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 August 29, 2009





OR





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ________ to ________





Commission
File No. 1-33752





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 No.)15725
      SW Greystone Court, Suite 200, Beaverton, Oregon
            
            97006(Address
      of principal executive offices)
            
            (Zip
      Code)Registrant’s
      telephone number, including area code:  503-716-3700




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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes  o   No
o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer
o Accelerated filer
o Non-accelerated
filer o (Do not
check if a smaller reporting company) Smaller reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes o  No x




The
number of shares of common stock outstanding as of October 5, 2009
was 21,880,366 shares.








MERIX
CORPORATION


INDEX TO FORM 10-Q





PART I - FINANCIAL
      INFORMATION
            PageItem 1.
            Consolidated Financial Statements
      (Unaudited)Consolidated Balance Sheets – August 29, 2009 and May
      30, 2009
            2Consolidated
      Statements of Operations – Fiscal Quarters Ended August 29, 2009and
      August 30, 2008
            3Consolidated Statements of Shareholders’ Equity and
      Comprehensive Income (Loss) – Fiscal Quarters Ended August
      29,  2009 and August 30, 2008
            4Consolidated Statements of Cash Flows – Fiscal Quarters
      Ended August 29, 2009 and August 30, 2008
            5Notes to Consolidated Financial
      Statements
            6Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            16Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            24Item 4.
            Controls and Procedures
            24PART II - OTHER
      INFORMATIONItem 1.
            Legal Proceedings
            25Item 1A.
            Risk Factors
            25Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            40Item 6.
            Exhibits
            41Signatures
            
            41











Table of Contents


PART I – FINANCIAL
INFORMATION


MERIX CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in
      thousands)(unaudited)August
      29,
            
            
            May
      30,2009
            
            
            2009AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            21,353
            
            
            $
            16,141Accounts
      receivable, net of allowances for doubtfulaccounts
      of $1,478 and $1,503
            
            
            42,219
            
            
            
            43,290Inventories,
      net
            
            
            14,941
            
            
            
            14,593Assets
      held for sale
            
            
            112
            
            
            
            3Deferred
      income taxes
            
            
            160
            
            
            
            160Prepaid
      and other current assets
            
            
            6,928
            
            
            
            5,437Total
      current assets
            
            
            85,713
            
            
            
            79,624Property,
      plant and equipment, net of accumulateddepreciation
      of $141,809 and $138,482
            
            
            89,458
            
            
            
            95,170Goodwill
            
            
            11,392
            
            
            
            11,392Definite-lived
      intangible assets, net of accumulatedamortization
      of $10,849 and $10,380
            
            
            6,359
            
            
            
            6,828Deferred
      income taxes, net
            
            
            521
            
            
            
            521Assets
      held for sale
            
            
            1,146
            
            
            
            1,146Other
      assets
            
            
            4,328
            
            
            
            4,470Total
      assets
            
            $
            198,917
            
            
            $
            199,151Liabilities
      and Shareholders' EquityCurrent
      liabilities:Accounts
      payable
            
            $
            34,514
            
            
            $
            33,371Accrued
      liabilities
            
            
            14,547
            
            
            
            13,088Total
      current liabilities
            
            
            49,061
            
            
            
            46,459Long-term
      debt
            
            
            83,000
            
            
            
            78,000Other
      long-term liabilities
            
            
            4,582
            
            
            
            4,374Total
      liabilities
            
            
            136,643
            
            
            
            128,833Commitments
      and Contingencies (Note 14)Shareholders'
      equity:Preferred
      stock, no par value; 10,000 shares authorized;none
      issued
            
            
            -
            
            
            
            -Common
      stock, no par value; 50,000 shares authorized;21,881
      and 21,781 issued and outstanding
            
            
            217,579
            
            
            
            217,112Accumulated
      deficit
            
            
            (159,047
            )
            
            
            (150,813
            )Accumulated
      other comprehensive income
            
            
            33
            
            
            
            34Total
      Merix shareholders' controlling interest
            
            
            58,565
            
            
            
            66,333Noncontrolling
      interest
            
            
            3,709
            
            
            
            3,985Total
      shareholders' equity
            
            
            62,274
            
            
            
            70,318Total
      liabilities and shareholders' equity
            
            $
            198,917
            
            
            $
            199,151See
      accompanying Notes to Consolidated Financial Statements.












Table of Contents


MERIX
      CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF
    OPERATIONS(in
      thousands, except per share data)(unaudited)Fiscal
      quarter endedAugust
      29,
            
            
            August
      30,2009
            
            
            2008Net
      sales
            
            $
            57,797
            
            
            $
            90,627Cost
      of sales
            
            
            54,283
            
            
            
            80,353Gross
      profit
            
            
            3,514
            
            
            
            10,274Operating
      expenses:Engineering
            
            
            261
            
            
            
            563Selling,
      general and administration
            
            
            7,966
            
            
            
            9,702Amortization
      of intangible assets
            
            
            469
            
            
            
            520Impairment
      of fixed assets (Note 16)
            
            
            642
            
            
            
            -Severance
      charges and other restructuring costs (Note 16)
            
            
            314
            
            
            
            (527
            )Total
      operating expenses
            
            
            9,652
            
            
            
            10,258Operating
      income (loss)
            
            
            (6,138
            )
            
            
            16Other
      income (expense):Interest
      income
            
            
            6
            
            
            
            51Interest
      expense
            
            
            (1,041
            )
            
            
            (876
            )Other
      income (expense), net
            
            
            (53
            )
            
            
            (364
            )Total
      other expense, net
            
            
            (1,088
            )
            
            
            (1,189
            )Loss
      before income taxes and minority interests
            
            
            (7,226
            )
            
            
            (1,173
            )Provision
      for income taxes
            
            
            909
            
            
            
            728Net
      loss
            
            
            (8,135
            )
            
            
            (1,901
            )Net
      income attributable to noncontrolling interest
            
            
            99
            
            
            
            246Net
      loss attributable to controlling interest
            
            $
            (8,234
            )
            
            $
            (2,147
            )Basic
      and diluted loss per share attributable toMerix
      common shareholders
            
            $
            (0.38
            )
            
            $
            (0.10
            )Weighted
      average number of shares - basic and diluted
            
            
            21,614
            
            
            
            20,794See
      accompanying Notes to Consolidated Financial Statements.













Table of Contents


MERIX CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS'
      EQUITYAND
      COMPREHENSIVE INCOME (LOSS)For
      the fiscal quarters ended August 29, 2009 and August 30,
    2008(in
      thousands)AccumulatedOtherNon-
            
            
            
            
            
            
            
            
            
            
            
            Comprehensive
            
            
            Totalcontrolling
            
            
            Common
      Stock
            
            
            Accumulated
            
            
            Income
            
            
            Shareholders'Interest
            
            
            Shares
            
            
            Amount
            
            
            Deficit
            
            
            (Loss)
            
            
            EquityBalance
      at May 31, 2008
            
            $
            4,573
            
            
            
            21,073
            
            
            $
            215,085
            
            
            $
            (101,358
            )
            
            $
            47
            
            
            $
            118,347Dividend
      declared for distribution to non-controlling interest
            
            
            (297
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (297
            )Stock
      Plans:Issuance
      of restricted stock to employees
            
            
            -
            
            
            
            26
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of stock under employee stock purchase plan
            
            
            -
            
            
            
            147
            
            
            
            262
            
            
            
            -
            
            
            
            -
            
            
            
            262Share-based
      compensation expense
            
            
            -
            
            
            
            -
            
            
            
            566
            
            
            
            -
            
            
            
            -
            
            
            
            566Shares
      repurchased, surrendered or cancelled
            
            
            -
            
            
            
            (8
            )
            
            
            (18
            )
            
            
            -
            
            
            
            -
            
            
            
            (18
            )Comprehensive
      loss:Net
      income (loss)
            
            
            246
            
            
            
            -
            
            
            
            -
            
            
            
            (2,147
            )
            
            
            -
            
            
            
            (1,901
            )Foreign
      currency translation adjustment, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2
            )
            
            
            (2
            )Quarterly
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,903
            )Balance
      at August 30, 2008
            
            $
            4,522
            
            
            
            21,238
            
            
            $
            215,895
            
            
            $
            (103,505
            )
            
            $
            45
            
            
            $
            116,957Balance
      at May 30, 2009
            
            $
            3,935
            
            
            
            21,781
            
            
            $
            217,112
            
            
            $
            (150,622
            )
            
            $
            33
            
            
            $
            70,458Elimination
      of one-month reporting lag for Asia subsidiary
            
            
            50
            
            
            
            -
            
            
            
            -
            
            
            
            (191
            )
            
            
            1
            
            
            
            (140
            )Dividend
      declared for distribution to non-controlling interest
            
            
            (375
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (375
            )Stock
      Plans:Issuance
      of restricted stock to employees
            
            
            -
            
            
            
            108
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Share-based
      compensation expense
            
            
            -
            
            
            
            -
            
            
            
            475
            
            
            
            -
            
            
            
            -
            
            
            
            475Shares
      repurchased, surrendered or cancelled
            
            
            -
            
            
            
            (8
            )
            
            
            (8
            )
            
            
            -
            
            
            
            -
            
            
            
            (8
            )Comprehensive
      loss:Net
      income (loss)
            
            
            99
            
            
            
            -
            
            
            
            -
            
            
            
            (8,234
            )
            
            
            -
            
            
            
            (8,135
            )Foreign
      currency translation adjustment, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1
            )
            
            
            (1
            )Quarterly
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (8,136
            )Balance
      at August 29, 2009
            
            $
            3,709
            
            
            
            21,881
            
            
            $
            217,579
            
            
            $
            (159,047
            )
            
            $
            33
            
            
            $
            62,274See
      accompanying Notes to Consolidated Financial Statements.












Table of Contents


MERIX
      CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in
      thousands)(unaudited)Fiscal
      quarter endedCASH
      FLOWS FROM OPERATING ACTIVITIES
            
            August
      29, 2009
            
            
            August
      30, 2008Net
      loss
            
            $
            (8,135
            )
            
            $
            (1,901
            )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      and amortization
            
            
            5,833
            
            
            
            5,457Share-based
      compensation expense
            
            
            475
            
            
            
            566Impairment
      of fixed assets
            
            
            642
            
            
            
            -Gain
      on disposition of assets
            
            
            (9
            )
            
            
            (567
            )Changes
      in operating accounts:Decrease
      in accounts receivable, net
            
            
            959
            
            
            
            2,818(Increase)
      decrease in inventories, net
            
            
            (348
            )
            
            
            5(Increase)
      decrease in other assets
            
            
            (1,481
            )
            
            
            3,246Increase
      (decrease) in accounts payable
            
            
            1,377
            
            
            
            (1,734
            )Increase
      in other accrued liabilities
            
            
            1,306
            
            
            
            1,310Increase
      (decrease) in due to affiliate, net
            
            
            -
            
            
            
            (67
            )Net
      cash provided by operating activities
            
            
            619
            
            
            
            9,133CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, plant and equipment
            
            
            (422
            )
            
            
            (9,421
            )Proceeds
      from disposal of property, plant and equipment
            
            
            23
            
            
            
            555Net
      cash used in investing activities
            
            
            (399
            )
            
            
            (8,866
            )CASH
      FLOWS FROM FINANCING ACTIVITIESBorrowing
      on revolving line of credit
            
            
            5,000
            
            
            
            6,000Borrowing
      on long-term notes payable
            
            
            1,500
            
            
            
            -Principal
      payments on revolving line of credit
            
            
            (1,500
            )
            
            
            (6,000
            )Proceeds
      from exercise of stock options and stock plan transactions
            
            
            -
            
            
            
            262Reacquisition
      of common stock
            
            
            (8
            )
            
            
            (18
            )Dividend
      distribution to non-controlling interest
            
            
            
            
            
            
            (297
            )Other
      financing activities
            
            
            -
            
            
            
            (4
            )Net
      cash provided by (used in) financing activities
            
            
            4,992
            
            
            
            (57
            )NET
      CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            5,212
            
            
            
            210CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            16,141
            
            
            
            5,728CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            21,353
            
            
            $
            5,938SUPPLEMENTAL
      CASH FLOW INFORMATIONCash
      paid for income taxes, net
            
            $
            356
            
            
            $
            480Cash
      paid for interest
            
            
            38
            
            
            
            174See
      accompanying Notes to Consolidated Financial Statements.











Table of Contents


MERIX
CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
1.                      NATURE
OF BUSINESS





Merix
Corporation, an Oregon corporation, was formed in March 1994. Merix is a leading
global manufacturing service provider for technologically advanced printed
circuit boards (PCBs) for original equipment manufacturer (OEM) customers and
their electronic manufacturing service (EMS) providers. The Company’s principal
products are complex multi-layer rigid PCBs, which are the platforms used to
interconnect microprocessors, integrated circuits and other components that are
essential to the operation of electronic products and systems. The market
segments the Company serves are primarily in commercial equipment for the
communications and networking, computing and peripherals, industrial and
medical, defense and aerospace and automotive markets. The Company’s markets are
generally characterized by rapid technological change, high levels of complexity
and short product life cycles, as new and technologically superior electronic
equipment is continually being developed.





NOTE
2.                      BASIS
OF PRESENTATION AND CONSOLIDATION





The
accompanying consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and note disclosures normally included in the Annual Report
on Form 10-K prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules or
regulations. The interim consolidated financial statements are unaudited,
however, they reflect all normal recurring adjustments and non-recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in our 2009 Annual Report on Form 10-K. Results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year.





The
Company’s fiscal year consists of a 52 or 53 week period that ends on the last
Saturday in May. Fiscal 2010 is a 52 week fiscal year ending on May 29, 2010.
The first quarter of fiscal 2010 ended August 29, 2009 and the first quarter of
fiscal 2009 ended August 30, 2008 and included thirteen weeks,
respectively.





The
consolidated financial statements include the accounts of Merix Corporation and
its wholly-owned and majority-owned subsidiaries. Beginning in the first quarter
of fiscal 2010, all intercompany accounts, transactions and profits have been
eliminated in consolidation.  Prior to May 30, 2009 certain
intercompany amounts related to Merix Asia could not be eliminated, as discussed
in Note 4.





The
functional currency for all subsidiaries is the U.S. dollar.  Foreign
exchange losses for the fiscal quarters ended August 29, 2009 and August 30,
2008 totaled $0.1 million and $0.3 million, respectively, and are included in
net other expense in the consolidated statements of operations.





Events
subsequent to August 29, 2009 were evaluated through October 7, 2009, the date
on which the financial statements were issued.









Table of Contents





NOTE
3.                      FAIR
VALUE OF FINANCIAL ASSETS AND LIABILITIES





We
estimate the fair value of our monetary assets and liabilities based upon
comparison of such assets and liabilities to the current market values for
instruments of a similar nature and degree of risk.  Our monetary
assets and liabilities include cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities and long-term debt.  Due to
their short-term nature, we estimated that the recorded value of our monetary
assets and liabilities, except long-term debt as disclosed below, approximated
fair value as of August 29, 2009 and May 30, 2009.





