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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 23, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 0-23818
 
 
MERIX CORPORATION
(Exact name of registrant as specified in its charter)
 
OREGON
   
93-1135197
(State or other Jurisdiction of
Incorporation or Organization)
   
(I.R.S. Employer
Identification Number)
 
1521 Poplar Lane, Forest Grove, Oregon
   
97116
(Address of principal executive offices)
   
(Zip Code)
 
(503) 359-9300
(Registrant’s telephone number)
 
 
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 the filing requirements for the past 90 days.  Yes  x  No  ¨
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x
 
The number of shares of the Registrant’s Common Stock outstanding as of January 2, 2003 was 14,531,395 shares.
 

Table of Contents
MERIX CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
         
Page
Part I
   
Financial Information
     
Item 1.
   
Financial Statements:
     
       
2
       
3
       
4
       
5
       
6
Item 2.
      
9
Item 3.
      
14
Item 4
      
15
Part II
   
Other Information
     
Item 4
      
16
Item 6.
      
16
  
17
  
18
 

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Table of Contents
 
PART I. FINANCIAL INFORMATION
 
MERIX CORPORATION
BALANCE SHEETS
(in thousands)
 
    
November 23, 2002
     
May 25, 2002
    
(unaudited)
       
Assets
                
Cash and cash equivalents
   
$
51,166
 
   
$
42,636
Short-term investments
   
 
—  
 
   
 
9,294
Accounts receivable, net of allowance of $992 and $998
   
 
12,581
 
   
 
10,808
Inventories
   
 
5,622
 
   
 
5,007
Income tax receivable
   
 
91
 
   
 
1,693
Deferred tax asset
   
 
1,592
 
   
 
1,574
Other current assets
   
 
2,177
 
   
 
1,036
    
  
Total current assets
   
 
73,229
 
   
 
72,048
Property, plant and equipment, net
   
 
82,324
 
   
 
83,647
Deferred tax asset
   
 
9,410
 
   
 
5,392
Other assets
   
 
1,033
 
   
 
115
    
  
Total assets
   
$
165,996
 
   
$
161,202
    
  
Liabilities and Shareholders’ Equity
                
Accounts payable
   
$
7,791
 
   
$
6,468
Accrued compensation
   
 
2,025
 
   
 
2,428
Accrued warranty
   
 
992
 
   
 
1,310
Other accrued liabilities
   
 
1,473
 
   
 
2,197
    
  
Total current liabilities
   
 
12,281
 
   
 
12,403
Long-term debt
   
 
25,000
 
   
 
16,000
    
  
Total liabilities
   
 
37,281
 
   
 
28,403
    
  
Commitments and contingencies (Note 8)
   
 
—  
 
   
 
—  
Shareholders’ equity:
                
Preferred stock, no par value; authorized 10,000 shares; none issued
   
 
—  
 
   
 
—  
Common stock, no par value; authorized 50,000 shares; issued and outstanding November 23, 2002: 14,515 shares, May 25, 2002: 14,411 shares
   
 
104,062
 
   
 
103,189
Unearned compensation
   
 
(12
)
   
 
—  
Retained earnings
   
 
24,665
 
   
 
29,610
    
  
Total shareholders’ equity
   
 
128,715
 
   
 
132,799
    
  
Total liabilities and shareholders’ equity
   
$
165,996
 
   
$
161,202
    
  
 
The accompanying notes are an integral part of the financial statements.

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Table of Contents
 
MERIX CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts, unaudited)
 
    
Three Months Ended
     
Six Months Ended
  
    
November 23, 2002
     
November 24, 2001
     
November 23, 2002
     
November 24, 2001
  
Net sales
   
$
25,856
 
   
$
18,794
 
   
$
49,974
 
   
$
46,463
 
Cost of sales
   
 
25,272
 
   
 
21,085
 
   
 
48,988
 
   
 
43,785
 
    
  
  
  
Gross profit (loss)
   
 
584
 
   
 
(2,291
)
   
 
986
 
   
 
2,678
 
Operating expenses:
                                    
Engineering
   
 
1,611
 
   
 
1,313
 
   
 
3,197
 
   
 
2,706
 
Selling, general and administrative
   
 
3,007
 
   
 
2,365
 
   
 
6,034
 
   
 
5,578
 
    
  
  
  
Total operating expenses
   
 
4,618
 
   
 
3,678
 
   
 
9,231
 
   
 
8,284
 
Operating loss
   
 
(4,034
)
   
 
(5,969
)
   
 
(8,245
)
   
 
(5,606
)
Interest and other income (expense), net
   
 
(160
)
   
 
575
 
   
 
(659
)
   
 
1,059
 
    
  
  
  
Loss before taxes
   
 
(4,194
)
   
 
(5,394
)
   
 
(8,904
)
   
