UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(MARK ONE)

 

 

For the transition period from         to        

 

COMMISSION FILE NUMBER:  001-15883

 

 

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

 

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

 

 

MANUFACTURERS’ SERVICES LIMITED

INDEX

 

PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets – September 29, 2002 (Unaudited) and December 31, 2001
	Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 29, 2002 and September 30, 2001
	Consolidated Statements of Cash Flows (Unaudited) – Three and Nine Months Ended September 29, 2002 and September 30, 2001
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure about Market Risk
Item 4.	Controls and Procedures
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings
Item 6.	Exhibits and Reports on Form 8-K
	Signatures

 

2

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MANUFACTURERS’ SERVICES LIMITED

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

 

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

 

See accompanying notes to the interim consolidated financial statements.

 

3

 

MANUFACTURERS’ SERVICES LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

(IN THOUSANDS, EXCEPT PER SHARE DATA)

 

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

 

See accompanying notes to the interim consolidated financial statements.

 

4

 

MANUFACTURERS’ SERVICES LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(IN THOUSANDS)

 

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

 

See accompanying notes to the interim consolidated financial statements.

 

5

 

MANUFACTURERS’ SERVICES LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(IN THOUSANDS, EXCEPT SHARE DATA)

 

1.             BASIS OF PRESENTATION

 

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

 

In response to the economic downturn experienced in 2001 and 2002 and the related weakening in demand from customers, the Company evaluated its worldwide workforce and manufacturing capacity and realigned its cost structure (Note 9) with the lower demand requirements and its ongoing capital and liquidity requirements.  In June 2002, the Company entered into a new three year $110,500 credit facility consisting of a $100,000 senior secured revolving credit facility and a $10,500 three year term loan (the “2002 Credit Agreement”).  In August 2002, the 2002 Credit Agreement was amended to increase the senior secured revolving credit facility to $120,000 in connection with the final syndication of the facility.  Borrowings under the 2002 Credit Agreement are determined by a borrowing base calculation derived from accounts receivable and inventory from its US operations.  Borrowing under the 2002 Credit Agreement could be limited by the following factors:

 

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

 

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

 

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

 

•                    failure to comply with the Credit Agreement’s covenants

 

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

 

2.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Exit or Disposal Activities”.  SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”.  The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002.  The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146.  The effect-on-adoption of SFAS No. 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred.  The Company does not anticipate that the adoption of this statement will have a material impact on its 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 Statement No.13, and Technical Corrections as of April 2002”.  SFAS No. 145 eliminates SFAS No. 4 “Reporting Gains and Losses from Extinguishment of Debt”, which required companies to classify gains or losses from the extinguishment of debt as an extraordinary item, net of tax. As a result of this new FASB, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB Opinion No.30 “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”.  The Company does not believe that its extinguishment of debt will qualify as an extraordinary item as defined in APB 30, and therefore the Company will be required to classify these charges as operating expenses.  The Company will adopt 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 supercedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”. SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, “Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business”. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 31, 2001, and has been adopted by the Company, as required, on January 1, 2002. The adoption of SFAS No. 144 had no impact on the Company’s financial statements.

 

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”.  The Company has adopted SFAS 142 as of January 1, 2002. SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually.  With the adoption of SFAS 142, the Company reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization period adjustments. Based on that assessment, only goodwill was determined to have an indefinite useful life and no adjustments were made to the amortization period or residual values of other intangible assets.  The new statement also required the completion of a transitional impairment test within six months of adoption, with any impairment treated as a cumulative effect of a change in accounting principle.  The Company completed the transitional impairment test during the second quarter of 2002 and determined that no impairment existed as of the date of adoption.

 

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

 

6

 

3.                                       INVENTORY

 

Inventories are comprised of the following:

 

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

 

4.             BUSINESS SEGMENT INFORMATION

 

The Company’s operations comprise a single line of business, providing electronics design and manufacturing services. Information about the Company’s operations in different geographic regions is presented in the table below:

 

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

 

7

 

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

 

5.             CREDIT FACILITIES

 

On June 20, 2002 the Company replaced its existing Credit Agreement with a $110,500 credit facility consisting of a $100,000 senior secured revolving credit facility and a $10,500 three-year term loan (the “2002 Credit Agreement”).  On August 21, 2002, the 2002 Credit Agreement was amended to increase the senior secured revolving credit facility to $120,000 in connection with the final syndication of the facility.  The 2002 Credit Agreement has a final maturity date of June 20, 2005 and is secured by substantially all domestic assets and a pledge of 65% of the shares of foreign subsidiaries.  Restrictive covenants for the 2002 Credit Agreement include restrictions on leverage ratios as well as covenants requiring minimum net worth, EBITDA and fixed charge coverage ratios.  A weekly borrowing base is determined based upon domestic 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, with the remaining outstanding balance due at maturity.

 

The 2002 Credit Agreement includes participation by certain affiliates of Credit Suisse First Boston Corporation (“CSFB”), the Company’s major shareholder, holding approximately 49% of the Company’s outstanding common stock.  These affiliates were 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 previous credit facility, an extraordinary loss of $4,031 was recorded in the second quarter of 2002, net of a $0 tax benefit.  This extraordinary loss related to the write-off of deferred financing costs under the previous credit facility.  The Company capitalized $4,352 of debt issuance costs incurred in connection with the 2002 Credit Agreement, $625 of which was paid to certain affiliates of CSFB.  The total capitalized costs will be amortized over a three-year period on a straight-line basis, representing approximately $360 per quarter in non-cash charges.

 

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

 

8

 

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 Interest Rate (which is equal to 3.0%).  The interest rate on the term loan at September 29, 2002 was 14.0%.

 

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

 

On June 26, 2002 the Company entered into a ten-year mortgage loan of 10,000 Euros in Valencia, Spain.  The loan is secured by the property and buildings of Global Manufacturers’ Services Valencia, S.A., the Company’s Spanish subsidiary, and has a monthly amortizing repayment schedule.  The cost of borrowing under the mortgage is three-month Euro LIBOR plus 0.85%.

 

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

 

6.             CONVERTIBLE PREFERRED STOCK

 

In March 2002, the Company issued $41,500 of convertible preferred stock and warrants to purchase 1,612,281 shares of common stock in a private placement to qualified accredited investors (the “Offering”). Proceeds of the Offering, net of costs of the Offering, were $37,720. The convertible preferred stock is recorded as temporary equity, and the warrants are recorded as liabilities.