The fair
market value of long-term fixed interest rate debt is subject to interest rate
risk.  Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise;
however, the quoted market price for the Company’s debt is currently reflecting
a significant risk premium.  The Company’s debt trades infrequently in
the open market and as such, the quoted market price is considered a Level II
input in the assessment of fair value.  At August 29, 2009 and May 30,
2009, respectively, the book value of our fixed rate debt and the fair value,
based on open market trades proximate to the fair value measurement date, was as
follows:




August
      29,
            
            
            May
      30,2009
            
            
            2009Book
      value of fixed rate debt
            
            $
            70,000
            
            
            $
            70,000Fair
      value of fixed rate debt
            
            $
            35,000
            
            
            $
            28,000





NOTE
4.                      ELIMINATION
OF ONE MONTH REPORTING LAG FOR MERIX ASIA





The
Company implemented an enterprise resource planning (ERP) system during the
first quarter of fiscal 2009 for Merix Asia.  Prior to that
implementation, the Company’s financial reporting systems at Merix Asia were
predominantly manual in nature, and required significant time to process and
review the transactions in order to assure the financial information was
properly stated. Additionally, Merix Asia performs a complex regional financial
consolidation of its subsidiaries prior to the Company’s final consolidation.
The time required to complete Merix Asia’s consolidation, record intercompany
transactions and properly report any adjustments, intervening and/or subsequent
events required the use of a one-month lag in consolidating the financial
statements for Merix Asia with Merix Corporation through the end of fiscal 2009.
Intercompany balances resulting from transactions with Merix Asia during the
one-month lag period were netted and presented as a current asset or liability
on the consolidated balance sheet.





As a
result of the implementation of the new ERP system for Merix Asia and the
related streamlining of business processes the Company has been able to
eliminate the one-month reporting lag for Merix Asia as of the commencement of
the first quarter of fiscal 2010.





The
elimination of the one-month reporting lag resulted in an increase to
accumulated deficit as of May 30, 2009 of $0.2 million, representing the
operating results for Merix Asia for the four weeks ended May 30, 2009 as
presented below:





Net
      Sales
            
            $
            8,182Cost
      of
      Sales
            
            
            7,389Gross
      Profit
            
            
            793Gross
      margin
            
            
            9.7
            %Engineering
      expense
            
            
            56Selling,
      general and
      administration
            
            
            510Amortization
      of intangible
      assets
            
            
            56Severance,
      asset impairment and restructuring charges
            
            
            197Loss
      from
      operations
            
            
            (26
            )Other
      expense,
      net
            
            
            16Provision
      for income taxes
            
            
            99Net
      loss
            
            
            (141
            )Net
      income attributable to noncontrolling interest
            
            
            50Net
      increase to accumulated
      deficit
            
            $
            (191
            )










Table of Contents





The
amounts presented on the consolidated balance sheet as of May 30, 2009 have been
revised from those previously reported to reflect the consolidation of Merix
Asia after the elimination of the one-month reporting lag as shown
below:





May
      30,
            
            
            May
      30,2009
            
            
            2009Assets
            
            (as
      reported)
            
            
            (as
      revised)Cash
            
            $
            17,571
            
            
            $
            16,141Accounts
      receivable,
      net
            
            
            43,285
            
            
            
            43,290Inventories,
      net
            
            
            14,367
            
            
            
            14,593Other
      current
      assets
            
            
            5,059
            
            
            
            5,600Total
      current
      assets
            
            
            80,282
            
            
            
            79,624Property,
      plant and equipment,
      net
            
            
            95,883
            
            
            
            95,170Other
      assets
            
            
            24,505
            
            
            
            24,357Total
      assets
            
            $
            200,670
            
            
            $
            199,151Liabilities
      and Shareholder’s EquityAccounts
      payable
            
            $
            33,263
            
            
            $
            33,371Accrued
      liabilities
            
            
            14,715
            
            
            
            13,088Total
      current
      liabilities
            
            
            47,978
            
            
            
            46,459Long-term
      debt
            
            
            78,000
            
            
            
            78,000Other
      long-term
      liabilities
            
            
            4,234
            
            
            
            4,374Total
      liabilities
            
            
            130,212
            
            
            
            128,833Noncontrolling
      interest
            
            
            3,935
            
            
            
            3,985Common
      stock
            
            
            217,112
            
            
            
            217,112Accumulated
      other comprehensive income
            
            
            33
            
            
            
            34Accumulated
      deficit
            
            
            (150,622
            )
            
            
            (150,813
            )Total
      shareholder’s
      equity
            
            
            70,458
            
            
            
            70,318Total
      liabilities and shareholder’s
      equity
            
            $
            200,670
            
            
            $
            199,151





Prior
period consolidated results of operations and cash flows have not been restated
to conform with the new Merix Asia fiscal reporting period since the results, as
previously presented, are considered comparable to the current year consolidated
financial statements in all material respects.












Table of Contents





NOTE
5.                      INVENTORIES





Inventories
are valued at the lower of cost or market and include materials, labor and
manufacturing overhead. Inventory cost is determined by standard cost, which
approximates the first-in, first-out (FIFO) basis.





Provisions
for inventories are made to reduce excess inventories to their estimated net
realizable values, as necessary. A change in customer demand for inventory is
the primary indicator for reductions in inventory carrying values. The Company
records provisions for excess inventories based on historical experiences with
customers, the ability to utilize inventory in other programs, the ability to
redistribute inventory back to the suppliers and current and forecasted demand
for the inventory. The net decrease to inventory valuation reserves was $0.2
million and $0.8 million, respectively, during the first quarters of fiscal 2010
and 2009. As of August 29, 2009 and May 30, 2009, our inventory reserves totaled
$3.4 million and $3.6 million, respectively.





The
Company maintains inventories on a consignment basis at global customer
locations.. Consignment inventory is recorded as inventory until the product is
pulled from the consignment inventories by the customer and all risks and
rewards of ownership of the consignment inventory have been transferred to the
customer.





Abnormal
amounts of idle facility expense, freight, handling costs and wasted material
(spoilage) are recognized as current-period charges and the allocation of fixed
production overheads to the costs of conversion is based on the normal capacity
of the production facilities.  The Company is required to estimate the
amount of idle capacity and expense amounts in the current
period.  During the first quarter of fiscal 2010, the Company expensed
$0.1 million related to abnormally low production volumes as a component of cost
of sales.  There were no amounts expensed related to abnormally low
production volumes and related excess capacity in the first quarter of fiscal
2009.


Inventories,
net of related reserves, consisted of the following (in thousands):





August
      29,
            
            
            May
      30,2009
            
            
            2009Raw
      materials
            
            $
            2,791
            
            
            $
            2,910Work-in-process
            
            
            4,735
            
            
            
            3,967Finished
      goods
            
            
            3,415
            
            
            
            3,930Consignment
      finished goods
            
            
            4,000
            
            
            
            3,786$
            14,941
            
            
            $
            14,593





NOTE
6.                      PREPAID
AND OTHER CURRENT ASSETS





Prepaid
expenses and other current assets consisted of the following at August 29, 2009
and May 30, 2009 (in thousands):





August
      29,
            
            
            May
      30,2009
            
            
            2009Prepaid
      expenses
            
            $
            1,666
            
            
            $
            1,578Income
      taxes
      receivable
            
            
            368
            
            
            
            328Value-added
      tax
      receivable
            
            
            3,178
            
            
            
            2,009Other
      assets
            
            
            1,716
            
            
            
            1,522$
            6,928
            
            
            $
            5,437





NOTE
7.                      DEFINITE-LIVED
INTANGIBLE ASSETS





At August
29, 2009 and May 30, 2009, the Company’s definite-lived intangible assets
included customer relationships and a manufacturing sales representative
network. The gross amount of the Company’s definite-lived intangible assets and
the related accumulated amortization were as follows (in
thousands):





Amortization
            
            August
      29,
            
            
            May
      30,Period
            
            2009
            
            
            2009Customer
      relationships
            6.5-10
      years
            
            $
            17,168
            
            
            $
            17,168Manufacturing
      sales representatives network
            5.5
      years
            
            
            40
            
            
            
            4017,208
            
            
            
            17,208Accumulated
      amortization
            
            
            
            (10,849
            )
            
            
            (10,380
            )$
            6,359
            
            
            $
            6,828





Amortization
expense was as follows (in thousands):





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008Customer
      relationships
            
            $
            467
            
            
            $
            518Manufacturing
      sales representatives network
            
            
            2
            
            
            
            2$
            469
            
            
            $
            520





Amortization
is as follows over the next five fiscal years and thereafter (in
thousands):





Remainder
      of fiscal 2010
            
            $
            1,2962011
            
            
            1,5532012
            
            
            1,1202013
            
            
            7272014
            
            
            727Thereafter
            
            
            936$
            6,359










Table of Contents





NOTE
8.                      OTHER
ASSETS





Other
assets consisted of the following at August 29, 2009 and May 30, 2009 (in
thousands):





August
      29,
            
            
            May
      30,2009
            
            
            2009Leasehold
      land use rights,
      net
            
            $
            1,190
            
            
            $
            1,197Deferred
      financing costs, net
            
            
            2,826
            
            
            
            3,022Other
      assets
            
            
            312
            
            
            
            251$
            4,328
            
            
            $
            4,470





NOTE
9.                      ACCRUED
LIABILITIES





Accrued
liabilities consisted of the following at August 29, 2009 and May 30, 2009 (in
thousands):





August
      29,
            
            
            May
      30,2009
            
            
            2009Accrued
      compensation
            
            $
            7,167
            
            
            $
            6,602Accrued
      warranty (Note
      10)
            
            
            701
            
            
            
            986Income
      taxes
      payable
            
            
            606
            
            
            
            321Other
      liabilities
            
            
            6,073
            
            
            
            5,179$
            14,547
            
            
            $
            13,088





NOTE
10.                      ACCRUED
WARRANTY





The
Company generally warrants its products for a period of up to twelve months from
the point of sale. However, in selected circumstances, the Company grants longer
warranty periods to certain customers of up to three years. The Company records
a liability for the estimated cost of the warranty upon transfer of ownership of
the products to the customer. Using historical data, the Company estimates
warranty costs and records the provision for such charges as an element of cost
of goods sold upon recognition of the related revenue. The Company also accrues
warranty liability for certain specifically identified items that are not
covered by its assessment of historical experience.





Warranty
activity was as follows (in thousands):





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008Balance,
      beginning of
      period
            
            $
            986
            
            
            $
            2,147Provision
      for warranty
      charges
            
            
            458
            
            
            
            982Warranty
      charges
      incurred
            
            
            (743
            )
            
            
            (809
            )Balance,
      end of
      period
            
            $
            701
            
            
            $
            2,320





NOTE
11.                      EARNINGS
PER SHARE AND ANTIDILUTIVE SHARES





For the
fiscal quarters ended August 29, 2009 and August 30, 2008, the following
potentially dilutive shares were excluded from the calculation of diluted EPS
because their effect would have been anti-dilutive.





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008Stock
      options
            
            
            2,865
            
            
            
            3,364Restricted
      stock
      awards
            
            
            253
            
            
            
            334Convertible
      notes
            
            
            4,608
            
            
            
            4,608










Table of Contents





NOTE
12.                      SEGMENT
INFORMATION





The
Company has two reportable business segments defined by geographic location:
North America and Asia. Operating segments are defined as components of an
enterprise for which separate financial information is available and regularly
reviewed by senior management. The Company’s operating segments are evidence of
the internal structure of its organization. Each segment operates in the same
industry with production facilities that produce similar customized products for
its customers. The production facilities, sales management and chief
decision-makers for all processes are managed by the same executive team. The
Company’s chief operating decision maker is its Chief Executive Officer. Segment
disclosures are presented to the gross profit level as this is the primary
performance measure for which the segment managers are responsible. No other
operating results information is provided to the chief operating decision maker
for review at the segment level. The following tables reconcile certain
financial information by segment.





Net sales
by segment were as follows (in thousands):





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008North
      America
            
            $
            26,297
            
            
            $
            44,917Asia
            
            
            31,500
            
            
            
            45,710$
            57,797
            
            
            $
            90,627





Gross
profit by segment was as follows (in thousands):





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008North
      America
            
            $
            (771
            )
            
            $
            5,164Asia
            
            
            4,285
            
            
            
            5,110$
            3,514
            
            
            $
            10,274





Total
assets by segment were as follows (in thousands):





August
      29,
              2009
            
            
            May
      30,
              2009North
      America
            
            $
            132,467
            
            
            $
            131,535Asia
            
            
            66,450
            
            
            
            67,616$
            198,917
            
            
            $
            199,151





NOTE
13.                      SIGNIFICANT
CUSTOMERS





There
were no customers individually accounting for 10% or more of the Company’s net
sales in the first quarter of fiscal 2010.  Two customers exceeded 10%
of net sales in the first quarter of fiscal 2009, accounting for 15% and 10%,
respectively, of net sales.





At August
29, 2009, five entities represented approximately 44% of the Company’s
consolidated net trade accounts receivable balance, individually ranging from
approximately 5% to approximately 19%.










Table of Contents





NOTE
14.                      COMMITMENTS
AND CONTINGENCIES





Litigation


The
Company is, from time to time, made subject to various legal claims, actions and
complaints in the ordinary course of its business. Except as disclosed below,
management believes that the outcome of litigation should not have a material
adverse effect on its consolidated results of operations, financial condition or
liquidity.





Securities Class
Action


Four
purported class action complaints were filed against the Company and certain of
its executive officers and directors in the first quarter of fiscal 2005. The
complaints were consolidated in a single action entitled In re Merix Corporation
Securities Litigation, Lead Case No. CV 04-826-MO, in the U.S. District Court
for the District of Oregon. After the court granted the Company’s motion to
dismiss without prejudice, the plaintiffs filed a second amended complaint. That
complaint alleged that the defendants violated the federal securities laws by
making certain inaccurate and misleading statements in the prospectus used in
connection with the January 2004 public offering of approximately $103.4 million
of the Company’s common stock. In September 2006, the Court dismissed that
complaint with prejudice. The plaintiffs appealed to the Ninth Circuit Court of
Appeals. In April 2008, the Ninth Circuit reversed the dismissal of the second
amended complaint seeking an unspecified amount of damages. The Company sought
rehearing which was denied and rehearing en banc was also denied. The Company
obtained a stay of the mandate from the Ninth Circuit and filed a certiorari
petition with the United States Supreme Court on September 22, 2008. On December
15, 2008, the Supreme Court denied the certiorari petition and the case was
remanded back to the U.S. District Court for the District of Oregon. On May 15,
2009, the plaintiffs moved to certify a class of all investors who purchased in
the public offering and who were damaged thereby. The Court has not yet ruled on
that motion. The case is currently in the discovery phase. A potential loss or
range of loss that could arise from these cases is not estimable or probable at
this time.