 
(4,547
)
Income tax benefit
   
 
(2,075
)
   
 
(2,699
)
   
 
(3,959
)
   
 
(2,394
)
    
  
  
  
Net loss
   
$
(2,119
)
   
$
(2,695
)
   
$
(4,945
)
   
$
(2,153
)
    
  
  
  
Net loss per share:
                                    
Basic
   
$
(0.15
)
   
$
(0.19
)
   
$
(0.34
)
   
$
(0.16
)
    
  
  
  
Diluted
   
$
(0.15
)
   
$
(0.19
)
   
$
(0.34
)
   
$
(0.16
)
    
  
  
  
Shares used in per share calculations:
                                    
Basic
   
 
14,481
 
   
 
13,940
 
   
 
14,456
 
   
 
13,848
 
    
  
  
  
Diluted
   
 
14,481
 
   
 
13,940
 
   
 
14,456
 
   
 
13,848
 
    
  
  
  
 
The accompanying notes are an integral part of the financial statements.

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Table of Contents
 
MERIX CORPORATION
STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited, in thousands)
 
    
Common Stock
       
Unearned
Compensation
     
Retained Earnings
     
Total
  
    
Shares
   
Amount
             
Balance at May 25, 2002
   
14,411
   
$
103,189
 
     
 
—  
 
   
$
29,610
 
   
$
132,799
 
Net loss
   
—  
   
 
—  
 
     
 
—  
 
   
 
(2,826
)
   
 
(2,826
)
Exercise of stock options
   
9
   
 
46
 
     
 
—  
 
   
 
—  
 
   
 
46
 
Stock issued under defined contribution plan
   
34
   
 
300
 
     
 
—  
 
   
 
—  
 
   
 
300
 
Tax benefit related to stock-based compensation
   
—  
   
 
21
 
     
 
—  
 
   
 
—  
 
   
 
21
 
    
  
    
  
  
Balance at August 25, 2002
   
14,454
   
$
103,556
 
     
 
—  
 
   
$
26,784
 
   
$
130,340
 
Net loss
   
—  
   
 
—  
 
     
 
—  
 
   
 
(2,119
)
   
 
(2,119
)
Exercise of stock options
   
24
   
 
123
 
     
 
—  
 
   
 
—  
 
   
 
123
 
Stock issued under defined contribution plan
   
37
   
 
331
 
     
 
—  
 
   
 
—  
 
   
 
331
 
Tax benefit related to stock-based compensation
   
—  
   
 
37
 
     
 
—  
 
   
 
—  
 
   
 
37
 
Stock options granted to non-employees
   
—  
   
 
17
 
     
 
(17
)
   
 
—  
 
   
 
—  
 
Amortization of unearned compensation
   
—  
   
 
—  
 
     
 
5
 
   
 
—  
 
   
 
5
 
Shares surrended or canceled
   
—  
   
 
(2
)
     
 
—  
 
   
 
—  
 
   
 
(2
)
    
  
    
  
  
Balance at November 23, 2002
   
14,515
   
$
104,062
 
     
$
(12
)
   
$
24,665
 
   
$
128,715
 
    
  
    
  
  
 
The accompanying notes are an integral part of the financial statements.

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Table of Contents
 
MERIX CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
    
Six Months Ended
  
    
November 23, 2002
     
November 24, 2001
  
Cash flows from operating activities:
                  
Net loss
   
$
(4,945
)
   
$
(2,153
)
Adjustments to reconcile net loss to net cash providedby (used in) operating activities:
                  
Depreciation and amortization
   
 
5,475
 
   
 
5,102
 
Tax benefit related to exercise of nonqualified stock options
   
 
58
 
   
 
1,856
 
Deferred income taxes
   
 
(4,036
)
   
 
(910
)
Contribution of common stock to defined contribution plan
   
 
631
 
   
 
—  
 
Other
   
 
98
 
   
 
76
 
Changes in assets and liabilities:
                  
Accounts receivable
   
 
(1,773
)
   
 
6,423
 
Inventories
   
 
(615
)
   
 
2,624
 
Income tax receivable
   
 
1,602
 
   
 
(2,162
)
Other assets
   
 
(822
)
   
 
(724
)
Accounts payable
   
 
1,032
 
   
 
(3,333
)
Accrued compensation
   
 
(403
)
   
 
(633
)
Accrued warranty
   
 
(318
)
   
 
(154
)
Other accrued liabilities
   
 
(710
)
   
 
401
 
    
  
Net cash (used in) provided by operating activities
   
 
(4,726
)
   
 
6,413
 
    
  
Cash flows from investing activities:
                  
Short-term investments:
                  
Purchases
   
 
—  
 
   
 
(3,810
)
Maturities
   
 
9,294
 
   
 
