In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. As amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133," SFAS No. 133 and No. 138 are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 and SFAS No. 138 in the first quarter of fiscal 2001 did not have a material effect on the Company's financial position or results of operations.

        On September 29, 2000, the Company amended and restated its credit facility (the "Amended and Restated Credit Facility") to provide up to $125 million in secured financing. The Amended and Restated Credit Facility increased the revolving credit facility to $70 million from $50 million, maintained a $10 million equipment loan facility, and provided for an $8 million term loan A and a $37 million term loan B (See Note 7 - Long-term Debt - Related Parties). The revolving credit facility, equipment loan facility and term loan A are collateralized by a first priority security interest in substantially all of the Company's assets, including real property, and mature in February 2004. Term loan B is collateralized by a second priority lien on these same assets and matures in August 2004. The equipment loan facility and term loan A and B may not be re-borrowed upon repayment. The Amended and Restated Credit Facility restricts the Company's ability to incur additional indebtedness, to create liens or other encumbrances, to make certain investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of its assets or to enter into any merger or consolidation. The Amended and Restated Credit Facility also contains a covenant requiring that the Company maintain certain fixed charge ratios.

        On September 29, 2000, term loan A and B were fully funded, the proceeds of which were used to repay $23.7 million in notes from shareholders (see Note 7 - Long-term Debt - Related Parties), plus $0.6 million in accrued interest, $3.3 million in closing costs and partially pay down the revolver balance. As of January 8 2001, the Company had $52.6 million outstanding under the revolving credit facility, $5.5 million outstanding under the equipment loan facility, $7.7 million outstanding under term loan A and $37.0 million outstanding under term loan B (See Note 7 - Long-term Debt - Related Parties). As of January 8, 2001, the Company had $17.4 million available to borrow under its revolving credit facility and $3.8 million available to borrow under its equipment loan facility.

        Also on September 29, 2000, LB1 Group, Inc., purchased shares of MCMS, formerly owned by Micron Electronics of California, Inc., a less than 10% owner. LB1 Group, Inc., an affiliate of Lehman Brothers, is the lender under Term Loan B of the Amended and Restated Credit Facility (see Note 7 - Long-term Debt - Related Parties).

        On September 29, 2000, the Company repaid all notes from shareholders from the proceeds received from term loans provided for in the Amended and Restated Credit Facility (See Note 6 - Long-term debt). In connection with $15 million of the notes from shareholders dated August 30, 2000, the Company issued to the participating shareholders warrants for the purchase of 500,000 shares of the Company's common stock. A debt discount was recorded on August 30, 2000 for the estimated fair market value of the warrants issued with the notes from shareholders dated August 30, 2000. The early repayment of the notes from shareholders resulted in a $374,000 extraordinary loss, net of taxes, for the unamortized portion of the debt discount.

        The Redeemable Preferred Stock is subject to mandatory redemption on March 1, 2010 and has a liquidation preference of $100 per share. The holders of Redeemable Preferred Stock are entitled to a cumulative 12-1/2% annual dividend based upon the liquidation preference per share of Redeemable Preferred Stock, payable quarterly. To date, the Company has paid all dividends in-kind.

        Basic loss per share is computed using net loss increased by dividends on the Redeemable Preferred Stock divided by the weighted-average number of common shares outstanding. Diluted loss per share is computed using the weighted-average number of common and common stock equivalent shares outstanding. Common stock equivalent shares result from the assumed exercise of outstanding stock options and shares issuable upon the conversion of outstanding convertible securities and affect earnings per share only when they have a dilutive effect. The Company's basic loss per share and its fully diluted loss per share were the same for the three month periods ended November 30, 2000 and December 2, 1999 because of the antidilutive effect of outstanding convertible securities and stock options.