 

The convertible preferred stock accrues dividends quarterly at the rate of 5.25% per annum, payable quarterly in common stock or cash, at the Company’s option. The convertible preferred stock is convertible to common stock at any time by holders based on a conversion price of $6.44 per share. The Company may require holders to convert to common stock provided the price of its common stock has traded at 150% of the conversion price, or $9.65 per share, for a specified period.  The preferred stock has a scheduled maturity of March 14, 2007, unless converted earlier, and is redeemable for the Company’s common stock or cash, at the Company’s option.  If the Company chooses to pay dividends in common 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 the market value of the common stock. The warrants are exercisable at any time through March 14, 2007 at the exercise price of $7.02 per share. The Company has the right to require the exercise of the warrants after March 14, 2003 if the common stock trades for 175% of the exercise price of the warrants for a specified period.

 

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

 

The Offering included participation by certain affiliates of CSFB, the Company’s major shareholder.  These affiliates purchased 300,000 shares of the convertible preferred stock, which is convertible into 2,331,003 shares of common stock, and warrants to purchase 582,751 shares of common stock. In connection with this investment, the Company paid an affiliate of CSFB an advisory fee of 1.446% on the total amount invested in the Offering (an aggregate of $600) 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 otherwise transfer any of the Company’s securities for six months

 

9

 

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

 

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

 

7.             EARNINGS PER SHARE

 

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

 

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

 

10

 

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

 

8.             COMPREHENSIVE LOSS

 

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

 

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

 

9.             RESTRUCTURING AND OTHER ASSET WRITEDOWNS

 

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

 

In the second quarter of 2002, the Company recorded a gain of $569 from the sale of its Salt Lake City building.  An impairment charge for the building was previously recorded as part of a restructuring charge taken in the third quarter of 2001 when the Company wrote down the building to its estimated fair market value.

 

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

 

During the first nine months of 2001, the Company implemented various restructuring plans throughout its organization to align its cost structure with its reduced revenue stream as a result of the severe economic downturn in the EMS industry.  These restructuring activities included closing the Company’s Salt Lake City facility and reducing its operations in Asia, Spain, Ireland and certain United States locations.  The total restructuring charge through September 30, 2001 of $79,699 consisted of asset write-downs of $59,402, employee severance of $15,897 and lease termination and facility costs of  $4,400.

 

The following table sets forth the activity in the restructuring reserves through September 29, 2002:

 

 

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Reserves remaining at September 29, 2002 represent liabilities for severance and lease termination payments and are expected to be substantially paid by June 30, 2003, except for certain lease payments that may continue through 2010.

 

10.           OTHER OPERATING INCOME

 

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

 

11.           GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

The new statement also requires the completion of a transitional impairment test within six months of adoption, with any impairment treated as a cumulative effect of a change in accounting principle.  The Company completed the transitional impairment test during the second quarter of 2002 and determined that no impairment existed as of the date of adoption. The Company is also required to perform goodwill impairment tests on an annual basis, which it did as of July 1, 2002, and determined that no impairment existed.  Future annual goodwill impairment tests may result in a charge to earnings.

 

The following table gives effect to the adoption of SFAS 142 as if the provisions had been adopted as of January 1, 2001.  The net loss for the three and nine month periods ended September 29, 2002 are presented for comparison purposes as the effect of adoption is reflected in the Company’s actual results of operations for these periods.

 

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

 

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

 

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

 

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

 

12.           DERIVATIVE INSTRUMENTS

 

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

 

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

 

2.               The warrants issued with the convertible preferred stock.

 

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

 

13.           ACQUISITIONS

 

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

 

14.           CONTINGENCIES

 

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

 

While the Company believes the customer currently has sufficient unencumbered assets to satisfy the agreed settlement amounts, the customer’s ability to pay, or the timing within which the customer will pay the Company, could be adversely impacted by a weakening in the customer’s overall financial performance. Therefore, the Company will not adjust the reserves provided until such time that the Company receives the remaining net exposure amount of $7,831.  The customer has not missed any of the scheduled weekly principal payments or monthly interest payments.

 

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

 

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

 

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

 

OVERVIEW

 

We are a leading global provider of advanced electronics manufacturing and supply chain services to original equipment manufacturers (OEMs). Our customers include leading OEMs who have chosen outsourcing as a core manufacturing strategy. We have developed relationships with OEMs in a diverse range of industries, including computer systems and peripherals, industrial equipment, communications and networking, 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 outsourcing solution that represents a lower total cost of ownership than that typically provided by their internal operations. We seek to differentiate ourselves by providing advanced manufacturing methodologies, capabilities, fulfillment solutions and exceptional customer focus and by integrating our services into our customers’ operations.

 

We provide integrated supply chain solutions that address all stages of our customers’ product life cycle, including engineering and design, new product introduction, global supply chain management, printed circuit board assembly, product assembly and system integration, testing, logistics and distribution, fulfillment and after-market services. We believe this comprehensive range of

 

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

 

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

 

From our founding in 1994 until 2000, we experienced growth driven primarily by acquisitions of existing OEM manufacturing facilities and by the increasing number of OEMs who are outsourcing their manufacturing requirements. During the past two years, we have closed certain facilities and reduced our workforce to reflect our reduced revenue stream resulting from adverse economic conditions.  Despite this recent downsizing, we intend to grow in the future by actively pursuing strategic acquisitions and by benefiting from expected increases in OEMs that outsource their manufacturing requirements.

 

We work closely with our customers to anticipate and forecast their future volume of orders and delivery dates. We derive most of our net sales under purchase orders from our customers. We recognize sales, net of product return and warranty costs, typically at the time of product shipment or as services are rendered. Our cost of goods sold usually includes the cost of components and materials, labor costs and manufacturing overhead.  Under some contracts our customers will own the components and consign the inventory to us.  In these situations, we recognize revenue (and related cost of sales) only on the labor and overhead used to assemble the product.  The procurement of raw materials and components requires us to commit significant working capital to our operations and to manage the purchasing, receiving, inspection and stocking of these items. Our typical customer contract contains provisions which specify that we may recover from the customer inventory costs and material acquisition costs for raw material which becomes excess or obsolete due to customer reschedules, cancellations or product changes.