35,881
 
Proceeds from the sale of assets
   
 
1
 
   
 
—  
 
Capital expenditures
   
 
(3,832
)
   
 
(12,658
)
    
  
Net cash provided by investing activities
   
 
5,463
 
   
 
19,413
 
    
  
Cash flows from financing activities:
                  
Long-term borrowings:
                  
Proceeds
   
 
25,000
 
   
 
—  
 
Principal payments
   
 
(16,000
)
   
 
(5,149
)
Deferred financing costs
   
 
(1,376
)
   
 
—  
 
Exercise of stock options
   
 
169
 
   
 
1,891
 
    
  
Net cash provided by (used in) financing activities
   
 
7,793
 
   
 
(3,258
)
    
  
Increase in cash and cash equivalents
   
 
8,530
 
   
 
22,568
 
Cash and cash equivalents at beginning of period
   
 
42,636
 
   
 
26,790
 
    
  
Cash and cash equivalents at end of period
   
$
51,166
 
   
$
49,358
 
    
  
Supplemental Disclosures:
                  
Cash paid for:
                  
Interest, net of amounts capitalized
   
$
410
 
   
$
185
 
Taxes
   
 
—  
 
   
 
1,026
 
 
The accompanying notes are an integral part of the financial statements.

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Table of Contents
 
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands)
 
Note 1.    BASIS OF PRESENTATION
 
The accompanying unaudited financial statements of Merix Corporation (the Company) have been prepared pursuant to Securities and Exchange Commission rules and regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 25, 2002.
 
The financial information included herein reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The results of operations for the six months ended November 23, 2002 are not necessarily indicative of the results to be expected for the full fiscal year.
 
The Company’s fiscal year is the 52 or 53-week period ending the last Saturday in May. Fiscal year 2003 is a 53-week year ending May 31, 2003 and fiscal year 2002 was a 52-week year ended May 25, 2002.
 
Note 2.    INVENTORIES
 
      
November 23,
2002
       
    May 25,    
2002
  
Raw materials
     
$
1,011
 
     
$
718
 
Work in process
     
 
2,922
 
     
 
1,992
 
Finished goods
     
 
1,689
 
     
 
2,297
 
      
    
Total
     
$
5,622
 
     
$
5,007
 
      
    
 
Note 3.    PROPERTY, PLANT AND EQUIPMENT
 
    
 November 23, 
2002
     
    May 25,    
2002
  
Land
   
$
2,190
 
   
$
2,190
 
Buildings and grounds
   
 
32,933
 
   
 
32,916
 
Leasehold improvements
   
 
8,847
 
   
 
8,847
 
Machinery and equipment
   
 
91,359
 
   
 
89,368
 
Construction in progress
   
 
20,998
 
   
 
21,339
 
    
  
Total
   
 
156,327
 
   
 
154,660
 
Accumulated depreciation
   
 
(74,003
)
   
 
(71,013
)
    
  
Property, plant and equipment, net
   
$
82,324
 
   
$
83,647
 
    
  

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Table of Contents
 
Note 4.    NET INCOME PER SHARE
 
Basic net income per share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted net income per share is computed using the weighted average number of shares of common stock and dilutive common equivalent shares related to stock options outstanding during the period. Incremental shares of 2,859,426 and 2,903,441, related to outstanding stock options and the convertible debenture, were excluded from the calculations of diluted net income per share for the quarter and six months ended November 23, 2002, because including them would have been antidilutive. Incremental shares of 1,153,784 and 1,091,106, related to outstanding stock options, were excluded in the calculations of diluted net income per share for the quarter and six months ended November 24, 2001, because including them would have been antidilutive.
 
Note 5.    STOCK BASED COMPENSATION PLAN
 
In fiscal 2001, the Board of Directors approved the Merix Corporation 2000 Nonqualified Stock Option Plan (“the 2000 Plan”). The 2000 Plan, as amended, permitted the grant of up to 2,000,000 shares of authorized common stock in the form of nonqualified stock options and stock awards to employees, directors and to non-employee consultants, agents and independent contractors and advisors who provide services to the Company. In August 2002, the Board of Directors authorized an additional 2,000,000 shares to be available for grant under the 2000 Plan.
 
During the quarter ended November 23, 2002, the Company issued options from the 2000 Plan to a non-employee consultant for services to be provided for a term of one year. The Company has recognized $5 of the estimated charge of $17 of compensation expense in the quarter ended November 23, 2002 related to this grant. Compensation expense associated with these options is subject to periodic remeasurement throughout the period of service.
 