        The Company had income tax expense of $50,000 for the three months ended November 30, 2000, compared to no income tax expense or benefit for the three months ended December 2, 1999. The effective rate of tax expense for the first quarter of fiscal 2001 was 1.3% compared to no effective rate of income tax expense or benefit for the first fiscal quarter of 2000. During the three months ended November 30, 2000, the Company's valuation allowance increased by $3.4 million to $23.5 million, which eliminates the income tax benefit that would have otherwise resulted from the losses.

        The Company's comprehensive loss is comprised of net loss and foreign currency translation adjustments. Comprehensive loss was $3,706,000 and $5,243,000 for the three months ended November 30, 2000 and December 2, 1999, respectively. The accumulated balance of foreign currency translation adjustments, excluded from net loss, is presented in the consolidated balance sheet as "Accumulated other comprehensive loss."

        The Company's facilities in Durham, North Carolina; San Jose, California; Penang, Malaysia; and Monterrey, Mexico; and certain other property and equipment, are leased under operating lease agreements with non-cancelable terms expiring through 2007, with renewals thereafter at the option of the Company. Future minimum lease payments total approximately $24,404,000 and are as follows: $4,956,000 remaining in 2001, $5,763,000 in 2002, $4,487,000 in 2003, $3,563,000 in 2004 and $5,635,000 in 2005 and thereafter.

        From time to time, the Company is party to various legal actions arising in the ordinary course of business. To the best of the Company's knowledge, there are no material legal proceedings currently pending or threatened.

        We provide services on both a turnkey and consignment basis. Under a turnkey arrangement, we assume responsibility for both the procurement of components and their assembly. Turnkey manufacturing generates higher net sales than consignment manufacturing due to the generation of revenue from materials as well as labor and manufacturing overhead. Turnkey manufacturing also typically results in lower gross margins than consignment manufacturing. Under a consignment arrangement, the original equipment manufacturer procures the components and we assemble and test them in exchange for a service fee. Consignment revenues accounted for 3.1% and 10.3% of our net sales for the three months ended November 30, 2000 and December 2, 1999, respectively.

        Net Sales. Net sales for the three months ended November 30, 2000 increased by $100.5 million or 100.5% to $200.5 million from $100.0 million for the three months ended December 2, 1999. The increase in net sales is primarily the result of higher volumes of PCBA and system assembly shipments to customers in the networking and telecommunications industries.

        Net sales attributable to foreign subsidiaries totaled $66.1 million for the three months ended November 30, 2000, compared to $18.5 million for the corresponding period of fiscal 2000. The growth in foreign subsidiary net sales is primarily the result of increased PCBA shipments from our Malaysian operation. Nets sales for the three months ended November 30, 2000 includes $5.5 million from our Mexican operation compared to no sales in the corresponding period of fiscal 2000.

        Gross Profit. Gross profit for the three months ended November 30, 2000 increased by $4.6 million, or 75.4%, to $10.7 million from $6.1 million for the three months ended December 2, 1999. Gross margin for the three months ended November 30, 2000 decreased to 5.3% of net sales from 6.1% for the comparable period ended December 2, 1999. Gross profit and gross margin were primarily affected by the under utilization of our facility in Monterrey, Mexico, while we invested in additional staffing and training to support future business. Reduced capacity utilization continued to impact our operations in Durham, North Carolina in the first quarter of fiscal 2001 as it did in the first quarter of fiscal 2000. In addition, we experienced lower shipments of consigned memory modules, due to the softening of product demand in the computer industry.

        Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") for the three months ended November 30, 2000 increased by $1.2 million, or 20.7%, to $7.0 million from $5.8 million for the three months ended December 2, 1999. This increase for the three months ended November 30, 2000 was primarily the result of additional staffing costs incurred to support the Company's future growth. During the three months ended November 30, 2000, SG&A expenses included a non-cash foreign currency expense of $0.2 million compared to $0.1 million in the corresponding period of fiscal 2000.

