | (0.05 | ) | $ | (0.25 | ) |

 

For the threeand six months ended June 29, 2003, 8,503 anti-dilutive option and warrantshares, and for the three and six months ended June 30, 2002**,**7,895anti-dilutive option and warrant shares have been excluded from the calculationof diluted earnings per share, as the Company had a net loss available tocommon stockholders for these periods.

 

In addition,for three months ended June 29, 2003 and June 30, 2002 and the six months endedJune 29, 2003 and June 30, 2002, a total of 6,511, 6,526, 6,508 and 3,912shares, respectively, of convertible preferred stock and preferred stockdividends have been excluded from the calculation of diluted earning per shareon an “if converted” basis as they are anti-dilutive in nature until theCompany exceeds a certain net income threshold.

 

7.  COMPREHENSIVE INCOME (LOSS)

 

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

 
|                                     |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                     |   | **June 29,  2003**      |   | **June 30,  2002**    |   | **June 29,  2003** |   | **June 30,  2002** |   |
| Net Income (loss)                        |   | $                       | (713   | )                     | $      | 238 |   | $ | 116 |   | $ | (6,948 | ) |
| Other comprehensive income (loss)        |   |                    |   |                  |   |   |   |   |   |
| Foreign currency translation adjustments |   | 3,179                   |   | 5,198                 |   | 4,436 |   | 4,254 |   |
|                                     |   |                    |   |                  |   |   |   |   |   |
| Comprehensive income (loss)              |   | $                       | 2,466  |                  | $      | 5,436 |   | $ | 4,552 |   | $ | (2,694 | ) |

 

8. RESTUCTURING

 

In the secondquarter of 2003, the Company recorded a net restructuring charge of $954.  This included a charge of $1,600 related tocertain costs in connection with the planned closing of the Company’s Athlone,Ireland plant, which was formally announced in July 2003.  This charge relates to an estimatedcontingent liability for which the expected settlement has been determined tobe probable as of June 29, 2003.  Thisamount was offset by a reversal of $432 of restructuring reserves related tothe final sale of the Company’s China operation, which had been shut down inthe third quarter of 2002 and a recorded gain of $214 on assets that hadpreviously been written down at its China facility in accordance with SFAS 144.

 

In the firstquarter of 2003, the Company reversed $249 of restructuring reserves relatedmainly to severance expenses which are no longer expected to be incurred.

 

In the secondquarter of 2002, the Company recorded a gain of $569 from the sale of its SaltLake City building.  This was recordedas a reversal of a restructuring charge which had been taken in the thirdquarter of 2001 when the Company wrote down the building to its estimated fairmarket value.

 

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In the first quarter of 2002, the Companyimplemented a plan to restructure certain operations, primarily related toclosing its facility in China and a workforce reduction at its corporateheadquarters.  The China facility, whichceased operations during the third quarter of 2002, was closed as the site didnot meet the Company’s long-term strategic goals.  The total charge recorded for this plan was $5,457, which wascomprised of asset write-downs of $3,069, lease termination costs of $548 andseverance of $1,840 related to the reduction of 371 manufacturing and 24managerial employees.  This plan wascompleted by the end of the second quarter of 2003.

 

During thefull year 2002, the Company implemented various restructuring plans throughoutits organizations to align its cost structure with the reduced revenue streamas a result of the economic downturn in the EMS industry.  In total for all 2002, the Company incurredrestructuring charges of $13,488 consisting of asset write-downs of $4,315,employee severance of $5,343 and lease termination costs of $3,830.

 

The following table sets forth the activity in the restructuringreserves from December 31, 2002 to June 29, 2003:

 
|                           |   | **Employee  Severance and  Related Expenses** |   | **Lease Payments  on Facilities and  Equipment** |   | **Other Plant  Closing Costs** |   | **Total** |   |
|--------------------------------|--------|-----------------------------------------------|--------|--------------------------------------------------|--------|--------------------------------|--------|-----------|--------|
| Balances 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     |   |
| Restructuring  provision       |   | —                                        |   | —                                           |   | 1,600                          |   | 1,600     |   |
| Charges  utilized              |   | (201                                          | )      | (146                                             | )      | —                         |   | (347      | )      |
| Provision  adjustments         |   | —                                        |   | (432                                             | )      | —                         |   | (432      | )      |
| Balance at  June 29, 2003      |   | $                                             | 107    |                                             | $      | 2,129                          |   | $         | 1,600  |   | $ | 3,836 |   |

 

Reserves remaining at June 29, 2003 mainlyrepresent lease termination payments in Singapore which may continue until thelease expires in 2010, and liabilities related to the Athlone plant closingwhich should be settled by the fourth quarter of 2003.

 

9. GUARANTEES AND INDEMNIFICATION OBLIGATIONS

 

As permittedunder Delaware law, we have agreements whereby we indemnify our officers anddirectors for certain events or occurrences while the officer or director is,or was, serving at our request in such capacity. The term of theindemnification period is for the officer’s or director’s lifetime. The maximumpotential amount of future payments we could be required to make under theseindemnification agreements is unlimited; however, we have Directors andOfficers Liability insurance policies that limit our exposure for eventscovered under the policies and enable us to recover a portion of any futureamounts paid. As a result of the coverage under our insurance policies, webelieve the estimated fair value of these indemnification agreements isminimal. Most of these indemnification agreements were grandfathered under theprovisions of FIN No. 45 as they were in effect prior to December 31,2002. Accordingly, we have no liabilities recorded for these agreements as ofJune 29, 2003.

 

In conjunctionwith our initial public offering in June 2000, we entered into an UnderwritingAgreement with several underwriters in which we agreed to indemnify theunderwriters for losses, claims or damages caused by an untrue statement oralleged untrue statement or omission or alleged omission of a material factcontained in or omitted from our Registration Statement. The term and maximumpotential amounts of this indemnification is not limited. However, we have aDirectors and Officers Liability Insurance policy that limits our expense for eventscovered by such policies. Accordingly, we believe the estimated fair value ofthis indemnification obligation is minimal. Accordingly, we have no liabilitiesrecorded from the agreement as of June 29, 2003.

 

In June 2002,we entered into a Credit Agreement in which we agreed to indemnify each lenderparty thereto, from any taxes or incurred lending costs paid by such lenders inconnection with the Credit Agreement, including as a result of any change inthe tax laws or other regulations. This indemnification obligation is unlimitedas to time and amount. We have never been required to make any paymentspursuant to this indemnification. As a result, we believe the estimated fairvalue of this indemnification agreement is minimal. Accordingly, we have noliabilities recorded for those agreements as of June 29, 2003.

 

The Companyprovides for the estimated cost of product warranties, primarily fromhistorical information, at the time product revenue is recognized. While theCompany engages in extensive product quality programs and processes, theCompany’s warranty obligation is affected by product failure rates, utilizationlevels, material usage, service delivery costs incurred in correcting a productfailure, and supplier warranties on parts delivered to the Company.  Should actual product failure rates,utilization levels, material usage, service delivery costs or supplierwarranties on parts differ from the Company’s estimates, revisions to theestimated warranty liability would be required.

 

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| Balance at  December 31, 2002                                      |   | $      | 1,359  |   |
|--------------------------------------------------------------------|--------|--------|--------|--------|
| Accruals for  warranties during the six months ended June 29, 2003 |   | 250    |   |
| Settlements  made during the six months ended June 29, 2003        |   | (166   | )      |
|                                                               |   |   |   |
| Balance at  June 29, 2003                                          |   | $      | 1,443  |   |

 

10.  GOODWILL

 

The Companyadopted SFAS 142, “Goodwill and Other Intangible Assets”, onJanuary 1, 2002, which requires that goodwill and intangible assets withindefinite useful lives no longer be amortized, but instead be tested forimpairment at least annually.  As aresult, the Company ceased all goodwill amortization as of January 1, 2002.

 

In accordancewith SFAS No. 142, the Company is required to perform an annual goodwillimpairment test as of the beginning of its third fiscal quarter, which beginson June 30, 2003.  This involvesdetermining the estimated fair value of each reporting unit and comparing it tothe reporting unit’s carrying amount. If a reporting unit’s carrying amount exceeds its fair value, anindication exists that the reporting unit’s goodwill is impaired and theCompany would be required to perform the second step of the impairmenttest.  The Company does not believe thatan event occurred or circumstances changed that would have required it toperform an impairment test prior to its annual test at the beginning of thethird quarter.  The Company willcomplete its annual impairment test during its fiscal third quarter of 2003.

 

Changes in the net carrying amount of goodwill for the period endedJune 29, 2003 were as follows:

 
| Balance at December 31, 2002            |   | $   | 8,441  |   |
|-----------------------------------------|--------|-----|--------|--------|
| Foreign currency translation adjustment |   | 118 |   |
| Balance at June 29, 2003                |   | $   | 8,559  |   |

 

11.  COMMITMENTS ANDCONTINGENCIES

 

A class actioncomplaint filed on December 6, 2000, alleging violations of federal securitieslaws has been pending in the United States District Court, Southern District ofNew York against the Company, certain of its former officers and theunderwriters that participated in the Company’s initial public offering(“IPO”). The Company understands that various other plaintiffs have filedsubstantially similar class action cases against approximately 300 otherpublicly traded companies and their IPO underwriters, which cases have beenconsolidated to a single federal district court for coordinated casemanagement. The complaint, which seeks unspecified damages among other things,alleges that the prospectus filed by the Company relating to stock sold in itsinitial public offering contained false and misleading statements with respectto the commission arrangements between the underwriters and their customers.The Company believes that this claim against the Company lacks merit.

 

OnJuly 15, 2002, the Company together with the other issuers named asdefendants in these coordinated proceedings filed a collective motion todismiss the consolidated complaints against them on various legal grounds.  On October 9, 2002, the court approveda stipulation between the plaintiffs and the individual defendants providingfor the dismissal of the individual defendants without prejudice.  In February 2003, that motion wasdenied with respect to most issuers, including the Company.

 

The Company is currently considering a Memorandum of Understanding andrelated documents proposed by the plaintiffs containing the terms of anagreement resolving the claims of the plaintiffs against the Company and itsnamed officers.  While theCompany can make no assurances regarding the outcome of this action, theCompany believes that the final result will have no material effect on itsconsolidated financial condition or result of operations.