Note 6.    DEBT
 
In the first quarter of fiscal 2003, the Company privately sold a $25,000, 6.5% convertible debenture due May 2007. The debenture is unsecured, is convertible into shares of our common stock at a fixed conversion price of $19.41 per share, and is callable after August 2004 if certain conditions are met. There is no principal amortization, and interest is payable quarterly. The debenture contains an embedded derivative in the form of a put option that entitles the holder to require the Company to redeem the debenture at a price equal to 110% of the principal balance if a change in control of the Company should occur. This put option is marked-to-market quarterly and any effect is shown in the Statement of Operations. There was no effect on the Statement of Operations for the six months ended November 23, 2002. The Company does not anticipate that the derivative will have a significant value because no change of control is currently contemplated. The debenture contains a debt ratio incurrence covenant. A portion of the proceeds of this financing were used to repay in full the remaining $16,000 outstanding at the end of fiscal 2002 under senior unsecured notes.
 
Note 7.    LEASE AGREEMENT
 
The Company leases manufacturing equipment under an operating lease. Outstanding minimum lease payments at the end of the second quarter of fiscal 2003 were $1,810 to be paid in monthly installments through November 2004. The lease was entered into as part of a sales leaseback transaction and a deferred gain on the sale of equipment was recorded at the time of the transaction. The deferred gain is amortized over the life of the lease and as of November 23, 2003 the unamortized gain was $47. The lease agreement includes certain financial covenants, including minimum net worth, debt to capitalization and debt service coverage requirements. As of November 23, 2002, the Company was not in compliance with the covenant that specifies a minimum debt service coverage ratio. Compliance with this covenant was waived by the lessor through the first quarter of fiscal 2004.

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Table of Contents
 
Note 8.    COMMITMENTS AND CONTINGENCIES
 
Litigation
 
From time to time, the Company is party to various legal claims, actions and complaints. The Company believes that the disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations and cashflows.
 
Commitments
 
The Company had capital commitments of approximately $7,236 as of November 23, 2002, primarily relating to the purchase of manufacturing equipment at Wood Village.
 
The Company issued a standby letter of credit in the amount of $699 to secure obligations due under employee health insurance plans. This letter of credit expired on July 1, 2002.
 
The Company guaranteed a note with a bank related to the financing of certain manufacturing equipment that was purchased by a subcontractor. As of November 23, 2002, the Company was released from this commitment.
 
The Company has consignment agreements with certain suppliers for raw material inventory, some of which obligate us to purchase inventory on hand upon termination of the agreement. As of the end of the second quarter of fiscal 2003, potential commitments under these agreements were insignificant.
 
Note 9.    SUBSEQUENT EVENTS
 
On December 19, 2002, the Company announced a restructuring plan and asset write-off to be completed within the third quarter of fiscal 2003. The plan consists of a voluntary layoff and relocation of certain of the Forest Grove production facilities. The Company expects to record a charge in the third quarter in the range of $2,200 to $2,700 related to severance costs, relocation costs and asset impairment.

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Table of Contents
 
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Quarterly Report are forward looking. We use words such as “anticipates,” “believes,” “expects,” “future” and “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations, plans or projections and are inherently uncertain. Actual results could differ materially from management’s expectations, plans or projections. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Certain risks and uncertainties that could cause our actual results to differ significantly from management’s expectations are described in the section entitled “Risk Factors Affecting Business and Results of Operations.” This section, along with other sections of this Quarterly Report, describes some, but not all, of the factors that could cause actual results to differ significantly from management’s expectations. We undertake no obligation to revise these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission.
 
Overview
 
We are a leading manufacturer of technologically advanced electronic interconnect solutions for use in sophisticated electronic equipment. Our principal products are complex multilayer printed circuit boards, which are the platforms used to interconnect microprocessors, integrated circuits and other components that are essential to the operation of electronic products and systems.
 
Results of Operations
 
Net Sales
 
Net sales were $25.9 million in the second quarter of fiscal 2003, an increase of 38% from net sales of $18.8 million in the second quarter of fiscal 2002. Net sales for the first half of fiscal 2003 were $50.0 million, an increase of 8% from net sales of $46.5 million in the first half of fiscal 2002. The increase in net sales for the second quarter and first half of fiscal 2003 as compared to the same periods in the prior year resulted from an increase in unit shipments, partially offset by a decrease in average pricing. In addition, the first quarter of fiscal 2002 included a one-time payment by a customer to secure a release from future commitments under a supply agreement. Per the terms of the agreement, the payment amount was confidential. Unit shipments were 73% and 49% higher in the second quarter and first half of fiscal 2003 compared to the respective periods in fiscal 2002. The increase in unit shipments is partially due to a higher level of volume production orders as existing customers have reduced excess inventories and introduced new programs. In addition, beginning January 2001, we began to aggressively pursue new customers in order to utilize excess capacity that became available in our facility as a result of the downturn in the technology sector. This strategy has contributed to our volume increase as approximately one-third of revenues in the second quarter of fiscal 2003 were attributable to customers that have been added over the last two years.