        Provision for Income Taxes. Income tax expense for the three months ended November 30, 2000 was $50,000 compared to no income tax expense or benefit for the three months ended December 2, 1999. The income tax expense for the three months ended November 30, 2000 resulted primarily from a mandatory minimum foreign income tax on its Mexican subsidiary. The effective rate of tax expense for the three months ended November 30, 2000 was 1.3% compared to no effective rate of income tax expense or benefit for the corresponding period of fiscal 2000. During the three months ended November 30, 2000 and December 2, 1999, a valuation allowance eliminated any income tax benefit that would have otherwise resulted from the losses. We do not provide for U.S. tax on the earnings of some of our foreign subsidiaries.

        Extraordinary Loss. During the three months ended November 30, 2000, the early repayment of certain loans from shareholders resulted in a $0.4 million extraordinary loss for the unamortized portion of a debt discount.

        Net Loss. For the reasons stated above, net loss for the three months ended November 30, 2000 decreased by $1.2 million to a loss of $3.8 million from a loss of $5.0 million for the three months ended December 2, 1999. As a percentage of net sales, net loss for the three months ended November 30, 2000 was 1.9% compared to 5.0% for the three months ended December 2, 1999.

        During the first quarter of fiscal 2001, net cash consumed by operating activities was $43.6 million. Net cash used by investing activities was $2.7 million and net cash provided by financing activities was $46.4 million. Exchange rate changes had a nominal effect on cash. Net cash used by investing activities during the first quarter of fiscal 2001 primarily consisted of capital expenditures for facility upgrades and expansion of manufacturing capacity in Nampa, Idaho, Monterrey, Mexico and San Jose, California. Net cash generated from financing activities resulted from net borrowings under our Amended and Restated Credit Facility, dated September 29, 2000.

        The cash consumed by operations of $43.6 million was primarily due to an increase in accounts receivable and inventory, offset in part by an increase in accounts payable. As of November 30, 2000, accounts receivable increased $30.6 million from August 31, 2000, primarily due to a $40.6 million increase in sales for the three months ended November 30, 2000 over the three months ended August 31, 2000. The increase in sales was concentrated in the latter part of the quarter ending November 30, 2000. For the three months ended November 30, 2000, the average accounts receivable collection period was 35.1 days compared to 41.2 days for the corresponding period of fiscal 2000. As of November 30, 2000, inventory increased by $31.5 million over the three months ended August 31, 2000. For the three months ended November 30, 2000, the average inventory turns were 7.2 turns compared to 7.9 turns for the corresponding period of fiscal 2000. The increase in inventory is primarily due to our increase in sales. In addition, we experienced longer lead times and restricted availability on certain critical components, which has resulted in a general increase in inventory levels and has negatively impacted inventory turns. The inventory increase in the first quarter of fiscal 2001 resulted in a $24.0 million increase in trade accounts payable (including bank overdrafts) during this same period. For the three months ended November 30, 2000, the average trade accounts payable payment period was 53.6 days compared to 48.7 days for the corresponding period of fiscal 2000.

        Our Amended and Restated Credit Facility, dated September 29, 2000, provides up to $125 million in secured financing. The Amended and Restated Credit Facility increased the revolving credit facility to $70 million from $50 million, maintained the $10 million equipment loan facility, and provided for an $8 million term loan A and a $37 million term loan B. The revolving credit facility, equipment loan facility and term loan A are collateralized by a first priority security interest in substantially all of our assets, including real property, and mature in February 2004. Term loan B is collateralized by a second priority lien on these same assets and matures in August 2004. Term loan B is subject to a mandatory prepayment, if at any time prior the maturity of term loan B, we receive proceeds from the sale of our capital stock, a public offering or cash equity contribution. If a mandatory prepayment of term loan B is made during the twelve-month period commencing on September 29, 2000, prepayment is due at a premium of 107.5% and decreases annually at a rate of 2.5% of face value to 100.0% on September 29, 2003. Other than a mandatory prepayment or payment upon maturity, term loan B may not be prepaid, in whole or in part, unless all amounts due under the revolving credit facility and equipment loan facility have been paid in full and all commitments under the Amended and Restated Credit Facility have been terminated. The equipment loan facility and term loans A and B may not be reborrowed upon repayment. The Amended and Restated Credit Facility restricts our ability to incur additional indebtedness, to create liens or other encumbrances, to make certain investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of our assets or to enter into any merger or consolidation. The Amended and Restated Credit Facility also contains a covenant requiring that we maintain certain fixed charge ratios.

