**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-Q**

**(MARK ONE)**

 

| **ý**                                        | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.**  |
|---------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                                              |                                                                                            |
| **For  the quarterly period ended June 30, 2002** |
|                                              |
| **OR**                                            |
|                                              |
| **o**                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |
|                                                   |                                                                                                 |  |

 

**For thetransition period from        to        **

 

**COMMISSIONFILE NUMBER:  001-15883**

 

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

 

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

 

At August 13, 2002, there were 32,632,791 shares of Common Stock,$0.001 par value, outstanding.

 

 

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MANUFACTURERS’ SERVICESLIMITED

INDEX

 
| PART I.  FINANCIAL INFORMATION |
|-------------------------------------|
|                                |
| Item 1.                             | Financial Statements |
|                                |   |
|                                | Consolidated Balance Sheets  – June 30, 2002 (Unaudited) and December 31, 2001 |
|                                |   |
|                                | Consolidated  Statements of Operations (Unaudited) – Three and Six Months Ended June 30,  2002 and July 1, 2001 |
|                                |   |
|                                | Consolidated  Statements of Cash Flows (Unaudited) – Three and Six Months Ended June 30,  2002 and July 1, 2001 |
|                                |   |
|                                | Notes  to Consolidated Financial Statements |
|                                |   |
| Item  2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                |   |
| Item  3.                            | Quantitative  and Qualitative Disclosure about Market Risk |
|                                |   |
| PART II.  OTHER INFORMATION    |
|                                |   |
| Item  4                             | Submission  of Matters to a Vote of Security Holders |
|                                |   |
| Item 6.                             | Exhibits and  Reports on Form 8-K |
|                                |   |
|                                | Signatures |

 

2

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MANUFACTURERS’ SERVICESLIMITED

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPTSHARE DATA)

 
|                                                                                                                                                                                                                |   | **June 30,**

** 2002** |    | **December  31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                                |   | **(UNAUDITED)**              |    |                    |   |
| ASSETS                                                                                                                                                                                                              |   |                         |    |                    |   |
| Current assets:                                                                                                                                                                                                     |   |                         |    |                    |   |
| Cash and cash  equivalents                                                                                                                                                                                          |   | $                            | 51,770  |                    | $      | 30,906 |   |
| Accounts  receivable, less allowance for doubtful accounts of $10,673 and $11,440 at  June 30, 2002 and December 31, 2001, respectively                                                                             |   | 137,285                      |    | 172,822                 |   |
| Inventories                                                                                                                                                                                                         |   | 98,232                       |    | 126,328                 |   |
| Prepaid expenses  and other current assets                                                                                                                                                                          |   | 23,156                       |    | 27,860                  |   |
| Total current  assets                                                                                                                                                                                               |   | 310,443                      |    | 357,916                 |   |
|                                                                                                                                                                                                                |   |                         |    |                    |   |
| Property and  equipment, net                                                                                                                                                                                        |   | 39,815                       |    | 52,681                  |   |
| Goodwill, net                                                                                                                                                                                                       |   | 8,360                        |    | 8,241                   |   |
| Other intangible  assets, net                                                                                                                                                                                       |   | —                       |    | 3,706                   |   |
| Other assets                                                                                                                                                                                                        |   | 11,632                       |    | 14,276                  |   |
| Total assets                                                                                                                                                                                                        |   | $                            | 370,250 |                    | $      | 436,820 |   |
|                                                                                                                                                                                                                |   |                         |    |                    |   |
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND  STOCKHOLDERS’ EQUITY                                                                                                                                             |   |                         |    |                    |   |
| Current  liabilities                                                                                                                                                                                                |   |                         |    |                    |   |
| Current portion  of long-term debt and capital lease obligations                                                                                                                                                    |   | $                            | 5,626   |                    | $      | 6,477 |   |
| Accounts payable                                                                                                                                                                                                    |   | 135,662                      |    | 150,216                 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                     |   | 39,109                       |    | 49,224                  |   |
| Total current  liabilities                                                                                                                                                                                          |   | 180,397                      |    | 205,917                 |   |
|                                                                                                                                                                                                                |   |                         |    |                    |   |
| Long-term debt  and capital lease obligations                                                                                                                                                                       |   | 38,365                       |    | 114,083                 |   |
| Other  liabilities                                                                                                                                                                                                  |   | 5,177                        |    | 3,114                   |   |
| Total  liabilities                                                                                                                                                                                                  |   | 223,939                      |    | 323,114                 |   |
|                                                                                                                                                                                                                |   |                         |    |                    |   |
| Commitments and  contingencies (Note 13)                                                                                                                                                                            |   |                         |    |                    |   |
|                                                                                                                                                                                                                |   |                         |    |                    |   |
| Convertible  preferred stock, 830,000 shares authorized; 830,000 and 0 shares issued and  outstanding at June 30, 2002 and December 31, 2001, respectively  (liquidation value of $51 per share at June 30, 2002)   |   | 35,539                       |    | —                  |   |
|                                                                                                                                                                                                                |   |                         |    |                    |   |
| Stockholders’  equity                                                                                                                                                                                          |   |                         |    |                    |   |
| Preferred stock,  $0.001 par value, 5,000,000 shares authorized; no shares issued and  outstanding                                                                                                                  |   | —                       |    | —                  |   |
|                                                                                                                                                                                                                |   |                         |    |                    |   |
| Common stock,  $0.001 par value; 150,000,000 shares authorized; 34,011,873 shares issued and  32,460,653 outstanding at June 30, 2002 and 33,829,127 shares issued and  32,277,907 outstanding at December 31, 2001 |   | 34                           |    | 34                      |   |
| Additional paid  in capital                                                                                                                                                                                         |   | 264,119                      |    | 264,359                 |   |
| Accumulated  deficit                                                                                                                                                                                                |   | (136,484                     | )       | (129,536                | )      |
| Accumulated  other comprehensive loss                                                                                                                                                                               |   | (10,150                      | )       | (14,404                 | )      |
| Treasury stock,  at cost; 1,551,220 shares at June 30, 2002 and December 31, 2001                                                                                                                                   |   | (6,747                       | )       | (6,747                  | )      |
| Total  stockholders’ equity                                                                                                                                                                                    |   | 110,772                      |    | 113,706                 |   |
| Total  liabilities, convertible preferred stock and stockholders’ equity                                                                                                                                       |   | $                            | 370,250 |                    | $      | 436,820 |   |

 

See accompanying notes tothe interim consolidated financial statements.

 

3

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MANUFACTURERS’ SERVICESLIMITED

CONSOLIDATED STATEMENTSOF OPERATIONS – UNAUDITED

(IN THOUSANDS, EXCEPT PERSHARE DATA)

 
|                                                                    |   | **Three  months ended** |    | **Six months  ended** |   |
|-------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                                                                    |   | **June 30,  2002**      |    | **July 1,  2001**     |   | **June 30,  2002** |   | **July 1,  2001** |   |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Net sales                                                               |   | $                       | 227,831 |                  | $      | 403,505 |   | $ | 443,197 |   | $ | 932,213 |   |
| Cost of goods  sold                                                     |   | 205,020                 |    | 371,288               |   | 402,106 |   | 865,860 |   |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Gross profit                                                            |   | 22,811                  |    | 32,217                |   | 41,091 |   | 66,353 |   |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Operating  expenses:                                                    |   |                    |    |                  |   |   |   |   |   |
| Selling, general  and administrative                                    |   | 14,884                  |    | 31,706                |   | 35,913 |   | 56,276 |   |
| Intangible  amortization expense                                        |   | 1,853                   |    | 2,079                 |   | 3,706 |   | 4,229 |   |
| Other operating  expense (income)                                       |   | —                  |    | —                |   | (800 | ) | — |   |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Operating income  (loss)                                                |   | 6,074                   |    | (1,568                | )      | 2,272 |   | 5,848 |   |
| Interest  expense, net                                                  |   | (2,143                  | )       | (5,826                | )      | (5,137 | ) | (11,550 | ) |
| Change in fair  value of derivatives                                    |   | 910                     |    | —                |   | 910 |   | — |   |
| Foreign exchange  gain (loss)                                           |   | 39                      |    | 229                   |   | 56 |   | 192 |   |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Income (loss)  before provision for income taxes and extraordinary loss |   | 4,880                   |    | (7,165                | )      | (1,899 | ) | (5,510 | ) |
| Provision for  income taxes                                             |   | 611                     |    | 463                   |   | 1,018 |   | 1,036 |   |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Income (loss)  before extraordinary loss                                |   |                    | 4,269   |                  |   | (7,628 | ) |   | (2,917 | ) |   | (6,546 | ) |
| Extraordinary  loss                                                     |   | (4,031                  | )       | —                |   | (4,031 | ) | — |   |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Net income  (loss)                                                      |   | $                       | 238     |                  | $      | (7,628 | ) | $ | (6,948 | ) | $ | (6,546 | ) |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Net income  (loss) applicable to common stockholders                    |   | $                       | (622    | )                     | $      | (7,628 | ) | $ | (7,951 | ) | $ | (6,546 | ) |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Basic income  (loss) per share:                                         |   |                    |    |                  |   |   |   |   |   |
| Income (loss)  before extraordinary loss                                |   | $                       | 0.11    |                  | $      | (0.23 | ) | $ | (0.12 | ) | $ | (0.20 | ) |
| Extraordinary  loss                                                     |   | (0.12                   | )       | —                |   | (0.12 | ) | — |   |
| Net income  (loss) applicable to common stockholders                    |   | $                       | (0.02   | )                     | $      | (0.23 | ) | $ | (0.24 | ) | $ | (0.20 | ) |
| Weighted average  shares outstanding                                    |   | 32,450                  |    | 33,547                |   | 32,415 |   | 33,494 |   |
|                                                                    |   |                    |    |                  |   |   |   |   |   |
| Diluted income  (loss) per share:                                       |   |                    |    |                  |   |   |   |   |   |
| Income (loss)  before extraordinary loss                                |   | $                       | 0.11    |                  | $      | (0.23 | ) | $ | (0.12 | ) | $ | (0.20 | ) |
| Extraordinary  loss                                                     |   | (0.10                   | )       | —                |   | (0.12 | ) | — |   |
| Net income  (loss) applicable to common stockholders                    |   | $                       | 0.01    |                  | $      | (0.23 | ) | $ | (0.24 | ) | $ | (0.20 | ) |
| Weighted average  shares outstanding                                    |   | 39,207                  |    | 33,547                |   | 32,415 |   | 33,494 |   |
|                                                                         |        |                         |         |                       |        |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes tothe interim consolidated financial statements.

 

4

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MANUFACTURERS’ SERVICESLIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS –UNAUDITED

(IN THOUSANDS)

 
|                                                                                       |   | **SIX MONTHS  ENDED** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                       |   | **June 30,  2002**    |   | **July 1,  2001** |   |
|                                                                                       |   |                  |   |   |   |
| CASH FLOWS  RELATING TO OPERATING ACTIVITIES:                                              |   |                  |   |   |   |
| Net loss                                                                                   |   | $                     | (6,948 | ) | $ | (6,546 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                  |   |   |   |
| Depreciation and  amortization                                                             |   | 13,269                |   | 18,138 |   |
| Amortization of  capitalized finance fees                                                  |   | 1,774                 |   | 1,313 |   |
| Write-off of  capitalized bank fees                                                        |   | 4,031                 |   | — |   |
| Change in fair  value of derivatives                                                       |   | (910                  | )      | — |   |
| Additions to  allowance for doubtful accounts                                              |   | 181                   |   | 2,302 |   |
| Non cash charge  for equity awards                                                         |   | 333                   |   | 519 |   |
| Foreign exchange  loss                                                                     |   | (72                   | )      | 1,227 |   |
| Deferred taxes                                                                             |   | 534                   |   | (1,185 | ) |
| Write down and  loss on disposal of fixed assets                                           |   | 3,961                 |   | 5,020 |   |
| Changes in  operating assets and liabilities:                                              |   |                  |   |   |   |
| Accounts  receivable                                                                       |   | 37,472                |   | 97,347 |   |
| Inventories                                                                                |   | 31,046                |   | 143,989 |   |
| Prepaid expenses  and other assets                                                         |   | 5,750                 |   | (15,345 | ) |
| Accounts payable                                                                           |   | (17,670               | )      | (240,215 | ) |
| Accrued expenses  and other liabilities                                                    |   | (11,949               | )      | (7,125 | ) |
| Net cash  provided by (used in) operating activities                                       |   | 60,802                |   | (561 | ) |
|                                                                                       |   |                  |   |   |   |
| CASH FLOWS  RELATING TO INVESTING ACTIVITIES:                                              |   |                  |   |   |   |
|                                                                                       |   |                  |   |   |   |
| Purchase of  intangible assets                                                             |   | —                |   | (1,393 | ) |
| Proceeds from  sale of fixed assets                                                        |   | 4,025                 |   | 226 |   |
| Purchases of  property and equipment                                                       |   | (1,304                | )      | (11,322 | ) |
| Cost of internal  use software                                                             |   | (320                  | )      | (808 | ) |
| Net cash  provided by (used in) investing activities                                       |   | 2,401                 |   | (13,297 | ) |
|                                                                                       |   |                  |   |   |   |
| CASH FLOWS  RELATING TO FINANCING ACTIVITIES:                                              |   |                  |   |   |   |
| Proceeds from  issuance of convertible preferred stock and warrants, net of issuance costs |   | 37,720                |   | — |   |
| Proceeds from  long term debt                                                              |   | 9,189                 |   | — |   |
| Net proceeds  from new credit facilities                                                   |   | 29,120                |   | — |   |
| Net proceeds  from (payments on)previous revolving line-of-credit                          |   | (111,811              | )      | 25,651 |   |
| Repayments of  long-term debt and capital lease obligations                                |   | (4,427                | )      | (4,056 | ) |
| Debt issuance  and amendment costs                                                         |   | (4,493                | )      | (358 | ) |
| Proceeds from  exercise of stock options                                                   |   | 181                   |   | 139 |   |
| Proceeds from  employee stock purchase plan                                                |   | 586                   |   | 1,063 |   |
| Net cash  provided by financing activities                                                 |   | (43,935               | )      | 22,439 |   |
| Effect of  foreign exchange rates on cash                                                  |   | 1,596                 |   | (1,498 | ) |
|                                                                                       |   |                  |   |   |   |
| Net increase in  cash                                                                      |   | 20,864                |   | 7,083 |   |
| Cash and cash  equivalents at beginning of period                                          |   | $                     | 30,906 |   | $ | 10,388 |   |
| Cash and cash  equivalents at end of period                                                |   | $                     | 51,770 |   | $ | 17,471 |   |

 

See accompanying notes tothe interim consolidated financial statements.