 

In addition,the Company is from time to time subject to legal proceedings and claims whicharise in the normal course of its business. In the opinion of management, theamount of ultimate liability with respect to these actions will not have amaterial adverse effect on the Company’s financial position or its results ofoperations.

 

12.                                 SUBSEQUENTEVENTS

 

*Series B Convertible Preferred Stock*

 

On July 2,2003, the Company issued $25,000 of Series B Convertible Preferred Stock(“Series B Preferred”) and warrants to purchase 1,165,254 shares of commonstock in a private placement to qualified accredited investors.  Proceeds of the Series B Preferred,

 

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net of costs, wereapproximately $22,920.  The Series BPreferred will be recorded as temporary equity, and the warrants will berecorded as liabilities.

 

The Series BPreferred accrues dividends quarterly at the rate of 4.50% per annum, payablequarterly in common stock or cash, at the Company’s option. The Series BPreferred is convertible to common stock at any time by holders based on aconversion price of $5.90 per share. The Series B Preferred has a scheduledmaturity of July 3, 2008, unless converted earlier.  The Company may redeem the Series B Preferred on or after July 3,2006, in whole or in part, at its option, at par value payable in the Company’scommon stock or cash, at the Company’s option, plus accrued and unpaiddividends, if any, payable in cash.  Ifthe Company chooses to pay dividends in common stock or to redeem theconvertible preferred stock with common stock, the number of shares of commonstock issued will be computed using 95% of the market value of the common stockat that time. The warrants are exercisable at any time through July 3, 2008 atthe exercise price of $6.275 per share. The Company has the right to requirethe exercise of the warrants at any time if the common stock trades for 175% ofthe exercise price of the warrants for a specified period of time.

 

A portion ofthe total consideration received was allocated to the warrants based on theirfair value of $1,950 and the residual proceeds were allocated to the Series BPreferred.  The resulting initial SeriesB Preferred balance will be accreted to the liquidation value of $50 per share,subject to certain adjustments over the life of the Series B Preferred.  The discount on the Series B Preferredresulting from allocation of proceeds to the warrants will be accreted, usingthe effective interest method, through the scheduled maturity date and will berecorded as a charge against additional paid in capital.  In the event the Company elects to call theSeries B Preferred in advance of the maturity date, accretion of the remainingdiscount will occur.  All such amountsfor accretion will be deducted from the net income available to commonstockholders, for purposes of earnings per share calculations.

 

*Acquisition*

 

On July 22,2003, the Company acquired certain manufacturing assets and assumed certainliabilities of the Barcelona, Spain operation of Telesincro, S.A., a subsidiaryof Groupe Ingenico for approximately $1,136 in cash.  Included in the transfer were approximately 280 manufacturingemployees.  The site had been Ingenico’sonly internal manufacturing facility for electronic payment terminals.  The purchased assets include productionassets, service inventory and intellectual property necessary to manufacture,repair and otherwise service the terminals. As part of the transaction the Company agreed to lease 5,500 squaremeters in the Barcelona facility for three years and entered into a four yearmanufacturing services agreement to manufacture, repair and service terminalsfor Ingenico.  The agreement includes aminimum guaranteed purchase commitment from Ingenico for the first three years.

 

In addition,as a contingent purchase price amount the Company transferred 250,000 shares ofits common stock to Ingenico in return for the expectation that Ingenico willaward MSL additional revenue amounts over the next three years.  These shares are not registered ortransferable for the three year period and the Company retains the right torepurchase the shares at $0 in the event that Ingenico has not awarded theCompany the required revenue amounts.

 

*Restructuring and Asset Writedowns*

 

During thethird quarter of fiscal 2003, the Company implemented a plan to furtherstreamline operations and reduce manufacturing capacity and general andadministrative expenses as a result of the continued slowdown in theeconomy.  This plan will result incharges that are estimated to be between $8,000 and $10,000, which will berecorded in the third and fourth quarters of 2003, except for a $1,600 chargewhich was accrued in the second quarter as discussed in Note 8 above.  The plan includes the closing of theCompany’s Athlone, Ireland facility and limited headcount reductions in certainother locations.  Substantially allcustomers at the Athlone facility, which had revenues for the six months endedJune 29, 2003 of $16,802, will be transferred to other MSL sites.  This plan includes the reduction ofapproximately 225 manufacturing and managerial employees and is expected to besubstantially complete by the end of 2003.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

FORWARD LOOKING STATEMENTS

 

References inthis report to “the Company”, “MSL”, “we”, “our”, or “us” mean Manufacturers’Services Limited together with its subsidiaries, except where the contextotherwise requires. This Quarterly Report on Form 10-Q contains certainstatements that are, or may be deemed to be, forward-looking statements withinthe meaning of section 27A of the Securities Act of 1933 and section 21E of theSecurities Exchange Act of 1934, and are made in reliance upon the protectionsprovided by such acts for forward-looking statements. These forward-lookingstatements (such as when we describe what we “believe,” “expect” or“anticipate” will occur, and other similar statements) include, but are notlimited to, statements regarding future sales and operating results, futureprospects, anticipated benefits of proposed (or future) acquisitions and newfacilities, growth, the capabilities and capacities of business operations, anyfinancial or other guidance and all statements that are not based on historicalfact, but rather reflect our current expectations concerning future results andevents. The ultimate correctness of these forward-looking statements isdependent upon a number of known and unknown risks and events, and is subjectto various uncertainties and other factors that may cause our

 

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actual results, performance orachievements to be different from any future results, performance orachievements expressed or implied by these statements. The factors describedunder “Risk Factors” below are among the factors that could affect futureresults and events, causing those results and events to differ materially fromthose expressed or implied in our forward-looking statements.

 

All forward-looking statements included in this Report onForm 10-Q are made only as of the date of this Report on Form 10-Q.We anticipate that subsequent events and developments will cause our views tochange.  However, while we may elect toupdate forward-looking statements at some point in the future, we specificallydisclaim any obligation to do so.  Theforward looking information contained in this report should not be relied uponas representing our views as of any date subsequent to the date of this report.

 

OVERVIEW

 

We are aglobal electronic manufacturing and supply chain services company providing aportfolio of integrated capabilities that allows our customers to get theirproducts to market 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 of industries,including industrial equipment, commercial avionics, retail infrastructure,medical products, voice and data communications, network storage, officeequipment, computers, computer peripherals and consumer electronics.  By efficiently and aggressively managing ourbusiness, costs and asset base, we are able to offer our customers anoutsourcing solution that represents a lower total cost of ownership than thattypically provided by their internal operations. We seek to differentiateourselves by providing a superior customer experience through open and activecommunication, personalized service, a deep understanding of our customers’needs, attention to each customers unique operating requirements, customizedand flexible supply chain solutions and rapid response.

 

We provideintegrated supply chain solutions that address all stages of our customer’sproduct life cycle, including engineering and design, new product introduction,global supply chain management, printed circuit board assembly, high speed automatedmanufacturing, final product assembly including configure-to-order andbuild-to-order, integration and testing of complex systems, fulfillment anddistribution and after-market services. We believe this comprehensive range of services provides opportunitiesfor growth by attracting new customers and capturing additional outsourcingopportunities with our existing customers.

 

We have aglobal network consisting of 15****manufacturing, design and fulfillmentfacilities in the world’s major electronics markets—North America, Europe andAsia—to serve the increasing outsourcing needs of both multinational andregional OEMs.  Our manufacturing facilities are strategically locatednear our customers and their end-markets, which benefits our customers by reducingthe time required to get their products to market and by increasing theirflexibility to respond quickly to changing market conditions. We believe thatthe combination of our services and our global manufacturing network hasenabled us to become an integral part of our customers’ product development andmanufacturing strategies.

 

Since ourfounding in 1994 through 2000, our growth had been driven primarily byacquisitions of existing OEM manufacturing facilities and by the increasingnumber of OEMs who had outsourced their manufacturing requirements. Duringthe past three years, we have closed certain facilities and reduced ourworkforce to reflect our reduced revenue stream resulting from adverse economicconditions affecting demand for our customers’ end-market products.  Despite this recent downsizing, we intend tocontinue to actively pursue strategic acquisitions and to continue to benefitfrom expected increases in the number of OEMs that outsource their manufacturingrequirements, as demonstrated by our recent asset acquisition of Telesincro inJuly 2003.

 

During thepast 18 months we have been repositioning ourselves in the EMS market bydeveloping our offerings, adding new customers and refocusing the relationshipswe have and the business we do with existing customers to emphasize thoseservices where we provide the most value. We focus principally on those customers and programs where we are thelead EMS provider.

 

While newprograms with existing customers develop and new customers are added, ouroverall revenue has declined and our customer mix has changed.  We anticipate that changes will continue asour business develops and programs with some customers will increase andprograms with others will decline consistent with recent customer and vendorconsolidation tends in the EMS industry. For example, we anticipate that over the next twelve months certainfulfillment services we currently provide to a customer will cease to beprovided, while fulfillment services we provide to another customer willincrease.  The net impact of thistransition in these programs is expected to be a decline of less than 2% ofannual revenue.  With the expiration ofthis program we will cease activities at the customer-controlled site.  We do not expect any material chargesassociated with the cessation of this customer program.  The expiring program representedapproximately 7.6% of revenue for the first six months of fiscal 2003.  We believe that other business with new andexisting customers, combined with the expected revenues from our recentIngenico acquisition, will more than offset this net 2% decline in 2004.

 

We workclosely with our customers to anticipate and forecast their future volume oforders and delivery dates. We derive most of our net sales under purchaseorders from our customers. We recognize sales, net of expected product returnand warranty costs, typically at the time of product shipment or as servicesare rendered, provided no post-delivery obligations remain and collection isreasonably assured. Our cost of goods sold usually includes the cost ofcomponents and materials, labor costs and manufacturing overhead.  Under some contracts, our customers will ownthe components and consign the inventory to us.  In these situations, we may recognize revenue (and related costof sales) only on the labor and overhead used to assemble the product.  The procurement of raw materials andcomponents requires us to commit significant working capital to our operationsand to manage the purchasing, receiving, inspection and stocking of theseitems. Our typical customer contract contains provisions which specify that wemay recover from the customer inventory costs and material acquisition costsfor raw material which becomes excess or obsolete due to customer reschedules,cancellations or product changes.