        On September 29, 2000, term loans A and B were fully funded, the proceeds of which were used to repay $23.7 million in notes from shareholders, plus $0.6 million in accrued interest, pay closing costs of approximately $3.3 million and partially pay down the revolving credit facility. As of January 8, 2001, we had $52.6 million outstanding under the revolving credit facility, $5.5 million outstanding under the equipment loan facility, $7.7 million outstanding under term loan A and $37.0 million outstanding under term loan B. As of January 8, 2001, we had $17.4 million available to borrow under our revolving credit facility and $3.8 million available to borrow under our equipment loan facility.

        In addition to factors discussed elsewhere in this Form 10-Q and in other Company filings with the Securities and Exchange Commission, the following are important factors which could cause actual results or events to differ materially from the historical results of the Company's operations or those results or events contemplated in any forward-looking statements made by or on behalf of the Company.

        We are highly leveraged and plan to continue to incur indebtedness from time to time to finance acquisitions, working capital or capital expenditures or for other purposes. This debt has contributed to our shareholders' deficit which could have adverse consequences for our business, including:

• we may be more vulnerable to adverse general economic conditions;
• we will be required to dedicate a substantial portion of our cash flow from operations to repayment of debt, limiting the availability of cash for other purposes;
• we may have limited flexibility in planning for, or reacting to, changes in our business and industry;
• we could be limited by financial and other restrictive covenants in our credit arrangements in our borrowing of additional funds; and
• we may fail to comply with the covenants under which we have borrowed our indebtedness, which could result in an event of default. If an event of default occurs and is not cured or waived, it could result in all amounts outstanding, together with accrued interest, becoming immediately due and payable. If we were unable to repay such amounts, the lenders could proceed against any collateral granted to them to secure that indebtedness.

        Our ability to pay principal and interest on our indebtedness, to meet our financial and restrictive covenants and to satisfy our other debt obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions that are beyond our control, as well as the availability of revolving credit borrowings under our senior credit facility or successor facilities. If cash flows from operating activities and availability under our senior credit facility are not sufficient to meet these obligations, we may require additional equity or debt financing. There can be no assurance that additional financing will be available on satisfactory terms when required.

        We expect to continue to have increasing working capital and capital expenditure requirements to expand our operations and remain competitive in the rapidly changing electronics manufacturing services industry. Our future success may depend on our ability to obtain additional financing to support our future growth, if any. We may not be able to obtain additional financing when we want or need it, and it may not be available on satisfactory terms. In addition, any additional capital may have terms and conditions that adversely affect our business, such as financial or operating covenants.

        The terms of our current indebtedness agreements restrict, among other things, our ability to incur additional indebtedness, pay dividends or make other restricted payments, consummate asset sales, enter into transactions with affiliates, merge, consolidate or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. We are also required to maintain specified financial ratios and satisfy financial condition tests, which further restrict our ability to operate as we choose. Substantially all our assets and those of our subsidiaries are pledged as security under our senior credit facility.

        We depend on a relatively small number of customers for a significant portion of our net sales. Our three largest customers for the three months ended November 30, 2000 were Cisco Systems, Extreme Networks and Nokia, which represented approximately 40.4%, 18.5% and 11.2%, respectively of our net sales. In addition, our ten largest customers for the three months ended November 30, 2000 accounted for approximately 88.6% of our net sales. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net sales.

        Our major customers may not continue to purchase products and services from us at current levels or at all. In addition, sales to our major customers may decline due to softening demand for their products. In the past we have lost and in the future we could lose customers for a variety of reasons, including the acquisition of our customers by third parties, product discontinuation and customers' shifting of production to internal facilities or to our competitors. We may not be able to expand our customer base to make up any sales shortfalls if we lose one or more of our major customers. Our attempts to diversify our customer base and reduce our reliance on particular customers may not be successful. If we lose one or more of our major customers and are unable to adequately expand our customer base to make up the resulting sales shortfalls, our net sales and profitability would likely decline.