 

Our operating results are affected by the level of capacity utilization in our manufacturing facilities, indirect labor costs and selling, general and administrative expenses. Gross margins and operating income generally improve during periods of high-volume and high-capacity utilization in our manufacturing facilities and decline during periods of low-volume and low-capacity utilization. However, certain of our customer contracts contain guarantee minimum commitments, requiring the customer to either purchase certain contractual minimum quantities or pay for amounts in deficit of the minimum purchase commitment.  Such contracts have helped offset the negative impact of low-capacity utilization on gross margins and operating income.  One such contract with 3Com, which expired as of June 30, 2002, had contributed $21.5 million in revenue during the first six months of 2002.

 

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

 

On July 24, 2002, we entered into a settlement agreement with a customer that had been disputing its obligation to pay $21.5 million to us.  The agreement settles the disputed outstanding accounts receivable, inventory and accounts payable between the two parties.  We had established reserves against these current assets of $10.5 million, for a net exposure from the customer of $11.0 million.  As part of the total settlement amount of $15.1 million, we received an immediate payment of $1.5 million, a secured promissory note in the amount of $13.6 million with interest accruing at 7% per year, and an agreement to complete the purchase of an additional $2.6 million of inventory as part of ongoing orders, which the customer did subsequently purchase.  The promissory note is secured by restricted shares (until January 2004) held by the customer in a Taiwan-based  publicly listed company.   Payment on the note will be received weekly at $0.2 million per week, ending in January 2004.   In addition, the customer is paying the accrued interest amounts on a monthly basis.  The balance on the promissory note at September 29, 2002 is $11.9 million and we have established a reserve of $4.0 million against this balance.  While we believe the customer currently has sufficient unencumbered assets to satisfy the agreed settlement amounts, the customer’s ability to pay, or the timing within which the customer will pay us, could be adversely impacted by a weakening in the customer’s overall financial performance. Therefore, we will not adjust the reserves provided until such time that we receive the remaining net exposure amount of $7.8 million.  The customer has not missed any of the scheduled weekly principal or monthly interest payments.

 

ACQUISITIONS

 

On July 1, 2002, we acquired all of the capital stock and certain assets of Lexmark Electronics S.A. de C.V., a subsidiary of Lexmark International, Inc. located in Reynosa, Mexico, that provides printed circuit board assemblies for laser printers, for approximately $6.0 million in cash and assumed liabilities.  Included in the purchase price is $3.2 million of inventory that we agreed to purchase within 60 days after the closing date.  The acquired assets consist of cash of $0.8 million, manufacturing assets and working capital related to the operations, while the liabilities consist of accounts payable and accrued liabilities.  The transaction was accounted for as a purchase of a business, and the purchase price was allocated to the assets and liabilities based upon their relative fair values at the date of acquisition.  The excess of the fair value of assets acquired over the purchase price was allocated to the acquired fixed assets, which reduced their recorded fair values.  As part of the transaction, we retained approximately 230 facility employees, entered into a lease for a 156,000 square foot manufacturing facility in Reynosa and entered into an eighteen-month supply agreement to provide printed circuit board assemblies to Lexmark.

 

RESTUCTURING AND OTHER ASSET WRITEDOWNS

 

In the third quarter of 2002, in response to the continued slowdown in the EMS industry and economy worldwide, we recorded restructuring and asset writedown charges of $9.8 million, primarily related to closing our facility in Mt. Prospect, Illinois and restructuring of certain manufacturing space in Singapore.  For the nine months ended September 29, 2002, the Mt Prospect facility generated net sales of $95.4 million (principally from 3 customers) and net income of $10.7 million.  However, the net income amount included approximately $21.5 million in additional revenue from a guaranteed minimum contract with 3Com that expired on June 30, 2002.  We have disengaged from activities with 3Com as of September 29, 2002, and all other customers have been transferred to other facilities.  The total restructuring charge is comprised of severance of $3.7 million related to the termination of approximately 313 manufacturing and managerial employees, asset write downs of $2.1 million and lease termination and facility costs of $4.0 million.  This plan is expected to be complete by the end of the second quarter of 2003, except for lease payments in Singapore which may continue until the lease expires in 2010, and we estimate annual cost savings of approximately $23 million from these restructuring activities.

 

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

 

In the first quarter of 2002, we approved a plan to restructure certain operations, primarily related to closing our facility in China and a workforce reduction at our corporate headquarters.  The China facility ceased operations during the third quarter of 2002.  The total charge recorded for this plan was $5.5 million, which was comprised of asset write downs of $3.1 million, lease termination costs of $0.6 million and severance of $1.8 million related to the reduction of 371 manufacturing and 24 managerial employees.  This plan is expected to be substantially complete by the end of the fourth quarter of 2002.

 

During the first nine months of 2001, we implemented various restructuring plans throughout our organization to align our cost structure with our reduced revenue stream as a result of the severe economic downturn in the EMS industry.  These restructuring activities included closing our Salt Lake City facility and reducing operations in Asia, Spain, Ireland and certain United States locations.  The total restructuring charge for the nine months ended September 30, 2001 of $79.7 million consisted of asset write-downs of $59.4 million, employee severance of $15.9 million and lease termination and facility costs of  $4.4 million. 

 

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The following table sets forth the activity in the restructuring reserves through September 29, 2002 (dollars in thousands):

 

 

Reserves remaining at September 29, 2002 primarily represent liabilities for severance and lease termination payments and are expected to be substantially paid by June 30, 2003, except for certain lease payments that may continue through 2010.

 

We currently do not have any further plans to restructure operations.  However, if future economic conditions do not meet expectations, we may implement further restructuring plans in the future.  Such plans may include further headcount reductions, lease terminations, and disposal of underutilized manufacturing assets, as well as shutdowns or consolidations of facilities.  If we were to implement such plans, it may result in significant further restructuring costs related to severance payments and lease termination costs, as well as write downs of certain long-lived assets.