 

Our operatingresults are affected by the level of capacity utilization in our manufacturingfacilities, indirect labor costs and selling, general and administrativeexpenses. Gross margins and operating income generally improve during periodsof high-volume and high-capacity utilization in our manufacturing facilitiesand decline during periods of low-volume and low-capacity utilization. However,certain of our customer contracts contained guaranteed minimum commitments,requiring the customer to either purchase certain contractual minimumquantities or pay for amounts less than the minimum purchase commitment.  Such contracts helped offset the negativeimpact of low-capacity utilization on gross margins and operating income.  Currently we have only one customer contractcontaining a guaranteed minimum commitment which relates to the Telesincroacquisition.

 

Our businessstrategy includes the continued expansion of our global manufacturing network.Currently, approximately 73%

 

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of our net sales worldwide aredenominated in US dollars, while our labor and utility costs in facilitiesoutside of the United States are denominated in local currencies. Foreigncurrency gains and losses are the result of transacting business in a currencythat is different from the functional currency of our operating entity and themovements in those currencies between the time a transaction is recorded forfinancial reporting purposes and the time payment is made or received. Wecurrently use forward foreign exchange contracts on a limited basis to minimizeour foreign currency risk but not for trading purposes. We expect to continueto utilize forward foreign exchange contracts only to the extent that thesecontracts minimize exposure and reduce risk from exchange rate fluctuations onspecific underlying transactions that create foreign currency exchange raterisk for us. Any increase or decrease in our use of derivative financial instrumentswill likely be as a result of these contracts.

 

RECENT ACQUISTIONS

 

On July 22,2003, we acquired certain manufacturing assets and assumed certain liabilitiesof the Barcelona, Spain operation of Telesincro, S.A., a subsidiary of GroupeIngenico for approximately $1.1 million in cash.  Included in the transfer were approximately 280 manufacturingemployees.  The site had been Ingenico’sonly internal manufacturing facility for electronic payment terminals.  The purchased assets include productionassets, service inventory and intellectual property necessary to manufacture,repair and otherwise service the terminals. As part of the transaction we agreed to lease approximately 5,500 squaremeters in the Barcelona facility for three years and entered into a four yearmanufacturing services agreement to manufacture, repair and service terminalsfor Ingenico.  The agreement includes aminimum guaranteed purchase commitment from Ingenico for the first three years.

 

In addition,as a contingent purchase price amount we transferred 250,000 shares of ourcommon stock to Ingenico in return for the expectation that Ingenico will awardus additional revenue amounts over the next three years.  These shares are not registered ortransferable for the three year period and we retain the right to repurchasethe shares at $0 in the event that Ingenico has not awarded us the requiredrevenue amounts.

 

OnJuly 1, 2002, we acquired for approximately $6.0 million in cash andassumed liabilities, all of the capital stock and certain assets of LexmarkElectronics S.A. de C.V., a subsidiary of Lexmark International, Inc.located in Reynosa, Mexico, that provides printed circuit board assemblies forlaser printers. Included in the purchase price was $3.2 million of inventorythat we had agreed to purchase within 60 days after the closing. Theacquired assets consist of cash of $0.8 million, manufacturing assets andother working capital related to the operations, while the liabilities consistof accounts payable and accrued liabilities. The transaction was accounted foras a purchase of a business, and the purchase price was allocated to the assetsand liabilities based upon their relative fair values at the date ofacquisition. The excess of the fair value of assets acquired over the purchaseprice was allocated to the acquired fixed assets, which reduced their recordedfair values. As part of the transaction, we retained approximately 230employees, assumed an existing lease that expires in February 2010, for a156,000 square foot manufacturing facility in Reynosa and entered into aneighteen-month supply agreement to provide printed circuit board assemblies toLexmark. The supply agreement included certain minimum guaranteed purchasecommitments for the first 12 months.

 

RESTUCTURINGS AND ASSET WRITEDOWNS

 

In the secondquarter of 2003, we recorded a net restructuring and asset writedown charge of$1.0 million.  This included a charge of$1.6 million related to certain costs in connection with the planned closing ofour Athlone, Ireland plant, which was formally announced in July 2003.  This charge relates to a contingentliability for which the expected settlement has been determined to be probableas of June 29, 2003.  This amount wasoffset by a reversal of $0.4 million of restructuring reserves related to thefinal sale of our China operation, which had been shut down in the thirdquarter of 2002 and a recorded gain of $0.2 million on assets that hadpreviously been written down at our China facility in accordance with SFAS 144.

 

In the firstquarter of 2003, we reversed $0.2 million of restructuring reserves relatedmainly to severance expenses which were no longer expected to be incurred.

 

In the secondquarter of 2002, we recorded a gain of $0.6 million from the sale of our Salt LakeCity building.  This was recorded as areversal of a restructuring charge which had been taken in the third quarter of2001 when we wrote down the building to its estimated fair market value.

 

In the first quarter of 2002, we implementeda plan to restructure certain operations, primarily related to closing ourfacility in China and a workforce reduction at our corporate headquarters.  The China facility, which ceased operationsduring the third quarter of 2002, was closed as the site did not meet our long-termstrategic goals.  The total chargerecorded for this plan was $5.5 million, which was comprised of assetwrite-downs of $3.1 million, lease termination costs of $0.6 million andseverance of $1.8 million related to the reduction of 371 manufacturing and 24managerial employees.  This plan wascompleted by the end of the second quarter of 2003.

 

During the full year 2002, we implemented various restructuring plansthroughout our organization to align our cost

 

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structure with the reducedrevenue stream as a result of the economic downturn in the EMS industry. Intotal for all 2002, we incurred restructuring charges of $13.4 millionconsisting of asset write-downs of $4.3 million, employee severance of $5.3million and lease termination costs of $3.8 million.

 

The following table sets forth the activity in the restructuringreserves from December 31, 2002 to June 29, 2003:

 
|                           |   | **Employee  Severance and  Related Expenses** |   | **Lease Payments  on Facilities and  Equipment** |   | **Other Plant  Closing Costs** |   | **Total** |   |
|--------------------------------|--------|-----------------------------------------------|--------|--------------------------------------------------|--------|--------------------------------|--------|-----------|--------|
| Balances 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       |   |
| Restructuring  provision       |   | —                                        |   | —                                           |   | 1.6                            |   | 1.6       |   |
| Charges  utilized              |   | (0.2                                          | )      | (0.2                                             | )      | —                         |   | (0.4      | )      |
| Provision  adjustments         |   | —                                        |   | (0.4                                             | )      | —                         |   | (0.4      | )      |
| Balance at  June 29, 2003      |   | $                                             | 0.1    |                                             | $      | 2.1                            |   | $         | 1.6    |   | $ | 3.8 |   |

 

Reserves remaining at June 29, 2003 mainlyrepresent lease termination payments in Singapore which may continue until thelease expires in 2010, and liabilities related to the Athlone plant closingwhich should be settled by the fourth quarter of 2003.

 

We recentlyannounced a plan to further streamline operations and reduce manufacturingcapacity and general and administrative expenses as a result of the continuedslowdown in the economy.  This plan willresult in charges that are estimated to be between $8.0 and $10.0 million,which will be recorded in the third and fourth quarters of 2003, except for a$1.6 million charge which was accrued in the second quarter as notedabove.  The plan includes the closing ofour Athlone, Ireland facility and limited headcount reductions in certain otherlocations.  Substantially all our customersat our Athlone facility, which had revenues for the six months ended June 29,2003 of $16.8 million, will be transferred to other MSL sites.  The plan includes the reduction ofapproximately 225 manufacturing and managerial employees and is expected to besubstantially complete by the end of 2003 and to result in annual savings ofapproximately $5.5 million.

 

RESULTS OF OPERATIONS

 

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

 
|                                                |   | **Three  Months Ending**   |    | **Six Months  Ending** |   |
|-----------------------------------------------------|--------|----------------------------|---------|------------------------|--------|
|                                                |   | **June 29,  2003**         |    | **June 30,  2002**     |   | **June 29,  2003** |   | **June 30,  2002** |   |
|                                                |   | **(Dollars in thousands)** |    |
| Net sales                                           |   | $                          | 182,203 |                   | 100.0  | % | $ | 227,831 |   | 100.0 | % | $ | 343,576 |   | 100.0 | % | $ | 443,197 |   | 100.0 | % |
| Cost of goods sold                                  |   | 166,966                    |    | 91.6                   |   | 205,020 |   | 90.0 |   | 315,322 |   | 91.8 |   | 402,106 |   | 90.7 |   |
| Gross profit                                        |   | 15,237                     |    | 8.4                    |   | 22,811 |   | 10.0 |   | 28,254 |   | 8.2 |   | 41,091 |   | 9.3 |   |
|                                                |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative                 |   | 13,438                     |    | 7.4                    |   | 15,453 |   | 6.7 |   | 25,550 |   | 7.4 |   | 31,025 |   | 7.0 |   |
| Amortization expense                                |   | —                     |    | —                 |   | 1,853 |   | 0.8 |   | — |   | — |   | 3,706 |   | 0.8 |   |
| Restructuring and asset writedowns                  |   | 954                        |    | 0.5                    |   | (569 | ) | (0.2 | ) | 705 |   | 0.2 |   | 4,888 |   | 1.1 |   |
| Other operating income                              |   | —                     |    | —                 |   | — |   | — |   | — |   | — |   | (800 | ) | (0.1 | ) |
|                                                |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income                                    |   | 845                        |    | 0.5                    |   | 6,074 |   | 2.7 |   | 1,999 |   | 0.6 |   | 2,272 |   | 0.5 |   |
|                                                |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                               |   | (1,102                     | )       | (0.6                   | )      | (2,143 | ) | (1.0 | ) | (2,102 | ) | (0.6 | ) | (5,137 | ) | (1.1 | ) |
| Gain (loss) on Change in derivatives                |   | (200                       | )       | (0.1                   | )      | 910 |   | 0.4 |   | 320 |   | 0.1 |   | 910 |   | 0.2 |   |
| Foreign exchange gain (loss)                        |   | 87                         |    | 0.0                    |   | 39 |   | 0.0 |   | 406 |   | 0.1 |   | 56 |   | 0.0 |   |
| Loss on extinguishment of debt                      |   | —                     |    | —                 |   | (4,031 | ) | (1.7 | ) | — |   | — |   | (4,031 | ) | (0.9 | ) |
|                                                |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before provision for income taxes     |   | (370                       | )       | (0.2                   | )      | 849 |   | 0.4 |   | 623 |   | 0.2 |   | (5,930 | ) | (1.3 | ) |
| Provision for income taxes                          |   | 343                        |    | 0.2                    |   | 611 |   | 0.3 |   | 507 |   | 0.1 |   | 1,018 |   | 0.2 |   |
|                                                |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                   |   | $                          | (713    | )                      | (0.4   | )% | $ | 238 |   | 0.1 | % | $ | 116 |   | 0.0 | % | $ | (6,948 | ) | (1.5 | )% |
|                                                |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) applicable to common stockholders |   | $                          | (1,589  | )                      | (0.9   | )% | $ | (628 | ) | (0.3 | )% | $ | (1,635 | ) | (0.5 | )% | $ | (7,957 | ) | (1.8 | )% |