 

5

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MANUFACTURERS’ SERVICESLIMITED

NOTES TO INTERIMCONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED

(IN THOUSANDS, EXCEPTSHARE DATA)

 

1.             BASISOF PRESENTATION

 

The accompanying consolidated financial statements ofManufacturers’ Services Limited (the “Company”) are unaudited, and certaininformation and footnote disclosures related thereto normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been omitted in accordance with Rule 10-01 of Regulation S-X.Accordingly, these statements should be read in conjunction with the auditedfinancial statements and notes thereto for the year ended December 31, 2001included in the Company’s Annual Report on Form 10-K. In the opinion ofmanagement, the accompanying unaudited consolidated financial statements wereprepared following the same policies and procedures used in the preparation ofthe audited financial statements and reflect all adjustments (consisting ofnormal recurring adjustments) considered necessary to present fairly thefinancial position and results of operations of the Company. The results ofoperations for the interim periods are not necessarily indicative of theresults to be expected for the entire fiscal year.  Certain amounts in prior year financial statements have beenreclassified to conform to the current year presentation.

 

In response to the economic downturn experienced in2001 and 2002 and the related weakening in demand from customers, the Companyevaluated its worldwide workforce and manufacturing capacity and realigned itscost structure (Note 9) with the lower demand requirements and its ongoingcapital and liquidity requirements.  InJune 2002, the Company entered into a new three year $110,500 credit facilityconsisting of a $100,000 senior secured revolving credit facility and a $10,500three year term loan (the “2002 Credit Agreement”).  Borrowings under the 2002 Credit Agreement are dependent upon aborrowing base calculation derived from both accounts receivable and inventoryfrom its US Operations.  Borrowing underthe 2002 Credit Agreement could be limited by the following factors:

 

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

 

•                    ahigher percentage of business conducted in foreign jurisdictions, or

 

•                    diminishedcreditworthiness within the Company’s customer base.

 

At June 30, 2002, the Company was in compliance with all covenantsunder its new credit facilities.

 

2.             RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS

 

In July 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets. The Company has adopted SFAS 142 as of January 1, 2002. SFAS 142requires goodwill and intangible assets with indefinite useful lives to nolonger be amortized, but instead be tested for impairment at leastannually.  With the adoption of SFAS 142,the Company reassessed the useful lives and residual values of all acquiredintangible assets to make any necessary amortization period adjustments. Basedon that assessment, only goodwill was determined to have an indefinite usefullife and no adjustments were made to the amortization period or residual valuesof other intangible assets.  The newstatement also requires the completion of a transitional impairment test withinsix months of adoption, with any impairment treated as a cumulative effect of achange in accounting principle.  The Companycompleted the transitional impairment test during the second quarter of 2002and determined that no impairment existed as of the date of adoption.

 

In October 2001, the FASB issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).SFAS 144 supercedes FASB Statement No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of”. SFAS 144applies to all long-lived assets (including discontinued operations) andconsequently amends Accounting Principles Board Opinion No. 30, “ReportingResults of Operations – Reporting the Effects of Disposal of a Segment ofa Business”. SFAS No. 144 is effective for financial statements issued for 

 

6

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fiscal years beginning after December 31, 2001, and has been adopted bythe Company, as required, on January 1, 2002. SFAS No. 144 had no impact on theCompany’s financial statements.

 

In April 2002, the FASB issued SFAS No. 145“Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB StatementNo.13, and Technical Corrections as of April 2002”.  SFAS No. 145 eliminates SFAS No. 4 “Reporting Gains and Lossesfrom Extinguishment of Debt”, which required companies to classify gains or lossesfrom the extinguishment of debt as an extraordinary item, net of tax. As aresult of this new FASB, gains and losses from extinguishment of debt should beclassified as extraordinary items only if they meet the criteria in APB OpinionNo.30 “Reporting the Results of Operations-Reporting the Effects of Disposal ofa Segment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions”.  The Companydoes not believe that its extinguishment of debt will qualify as an extraordinaryitem as defined in APB 30, and therefore the Company will be required toclassify these charges as operating expenses. The Company will adopt SFAS No. 145 on January 1, 2003, as allowed bythe Statement, and will restate all prior periods for comparative purposes.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Exit or Disposal Activities” (“SFAS No. 146”).  SFAS No. 146 addresses significantissues regarding the recognition, measurement and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring)”.  The scope of SFASNo. 146 also includes costs related to terminating a contract that is nota capital lease and termination benefits that employees who are involuntarilyterminated receive under the terms of a one-time benefit arrangement that isnot an ongoing benefit arrangement or an individual deferred-compensationcontract. The Company is required to adopt the provisions of SFAS No. 146effective for exit or disposal activities initiated after December 31,2002.  The provisions of EITFNo. 94-3 shall continue to apply for an exit activity initiated under anexit plan that met the criteria of EITF No. 94-3 prior to the adoption ofSFAS No. 146.  Theeffect-on-adoption of SFAS No. 146 will change on a prospective basis thetiming of when restructuring charges are recorded from a commitment dateapproach to when the liability is incurred. The Company does not anticipate that the adoption of this statement willhave a material impact on its consolidated balance sheet or statement of operations.

 

3.                                       INVENTORY

 

Inventories are comprised of the following:

 
|                                   |   | **June 30,  2002** |   | **December  31,  2001** |   |
|----------------------------------------|--------|--------------------|--------|-------------------------|--------|
| Raw materials  and purchased inventory |   | $                  | 86,027 |                    | $      | 107,399 |   |
| Work-in-process.                       |   | 10,796             |   | 14,543                  |   |
| Finished goods                         |   | 1,409              |   | 4,386                   |   |
|                                   |   | $                  | 98,232 |                    | $      | 126,328 |   |

 

4.             BUSINESSSEGMENT INFORMATION

 

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

 
|                            |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|---------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                            |   | **June 30,  2002**      |    | **July 1,  2001**     |   | **June 30,  2002** |   | **July 1  2001** |   |
| Net sales                       |   |                    |    |                  |   |   |   |   |   |
| United States –  Corporate |   | $                       | —  |                  | $      | — |   | $ | — |   | $ | — |   |
|  – Operations         |   | 157,597                 |    | 306,445               |   | 307,077 |   | 697,205 |   |
| Europe                          |   | 59,889                  |    | 84,517                |   | 116,989 |   | 193,322 |   |
| Asia                            |   | 10,345                  |    | 12,543                |   | 19,131 |   | 41,686 |   |
|                            |   | $                       | 227,831 |                  | $      | 403,505 |   | $ | 443,197 |   | $ | 932,213 |   |
|                            |   |                    |    |                  |   |   |   |   |   |
| Operating income  (loss)        |   |                    |    |                  |   |   |   |   |   |
| United States –  Corporate |   | $                       | (8,212  | )                     | $      | (6,390 | ) | $ | (11,175 | ) | $ | (14,423 | ) |
|  – Operations         |   | 13,467                  |    | 14,718                |   | 16,710 |   | 31,482 |   |
| Europe                          |   | 2,764                   |    | 801                   |   | 3,667 |   | 4,222 |   |
| Asia                            |   | (1,945                  | )       | (10,697               | )      | (6,930 | ) | (15,433 | ) |
|                            |   | $                       | 6,074   |                  | $      | (1,568 | ) | $ | 2,272 |   | $ | 5,848 |   |

 

7

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|                 |               | **June 30,  2002** |    | **December  31,  2001** |    |
|----------------------|--------------------|--------------------|---------|-------------------------|---------|
| Identifiable  Assets |               |               |    |                    |    |
| United States        | –  Corporate  |               | $       | 20,220                  |    | $ | 15,027 |   |
|                 | –  Operations |               | 194,743 |                    | 248,977 |   |
| Europe               |               | 128,379            |    | 134,308                 |    |
| Asia                 |               | 26,908             |    | 38,508                  |    |
|                 |               | $                  | 370,250 |                    | $       | 436,820 |   |

 

5.             CREDITFACILITIES

 

On June 20, 2002 the Company replaced its existingCredit Agreement with a $110,500 credit facility consisting of a $100,000senior secured revolving credit facility and a $10,500 three-year term loan(the “2002 Credit Agreement”).  The 2002Credit Agreement has a final maturity date of June 20, 2005 and is secured bysubstantially all domestic assets and a pledge of 65% of the shares of foreignsubsidiaries.  Restrictive covenants forthe 2002 Credit Agreement include restrictions on leverage ratios as well ascovenants requiring minimum net worth, EBITDA and fixed charge coverageratios.  A weekly borrowing base isdetermined by domestic receivables and domestic inventory.  The three-year loan has a regular quarterlyamortizing payment of $333 payable on the first business day of each quarter.

 

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

 

In connection with the replacement of the previouscredit facility, an extraordinary loss of $4,031 was recorded, net of a $0 taxbenefit.  This extraordinary lossrelated to the write-off of deferred financing costs under the previous creditfacility.  The Company capitalized$4,217 of debt issuance costs incurred in connection with the closing of the2002 Credit Agreement, $625 of which were paid to certain affiliates ofCSFB.  The total capitalized costs willbe amortized over a three-year period on a straight-line basis.

 

Borrowings under the revolving facility are limited tothe sum of 85% of all eligible accounts receivable of the U.S. domesticsubsidiaries of the Company and 85% of the orderly liquidation value of theeligible inventory of the U.S. domestic subsidiaries.  The revolving credit facility provides for an annual commitment feeof 0.50% on the unused portion of the revolving facility, payable quarterly inarrears.  The cost of borrowing underthe revolving facility is either the base rate (the bank’s prime rate) orLIBOR, plus the applicable spread costs. The Company has the option of choosing either the base rate orLIBOR.  In the first year the spreadcost is fixed for base rate and LIBOR loans. The spread on the base rate loans is 1.75% over the base rate and thespread on the LIBOR loans is the chosen LIBOR period rate plus 3.25%.  In the second and third years the spreadswill reset quarterly based on the average net availability of borrowings forthe preceding quarter.  The spread onthe base rate loans will be between 1.25% and 2.25% and the spread on the LIBORloans will be between 2.5% and 3.5%. The interest rate under the term note is 

 

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equal to the sum of the Cash Interest Rate (which is the greater of (i)the base rate in effect plus 6.0% or (ii) 11.0%) plus the Deferred InterestRate (which is equal to 3.0%).

 

The 2002 Credit Facility requires the Company toobtain within 180 days of the closing (and maintain at all times), interestrate hedging agreements covering a notional amount of not less than $10,000 ofthe revolving loans, provided, that upon the request of the administrativeagent, the Company must increase the amount covered by the hedge agreements upto an aggregate amount equal to 25% of the aggregate outstanding balance of therevolving loans at such time.  However,in no event shall the aggregate amount covered by such hedge agreements at anytime exceed $20,000.  The Company hasnot entered into any interest rate hedge agreements at June 30, 2002.

 

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

 

On June 28, 2002 the Company entered into a  a 3,000 Euro revolving credit facility inValencia, Spain.  The credit agreementhas a final maturity of June 26, 2003 and is secured by named receivables ofGlobal Manufacturers’ Services Valencia, S.A. The cost of borrowing under the credit facility is variable spreadstarting at 0.49% over the Madrid Interbank Market rate.