Commitments


As of
August 29, 2009, the Company had capital commitments of approximately $0.7
million, primarily relating to the purchase of machinery and
equipment.





NOTE
15.                      RELATED
PARTY TRANSACTIONS





The
Company recorded the following amounts for transactions with Huizhou Desay
Holdings Co. Ltd., a minority shareholder in two Merix Asia manufacturing
facilities, during the periods indicated (in thousands):





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008Consulting
      fees
            
            $
            53
            
            
            $
            53Operating
      lease rental
      fees
            
            
            82
            
            
            
            81Management
      fees
            
            
            36
            
            
            
            22Capitalized
      construction costs
            
            
            -
            
            
            
            246Other
      fees
            
            
            65
            
            
            
            96$
            236
            
            
            $
            498








Table of Contents





NOTE
16.                      SEVERANCE,
IMPAIRMENT AND RESTRUCTURING CHARGES





Total
severance and restructuring charges were as follows (in thousands):





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008Severance
      charges
            
            $
            245
            
            
            $
            40Hong
      Kong office closure charges
            
            
            56
            
            
            
            -Legal
      and other restructuring charges
            
            
            13
            
            
            
            -Impairment
      of fixed assets
            
            
            642
            
            
            
            -Gain
      on sale of Merix Asia equipment
            
            
            -
            
            
            
            (567
            )$
            956
            
            
            $
            (527
            )







In the
first quarter of fiscal 2010, the Company recorded $0.1 million in restructuring
costs related to the relocation of its Asia administrative offices from Hong
Kong to the People’s Republic of China (PRC), comprised of severance and
relocation freight costs.




The
Company also recorded $0.2 million in other severance charges during the first
quarter of fiscal 2010 due to minor reductions-in-force in both North America
and Asia in order to mitigate costs in response to ongoing softness in demand
for the Company’s products.




The
Company determined in the first quarter of fiscal 2010 that it would
decommission certain manufacturing equipment at its Forest Grove facility with a
net book value of $0.6 million.  An impairment charge was recorded to
write off the net book value of this equipment.




In the
first quarter of fiscal 2009, the Company recorded approximately $40,000 in
severance and related costs in connection with closure of the Hong Kong
manufacturing facility as part of the Company’s actions to consolidate its Asian
operations at its lower-cost facilities in China and expand the facilities at
its Huiyang plant to increase its manufacturing capacity in China, which was
completed in the fourth quarter of fiscal 2008.  Additionally, the
Company recorded a gain of $0.6 million in the first quarter of fiscal 2009
related to the sale of equipment previously used at the Hong Kong
facility.





A
roll-forward of the Company’s severance accrual for the first quarter of fiscal
2010 was as follows (in thousands):





May
      30, 2009
            
            
            Charged
      to Expense
            
            
            Expenditures
            
            
            August
      29, 2009Severance
      costs
            
            $
            435
            
            
            $
            245
            
            
            $
            (572
            )
            
            $
            108





NOTE
17.                      NEW
ACCOUNTING PRONOUNCEMENTS





Recently
Adopted Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141(R), “Business Combinations,”
which replaces SFAS No. 141, “Business Combinations.”SFAS No. 141(R)
establishes principles and requirements for how an acquiring company (1)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, (2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and (3) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R) is
effective for business combinations occurring on or after December 15, 2008, and
applies to all transactions or other events in which the Company obtains control
in one or more businesses. The impact of adopting SFAS No. 141(R) did not have a
material impact on the Company’s consolidated financial position or results of
operations.





In
December 2007, the FASB issued SFAS  No. 160, “Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB No. 51,”
which requires the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the
consolidated statement of










Table of Contents





financial
position within equity, but separate from the parent’s equity. It also requires
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the face of the
consolidated statement of income. SFAS No. 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2008, and early adoption is prohibited. SFAS No. 160 shall be applied
prospectively as of the beginning of the fiscal year in which it is initially
applied, except for the presentation and disclosure requirements. The impact of
adopting SFAS No. 160 did not have a material impact on the Company’s
consolidated financial position or results of operations. The adoption of SFAS
No. 160 did result in a reclassification of minority interest into total
consolidated equity thereby increasing total equity by $4.0 million at May 30,
2009.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities,” which requires certain disclosures related to
derivative instruments. SFAS No. 161 is effective prospectively for interim
periods and fiscal years beginning after November 15, 2008. The Company
currently has no derivative instruments and does not currently engage in hedging
activity and as such, the adoption of SFA No. 161 did not have a significant
impact on its consolidated financial position and results of
operations.





In April
2008, the FASB issued Staff Position No. FAS 142-3 "Determination of the Useful
Life of Intangible Assets" (FSP 142-3). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets.” The intent of this Staff Position is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141(R), “Business Combinations,” and
other  U.S. generally accepted accounting principles. FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The adoption
of FSP 142-3 did not have a significant impact on the Company’s consolidated
financial position or results of operations.





In May
2008, the FASB issued Staff Position No. APB 14-1 "Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement)" (FSP APB 14-1). FSP APB 14-1 clarifies that convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants."
Additionally, FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP APB 14-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company currently has no
convertible debt instruments that may be settled in cash upon conversion and, as
such, the adoption did not have a significant impact on its consolidated
financial position and results of operations.





In April
2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1 “Interim
Disclosures About Fair Value of Financial Instruments” (FSP FAS 107-1 & APB
28-1) which requires disclosure about the method and significant assumptions
used to establish the fair value of financial instruments for interim reporting
periods as well as annual reporting periods. FSP FAS 107-1 & APB 28-1 is
effective for interim reporting periods ending after June 15, 2009 and the
adoption of this FSP did not have a material impact on the Company’s
consolidated financial position and results of operations.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. Specifically, the standard requires disclosure of
the date through which an entity has evaluated subsequent events and the basis
for that date, which will alert users of the financial statements that the
Company has not evaluated subsequent events occurring after that date. SFAS
No.165 is effective for interim or annual reporting periods ending after June
15, 2009 and the adoption of SFAS No. 165 did not have a material impact on the
Company’s consolidated financial position and results of
operations.










Table of Contents





Recently
Issued Accounting Pronouncements





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets - An Amendment to Statement No. 140,” to simplify guidance for transfers
of financial assets in SFAS No. 140. The guidance removes the concept of a
qualified special purpose entity (QSPE), which will result in securitization and
other asset-backed financing vehicles, to be evaluated for consolidation under
SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 166 also
expands legal isolation analysis, limits when a portion of a financial asset can
be derecognized, and clarifies that an entity must consider all arrangements or
agreements made contemporaneously with, or in contemplation of, a transfer when
applying the derecognition criteria. SFAS No. 166 is effective for first annual
reporting periods beginning after November 15, 2009, and is to be applied
prospectively. The Company does not maintain any QSPEs and as such, the adoption
of SFAS No. 166 is not expected to have a material impact on the Company’s
consolidated financial position and results of operations.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” which addresses the primary beneficiary (PB) assessment criteria for
determining whether an entity is to consolidate a variable interest entity
(VIE). An entity is considered the PB and shall consolidate a VIE if it meets
both the following characteristics: (1) the power to direct the activities of
the VIE that most significantly affects economic performance and (2) the
obligation to absorb losses or right to receive benefits that could potentially
be significant to the VIE. The statement also provides guidance in relation to
the elimination of the QSPE concept from SFAS No. 166. This statement is
effective for annual reporting periods beginning after November 15, 2009. The
Company does not maintain any VIEs and as such, the adoption of SFAS No. 167 is
not expected to have a material impact on the Company’s consolidated financial
position and results of operations.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, A Replacement of
FASB Statement No. 162, The
Hierarchy of Generally Accepted Accounting Principles,” to establish the
FASB Accounting Standards Codification (“Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP in the United States (“the GAAP hierarchy”). Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The impact of adopting SFAS No. 168 will not have a
material impact on the Company’s consolidated financial condition or results of
operations.





NOTE
18.                      Subsequent
Events





New
Borrowing





In
September 2009, the Company entered into a $2.7 million Loan Contract under its
credit facility with Industrial and Commercial Bank of China,
Ltd.  The proceeds borrowed under this loan contract were used for
working capital and operating expenses.  The Company also reduced its
borrowings under its revolving line of credit with Bank of America, N.A. by $2.7
million.




Merger
Agreement
 
 On
October 6, 2009, the Company announced that it entered into a merger agreement
to be acquired by ViaSystems, Inc, (ViaSystems) a leading worldwide provider of
complex multi-layer printed circuit boards and electro-mechanical
solutions.  Under the terms of the merger agreement, ViaSystems will
acquire all of the outstanding common stock of Merix Corporation.
 
 Each
Merix share will be converted into approximately 0.11 newly issued shares of
ViaSystems, subject to adjustment, which will be publicly traded on the NASDAQ
upon completion of the transaction.  Approximately 98 percent of the
holders of Merix $70 million 4% Convertible Senior Subordinated Notes due 2013
have agreed to enter into an exchange agreement where their notes will be
exchanged for approximately 1.4 million newly issued ViaSystems shares plus a
total cash payment of approximately $36 million.
 
 Following
the merger transaction and note exchange, approximately 20 million shares will
be outstanding.  Existing ViaSystems shareholders will own
approximately 80.5 percent of the combined company, existing Merix shareholders
will own approximately 12.5 percent and Merix convertible bond holders will own
approximately 7 percent.
 
 The
Company’s Board of Directors has unanimously approved the merger, which must
also be approved by a vote of the Company’s shareholders.








Item
2.                      Management's
Discussion and Analysis of Financial Condition and Results of
Operations





Forward
Looking Statements





This
Quarterly Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements made in this
Quarterly Report, other than statements of historical fact, are forward-looking,
including, but not limited to, statements regarding industry prospects and
cyclicality and future results of operations or financial position. We use words
such as “anticipates,” “believes,” “expects,” “future” and “intends” and other
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, plans and
projections are described in Part II, Item 1A, “Risk Factors” under the
subheading “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, plans and projections. We do not intend to
publicly release any revisions to 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, including our most recent Annual Report on Form 10-K for the fiscal
year ended May 30, 2009.





Business





We are a
leading global manufacturing service provider of technologically advanced
printed circuit boards (PCBs) used in the design and development of complex
electronic applications by original equipment manufacturer (OEM) customers and
their electronic manufacturing service (EMS) providers. Our principal products
are complex multi-layer rigid PCBs, which are the platforms used to interconnect
microprocessors, integrated circuits and other components that are essential to
the operation of electronic products and systems. Our principal markets include
automotive, defense & aerospace, communications, computing, industrial,
networking, peripherals and test end markets in the worldwide electronics
industry.  The markets served by Merix are generally characterized by
rapid technological change, high levels of complexity and short product life
cycles, as new and technologically superior electronic equipment is continually
being developed and introduced to the global marketplace.





Operating
Segments





Our
business has two operating segments defined by geographic location: North
America and Asia. Operating segments are defined as components of an enterprise
for which separate financial information is available and regularly reviewed by
senior management. Each operating segment operates predominately in the same
industry with production facilities that produce similar customized products for
our global customers. The chief operating decision-maker for both of our
operating segments is our Chief Executive Officer.





Backlog





Backlog
comprises purchase orders received and, in some instances, forecast requirements
released for production under customer contracts. Backlog shippable within the
next 90 days totaled $31.5 million and $27.6 million at August 29, 2009 and May
30, 2009, respectively.  The increase in backlog reflects
strengthening demand in our markets near the end of the first quarter of fiscal
2010 as customers begin rebuilding inventory levels in anticipation of global
economic recovery.





Customers
may cancel or postpone all scheduled orders, in most cases without penalty.
Therefore, backlog may not be a meaningful indicator of future financial
results.










Summary
of Sequential Quarterly Results and Outlook for Second Quarter of Fiscal
2010





Net sales
of $57.8 million in the current quarter decreased $1.1 million or 2% compared to
net sales in the fourth quarter of fiscal 2009, primarily due to a 4% net sales
decrease in our North American operating segment, reflecting continued soft
demand for our products.  Although we experienced increasing demand in
the latter half of the quarter, it was generally not reflected in current
quarter net sales as many of the orders had shipment dates scheduled for the
Company’s second fiscal quarter.  Gross margin decreased to 6.1% in
the current quarter compared to 8.5% in the fourth quarter of fiscal 2009 due
primarily to reduced variable contribution margins on lower production volumes,
primarily in our North American operating segment.  Operating expenses
of $9.7 million decreased $2.0 million compared to the prior quarter due
primarily to reduced restructuring costs and legal charges in the current
quarter. Net loss attributable to Merix shareholders for the quarter totaled
$8.2 million or $0.38 per diluted share, compared to $8.4 million or $0.39 per
diluted share in the fourth quarter of fiscal 2009.





During
normal cyclical downturns, the Company’s attention would be focused on
minimizing the negative impact on net income.  However, given the
significance of the recent economic decline and reduced customer demand we have
focused principally on maximizing cash flow, maintaining and improving customer
service and retaining factory capacity and flexibility. As we begin to see
increases in demand in response to improving global economic conditions,
management is carefully evaluating our manufacturing capacity to ensure we meet
customers’ requirements while at the same time maximizing Merix’ financial
returns.





Customer
demand strengthened in the Company’s markets in the final weeks of the first
quarter.  While visibility to a protracted improvement remains
limited, we expect orders to continue at this higher level, particularly in our
Asian factories, resulting in improved net sales and gross margin in the second
quarter.    We expect operating and non-operating costs to
remain relatively stable compared to the first quarter of fiscal
2010.





Results
of Operations Compared to Prior Year





The
following table sets forth our statement of operations data, both in absolute
dollars and as a percentage of net sales (dollars in thousands).