 

RESULTS OF OPERATIONS

 

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

 

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

 

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

 

NET SALES

 

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

 

GROSS PROFIT

 

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

 

SELLING, GENERAL AND ADMINISTRATIVE

 

Selling, general and administrative expense for the quarter ended September 29, 2002 decreased to $15.5 million, or 7.7% of net sales, from $25.2 million, or 7.9% of net sales, for the quarter ended September 30, 2001.  This decrease of $9.7 million related mainly to the expense savings from the various restructuring activities the Company executed throughout 2001 and the first quarter of 2002.  The closure of the Salt Lake City facility in the fourth quarter of 2001 contributed $9.8 million to this overall decrease, of which $7.4 million related to increased bad debt reserves.  In addition, increases in bonuses and fringe benefits of $0.7 million and telecommunication expenses of  $0.4 million were partially offset by decreases in subcontracted services of $0.4 million and consulting services of $0.4 million.

 

AMORTIZATION EXPENSE

 

Amortization expense was $0 in the quarter ended September 29, 2002 compared to $2.1 million in the quarter ended September 30, 2001.  We adopted the Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.  In accordance with SFAS 142, we ceased amortizing goodwill as of January 1, 2002.  In the third quarter of 2001, we amortized $0.3 million of goodwill expense.  Also in the third quarter of 2001, we had $1.5 million of amortization of intangible assets related to our Salt Lake City facility, which were written off during the third quarter of 2001, and $0.3 million of amortization expense related to our asset acquisition from 3Com in September 2000, which related mainly to customer relationships.  These remaining assets were amortized over the term of our supply agreement with 3Com, which expired on June 30, 2002.

 

SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually.  The statement requires the completion of a transitional impairment test within six months of adoption, with any impairment treated as a cumulative effect of a change in accounting principle.  We completed the transitional impairment test during the second quarter of 2002 and determined that no impairment existed as of the date of adoption. We are also required to perform a goodwill impairment tests on an annual basis, which we completed as of July 1, 2002, and determined that no impairment existed.  It is possible that future annual goodwill impairment tests will result in a charge to earnings.

 

INTEREST EXPENSE, NET

 

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

 

CHANGE IN FAIR VALUE OF DERIVATIVE

 

During the third quarter of 2002, we recorded a reduction in the fair value of our warrant derivative.  The warrant was issued as part of our preferred stock offering in the first quarter of 2002, and was originally fair valued at $3.2 million.  During the third quarter of 2002, the warrant’s fair value decreased by $1.3 million from its fair value of  $2.3 million at June 30, 2002.  The reduction in the value of this liability was recorded as a non-operating gain in the third quarter.

 

OTHER INCOME

 

During the three months ended September 30, 2001, we recorded $4.5 million in income on an insurance claim received in the quarter related to business interruption losses in 2000 and  $6.7 million in income during the same period related to 1,551,220 shares of our common stock returned from 3Com in connection with the amendment of our supply agreement with 3Com at our Mt. Prospect facility.

 

FOREIGN EXCHANGE TRANSACTION GAINS/LOSSES

 

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

 

PROVISION FOR INCOME TAXES

 

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

 

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

 

NET SALES

 

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

 

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GROSS PROFIT

 

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

 

SELLING, GENERAL AND ADMINISTRATIVE

 

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

 

AMORTIZATION EXPENSE

 

Amortization expense decreased to $3.7 million in the nine months ended September 29, 2002 compared to $6.4 million in the nine months ended September 30, 2001.  In the first nine months of 2001, we amortized $0.8 million of goodwill expense and $5.6 million of intangible asset amortization, $4.5 of which related to the Company’s Salt Lake City intangible assets, which were later written off in the third quarter 2001 restructuring.  Total amortization expense in the first nine months of 2002 related to the Company’s asset acquisition from 3Com in September 2000, and related mainly to customer relationships.  These assets were amortized over the term of our supply agreement with 3Com, which expired on June 30, 2002.

 

OTHER OPERATING INCOME

 

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

 

INTEREST EXPENSE, NET

 

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

 

CHANGE IN FAIR VALUE OF DERIVATIVE

 

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

 

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value was $1.0 million as a result of the change in our common stock value.  The reduction in the value of this liability was recorded  as a non-operating gain.

 

FOREIGN EXCHANGE TRANSACTION GAINS/LOSSES

 

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

 

PROVISION FOR INCOME TAXES

 

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

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

Net cash provided by operating activities of $79.5 million for the nine months ended September 29, 2002 resulted primarily from a decrease in operating assets of $101.6 million and depreciation and amortization expenses of $17.8 million, offset in part by a decrease in operating liabilities of $36.4 million and a net loss of $15.4 million. The decrease in operating assets included a $66.9 million reduction in accounts receivable, which was a direct result of the reduction in revenue and the reclassification of approximately $20.7 million to a note receivable (see Note 14), and $34.6 million in inventory reductions, caused by the reduced volume through the manufacturing sites and better inventory management.  The decrease in operating liabilities included a $27.8 million reduction in accounts payable, which is a result of the decrease in manufacturing activities and the reclassification of  $10.2 million to a note receivable (see Note 14).  Other non-cash items include $4.0 million for the write-off of capitalized bank fees in connection with the Company’s refinancing of its credit facility during the second quarter of 2002, and write downs and loss on disposal of fixed assets of $6.7 million related mainly to the restructuring charges taken in the first and third quarters of 2002.  Net cash provided by operating activities of $72.3 million for the nine months ended September 30, 2001 resulted primarily from a decrease in operating assets of $345.8 million, depreciation and amortization of $27.3 million and non-cash charges aggregating $65.3 million offset by a net loss of $71.0 million and a decrease in operating liabilities of $295.0 million.  The most significant non-cash items included in the net loss for the nine months ended September 30, 2001 were $59.4 million of write-downs and losses on asset impairments and disposals, $10.8 million of additions to the allowance for doubtful accounts and a $6.7 million non-cash gain related to 1,551,220 shares of our common stock returned from 3Com in connection with the amendment of our supply agreement pertaining to our Mt. Prospect facility.  The decrease in operating assets included an approximately $117.0 million reduction in inventory attributable to the sale of excess inventory under the provisions of our customer contracts.  Of the $117.0 million of excess inventory sales recorded during the period, $8.2 million remaining to be collected were recorded in prepaid expenses and other current assets at September 30, 2001.   