 

6.             CONVERTIBLEPREFERRED STOCK

 

In March 2002, the Companyissued $41,500 of convertible preferred stock and warrants to purchase1,612,281 shares of common stock in a private placement to qualified accreditedinvestors (the “Offering”). Proceeds of the Offering, net of costs of theOffering, were $37,720. The convertible preferred stock is recorded astemporary equity, and the warrants are recorded as liabilities.

 

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

 

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

 

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

 

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(other than as part of an underwritten offering the Company initiates),and (iii) the agreement by the CSFB affiliates to accept piggybackregistration rights instead of having the common stock issuable upon theconversion or exercise of its securities included in the shelf registrationstatement which was filed with the SEC to register the resale of the commonstock underlying the preferred stock and warrants sold to other investors inthe Offering.  The registrationstatement, covering 5,937,461 shares, became effective on April 23, 2002.

 

7.             EARNINGSPER SHARE

 

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

 
|                                                                        |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-----------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                                        |   | **June 30,  2002**      |   | **July 1,  2001**     |   | **June 30,  2002** |   | **July 1,  2001** |   |
| Numerator –  basic earnings  per share:                           |   |                    |   |                  |   |   |   |   |   |
| Income(loss)  before extraordinary loss                                     |   | $                       | 4,269  |                  | $      | (7,628 | ) | $ | (2,917 | ) | $ | (6,546 | ) |
| Dividends on convertible  preferred stock                                   |   | (545                    | )      | —                |   | (636 | ) | — |   |
| Accretion of  convertible preferred stock                                   |   |                    | (315   | )                     |   | — |   |   | (367 | ) |   | — |   |
| Income (loss)  available to common stockholders                             |   | 3,409                   |   | (7,628                | )      | (3,920 | ) | (6,546 | ) |
| Extraordinary  loss                                                         |   |                    | (4,031 | )                     |   | — |   |   | (4,031 | ) |   | — |   |
| Net income  (loss) available to common stockholders                         |   | $                       | (622   | )                     | $      | (7,628 | ) | $ | (7,951 | ) | $ | (6,546 | ) |
| Numerator –  diluted earnings per share:                               |   |                    |   |                  |   |   |   |   |   |
| Income  (loss)available to common stockholders                              |   | $                       | 3,409  |                  | $      | (7,628 | ) | $ | (3,920 | ) | $ | (6,546 | ) |
| Dividends on convertible  preferred stock                                   |   | 545                     |   | —                |   | — |   | — |   |
| Accretion of  convertible preferred stock                                   |   |                    | 315    |                  |   | — |   |   | — |   |   | — |   |
| Income (loss)  available to common stockholders and assumed conversions     |   |                    | 4,269  |                  |   | (7,628 | ) |   | (3,920 | ) |   | (6,546 | ) |
| Extraordinary  loss                                                         |   | (4,031                  | )      | —                |   | (4,031 | ) | — |   |
| Net income  (loss) available to common stockholders and assumed conversions |   | $                       | 238    |                  | $      | (7,628 | ) | $ | (7,951 | ) | $ | (6,546 | ) |
|                                                                        |   |                    |   |                  |   |   |   |   |   |
| Denominator:                                                                |   |                    |   |                  |   |   |   |   |   |
| Basic income  (loss) per share – weighted average shares outstanding   |   | 32,450                  |   | 33,547                |   | 32,415 |   | 33,494 |   |
| Convertible  preferred stock                                                |   | 6,449                   |   | —                |   | — |   | — |   |
| Stock dividends  on preferred stock                                         |   | 76                      |   | —                |   | — |   | — |   |
| Effect of  dilutive securities – stock options and warrants            |   |                    | 232    |                  |   | — |   |   | — |   |   | — |   |
| Diluted income  (loss) per share – Weighted average shares outstanding |   |                    | 39,207 |                  |   | 33,547 |   |   | 32,415 |   |   | 33,494 |   |
| Basic income  (loss) per share                                              |   | $                       | (0.02  | )                     | $      | (0.23 | ) | $ | (0.24 | ) | $ | (0.20 | ) |
| Diluted income  (loss) per share                                            |   | $                       | 0.01   |                  | $      | (0.23 | ) | $ | (0.24 | ) | $ | (0.20 | ) |
|                                                                             |        |                         |        |                       |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

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For the three months ended June 30, 2002, 7,895 option and warrantshares have been excluded from the calculation of diluted EPS because inclusionof such shares would have an anti-dilutive effect on income per share. Also forthe three months ended June 30, 2002, 6,526 shares of convertible preferredstock have been excluded from the calculation of diluted earnings per sharebefore extraordinary loss because inclusion of such shares on an as convertedbasis would have an anti-dilutive effect on the income per share beforeextraordinary loss.  For the six monthsended June 30, 2002, 8,914 anti-dilutive option and warrant shares and 6,526shares of convertible preferred stock and preferred stock dividends and for thethree and six months ended July 1, 2001, 5,229 anti-dilutive option and warrantshares have been excluded from the calculation of EPS as the Company had a netloss available to common stockholders for these periods.

 

8.             COMPREHENSIVEINCOME (LOSS)

 

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

 
|                                      |   | **Three  Months Ended** |        | **Six Months  Ended** |   |
|-------------------------------------------|--------|-------------------------|-------------|-----------------------|--------|
|                                      |   | **June 30,  2002**      |        | **July 1,  2001**     |   | **June 30,  2002** |   | **July 1,  2001** |   |
| Net Income  (loss)                        |   | $                       | 238         |                  | $      | (7,628 | ) | $ | (6,948 | ) | $ | (6,546 | ) |
| Other  comprehensive income (loss)        |   |                    |        |                  |   |   |   |   |   |
| Foreign currency  translation adjustments |   | 5,198                   |        | (1,221                | )      | 4,254 |   | (4,168 | ) |
|                                      |   |                    |        |                  |   |   |   |   |   |
| Comprehensive  income (loss)              |   | $                       |  5,436 |                  | $      |  (8,849 | ) | $ |  (2,694 | ) | $ |  (10,714 | ) |

 

9.             RESTRUCTURINGAND OTHER ASSET WRITEDOWNS

 

In the second quarter of 2002, the Company recorded again of $569 from the sale of its Salt Lake City building.  This was recorded as a reversal of arestructuring charge, included in selling, general and administrative expenses,taken in the third quarter of 2001 when the Company wrote down the building toits estimated fair market value.

 

In the first quarter of 2002, the Company approved aplan to restructure certain operations, primarily related to closing itsfacility in China and a workforce reduction at its corporate headquarters.  The total charge recorded for this plan was$5,457, which was comprised of asset write downs of $3,069, lease terminationcosts of $548 and severance of $1,840 related to the reduction of 371manufacturing and 24 managerial employees. This plan is expected to be substantially complete by the end of thefourth quarter of 2002.

 

During the full year 2001, the Company implementedvarious restructuring plans throughout its organization to align its coststructure with its reduced revenue stream as a result of the severe economicdownturn in the EMS industry. In total for all 2001, it incurred restructuringcharges of $91,939 consisting of asset write-downs of $61,777, employeeseverance of $24,912 and lease termination costs of $5,250.

 

The following table sets forth the activity in therestructuring reserves through June 30, 2002:

 

| Balance at December 31, 2001 |   | $      | 12,521 |   |
|------------------------------|--------|--------|--------|--------|
| Restructuring provision      |   | 5,457  |   |
| Asset write  downs           |   | (3,069 | )      |
| Cash payments                |   | (6,659 | )      |
| Balance at March  31, 2002   |   | 8,250  |   |
| Cash payments                |   | (2,394 | )      |
| Balance at June  30, 2002    |   | $      | 5,856  |   |

 

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Reserves remaining at June 30, 2002 represent liabilities for severanceand lease termination payments and are expected to be paid by December 31,2002.

 

10.           OTHEROPERATING INCOME

 

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

 

11.           GOODWILLAND OTHER INTANGIBLE ASSETS

 

As described in Note 2, the Company adopted SFAS 142on January 1, 2002.  SFAS 142 requiresgoodwill and intangible assets with indefinite useful lives to no longer beamortized, but instead be tested for impairment at least annually.  As a result, the Company ceased all goodwillamortization and did not recognize approximately $273 and $546 of goodwillamortization expense that would have been recognized in the three and sixmonths ended June 30, 2002, respectively, under the previous accountingstandard.

 

The new statement also requires the completion of atransitional impairment test within six months of adoption, with any impairmenttreated as a cumulative effect of a change in accounting principle.  The Company completed the transitionalimpairment test during the second quarter of 2002 and determined that noimpairment existed as of the date of adoption. The Company is required to performgoodwill impairment tests on an annual basis. It is possible that future goodwill impairment tests will result in acharge to earnings.

 

The following table gives effect to the adoption ofSFAS 142 as if the provisions had been adopted as of January 1, 2001.  The net income (loss) for the three and sixmonth periods ended June 30, 2002 are presented for comparison purposes as theeffect of adoption is reflected in the Company’s actual results of operationsfor these periods.

 
|                                                   |   | **Three  Months ended** |   | **Six months  Ended** |   |
|--------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                   |   | **June 30,  2002**      |   | **July 1,  2001**     |   | **June 30,  2002** |   | **July 1,  2001** |   |
| NET INCOME  (LOSS)                                     |   |                    |   |                  |   |   |   |   |   |
|                                                   |   |                    |   |                  |   |   |   |   |   |
| Net income  (loss) applicable to common stock          |   | $                       | 238    |                  | $      | (7,628 | ) | $ | (6,948 | ) | $ | 6,546 | ) |
| Add back:  goodwill amortization after tax             |   | —                  |   | 269                   |   | — |   | 513 |   |
| Adjusted net  income (loss) applicable to common stock |   | $                       | 238    |                  | $      | (7,359 | ) | $ | (6,948 | ) | $ | (6,033 | ) |
|                                                   |   |                    |   |                  |   |   |   |   |   |
| BASIC EARNINGS  PER SHARE                              |   |                    |   |                  |   |   |   |   |   |
|                                                   |   |                    |   |                  |   |   |   |   |   |
| Reported net  loss per share                           |   | $                       | (0.02  | )                     | $      | (0.23 | ) | $ | (0.24 | ) | $ | (0.20 | ) |
| Goodwill  amortization after tax                       |   | —                  |   | .01                   |   | — |   | 0.02 |   |
| Adjusted net  loss per share                           |   | $                       | (0.02  | )                     | $      | (0.22 | ) | $ | (0.24 | ) | $ | (0.18 | ) |
|                                                   |   |                    |   |                  |   |   |   |   |   |
| DILUTED EARNINGS  PER SHARE                            |   |                    |   |                  |   |   |   |   |   |
|                                                   |   |                    |   |                  |   |   |   |   |   |
| Reported net  income (loss) per share                  |   | $                       | 0.01   |                  | $      | (0.23 | ) | $ | (0.24 | ) | $ | (0.20 | ) |
| Goodwill  amortization after tax                       |   | —                  |   | .01                   |   | — |   | 0.02 |   |
| Adjusted net  income (loss) per share                  |   | $                       | 0.01   |                  | $      | (0.22 | ) | $ | (0.24 | ) | $ | (0.18 | ) |
|                                                        |        |                         |        |                       |        |  |  |  |  |  |  |  |  |  |  |  |

 

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Changes in the net carrying amount of goodwill for the six months endedJune 30, 2002 were as follows:

 
| Balance at December 31,  2001            |   | $      | 8,241  |   |
|------------------------------------------|--------|--------|--------|--------|
| Foreign currency  translation adjustment |   | 119    |   |
|                                     |   |   |   |
| Balance at June  30, 2002                |   | $      | 8,360  |   |

 

Other intangible assets amounted to $0 (net ofaccumulated amortization of $6,949) and $3,706 (net of accumulated amortizationof $3,243) at June 30, 2002 and December 31, 2001, respectively.  Amortization expense of other intangibleswas $1,853 and $3,706 for the three months and six months ended June 30, 2002and $1,787 and $3,683 for the three and six months ended July 1, 2001,respectively.  The other intangibleassets related to the Company’s asset acquisition from 3Com in September 2000,consisting mainly of customer relationships. These assets were amortized on a straight-line basis over the remainingterm of the Company’s supply agreement with 3Com, which expired on June 30,2002.

 

12.           DERIVATIVEINSTRUMENTS

 

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

 

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

 

2.               The warrants issuedwith the convertible preferred stock.

 

As of June 30, 2002, the Company has calculated thefair value of the warrants at $2,279, a decrease of $910 from its value atMarch 31, 2002.  This gain on the changein fair value of the warrants is included as non-operating income.  The fair value of the change in controlderivative is not material.