 

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FISCAL QUARTER ENDED JUNE 29, 2003 COMPARED TO FISCAL QUARTER ENDEDJUNE 30, 2002

 

NET SALES

 

Net sales forthe quarter ended June 29, 2003 decreased by $45.6 million, or 20%, to $182.2million from $227.8 million for the quarter ended June 30, 2002.  A portion of this decrease relates to theclosing of our Mt. Prospect, IL facility in the third quarter of 2002, whichhad revenues in the second quarter of 2002 of $33.4 million.  Of the Mt Prospect revenues, $18.2 millionrelated to business with 3Com which ended in the third quarter of 2002, withthe remaining revenue from this facility being transferred to our othermanufacturing sites**.  **Thebalance of the decrease of approximately $27.4 million consists of $28.1million from two customers which whom we no longer do business in 2003 and $9.1million due to the overall decline in the economy, which was partially offsetby $9.8 million in revenue from our Reynosa, Mexico acquisition.

 

GROSS PROFIT

 

Gross profitdecreased from 10.0% of net sales for the quarter ended June 30, 2002 to 8.4%of net sales for the quarter ended June 29, 2003. Our gross margin in thesecond quarter of 2003 was impacted by the loss of our take or pay contractswith two customers, each of which expired during 2002 but had positivelycontributed to our gross profit in the second quarter of 2002, and by thedecrease in utilization of our manufacturing capacity due to the revenuedecline in the second quarter of 2003 compared to second quarter of 2002.  This decrease was partially offset by thepositive impact of lower inventory writedowns in the second quarter of 2003compared to 2002 and a favorable change in customer mix, with a portion of ourrevenue decrease coming from products with lower gross margins.

 

SELLING, GENERAL AND ADMINISTRATIVE

 

Selling,general and administrative expense for the quarter ended June 29, 2003decreased to $13.4 million, or 7.4% of net sales, from $15.5 million, or 6.7%of net sales, for the quarter ended June 30, 2002. This net decrease of $2.1million related mainly to the restructuring activities the Company executed in2002 offset by increased expenses from our new Reynosa, Mexico facility**. **Included in the second quarter2002 expenses were $1.0 million related to our Mt Prospect facility which wasclosed in the third quarter of 2002.  Noexpenses were incurred in the second quarter of 2003 related to thisfacility.  This was offset by $1.3million of additional expenses in the second quarter of 2003 from our Reynosafacility which was acquired in July 2002, and therefore had no expenses in thesecond quarter of 2002.

 

The remaining decrease of $2.4 million consists mainly of loweremployee recruiting and relocation expenses of $0.8 million, which had beenincurred mostly in our Concord headquarters in the second quarter of 2002,decreased consulting costs of $0.5 million and lower employee labor costs of$0.6 million from the various restructuring activities and other costreductions to offset our reduced revenue amounts.

 

AMORTIZATION EXPENSE

 

Amortization expense was zero in the quarter ended June 29, 2003 comparedto $1.9 million in the quarter ended June 30, 2002.  The amortization expense in the second quarter of 2002 related toour asset acquisition from 3Com in September 2000, which consisted mainly ofcustomer relationships.  These assetswere amortized over the term of our supply agreement with 3Com, which expiredon June 30, 2002.

 

RESTRUCTURING AND ASSET WRITEDOWNS

 

See theprevious discussion in the section titled “Restructuring and Asset Writedowns”.

 

INTEREST EXPENSE, NET

 

Net interest expense decreased to $1.1 million for the quarter endedJune 29, 2003 from $2.1 million for the quarter ended June 30, 2002, reflectinglower average borrowings in addition to the impact of decreasing interestrates.

 

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CHANGE IN FAIR VALUE OF DERIVATIVE

 

During thesecond quarter of 2003, we recorded an increase in the fair value of ourwarrant derivatives of $0.2 million compared to a reduction of $0.9 million forsecond quarter of 2002.  The warrantswere issued as part of our Series A preferred stock offering in the firstquarter of 2002, and were originally fair valued at $3.2 million.  The warrants’ fair value increased from $2.2million at March 30, 2003 to $2.4 million at June 29, 2003.  The increase in the value of this liabilitywas recorded as a non-operating loss in the second quarter of 2003.

 

FOREIGN EXCHANGE GAINS/LOSSES

 

There were no significant foreign exchange gains or losses for eitherof the three-month periods ended June 29, 2003 or June 30, 2002.

 

PROVISION FOR INCOME TAXES

 

Provision for income taxes was $0.3 million for the quarter ended June29, 2003 and $0.6 million for the quarter ended June 30, 2002. Our taxprovisions in both quarters resulted from the mix of profits and lossesexperienced by us across the jurisdictions within which we operate.

 

SIX MONTHS ENDED JUNE 29, 2003COMPARED TO SIX MONTHS ENDED JUNE 30, 2002

 

NET SALES

 

Net sales forthe six months ended June 29, 2003 decreased by $99.6 million, or 22%, to$343.6 million from $443.2 million for the six months ended June 30, 2002. Aportion of the decrease relates to the closing of our Mt. Prospect facility inthe third quarter of 2002, which had revenues for the six months ended June 30,2002 of $76.4 million.   Of the MtProspect revenues, $36.6 million related to business with 3Com which ended inthe third quarter of 2002, with the remaining revenue from this facility beingtransferred to our other manufacturing sites**.** ** **The balance of thedecrease of approximately $63.0 million consists of $55.9 million from threecustomers whom we no longer do business with in 2003 and $27.6 million due tothe overall decline in the economy, which was partially offset by $20.5 millionin revenue from two new customers, including $18.9 million from our Reynosa,Mexico acquisition.

 

GROSS PROFIT

 

Gross profitdecreased to 8.2% of net sales for the six months ended June 29, 2003 from 9.3%of net sales for the six months ended June 30, 2002. This decrease resultedprimarily from the loss of our take or pay contracts with two customers, eachof which expired during 2002 but had positively contributed to our gross profitin the six months ended June 30, 2002. Our gross profit was also negatively impacted by the decrease inutilization of our manufacturing capacity due to the revenue decline in the sixmonth period ended June 29, 2003 compared to six month period ended June 30,2002.  This decrease was partiallyoffset by the positive impact of lower inventory provisions in 2003 compared to2002 and a favorable change in customer mix, with a higher percentage of ourrevenues coming from products with higher gross margins.

 

SELLING, GENERAL ANDADMINISTRATIVE

 

Selling,general and administrative expense for the six months ended June 29, 2003decreased to $25.6 million, or 7.4% of net sales, from $31.0 million, or 7.0%of net sales, for the six months ended June 30, 2002.  This net decrease of $5.4 million related mainly to the variousrestructuring activities the Company executed in 2002 offset by an increase in expensesfrom our new Reynosa, Mexico facility. The closure of the Mt Prospect facility in the third quarter of 2002contributed $1.7 million to this overall decrease, which was offset by anincrease of $2.1 million of additional expenses in the six months ended June29, 2003 from our Reynosa facility which was acquired in July 2002, andtherefore had no expenses in the six months ended June 30, 2002.

 

The remaining decrease of $5.8 million consists mainly of loweremployee recruiting and relocation expenses of $1.1 million, which had beenincurred mostly in Concord in the second quarter of 2002, decreased consultingcosts of $0.9 million, mainly in the Corporate headquarters for internal auditand tax planning services, decreased bad debt charges of $0.7 million, whichhad been incurred primarily in Asia in the first quarter of 2002 and loweremployee labor costs of $1.6 million from the various restructuring activitiesand other cost reductions to offset our reduced revenue amounts.

 

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AMORTIZATION EXPENSE

 

Amortization expense was zero in the six month period ended June 29,2003 compared to $3.7 million for the six month period ended June 30,2002.  The amortization expense in 2002related to our asset acquisition from 3Com in September 2000, which consistedmainly of customer relationships.  Theseassets were amortized over the term of our supply agreement with 3Com, whichexpired on June 30, 2002.

 

RESTRUCTURING AND ASSETWRITEDOWNS

 

See the previous discussion in the section titled "Restructuringand Asset Writedowns".

 

OTHER OPERATING INCOME

 

During the sixmonth period ended June 30, 2002, the Company received a $1.1 million feerelated to costs incurred in pursuing an unsuccessful acquisition opportunityin the fourth quarter of 2001.  Thisamount was netted against $0.3 million of expenses incurred during the periodrelated to this acquisition opportunity.

 

INTEREST EXPENSE, NET

 

Net interestexpense decreased to $2.1 million for the six months ended June 29, 2003, from$5.1 million for the six months ended June 30, 2002, reflecting lower averageborrowings and decreased interest rates.

 

CHANGE IN FAIR VALUE OFDERIVATIVE

 

During the six months ended June 29, 2003, we recorded a reduction inthe fair value of our warrant derivatives of $0.3 million compared to areduction of $0.9 million for the six months ended June 30, 2002.  The warrants were issued as part of ourpreferred stock offering in the first quarter of 2002, and were originallyvalued at $3.2 million.   For the sixmonth period ended June 29, 2003, the warrants’ fair value decreased from $2.7million at December 31, 2002 to $2.4 million at June 29, 2003.  The decrease in the value of this liabilitywas recorded as a non-operating gain in the period ended June 29, 2003.

 

FOREIGN EXCHANGE TRANSACTIONGAINS/LOSSES

 

Foreign exchange gains for the six months ended June 29, 2003 were $0.4million compared to effectively no foreign exchange gains or losses for sixmonths ended June 30, 2002.  The gain in2003 related primarily to the weakening of the US Dollar against the EURO foractivities in our Valencia, Spain subsidiary.