        One of our major customers has notified us of its preference to limit the percentage of our business that its orders may constitute. If we are unable to expand and diversify our customer base, this customer or other major customers may reduce the amount of products and services that they currently purchase from us, which could cause our net sales and profitability to decline.

        Our net sales and operating results have fluctuated and may continue to fluctuate significantly from quarter to quarter. We generally receive purchase orders from customers for products to be shipped during the ensuing 60 to 90 days. Accordingly, our net sales in any given quarter depend on obtaining and fulfilling orders for assemblies to be manufactured and shipped in the same quarter in which those orders are received. Further, our level of net sales in a given quarter may depend on assemblies configured, completed, packaged and shipped in the final weeks of such quarter. Our operating results may fluctuate in the future as a result of many factors, including:

• variations in customer orders relative to our manufacturing capacity;
• variations in the timing of shipment of products to customers;
• introduction and market acceptance of our customers' new products;
• changes in competitive and economic conditions generally or in our customers' markets;
• effectiveness of our manufacturing processes, including controlling costs;
• changes in cost and availability of components or skilled labor;
• the timing and price we pay for acquisitions and related acquisition costs; and
• start-up costs associated with the launching of new customer programs or operations.

        We base our operating expenses on anticipated revenue levels and a high percentage of our operating expenses are relatively fixed in the short term. As a result, any unanticipated shortfall in revenue in a quarter would likely adversely affect our operating results for that quarter. Also, changes in our product assembly mix may cause our margins to fluctuate, which could negatively impact our results of operations for that period. Our results in any period should not be considered indicative of the results to be expected in any future period.

        We generally obtain short-term purchase orders or commitments from our customers, rather than long-term contracts. We work closely with our customers to develop forecasts for future orders, but these forecasts are not binding. Customers may cancel their orders, change production quantities from forecast volumes or delay production for a number of reasons which are beyond our control, including their internal operating and liquidity concerns. Any significant delay, cancellation or reduction of orders from our customers could cause our net sales and profitability to decline significantly. Moreover, the cancellation of purchase orders by customers, inaccurate customer forecasts or a failure on our part to anticipate customer material requirements accurately, has resulted in and could continue to result in excess and obsolete inventory. While we seek to hold our customers responsible for actions on their part that result in excess and obsolete inventory, our failure to do so or our inability to otherwise dispose of, make use of, or return this inventory, has in the past resulted in, and may in the future result in inventory write-offs, which could have an adverse effect on our business, financial condition and results of operations.

        Our business depends on the market acceptance and demand for the products we build for our customers, who primarily serve the data communications, telecommunications and computer/memory module industries, which are characterized by intense competition, relatively short product life cycles and significant fluctuations in product demand. These industries and our customers' products are generally subject to rapid technological change and product obsolescence. If any of these factors or other factors reduce demand for our customers' products, our net sales and profitability would likely be negatively affected. Furthermore, these industries are subject to economic cycles and have in the past experienced, and are likely in the future to experience, recessionary periods. A recession or any other event leading to excess capacity or a downturn in the markets we serve would likely cause our net sales and profitability to decline.

        Many of the products we manufacture include components that are only available from a single supplier. Supply shortages for a particular component can delay production of all products using that component or cause cost increases in the services we provide. In the past, we have experienced, and we are currently experiencing, industry-wide shortages in some of the materials we use, such as capacitors, memory components, logic devices and enclosures. As a result, our suppliers have been forced to allocate available quantities among their customers and we have not been able to obtain all of the materials desired in a timely fashion. Our inability to obtain these needed materials has in some instances slowed production or assembly, and therefore delayed shipments to our customers, increased inventory levels, increased costs and reduced profitability. We may also bear the risk of periodic component price increases, which could increase our costs and reduce our profitability.