 

13.           CONTINGENCIES

 

As of June 30, 2002, the Company had $21,007 of netcurrent assets associated with a customer that was disputing its obligation topay for a portion of these assets.  Thisbalance consists of the following:

 
| Accounts receivable        |   | $       | 26,750 |   |
|----------------------------|--------|---------|--------|--------|
| Inventory                  |   | 4,487   |   |
| Accounts payable           |   | (10,230 | )      |
| Net assets                 |   | 21,007  |   |
| Inventory and AR  reserves |   | (10,254 | )      |
| Net exposure to  Company   |   | $       | 10,753 |   |

 

On July 24, 2002, the Company entered into a settlementagreement with the customer whereby the Company received an immediate paymentof $1,509, a secured promissory note in the amount of $13,578 with interestaccruing at 7% per year, and an agreement to complete the purchase of anadditional approximately $2,600 of inventory as part of ongoing orders.  The agreement settles the disputedoutstanding accounts receivable, inventory and accounts payable between the twoparties.  The promissory note is securedby restricted shares (until January 2004) held by the customer in a foreignpublicly held company.   The remainingbalance of $13,578 will be received weekly at $170 per week over the next 80weeks, ending in January 2004.  As partof the total settlement amount of $15,087, the customer is paying the Company forinventory in the amount of $3,058, and the customer 

 

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may, at its option, take delivery of that inventory.  If the customer fails to take delivery ofthe inventory before September 30, 2002, the Company may dispose of theinventory in its discretion.

 

While the Company believes the customer currently hassufficient unencumbered assets to satisfy the agreed settlement amounts, thecustomer’s ability to pay, or the timing within which the customer will pay theCompany, could be adversely impacted by a weakening in the customer’s overallfinancial performance. Therefore, the Company will not adjust the reservesprovided until such time that the Company believes the full remaining balanceof approximately $13 million will be collected.

 

14.           SUBSEQUENTEVENTS

 

*Mexico Acquisition*

 

On July 1, 2002, the Company acquired all of thecapital stock and certain assets of Lexmark Electronics, a subsidiary ofLexmark International, Inc. located in Reynosa, Mexico, that provides printedcircuit board assemblies for laser printers, for approximately $2,800 in cashand assumed liabilities. In connection with the transaction, the Company agreedto purchase approximately $3,200 of inventory within 60 days after the closing date.  The acquired assets consist of manufacturingassets and working capital related to the operations, while the liabilitiesconsist of accounts payable and accrued liabilities. The transaction wasaccounted for as a purchase of a business, and the purchase price was allocatedto the assets and liabilities based upon their relative fair values at the dateof acquisition.  As part of thetransaction, the Company retained approximately 250 facility employees, enteredinto a lease for a 156,000 square foot manufacturing facility in Reynosa andentered into an eighteen-month supply agreement to provide printed circuitboard assemblies to Lexmark.

 

*Restructuring and Asset Write downs*

 

During July 2002, the Company announced plans torestructure its operations, primarily related to closing its facility in Mt.Prospect, Illinois.  The total cost ofthis plan is estimated to be approximately $10,000, which is comprised ofseverance of $6,300 related to the reduction of approximately 355 manufacturingand managerial employees, asset write downs of $3,200 and lease terminationcosts of $500.  This plan is expected tobe complete by the end of the first quarter of 2003.

 

*Boardof Directors*

 

On August 12, 2002, Mr. John F. Fort, III resignedfrom the Company's Board of Directors.

 

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

 

OVERVIEW

 

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

 

We provide integrated supply chain solutions thataddress all stages of our customers’ product life cycle, including engineeringand design, new product introduction, global supply chain management, printed circuitboard assembly, product assembly and system integration, testing, logistics anddistribution, fulfillment and after-market services. We believe thiscomprehensive range of 

 

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

 

We have established a global network consisting of 14manufacturing, design and fulfillment facilities in the world’s majorelectronics markets–North America, Europe and Asia–to serve the increasingoutsourcing needs of both multinational and regional OEMs. Our manufacturingfacilities are strategically located near our customers and their end-markets,which benefits our customers by reducing the time required to get theirproducts to market and by increasing their flexibility to respond quickly tochanging market conditions. We believe that the combination of our services andour global manufacturing network has enabled us to become an integral part ofour customers’ product development and manufacturing strategies.

 

From our founding in 1994 until 2000, we experiencedgrowth driven primarily by acquisitions of existing OEM manufacturingfacilities and by the increasing number of OEMs who are outsourcing theirmanufacturing requirements. During the past two years, we have closed certainfacilities and reduced our workforce to reflect our reduced revenue streamresulting from adverse economic conditions. Despite this recent downsizing, we do intend to grow in the future byactively pursuing strategic acquisitions and by benefiting from expectedincreases in OEMs that outsource their manufacturing requirements.

 

We work closely with our customers to anticipate andforecast their future volume of orders and delivery dates. We derive most ofour net sales under purchase orders from our customers. We recognize sales, netof product return and warranty costs, typically at the time of product shipmentor as services are rendered. Our cost of goods sold includes the cost ofelectronic components and materials, labor costs and manufacturing overhead.The procurement of raw materials and components requires us to commitsignificant working capital to our operations and to manage the purchasing,receiving, inspection and stocking of these items. Our typical customercontract contains provisions which specify that we may recover from thecustomer inventory costs and material acquisition costs for raw material whichbecomes excess or obsolete due to customer reschedules, cancellations orproduct changes.

 

Our operating results are affected by the level ofcapacity utilization in our manufacturing facilities, indirect labor costs andselling, general and administrative expenses. Gross margins and operating incomegenerally improve during periods of high-volume and high-capacity utilizationin our manufacturing facilities and decline during periods of low-volume andlow-capacity utilization. However, certain of our customer contracts containguarantee minimum commitments, requiring the customer to either purchasecertain contractual minimum quantities or pay for amounts in deficit of theminimum purchase commitment.  Suchcontracts have helped offset the negative impact of low-capacity utilization ongross margins and operating income.  Onesuch contract with 3Com expired as of June 30, 2002.

 

As of June 30, 2002, we had approximately $21.0million of net current assets associated with a customer that has beendisputing its obligation to pay for a portion of these assets.  Of these net assets, $16.5 million isoutstanding receivables (net of $10.2 million accounts payable due from us tothe customer) and $4.5 million is inventory purchased specifically for thecustomer.  We currently maintain a $10.3million reserve related to these assets, giving us net exposure to the customerof $10.7 million. On July 24, 2002, we entered into a settlement agreement withthe customer whereby we received an immediate payment of $1.5 million, asecured promissory note in the amount of $13.6 million with interest accruingat 7% per year, and an agreement to complete the purchase of an additionalapproximately $2.6 million of inventory as part of ongoing orders. Theagreement settles the disputed outstanding accounts receivable, inventory andaccounts payable between the two parties. The promissory note is secured by restricted shares (until January 2004)held by the customer in a foreign publicly held company.  The remaining balance of $13.6 million willbe received weekly at $0.2 million per week over the next 80 weeks, ending inJanuary 2004.  As part of the totalsettlement of $15.1 million, the customer is paying us for inventory in theamount of $3.1 million, and the customer may, at its option, take delivery ofthat inventory.  If the customer failsto take delivery of this inventory before September 30, 2002, we may dispose ofthe inventory in our discretion.  Whilewe believe the customer currently has sufficient unencumbered assets to satisfythe agreed settlement amounts, the customer’s ability to pay, or the timingwithin which the customer will pay us, could be adversely impacted by aweakening in the customer’s overall financial performance. Therefore, we willnot adjust the reserves provided until such time that we believe the fullremaining balance of approximately $13 million will be collected.  We are 

 

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currently not shipping any new products to the customer unless paymentis received in advance. Once payment has been received, the product is shippedand revenue is recorded.

 

Our business strategy includes the expansion of ourglobal manufacturing network. Currently, approximately 78% of our net salesworldwide are denominated in US dollars, while our labor and utility costs infacilities outside of the United States are denominated in local currencies.Foreign currency gains and losses are the result of transacting business in acurrency that is different from the functional currency of our operating entityand the movements in those currencies between the time a transaction isrecorded for financial reporting purposes and the time payment is made orreceived. We currently use forward foreign exchange contracts on a limitedbasis to minimize our foreign currency risk but not for trading or speculativepurposes. We expect to continue to utilize forward foreign exchange contractsonly to the extent that these contracts minimize exposure and reduce risk fromexchange rate fluctuations on specific underlying transactions that createforeign currency exchange rate risk for us. Any increase or decrease in our useof derivative financial instruments will likely be as a result of thesecontracts.

 

ACQUISITIONS

 

On July 1, 2002, we acquired all of the capital stockand certain assets of Lexmark Electronics, a subsidiary of LexmarkInternational, Inc. located in Reynosa, Mexico, that provides printed circuitboard assemblies for laser printers, for approximately $2.8 million in cash andassumed liabilities.  In connection withthe transaction the Company agreed to purchase approximately $3.2 million ofinventory within 60 days after the closing date.  The acquired assets consist of manufacturing assets and workingcapital related to the operations, while the liabilities consist of accountspayable and accrued liabilities.  Thetransaction was accounted for as a purchase of a business, and the purchaseprice was allocated to the assets and liabilities based upon their relativefair values at the date of acquisition. As part of the transaction, we retained approximately 250 facilityemployees, entered into a lease for a 156,000 square foot manufacturingfacility in Reynosa and entered into an eighteen-month supply agreement toprovide printed circuit board assemblies to Lexmark.

 

In January 2001, we acquired selected fixed assets andintangible assets from Oce, an existing customer and a leadingNetherlands-based OEM, for $5.9 million in cash and assumed liabilities.  As part of the transaction, we acquired a130,000 square foot manufacturing facility in Guerande, France.  In connection with this acquisition, weentered into a three-year supply agreement to manufacture complex printersystems for Oce.  We also retained thefacility employees.  The acquisition ofthe Guerande facility expanded our relationship with Oce and provided us withour operations in France.

 

RESTUCTURING AND OTHER ASSET WRITEDOWNS

 

In the second quarter of 2002, we recorded a gain of$0.6 million from the sale of our Salt Lake City building.  This was recorded as a reversal of arestructuring charge, included in selling, general and administrative expenses,taken in the third quarter of 2001 when we wrote down the building to itsestimated fair market value.

 

In the first quarter of 2002, we approved a plan torestructure certain operations, primarily related to closing our facility inChina and a workforce reduction at our corporate headquarters.  The total charge recorded for this plan was$5.5 million, which was comprised of asset write downs of $3.1 million, leasetermination costs of $0.6 million and severance of $1.8 million related to thereduction of 371 manufacturing and 24 managerial employees.  This plan is expected to be substantiallycomplete by the end of the fourth quarter of 2002 and the expected annualsavings from the implementation of this plan are estimated to be approximately$6.4 million.

 

During the full year 2001, we implemented variousrestructuring plans throughout our organization to align our cost structurewith our reduced revenue stream as a result of the severe economic downturn inthe EMS industry. In total for all 2001, we incurred restructuring charges of$91.9 million consisting of asset write-downs of $61.8 million, employeeseverance of $24.9 million and lease termination costs of $5.2 million.

 

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The following table sets forth the activity in therestructuring reserves through July 1, 2001 (dollars in thousands):

 

| Balance at December 31, 2001 |   | $      | 12,521 |   |
|------------------------------|--------|--------|--------|--------|
| Restructuring provision      |   | 5,457  |   |
| Asset write  downs           |   | (3,069 | )      |
| Cash payments                |   | (6,659 | )      |
| Balance at March  31, 2002   |   | 8,250  |   |
| Cash payments                |   | (2,394 | )      |
| Balance at June  30, 2002    |   | $      | 5,856  |   |

 

Reserves remaining at June 30, 2002 primarilyrepresent liabilities for severance and lease termination payments and areexpected to be paid by December 31, 2002.

 

During July 2002, we announced plans to furtherrestructure our operations, primarily related to closing our facility in Mt.Prospect, Illinois.  The total cost ofthis plan is estimated to be approximately $10.0 million, which is comprised ofseverance of $6.3 million related to the reduction of approximately 355manufacturing and managerial employees, asset write downs of $3.2 million andlease termination costs of $0.5 million. This plan is expected to be completed by the end of first quarter of2003.

 

We currently do not have any further plans torestructure operations.  However, inlight of current economic conditions, we may implement further restructuringplans during fiscal 2002 or 2003.  Suchplans may include further headcount reductions, lease terminations, anddisposal of underutilized manufacturing assets, as well as shutdowns ofmanufacturing facilities.  If we were toimplement such plans, it may result in significant further restructuring costsrelated to severance payments and lease termination costs, as well as writedowns of certain long-lived assets.