 

Net cash used in investing activities for the nine months ended September 29, 2002 was $4.2 million, consisting of $4.0 million of proceeds from the sale of the Company’s Salt Lake City building during the second quarter, offset by $5.3 million of net cash used for the Lexmark acquisition in Mexico and $2.6 million in capital expenditures.  Net cash used in investing activities for the nine months ended September 30, 2001 was $15.7 million, consisting primarily of $13.0 million of net capital expenditures, $1.3 million of internal use software, and $1.4 million for the acquisition of intangible assets related to our Guerande facility.  Capital expenditures include $3.9 million related to the purchase of our Guerande facility.

 

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

 

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

 

In March 2002, we issued $41.5 million of convertible preferred stock and warrants to purchase 1,612,281 shares of common stock in a private placement to qualified accredited investors (the “Offering”). Proceeds of the Offering, net of costs of the Offering, were $37.7 million. We used the proceeds of the Offering to pay down a portion of our bank credit facility. The convertible preferred stock accrues dividends quarterly at the rate of 5.25% per annum, payable quarterly in common stock or cash, at our option. 

 

The convertible preferred stock is convertible to common shares based on a conversion price of $6.44 per share. We may require holders to convert to common stock provided the price of our common stock has traded at 150% of the conversion 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, at our option. If we choose to pay dividends in common stock or to redeem the convertible preferred stock with common stock, the shares of common stock issued will be computed using 95% of the market value of the common stock. The warrants are exercisable at any time through March 14, 2007. We have the right to require the exercise of the warrants after March 14, 2003 if our common stock trades for 175% of the exercise price of the warrants for a specified period.

 

The Offering included participation 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 to purchase 582,751 shares of common stock. In connection with this investment, we paid an affiliate of CSFB an advisory fee of 1.446% on the total amount invested in the Offering (an aggregate of $0.6 million) in return for (i) CSFB’s services in helping to structure and arrange the transaction, (ii) the agreement by the CSFB affiliates not to sell or otherwise transfer any of our securities for six months (other than as part of an underwritten offering we initiate), and (iii) the agreement by the CSFB affiliates to accept piggyback registration rights instead of having the common stock issuable upon the conversion or exercise of its securities included in the shelf registration statement which was filed with the SEC to register the resale of the common stock underlying the preferred stock and warrants sold to other investors in the Offering.  The registration statement, covering 5,937,461 shares, became effective on April 23, 2002.

 

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

 

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

 

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

 

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

 

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

 

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either the base rate (the bank’s prime rate) or LIBOR, plus the applicable spread costs.  The Company has the option of choosing either the base rate or LIBOR.  In the first year the spread cost is fixed for base rate and LIBOR loans.  The spread on the base rate loans is 1.75% over the base rate and on the LIBOR loans is the chosen LIBOR period rate plus 3.25%.  In the second and third years the spreads will reset quarterly based on the average net availability of borrowings for the preceding quarter.  The spread on the base rate loans will be between 1.25% and 2.25% and on the LIBOR loans will be between 2.5% and 3.5%. The interest rate under the term note is 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 Interest Rate (which is equal to 3.0%).  The interest rate on the term loan at September 29, 2002 was 14.0%.

 

The 2002 Credit Facility requires us to obtain within 180 days of the closing (and maintain at all times), interest rate hedging agreements covering a notional amount of not less than $10 million of the revolving loans, provided, that upon the request of the administrative agent, we must increase the amount covered by the hedge agreements up to an aggregate amount equal to 25% of the aggregate outstanding balance of the revolving loans at such time.  However, in no event shall the aggregate amount covered by such hedge agreements at any time exceed $20 million.  We have not entered into any interest rate hedge agreements at September 29, 2002.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•                  failure to comply with Credit Agreement covenants.

 

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We were in compliance with all covenants under our new credit facilities as of September 29, 2002. In the event we do not have adequate funding from our new credit facility, we would work with our senior lenders to modify the new credit facilities or identify other sources of capital to obtain necessary debt or equity financing. There is no assurance we would be able to modify our current credit facility with existing lenders or obtain alternative debt or equity financing to satisfy our funding needs. While there can be no assurance we will have sufficient funds to meet our cash requirements over the next twelve months, we believe that funds generated from operations, proceeds from the convertible preferred stock offering and borrowings under our new credit facility will be adequate to meet our anticipated future operating expenses, capital expenditures and debt obligations for at least the next twelve months.

 

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

 

•                  Material off-balance sheet activities, including the use of structured finance or special purpose entities, or

 

•                  Trading activities in non-exchange traded contracts.

 

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Exit or Disposal Activities”.  SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).  We are required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002.  The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS No. 146.  The effect-on-adoption of SFAS No. 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred.  We do not anticipate that the adoption of this statement will have a material 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 Statement No.13, and Technical Corrections as of April 2002”.  FASB No. 145 eliminates FASB No. 4 “Reporting Gains and Losses from Extinguishment of Debt”, which required companies to classify gains or losses from the extinguishment of debt as an extraordinary item, net of tax. As a result of this new FASB, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB Opinion No.30 “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”.  We do not believe that the extinguishment of debt will qualify as an extraordinary item as defined in APB 30, and therefore we will be required to classify these charges as operating expenses.  We plan on 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 supercedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”.  SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, “Reporting Results of Operations - Reporting the Effects of

 

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

 

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets.  We have adopted SFAS 142 as of January 1, 2002. SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually.  With the adoption of SFAS 142, we reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization period adjustments. Based on that assessment, only goodwill was determined to have an indefinite useful life and no adjustments were made to the amortization period or residual values of other intangible assets.  The statement also requires the completion of a transitional impairment test within six months of adoption, with any impairment treated as a cumulative effect of a change in accounting principle.  We completed the transitional impairment test during the second quarter of 2002 and determined that no impairment existed as of the date of adoption. We are also required to perform goodwill impairment tests on an annual basis, which we did as of July 1, 2002, and determined that no impairment existed.

 

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

 

RISK FACTORS

 

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. ADDITIONAL RISKS NOT PRESENTLY KNOWN 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 SMALL NUMBER OF CUSTOMERS, ANY DECREASE IN SALES FROM THESE CUSTOMERS COULD HARM OUR OPERATING RESULTS.

 

We depend on a small number of customers for a large portion of our business. Our ten largest customers accounted for approximately 82% of net sales in the nine months ended September 29, 2002 and approximately 87% of net sales for fiscal 2001.  Changes in our customers’ orders have in the past had a significant impact on our operating results. If a major customer significantly reduces the amount of business it does with us, there would be an adverse impact on our operating results.