        We have consistently experienced net losses since the second quarter of fiscal 1998. We reported a net loss to common stockholders for fiscal year 2000 of $27.7 million, for fiscal year 1999 of $17.5 million and for fiscal year 1998 of $3.5 million. Due to our significant leverage and other factors, we may experience further net losses in the future. We cannot predict whether, when or to what extent we will become consistently profitable.

        In addition, if we fail to manage our inventory effectively, we may be subject to fluctuations in materials costs, scrap and excess and obsolete inventory, which could increase our overall costs and reduce profitability. We are required to forecast our future inventory needs based upon the anticipated demand of our customers. If we are unable to accurately forecast this demand, we may experience a shortage or an excess of materials. A shortage of materials could lengthen production schedules and increase costs, while an excess of materials may increase the costs of maintaining inventory, adversely impact our liquidity, and increase the risk of inventory obsolescence.

        The electronics manufacturing services industry is highly competitive and characterized by low profit margins. We compete against numerous electronics manufacturing service providers with global operations. In addition, current and prospective customers could evaluate the merits of manufacturing products internally. Consolidation in the electronics manufacturing services industry results in a continually changing competitive landscape. The consolidation trend in the industry also results in larger and more geographically diverse competitors who have significant combined resources with which to compete against us. Many of our competitors are less financially leveraged than we are and have substantially greater managerial, manufacturing, engineering, technical, financial, systems, sales and marketing resources than we do. These competitors may:

• have greater name recognition and geographic and market presence;
• be better able to take advantage of acquisition opportunities;
• adapt more quickly to changes in customer requirements;
• devote greater resources to the development, promotion and sale of their services; and
• have broader service offerings.

        We also may be operating at a cost disadvantage as compared to competitors who have greater direct buying power or who have lower cost structures. Increased competition from existing or potential competitors could result in price reductions, reduced profitability or loss of market share.

        The markets for our products and services are characterized by rapidly changing technologies and continuing process developments. Our success will depend in large part upon our ability to maintain and enhance our technological capabilities, to develop and market products and services that meet changing customer needs and to successfully anticipate or respond to technological changes on a cost-effective and timely basis. Our core technologies may encounter competition from new or revised technologies that render existing technology less competitive or obsolete or that reduce the demand for our services. We may be unable to respond effectively to the technological requirements of the changing market. If we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of these technologies may require us to make significant capital investments. We may not be able to obtain capital for these purposes in the future, and our investments in new technologies may not result in commercially viable technological processes. If we are unable to successfully respond to these changing technologies and process developments, our net sales and profitability could be adversely affected.

        Our future success largely depends on the skills and efforts of our executive management and our engineering, program management, procurement, manufacturing and sales employees. Our continued growth will also require us to attract, motivate, train and retain additional skilled and experienced personnel. We face intense competition for such personnel. We may not be able to attract, motivate and retain personnel with the skills and experience needed to successfully manage our business and operations.

        We currently have foreign operations in Malaysia, Mexico and Belgium. We may in the future expand into other international regions. We also purchase a significant number of components manufactured in foreign countries. Because of the scope of our international operations, we are subject to the following uncertainties:

• economic or political instability;
• transportation delays and interruptions;
• foreign currency exchange rate fluctuations;
• increased employee turnover and labor unrest;
• longer payment cycles;
• greater difficulty in collecting accounts receivable;
• difficulties in staffing and managing foreign personnel and diverse cultures; and
• less developed infrastructures.

        In addition, changes in policies by the United States or foreign governments could negatively affect our operating results due to increased duties, increased regulatory requirements, higher taxation, currency conversion limitations, restrictions on the transfer of funds, the imposition of or increase in tariffs and limitations on imports or exports. Also, we could be negatively affected if our host countries revise their policies away from encouraging foreign investment or foreign trade, including tax holidays.