Fiscal
      Quarter Ended(1)
            
            
            Fiscal
      Quarter Ended(1)August
      29, 2009
            
            
            August
      30, 2008Net
      sales
            
            $
            57,797
            
            
            
            100.0
            %
            
            $
            90,627
            
            
            
            100.0
            %Cost
      of sales
            
            
            54,283
            
            
            
            93.9
            
            
            
            80,353
            
            
            
            88.7Gross
      profit
            
            
            3,514
            
            
            
            6.1
            
            
            
            10,274
            
            
            
            11.3Engineering
            
            
            261
            
            
            
            0.5
            
            
            
            563
            
            
            
            0.6Selling,
      general and administrative
            
            
            7,966
            
            
            
            13.8
            
            
            
            9,702
            
            
            
            10.7Amortization
      of identifiable intangible assets
            
            
            469
            
            
            
            0.8
            
            
            
            520
            
            
            
            0.6Severance,
      impairment and restructuring charges
            
            
            956
            
            
            
            1.7
            
            
            
            (527
            )
            
            
            (0.6
            )Operating
      income (loss)
            
            
            (6,138
            )
            
            
            (10.6
            )
            
            
            16
            
            
            
            0.0Other
      expense, net
            
            
            (1,088
            )
            
            
            (1.9
            )
            
            
            (1,189
            )
            
            
            (1.3
            )Loss
      before income taxes
            
            
            (7,226
            )
            
            
            (12.5
            )
            
            
            (1,173
            )
            
            
            (1.3
            )Provision
      for income taxes
            
            
            909
            
            
            
            1.6
            
            
            
            728
            
            
            
            0.8Net
      loss
            
            
            (8,135
            )
            
            
            (14.1
            )
            
            
            (1,901
            )
            
            
            (2.1
            )Net
      income attributable to non-controlling interests
            
            
            99
            
            
            
            0.2
            
            
            
            246
            
            
            
            0.3Net
      loss attributable to Merix common shareholders
            
            $
            (8,234
            )
            
            
            (14.2
            )%
            
            $
            (2,147
            )
            
            
            (2.4
            )%





(1)  Percentages
may not add due to rounding.










Table of ContentsNet Sales





Net sales
decreased by $32.8 million, or 36%, to $57.8 million, in the first quarter of
fiscal 2010 compared to $90.6 million in the first quarter of fiscal 2009. The
decline in net sales is directly related to the deterioration in global economic
conditions, which reduced demand for our products.  Net sales in our
North America and Asia segments decreased by 41% and 31%, respectively, in the
current quarter compared to the first quarter of the prior fiscal
year.




Segment
and Per Unit Information





Net sales
by segment were as follows (in thousands):





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter
              Ended
              August
      30, 2008North
      America
            
            $
            26,297
            
            
            $
            44,917Asia
            
            
            31,500
            
            
            
            45,710$
            57,797
            
            
            $
            90,627





Per
Unit Information





We define
“unit” as the number of panels shipped to customers during the fiscal
quarter.  Percentage increases (decreases) in unit volume and pricing
for the first quarter of fiscal 2010 compared to the first quarter of fiscal
2009 were as follows:





North
      America:Unit
      volume
            
            (40)%Average
      unit pricing
            
            (2)%Asia:Unit
      volume
            
            (33)%Average
      unit pricing
            
            3%Consolidated:Unit
      volume
            
            (34)%Average
      unit pricing
            
            (4)%





Consolidated


Consolidated
unit sales volume decreased 34%, driven primarily by decreases in demand from
customers in each of our segments as discussed further
below.  Consolidated average unit pricing decreased by 4%, despite a
3% increase in average unit pricing for our Asia segment and only a 2% decrease
in our North America operating segment, as further discussed
below.  This is primarily due to an overall shift in product mix from
higher-technology, higher-priced PCBs produced by our North American facilities
to generally lower-technology, lower-priced PCBs produced by our facilities in
Asia.  The Asia segment’s average price per unit is significantly
lower than the North American segment and Asia net sales increased to 55% of
total net sales in the first quarter of fiscal 2010, compared to 50% in the
first quarter of the prior fiscal year.  This overall shift in product
mix from higher-technology, higher-priced PCBs produced by our North American
facilities to lower-technology, lower-priced PCBs produced by our facilities in
Asia results in a lower consolidated average unit price.





North
America


North
America net sales of $26.3 million decreased by $18.6 million or 41% compared to
the first quarter of fiscal 2009.  This reduction is primarily due to
a 40% decrease in unit volume resulting from demand decreases associated with
the deterioration of macroeconomic conditions.





In
addition to the volume decrease, average unit pricing decreased by 2%, which
resulted primarily from product mix impact due to lower-technology boards being
produced during the current quarter compared to the prior year.  In
particular, the end market showing the sharpest decline since the first quarter
of fiscal 2009 is the communications & networking market.  The
products sold in this end market are generally some of the highest technology
and highest average priced products we produce.













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Asia


Asia net
sales of $31.5 million in the first quarter of fiscal 2010 decreased by $14.2
million or 31% compared to the first quarter of fiscal 2009.  Panel
unit volumes decreased by 33% compared to the same quarter in the prior year,
due primarily to the global economic recession.  Efforts to improve
our product mix through higher priced enhanced technology offerings from our
Asia manufacturing operations over the past year resulted in a 3% increase in
average unit pricing.





Net
Sales by End Market





The
following table shows, for the periods indicated, the amount of net sales to
each of our principal end-user markets and the percentage of the end-user
market’s sales to our consolidated net sales (dollars in
thousands):







Fiscal
      Quarter
              Ended
              August
      29, 2009
            
            Fiscal
      Quarter
              Ended
              August
      30, 2008Communications
      & Networking
            $
            19,529
            33.8%
            $
            38,776
            42.8%Automotive
            
            12,773
            22.1%
            
            19,413
            21.4%Computing
      & Peripherals
            
            4,039
            7.0%
            
            6,585
            7.3%Test,
      Industrial & Medical
            
            8,274
            14.3%
            
            10,419
            11.5%Defense
      & Aerospace
            
            7,157
            12.4%
            
            7,223
            8.0%Other
            
            6,025
            10.4%
            
            8,211
            9.0%$
            57,797
            100.0%
            $
            90,627
            100.0%





As
mentioned earlier, demand has been severely affected by the global economic
slow-down, which has especially affected orders and revenue for products sold
into the commercial and consumer end market segments.  Overall market
demand from the defense & aerospace market has not been affected to the same
extent.  Further, over the last 12 to 18 months the Company has
specifically targeted key customers in the defense & aerospace market and
made significant investments in its factories and support infrastructure to
serve this market.  As a result, defense & aerospace net sales
have remained stable at $7.2 million in both the first quarter of fiscal 2010
and the first quarter of the prior year and are expected to show growth in the
future.





The $6.6
million or 34% decrease in automotive net sales is due primarily to the
substantial reduction in global automotive sales experienced over the past 12
months.  We have, however, seen a meaningful improvement in demand
from this segment since the middle of the first quarter of fiscal
2010.  The improvement in demand is due in part to several national
programs used to stimulate sales of automobiles in the U.S. and
abroad.





The $19.2
million or 50% decrease in net sales to the communications & networking
market is primarily due to the deterioration in global economic conditions and
the related impact on end customer demand.  We also experienced
decreases in net sales to our smaller markets, including the computing &
peripherals market ($2.5 million or 39%), the test, industrial & medical
market ($2.1 million or 21%), and our other products end market ($2.2 million or
27%) primarily attributable to demand decreases resulting from the global
recession.  We have experienced demand increases in these broader
customer segments in July and August 2009 and believe this is due in part to
recent improvements in global economic conditions.  These demand
improvements will not substantially impact net sales until the second quarter of
fiscal 2010.









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Net
Sales by Geographic Region





Net sales
to customers outside the United States totaled 53% and 38% of net sales in the
first quarters of fiscal 2010 and fiscal 2009, respectively.  In the
first quarter of fiscal 2010, 14% of total net sales were made to customers in
China.  There were no other countries outside of the United States to
which sales totaled 10% of net sales in the first quarters of fiscal 2010 and
fiscal 2009.





Cost
of Sales and Gross Margin





Cost of
sales includes manufacturing costs, such as materials, labor (both direct and
indirect) and factory overhead. Cost of sales decreased $26.1 million, or 32%,
to $54.3 million (93.9% of net sales) in the first quarter of fiscal 2010
compared to $80.4 million (88.7% of net sales) in the first quarter of fiscal
2009.





Our gross
profit by segment was as follows (in thousands):





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008North
      America
            
            $
            (771
            )
            
            $
            5,164Asia
            
            
            4,285
            
            
            
            5,110$
            3,514
            
            
            $
            10,274





Our gross
margin as a percentage of net sales by segment was as follows:





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008North
      America
            
            
            (2.9
            )%
            
            
            11.5
            %Asia
            
            
            13.6
            %
            
            
            11.2
            %Consolidated
            
            
            6.1
            %
            
            
            11.3
            %





North
America


Gross
margin for our North American segment decreased to negative 2.9% of net sales in
the first quarter of fiscal 2010 from 11.5% in the first quarter of fiscal 2009
primarily due to volume decreases in net sales as a result of the deterioration
in global economic conditions and, to a lesser extent, a lower-technology
product mix.  Factory margins are heavily influenced by factory
utilization rates because the cost structure needed to produce printed circuit
boards is heavily weighted to fixed or step-variable costs. Our fixed cost
levels have been mitigated over the past 12 months as a result of cost reduction
programs that resulted in a decrease of approximately 32% in labor and other
fixed costs in the first quarter of fiscal 2010 compared to the first quarter of
the prior fiscal year.  Despite these cost reductions, reduced
variable contribution margins on lower production volumes resulted in lower
gross margin.





Merix
Asia


Gross
margin for our Asia segment increased to 13.6% in the current quarter compared
to 11.2% in the first quarter of fiscal 2009.  The increase reflects
the benefit of the cost containment actions and improved higher-technology
product mix enabled by the expanded technology capabilities at our Huiyang,
China facility, more than offsetting the impact of a decrease in net sales that
resulted from the deterioration in the global economic conditions.





Engineering
Costs





Engineering
costs include indirect labor, materials and overhead to support the development
of new manufacturing processes required to meet our customers’ evolving
technology requirements.





Engineering
costs decreased $0.3 million, or 54%, to $0.3 million in the first quarter of
fiscal 2010 compared to $0.6 million in the first quarter of fiscal 2009. The
decrease is primarily due to decreased compensation expense resulting from
reductions-in-force implemented over the past 12 months.









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Selling,
General and Administrative Costs





Selling,
general and administrative (SG&A) costs include indirect labor, travel,
outside services and overhead incurred in our sales, marketing, management and
administrative support functions.





SG&A
costs decreased $1.7 million, or 18%, to $8.0 million in the first quarter of
fiscal 2010 as compared to the first quarter of fiscal 2009.  The
decrease is primarily due to lower labor costs resulting from headcount
reductions and salary and benefit curtailments, reduced commission expense on
the lower revenue base and reduced overall expense levels due to aggressive cost
management programs.  Included in SG&A costs for the first quarter
of fiscal 2010 was $0.7 million in legal costs primarily associated with the
ongoing securities litigation, compared to $0.1 million in the first quarter of
fiscal 2009.





Amortization
of Identifiable Intangible Assets





Amortization
of identifiable intangible assets was $0.5 million in the first quarter of
fiscal 2010 and the first quarter of fiscal 2009, respectively. Our identifiable
intangible assets balance at August 29, 2009 was $6.4 million and current
amortization is approximately $0.5 million per quarter.





Severance
and Restructuring Charges





Total
severance and restructuring charges were as follows (in thousands):





Fiscal
      Quarter Ended
              August
      29, 2009
            
            
            Fiscal
      Quarter Ended
              August
      30, 2008Severance
      charges
            
            $
            245
            
            
            $
            40Hong
      Kong office closure charges
            
            
            56
            
            
            
            -Legal
      and other restructuring charges
            
            
            13
            
            
            
            -Impairment
      of fixed assets
            
            
            642
            
            
            
            -Gain
      on sale of Merix Asia equipment
            
            
            -
            
            
            
            (567
            )$
            956
            
            
            $
            (527
            )




In the
first quarter of fiscal 2010, we recorded $0.1 million in restructuring costs
related to the relocation of our Asia administrative offices from Hong Kong to
the PRC, comprised of severance and relocation freight costs.




We also
recorded $0.2 million in other severance charges during the first quarter of
fiscal 2010 due to minor reductions-in-force in both North America and Asia in
order to mitigate costs in response to ongoing softness in demand for our
products.




We
determined in the first quarter of fiscal 2010 that certain manufacturing
equipment at our Forest Grove facility with a net book value of $0.6 million
will be decommissioned.  An impairment charge was recorded to write
off the net book value of this equipment.




In the
first quarter of fiscal 2009, we recorded approximately $40,000 in severance and
related costs in connection with closure of the Hong Kong manufacturing facility
as part of the actions to consolidate our Asian manufacturing operations at our
lower-cost facilities in China and expand the facilities at our Huiyang plant to
increase our manufacturing capacity in China, which was completed in the fourth
quarter of fiscal 2008.  Additionally, we recorded a gain of $0.6
million in the first quarter of fiscal 2009 related to the sale of equipment
previously used at the Hong Kong facility.





Income
Tax Expense




On a
quarterly basis, we estimate our provision for income taxes based on our
projected results of operations for the full year. Income tax is provided for
entities expected to generate profits that are not offset by losses generated by
entities in other tax jurisdictions. As a result, our effective income tax rate
was negative 12.6% in the first quarter of fiscal 2010 and negative 62.1% in the
first quarter of fiscal 2009.  The variance in effective tax rates is
primarily due to the ratio of pre-tax foreign subsidiary pre-tax income to
consolidated net loss.





Our
effective income tax rate differs from tax computed at the federal statutory
rate primarily as a result of our mix of earnings in various tax jurisdictions,
the diversity in income tax rates, and our continuous assessment of









Table of Contents


the
realization of our uncertain tax positions and deferred tax assets. The
effective tax rate reflects current taxes expected to be paid in profitable
jurisdictions, interest accrued on uncertain tax positions, foreign withholding
taxes for which tax credits are not anticipated and maintenance of valuation
allowances in jurisdictions with cumulative losses or profitability
risks.





Liquidity
and Capital Resources





Our
sources of liquidity and capital resources as of August 29, 2009 consisted of
$21.4 million of cash and cash equivalents and $38.1 million unused availability
under our revolving bank credit agreement, described below. We also have an
agreement with Industrial and Commercial Bank of China, Limited that provides
for borrowings up to 36 million renminbi (approximately US$5.3 million) secured
by the building and land lease rights at our Huiyang manufacturing
facility.  The borrowing limit under this agreement is expected to
increase to 50 million renminbi (approximately US$7.3 million) upon perfection
of the security interest in the building pending removal of a contractor’s lien
currently in negotiation. At August 29, 2009, amounts outstanding under this
China facility totaled $1.5 million.  We expect our capital resources
to be sufficient to fund operations and known capital requirements for at least
one year from August 29, 2009, although we may seek additional sources of
funds.





We have a
Loan and Security Agreement with Bank of America, N.A. (the Credit Agreement)
which provides a revolving line of credit of up to $55.0 million on a borrowing
base calculated with respect to the value of accounts receivable, equipment and
real property.  The Credit Agreement expires in February
2013.  The obligations under the Credit Agreement are secured by
substantially all of our U.S. assets and certain accounts receivable from
foreign customers.  The borrowings bear interest based, at the
Company’s election, on either the prime rate announced by Bank of America or
LIBOR plus an applicable margin.  As of August 29, 2009, the unused
borrowing base was $38.1 million, with an outstanding balance of $11.5
million.  The Credit Agreement contains usual and customary covenants
for credit facilities of this type all of which we were in compliance with as of
August 29, 2009.  In addition, the Credit Agreement also includes a
financial covenant requiring a minimum fixed charge coverage ratio of 1.1:1 if
Excess Availability, defined in the Credit Agreement as a function of the unused
borrowing base and cash held in certain U.S. bank accounts, falls below $20.0
million.  Excess Availability at August 29, 2009 was $44.2 million and
as such this covenant is not currently in effect.  We would not be in
compliance if this covenant was currently applicable.  Based on
management forecast, we do not expect that Excess Availability will fall below
$20.0 million for at least one year from August 29, 2009.