 

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

 

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In addition, we generate significant accounts receivable in connection with providing services to our major customers. If one or more of our customers were to become insolvent or otherwise be unable to pay for our services or were to become unwilling to make payments in a timely fashion, our operating results and financial condition could be adversely affected.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•             financial risks, such as:

 

•      potential liabilities of the facilities and businesses we acquire;

 

•      our need to incur additional indebtedness; and

 

•      dilution if we issue additional equity securities.

 

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

 

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

 

We expect to selectively pursue strategic acquisitions as part of our overall business strategy. Competition for acquiring attractive facilities and businesses in our industry is substantial. In executing this part of our business strategy, we may experience difficulty in identifying suitable acquisition candidates or in completing selected transactions. In addition, our new secured revolving credit facility limits our ability to acquire the assets or businesses of other companies. If we are able to identify acquisition candidates, such acquisitions may be financed with substantial debt or with potentially dilutive issuances of equity securities. Our ability to successfully complete acquisitions in the future will depend upon several factors, including the continued availability of financing. We cannot assure you that financing for acquisitions will be available on terms acceptable to us, if at all.

 

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

 

Our growth and acquisition strategy could require us to incur substantial amounts of indebtedness. As of September 29, 2002, our total debt was $23.2 million and our interest expense for

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As is typical in the EMS industry, we do not usually obtain long-term purchase orders or commitments from our customers. Instead, we work closely with our customers to develop non-binding forecasts of the future volume of orders.  Customers may cancel their orders, change production quantities from forecasted volumes or delay production 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. In addition, because many of our costs are fixed, a reduction in net sales could have a disproportionate adverse effect on our operating results. From time to time we make capital investments in anticipation of future business opportunities. There can be no assurance that we will receive the anticipated business. If we are unable to obtain the anticipated business, our operating results and financial condition may be harmed.

 

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

 

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

 

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sometimes experience short-term adverse effects due to price fluctuations, extended lead times and delayed shipments. In the past, there have been industry-wide shortages of electronic components, particularly memory and logic devices. If a significant shortage of raw materials or components were to occur, we may have to delay shipments to customers, and our operating results would be adversely affected. In some cases, supply shortages of particular components will substantially curtail production of products using these components. While most of our significant customer contracts permit quarterly or other periodic reviews of pricing based on decreases and increases in the prices of raw materials and components, we are not always able to pass on price increases to our customers. Accordingly, some raw material and component price increases could adversely affect our operating results. We also depend on a small number of suppliers for many of the other raw materials and components that we use in our business. If we were unable to continue to purchase these raw materials and components from our suppliers, our operating results would be adversely affected. Because many of our costs are fixed, our margins depend on our volume of output at our facilities and a reduction in volume will adversely affect our margins.

 

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

 

We typically purchase components and manufacture products in anticipation of customer orders based on customer forecasts. For a variety of reasons, such as decreased end-user demand for the products we are manufacturing, our customers may not purchase all of the products we have manufactured or for which we have purchased components. In such event, we would attempt to recoup our materials and manufacturing costs by means such as returning components to our vendors, disposing of excess inventory through other channels or requiring our OEM customers to purchase or otherwise compensate us for such excess inventory. Some of our significant customer agreements do not give us the ability to require our OEM customers to do so. To the extent we are unsuccessful in recouping our material and manufacturing costs, not only would our net sales be adversely affected, but our operating results would be disproportionately adversely affected. Moreover, carrying excess inventory would reduce the working capital we have available to continue to operate and grow our business.

 

UNCERTAINTIES AND ADVERSE TRENDS AFFECTING THE ELECTRONICS INDUSTRY OR ANY 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 and pricing and margin pressure.  In addition, the electronics industry has historically been cyclical and subject to significant downturns characterized by diminished product demand, rapid declines in average selling prices and production over-capacity. When these factors adversely affect our customers, we may suffer similar effects. Our customers’ markets are also subject to economic cycles and are likely to experience recessionary periods in the future. The economic conditions affecting the electronics industry, in general, or any of our major customers, in particular, including the economic slowdown and heightened levels of uncertainty related to the September 11, 2001 terrorist attacks in the United States, may continue to adversely affect our operating results.

 

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

 

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

 

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

 

•             fluctuations in the value of foreign currencies;

 

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

 

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

 

25

 

•             greater difficulty in collecting our accounts receivable and longer payment cycles;

 

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

 

•             increases in the duties and taxes we pay;

 

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

 

•             expropriation of private enterprises.

 

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

 

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

 

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

 

•             introduction and market acceptance of our customers’ new products;

 

•             changes in demand for our customers’ existing products;

 

•             the timing of our expenditures in anticipation of future orders;

 

•             effectiveness in managing our manufacturing processes;

 

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

 

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

 

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

 

•             foreign currency exposure.

 

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

 

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

 

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

 

26

 

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

 

We believe that our future success will depend upon our ability to develop and provide design and manufacturing services that meet the changing needs of our customers. This requires that we successfully anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. As a result, we continually evaluate the advantages and feasibility of new product design and manufacturing processes. We cannot, however, assure you that our process development efforts will be successful.

 

WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS THAT EXPOSE US TO POTENTIAL 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 water as well as the handling, storage and disposal of these materials. These laws and regulations include the Clean Air Act, the Clean Water Act, 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 us because we use hazardous materials in our manufacturing process. In addition, because we are a generator of hazardous wastes, we, along with any other person who arranges for the disposal of our wastes, may be subject to financial exposure for costs associated with an investigation and any remediation of sites at which we have arranged for the disposal of hazardous wastes if these sites become contaminated, even if we fully comply with applicable environmental laws. In the event of a violation of environmental laws, we could be held liable for damages and for the costs of remedial actions and could also be subject to revocation of our effluent discharge permits. Any revocation could 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 greater compliance 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 HAVE INTERESTS THAT DIFFER FROM YOURS.

 

Credit Suisse First Boston, through certain of its affiliates, owns approximately 49% of our outstanding common stock and, as a result, has significant control over our business, policies and affairs, including, effectively, the power to appoint new management, prevent or cause a change of control and approve any action requiring the approval of the holders of our common stock, such as adopting amendments to our certificate of incorporation and approving mergers or sales of all or substantially all of our assets. In addition, under the terms of a stockholders agreement between us, certain other parties and those affiliates of Credit Suisse First Boston, those affiliates 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 the interests of these stockholders could be in conflict with your interests.