 

PROVISION FOR INCOME TAXES

 

Provision forincome taxes was $0.5 million for the six months ended June 29, 2003 comparedto $1.0 million for the six months ended June 30, 2002.  Our tax provisions in both periods resultedfrom the mix of profits and losses experienced by us across the jurisdictionswithin which we operate. For the six months ended June 30, 2003, pretax incomein the United States and Asia was offset by net operating loss carryforwards,while a tax provision was recorded in France. For the six months ended June 30, 2002, pretax income in the UnitedStates was offset by net operating loss carryforwards while losses in Asiaprovided us with no income tax benefit because we do not believe it is morelikely than not that we will be able to utilize these taxable losses in thefuture.  Profits in Spain and Francerequired us to record tax provisions in the period.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At June 29, 2003, we had cash and cash equivalents of $44.7 million,total bank and other debt of $25.5 million and $33.8 million of unusedborrowing capacity under the credit agreement we entered into in 2002 (“2002Credit Agreement”).  In addition, we had$3.0 million of unused borrowing capacity under a revolving credit facility inSpain.  During the six months ended June29, 2003, our operations were funded primarily with cash flow from operatingactivities and available cash.

 

Net cash provided by operating activities of $1.9 million for the sixmonths ended June 29, 2003 resulted mainly from a decrease in operating assetsof $24.7 million and depreciation and amortization expenses of $8.0 million,offset in part by a decrease in operating liabilities of $30.6 million.  The decrease in operating assets included areduction in accounts receivable of $16.3 million as a direct result of ourdecrease in revenues and a $4.5 million reduction in inventory.   The decrease in operating liabilitiesincluded a decrease in accounts payable of $23.7 million as a result of reducedvolume through our manufacturing sites and a reduction of $6.8 million inaccrued expenses mainly as a result of lower restructuring reserves, incometaxes payable and accrued salaries and benefits.

 

Net cash provided by operating activities of $60.8 million for the sixmonths ended June 30, 2002 resulted primarily from a decrease in operatingassets of $74.3 million and depreciation and amortization expenses of $13.3million, offset in part by a decrease in operating liabilities of $29.6 millionand a net loss of $6.9 million. The decrease in operating assets included a$37.5 million reduction in accounts receivable, most of which was a directresult of the reduction in revenue, and $31.0 million in inventory

 

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reductions, caused by thereduced volume through the manufacturing sites and better inventorymanagement.  Other non-cash itemsinclude $4.0 million for the write-off of capitalized bank fees in connectionwith the Company’s refinancing of its credit facility during the second quarterof 2002, and write downs and loss on disposal of fixed assets of $4.0 millionrelated mainly to the restructuring charge taken for closing the China facilityin the first quarter of 2002.

 

Net cash used in investing activities for the six months ended June 29,2003 was $3.2 million, consisting of $8.1 million of capital expenditures,mainly from the purchase of a previously leased Surface Mount Technology(“SMT”) line of $4.8 million in the first quarter of 2003, offset by $5.1million in proceeds from the sale of fixed assets, $4.8 of which related to thesame SMT line, which was subsequently leased back in the first quarter in a sales/leasebacktransaction that has been treated as a capital lease. This sales/leasebacktransaction required us to restrict $2.1 million in cash over the threeyear term of the lease. This cash has been reclassified to other assets at June29, 2003.  Net cash provided byinvesting activities for the six months ended June 30, 2002 was $2.4 million,consisting of $4.0 million of proceeds from the sale of the Company’s Salt LakeCity building during the second quarter, partially offset by capital expendituresof $1.3 million.

 

Net cash usedin financing activities for the six months ended June 29, 2003 was $3.8million, consisting mainly of $4.3 million of payments on long term debt and$0.7 million of payments on our term loan, partially offset by $1.2 million ofproceeds from the exercise of stock options and our stock purchase plan.  Net cash used in financing activities forthe six months ended June 30, 2002 was $43.9 million consisting primarily of$116.2 million of net payments on the Company’s previous credit facility, whichwas replaced by the 2002 Credit Agreement during the second quarter of2002.  This was offset in part by $29.1million in borrowings under the 2002 Credit Agreement, $9.2 million from amortgage loan on the Company’s Spain facility and $37.7 million in net proceedsfrom the issuance of our Series A convertible preferred stock and warrants.

 

In March 2002, we issued$41.5 million of Series A Convertible Preferred Stock (“Series APreferred) and warrants to purchase 1,612,281 shares of common stock in aprivate placement to qualified accredited investors (the “Offering”). Proceedsof the Offering, net of costs of the Offering, were $37.7 million.  The Series A Preferred accrues dividendsquarterly at the rate of 5.25% per annum, payable quarterly in common stock orcash, at our option.  Ifwe choose to pay dividends in common stock or to redeem the Series A Preferredwith common stock, the shares of common stock issued will be computed using 95%of the market value of the common stock over a prescribed measurement period.

 

The Series APreferred is convertible to common stock based on a conversion price of $6.44per share. We may require holders to convert to common stock provided the priceof our common stock has traded at 150% of the conversion price for a specifiedperiod.  The Series A Preferred 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.

 

On July 2,2003, we issued $25.0 million of Series B Convertible Preferred Stock (“SeriesB Preferred”) and warrants to purchase 1,165,254 shares of common stock in aprivate placement to qualified accredited investors.  Proceeds of the Series B Preferred, net of costs, wereapproximately $22.9 million.  The SeriesB Preferred will be recorded as temporary equity, and the warrants will berecorded as liabilities.

 

The Series BPreferred accrues dividends quarterly at the rate of 4.50% per annum, payablequarterly in common stock or cash, at our option. The Series B Preferred isconvertible to common stock at any time by holders based on a conversion priceof $5.90 per share and has a scheduled maturity of July 3, 2008, unlessconverted earlier.  We may redeem theSeries B Preferred on or after July 3, 2006, in whole or in part, at our option,at par value payable in our common stock or cash, at our option plus accruedand unpaid dividends, if any, payable in cash. If we choose to pay dividends in common stock or to redeem the Series BPreferred with common stock, the number of shares of common stock issued willbe computed using 95% of the market value of the common stock at that time. Thewarrants are exercisable at any time through July 3, 2008 at the exercise priceof $6.275 per share. We have the right to require the exercise of the warrantsat any time if our common stock trades for 175% of the exercise price of thewarrants for a specified period of time.

 

A portion ofthe total consideration received was allocated to the warrants based on theirfair value of $1.9 million and the residual proceeds were allocated to theSeries B Preferred.  The resultinginitial Series B Preferred balance will be accreted to the liquidation value of$50 per share, subject to certain adjustments over the life of the Series BPreferred.  The discount on the Series BPreferred resulting from allocation of proceeds to the warrants will beaccreted, using the effective interest method, through the scheduled maturitydate and will be recorded as a charge against additional paid in capital.  In the event we elect to call the Series BPreferred in advance of the maturity date, accretion of the remaining discountwill occur.  All such amounts foraccretion will be deducted from the net income available to common stockholders,for purposes of earnings per share calculations.

 

We have a$130.5 million credit facility consisting of a $120 million senior securedrevolving credit facility and a $10.5 million three-year term loan (the “2002Credit Agreement”).  The 2002 CreditAgreement is secured by substantially all domestic assets and a pledge of 65%of the shares of certain foreign subsidiaries. Restrictive covenants for the 2002 Credit Agreement include restrictionson leverage ratios as well as covenants requiring minimum net worth, domesticadjusted EBITDA and fixed charge

 

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coverage ratios.  The three-year term loan has a regularquarterly payment of $0.3 million payable on the first business day of eachquarter, with the remaining outstanding balance due at maturity.

 

Also in June2002, we entered into a ten-year mortgage loan for 10 million Euros ($9.2million) and a 3 million Euro ($2.7 million) revolving credit facility inValencia, Spain.  This revolving creditfacility, which was due to expire on June 26, 2003, was extended for six monthsthrough December 31, 2003.  There wereno borrowings under the revolving credit facility at June 29, 2003.

 

Borrowingsunder the revolving facility of the 2002 Credit Agreement are limited to thesum 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 June 29, 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. We have the option of choosing either the base rate or LIBOR.  In the first year the spread cost is fixedfor base rate and LIBOR loans.  Thespread on the base rate loans is 1.75% over the base rate and on the LIBORloans is the chosen LIBOR period rate plus 3.0% for the three months endedSeptember 28, 2003.  In the second andthird years the spreads will reset quarterly based on the average netavailability of borrowings for the preceding quarter.  The spread on the base rate loans will be between 1.25% and 2.25%and on the LIBOR loans will be between 2.5% and 3.5%. The interest rate under theterm loan is equal to the sum of the Cash Interest Rate (which is the greaterof (i) the base rate in effect plus 6.0% or (ii) 11.0%) plus the DeferredInterest Rate (which is equal to 3.0%). The interest rate on the term loan at June 29, 2003 was 14.0%.

 

The 2002Credit Facility requires us to obtain within 180 days of the closing (andmaintain at all times), interest rate hedging agreements covering a notionalamount of not less than $10 million of the revolving loans, provided, that uponthe request of the administrative agent, we must increase the amount covered bythe hedge agreements up to an aggregate amount equal to 25% of the aggregateoutstanding balance of the revolving loans at such time.  However, in no event shall the aggregateamount covered by such hedge agreements at any time exceed $20 million**. **Since we did not have anyborrowings against the revolving credit facility at June 29, 2003, we receiveda temporary waiver of the interest rate hedge requirement through September 20,2003 and have not entered into any interest rate hedge agreement at June 29,2003.

 

Our principalsources of funding our operating expenses, capital expenditures and debtobligations are expected to be our current cash and cash equivalents, includingcash from our recent Series B Preferred Stock offering, cash generated fromoperations and available borrowings under our 2002 Credit Agreement. The amountof cash generated from operations will be dependent upon such factors as thesuccessful execution of our business plan and worldwide economic conditions.Borrowings under 2002 Credit Agreement are dependent upon a borrowing basecalculation derived from our domestic accounts receivable and inventory.  Availability fluctuates according to thequantity and quality of our receivables and US inventory.  Borrowings under our 2002 Credit Agreementcould be limited by a number of factors, including the following:

 

•  revenue reductions fromdecreased customer demand or lost customers causing lower borrowing assets,particularly accounts receivable,

 

•  a lower amount of our business beingconducted in the US and Mexico,

 

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

 

•  failure to comply with Credit Agreementcovenants.