 

RESULTS OF OPERATIONS

 

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

 

 
|                                                                    |   | **Three  Months Ending**   |    | **Six Months  Ending** |   |
|-------------------------------------------------------------------------|--------|----------------------------|---------|------------------------|--------|
|                                                                    |   | **June 30,  2002**         |    | **July 1,  2001**      |   | **June 30,  2002** |   | **July 1,  2001** |   |
|                                                                    |   | **(Dollars in thousands)** |    |
| Net sales                                                               |   | $                          | 227,831 |                   | 100.0  | % | $ | 403,505 |   | 100.0 | % | $ | 443,197 |   | 100.0 | % | $ | 932,213 |   | 100.0 | % |
| Cost of goods sold (b)                                                  |   | 205,020                    |    | 90.0                   |   | 371,288 |   | 92.0 |   | 402,106 |   | 90.7 |   | 865,860 |   | 92.9 |   |
| Gross profit                                                            |   | 22,811                     |    | 10.0                   |   | 32,217 |   | 8.0 |   | 41,091 |   | 9.3 |   | 66,353 |   | 7.1 |   |
| Selling, general and administrative (a)(b)                              |   | 14,884                     |    | 6.5                    |   | 31,706 |   | 7.9 |   | 35,913 |   | 8.1 |   | 56,276 |   | 6.0 |   |
| Amortization expense                                                    |   | 1,853                      |    | 0.8                    |   | 2,079 |   | 0.5 |   | 3,706 |   | 0.8 |   | 4,229 |   | 0.5 |   |
| Other operating income                                                  |   | —                     |    | —                 |   | — |   | — |   | (800 | ) | (0.1 | ) | — |   | — |   |
|                                                                    |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                                 |   | 6,074                      |    | 2.7                    |   | (1,568 | ) | (0.4 | ) | 2,272 | ) | 0.5 |   | 5,848 |   | 0.6 |   |
| Interest expense, net                                                   |   | (2,143                     | )       | (1.0                   | )      | (5,826 | ) | (1.4 | ) | (5,137 | ) | (1.1 | ) | (11,550 | ) | (1.2 | ) |
| Gain on Change in derivatives                                           |   | 910                        |    | 0.4                    |   | — |   | — |   | 910 |   | 0.0 |   | — |   | — |   |
| Foreign exchange gain (loss)                                            |   | 39                         |    | 0.0                    |   | 229 |   | 0.1 |   | 56 |   | (0.0 | ) | 192 |   | (0.0 | ) |
|                                                                    |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before provision for income taxes and extraordinary  loss |   | 4,880                      |    | 2.1                    |   | (7,165 | ) | (1.8 | ) | (1,899 | ) | (0.4 | ) | (5,510 | ) | (0.6 | ) |
| Provision for income taxes                                              |   | 611                        |    | 0.3                    |   | 463 |   | 0.1 |   | 1,018 |   | 0.2 |   | 1,036 |   | 0.1 |   |
|                                                                    |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before extraordinary loss                                 |   | 4,269                      |    | 1.8                    |   | (7,628 | ) | (1.9 | ) | (2,917 | ) | (0.6 | ) | (6,546 | ) | (0.7 | ) |
| Extraordinary loss                                                      |   | (4,031                     | )       | (1.7                   | )      |   |   | — |   | (4,031 | ) | (0.9 | ) | — |   | — |   |
|                                                                    |   |                       |    |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                       |   | $                          | 238     |                   | 0.1    | % | $ | (7,628 | ) | (1.9 | )% | $ | (6,948 | ) | (1.5 | )% | $ | (6,546 | ) | (0.7 | )% |

 

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| (a)    |   | Includes charges (credits) related to restructurings  and asset write downs of $(569) and $4,888 for three month and six month  periods ended June 30, 2002, and $10,151 and $12,942 for the three month and  six month periods ended July 1, 2001, respectively.  Also includes $120, $334, $333 and $519 of non-cash charges  related to stock-based compensation in the three months ended June 30, 2002  and July 1, 2001, and the six months ended June 30, 2002 and July 1, 2001,  respectively. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (b)    |   | Includes $3,474 of losses in the six month period  ended June 30, 2002 associated with the Salt Lake City facility which was  closed as part of the third quarter 2001 restructuring.  These costs include $2,057 of costs of  goods sold and $1,417 of selling, general and administration.                                                                                                                                                                                                           |

 

17

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FISCAL QUARTER ENDED JUNE 30, 2002 COMPARED TO FISCAL QUARTER ENDEDJULY 1, 2001

 

NET SALES

 

Net sales for the quarter ended June 30, 2002decreased $175.7 million, or 44%, to $227.8 million from $403.5 million for thequarter ended July 1, 2001. The decrease mainly relates to the closing of theSalt Lake City facility in the fourth quarter of 2001, which had revenues inthe second quarter of 2001 of $122.3 million, of which $42.6 million weretransferred to our other manufacturing sites. Other decreases include approximately $56.5 million from one customer,$38.0 million of which resulted from the customer discontinuing a certainproduct line, and $38.3 million from three other customers due to the overalleconomy.

 

GROSS PROFIT

 

Gross profit increased to 10.0% of net sales for thequarter ended June 30, 2002 from 8.0% of net sales for the quarter ended July1, 2001. This increase resulted primarily from the positive effects of closingdown our Salt Lake City facility in 2001, which had been operating atapproximately a 4.9% gross margin on sales of $122.3 million. In addition, ourvalue-add business, which generates higher margins, reported a higher percentageof our net sales.  These increases werepartially offset by the decrease in utilization of our manufacturing capacityrelated to the continued economic downturn experienced during the first half of2002.

 

SELLING, GENERAL AND ADMINISTRATIVE

 

Selling, general and administrative expense for thequarter ended June 30, 2002 decreased to $14.9 million, or 6.5% of net sales,from $31.7 million, or 7.9% of net sales, for the quarter ended July 1,2001.  Included in the amounts for thesecond quarter of 2002 and 2001, is $0.6 million of restructuring gain and$10.2 million of restructuring charges, respectively.  The restructuring gain in the second quarter of 2002 related tothe sale of the Salt Lake City building, which had been written down during therestructuring in the third quarter of 2001 and charged to SG&A.  The resulting gain was therefore included inSG&A during the current quarter. Excluding the restructuring charges (gain) in 2002 and 2001, thedecrease from the second quarter of 2001 to the second quarter of 2002 was $6.0million.  This decrease related mainlyto the expense savings from the various restructuring activities the Companyexecuted throughout 2001 and the first quarter of 2002.  The closure of the Salt Lake City facilityin the fourth quarter of 2001 contributed $5.1 million to this overalldecrease, and labor costs were down $1.3 million due to the variousrestructuring activities.

 

AMORTIZATION EXPENSE

 

Amortization expense was $1.9 million in the quarterended June 30, 2002 compared to $2.1 million in the quarter ended July 1,2001.  We adopted the Statement ofFinancial Accounting Standards (“SFAS”) No. 142, Goodwill and Other IntangibleAssets, on January 1, 2002.  In 

 

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accordance with SFAS 142, we ceased amortizing goodwill as of January1, 2002.  In the second quarter of 2001,we amortized $0.3 million of goodwill expense. The amortization expense in the second quarter of 2002 relates to ourasset acquisition from 3Com in September 2000, and relates mainly to customerrelationships.  These assets were beingamortized over the remaining term of our supply agreement with 3Com, whichexpired on June 30, 2002.

 

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

 

INTEREST EXPENSE, NET

 

Net interest expense decreased to $2.1 million for thequarter ended June 30, 2002 from $5.8 million for the quarter ended July 1,2001, reflecting lower average borrowings and decreasing interest rates.

 

CHANGE IN FAIR VALUE OF DERIVATIVE

 

During the second quarter of 2002, we recorded areduction in the fair value of our warrant derivative.  The warrant was issued as part of ourpreferred stock offering in the first quarter of 2002, and was originallyvalued at $3.2 million.  At June 30,2002, the warrant’s fair value was  $2.3million as a result of the change in our common stock value.  The reduction in the value of this liabilitywas recorded as a non-operating gain in the second quarter.

 

FOREIGN EXCHANGE TRANSACTION GAINS/LOSSES

 

There were no significant foreign exchange gains orlosses for either of the three-month periods ended June 30, 2002 or July 1,2001.

 

PROVISION FOR INCOME TAXES

 

Provision for income taxes was $0.6 million for thequarter ended June 30, 2002 and $0.5 million for the quarter ended July 1,2001. Our tax provisions in both quarters resulted from the mix of profits andlosses experienced by us across the jurisdictions within which we operate. Forthe three month periods ended June 30, 2002 and July 1, 2001, pretax income inthe United States was offset by net operating loss carryforwards while lossesin Asia provided us with no income tax benefit because we do not believe it ismore likely than not that we will be able to utilize these taxable losses inthe future. Profits in Spain and France required us to record tax provisions inboth periods.

 

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JULY 1,2001

 

NET SALES

 

Net sales for the six months ended June 30, 2002decreased $489.0 million, or 52.4%, to $443.2 million from $932.2 million forthe six months ended July 1, 2001. The decrease mainly relates to the closingof the Salt Lake City facility in the fourth quarter of 2001, which hadrevenues for the six months ended July 1, 2001 of $281.1 million, of which$92.6 million were transferred to our other manufacturing sites.  Other decreases include approximately $151.6from one customer, $95 million of which resulted from the customerdiscontinuing a certain product line, $119.1 million from four customers due tothe overall economy and $35.4 million from three customers whom we no longer dobusiness with in 2002. These decreases were offset by additional revenues of$22.0 million from two new customers, from which sales volumes are starting toramp up.

 

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GROSS PROFIT

 

Gross profit increased to 9.3% of net sales for thesix months ended June 30, 2002 from 7.1% of net sales for the six months endedJuly 1, 2001. This increase resulted primarily from the positive effects ofclosing down our Salt Lake City Facility in 2001, which had been operating atapproximately a 4.6% gross margin on sales of $281.1 million. In addition, the2002 margin was positively impacted by the effects of our Mt. Prospect andGuerande facilities, which operate under customer contracts with guaranteedminimum purchase commitments, as well as a higher percentage of net salescomprised of our value-add business, which generates higher margins.  These increases were partially offset by thedecrease in utilization of our manufacturing capacity related to the continuedeconomic downturn experienced during the first half of 2002.

 

SELLING, GENERAL AND ADMINISTRATIVE

 

Selling, general and administrative expense for thesix months ended June 30, 2002 decreased to $35.9 million, or 8.1% of netsales, from $56.3 million, or 6.0% of net sales, for the six months ended July1, 2001. Included in the amount for the first six months of 2002 and 2001, is$4.9 million and $12.9 million of restructuring charges, respectively.  Excluding the restructuring charges in bothyears, the decrease from the six months ended July 1, 2001 to the six monthsended June 30, 2002 was $12.4 million. This decrease related mainly to the various restructuring activities theCompany executed throughout 2001 and the first quarter of 2002.  The closure of the Salt Lake City facilityin the fourth quarter of 2001 contributed $7.9 million to this overalldecrease, and labor costs were down $2.5 million due to the variousrestructuring activities and a 5.0%-10.0% wage cut at all US subsidiaries.  Additional decreases include consultingservices of $1.1 million, primarily associated with integrating informationsystems in 2001, and sales commissions of $0.7 million as a result of lowersales in 2002.

 

AMORTIZATION EXPENSE

 

Amortization expense decreased to $3.7 million in thesix months ended June 30, 2002 compared to $4.2 million in the six months endedJuly 1, 2001.  In the first six monthsof 2001, we amortized $0.5 million of goodwill expense and $3.7 million ofintangible asset amortization, $3.0 of which related to the Company’s Salt LakeCity intangible assets, which were later written off in the third quarter 2001restructuring.  Total amortizationexpense in the first six months of 2002 relates to the Company’s assetacquisition from 3Com in September 2000, and relates mainly to customer relationships.  These assets were being amortized over theremaining term of our supply agreement with 3Com, which expired on June 30,2002.

 

OTHER OPERATING INCOME

 

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

 

INTEREST EXPENSE, NET

 

Net interest expense decreased to $5.1 million for thesix months ended June 30, 2002, from $11.6 million for the six months endedJuly 1, 2001, reflecting lower average borrowings and decreased interest rates.

 

CHANGE IN FAIR VALUE OF DERIVATIVE

 

During the six months ended June 30, 2002, we recordeda reduction in the fair value of our warrant derivative.  The warrant was issued as part of ourpreferred stock offering in the first quarter of 2002, and was originallyvalued at $3.2 million.  At June 30,2002, the warrant’s fair 

 

20

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value was $2.3 million as a result of the change in our common stockvalue.  The reduction in the value ofthis liability was recorded as a non-operating gain in the second quarter.

 

FOREIGN EXCHANGE TRANSACTION GAINS/LOSSES

 

There were no significant foreign exchange gains orlosses for either of the six-month periods ended June 30, 2002 or July 1, 2001.