 

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

 

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

 

27

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

 

Interest Rate Risk

 

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

 

The cost of borrowing under the revolving facility is contained under the caption Liquidity and Capital Resources in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following table summarizes our market risks associated with our variable rate debt in place at September 29, 2002 based on current maturities and interest rates:

 

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

 

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

 

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

 

Foreign Currency Exchange Rate Risk

 

We also have exposure to various foreign currency exchange-rate fluctuations for cash flow received from our foreign subsidiaries. This risk is mitigated because the functional currency of our subsidiaries in Ireland, Singapore and Malaysia is the US dollar and most of their financial transactions are denominated in US dollars. The foreign currency exchange-rate risk for our subsidiaries in Spain and France are mitigated because their functional currency is the Euro and most of their financial transactions are denominated in Euro. Our exposure to foreign currency exchange-rate fluctuations is primarily related to intercompany loans payable to the corporate entity, intercompany receivables from the corporate entity and specific trade receivables and payables, all at our subsidiaries in Spain and France, which are denominated in US dollars. Our foreign currency exchange-rate exposure on the intercompany balances and the trade receivables and payables is mitigated by the use of foreign exchange contracts which are effective as a means of minimizing exposure and reducing risk from exchange rate fluctuations related to these specific transactions. We actively monitor our foreign currency exchange-rate exposure and manage our foreign exchange contract positions to maintain the effectiveness of this risk mitigation process.

 

28

 

As of December 31, 2001, we had the following foreign 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 million in U.S. denominated trade payables at our subsidiary in Spain. The net unrealized 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 peseta and the US dollar would have resulted in a change in unrealized gain, or loss of $1.2 million.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

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

 

(b)           Changes in internal controls.  There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.

 

PART II. OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

Dan Stearne, et al. v. Manufacturers’ Services Limited, et al. - A class action complaint filed on December 6, 2000 alleging violations of federal securities laws has been pending in the United States District Court, Southern District of New York against Manufacturers’ Services Limited, certain of its officers and the underwriters that participated in the Company’s initial public offering (“IPO”).  The Company understands that various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their IPO underwriters, which cases have been consolidated to a single federal district court for coordinated case management.  The complaint, which seeks unspecified damages among other things, alleges that the prospectus filed by the Company relating to stock sold in its initial public offering contained false and misleading statements with respect to the commission arrangements between the underwriters and their customers.

 

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

 

While the Company can make no promises regarding the outcome of this action, the Company believes that the final result will have no material effect on its consolidated financial condition or result of operations.

 

29

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a)      Exhibits

 