 

We arecurrently in compliance with all covenants under our 2002 CreditAgreement.  In the event we do not haveadequate funding from our 2002 Credit Agreement, we would work with our lendinginstitutions to modify the 2002 Credit Agreement or identify other sources ofcapital to obtain necessary debt or equity financing. There is no assurance wewould be able to modify the 2002 Credit Agreement with existing lenders orobtain alternative debt or equity financing to satisfy our funding needs.

 

Although webelieve that our current cash balances, funds generated from operations andborrowings under the 2002 Credit Agreement will be adequate to meet ouranticipated 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 twelvemonths and as such we continue to consider financing opportunities that wouldprovide additional liquidity.

 

GOODWILL IMPAIRMENT

 

In accordancewith SFAS No. 142, “Goodwill and Other Intangible Assets”, we are required toperform an annual goodwill impairment test as of the beginning of our fiscalthird quarter, which begins on June 30, 2003. This involves determining the estimated fair value of each reportingunit and comparing it to the reporting unit’s carrying amount.  If a reporting unit’s carrying

 

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amount exceeds its fair value,an indication exists that the reporting unit’s goodwill is impaired and wewould be required to perform the second step of the impairment test.  We do not believe that an event occurred orcircumstances changed that would have required us to perform an impairment testprior to our annual test at the beginning of our third quarter.   We will complete our annual impairment testduring our third quarter of 2003.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In May 2003, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity,” which establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. Financial instruments that are within the scope of the statement, whichpreviously were often classified as equity, must now be classified asliabilities. This statement is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise shall be effective at thebeginning of the first interim period beginning after June 15, 2003.  We have determined that the adoption of SFASNo. 150 will not have a material impact on our consolidated financialstatements.

 

In April 2003, the FASBissued SFAS No. 149, “Amendments of Statement 133 on DerivativeInstruments and Hedging Activities,” which amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts and for hedging activitiesunder SFAS No. 133. This statement is effective for contracts entered intoor modified after June 30, 2003, with certain exceptions, and for hedgingrelationships designated after June 30, 2003.  We do not expect adoption of SFAS No. 149 to have a materialimpact on our consolidated financial statements.

 

In December2002, the FASB issued SFAS No. 148, Accounting for Stock-BasedCompensation- Transition and Disclosure” (“SFAS 148”).  This statement amends SFAS 123 to providealternative methods of transition for a voluntary change to the fair valuebased 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 June 2002, the FASB issued SFAS No. 146, “Accounting forExit or Disposal Activities”.  SFASNo. 146 addresses significant issues regarding the recognition,measurement and reporting of costs that are associated with exit and disposalactivities, including restructuring activities that are currently accounted forunder EITF No. 94-3.  We adoptedthe provisions of SFAS No. 146 effective for exit or disposal activitiesinitiated after December 31, 2002. The effect-on-adoption of SFAS No. 146 changed the timing of whenrestructuring charges are recorded from a commitment date approach to when theliability is incurred.

 

In April 2002,the FASB issued SFAS No. 145 “Rescission of FASB Statements No.4, 44 and 64,Amendment of FASB Statement No.13, and Technical Corrections as of April2002”.  FASB No. 145 eliminates FASB No.4 “Reporting Gains and Losses from Extinguishment of Debt”, which requiredcompanies to classify gains or losses from the extinguishment of debt as anextraordinary item, net of tax. As a result of this new FASB, gains and lossesfrom extinguishment of debt should be classified as extraordinary items only ifthey meet the criteria in APB Opinion No.30 “Reporting the Results ofOperations-Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events andTransactions”.  We do not believe thatthe extinguishment of debt will qualify as an extraordinary item as defined inAPB 30, and therefore we will be required to classify these charges asnon-operating expenses.  We have adoptedSFAS No. 145 on January 1, 2003, and have reclassified the extraordinary lossto a non-operating loss in all applicable periods for comparative purposes.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations” to be effective for all fiscal years beginning afterJune 15, 2002, with early adoption permitted.  SFAS No. 143 establishes accounting standards for the recognitionand measurement of an asset retirement obligation and its associated assetretirement cost. It also provides accounting guidance for legal obligationsassociated with the retirement of tangible long-lived assets.  We have adopted SFAS No. 143 in thefirst quarter of 2003 and determined that it did not impact our financialposition, results of operations or cash flows.

 

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RELATED PARTY TRANSACTIONS

 

At June 29,2003, affiliates of Credit Suisse First Boston Corporation (“CFSB”) ownedapproximately 46% of our outstanding common stock, not including warrants topurchase 749,797 shares of the our common stock, and had one seat on our Boardof Directors.  Details of the warrantsare included below.  Further, CSFB is amember of the bank group under our 2002 Credit Agreement and has committed tolend up to $10 million of the overall 2002 Credit Agreement.  In connection with structuring thisagreement in the second quarter of 2002, certain affiliates of CFSB were paid $0.6million.

 

Affiliates ofCFSB participated in our Series A convertible preferred stock offering in March2002.  These affiliates purchased300,000 shares of the convertible preferred stock, which is convertible into2,331,003 shares of common stock, and warrants to purchase 582,751 shares of commonstock.   In connection with thisinvestment, we paid an affiliate of CSFB an advisory fee of 1.446% on the totalamount invested in the offering (an aggregate of $0.6 million) in return for(i) CSFB’s services in helping to structure and arrange the transaction,(ii) the agreement by the CSFB affiliates not to sell or otherwisetransfer any of the our securities for six months (other than as part of anunderwritten offering we initiate), and (iii) the agreement by the CSFBaffiliates to accept piggyback registration rights instead of having the commonstock issuable upon the conversion or exercise of its securities included inthe shelf registration statement which was filed with the SEC to register theresale of the common stock underlying the preferred stock and warrants sold toother investors in the offering.  Theregistration statement, covering 5,937,461 shares, became effective on April23, 2002.  CFSB and its affiliates didnot participate in our July 2003 Series B convertible preferred stock offering.

 

Affiliates ofCFSB also participated 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 June 29,2003, 167,046 of these warrants were still outstanding.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not haveany financial partnerships with unconsolidated entities, such as entities oftenreferred to as structured finance, special purpose entities or variableinterest entities which are often established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limited purposes.Accordingly, we are not exposed to any financing, liquidity, market or creditrisk that could arise if we had such relationships.

 

### **RISK FACTORS**

 

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKINGAN INVESTMENT DECISION. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WECURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS. ANY OF THESE RISKSCOULD HAVE A MATERIAL AND NEGATIVE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONOR RESULTS OF OPERATIONS.

 

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

 

We depend on asmall number of customers for a large portion of our business. Our ten largestcustomers accounted for approximately 86% of net sales in the six months endedJune 29, 2003 and approximately 80% of net sales for fiscal 2002.  Changes in our customers’ orders have, inthe past, had a significant impact on our operating results. If a majorcustomer significantly reduces the amount of business it does with us, therewould be an adverse impact on our operating results.

 

We expect tocontinue to depend on sales to our major customers. Because it is not alwayspossible to replace lost business on a timely basis, it is likely that ouroperating results would be adversely affected if one or more of our majorcustomers were to cancel, delay or reduce a large amount of business with us.Our customer agreements typically permit the customer to terminate theagreement on three to six month’s notice. Were a customer to terminate itsagreement with us, it is likely that our operating results, through lowerrevenue and lower fixed cost absorption, would be adversely affected.  Moreover, our operating results in the past have been positivelyaffected by several customer contracts containing guaranteed minimumcommitments.  While those contractsgenerally have fixed terms and may not be terminated (absent a breach) prior totheir stated expiration, the favorable effects of the contracts are unlikely tobe replicated after these contracts expire or otherwise terminate.

 

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

 

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

 

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OF THESE FACILITIES COULD HARM OUR OPERATING RESULTS AND FINANCIALCONDITION.

 

Our growth andacquisition strategy could require us to incur substantial amounts ofindebtedness. As of June 29, 2003, our total debt was $25.5 million and ourinterest expense for the quarter then ended was $1.1 million. In addition, wemay incur additional indebtedness in the future.  Our future level of indebtedness could have adverse consequencesfor our business, including:

 

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

 

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

 

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

 

•  failure to comply with the financialcovenants under the agreements governing our indebtedness relating to matterssuch as fixed charge coverage ratio, minimum adjusted tangible net worth, andminimum domestic EBITDA, resulting in an event of default, which if not curedor waived, could cause substantially all of our indebtedness to become immediatelydue and payable.

 

We havefinancial instruments that are subject to interest rate risk, principally debtobligations under our 2002 Credit Agreement. An increase in the base rates uponwhich our interest rates are determined could have an adverse effect on ouroperating results and financial condition.

 

WE HAVE MADE SEVERAL STRATEGIC ACQUISITIONS OF MANUFACTURING FACILITIESAND BUSINESSES AND MAY MAKE MORE ACQUISITIONS IN THE FUTURE, AND THE FAILURE TOSUCCESSFULLY INTEGRATE ACQUIRED FACILITIES AND BUSINESSES MAY ADVERSELY AFFECTOUR FINANCIAL PERFORMANCE.

 

We have madeseveral significant acquisitions in the past, and selectively pursuingstrategic acquisitions remains an important part of our overall businessstrategy. However, any acquisitions we make could result in:

 

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

 

•  difficulty in managing and operatinggeographically dispersed businesses, including some located in foreigncountries;

 

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

 

•  an increase in our expenses and our workingcapital requirements;

 

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

 

•  financial risks, such as:

 

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

 

•  our need to incur additional indebtedness;and

 

•  dilution if we issue additional equitysecurities.

 

We may notsuccessfully integrate any operations, technologies, systems, products orservices that we acquire, and we cannot assure you that any of our recent orfuture acquisitions will be successful. If any of our recent or future acquisitionsare not successful, it is likely that our financial performance will beadversely affected.

 

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

 

We expect to selectively pursue strategic acquisitions as part of ouroverall business strategy. Competition for acquiring attractive facilities andbusinesses in our industry is substantial. In executing this part of ourbusiness strategy, we may experience difficulty in identifying suitableacquisition candidates or in completing selected transactions. In addition, our2002 Credit

 

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Agreement limits our ability toacquire the assets or businesses of other companies. If we are able to identifyacquisition candidates, such acquisitions may be financed with substantial debtor with potentially dilutive issuances of equity securities. Our ability tosuccessfully complete acquisitions in the future will depend upon severalfactors, including the continued availability of financing. We cannot assureyou that financing for acquisitions will be available on terms acceptable tous, if at all.