        Since 1996, we have completed one acquisition and commenced operations at three new facilities. Our growth has placed and will continue to place a significant strain on our management, financial resources and information, operations and financial systems.

        As part of our business strategy, we expect to continue to expand our operations through the opening of new facilities, expanding existing facilities and by selectively making acquisitions. Competition for attractive manufacturing operations in our industry is substantial. Expanding our operations involves numerous risks, including:

• difficulty in integrating operations, technologies, systems, and products and services of acquired companies;
• diversion of management's attention;
• disruption of operations; and
• failure to effectively enter markets in which we have limited or no prior experience and where competitors in such markets have stronger market positions; and

Acquisitions may have an adverse financial impact on our business as a result of various factors, including:

• the potential liabilities of the acquired businesses;
• increases in expenses and working capital requirements;
• the dilutive effect of the issuance of additional equity securities;
• the financial impact of transaction expenses; and
• the amortization of goodwill and other intangible assets involved in any transactions that are accounted for using the purchase method of accounting and possible adverse tax and accounting effects.

        We may not be able to identify suitable acquisition candidates or finance and complete transactions that we select

        We believe that the protection of our intellectual property rights is, and will continue to be, important to the success of our business. We rely on a combination of patent, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite these protections, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. We cannot be certain that patents we have or that may be issued as a result of our pending patent applications will protect or benefit us or give us adequate protection from competing technologies. We also cannot be certain that others will not develop our unpatented proprietary technology or effective competing technologies on their own. We believe that our proprietary technology does not infringe on the proprietary rights of others. However, if others assert valid infringement claims against us with respect to our past, current or future designs or processes, we could be required to enter into cross-licensing agreements or expensive royalty arrangements, indemnify third parties, develop non-infringing technologies or engage in costly litigation.

        Our operations are regulated under a number of federal, state, provincial, local and foreign environmental and workplace health and safety laws and regulations, which govern, among other things, the discharge of hazardous materials into the air, ground and water as well as the handling, storage and disposal of these materials. Compliance with these laws is an important consideration for us because we do use hazardous materials in our manufacturing processes. We may be liable under environmental laws for the cost of cleaning up properties we own or operate if they are or become contaminated by the release of hazardous materials, regardless of whether we caused the release. Even if we fully comply with applicable environmental laws, we, along with any other person who arranges for the disposal of our wastes, may be liable for costs associated with an investigation and remediation of sites at which we have arranged for the disposal of hazardous wastes if the sites become contaminated. In addition, we may be liable in the event employees and/or visitors are exposed to hazardous materials in excess of legally permissible exposure limits. In the event of a contamination or a violation of environmental and workplace health and safety laws, we could be held liable for damages, including fines, penalties and the costs of remedial actions, and could also be subject to revocation of our discharge permits. Any revocations could require us to cease or limit production at one or more of our facilities, thereby negatively affecting our operations. Environmental and workplace health and safety laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation.

        MCMS is owned by an investment group led by Cornerstone Equity Investors IV, L.P. No single investor has more than 49.0% of the voting power of our outstanding securities or the ability to appoint a majority of the directors. However, the aggregate votes of these investors could determine the composition of a majority of the board of directors and, therefore, influence our management and policies.

        We use the U.S. dollar as our functional currency, except for our operations in Belgium, Malaysia and Mexico. Direct labor, manufacturing overhead, and selling, general and administrative costs of the international operations are denominated in the local currencies. We have evaluated the potential costs and benefits of hedging potential adverse changes in the exchange rates between U.S. dollar, Belgian Franc, Malaysian Ringgit and Mexican Peso. Currently, we do not enter into derivative financial instruments because a substantial portion of our sales in these foreign operations are in U.S dollar. The assets and liabilities of the Belgium, Malaysian and Mexican operations are translated into U.S. dollars at an exchange rates in effect at the period end date. Income and expense items are translated at the year-to-date average rate. Aggregate transaction losses included in net loss for the three months ended November 30, 2000 were $0.2 million.

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the following duly authorized person has signed this report on behalf of the registrant.