EXHIBIT NUMBER		DESCRIPTION
2.1(1)		Securities Purchase Agreement dated as of January 20, 1995 by and among MSL and the parties listed therein.
2.2(1)		Warrant Agreement dated as of August 31, 1995 by and among MSL, Bank of America National Trust and Savings Association and the parties listed therein.
2.3(1)		Preferred Stock and Warrant Subscription Agreement dated as of November 26, 1999 by and among MSL and the parties listed therein.
2.4(1)		Escrow Agreement dated as of November 26, 1999 by and among MSL and the parties listed therein.
2.5(1)		Asset Purchase Agreement dated as of November 19, 1999 among 3Com Corporation, Manufacturers’ Services Limited and Manufacturers’ Services Salt Lake City Operations, Inc.
2.6(2)		Asset Purchase Agreement dated as of September 26, 2000 among 3Com Corporation, Manufacturers’ Services Limited and Manufacturers’ Services Salt Lake City Operations, Inc.
3.1(1)		Restated Certificate of Incorporation of MSL.
3.2(1)		Amended and Restated By-Laws of MSL.
3.4(5)		Amended and Restated Articles of Incorporation of MSL.
3.3(1)		Form of certificate representing shares of common stock, $.001 par value per share.
4.1(1)		Stockholders Agreement dated as of January 20, 1995 by and among MSL and the stockholders named therein.
4.2(1)		Stockholders Agreement Amendment dated November 26, 1999 by and among MSL and the stockholders named therein.
4.3(1)		Credit Agreement dated August 21, 1998 among MSL, MSL Overseas Finance B.V. and the lenders named therein.
4.4(1)		First Amendment to Credit Agreement and Limited Waiver dated as of February 26, 1999 by and among MSL, MSL Overseas Finance B.V. and the lenders named in the Credit Agreement.
4.5(1)		Second Amendment to Credit Agreement and Consent dated as of November 23, 1999 by and among MSL, MSL Overseas Finance B.V. and the lenders named in the Credit Agreement.
4.6(4)		First Amended and Restated Credit Agreement dated as of September 29, 2000 by and between Manufacturers’ Services Limited and the lenders named in the Credit Agreement.
4.7(4)		First Amendment Agreement and Consent dated as of September 29, 2000 by and between Manufacturers’ Services Limited and the lenders named therein.
4.8(3)		First Amendment to First Amended and Restated Credit Agreement dated as of October 25, 2000 by and between Manufacturers’ Services Limited and the lenders named therein.
4.9(5)		Second Amendment to First Amended and Restated Credit Agreement dated as of March 2, 2001 by and between Manufacturers’ Services Limited and the lenders named therein.
4.10(7)		Third Amendment to First Amended and Restated Credit Agreement dated as of October 18, 2001 by and between Manufacturers’ Services Limited and the lenders named therein.
4.11(9)		Certificate of Designations of 5.25% Series A Convertible Preferred Stock of Manufacturers’ Services, Limited.
4.12(11)		Credit Agreement dated as of June 20, 2002 by and between Manufacturers’ Services Limited and the lenders named therein.
10.1(1)		Employment Agreement dated as of January 20, 1995 by and between MSL and Kevin C. Melia.
10.2(1)		Employment Letter dated as of June 20, 1997 by and between MSL and Robert E. Donahue.
10.3(1)		Employment Letter dated as of September 27, 1995 by and between MSL and Rodolfo Archbold.
10.4(1)		Employment Letter dated as of January 4, 1996 by and between MSL and Dale R. Johnson.
10.5(1)		Severance Letter dated June 25, 1996 by and between MSL and Dale R. Johnson.
10.6(1)		Employment Letter dated as of January 23, 1998 by and between MSL and James N. Poor.
10.7(1)		Second Amended and Restated Non-Qualified Option Plan.
10.8(1)		Form of 2000 Equity Incentive Plan.
10.9(1)		Form of 2000 Employee Stock Purchase Plan.
10.10(1)		Form of Indemnification Agreement.
10.11(1)		Office/Warehouse Lease dated as of April 14, 1997 by and between Amberjack, Ltd. and Manufacturers’ Services Limited-Roseville, Inc.
10.12(1)		Lease dated as of May 5, 1998 by and between International Business Machines Corporation and Manufacturers’ Services Western U.S. Operations, Inc.
10.13(1)+		Supply Agreement dated as of November 27, 1999 buy and between MSL and 3Com Corporation.
10.14(1)+		Outsourcing Agreement dated as of June 1, 1998 by and between International Business Machines Corporation and Manufacturers’ Services Western US Operations, Inc.
10.15(1)+		Manufacturing, Integration and Fulfillment Contract dated as of June 26, 1998 by and between International Business Machines S.A. and Global Manufacturers’ Services-Valencia.
10.16(1)+		Global Requirements Agreement No. MSL 183G dated as of July 30, 1997 by and between MSL and Iomega Corporation.
10.17(1)+		Supply Agreement dated as of November 27, 1999 by and between MSL and Palm Computing, Inc.
10.18(1)+		Manufacturing Services Agreement dated as of June 1, 1999 by and between Hewlett-Packard Singapore Pte Ltd. and Manufacturers’ Services Singapore Pte Ltd
10.19(1)		2000 Cash Incentive Compensation Plan.
10.20(4)+		Supply Agreement dated as of September 26, 2000 between Manufacturers’ Services Salt Lake City Operations, Inc. and 3Com Corporation.
10.21(4)+		Lease dated as of September 26, 2000 by and between 3Com Corporation and Manufacturers’ Services Salt Lake City Operations, Inc.
10.22(4)		2000 Non-employee Director Stock Option Plan, as amended.
10.23(4)		2000 Non-qualified Stock Option Plan.
10.24(4)		Second Amended and Restated Non-qualified Stock Option Plan, as amended.
10.25(4)		2000 Equity Incentive Plan, as amended.
10.26(5)		Form of Change in Control Agreement for Kevin Melia, Robert Donahue, Albert Notini, Rodolfo Archbold, James Poor, Alan Cormier, Richard Gaynor, Francis Binder, Richard Buckingham and Sam Landol.
10.27(5)+		First Amendment to Supply Agreement between Manufacturers’ Services Salt Lake City Operations, Inc. and Palm, Inc., effective as of December 1, 2000.
10.28(5)		Amendment to Employment Letter dated as of September 27, 1995 between MSL and Rodolfo Archbold.
10.29(5)+		First Amendment to Supply Agreement between Manufacturers Services Salt Lake City Operations, Inc. and 3Com Corporation, effective as of January 15, 2001.
10.30(6)		2000 Equity Incentive Plan, as amended.
10.31(6)		2000 Employee Stock Purchase Plan, as amended.
10.32(6)		2000 Non-Qualified Stock Option Plan, as amended.
10.33(7)		Amendment to Supply Agreement between Manufacturers Services Salt Lake City Operations, Inc. and 3Com Corporation effective as of September 14, 2001.
10.34(8)+		Amendment to the Outsourcing Agreement dated as of June 1, 1998 by and between International Business Machines Corporation and Manufacturers’ Services Western US Operations, Inc.
10.35(8)		Severance Agreement effective March 29, 2002 by and between MSL and Robert E. Donahue.
10.36(8)		Employment Agreement dated as of January 2, 2002 by and between MSL and Kevin C. Melia.
10.37(8)		Employment Agreement dated as of January 31, 2002 by and between MSL and Albert A. Notini.
10.38(8)		Employment Agreement dated as of December 19, 2002 by and between MSL and Robert C. Bradshaw.
10.39(8)		Employment Agreement dated as of January 30, 2002 by and between MSL and Santosh Rao.
10.40(8)		Form of Change in Control Agreement for Santosh Rao, Bruce Leasure, Dewayne Rideout.
10.41(10)		Severance Agreement effective March 29, 2002 by and between Manufacturers’ Services Limited and Rodolfo Archbold.
10.42(11)		Severance Agreement effective March 29, 2002 by and between Manufacturers’ Services Limited and James N. Poor.
10.43(11)		2000 Equity Incentive Plan, as amended on May 15, 2002.
10.44(11)		2000 Employee Stock Purchase Plan, as amended on May 15, 2002.
10.45(11)		2000 Non-Employee Director Stock Option Plan, as amended on May 15, 2002
10.46(12)		Credit Agreement Dated June 20, 2002 among the Company, Bank of America N.A. and certain other financial institutions named therein.
10.47		Accession Agreement dated August 22, 2002 among Congress Financial Corporation, Bank of America, Manufacturers' Services Limited, et al.
10.48		Notice of Assignment and Acceptance dated August 21, 2002 among HSBC Business Credit (USA) Inc., Bank of America, N.A. and Manufacturers' Services Limited.
10.49		Notice of Assignment and Acceptance dated August 20, 2002 among Orix Financial Services, Bank of America, N.A. and Manufacturers' Services Limited.
99.1		Certification

 

+                                         Confidential treatment requested as to certain portions which portions have been filed separately with the Securities and Exchange Commission.

(1)                                  Filed as an Exhibit to the Registrant’s Registration 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 Current Report on Form 8-K filed on October 11, 2000

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

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

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

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

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

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

(9)                                  Filed as 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 Quarterly Report on Form 10-Q filed on May 15, 2002

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

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

 

 

30

 

(b)           Reports on Form 8-K

 

None

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	MANUFACTURERS’ SERVICES LIMITED
	(Registrant)
	Date: November 13, 2002
	By:	/s/ Albert A. Notini
		Albert A. Notini
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)
	By:	/s/ Richard J. Gaynor
		Richard J. Gaynor
		Vice President and
		Corporate Controller
		(Principal Accounting Officer)

 

31

 

CERTIFICATIONS PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

CERTIFICATION

 

I, Robert C. Bradshaw, certify that:

 

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

 

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

 

32

 

CERTIFICATION

 

I, Albert A. Notini, certify that:

 

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

 

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

 

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