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Table of Contents
 
However, volume gains have been partially offset by a 20% and 26% decrease in average pricing in the second quarter and first half of fiscal 2003, respectively, as compared to the same periods in fiscal 2002. The decrease in average pricing is a result of product mix changes, competitive pressures on pricing for both quick-turn and volume orders resulting from the overall decline in the electronics industry, and a lower level of premium revenue. Premium revenue, consisting of quick-turn prototype, pre-production and compressed lead-time volume orders, comprised 25% and 27% of net sales in the second quarter and first half of fiscal 2003, respectively, compared to 35% and 34% for the same periods in fiscal 2002. Premium revenue in both the first half of 2003 and the first half of 2002 consisted principally of quick-turn prototype and pre-production orders, as opposed to compressed lead-time volume orders. Until industry conditions improve and demand significantly increases, we expect that decreased average pricing will continue to negatively affect our sales.
 
Sales to our five largest original equipment manufacturer (“OEM”) customers comprised 59% and 60% of our net sales in the second quarter and first half of fiscal 2003, respectively, compared to 70% and 64% in the second quarter and first half of fiscal 2002. Sales to OEMs include sales made through contract manufacturers that assemble components on our products for resale to OEMs. Approximately, 62% and 63% of our net sales were made through our contract manufacturing customers in the second quarter and first half of fiscal 2003, respectively, compared to 42% and 39% in the second quarter and first half of fiscal 2002. The rise in sales through contract manufacturers is due to both a change in customer mix and a move towards outsourcing by certain of our OEM customers. OEMs direct most of our sales through the contract manufacturing channel and negotiate product pricing and volumes directly with us. However, in the prior year we were added to the approved vendor list of three additional contract manufacturers and we have been awarded incremental discretionary orders directly from these contract manufacturers. We expect these discretionary orders to increase in the future.
 
One customer accounted for more than 10% of our net sales in the second quarter of fiscal 2003 and two customers each accounted for more than 10% of our net sales in the second quarter of fiscal 2002. One customer accounted for more than 10% of our net sales in the first half of fiscal 2003 and three customers each accounted for more than 10% of our net sales in the first half of fiscal 2002. We expect to continue to depend upon a small number of customers for a significant portion of our net sales in the foreseeable future. The loss of or decrease in orders from one or more major customers could materially reduce our sales.
 
Our 90-day backlog was approximately $9.0 million at November 23, 2002, $10.7 million at August 24, 2002 and $9.5 million at May 25, 2002. A substantial portion of our backlog is typically scheduled for delivery within 60 days. The level and timing of orders placed by our customers vary due to a number of factors, including variations in demand for customer products, customer attempts to manage inventory and changes in customer manufacturing strategies. Because we do not generally obtain long-term purchase orders or commitments from our customers, we must anticipate the future volume of orders based on discussions with our customers. We rely on our estimates of anticipated future volumes when making commitments regarding the level of business that we will seek and accept, the mix of products that we intend to manufacture, the timing of production schedules and the levels and utilization of personnel and other resources. A customer may cancel, reduce or delay orders that were previously made or anticipated. A significant portion of our backlog may be subject to cancellation or postponement without penalty and we may not be able to timely replace canceled, delayed or reduced orders. Accordingly, our backlog is not necessarily indicative of future financial results.
 
Future demand and product pricing depend on many factors including product mix, levels of advanced technology, capacity utilization, competitive pressure in the printed circuit board industry, and economic conditions affecting the markets we serve and the electronics industry in general. The current uncertainty regarding the level and timing of an economic recovery in our product markets and volatility in our customer forecasts continue to make our forecasting less reliable than in prior periods. However, at this time we expect sales in the third quarter of fiscal 2003 to be approximately 5% lower than those in the second quarter of fiscal 2003.

10

Table of Contents
 
The following table shows, for the periods indicated, the percentage of our net sales to the principal end markets we serve ($ in thousands):
 
    
Three Months Ended
   
Six Months Ended
    
Nov. 23, 2002
   
Nov. 24, 2001
   
Nov. 23, 2002
   
Nov. 24, 2001
End Markets
                                                        
Communications
   
73
%
   
$
18,886
   
76
%
   
$
14,270
   
74
%
   
$
37,050
   
70
%
   
$
32,538
High-end Computing & Storage
   
14
%
   
 
3,736
   
15
%
   
 
2,776
   
14
%
   
 
7,087
   
15
%
   
 
6,832
Test and Measurement
   
8
%
   
 
1,957
   
7
%
   
 
1,267
   
8
%
   
 
4,005
   
13
%
   
 
5,952
Other
   
5
%
   
 
1,277
   
2
%
   
 
481
   
4
%
   
 
1,832
   
2
%
   
 
1,141
    
  
  
  
  
  
  
  
Total
   
100
%
   
$
25,856
   
100
%
   
$
18,794
   
100
%
   
$
49,974
   
100
%
   
$
46,463
    
  
  
  
  
  
  
  
 
The communications market is our primary focus and we are continuing to add new customers. Many of these new customers are relatively small companies, and our future business with them may be significantly affected by their ability to obtain ongoing financing. The percentage of sales into the test and measurement market was consistent in the second quarter of fiscal 2003 as compared to the second quarter of fiscal 2002; however, the percentage of sales in this market has declined in the first half of fiscal 2003 compared to the first half of 2002. This reflects a one-time customer payment discussed in “Net Sales” above.
 