 

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

 

We typicallypurchase components and manufacture products in anticipation of customer ordersbased on customer forecasts. For a variety of reasons, such as decreasedend-user demand for the products we are manufacturing, our customers may notpurchase all of the products we have manufactured or for which we havepurchased components. In such event, we would attempt to recoup our materialsand manufacturing costs by means such as returning components to our vendors,disposing of excess inventory through other channels or requiring our OEMcustomers to purchase or otherwise compensate us for such excess inventory.Some of our significant customer agreements do not give us the ability torequire our OEM customers to do so. To the extent we are unsuccessful inrecouping our material and manufacturing costs, not only would our net sales beadversely affected, but our operating results would be disproportionatelyadversely affected. Moreover, carrying excess inventory would reduce theworking capital we have available to continue to operate and grow our business.

 

As of June 29,2003, $51.3 million of our net inventory was held under a supply agreementwith one major customer. Of this amount, approximately 53% is inventory thatexceeds demand to fulfill forecast requirements at June 29, 2003. Our supplyagreement places responsibility on our customer for inventory purchasedconsistent with its forecasts, but requires us to hold such inventory, subjectin some instances to a monthly carrying charge, prior to the time the customerdeclares the product end of life.  Atsuch time as the product is declared end of life, the customer is required torepurchase any remaining unmitigated inventory. We believe that we haveproperly valued the inventory that we are responsible for as of June 29, 2003and believe the customer is credit worthy.

 

LONG-TERM PURCHASE ORDERS AND COMMITMENTS ARE NOT TYPICAL IN OURINDUSTRY, AND REDUCTIONS, CANCELLATIONS OR DELAYS IN CUSTOMER ORDERS WOULDADVERSELY AFFECT OUR OPERATING RESULTS.

 

As is typicalin the EMS industry, we do not usually obtain long-term purchase orders orcommitments from our customers. Instead, we work closely with our customers todevelop non-binding forecasts of the future volume of orders.  Customers may cancel their orders, changeproduction quantities from forecasted volumes or delay production for a numberof reasons beyond our control. Significant or numerous cancellations, reductions or delays in orders byour customers would reduce our net sales. In addition, because many of ourcosts are fixed, a reduction in net sales could have a disproportionate adverseeffect on our operating results. From time to time we make capital investmentsin anticipation of future business opportunities. There can be no assurance thatwe will receive the anticipated business. If we are unable to obtain theanticipated business, our operating results and financial condition may beharmed.

 

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

 

We operate ina highly competitive industry. We compete against many domestic and foreigncompanies, some of which have substantially greater manufacturing, financial,research and development and marketing resources than we do. Some of ourcompetitors have broader geographic breadth and range of services than we do.In addition, some of our competitors may have more developed relationships withour existing customers than we do. We also face competition from themanufacturing operations of our current and potential customers, whocontinually evaluate the benefits of internal manufacturing versus outsourcing.As more OEMs dispose of their manufacturing assets and increase the outsourcingof their products, we will face increasing competitive pressures to grow ourbusiness in order to maintain our competitive position.

 

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

 

We order rawmaterials and components to complete our customers’ orders, and some of theseraw materials and components are ordered from sole-source suppliers. Althoughwe work with our customers and suppliers to minimize the impact of shortages inraw materials and components, we sometimes experience short-term adverseeffects due to price fluctuations, extended lead times and delayed shipments.In the past, there have been industry-wide shortages of electronic components,particularly memory and logic devices. If a significant shortage of rawmaterials or components were to occur, we may have to delay shipments tocustomers and our operating results would be adversely affected. In some cases,supply shortages of particular components will substantially curtail productionof products using these components. While most of our significant customercontracts permit quarterly or other periodic reviews of pricing based ondecreases and increases in the prices of raw materials and components, we arenot always able to pass on price increases to our customers. Accordingly, someraw material and component price increases could adversely affect our operating

 

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results. We also depend on asmall number of suppliers for many of the other raw materials and componentsthat we use in our business. If we were unable to continue to purchase theseraw materials and components from our suppliers, our operating results would beadversely affected. Because many of our costs are fixed, our margins depend onour volume of output at our facilities and a reduction in volume will adverselyaffect our margins.

 

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

 

Our businessdepends on the electronics industry, which is subject to rapid technologicalchange, short product life cycles and pricing and margin pressure.  In addition, the electronics industry hashistorically been cyclical and subject to significant downturns characterizedby diminished product demand, rapid declines in average selling prices andproduction over-capacity. When these factors adversely affect our customers, wemay suffer similar effects. Our customers’ markets are also subject to economiccycles and are likely to experience recessionary periods in the future. Theeconomic conditions affecting the electronics industry, in general, or any ofour major customers, in particular including the economic slowdown, mayadversely affect our operating results.

 

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

 

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

 

•    political and economicinstability in countries or geographies where we have manufacturing facilities,particularly in Asia and Mexico where we conduct a portion of our business;

 

•    fluctuations in the value offoreign currencies;

 

•    high levels of inflation,historically the case in a number of countries in Asia and Mexico where we dobusiness;

 

•    changes in labor conditionsand difficulties in staffing and managing our foreign operations;

 

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

 

•    burdens and costs of ourcompliance with a variety of foreign laws;

 

•    increases in the duties andtaxes we pay;

 

•    imposition of restrictions oncurrency conversion or the transfer of funds; and

 

•    expropriation of privateenterprises.

 

OUR BUSINESS MAY BE IMPACTED BY GEOPOLITICAL EVENTS

 

As a globalbusiness, we operate and have customers located in many countries.  Geopolitical events such as terrorist actsmay effect the overall economic environment and negatively impact the demandfor our customers’ products.  As aresult, customer orders may be lower and our financial results may be adverselyaffected.

 

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

 

Our annual and quarterly results may vary significantly depending onvarious factors, 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:

 

•    variations in the timing andvolume of customer orders relative to our manufacturing capacity;

 

•    introduction and marketacceptance of our customers’ new products;

 

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•    changes in demand for ourcustomers’ existing products;

 

•    the timing of our expendituresin anticipation of future orders;

 

•    effectiveness in managing ourmanufacturing processes;

 

•    changes in competitive andeconomic conditions generally or in our customers’ markets;

 

•    the timing of, and the pricewe pay for, acquisitions and related integration costs;

 

•    changes in the cost oravailability of components or skilled labor; and

 

•    foreign currency exposure.

 

As is the case with many technology companies, we typically ship asignificant portion of our products in the last few weeks of a quarter. As aresult, any delay in anticipated sales is likely to result in the deferral ofthe associated revenue beyond the end of a particular quarter, which would havea significant effect on our operating results for that quarter. In addition,most of our operating expenses do not vary directly with net sales and aredifficult to adjust in the short term. As a result, if net sales for aparticular quarter were below our expectations, we could not proportionatelyreduce operating expenses for that quarter, and, therefore, that revenueshortfall would have a disproportionate adverse effect on our operating resultsfor that quarter.

 

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

 

We operate in the highly competitive EMS industry and depend on theservices of our key senior executives and our technological experts. The lossof the services of one or several of our key employees or an inability toattract, train and retain qualified and skilled employees, specificallyengineering, operations and sales personnel, could result in the loss ofcustomers or otherwise inhibit our ability to operate and grow our businesssuccessfully. In addition, our ability to successfully integrate acquiredfacilities or businesses depends, in part, on our ability to retain andmotivate key management and employees hired by us in connection with theacquisition.

 

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

 

We believe that our future success will depend upon our ability todevelop and provide design and manufacturing services that meet the changingneeds of our customers. This requires that we successfully anticipate and respondto technological changes in design and manufacturing processes in acost-effective and timely manner.  As aresult, we continually evaluate the advantages and feasibility of new productdesign and manufacturing processes. We cannot, however, assure you that ourprocess development efforts will be successful.

 

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

 

Our operations are regulated under a number of federal, state andforeign environmental and safety laws and regulations that govern, among otherthings, the discharge of hazardous materials into the air and water as well asthe handling, storage and disposal of these materials. These laws andregulations include the Clean Air Act, the Clean Water Act, the Resource,Conservation and Recovery Act, and the Comprehensive Environmental Response,Compensation and Liability Act, as well as analogous state and foreign laws.Compliance with these environmental laws is a major consideration for usbecause we use hazardous materials in our manufacturing process. In addition,because we are a generator of hazardous wastes, we, along with any other personwho arranges for the disposal of our wastes, may be subject to financialexposure for costs associated with an investigation and any remediation ofsites at which we have arranged for the disposal of hazardous wastes if thesesites become contaminated, even if we fully comply with applicableenvironmental laws. In the event of a violation of environmental laws, we couldbe held liable for damages and for the costs of remedial actions and could alsobe subject to revocation of our effluent discharge permits. Any revocationcould require us to cease or limit production at one or more of our facilities,thereby negatively impacting our revenues and results of operations.Environmental laws could also become more stringent over time, imposing greatercompliance costs and increasing risks and penalties associated with anyviolation, which also could negatively impact our operating results.

 

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

 

Credit Suisse First Boston, through certain of its affiliates, ownsapproximately 46% of our outstanding common

 

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stock and, as a result, hassignificant control over our business, policies and affairs, including,effectively, the power to appoint new management, prevent or cause a change ofcontrol and approve any action requiring the approval of the holders of ourcommon stock, such as adopting amendments to our certificate of incorporationand approving mergers or sales of all or substantially all of our assets.Circumstances may occur in which the interests of these stockholders could bein conflict with your interests.