In the
first quarter of fiscal 2010, cash and cash equivalents increased $5.2 million
to $21.4 million as of August 29, 2009 from $16.1 million as of May 30, 2009
primarily as a result of $0.6 million provided by operations (as described in
more detail below) and $5.0 million in net borrowings on our credit
facilities.  Additionally, as a result of the elimination of the one
month reporting lag, the balance of cash and cash equivalents at May 30, 2009
was reduced by $1.4 million, which represents cash used primarily to fund
working capital requirements for our Asia subsidiary in the month of May 2009
and is not reported in the statement of cash flows for the first quarter of
fiscal 2009.  The net increase in cash and cash equivalents at August
29, 2009 is $3.8 million compared to the balance of $17.6 million reported in
our Annual Report on Form 10-K for fiscal 2009.





Cash
provided by operating activities totaled $0.6 million.  Cash totaling
$1.2 million was consumed by net loss of $8.1 million, adjusted for $6.9 million
in non-cash charges, primarily $5.8 million for depreciation and
amortization.  As discussed in more detail below, changes in working
capital provided a net $1.8 million increase in cash from operations in the
first quarter of fiscal 2010, primarily comprised of inflows of $1.0 million
from reductions in accounts receivable and $2.7 million from increases in
accounts payable and other liabilities, offset by a $1.5 million increase in
other assets.  Note that changes in working capital balances vary from
cash flows from operations due to the impact of non-cash transactions on amounts
reported in the consolidated balance sheets.





Accounts
receivable, net of allowances for bad debts, decreased $1.1 million to
$42.2 million at August 29, 2009 from $43.3 million as of May 30, 2009
due to collection programs implemented to optimize cash management. Our days
sales outstanding, calculated on a quarterly basis, was decreased to 66 days at
August 29, 2009 from 67 days at May 30, 2009.











Prepaid
and other current assets increased $1.5 million to $6.9 million as of
August 29, 2009 compared to $5.4 million as of May 30, 2009, primarily due
to an increase of $1.2 million in value-added taxes (VAT) receivable from the
PRC government for taxes paid to PRC local vendors for the purchase of
materials. The timing of payments and refunds is heavily influenced by
production levels and the PRC government’s variable schedule of providing VAT
refund payments.





Accounts
payable of $34.5 million at August 29, 2009 increased $1.1 million compared to
$33.4 million due to the timing of purchases and payments.  Other
current liabilities of $14.5 million at August 29, 2009 increased by $1.4
million compared to $13.1 million at May 30, 2009, primarily due to the timing
of employee pay dates compared to the fiscal period end and the timing of annual
property tax payments.





Expenditures
for property, plant and equipment of $0.4 million in the first quarter of fiscal
2010 primarily consisted of minor expenditures for improvements to our
manufacturing equipment base.  In response to the economic downturn
and the resulting reduction in demand for our products, discretionary capital
expenditures have been substantially curtailed.  We believe our
facilities and equipment are in good condition and do not require significant
investments in the near term.  It is management’s intent to minimize
capital spending until market conditions and cash flows
improve.  Remaining capital expenditures in fiscal 2010 are currently
estimated at approximately $5 million.  Additional capital
expenditures may be approved in fiscal 2010, but are dependent upon achievement
of financial objectives.





We are
currently marketing for sale the facility formerly housing our Hong Kong
manufacturing operation.  Although a transaction is not imminent, we
estimate proceeds on sale in the range of $10 million to $15
million.





Recently
Issued Accounting Pronouncements





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets - An Amendment to Statement No. 140,” to simplify guidance for transfers
of financial assets in SFAS No. 140. The guidance removes the concept of a
qualified special purpose entity (QSPE), which will result in securitization and
other asset-backed financing vehicles, to be evaluated for consolidation under
SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 166 also
expands legal isolation analysis, limits when a portion of a financial asset can
be derecognized, and clarifies that an entity must consider all arrangements or
agreements made contemporaneously with, or in contemplation of, a transfer when
applying the derecognition criteria. SFAS No. 166 is effective for first annual
reporting periods beginning after November 15, 2009, and is to be applied
prospectively. We do not maintain any QSPEs and as such, the adoption of SFAS
No. 166 is not expected to have a material impact on our consolidated financial
position and results of operations.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” which addresses the primary beneficiary (PB) assessment criteria for
determining whether an entity is to consolidate a variable interest entity
(VIE). An entity is considered the PB and shall consolidate a VIE if it meets
both the following characteristics: (1) the power to direct the activities of
the VIE that most significantly affects economic performance and (2) the
obligation to absorb losses or right to receive benefits that could potentially
be significant to the VIE. The statement also provides guidance in relation to
the elimination of the QSPE concept from SFAS No. 166. This statement is
effective for annual reporting periods beginning after November 15, 2009. We do
not maintain any VIEs and as such, the adoption of SFAS No. 167 is not expected
to have a material impact on our consolidated financial position and results of
operations.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, A Replacement of
FASB Statement No. 162, The
Hierarchy of Generally Accepted Accounting Principles,” to establish the
FASB Accounting Standards Codification (“Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP in the United States (“the GAAP hierarchy”). Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The impact of adopting SFAS No. 168 will not have a
material impact on our consolidated financial condition or results of
operations.









Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a material current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.





Critical
Accounting Policies and Use of Estimates





We
reaffirm the information included under the heading “Critical Accounting
Policies and Use of Estimates” appearing at page 45 of our Annual Report on Form
10-K for the year ended May 30, 2009, which was filed with the Securities and
Exchange Commission on July 30, 2009.





Item 3.  Quantitative and Qualitative Disclosures About
Market Risk





There
have been no material changes in our reported market risks and risk management
policies since the filing of our Annual Report on Form 10-K for the year ended
May 30, 2009, which was filed with the Securities and Exchange Commission on
July 30, 2009.





Item
4.                      Controls
and Procedures





Attached
to this quarterly report as exhibits 31.1 and 31.2 are the certifications of our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO) required by
section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications).
This “Controls and Procedures” portion of our quarterly report on Form 10-Q is
our disclosure of the conclusions of our management, including our CEO and CFO,
regarding the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report based on management’s evaluation of
those disclosure controls and procedures. This disclosure should be read in
conjunction with the Section 302 Certifications for a complete understanding of
the topics presented.





Evaluation
of Disclosure Controls and Procedures


Our
management evaluated, with the participation and under the supervision of our
CEO and CFO, the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this Quarterly Report on Form 10-Q. Based on
this evaluation, our CEO and CFO concluded that as of the end of the period
covered by the Form 10-Q, our disclosure controls and procedures were effective
in providing reasonable assurance that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
accumulated and communicated to our management, including our CEO and our CFO,
as appropriate to allow timely decisions regarding required disclosure and that
such information is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and
forms.





Changes
in Internal Control Over Financial Reporting


There has
been no change in our internal control over financial reporting that occurred
during our last fiscal quarter that has materially affected or is reasonably
likely to materially affect our internal control over financial
reporting.










PART II – OTHER INFORMATION





Item 1. Legal Proceedings





We are,
from time to time, made subject to various legal claims, actions and complaints
in the ordinary course of business. Except as disclosed below, we believe that
the outcome of litigation should not have a material adverse effect on our
consolidated results of operations, financial condition or
liquidity.





Securities Class
Action


Four
purported class action complaints were filed against Merix and certain of our
executive officers and directors in the first quarter of fiscal 2005. The
complaints were consolidated in a single action entitled In re Merix Corporation Securities
Litigation, Lead Case No. CV 04-826-MO, in the U.S. District Court for
the District of Oregon. After the court granted our motion to dismiss without
prejudice, the plaintiffs filed a second amended complaint. That complaint
alleged that the defendants violated the federal securities laws by making
certain inaccurate and misleading statements in the prospectus used in
connection with the January 2004 public offering of approximately $103.4 million
of the our common stock. In September 2006, the Court dismissed that complaint
with prejudice. The plaintiffs appealed to the Ninth Circuit Court of Appeals.
In April 2008, the Ninth Circuit reversed the dismissal of the second amended
complaint. We sought rehearing which was denied and rehearing en banc was also
denied. We obtained a stay of the mandate from the Ninth Circuit and filed a
certiorari petition with the United States Supreme Court on September 22,
2008.  The plaintiffs seek unspecified damages. A potential loss or
range of loss that could arise from these cases is not estimable or probable at
this time.





Item 1A.  Risk Factors





RISK
FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS





Investing in our securities involves
a high degree of risk. If any of the following risks impact our business, the
market price of our shares of common stock and other securities could decline
and investors could lose all or part of their investment. In addition, the following risk
factors and uncertainties could cause our actual results to differ materially
from those projected in our forward-looking statements, whether made in this
Quarterly Report on Form 10-Q or the other documents we file with the SEC, or in
our annual or quarterly reports to shareholders, future press releases, or
orally, whether in presentations, responses to questions or
otherwise.





Current
conditions in the global economy and the major industry sectors that we serve
may materially and adversely affect our business and results of
operations.





Our
business and operating results will continue to be affected by worldwide
economic conditions and, in particular, conditions in the communications &
networking, automotive, computing & peripherals, and test, industrial &
medical, and defense & aerospace markets that we serve. As a result of
slowing global economic growth, the credit market crisis, declining consumer and
business confidence, increased unemployment, reduced levels of capital
expenditures, fluctuating commodity prices, bankruptcies and other challenges
currently affecting the global economy, our customers may experience
deterioration of their businesses, cash flow shortages and difficulty obtaining
financing. As a result, existing or potential customers may delay or cancel
plans to purchase products produced by our customers which would have a material
adverse effect on us. Further, our vendors may be experiencing similar
conditions, which may impact their ability to fulfill their obligations to us.
Although the United States government and the governments of other countries
have enacted, and may enact further, various economic stimulus programs, there
can be no assurance as to the effectiveness of these programs, and with respect
to future programs, the timing and effectiveness of such programs. Recent
economic indicators and demand trends for our products indicate that the
deterioration in global economic conditions may have reached a
bottom.  If there is significant further deterioration in the global
economy or the economic recovery is delayed or protracted, our results of
operations, financial position and cash flows could be materially adversely
affected.












We
are dependent upon the electronics industry, which is highly cyclical and
suffers significant downturns in demand resulting in excess manufacturing
capacity and increased price competition.





The
electronics industry, on which a substantial portion of our business depends, is
cyclical and subject to significant downturns characterized by diminished
product demand, rapid declines in average selling prices and over-capacity. This
industry has experienced periods characterized by relatively low demand and
price depression and is likely to experience recessionary periods in the future.
Economic conditions affecting the electronics industry in general, or specific
customers in particular, have adversely affected our operating results in the
past and may do so in the future.  Over the past year, the global
economy has been greatly impacted by the global recessionary conditions linked
to a collapse of values in the U.S. home mortgage sector, volatile fuel prices
and a changing political and economic landscape. These factors have contributed
to historically low consumer confidence levels resulting in a significantly
intensified downturn in demand for products incorporating PCBs, which in turn
has adversely affected our results of operations.





The
electronics industry is characterized by intense competition, rapid
technological change, relatively short product life cycles and pricing and
profitability pressures. These factors adversely affect our customers and we
suffer similar effects. Our customers are primarily high-technology equipment
manufacturers in the communications & networking, computing &
peripherals, test, industrial & medical, defense & aerospace and
automotive markets of the electronics industry. Due to the uncertainty in the
markets served by most of our customers, we cannot accurately predict our future
financial results or accurately anticipate future orders. At any time, our
customers can discontinue or modify products containing components manufactured
by us, adjust the timing of orders and shipments or affect our mix of
consolidated net sales generated from quick-turn and premium services revenues
versus standard lead time production, any of which could have a material adverse
effect on our results of operations.





Competition
in the printed circuit board market is intense and we could lose sales if we are
unable to compete effectively.




The
market for PCBs is intensely competitive and highly fragmented. We expect
competition to persist, which could result in continued reductions in pricing
and profitability and loss of market share. We believe our major competitors are
U.S., Asian and other international independent manufacturers of multi-layer
printed circuit boards, backplanes and other electronic assemblies. Those
competitors include Daeduck Electronics Co., DDi Corp., Elec and Eltek,
Meadville Holdings, Ltd., LG Electronics, Multek Corporation (a division of
Flextronics International Ltd.), Sanmina-SCI Corporation, TTM Technologies,
Inc., WUS Printed Circuits Company Ltd., ViaSystems, Inc. and Ibiden Co.,
Ltd.





Some of
our competitors and potential competitors may have a number of advantages over
us, including:


·
            significantly
      greater financial, technical, marketing and manufacturing
      resources;


·
            preferred
      vendor status with some of our existing and potential
      customers;


·
            more
      focused production facilities that may allow them to produce and sell
      products at lower price points;


·
            more
      capital; and


·
            larger
      customer bases.





In
addition, these competitors may have the ability to respond more quickly to new
or emerging technologies, be more successful in entering or adapting to existing
or new end markets, adapt more quickly to changes in customer requirements and
devote greater resources to the development, promotion and sale of their
products than we can. Consolidation in the PCB industry, which we expect to
continue, could result in an increasing number of larger PCB companies with
greater market power and resources. Such consolidation could in turn increase
price competition and result in other competitive pressures for us. We must
continually develop improved manufacturing processes to meet our customers’
needs for complex, high-technology products, and our basic interconnect
technology is generally not subject to significant proprietary protection. We
may not be able to maintain or expand our sales if competition increases and we
are unable to respond effectively.









Other
considerations that affect our ability to compete include providing
manufacturing services that are competitively priced, providing continually
evolving technical capabilities, having competitive lead times and meeting
specified delivery dates.





Due to
the severe downturn in the economic environment, coupled with our recent
financial performance, we have noted and expect to see continuing concern from
our customers about our ability to continue operations in the current
environment.  In order to minimize reductions to net sales that could
result from customer concerns about our financial health, we are actively
engaging with our significant customers to allay their concerns.  We
have not had any major customer cease doing business with us as a result of
concerns about our stability, although it is possible that orders have been
reduced as customers seek to secure an alternate vendor of our
products.  However, if one or more major customers were to
significantly reduce its purchases from us, it could have a material adverse
effect on our results of operations.





During
recessionary periods in the electronics industry, our competitive advantages in
providing an integrated manufacturing solution and responsive customer service
may be less important to our customers than they are in more favorable economic
climates.