 

PROVISION FOR INCOME TAXES

 

Provision for income taxes was $1.0 million for boththe six months ended June 30, 2002 and July 1, 2001, respectively.  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, 2002 and July 1,2001, pretax income in the United States was offset by net operating losscarryforwards while losses in Asia provided us with no income tax benefitbecause we do not believe it is more likely than not that we will be able toutilize these taxable losses in the future. Profits in Spain and Francerequired us to record tax provisions for both periods.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At June 30, 2002, we had cash and cash equivalents of$51.8 million, total bank and other debt of $44.0 million and $33.5 million ofunused borrowing capacity under our new secured revolving credit facility.  During the three and six months ended June30, 2002, our operations were funded by cash generated from operations.

 

Net cash provided by operating activities of $60.8million for the six months ended June 30, 2002 resulted primarily from adecrease in operating assets of $74.3 million and depreciation and amortizationexpenses of $13.3 million, offset in part by a decrease in operatingliabilities of $29.6 million and a net loss of $6.9 million. The decrease in operatingassets included a $37.5 million reduction in accounts receivable, most of whichwas a direct result of the reduction in revenue, and $31.0 million in inventoryreductions, caused by the reduced volume through the manufacturing sites andbetter inventory management.  Othernon-cash items include $4.0 million for the write-off of capitalized bank feesin connection with the Company’s refinancing of its credit facility during thesecond quarter of 2002, and write downs and loss on disposal of fixed assets of$4.0 million related mainly to the restructuring charge taken for closing theChina facility in the first quarter of 2002.  Net cash used in operating activities of $0.6 million for the six monthsended July 1, 2001 resulted primarily from a net loss of $6.5 million and adecrease in operating liabilities of $247.3 million, offset by a decrease ofoperating assets of $226.0 million, depreciation and amortization expenses of$18.1 million and non-cash charges related to loss on disposal of fixed assetstotaling $5.0 million.  The decrease inoperating assets included a $97.0 million reduction in inventory attributableto the sale of excess inventory under the provisions of our customer contracts.  Of the $97.0 million of excess inventorysales recorded during the period, $21.0 million remaining to be collected wererecorded in prepaid expenses and other current assets at July 1, 2001.

 

Net cash provided by investing activities for the sixmonths ended June 30, 2002 was $2.4 million, consisting of $4.0 million ofproceeds from the sale of the Company’s Salt Lake City building during thesecond quarter, partially offset by capital expenditures of $1.3 million.  Net cash used in investing activities forthe six months ended July 1, 2001 was $13.3 million, consisting primarily of$11.1 million of net capital expenditures, $0.8 million of internal usesoftware, and $1.4 million for the acquisition of intangible assets related toour Guerande facility.  Capitalexpenditures included $3.9 million related to the purchase of our Guerandefacility.

 

Net cash used in financing activities for the sixmonths ended June 30, 2002 was $43.9 million consisting primarily of $116.2million of net payments on the Company’s previous credit facility, which wasreplaced by a new secured revolving credit facility during the second quarterof 2002.  This was offset in part by$29.1 million in borrowings under the new credit facility, $9.2 million 

 

21

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from a mortgage loan on the Company’s Spain facility and $37.7 millionin net proceeds from the issuance of convertible preferred stock andwarrants.  Net cash provided byfinancing activities for the six months ended July 1, 2001 was $22.4 million,consisting of net borrowings under the previous bank credit facility of $21.6million and proceeds from the issuance of stock under our employee stockpurchase plan of $1.1 million.

 

In March 2002, we issued$41.5 million of convertible preferred stock and warrants to purchase1,612,281 shares of common stock in a private placement to qualified accreditedinvestors (the “Offering”). Proceeds of the Offering, net of costs of theOffering, were $37.7 million. We used the proceeds of the Offering to pay downa portion of our bank credit facility and to fund operating expenses andworking capital. The convertible preferred stock accrues dividends quarterly atthe rate of 5.25% per annum, payable quarterly in common stock or cash, at ouroption. The convertible preferred stock is convertible to common shares basedon a conversion price of $6.44 per share. We may require holders to convert tocommon stock provided the price of our common stock has traded at 150% of theconversion price for a specified period. The preferred stock has a scheduled maturity of March 14, 2007,unless converted earlier, and is redeemable for our common stock or cash, atour option. If we choose to pay dividends in common stock or to redeem theconvertible preferred stock with common stock, the shares of common stock issuedwill be computed using 95% of the market value of the common stock. Thewarrants are exercisable at any time through March 14, 2007. We have theright to require the exercise of the warrants after March 14, 2003 if ourcommon stock trades for 175% of the exercise price of the warrants for aspecified period.

 

The Offering includedparticipation by certain affiliates of Credit Suisse First Boston Corporation(“CSFB”), our major shareholder, holding approximately 49% of our common stock.These affiliates purchased 300,000 shares of the convertible preferred stock,which is convertible into 2,331,003 shares of our common stock, and warrants topurchase 582,751 shares of common stock. In connection with this investment, wepaid an affiliate of CSFB an advisory fee of 1.446% on the total amountinvested in the Offering (an aggregate of $0.6 million) in return for(i) CSFB’s services in helping to structure and arrange the transaction,(ii) the agreement by the CSFB affiliates not to sell or otherwisetransfer any of our securities for six months (other than as part of anunderwritten offering we initiate), and (iii) the agreement by the CSFBaffiliates to accept piggyback registration rights instead of having the commonstock issuable upon the conversion or exercise of its securities included inthe shelf registration statement which was filed with the SEC to register theresale of the common stock underlying the preferred stock and warrants sold toother investors in the Offering.  Theregistration statement, covering 5,937,461 shares, became effective on April23, 2002.

 

In June 2002, we replaced our existing CreditAgreement with a $110.5 million credit facility consisting of a $100 millionsenior secured revolving credit facility and a $10.5 million three-year termloan (the “2002 Credit Agreement”).  AtJune 30, 2002, we had $29.1 million outstanding under the new credit facilityand $33.5 million available to borrow. The 2002 Credit Agreement is secured by substantially all domesticassets and a pledge of 65% of the shares of foreign subsidiaries.  Restrictive covenants for the 2002 CreditAgreement include restrictions on leverage ratios as well as covenantsrequiring minimum net worth, EBITDA and fixed charge coverage ratios.  A weekly borrowing base is determined bydomestic receivables and domestic inventory. The three-year term loan has a regular quarterly amortizing payment of$333 payable on the first business day of each quarter.

 

The 2002 Credit Agreement included participation bycertain affiliates of CFSB.  Theseaffiliates were part of the syndicated lending group and have committed to lendup to $10,000 of the overall 2002 Credit Agreement.

 

In connection with the replacement of the previouscredit facility, an extraordinary loss of $4.0 million was recorded.  This extraordinary loss related to thewrite-off of deferred financing costs under the previous credit facility.  We capitalized $4.2 million of debt issuancecosts incurred in connection with the closing of the 2002 Credit Agreement, ofwhich $0.6 million was paid to certain affiliates of CFSB, our majorshareholder.  The total capitalizedcosts will be amortized over a three-year period on a straight-line basis.

 

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

 

22

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either the base rate (the bank’s prime rate) or LIBOR, plus theapplicable spread costs.  The Companyhas the option of choosing either the base rate or LIBOR.  In the first year the spread cost is fixedfor base rate and LIBOR loans.  Thespread on the base rate loans is 1.75% over the base rate and on the LIBORloans is the chosen LIBOR period rate plus 3.25%.  In the second and third years the spreads will reset quarterlybased on the average net availability of borrowings for the precedingquarter.  The spread on the base rateloans will be between 1.25% and 2.25% and the on the LIBOR loans will bebetween 2.5% and 3.5%. The interest rate under the term note is equal to thesum of the Cash Interest Rate (which is the greater of (i) the base rate ineffect plus 6.0% or (ii) 11.0%) plus the Deferred Interest Rate (which is equalto 3.0%).

 

The 2002 Credit Facility requires us to obtain within180 days of the closing (and maintain at all times), interest rate hedgingagreements covering a notional amount of not less than $10 million of therevolving loans, provided, that upon the request of the administrative agent,we must increase the amount covered by the hedge agreements up to an aggregateamount equal to 25% of the aggregate outstanding balance of the revolving loansat such time.  However, in no eventshall the aggregate amount covered by such hedge agreements at any time exceed$20 million.  The Company has notentered into any interest rate hedge agreements at June 30, 2002.

 

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

 

The following summarizes our debtand other contractual obligations at June 30, 2002:

 
|                               |   | **Total**          |    | **Less than  1 year** |   | **1 to 2  years** |   | **2 to 3  years** |   | **After  3 years** |   |
|------------------------------------|--------|--------------------|---------|-----------------------|--------|-------------------|--------|-------------------|--------|--------------------|--------|
|                               |   | **(In thousands)** |    |
|                               |   |               |    |
| Term loan borrowings               |   | $                  | 10,535  |                  | $      | 999               |   | $                 | 1,332  |               | $      | 8,204 |   | $ | — |   |
| Revolver borrowings                |   | 19,435             |    | —                |   | —            |   | 19,435            |   | —             |   |
| Mortgage                           |   | 9,936              |    | 1,066                 |   | 986               |   | 986               |   | 6,898              |   |
| Capital lease obligations          |   | 3,931              |    | 3,395                 |   | 525               |   | 10                |   | 1                  |   |
| Operating lease obligations        |   | 71,805             |    | 12,730                |   | 12,082            |   | 10,779            |   | 36,214             |   |
| Other borrowings and obligations   |   | 335                |    | 335                   |   | —            |   | —            |   | —             |   |
| Total contractual cash obligations |   | $                  | 115,977 |                  | $      | 18,525            |   | $                 | 14,925 |               | $      | 39,414 |   | $ | 43,113 |   |
|                                    |        |                    |         |                       |        |                   |        |                   |        |                    |        |  |  |  |  |  |  |

 

Our principal sources of funding our operatingexpenses, capital expenditures and debt obligations are expected to be ourcurrent cash and cash equivalents (including funds generated from ourconvertible preferred stock offering), cash generated from operations andborrowings under our new credit facilities. The amount of cash generated fromoperations will be dependent upon such factors as the successful execution ofour business plan and worldwide economic conditions. Borrowings under our newcredit facilities are dependent upon a borrowing base calculation derived fromour domestic accounts receivable and inventory.  Availability fluctuates according to the quantity and quality ofour receivables and inventory. Borrowings under our credit facilities could belimited by a number of factors, including the following:

 

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

 

•                  ahigher percentage of our business being conducted in foreign jurisdictions, or

 

•                  diminishedcreditworthiness within our customer base.

 

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We were in compliance with all covenants under our newcredit facilities as of June 30, 2002. In the event we do not have adequatefunding from our new credit facility, we would work with our senior lenders tomodify the new credit facilities or identify other sources of capital to obtainnecessary debt or equity financing. There is no assurance we would be able tomodify our current credit facility with existing lenders or obtain alternativedebt or equity financing to satisfy our funding needs. While there can be noassurance we will have sufficient funds to meet our cash requirements over thenext twelve months, we believe that funds generated from operations, proceedsfrom the convertible preferred stock offering and borrowings under our newcredit facility will be adequate to meet our anticipated future operatingexpenses, capital expenditures and debt obligations for at least the nexttwelve months.

 

During the six months ended June 30, 2002, MSL did notengage in:

 

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

 

•                  Tradingactivities in non-exchange traded contracts.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Exit or Disposal Activities” (“SFAS No. 146”).  SFAS No. 146 addresses significantissues regarding the recognition, measurement and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring)”.  The scope of SFASNo. 146 also includes costs related to terminating a contract that is nota capital lease and termination benefits that employees who are involuntarilyterminated receive under the terms of a one-time benefit arrangement that isnot an ongoing benefit arrangement or an individual deferred-compensationcontract. We are required to adopt the provisions of SFAS No. 146effective for exit or disposal activities initiated after December 31,2002.  The provisions of EITFNo. 94-3 shall continue to apply for an exit activity initiated under anexit plan that met the criteria of EITF No. 94-3 prior to the adoption ofSFAS No. 146.  Theeffect-on-adoption of SFAS No. 146 will change on a prospective basis thetiming of when restructuring charges are recorded from a commitment dateapproach to when the liability is incurred. We do not anticipate that the adoption of this statement will have amaterial impact on our consolidated balance sheet or statement of operations.

 

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

 

In October 2001, the FASB issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).SFAS 144 supercedes FASB Statement No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of”. SFAS 144applies to all long-lived assets (including discontinued operations) andconsequently amends Accounting Principles Board Opinion No. 30, “ReportingResults of Operations - Reporting the Effects of 

 

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Disposal of a Segment of a Business”. SFAS No. 144 is effective forfinancial statements issued for fiscal years beginning after December 31, 2001,and has been adopted by us, as required, on January 1, 2002. SFAS No. 144 hadno impact on our financial statements.