 

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

 

Provisions inour charter and bylaws may have the effect of delaying, deterring or preventinga change of control or changes in our management that investors might considerfavorable unless approved by our stockholders and directors affiliated withCredit Suisse First Boston. Those provisions serve to limit the circumstancesin which a premium may be paid for our common stock in proposed transactions orwhere a proxy contest for control of our board may be initiated. If a change ofcontrol or change in management is delayed, deterred or prevented, the marketprice of our common stock could suffer.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

 

There has beenno material changes in our market risk during the quarter ended June 29,2003.  Market risk information iscontained under the caption “Quantitative and Qualitative Disclosure Relatingto Market Risks” in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2002.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

The Company’smanagement, with the participation of the Company’s chief executive officer andchief financial officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Exchange Act) as of June 29, 2003. In designing and evaluating the Company’s disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving their objectives and management necessarily applied its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  Based on this evaluation,the Company’s chief executive officer and chief financial officer concludedthat, as of June 29, 2003, the Company’s disclosure controls and procedures were(1) designed to ensure that material information relating to the Company,including its consolidated subsidiaries, is made known to the Company’s chiefexecutive officer and chief financial officer by others within those entities,particularly during the period in which this report was being prepared and (2)effective, in that they provide reasonable assurance that information requiredto be disclosed by the Company in the reports that it files or submits underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms.

 

No change inthe Company’s internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscalquarter ended June 29, 2003 that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

PART II. OTHERINFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

A class action complaint filed on December 6,2000, alleging violations of federal securities laws has been pending in theUnited States District Court, Southern District of New York against us, certainof our former officers and the underwriters that participated in our initialpublic offering (“IPO”).  We understandthat various other plaintiffs have filed substantially similar class actioncases against approximately 300 other publicly traded companies and their IPOunderwriters, which cases have been consolidated to a single federal districtcourt for coordinated case management. The complaint, which seeks unspecified damages among other things,alleges that the prospectus filed by us relating to stock sold in our initialpublic offering contained false and misleading statements with respect to thecommission arrangements between the underwriters and their customers.  We believe that this claim against us lacksmerit.

 

On July 15, 2002, we together with the otherissuers named as defendants in these coordinated proceedings filed a collectivemotion to dismiss the consolidated complaints on various legal grounds.  On October 9, 2002, the court approved astipulation between the plaintiffs and the individual defendants providing forthe dismissal of the individual defendants without prejudice.  In February 2003, that motion was deniedwith respect to most issuers.

 

We are currently considering a Memorandum ofUnderstanding and related documents proposed by the plaintiffs containing theterms of an agreement resolving the claims of the plaintiffs against us and ournamed officers.  While wecan make no assurances regarding the outcome of this action, we believe thatthe final result will have no material effect on its consolidated financialcondition

 

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or result of operations.

 

We are partyto other lawsuits in the ordinary course of business. We do not believe thatthese other proceedings individually or in the aggregate will have a materialadverse effect on our financial position, results of operations or cash flows.

 

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

At the Company’s Annual Meetingof Stockholders held on May 22, 2003, the following proposals were adopted bythe margins indicated:

 

To elect two Class IIIdirectors to serve on the Board of Directors until the 2006 Annual Meeting ofStockholders or until their successors are duly elected and qualified.

 

 
|               |   | **Shares  Voted For** |   |
|--------------------|--------|-----------------------|--------|
| Robert C. Bradshaw |   | 34,645,746            |   |
| Robin Esterson     |   | 34,625,746            |   |

 

In addition, the followingdirectors hold office for terms continuing beyond the 2003 Annual Meeting:  Karl R. Wyss, William J. Weyand, DermottO’Flanagan, Curtis S. Wozniak, Albert A. Notini and John P. Cunningham.

 

To ratify the appointment ofPricewaterhouseCoopers, LLP as the independent auditors of the Company for theyear ending December 31, 2003.

 

Number of Shares

 
| **Voted For** |   | **Voted  Against** |   | **Abstain** |   | **Broker  Non-Votes** |   |
|---------------|--------|--------------------|--------|-------------|--------|-----------------------|--------|
| 34,616,338    |   | 132,012            |   | 2,697       |   | 0                     |   |

 

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ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

 

(a)           Exhibits

 

 
| **EXHIBIT NUMBER** |   | **DESCRIPTION**                                                                                                                                                                       |
|--------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                  |
| 2.1(1)             |   | Securities Purchase Agreement dated as of  January 20, 1995 by and among MSL and the parties listed therein.                                                                          |
| 2.2(1)             |   | Warrant Agreement dated as of August 31,  1995 by and among MSL, Bank of America National Trust and Savings Association  and the parties listed therein.                              |
| 2.3(1)             |   | Preferred Stock and Warrant Subscription  Agreement dated as of November 26, 1999 by and among MSL and the parties  listed therein.                                                   |
| 2.4(1)             |   | Escrow Agreement dated as of November 26,  1999 by and among MSL and the parties listed therein.                                                                                      |
| 2.5(1)             |   | Asset Purchase Agreement dated as of  November 19, 1999 among 3Com Corporation, 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. |

 

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| 10.16(1)+  |   | Global Requirements Agreement No. MSL 183G  dated as of July 30, 1997 by and between MSL and Iomega Corporation.                                                                                                        |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17(1)+  |   | Supply Agreement dated as of November 27,  1999 by and between MSL and Palm Computing, Inc.                                                                                                                             |
| 10.18(1)+  |   | Manufacturing Services Agreement dated as  of June 1, 1999 by and between Hewlett-Packard Singapore Pte Ltd. and  Manufacturers’ Services Singapore Pte Ltd                                                        |
| 10.19(1)   |   | 2000 Cash Incentive Compensation Plan.                                                                                                                                                                                  |
| 10.20(4)+  |   | Supply Agreement dated as of September 26,  2000 between Manufacturers’ Services Salt Lake City Operations, Inc. and 3Com  Corporation.                                                                            |
| 10.21(4)+  |   | Lease dated as of September 26, 2000 by and  between 3Com Corporation and Manufacturers’ Services Salt Lake City Operations,  Inc.                                                                                 |
| 10.22(4)   |   | 2000 Non-employee Director Stock Option  Plan, as amended.                                                                                                                                                              |
| 10.23(4)   |   | 2000 Non-qualified Stock Option Plan.                                                                                                                                                                                   |
| 10.24(4)   |   | Second Amended and Restated Non-qualified  Stock Option Plan, as amended.                                                                                                                                               |
| 10.25(4)   |   | 2000 Equity Incentive Plan, as amended.                                                                                                                                                                                 |
| 10.26(5)   |   | Form of Change in Control Agreement for  Kevin Melia, Robert Donahue, Albert Notini, Rodolfo Archbold, James Poor,  Alan Cormier, Richard Gaynor, Francis Binder, Richard Buckingham and Sam  Landol.                   |
| 10.27(5)+  |   | First Amendment to Supply Agreement between  Manufacturers’ Services Salt Lake City Operations, Inc. and Palm, Inc.,  effective as of December 1, 2000.                                                            |
| 10.28(5)   |   | Amendment to Employment Letter dated as of  September 27, 1995 between MSL and Rodolfo Archbold.                                                                                                                        |
| 10.29(5)+  |   | First Amendment to Supply Agreement between  Manufacturers Services Salt Lake City Operations, Inc. and 3Com Corporation,  effective as of January 15, 2001.                                                       |
| 10.30(6)   |   | 2000 Equity Incentive Plan, as amended.                                                                                                                                                                                 |
| 10.31(6)   |   | 2000 Employee Stock Purchase Plan, as  amended.                                                                                                                                                                         |
| 10.32(6)   |   | 2000 Non-Qualified Stock Option Plan, as  amended.                                                                                                                                                                      |
| 10.33(7)   |   | Amendment to Supply Agreement between  Manufacturers Services Salt Lake City Operations, Inc. and 3Com Corporation  effective as of September 14, 2001.                                                                 |
| 10.34(8)+  |   | Amendment to the Outsourcing Agreement  dated as of June 1, 1998 by and between International Business Machines  Corporation and Manufacturers’ Services Western US Operations, Inc.                               |
| 10.35(8)   |   | Severance Agreement effective March 29,  2002 by and between MSL and Robert E. Donahue.                                                                                                                                 |
| 10.36(8)   |   | Employment Agreement dated as of January 2,  2002 by and between MSL and Kevin C. Melia.                                                                                                                                |
| 10.37(8)   |   | Employment Agreement dated as of January  31, 2002 by and between MSL and Albert A. Notini.                                                                                                                        |
| 10.38(8)   |   | Employment Agreement dated as of December  19, 2002 by and between MSL and Robert C. Bradshaw.                                                                                                                          |
| 10.39(8)   |   | Employment Agreement dated as of January  30, 2002 by and between MSL and Santosh Rao.                                                                                                                                  |
| 10.40(8)   |   | Form of Change in Control Agreement for  Santosh Rao, Bruce Leasure, Dewayne Rideout.                                                                                                                                   |
| 10.41(10)  |   | Severance Agreement effective March 29,  2002 by and between 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.                                                                                                                                            |
| 31         |   | Section 302 Certifications                                                                                                                                                                                              |
| 32         |   | Section 906 Certification                                                                                                                                                                                               |

 

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

 

30

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(1)                                  Filedas an Exhibit to the Registrant’s Registration Statement on Form S-1, asamended (File No. 333-96227), filed on February 4, 2000.

 

(2)                                  Filedas an Exhibit to the Registrant’s Current Report on Form 8-K filed onOctober 11, 2000.

 

(3)                                  Filedas an Exhibit to the Registrant’s Current Report on Form 8-K filed onDecember 5, 2000.

 

(4)                                  Filedas an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed onNovember 14, 2000.

 

(5)                                  Filedas an Exhibit to the Registrant’s Annual Report on Form 10-K filed onApril 2, 2001.

 

(6)                                  Filedas an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed onAugust 14, 2001.

 

(7)                                  Filedas an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed onNovember 14, 2001.

 

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

 

(9)                                  Filedas an Exhibit to the Registrant’s Current Report on Form 8-K filed onMarch 18, 2002.

 

(10)                            Filedas an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed onMay 15, 2002.

 

(11)                            Filedas an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed onAugust 14, 2002.

 

(12)                            Filedas an Exhibit to the Registrant’s Current Report on Form 8-K filed onJune 28, 2002.

 

(13)                            Filedas an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed onNovember 13, 2002.

 

(14)         Filed as an Exhibitto the Registrant’s Annual Report on Form 10-K filed on March 31, 2003.

 

 

(b)                                 The registrant did notfile any Reports on Form 8-K during the quarterly period ended June 29, 2003.

 

 

SIGNATURES

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized:

 
|   |   | MANUFACTURERS’ SERVICES LIMITED |
|--------|--------|--------------------------------------|
|   |   | (Registrant)                         |
|   |   |                                 |   |
|   |   | Date: August 5, 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) |   |

 

31

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