If
competitive production capabilities increase in Asia, where production costs are
lower, we may lose market share in both North America and Asia and our
profitability may be materially adversely affected by increased pricing
pressure.




PCB
manufacturers in Asia and other geographies often have significantly lower
production costs than our North American operations and may even have cost
advantages over Merix Asia. Production capability improvements by foreign and
domestic competitors may play an increasing role in the PCB markets in which we
compete, which may adversely affect our revenues and profitability. While PCB
manufacturers in these locations have historically competed primarily in markets
for less technologically advanced products, they are expanding their
manufacturing capabilities to produce higher layer count, higher technology PCBs
and could compete more directly with our North American operations.





If
we are unable to respond to rapid technological change and process development,
we may not be able to compete effectively.




The
market for our products is characterized by rapidly changing technology and
continual implementation of new production processes. The success of our
business depends in large part upon our ability to maintain and enhance our
technological capabilities, to manufacture products that meet changing customer
needs, and to successfully anticipate or respond to technological changes on a
cost-effective and timely basis. In addition, the PCB industry could encounter
competition from new or revised manufacturing and production technologies that
render existing manufacturing and production technology less competitive or
obsolete. We may not be able to respond effectively to the technological
requirements of the changing market. If we need new technologies and equipment
to remain competitive, the development, acquisition and implementation of those
technologies and equipment may require us to make significant capital
investments. We may not be able to raise the necessary additional funds at all
or as rapidly as necessary to respond to technological changes as quickly as our
competitors.





During periods of
excess global PCB manufacturing capacity, our profitability may decrease and/or
we may have to incur additional restructuring charges if we choose to reduce the
capacity of or close any of our facilities.


A
significant portion of our factory costs of sales and operating expenses are
relatively fixed in nature, and planned expenditures are based in part on
anticipated orders. When we experience excess capacity, our sales revenues may
not fully cover our fixed overhead expenses, and our gross margins will fall. In
addition, we generally schedule our quick-turn production facilities at less
than full capacity to retain our ability to respond  to unexpected
additional quick-turn orders. However, if these orders are not received, we may
forego some production and could experience continued excess
capacity.





If we
conclude we have significant, long-term excess capacity, we may decide to
permanently close one or more of our facilities, and lay off some of our
employees. Closures or lay-offs could result in the recording of restructuring
charges such as severance, other exit costs, and asset
impairments.













Damage
to our manufacturing facilities or information systems due to fire, natural
disaster, or other events could harm our financial results.




We have
manufacturing and assembly facilities in Oregon, California and China. The
destruction or closure of any of our facilities for a significant period of time
as a result of fire, explosion, act of war or terrorism, or blizzard, flood,
tornado, earthquake, lightning, or other natural disaster could harm us
financially, increasing our costs of doing business and limiting our ability to
deliver our manufacturing services on a timely basis. Additionally, we rely
heavily upon information technology systems and high-technology equipment in our
manufacturing processes and the management of our business.  We have
developed disaster recovery plans; however, disruption of these technologies as
a result of natural disaster or other events could harm our business and have a
material adverse effect on our results of operations.





A
small number of customers account for a substantial portion of our consolidated
net sales and our consolidated net sales could decline significantly if we lose
a major customer or if a major customer orders fewer of our products or cancels
or delays orders.




Historically,
we have derived a significant portion of our consolidated net sales from a
limited number of customers. Our five largest OEM customers, which vary from
period to period, comprised 34% of our consolidated net sales during the first
quarter of fiscal 2010. We expect to continue to depend upon a small number of
customers for a significant portion of our consolidated net sales for the
foreseeable future. The loss of, or decline in, orders or backlog from one or
more major customers could reduce our consolidated net sales and have a material
adverse effect on our results of operations and financial condition. Further, as
part of our plan to improve the profitability of our North American operations
we have reduced our reliance on certain customers and products that have
historically generated significant revenues for Merix.  We anticipate
retaining a meaningful portion of this business, but there can be no assurance
we will be successful.  An unplanned loss of a large portion of this
revenue could adversely affect our financial results.





Some of
our customers are relatively small companies, and our future business with them
may be significantly affected by their ability to continue to obtain financing.
If they are unable to obtain adequate financing, they will not be able to
purchase products, which, in the aggregate, would adversely affect our
consolidated net sales.





We
are exposed to the credit risk of some of our customers and also as a result of
a concentration of our customer base.




Most of
our sales are on an “open credit” basis, with standard industry payment terms.
We monitor individual customer payment capability in granting open credit
arrangements, seek to limit open credit to amounts we believe the customers can
pay, and maintain reserves we believe are adequate to cover exposure for
doubtful accounts. During periods of economic downturn in the global economy and
the electronics and automotive industries, our exposure to credit risks from our
customers increases. Although we have programs in place to monitor and mitigate
the associated risk, those programs may not be effective in reducing our credit
risks.





In total,
five entities represented approximately 44% of the consolidated net trade
accounts receivable balance at August 29, 2009, individually ranging from
approximately 5% to approximately 19%. Our OEM customers direct our sales to a
relatively limited number of electronic manufacturing service providers. Our
contractual relationship is typically with the electronic manufacturing service
providers, who are obligated to pay us for our products. Because we expect our
OEM customers to continue to direct our sales to electronic manufacturing
service providers, we expect to continue to be subject to the credit risk of a
limited number of customers. This concentration of customers exposes us to
increased credit risks. If one or more of our significant customers were to
become insolvent or were otherwise unable to pay us, our financial condition and
results of operations would be adversely affected.





Because
we do not generally have long-term contracts with our customers, we are subject
to uncertainties and variability in demand by our customers, which could
decrease consolidated net sales and negatively affect our operating
results.




We
generally do not have long-term purchase commitments from our customers, and,
consequently, our consolidated net sales are subject to short-term variability
in demand by our customers. Customers generally









have no
obligation to order from us and may cancel, reduce or delay orders for a variety
of reasons. The level and timing of orders placed by our customers vary due
to:





·
            fluctuation
      in demand for our customers’
products;


·
            changes
      in customers’ manufacturing strategies, such as a decision by a customer
      to either diversify or consolidate the number of PCB manufacturers
      used;


·
            customers’
      inventory management;


·
            our
      own operational performance, such as missed delivery dates and repeated
      rescheduling; and


·
            changes
      in new product introductions.





We have
experienced terminations, reductions and delays in our customers’ orders. Future
terminations, reductions or delays in our customers’ orders could lower our
production asset utilization, which would lower our gross profits, decrease our
consolidated net sales and negatively affect our business and results of
operations.





The increasing
prominence of EMS providers in the PCB industry could reduce our gross margins,
potential sales, and customers.





Sales to
EMS providers represented approximately 47% of our net sales in the first
quarter of fiscal 2010. Sales to EMS providers include sales directed by OEMs as
well as orders placed with us at the EMS providers’ discretion. EMS providers
source on a global basis to a greater extent than OEMs. The growth and
concentration of EMS providers increases the purchasing power of such providers
and could result in increased price competition or the loss of existing OEM
customers. In addition, some EMS providers, including some of our customers,
have the ability to directly manufacture PCBs within their own businesses. If a
significant number of our other EMS customers were to acquire these abilities,
our customer base might shrink, and our sales might decline substantially.
Moreover, if any of our OEM customers outsource the production of PCBs to these
EMS providers, our business, results of operations and financial condition may
be harmed.





Automotive
customers have higher quality requirements and long qualification times and, if
we do not meet these requirements, our business could be materially adversely
affected.




For
safety reasons, our automotive customers have strict quality standards that
generally exceed the quality requirements of our other customers. Because a
significant portion of Merix Asia’s products are sold to customers in the
automotive industry, if our manufacturing facilities in Asia do not meet these
quality standards, our results of operations may be materially and adversely
affected. These automotive customers may require long periods of time to
evaluate whether our manufacturing processes and facilities meet their quality
standards. If we were to lose automotive customers due to quality control
issues, we might not be able to regain those customers, or gain new automotive
customers, for long periods of time, which could significantly decrease our
consolidated net sales and profitability.





The
cyclical nature of automotive production and sales could adversely affect Merix’
business.




A
significant portion of Merix Asia’s products are sold to customers in the
automotive industry. Net sales to the automotive market accounted for
approximately 22% of our consolidated net sales in the first quarter of fiscal
2010 and 23% of our consolidated net trade accounts receivable at August 29,
2009.  As a result, Asia’s results of operations may be materially and
adversely affected by market conditions in the automotive industry. Automotive
production and sales are cyclical and depend on general economic conditions and
other factors, including consumer spending and preferences. In addition,
automotive production and sales can be affected by labor relations issues,
regulatory requirements, trade agreements and other factors. Any significant
economic decline that results in a reduction in automotive production and sales
by Asia’s customers could have a material adverse effect on Merix’ business,
results of operations and financial condition.





We have
experienced significant decreases in demand from our automotive customers who
have been affected by the significant economic difficulties facing the
automotive industry.  Recent public bankruptcies and liquidity
concerns of certain companies in the automotive supply chain could impact our
future demand









Table of Contents


levels
and the collectibility of outstanding receivables and consigned inventory with
this customer base. A prolonged downturn or the failure of one or more of our
automotive customers could result in the impairment of assets invested in this
end market, including our Huizhou, China facility, which is heavily reliant on
the automotive industry for sales of its products.





Products
we manufacture may contain manufacturing defects, which could result in reduced
demand for our products and liability claims against us.




We
manufacture highly complex products to our customers’ specifications. These
products may contain manufacturing errors or failures despite our quality
control and quality assurance efforts. Further, our technology expansion efforts
including the major expansion in our Huiyang factory increase the risk related
to unanticipated yield issues, as well as to uncertainties related to future
warranty claims. Defects in the products we manufacture, whether caused by a
design, manufacturing or materials failure or error, may result in delayed
shipments, increased warranty costs, customer dissatisfaction, or a reduction in
or cancellation of purchase orders. If these defects occur either in large
quantities or too frequently, our business reputation may be impaired. Since our
products are used in products that are integral to our customers’ businesses,
errors, defects or other performance problems could result in financial or other
damages to our customers beyond the cost of the PCB, for which we may be liable
in some cases. Although we generally attempt to sell our products on terms
designed to limit our exposure to warranty, product liability and related
claims, in certain cases, the terms of our agreements allocate to Merix
substantial exposure for product defects. In addition, even if we can
contractually limit our exposure, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions.
Product liability litigation against us, even if it were unsuccessful, would be
time consuming and costly to defend. Although we maintain a warranty reserve,
this reserve may not be sufficient to cover our warranty or other expenses that
could arise as a result of defects in our products.





We
may incur material losses and costs as a result of product liability and
warranty claims that may be brought against us.




We face
an inherent business risk of exposure to warranty and product liability claims
in the event that our products, particularly those supplied by Merix Asia to the
automotive industry, fail to perform as expected or such failure results, or is
alleged to result, in bodily injury and/or property damage. In addition, if any
of our products are or are alleged to be defective, we may be required to
participate in a recall of such products. As suppliers become more integral to
the vehicle design process and assume more of the vehicle assembly functions,
vehicle manufacturers are increasingly looking to their suppliers for
contributions when faced with product liability claims or recalls. In addition,
vehicle manufacturers, who have traditionally borne the cost associated with
warranty programs offered on their vehicles, are increasingly requiring
suppliers to guarantee or warrant their products and may seek to hold us
responsible for some or all of the costs related to the repair and replacement
of parts supplied by us to the vehicle manufacturer. A successful warranty or
product liability claim against us in excess of our available insurance coverage
or established warranty and legal reserves or a requirement that we participate
in a product recall may have a material adverse effect on our business,
financial condition and results of operations.





We
rely on suppliers for the timely delivery of materials used in manufacturing our
PCBs, and an increase in industry demand, a shortage of supply or an increase in
the price of raw materials may increase the cost of the raw materials we use and
may limit our ability to manufacture certain products and adversely impact our
profitability.




To
manufacture our PCBs, we use materials such as laminated layers of fiberglass,
copper foil and chemical solutions which we order from our suppliers. Suppliers
of laminates and other raw materials that we use may from time to time extend
lead times, limit supplies or increase prices due to capacity constraints or
other factors, which could adversely affect our profitability and our ability to
deliver our products on a timely basis. We have experienced in the past, and may
experience in the future, significant increases in the cost of laminate
materials, copper products and petroleum-based raw materials. These cost
increases have had an adverse impact on our profitability and the impact has
been particularly significant on our Asian operations which have fixed price
arrangements with a number of large automotive customers. Some of our products
use types of laminates that are only available from a single supplier that holds
a patent on the material. Although other manufacturers of advanced PCBs also
must use the single supplier and our OEM customers generally determine the type
of laminates used, a failure to obtain the material from the single supplier for
any reason may cause a disruption, and possible cancellation, of orders for PCBs
using that type of laminate, which in turn would cause a decrease in our
consolidated net sales.









Additionally,
a significant portion of our raw material purchases is obtained from one
supplier.  Due to customer requalification requirements and a lack of
competitive alternate suppliers, we could experience a material adverse effect
on our business and results of operations if this supplier were not able to
provide the materials required to fulfill customer orders.





If
we lose key management, operations, engineering or sales and marketing
personnel, we could experience reduced sales, delayed product development and
diversion of management resources.




Our
success depends largely on the continued contributions of our key management,
administration, operations, engineering and sales and marketing personnel, many
of whom would be difficult to replace. We generally do not have employment or
non-compete agreements with our key personnel. If one or more members of our
senior management or key professionals were to resign, the loss of personnel
could result in loss of sales, delays in new product development and diversion
of management resources, which would have a negative effect on our business. We
do not maintain “key man” insurance policies on any of our
personnel.





Due to
the global economic downturn, the Company has made substantial
reductions-in-force, including a number of significant management and
professional personnel.  We do not anticipate the loss of any of the
personnel will have a material impact on our operations and have attempted to
mitigate the impact of the change in personnel.  However, there can be
no assurance that these risks are fully mitigated.





Successful
execution of our day-to-day business operations, including our manufacturing
process, depends on the collective experience of our employees and we have
experienced periods of high employee turnover. If high employee turnover
persists, our business may suffer and we may not be able to compete
effectively.




We rely
on the collective experience of our employees, particularly in the manufacturing
process, to ensure we continuously evaluate and adopt new technologies and
remain competitive. Although we are not generally dependent on any one employee
or a small number of employees involved in our manufacturing process, we have
generally experienced periods of high employee turnover at our Asian facilities.
If we are not able to replace these people with new employees with comparable
capabilities, our operations could suffer as we may be unable to keep up with
innovations in the industry or the demands of our customers. As a result, we may
not be able to continue to compete effectively.





If
we do not align our manufacturing capacity with customer demand, we could
experience difficulties meeting our customers’ expectations or, conversely,
incur excess costs to maintain unneeded capacity.