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill andOther Intangible Assets.  We haveadopted SFAS 142 as of January 1, 2002. SFAS 142 requires goodwill andintangible assets with indefinite useful lives to no longer be amortized, butinstead be tested for impairment at least annually.  With the adoption of SFAS 142, we reassessed the useful lives andresidual values of all acquired intangible assets to make any necessaryamortization period adjustments. Based on that assessment, only goodwill wasdetermined to have an indefinite useful life and no adjustments were made tothe amortization period or residual values of other intangible assets.  The statement also requires the completionof a transitional impairment test within six months of adoption, with anyimpairment treated as a cumulative effect of a change in accountingprinciple.  We completed thetransitional impairment test during the second quarter of 2002 and determinedthat no impairment existed as of the date of adoption. We are required toperform goodwill impairment tests on an annual basis.

 

FORWARD LOOKING STATEMENTS

 

This Form 10-Q includes forward-looking statements.Some of the forward-looking statements can be identified by the use offorward-looking words such as “believes,” “expects,” “may,” “will,” “should,”“seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” orthe negative of those words or other comparable terminology. Forward-lookingstatements involve risks and uncertainties. A number of important factors couldcause actual results to differ materially from those in the forward-lookingstatements. These factors include systems failures, technological changes,volatility of securities markets, government regulations and economicconditions and competition in the areas in which we conduct our operations. Fora discussion of factors that could cause actual results to differ, please seethe discussion under “Risk Factors” included below in this Form 10-Q. Theforward-looking statements made in this Form 10-Q represent our views only asof the date of this Report, and we disclaim any duty to update thesestatements, even if subsequent events cause our views to change.

 

RISK FACTORS

 

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

 

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

 

We depend on a small number of customers for a largeportion of our business. Our ten largest customers accounted for approximately84% of net sales in the six months ended June 30, 2002 and approximately 87% ofnet sales for fiscal 2001.  Changes inour customers’ orders have in the past had a significant impact on our operatingresults. If a major customer significantly reduces the amount of business itdoes with us, there would be an adverse impact on our operating results.

 

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

 

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

 

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

 

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

 

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

 

•          difficultyin managing and operating geographically dispersed businesses, including somelocated in foreign countries;

 

•          diversionof our capital and our management’s attention away from other business issues;

 

•          anincrease in our expenses and our working capital requirements;

 

•          potentialloss of key employees and customers of facilities or businesses we acquire; and

 

•          financialrisks, such as:

 

    •                          potentialliabilities of the facilities and businesses we acquire;

 

    •                          our needto incur additional indebtedness; and

 

    •                          dilutionif we issue additional equity securities.

 

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

 

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

 

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

 

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

 

Our growth and acquisition strategy could require usto incur substantial amounts of indebtedness. As of June 30, 2002, our totaldebt was $44.0 million and our interest expense for 

 

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the six months ended June 30, 2002 was $5.1 million. In addition, wemay incur additional indebtedness in the future.  Our future level of indebtedness could have adverse consequencesfor our business, including:

 

•          vulnerabilityto the effects of poor economic and industry conditions affecting our business;

 

•          dedicationof a substantial portion of our cash flow from operations to repayment of debtand interest expense, limiting the availability of cash for working capital,capital expenditures or acquisitions which may be attractive to us;

 

•          reducedflexibility in planning for, or reacting to, changes in our business andindustry, due to the debt repayment obligations and restrictive covenantscontained in our debt instruments; and

 

•          failureto comply with the financial covenants under the agreements governing ourindebtedness relating to matters such as fixed charge coverage ratio, minimumadjusted tangible net worth, and minimum domestic EBITDA, resulting in an eventof default, which if not cured or waived, could cause substantially all of ourindebtedness to become immediately due and payable.

 

We have financial instruments that are subject to interestrate risk, principally debt obligations under our 2002 Credit Agreement. Anincrease in the base rates upon which our interest rates are determined couldhave an adverse effect on our operating results and financial condition.

 

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

 

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

 

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

 

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

 

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

 

We order raw materials and components to complete ourcustomers’ orders, and some of these raw materials and components are orderedfrom sole-source suppliers. Although we work with our customers and suppliersto minimize the impact of shortages in raw materials and components, we 

 

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

 

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

 

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

 

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

 

Our business depends on the electronics industry,which is subject to rapid technological change, short product life cycles andpricing and margin pressure.  Inaddition, the electronics industry has historically been cyclical and subjectto significant downturns characterized by diminished product demand, rapiddeclines in average selling prices and production over-capacity. When thesefactors adversely affect our customers, we may suffer similar effects. Ourcustomers’ markets are also subject to economic cycles and are likely toexperience recessionary periods in the future. The economic conditionsaffecting the electronics industry, in general, or any of our major customers,in particular including the economic slowdown and heightened levels ofuncertainty related to the September 11, 2001 terrorist attacks in the UnitedStates, may continue to adversely affect our operating results.

 

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

 

We have substantial manufacturing operations inEurope, Asia and Mexico. Our international operations are subject to inherentrisks, which may adversely affect us, including:

 

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

 

•          fluctuationsin the value of foreign currencies;

 

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

 

•          changesin labor conditions and difficulties in staffing and managing our 

 

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foreign operations;

 

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

 

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

 

•          increasesin the duties and taxes we pay;

 

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

 

•          expropriationof private enterprises.

 

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

 

Our annual and quarterly results may varysignificantly depending on various factors, many of which are beyond ourcontrol, and may not meet the expectations of securities analysts or investors.If this occurs, the price of our common stock would likely decline. Thesefactors include:

 

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

 

•          introductionand market acceptance of our customers’ new products;

 

•          changesin demand for our customers’ existing products;

 

•          thetiming of our expenditures in anticipation of future orders;

 

•          effectivenessin managing our manufacturing processes;

 

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

 

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

 

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

 

•          foreigncurrency exposure.

 

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

 

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

 

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

 

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

 

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

 

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

 

Our operations are regulated under a number of federal,state and foreign environmental and safety laws and regulations that govern,among other things, the discharge of hazardous materials into the air and wateras well as the handling, storage and disposal of these materials. These lawsand regulations 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 any violation,which also could negatively impact our operating results.

 

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

 

Credit Suisse First Boston, through certain of itsaffiliates, owns approximately 49% of our outstanding common stock and, as aresult, has significant control over our business, policies and affairs,including, effectively, the power to appoint new management, prevent or cause achange of control and approve any action requiring the approval of the holdersof our common stock, such as adopting amendments to our certificate ofincorporation and approving mergers or sales of all or substantially all of ourassets. In addition, under the terms of a stockholders agreement between us,certain other parties and those affiliates of Credit Suisse First Boston, thoseaffiliates have the right to elect a majority of our directors if they own 50%or more of our outstanding common stock. Circumstances may occur in which theinterests of these stockholders could be in conflict with your interests.

 

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

 

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

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET RISKS

* *

***Interest Rate Risk***

 

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

 

The cost of borrowingunder the revolving facility is contained under the caption Liquidity andCapital Resources in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

The following table summarizesour market risks associated with our variable rate debt in place at June 30,2002 based on current maturities and interest rates:

 
|                       |   | **June 30,**                |   |
|----------------------------|--------|-----------------------------|--------|
|                       |   | **2003**                    |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   |
|                       |   | **(Dollars in  thousands)** |   |
|                       |   |                        |   |   |   |   |   |   |   |   |   |
| Term loan balance          |   | $                           | 9,536  |   | $ | 8,204 |   | — |   | — |   | — |   |
| Effective interest rate    |   | 14.0                        | %      | 14.0 | % | 14.0 | % | — |   | — |   |
| Principal payments         |   | $                           | 999    |   | $ | 1,332 |   | $ | 8,204 |   | — |   | — |   |
| Interest expense           |   | $                           | 1,405  |   | $ | 1,242 |   | $ | 574 |   | — |   | — |   |
| Revolving facility balance |   | $                           | 19,435 |   | $ | 19,435 |   | — |   | — |   | — |   |
| Unused credit (a)          |   | $                           | 80,565 |   | $ | 80,565 |   | — |   | — |   | — |   |
| Effective interest rate    |   | 6.60                        | %      | 6.60 | % | 6.60 | % | — |   | — |   |
| Fee on unused portion      |   | 0.50                        | %      | 0.50 | % | 0.50 | % | — |   | — |   |
| Interest expense           |   | $                           | 1,666  |   | $ | 1,666 |   | 1,666 |   | — |   | — |   |
| Mortgage Loan              |   | $                           | 8,870  |   | $ | 7,884 |   | $ | 6,898 |   | $ | 5,912 |   | $ | 4,926 |   |
| Effective Interest Rate    |   | 4.19                        | %      | 4.19 | % | 4.19 | % | 4.19 | % | 4.19 | % |
| Principal Payments         |   | $                           | 986    |   | $ | 986 |   | $ | 986 |   | $ | 986 |   | $ | 986 |   |
| Interest Expense           |   | $                           | 394    |   | $ | 351 |   | $ | 310 |   | $ | 268 |   | $ | 227 |   |

 

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(a)                                  As of June 30, 2002 approximately$33.5 million of the unused credit under our revolving credit facility wasavailable for additional borrowings based on a borrowing base calculationutilizing domestic accounts receivable and domestic inventory.

 

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

 

***Foreign Currency Exchange Rate Risk***

 

We also have exposure to various foreign currency exchange-rate fluctuations for cash flowreceived from our foreign subsidiaries. This risk is mitigated because thefunctional currency of our subsidiaries in Ireland, Singapore and Malaysia isthe US dollar and most of their financial transactions are denominated in USdollars. The foreign currency exchange-rate risk for our subsidiaries in Spainand France are mitigated because their functional currency is the Euro and mostof their financial transactions are denominated in Euro. Our exposure toforeign currency exchange-rate fluctuations is primarily related tointercompany loans payable to the corporate entity, intercompany receivablesfrom the corporate entity and specific trade receivables and payables, all atour subsidiaries in Spain and France, which are denominated in US dollars. Ourforeign currency exchange-rate exposure on the intercompany balances and thetrade receivables and payables is mitigated by the use of foreign exchange contractswhich are effective as a means of minimizing exposure and reducing risk fromexchange rate fluctuations related to these specific transactions. We activelymonitor our foreign currency exchange-rate exposure and manage our foreignexchange contract positions to maintain the effectiveness of this riskmitigation process.

 

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

 

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

 

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

 

PART II. OTHERINFORMATION

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

At the Company’s Annual Meeting of Stockholders held on May 15, 2002,the following proposals were adopted by the margins indicated:

 

To elect two Class II directors to serve on the Board of Directorsuntil the 2005 Annual Meeting of Stockholders or until their successors areduly elected and qualified.

 

 
|               |   | **Number of Shares** |   |
|--------------------|--------|----------------------|--------|
|               |   | **Voted For**        |   | **Withheld** |   |
| John F. Fort, III  |   | 26,256,843           |   | 134,666 |   |
| Curtis S.  Wozniak |   | 26,256,843           |   | 134,666 |   |

 

In addition the following directors hold office for terms continuingbeyond the 2002 Annual Meeting:  KevinC. Melia, Robert C. Bradshaw, Thompson Dean, Karl R. Wyss, William J. Weyandand Dermott O’Flanagan.

 

To approve an amendment to the 2000 Equity Incentive Plan, as amended,(“Plan”) to increase the number of shares available under the Plan from5,668,750 to 7,668,750.

 

Number of Shares

 
| **Voted For** |   | **Voted  Against** |   | **Abstain** |   | **Broker  Non-Votes** |   |
|---------------|--------|--------------------|--------|-------------|--------|-----------------------|--------|
| 16,111,721    |   | 2,296,630          |   | 978,009     |   | 7,005,149             |   |

 

To approve an amendment to the 2000 Non-Employee Director Stock OptionPlan, as amended, to change the formula options grants specified by the planand to increase the number of shares available for issuance under the plan by400,000. 

 

Number of Shares

 
| **Voted For** |   | **Voted  Against** |   | **Abstain** |   | **Broker  Non-Votes** |   |
|---------------|--------|--------------------|--------|-------------|--------|-----------------------|--------|
| 18,025,909    |   | 383,352            |   | 977,099     |   | 7,005,149             |   |

 

To approve an amendment to the 2000 Employee Stock Purchase Plan, asamended, to increase the number of shares available for issuance under the planby 500,000. 

 

Number of Shares

 
| **Voted For** |   | **Voted  Against** |   | **Abstain** |   | **Broker  Non-Votes** |   |
|---------------|--------|--------------------|--------|-------------|--------|-----------------------|--------|
| 18,196,645    |   | 213,639            |   | 976,076     |   | 7,005,149             |   |

 

32

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To approve the rights of affiliates of Credit Suisse First Boston toconvert shares of 5.25% Series A Preferred Stock into Common Stock and toexercise warrants to purchase Common Stock.

 

Number of Shares

 
| **Voted For** |   | **Voted  Against** |   | **Abstain** |   | **Broker  Non-Votes** |   |
|---------------|--------|--------------------|--------|-------------|--------|-----------------------|--------|
| 19,294,982    |   | 67,729             |   | 23,649      |   | 7,005,149             |   |

 

To approve the issuance of shares of Common Stock under the terms ofthe Series A Convertible Preferred Stock to satisfy obligations to paydividends, make payments due upon an optional or mandatory conversion of suchpreferred and to redeem such preferred stock.