Gross Profit
 
Gross profit as a percentage of sales or gross margin was 2% in the second quarter of fiscal 2003 compared to negative 12% in the second quarter of fiscal 2002. This increase in gross margin in the second quarter of 2003 reflects an increase in manufacturing capacity utilization, a lower cost structure and increased productivity, partially offset by a decrease in overall product pricing. Manufacturing capacity utilization improved due to increased product demand and the addition of new customers. Higher capacity utilization enhances gross margin because fixed costs are spread over a higher number of units produced which decreases the cost per unit. A lower cost structure primarily resulted from reduced headcount through attrition and lower pricing on materials and supplies. Productivity gains were achieved through process re-engineering. Gross margin was 2% for the first half of fiscal 2003 compared to 6% for the first half of fiscal 2002. Margins decreased as the effect of a decline in average pricing outpaced the impact of increased production and productivity and decreases in cost structure for the first half of fiscal 2003 compared to the first half of fiscal 2002. In addition, the one-time customer payment discussed in “Net Sales” above directly benefited the gross margin in fiscal 2002.
 
Until industry conditions improve and demand increases, we expect that gross margin will continue to be negatively affected by low capacity utilization and competitive product pricing. Our gross profit may also be affected by other factors, including production yields and changes in our cost structure.
 
Engineering
 
Engineering expenses were $1.6 million in the second quarter of fiscal 2003 and $1.3 million in the second quarter of fiscal 2002, representing 6% and 7% of net sales in those periods, respectively. Engineering expenses were $3.2 million and $2.7 million in the first half of fiscal 2003 and 2002, respectively, representing 6% of net sales in those periods. The increase in engineering expense in fiscal 2003 reflects the capitalization of qualified internal expenses related to the construction of the Wood Village facility and mandated time off during the first half of fiscal 2002 that was not repeated in the first half of fiscal 2003. Although engineering headcount is slightly lower in fiscal 2003 compared to fiscal 2002, mandatory time off in fiscal 2002 of 7 days in the first quarter and 10 days in the second quarter had a greater impact on salary expenses than the reduction in headcount in fiscal 2003. In addition, test materials and supplies have increased due to greater levels of customer design assistance and engineering services in the early stages of product development. These activities are critical to attracting new customers and supporting the increase in prototype work and higher technology products manufactured.

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Selling, General and Administrative
 
Selling, general and administrative expenses were $3.0 million, or 12% of net sales, in the second quarter of fiscal 2003 and $2.4 million, or 13% of net sales, in the second quarter of fiscal 2002. Selling, general and administrative expenses were $6.0 million and $5.6 million for the first half of fiscal 2003 and 2002, respectively, representing 12% of net sales for those periods. The increase in selling, general and administrative expense resulted largely from a reduction in labor costs due to mandated time off in fiscal 2002 that was not repeated in fiscal 2003 and increased sales force salaries and bonuses. Mandatory time off in fiscal 2002 consisted of 7 days in the first quarter and 10 days in the second quarter. Direct sales force salaries increased due to strategic hires to strengthen the organization and facilitate expansion of our sales group into Europe. Similarly, travel expenses have increased to support ongoing efforts to explore business opportunities in Europe and Asia. Sales commissions and bonuses have increased due to higher sales volumes and an increase in the number of manufacturing representation firms used by the Company. These increases were partially offset by a reduction in out-of-warranty costs in fiscal 2003.
 
Interest and Other Income (Expense), net
 
Interest and other income (expense), net was a net expense of $160 thousand in the second quarter of fiscal 2003 and net income of $575 thousand in the second quarter of fiscal 2002. Interest and other income (expense), net was a net expense of $659 thousand in the second half of fiscal 2003 and net income of $1.1 million in the second half of fiscal 2002. The net change is the result of decreased interest income, increased interest expense and an increase in other expenses. Interest income decreased in the second quarter and first half of fiscal 2003 due to reduced interest yield on lower levels of cash equivalents and short-term investments. In addition, interest expense increased in the second quarter and first half of fiscal 2003 because interest related to our capacity expansion projects is no longer being capitalized.
 