In the
latter half of the first quarter of fiscal 2010, we noted increasing demand for
our products as customers began to rebuild inventory levels, which were severely
curtailed in response to the deterioration in global economic
conditions.  If we fail to recruit, train and retain sufficient staff
to meet customer demand, particularly in the PRC, we may experience extended
lead times leading to the loss of customer orders.  Conversely, if we
restore manufacturing capacity and order levels do not remain stable or
increase, our business, operating results and financial condition could be
adversely impacted.





We export
products from the United States to other countries. If we fail to comply with
export laws, we could be subject to additional taxes, duties, fines and other
punitive actions.


Exports
from the United States are regulated by the U.S. Department of Commerce.
Failure to comply with these regulations can result in significant fines and
penalties. Additionally, violations of these laws can result in punitive
penalties, which would restrict or prohibit us from exporting certain products,
resulting in significant harm to our business.












Because
we have significant foreign sales and presence, we are subject to political,
economic and other risks we do not face in the domestic market.




As a
result of increased Asian operations, we expect sales in, and product shipments
to, non-U.S. markets to represent an increasingly significant portion of our
total sales in future periods. Our exposure to the business risks presented by
foreign economies includes:


·
            logistical,
      communications and other operational difficulties in managing a global
      enterprise;


·
            potentially
      adverse tax consequences;


·
            restrictions
      on the transfer of funds into or out of a
  country;


·
            longer
      sales and collection cycles;


·
            potential
      adverse changes in laws and regulatory practices, including export license
      requirements, trade barriers, tariffs and tax
  laws;


·
            protectionist
      and trade laws and business practices that favor local
      companies;


·
            restrictive
      governmental actions;


·
            burdens
      and costs of compliance with a variety of foreign
  laws;


·
            political,
      social and economic instability impacting our foreign labor force,
      including terrorist activities;


·
            natural
      disaster or outbreaks of infectious diseases affecting the regions in
      which we operate or sell products;
and


·
            difficulties
      in collecting accounts receivable.





Any one,
or a combination, of these risks may have a material adverse effect on our
business operations and/or our financial position.





We
must comply with the Foreign Corrupt Practices Act.




We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some of our competitors, are not subject
to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in many jurisdictions, including
mainland China. If our competitors engage in these practices they may receive
preferential treatment from personnel of some companies, giving our competitors
an advantage in securing business or from government officials who might give
them priority in obtaining new licenses, which would put us at a disadvantage.
Although we inform our personnel that such practices are illegal, we cannot
assure that our employees or other agents will not engage in such conduct for
which we might be held responsible. If our employees or other agents are found
to have engaged in such practices, we could suffer severe
penalties.





We
are subject to risks associated with currency fluctuations, which could have a
material adverse effect on our results of operations and financial
condition.




A
significant portion of our costs is denominated in foreign currencies, primarily
the Chinese renminbi. Substantially all of our consolidated net sales are
denominated in U.S. dollars. As a result, changes in the exchange rates of these
foreign currencies to the U.S. dollar will affect our cost of sales and
operating margins and could result in exchange losses. The exchange rate of the
Chinese renminbi to the U.S. dollar is closely monitored by the Chinese
government. Recent increases in the value of the renminbi relative to the U.S.
dollar have caused the costs of our Chinese operations to increase relative to
related dollar-denominated sales. The impact of future exchange rate
fluctuations on our results of operations cannot be accurately predicted. We may
enter into exchange rate hedging programs from time to time in an effort to
mitigate the impact of exchange rate fluctuations. However, hedging transactions
may not be effective and may result in foreign exchange hedging
losses.





Our
operations in the People’s Republic of China (PRC) subject us to risks and
uncertainties relating to the laws and regulations of the PRC.




Under its
current leadership, the Chinese government has been pursuing economic reform
policies, including the encouragement of foreign trade, investment and greater
economic decentralization. However, the










government
of the PRC may not continue to pursue such policies. Despite progress in
developing its legal system, the PRC does not have a comprehensive and highly
developed system of laws, particularly with respect to foreign investment
activities and foreign trade. Enforcement of existing and future laws and
contracts is uncertain, and implementation and interpretation thereof may be
inconsistent. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws and the preemption of local regulations by
national laws may adversely affect foreign investors. In addition, some
government policies and rules are not published or communicated in local
districts in a timely manner, if they are published at all. As a result, we may
operate our business in violation of new rules and policies without having any
knowledge of their existence. These uncertainties could limit the legal
protections available to us. Any litigation in the PRC may be protracted and
result in substantial costs and diversion of resources and management
attention.





Our
Chinese manufacturing operations subject us to a number of risks.




A
substantial portion of our current manufacturing operations is located in the
PRC. The geographical distances between these facilities and our U.S.
headquarters create a number of logistical and communications challenges. We are
also subject to a highly competitive market for labor in the PRC, which may
require us to increase employee wages and benefits to attract and retain
employees and spend significant resources to train new employees due to high
employee turnover, either of which could cause our labor costs to exceed our
expectations.





In
addition, because of the location of these facilities, we could be affected by
economic and political instability in the PRC, including:


·
            lack
      of developed infrastructure;


·
            currency
      fluctuations;


·
            overlapping
      taxes and multiple taxation issues;


·
            employment
      and severance taxes;


·
            the
      burdens of cost, compliance and interpretation of a variety of foreign
      laws;


·
            difficulty
      in attracting and training workers in foreign markets and problems caused
      by labor unrest; and


·
            less
      protection of our proprietary processes and
  know-how.





Moreover,
inadequate development or maintenance of infrastructure in the PRC, including
inadequate power and water supplies, transportation or raw materials
availability, communications infrastructure or the deterioration in the general
political, economic or social environment, could make it difficult and more
expensive, and possibly prohibitive, to continue to operate our manufacturing
facilities in the PRC.  For example, in the winter months of fiscal
2008, certain areas of Southern China faced electrical power constraints which
resulted from extreme winter weather in the area. In order to deal with the
power constraints, the Southern China Province Government initiated a power
rationing plan through May 2008.  We may experience issues in the
future with obtaining power or other key services due to infrastructure
weaknesses in China that may impair our ability to compete effectively as well
as adversely affect revenues and production costs. Any additional or extended
power supply rationing could adversely affect our China operations.





Success
in Asia may adversely affect our U.S. operations.




To the
extent Asian PCB manufacturers, including Merix Asia, are able to compete
effectively with products historically manufactured in the United States, our
facilities in the United States may not be able to compete as effectively and
parts of our North American operations may not remain viable.





If
we do not effectively manage the expansion of our operations, our business may
be harmed, and the increased costs associated with the expansion may not be
offset by increased consolidated net sales.




In the
first half of fiscal 2009, we completed efforts to significantly expand the
Huiyang, China-based facility.  This expansion and any other future
capacity expansion with respect to our facilities will expose us to significant
start-up risks including:


·
            delays
      in receiving and installing required manufacturing
    equipment;


·
            inability
      to retain management personnel and skilled employees, or labor shortages
      in general;












·
            difficulties
      scaling up production, including producing products at competitive costs,
      yields and quality standards at our expanded
  facilities;


·
            challenges
      in coordinating management of operations and order fulfillment between our
      U.S. and Asian facilities;


·
            a
      need to improve and expand our management information systems and
      financial controls to accommodate our expanded
  operations;


·
            additional
      unanticipated costs;  and


·
            shortfalls
      in production volumes as a result of unanticipated start-up or expansion
      delays that could prevent us from meeting our customers’ delivery
      schedules or production needs.





Our
forward-looking statements depend upon a number of assumptions and include our
ability to execute tactical changes that may adversely affect both short-term
and long-term financial performance. The success of our expansion efforts will
depend upon our ability to expand, train, retain and manage our employee base in
both Asia and North America. If we are unable to effectively do so, our business
and results of operations could be adversely affected.





In
addition, if our consolidated net sales do not increase sufficiently to offset
the additional fixed operating expenses associated with our Asian operations,
our consolidated results of operations may be adversely affected. If demand for
our products does not meet anticipated levels, the value of the expanded
operations could be significantly impaired, which would adversely affect our
results of operations and financial condition.





Failure
to maintain good relations with minority investors in our China manufacturing
facilities could materially adversely affect our ability to manage our Asian
operations.




Currently,
we have two PCB manufacturing plants in the PRC that are each partially owned by
a separate Chinese company. While we are the majority interest holder in both of
these companies, there is a minority interest holder in each subsidiary, owning
a 5% and 15% share in our Huiyang and Huizhou plants, respectively. These
minority holders are local investors with close ties to local economic
development and other government agencies. The investors are the leaseholders
for the land on which the plants owned by our Chinese operating companies are
located. In connection with the negotiation of their investments, the local
investors secured certain rights to be consulted and consent to certain
operating and investment matters concerning the plants and to board
representation. Failure to maintain good relations with the investors in either
China joint venture could materially adversely affect our ability to manage the
operations of one or more of the plants, which could in turn have a material
adverse effect on our business, operating results and financial
condition.




We
lease land for all of our owned and leased manufacturing facilities in China
from the Chinese government under land use rights agreements that may be
terminated by the Chinese government.




We lease
from the Chinese government, through land use rights agreements, the land where
our Chinese manufacturing facilities are located. Although we believe our
relationship with the Chinese government is sound, if the Chinese government
decided to terminate our land use rights agreements, our assets could become
impaired and our ability to meet our customers’ orders could be impacted. This
could have a material adverse effect on our financial condition, operating
results and cash flows.







We
do not currently have options to renew our leased manufacturing facility in the
PRC and failure to renew such lease could adversely affect our operations in
Asia.




Our
Huizhou manufacturing facility is leased from a Chinese company under an
operating lease that expires in 2010 and does not contain a lease renewal
option. Although the landlord also has a minority interest in our subsidiary
that operates the facility, this minority interest holder may choose to not
renew our lease. We have renewed this lease in the past and in July 2009, the
lessor indicated that it will extend the lease by one year, although no lease
amendment has been finalized.  Failure to maintain good relations with
this investor could materially adversely affect our ability to negotiate the
renewal of our operating lease or to continue to operate the plant. In addition,
the lease renewal allows early termination by either party, so failure to
maintain good relations with this investor could materially impact our continued
leasehold of the facility. Further, zoning and changes in laws in China could
impair the ability of the landlord to extend or renew the lease.










Our
bank credit covenant that limits our incremental investment in Merix Asia may
restrict our ability to adequately fund our Asian operations and our growth
plans in Asia.





Merix has
a bank credit agreement covenant that limits the incremental investment into
Merix Asia to $40 million and provides that our investments cannot be made if a
default exists under the credit agreement or the Excess Availability (defined in
the credit agreement as a function of outstanding borrowings and available cash)
is less than $20 million. As of August 29, 2009, we had advanced Asia
approximately $3.5 million against the incremental investment limit. If our
Asian operations at any time require an amount of cash greater than our
available capital resources, or than is permitted to be advanced under
applicable credit agreements, there is risk that we will not be able to fund our
Asian operations or achieve our growth plans in Asia.





Acquisitions
may be costly and difficult to integrate, may divert and dilute management
resources and may dilute shareholder value.




As part
of our business strategy, we have made and may continue to make acquisitions of,
or investments in, companies, products or technologies that complement our
current products, augment our market coverage, enhance our technical
capabilities or production capacity or that may otherwise offer growth
opportunities.  In any future acquisitions or investments, we could
potentially experience:


·
            problems
      integrating the purchased operations, technologies or
      products;


·
            failure
      to achieve potential sales, materials costs and other
      synergies;


·
            inability
      to retain existing customers of acquired entities when we desire to do
      so;


·
            the
      need to restructure, modify or terminate customer relationships of the
      acquired company;


·
            increased
      concentration of business from existing or new
  customers;


·
            unanticipated
      expenses and working capital
requirements;


·
            diversion
      of management’s attention and loss of key
  employees;


·
            asset
      impairments related to the acquisitions;
or


·
            fewer
      resources available for our legacy businesses as they are being redirected
      to the acquired entities to integrate their business
      processes.





In
addition, in connection with any future acquisitions or investments, we
could:


·
            enter
      lines of business and/or markets in which we have limited or no prior
      experience;


·
            issue
      stock that would dilute our current shareholders’ percentage
      ownership;


·
            incur
      debt and assume liabilities that could impair our
    liquidity;


·
            record
      goodwill and non-amortizable intangible assets that will be subject to
      impairment testing and potential periodic impairment
    charges;


·
            incur
      amortization expenses related to intangible
  assets;


·
            uncover
      previously unknown liabilities;


·
            become
      subject to litigation and environmental remediation
  issues;


·
            incur
      large and immediate write-offs that would reduce net income;
      or


·
            incur
      substantial transaction-related costs, whether or not a proposed
      acquisition is consummated.





Any of
these factors could prevent us from realizing anticipated benefits of an
acquisition or investment, including operational synergies, economies of scale
and increased profit margins and revenue. Acquisitions are inherently risky, and
any acquisition may not be successful. Failure to manage and successfully
integrate acquisitions could harm our business and operating results in a
material way. Even when an acquired company has already developed and marketed
products, product enhancements may not be made in a timely fashion. In addition,
unforeseen issues might arise with respect to such products after the
acquisition.





We face a risk
that capital needed for our business and to repay our debt obligations may not
be available to us on favorable terms, if at all. Additionally, our leverage and
our debt service obligations may adversely affect our cash flow, results of
operations and financial position.


Recent
turmoil in global financial markets has limited access to capital for many
companies. We are not currently experiencing any limitation of access to our
revolving line of credit and management is not aware of any issues currently
impacting our lender’s ability to honor its commitment to extend credit.
However, if we were unable to borrow on our revolving line of credit in the
future due to the global credit crisis, our business









and
results of operations could be adversely affected. Furthermore, additional
capital may not be available to us on favorable terms or at all. To the extent
that additional capital is raised through the sale of equity, or securities
convertible into equity, current shareholders may experience dilution of their
proportionate ownership.





As of
August 29, 2009, we had total indebtedness of approximately $83 million,
which represented approximately 57% of our total capitalization. We also have
$38.1 million unused availability under a secured bank revolving line of credit
that if utilized would increase our leverage.





Our
indebtedness could have significant negative consequences,
including:


·
              increasing
      our vulnerability to general adverse economic and industry
      conditions;
 ·
              limiting
      our ability to obtain additional
financing;
 ·
              requiring
      the use of a substantial portion of any cash flow from operations to
      service our indebtedness, thereby reducing the amount of cash flow
      available for other purposes, including capital
    expenditures;
 ·
              limiting
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we
compete; and
 ·
              placing
      us at a possible competitive disadvantage to less leveraged competitors
      and competitors that have better access to capital
    resources.