 

Number of Shares

 
| **Voted For** |   | **Voted  Against** |   | **Abstain** |   | **Broker  Non-Votes** |   |
|---------------|--------|--------------------|--------|-------------|--------|-----------------------|--------|
| 19,306,143    |   | 70,872             |   | 9,345       |   | 7,005,149             |   |

 

To ratify the appointment of PricewaterhouseCoopers, LLP as theindependent auditors of the Company for the year ending December 31, 2002.

 

Number of Shares

 
| **Voted For** |   | **Voted  Against** |   | **Abstain** |   | **Broker  Non-Votes** |   |
|---------------|--------|--------------------|--------|-------------|--------|-----------------------|--------|
| 26,322,109    |   | 63,910             |   | 5,490       |   | 7,005,149             |   |

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a)      Exhibits

 
| **EXHIBIT********NUMBER** |   | **DESCRIPTION**                                                                                                                                                                                       |
|---------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |   |                                                                                                                                                                                                  |
| 2.1(1)                    |   | Securities Purchase Agreement  dated as of January 20, 1995 by and among MSL and the parties listed  therein.                                                                                    |
| 2.2(1)                    |   | Warrant Agreement dated as of  August 31, 1995 by and among MSL, Bank of America National Trust and  Savings Association and the parties listed therein.                                         |
| 2.3(1)                    |   | Preferred Stock and Warrant  Subscription Agreement dated as of November 26, 1999 by and among MSL  and the parties listed therein.                                                              |
| 2.4(1)                    |   | Escrow Agreement dated as of  November 26, 1999 by and among MSL and the parties listed therein.                                                                                                 |
| 2.5(1)                    |   | Asset Purchase Agreement dated  as of November 19, 1999 among 3Com Corporation, Manufacturers’ Services  Limited and Manufacturers’ Services Salt Lake City Operations, Inc.           |
| 2.6(2)                    |   | Asset Purchase Agreement dated  as of September 26, 2000 among 3Com Corporation, Manufacturers’ Services  Limited and Manufacturers’ Services Salt Lake City Operations, Inc.          |
| 3.1(1)                    |   | Restated Certificate of  Incorporation of MSL.                                                                                                                                                        |
| 3.2(1)                    |   | Amended and Restated By-Laws of  MSL.                                                                                                                                                                 |
| 3.4(5)                    |   | Amended and Restated Articles  of Incorporation of MSL.                                                                                                                                               |
| 3.3(1)                    |   | Form of certificate  representing shares of common stock, $.001 par value per share.                                                                                                                  |
| 4.1(1)                    |   | Stockholders Agreement dated as  of January 20, 1995 by and among MSL and the stockholders named therein.                                                                                        |
| 4.2(1)                    |   | Stockholders Agreement  Amendment dated November 26, 1999 by and among MSL and the stockholders  named therein.                                                                                  |
| 4.3(1)                    |   | Credit Agreement dated  August 21, 1998 among MSL, MSL Overseas Finance B.V. and the lenders  named therein.                                                                                     |
| 4.4(1)                    |   | First Amendment to Credit  Agreement and Limited Waiver dated as of February 26, 1999 by and among  MSL, MSL Overseas Finance B.V. and the lenders named in the Credit Agreement.                |
| 4.5(1)                    |   | Second Amendment to Credit  Agreement and Consent dated as of November 23, 1999 by and among MSL,  MSL Overseas Finance B.V. and the lenders named in the Credit Agreement.                      |
| 4.6(4)                    |   | First Amended and Restated  Credit Agreement dated as of September 29, 2000 by and between  Manufacturers’ Services Limited and the lenders named in the Credit  Agreement.                 |
| 4.7(4)                    |   | First Amendment Agreement and  Consent dated as of September 29, 2000 by and between Manufacturers’  Services Limited and the lenders named therein.                                        |
| 4.8(3)                    |   | First Amendment to First  Amended and Restated Credit Agreement dated as of October 25, 2000 by  and between Manufacturers’ Services Limited and the lenders named therein.                 |
| 4.9(5)                    |   | Second Amendment to First  Amended and Restated Credit Agreement dated as of March 2, 2001 by and  between Manufacturers’ Services Limited and the lenders named therein.                   |
| 4.10(7)                   |   | Third Amendment to First  Amended and Restated Credit Agreement dated as of October 18, 2001 by  and between Manufacturers’ Services Limited and the lenders named therein.                 |
| 4.11(9)                   |   | Certificate of Designations of  5.25% Series A Convertible Preferred Stock of Manufacturers’ Services,  Limited.                                                                                 |
| 4.12(11)                  |   | Credit Agreement dated as of  June 20, 2002 by and between Manufacturers’ Services Limited and the lenders  named therein.                                                                       |
| 10.1(1)                   |   | Employment Agreement dated as  of January 20, 1995 by and between MSL and Kevin C. Melia.                                                                                                        |
| 10.2(1)                   |   | Employment Letter dated as of  June 20, 1997 by and between MSL and Robert E. Donahue.                                                                                                           |
| 10.3(1)                   |   | Employment Letter dated as of  September 27, 1995 by and between MSL and Rodolfo Archbold.                                                                                                       |
| 10.4(1)                   |   | Employment Letter dated as of  January 4, 1996 by and between MSL and Dale R. Johnson.                                                                                                           |
| 10.5(1)                   |   | Severance Letter dated  June 25, 1996 by and between MSL and Dale R. Johnson.                                                                                                                    |
| 10.6(1)                   |   | Employment Letter dated as of  January 23, 1998 by and between MSL and James N. Poor.                                                                                                            |
| 10.7(1)                   |   | Second Amended and Restated  Non-Qualified Option Plan.                                                                                                                                               |
| 10.8(1)                   |   | Form of 2000 Equity Incentive  Plan.                                                                                                                                                                  |
| 10.9(1)                   |   | Form of 2000 Employee Stock  Purchase Plan.                                                                                                                                                           |
| 10.10(1)                  |   | Form of Indemnification  Agreement.                                                                                                                                                                   |
| 10.11(1)                  |   | Office/Warehouse Lease dated as  of April 14, 1997 by and between Amberjack, Ltd. and Manufacturers’  Services Limited-Roseville, Inc.                                                      |
| 10.12(1)                  |   | Lease dated as of May 5,  1998 by and between International Business Machines Corporation and  Manufacturers’ Services Western U.S. Operations, Inc.                                        |
| 10.13(1)+                 |   | Supply Agreement dated as of  November 27, 1999 buy and between MSL and 3Com Corporation.                                                                                                        |
| 10.14(1)+                 |   | Outsourcing Agreement dated as  of June 1, 1998 by and between International Business Machines  Corporation and Manufacturers’ Services Western US Operations, Inc.                         |
| 10.15(1)+                 |   | Manufacturing, Integration and  Fulfillment Contract dated as of June 26, 1998 by and between  International Business Machines S.A. and Global Manufacturers’  Services-Valencia.           |
| 10.16(1)+                 |   | Global Requirements Agreement  No. MSL 183G dated as of July 30, 1997 by and between MSL and Iomega  Corporation.                                                                                |
| 10.17(1)+                 |   | Supply Agreement dated as of  November 27, 1999 by and between MSL and Palm Computing, Inc.                                                                                                      |
| 10.18(1)+                 |   | Manufacturing Services  Agreement dated as of June 1, 1999 by and between Hewlett-Packard  Singapore Pte Ltd. and Manufacturers’ Services Singapore Pte Ltd                                 |
| 10.19(1)                  |   | 2000 Cash Incentive  Compensation Plan.                                                                                                                                                               |
| 10.20(4)+                 |   | Supply Agreement dated as of  September 26, 2000 between Manufacturers’ Services Salt Lake City  Operations, Inc. and 3Com Corporation.                                                     |
| 10.21(4)+                 |   | Lease dated as of  September 26, 2000 by and between 3Com Corporation and Manufacturers’  Services Salt Lake City Operations, Inc.                                                          |
| 10.22(4)                  |   | 2000 Non-employee Director  Stock Option Plan, as amended.                                                                                                                                            |
| 10.23(4)                  |   | 2000 Non-qualified Stock Option  Plan.                                                                                                                                                                |
| 10.24(4)                  |   | Second Amended and Restated  Non-qualified Stock Option Plan, as amended.                                                                                                                             |
| 10.25(4)                  |   | 2000 Equity Incentive Plan, as  amended.                                                                                                                                                              |
| 10.26(5)                  |   | Form of Change in Control  Agreement for Kevin Melia, Robert Donahue, Albert Notini, Rodolfo Archbold,  James Poor, Alan Cormier, Richard Gaynor, Francis Binder, Richard Buckingham  and Sam Landol. |
| 10.27(5)+                 |   | First Amendment to Supply  Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and  Palm, Inc., effective as of December 1, 2000.                                     |
| 10.28(5)                  |   | Amendment to Employment Letter  dated as of September 27, 1995 between MSL and Rodolfo Archbold.                                                                                                 |
| 10.29(5)+                 |   | First Amendment to Supply  Agreement between Manufacturers Services Salt Lake City Operations, Inc. and  3Com Corporation, effective as of January 15, 2001.                                     |
| 10.30(6)                  |   | 2000 Equity Incentive Plan, as  amended.                                                                                                                                                              |
| 10.31(6)                  |   | 2000 Employee Stock Purchase  Plan, as amended.                                                                                                                                                       |
| 10.32(6)                  |   | 2000 Non-Qualified Stock Option  Plan, as amended.                                                                                                                                                    |
| 10.33(7)                  |   | Amendment to Supply Agreement  between Manufacturers Services Salt Lake City Operations, Inc. and 3Com  Corporation effective as of September 14, 2001.                                               |
| 10.34(8)+                 |   | Amendment to the Outsourcing  Agreement dated as of June 1, 1998 by and between International Business  Machines Corporation and Manufacturers’ Services Western US Operations, Inc.        |
| 10.35(8)                  |   | Severance Agreement effective  March 29, 2002 by and between MSL and Robert E. Donahue.                                                                                                          |
| 10.36(8)                  |   | Employment Agreement dated as  of January 2, 2002 by and between MSL and Kevin C. Melia.                                                                                                         |
| 10.37(8)                  |   | Employment Agreement dated as  of January 31, 2002 by and between MSL and Albert A. Notini.                                                                                                      |
| 10.38(8)                  |   | Employment Agreement dated as  of December 19, 2002 by and between MSL and Robert C. Bradshaw.                                                                                                   |
| 10.39(8)                  |   | Employment Agreement dated as  of January 30, 2002 by and between MSL and Santosh Rao.                                                                                                           |
| 10.40(8)                  |   | Form of Change in Control  Agreement for Santosh Rao, Bruce Leasure, Dewayne Rideout.                                                                                                                 |
| 10.41(10)                 |   | Severance Agreement effective  March 29, 2002 by and between Manufacturers’ Services Limited and Rodolfo  Archbold.                                                                              |
| 10.42                     |   | Severance Agreement effective  March 29, 2002 by and between Manufacturers’ Services Limited and James N.  Poor.                                                                                 |
| 10.43                     |   | 2000 Equity Incentive Plan, as  amended on May 15, 2002.                                                                                                                                              |
| 10.44                     |   | 2000 Employee Stock Purchase  Plan, as amended on May 15, 2002.                                                                                                                                       |
| 10.45                     |   | 2000 Non-Employee Director  Stock Option Plan, as amended on May 15, 2002                                                                                                                             |
| 99.1                      |   | Certification                                                                                                                                                                                         |

 

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

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

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

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

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

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

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

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

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

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

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

 

33

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(11)                            Filedas an Exhibit to the Registrant’sCurrent Report on Form 8-K filed on June 28, 2002.

 

(b)           Reportson Form 8-K

 

On April 30, 2002, the Company filed a report on Form8-K furnishing information under Item5, Other Events, relating to the Company’s press release announcing firstquarter operating results.

 

On June 28, 2002, the Company filed a report on Form8-K furnishing information under Item 5, Other Events, relating to theCompany’s new Credit Agreement with Bank of America, N.A. and certain otherfinancial institutions named therein.

 

SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | MANUFACTURERS’ SERVICES LIMITED |
|--------|--------------------------------------|
|   | (Registrant)                         |
|   |                                 |
|   | Date: August 14, 2002                |
|   |                                 |
|   | By:                                  | /s/ Albert A. Notini |   |
|   |                                 | Albert A. Notini |   |
|   |                                 | Executive Vice  President and |   |
|   |                                 | Chief Financial Officer |   |
|   |                                 | (Principal Financial  Officer) |   |
|   |                                 |   |   |
|   | By:                                  | /s/ Richard J. Gaynor |   |
|   |                                 | Richard J. Gaynor |   |
|   |                                 | Vice President and |   |
|   |                                 | Corporate Controller |   |
|   |                                 | (Principal Accounting  Officer) |   |

 

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