Income Taxes
 
The effective tax rate was a benefit of 50% in the second quarter of fiscal 2003 and a cumulative benefit of 45% in the first half of fiscal 2003, compared to a tax benefit of 50% in the second quarter of fiscal 2002 and a cumulative benefit of 53% in the first half of fiscal 2002. The tax benefits recorded during the second quarters of fiscal 2003 and 2002 included research and development tax credits realized from prior years of $398 thousand and $585 thousand, respectively. Research and development tax credits related to the reported periods were also recognized in their respective periods. A foreign sales exclusion was reflected as a benefit for the second quarter of fiscal 2002.
 
The effective tax rate for the remainder of fiscal 2003 is expected to be approximately 41%. We expect to utilize the deferred tax benefits which are being carried forward prior to their expiration.
 
Liquidity and Capital Resources
 
At the end of the first half of fiscal 2003, we had $51.2 million in cash and cash equivalents.
 
Cash used in operating activities for the first half of fiscal 2003 was $4.7 million and was the result of a net loss of $4.9 million, adjusted for depreciation and amortization, deferred income taxes and the quarter’s net increase in working capital. The increase in working capital is primarily the result of an increase in accounts receivable, partially offset by an increase in accounts payable and a decrease in income tax receivable.
 
Cash provided by investing activities in the first half of fiscal 2003 was $5.5 million, primarily from the maturity of investments, offset by capital expenditures for manufacturing equipment.
 
Cash provided by financing activities in the first half of fiscal 2003 was $7.8 million, which was primarily the result of certain financing transactions described below.

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During the first quarter of fiscal 2003, we privately sold a $25.0 million, 6.5% convertible debenture due May 2007. The debenture is convertible into shares of our common stock at a fixed conversion price of $19.41 per share and is callable after August 2004 if certain conditions are met. Interest is payable quarterly beginning June 2002.
 
We lease manufacturing equipment under an operating lease. Outstanding minimum lease payments at the end of the first half of fiscal 2003 were $1.8 million, to be paid in monthly installments through November 2004. The lease agreement includes certain financial covenants including minimum net worth, debt to capitalization and debt service coverage requirements. As of November 23, 2002, we were not in compliance with the covenant that specifies a minimum debt service coverage ratio. This covenant has been waived by the lessor through the first quarter of fiscal 2004.
 
We lease a 90,000 square foot manufacturing facility located in Wood Village, Oregon under an operating lease. Monthly lease payments escalate at specific points over the minimum ten-year term of the lease. Outstanding minimum lease payments at the end of the first half of fiscal 2003 totaled $4.9 million. Payments on the initial term of the lease extend through July 2011 and we have the option to extend the initial term of the lease for three consecutive periods of five years each.
 
We had capital commitments of approximately $7.2 million as of November 23, 2002, primarily for manufacturing equipment at Wood Village.
 
We also have consignment agreements with certain suppliers for raw material inventory, some of which obligate us to purchase inventory on hand upon termination of the agreement. As of the end of the first half of fiscal 2003, potential commitments under these agreements were insignificant.
 
Restructuring and Asset Impairment
 
On December 18, 2002, the Company announced a restructuring plan to be completed during the third quarter of fiscal 2003. This plan consists of a voluntary layoff of approximately 50 employees from both production and support groups and the relocation of certain finishing, test, and shipping operations from a satellite production facility in Forest Grove to the primary manufacturing plant on our main campus. This relocation is expected to have a positive impact on our cost structure, cycle time, and productivity. We expect to record a charge in the third quarter in the range of $2.2 to $2.7 million related to severance costs, relocation costs and asset impairment. Approximately $1.0 million of this charge will be a cash charge. As a result of these actions, we expect to realize annual cost savings in the range of $2.4 to $2.6 million beginning in the fourth quarter of fiscal 2003.
 
Capacity Expansion
 
We commenced capacity expansion programs at our Wood Village, Oregon and Forest Grove, Oregon locations in the first quarter of fiscal 2001. Due to current industry conditions, the timeline for completion of this program has been significantly lengthened. The total cost for the capacity expansion programs will be approximately $90 million and we have incurred total costs of approximately $48.7 million related to these projects to date. We expect to fund our expansion projects with a combination of current cash resources, internally generated funds and external financing. Once completed, we expect these expansion projects to increase production capacity by approximately 100% and estimate our manufacturing facilities will support revenues of approximately $400 million annually.
 
Our planned capacity expansions involve significant risks. We may encounter construction delays, equipment delays, labor shortages or disputes and production start-up problems that could prevent us from meeting our customers’ delivery schedules. In addition, the electronics industry has historically been cyclical and is currently experiencing a significant economic downturn characterized by diminished product demand and over-capacity. We expect to incur new fixed operating expenses associated with our expansion efforts, including increases in depreciation expenses and lease expenses. The current unfavorable economic conditions affecting major customers or the electronics industry in general may affect our ability to successfully utilize our additional manufacturing capacity in an effective manner. If our revenues do not increase sufficiently to offset increased expenses, our operating results may be adversely affected.