Additionally,
we are exposed to interest rate risk relating to our revolving credit facility
which bears interest based, at our election, on either the prime rate or
LIBOR plus an additional margin based on our use of the credit facility. At
August 29, 2009, there was $11.5 million outstanding under the revolving line of
credit.  When we utilize our revolving credit facility to meet our
capital requirements, we are subject to market interest rate risk that could
increase our interest expense beyond expected levels and decrease our
profitability.





Restructuring
efforts have required both restructuring and impairment charges and we may be
required to record asset impairment charges in the future, which would adversely
affect our results of operations and financial condition.




We have
recorded impairment charges against certain assets in fiscal 2009, fiscal 2008
and fiscal 2007. As our strategy evolves and due to the cyclicality of our
business, rapid technological change and the migration of business to Asia, we
might conclude in the future that some of our manufacturing facilities are
surplus to our needs or will not generate sufficient future cash flows to cover
the net book value and, thus, we may be required to record an impairment charge.
Such an impairment charge would adversely affect our results of operations and
financial condition.





Due to
the substantial variance between our market capitalization based on the current
trading price range for our common stock and the net asset value reflected in
our consolidated balance sheet, as well as other factors regarding our results
of operations and the current economic environment, management has undertaken
quarterly assessments of potential impairment of the Company’s long-lived
assets.  An impairment charge was recorded in fiscal 2009 to reduce
the value of goodwill recorded in the acquisition of our Asia operations to
$0.  We have also performed an assessment for potential impairment of
other long-lived assets and determined that no further impairment charges are
necessary as of August 29, 2009.  However, it is possible that further
impairment charges may be recorded in the future, which would adversely affect
our results of operations and financial condition.
 
 As of
August 29, 2009, our consolidated balance sheet reflected $17.8 million of
goodwill and intangible assets. We periodically evaluate whether events and
circumstances have occurred that indicate the remaining balance of goodwill and
intangible assets may not be recoverable. If factors indicate that assets are
impaired, we would be required to reduce the carrying value of our goodwill and
intangible assets, which could adversely affect our results during the periods
in which such a reduction is recognized. Our goodwill and intangible assets may
increase in future periods if we consummate other acquisitions. Amortization or
impairment of these additional intangibles would, in turn, adversely affect our
earnings.





As
a result of the implementation of a global ERP system, unexpected problems and
delays could occur and could cause disruption to the management of our business
and significantly increase costs.




During
fiscal 2008, we completed the implementation for our world-wide ERP system at
our North American operations. We completed implementation of the ERP system at
our Asian operations during the first quarter of fiscal 2009. The ERP system is
integral to our ability to accurately and efficiently maintain our books and
records, record our transactions, provide critical information to our management
and prepare our financial statements. These systems are complex and we have not
had extensive experience with them. Implementation of the ERP system has
required us to change certain internal business practices and training may be
inadequate. We may encounter unexpected difficulties, delays, internal control
issues, costs, unanticipated adverse effects or other challenges, any of which
may disrupt our business. Corrections and improvements may be required as we
continue to refine the implementation of our ERP system, procedures and
controls, and could cause us to incur additional costs and require additional
management attention, placing burdens on our internal resources. Any disruption
in the operation or effectiveness of our enhanced systems, procedures or
controls, could harm our ability to accurately forecast sales demand, manage our
supply chain, achieve accuracy in the conversion of electronic data and records,
compete effectively and report financial and management information on a timely
and accurate basis. Failure to properly or adequately address these issues could
result in the diversion of management’s attention and resources and impact our
ability to manage our business and our results of operations.





We
have reported material weaknesses in our internal control over financial
reporting and if additional material weaknesses are discovered in the future,
our stock price and investor confidence in us may be adversely
affected.




A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected.





We have
previously identified a material weakness in controls over financial reporting
for our Merix Asia operations and determined that this material weakness was
remediated as of May 30, 2009.  We may, in the future, identify
additional internal control deficiencies that could rise to the level of a
material weakness or uncover errors in financial reporting. Material weaknesses
in our internal control over financial reporting may cause investors to lose
confidence in us, which could have an adverse effect on our business and stock
price.





Our
failure to comply with environmental laws could adversely affect our
business.




Our
operations are regulated under a number of federal, state and municipal
environmental and safety laws and regulations including laws in the U.S. and the
PRC that govern, among other things, the discharge of hazardous and other
materials into the air and water, as well as the handling, storage, labeling,
and disposal of such materials. When violations of environmental laws occur, we
can be held liable for damages, penalties and costs of investigation and
remedial actions. Violations of environmental laws and regulations may occur as
a result of our failure to have necessary permits, human error, equipment
failure or other causes. Moreover, in connection with the acquisitions of our
San Jose, California and Asia facilities , we may be liable for any violations
of environmental and safety laws at those facilities by prior owners. If we
violate environmental laws, we may be held liable for damages and the costs of
investigations and remedial actions and may be subject to fines and penalties,
and revocation of permits necessary to conduct our business. Any permit
revocations could require us to cease or limit production at one or more of our
facilities, and harm our business, results of operations and financial
condition. Even if we ultimately prevail, environmental lawsuits against us
would be time consuming and costly to defend. Our failure to comply with
applicable environmental laws and regulations could limit our ability to expand
facilities or could require us to acquire costly equipment or to incur other
significant expenses to comply with these laws and regulations. In the future,
environmental laws may become more stringent, imposing greater compliance costs
and increasing risks and penalties associated with violations. We operate in
environmentally sensitive locations and we are subject to potentially
conflicting and changing regulatory agendas of political, business and
environmental groups. Changes or restrictions on discharge limits, emissions
levels, permitting requirements and material storage, handling or disposal might
require a high level of unplanned capital investment, operating expenses or,
depending on the severity of the impact of the foregoing factors, costly plant
relocation. It is possible that environmental









Table of Contents


compliance
costs and penalties from new or existing regulations may harm our business,
results of operations and financial condition.





We are
potentially liable for contamination at our current and former facilities as
well as at sites where we have arranged for the disposal of hazardous wastes, if
such sites become contaminated. These liabilities could include investigation
and remediation activities. It is possible that remediation of these sites could
adversely affect our business and operating results in the future.





Pending
or future litigation could have a material adverse effect on our operating
results and financial condition.




We are
involved, from time to time, in litigation incidental to our business including
complaints filed by investors. This litigation could result in substantial costs
and could divert management’s attention and resources which could harm our
business.  Risks associated with legal liability are often difficult
to assess or quantify, and their existence and magnitude can remain unknown for
significant periods of time. In cases where we record a liability, the amount of
our estimates could be wrong. In addition to the direct costs of litigation,
pending or future litigation could divert management’s attention and resources
from the operation of our business. While we maintain director and officer
insurance, the amount of insurance coverage may not be sufficient to cover a
claim and the continued availability of this insurance cannot be assured. As a
result, there can be no assurance that the actual outcome of pending or future
litigation will not have a material adverse effect on our results of operations
or financial condition.





We
may be subject to claims of intellectual property infringement.




Several
of our competitors hold patents covering a variety of technologies, applications
and methods of use similar to some of those used in our products. From time to
time, we and our customers have received correspondence from our competitors
claiming that some of our products, as used by our customers, may be infringing
one or more of these patents. Competitors or others have in the past and may in
the future assert infringement claims against our customers or us with respect
to current or future products or uses, and these assertions may result in costly
litigation or require us to obtain a license to use intellectual property rights
of others. If claims of infringement are asserted against our customers, those
customers may seek indemnification from us for damages or expenses they
incur.





If we
become subject to infringement claims, we will evaluate our position and
consider the available alternatives, which may include seeking licenses to use
the technology in question or defending our position. These licenses, however,
may not be available on satisfactory terms or at all. If we are not able to
negotiate the necessary licenses on commercially reasonable terms or
successfully defend our position, our financial condition and results of
operations could be materially and adversely affected.





We
may have exposure to income tax rate fluctuations as well as to additional tax
liabilities, which wouldimpact
our financial position.




As a
corporation with operations both in the United States and abroad, we are subject
to taxes in the United States and various foreign jurisdictions. Our effective
tax rate is subject to fluctuation as the income tax rates for each year are a
function of the following factors, among others:


·
            the
      effects of a mix of profits or losses earned by us and our subsidiaries in
      numerous tax jurisdictions with a broad range of income tax
      rates;


·
            our
      ability to utilize net operating
losses;


·
            changes
      in contingencies related to taxes, interest or penalties resulting from
      tax audits; and


·
            changes
      in tax laws or the interpretation of such
laws.





Changes
in the mix of these items and other items may cause our effective tax rate to
fluctuate between periods, which could have a material adverse effect on our
financial position.





We are
also subject to non-income taxes, such as payroll, sales, use, value-added, net
worth, property and goods and services taxes, in both the United States and
various foreign jurisdictions.





Significant
judgment is required in determining our provision for income taxes and other tax
liabilities. Although we
believe that our tax estimates are reasonable, we cannot provide assurance that
the final determination of tax audits or tax disputes will not be different from
what is reflected in our historical income tax provisions and
accruals.












RISKS
RELATED TO OUR CORPORATE STRUCTURE AND STOCK





Our
stock price has fluctuated significantly, and we expect the trading price of our
common stock to remain highly volatile.




The
closing trading price of our common stock has fluctuated from a low of less than
$0.20 per share to a high of more than $70.00 per share over the past 15
years.





The
      market price of our common stock may fluctuate as a result of a number of
      factors including:


·
            actual
      and anticipated variations in our operating
  results;


·
            general
      economic and market conditions, including changes in demand in the PCB
      industry and the end markets which we
serve;


·
            interest
      rates;


·
            geopolitical
      conditions throughout the world;


·
            perceptions
      of the strengths and weaknesses of the PCB industry and the end markets
      which it serves;


·
            our
      ability to pay principal and interest on our debt when
  due;


·
            developments
      in our relationships with our lenders, customers, and/or
      suppliers;


·
            announcements
      of alliances, mergers or other relationships by or between our competitors
      and/or our suppliers and customers;


·
            announcements
      of plant closings, layoffs, restructurings or bankruptcies by our
      competitors; and


·
            developments
      related to regulations, including environmental and wastewater
      regulations.





We expect
volatility to continue in the future. The stock market in general has recently
experienced extreme price and volume fluctuations that have affected the PCB
industry and that may be unrelated to the operating performance of the companies
within these industries. These broad market fluctuations may adversely affect
the market price of our common stock and limit our ability to raise capital or
finance transactions using equity instruments.





A
large number of our outstanding shares and shares to be issued upon exercise of
our outstanding options may be sold into the market in the future, which could
cause the market price of our common stock to drop significantly, even if our
business is doing well.




We may,
in the future, sell additional shares of our common stock, or securities
convertible into or exercisable for shares of our common stock, to raise
capital. We may also issue additional shares of our common stock, or securities
convertible into or exercisable for shares of our common stock, to finance
future acquisitions. Further, a substantial number of shares of our common stock
are reserved for issuance pursuant to stock options. As of May 30, 2009, we had
approximately 2.6 million outstanding options, each to purchase one share of our
common stock, issued to employees, officers and directors under our equity
incentive plans. The options have exercise prices ranging from $1.60 per
share to $67.06 per share. Our shareholders will vote in October 2009 on a
proposal to approve the availability of an additional three million shares to
grant stock options or restricted stock awards and terminate additional grants
from available shares under our existing equity compensation
plans.  Currently outstanding options, as well as any issued in the
future, could have a significant adverse effect on the trading price of our
common stock, especially if a significant volume of the options was exercised
and the stock issued was immediately sold into the public market. Further, the
exercise of these options could have a dilutive impact on other shareholders by
decreasing their ownership percentage of our outstanding common stock. If we
attempt to raise additional capital through the issuance of equity or
convertible debt securities, the terms upon which we will be able to obtain
additional equity capital, if at all, may be negatively affected since the
holders of outstanding options can be expected to exercise them, to the extent
they are able, at a time when we would, in all likelihood, be able to obtain any
needed capital on terms more favorable than those provided in such
options.












Some
provisions contained in our Articles of Incorporation, Bylaws and Shareholders
Rights Agreement, as well as provisions of Oregon law, could inhibit an attempt
by a third party to acquire or merge with Merix Corporation.




Some of
the provisions of our Articles of Incorporation, Bylaws, Shareholders Rights
Agreement and Oregon’s anti-takeover laws could delay or prevent a merger or
acquisition between us and a third party, or make a merger or acquisition with
us less desirable to a potential acquirer, even in circumstances in which our
shareholders may consider the merger or acquisition favorable. Our Articles of
Incorporation authorize our Board of Directors to issue series of preferred
stock and determine the rights and preferences of each series of preferred stock
to be issued. Our Shareholder Rights Agreement is designed to enhance the
Board’s ability to protect shareholders against unsolicited attempts to acquire
control of us that do not offer an adequate price to all shareholders or are
otherwise not in the Company’s best interests and the best interests of our
shareholders. The rights issued under the rights agreement will cause
substantial dilution to any person or group who attempts to acquire a
significant amount of common stock without approval of our Board of Directors.
Any of these provisions that have the effect of delaying or deterring a merger
or acquisition between us and a third party could limit the opportunity for our
shareholders to receive a premium for their shares of our common stock, and
could also affect the price that some investors are willing to pay for our
common stock.





Item 2.  Unregistered Sales of Equity Securities
and Use of Proceeds





We
repurchased the following shares of our common stock during the first quarter of
fiscal 2010:





Total
      number of shares purchased
            
            
            Average
      price paid per share
            
            
            Total
      number of shares purchased as part of publicly announced
    plan
            
            
            Maximum
      number of shares that may yet be purchased under the planMay
      31, 2009 to July 4, 2009
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            
            -July
      5, 2009 to August 1, 2009
            
            
            3,875
            
            
            
            1.14
            
            
            
            -
            
            
            
            -August
      2, 2009 to August 29, 2009
            
            
            2,369
            
            
            
            1.72
            
            
            
            -
            
            
            
            -Total
            
            
            6,244
            
            
            
            1.36
            
            
            
            -
            
            
            
            -





Purchases
during the first quarter of fiscal 2010 represented shares purchased by the
Company from employees from which the proceeds are remitted to pay the
employees’ withholding taxes due at the time the employees’ restricted stock
awards vest under our equity-based compensation plans.












Item
6.                      Exhibits





The
following exhibits are filed herewith and this list is intended to constitute
the exhibit index:





31.1
            
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934.31.2
            
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934.32.1+
            
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of
      the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350.32.2+
            
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of
      the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350.





+
furnished herewith.





SIGNATURES








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








MERIX
CORPORATION








Dated:  October
7,
2009                                                       /s/ MICHAEL D.
BURGER


Michael
D. Burger


Director, President and


Chief Executive Officer


(Principal Executive
Officer)





/s/ KELLY E.
LANG


Kelly E. Lang


Executive
Vice President and Chief Financial Officer


(Principal
Financial Officer)





/s/ALLEN L.
MUHICH


Allen L.
Muhich


Vice
President, Finance and Corporate Controller


(Principal
Accounting Officer)