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We believe that our existing capital resources and expected cash generated from operations will be sufficient to meet our working capital and capital expenditure requirements through at least the next 12 months.
 
Risk Factors Affecting Business and Results of Operations
 
Certain statements in this report contain forward-looking information (as defined in Section 27A of the Securities Act of 1933, as amended) that involves risks and uncertainties. Words such as “anticipates,” “believes,” “expects,” “future” and “intends” and similar expressions identify forward-looking statements. These statements relate to future events or our future financial performance. These statements constitute forward-looking statements and are only predictions. Actual events or results may differ materially. The differences could be caused by a number of factors or combination of factors, including the factors listed below and the risks detailed in the Company’s Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the fiscal year ended May 25, 2002.
 
Forward-looking statements contained in this report relate to the Company’s plans and expectations as to future sales, our customer base, gross profit, capacity expansion and the need for and availability of capital resources and cash.
 
The following factors, among others, could cause actual results to differ from those indicated in the forward-looking statements: pricing pressures in the industry; the loss of any of our major customers; a continued downturn in the economy in general or in the technology sector; a further decrease in demand for electronic products or continued weak demand for these products; our ability to attract new customers; our ability to reduce costs, including those associated with our restructuring plan; an increase in competition in the market for electronic interconnect solutions; and the ability of some of our new customers to obtain financing. These factors or additional risks and uncertainties not known to us or that we currently deem immaterial may impair business operations and may cause our actual results to differ materially from any forward-looking statement.
 
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to conform them to actual results or to make changes in our expectations.
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our available funds for investment. We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high-credit quality securities. We do not believe that changes in interest rates will have a material effect on our liquidity, financial condition or results of operations.
 
We do not have interest rate risk in our long-term debt and do not enter into interest rate swap agreements. A change in interest rates would not effect interest expense on the $25.0 million, 6.5% convertible debenture because that instrument bears a fixed rate of interest.

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Table of Contents
 
ITEM 4.    CONTROLS AND PROCEDURES
 
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures within 90 days before the filing date of this quarterly report. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective to ensure that material information required to be included in the Company’s Exchange Act reports would be made known to management by others within the Company. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation, nor were there any significant deficiencies or material weaknesses in such internal controls. As a result, no corrective actions were required or taken.
 
Our CEO and CFO do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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Table of Contents
 
PART II. OTHER INFORMATION
 
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
Our annual meeting of shareholders was held on September 24, 2002 to elect directors. All of the nominees were elected and the shareholders voted as follows:
 
Directors
  
Votes For
  
Votes Withheld
Carlene Ellis
  
13,329,821
  
      26,125
Mark R. Hollinger
  
10,749,168
  
2,606,778
Donald D. Jobe
  
13,329,821
  
      26,125
George H. Kerckhove
  
13,329,821
  
      26,125
Dr. William Lattin
  
10,949,900
  
2,406,046
William C. McCormick
  
13,329,541
  
      26,405
Robert C. Strandberg
  
13,329,541
  
      26,405
 
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
 
(a)  See the Exhibit Index for the exhibits filed as part of this report.
 
(b)  Reports on Form 8-K
 
A Current Report on Form 8-K was filed on September 18, 2002 to report under Item 5 the Company’s results for the first quarter of fiscal 2003. No other reports on Form 8-K were filed during the quarter ended November 23, 2002.

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Table of Contents
 
SIGNATURE
 
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 this 6th day of January, 2003.
 
MERIX CORPORATION
 
 
By:
  
/s/  Janie S. Brown        
Janie S. Brown
Sr. Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)

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CERTIFICATION REQUIRED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Janie S. Brown, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Merix Corporation;
 
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.
 
Date: January 6, 2003
 
 
/s/ Janie S. Brown                    
Janie S. Brown
Chief Financial Officer

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I, Mark R. Hollinger, certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Merix Corporation;
 
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.
 
Date: January 6, 2003
 
 
/s/  Mark R. Hollinger                       
Mark R. Hollinger
Chief Executive Officer

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Table of Contents
 
EXHIBIT INDEX
Exhibit Number
   
Document Description
  3.1
   
Articles of Incorporation of the Company, as amended, incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended May 26, 2001.
  3.2
   
Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the Company’s Form 10-K for the fiscal year ended May 31, 1997.
10.1
   
Indemnity Agreement between the Company and Kirby Dyess dated as of September 24, 2002.
99.1
   
Merix Corporation Certification of Mark R. Hollinger, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2
   
Merix Corporation Certification of Janie S. Brown, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.