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 February 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23818
MERIX CORPORATION
(Exact name of registrant as specified in its charter)
OREGON 93-1135197
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1521 Poplar Lane, Forest Grove, Oregon 97116
(Address of principal executive offices) (Zip Code)
(503) 359-9300
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of April 1,
1999 was 6,329,336 shares.
<PAGE>
MERIX CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I Financial Information Page
Item 1. Financial Statements:
Balance Sheets as of February 27, 1999 and
May 30, 1998 2
Statements of Operations for the three months and nine
months ended February 27, 1999 and February 28, 1998 3
Statements of Cash Flows for the nine months
ended February 27, 1999 and February 28, 1998 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosure About Market Risk 13
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
MERIX CORPORATION
BALANCE SHEETS
(unaudited, in thousands)
February 27, May 30,
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and short-term investments $ 16,868 $ 22,899
Accounts receivable, net of allowance of $259 (1999 and 1998) 15,170 21,804
Inventories (Notes 2 and 5) 6,988 10,795
Tax refund receivable 759 759
Deferred income taxes 953 1,577
Other current assets 1,514 2,454
----------- -----------
Total current assets 42,252 60,288
Property, plant and equipment, net (Notes 3 and 5) 59,875 70,262
Goodwill, net (Note 5) - 2,027
Deferred income taxes 13,739 -
Other assets 335 2,591
----------- -----------
Total assets $ 116,201 $ 135,168
=========== ===========
Liabilities and Shareholders' Equity
Accounts payable $ 12,055 $ 10,584
Accrued compensation (Note 5) 2,724 2,512
Current portion of long-term debt 8,000 4,529
Other accrued liabilities (Note 5) 5,650 1,908
----------- -----------
Total current liabilities 28,429 19,533
Long-term debt (Note 6) 34,299 40,000
Deferred income taxes 4,171 4,171
Other liabilities - 1,273
----------- -----------
Total liabilities 66,899 64,977
Shareholders' equity:
Preferred stock, no par value; authorized 10,000 shares;
none issued - -
Common stock, no par value; authorized 50,000 shares;
issued and outstanding 1999: 6,314 shares,
1998: 6,203 shares 44,889 44,625
Unearned compensation (5) (250)
Retained earnings 4,418 25,816
----------- -----------
49,302 70,191
----------- -----------
Total liabilities and shareholders' equity $ 116,201 $ 135,168
=========== ===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MERIX CORPORATION
STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended
Feb. 27, Feb. 28, Feb. 27, Feb. 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 30,503 $ 46,416 $ 81,050 $ 137,546
Cost of sales 25,273 38,278 82,471 117,176
------------ ------------ ------------ ------------
Gross profit (loss) 5,230 8,138 (1,421) 20,370
------------ ------------ ------------ ------------
Engineering 1,010 1,441 3,058 4,420
Selling, general and administrative 2,121 3,720 7,032 10,604
Restructuring expense (benefit) (Note 5) (6,129) - 21,750 1,878
------------ ------------ ------------ ------------
Total operating expense (benefit) (2,998) 5,161 31,840 16,902
Operating income (loss) 8,228 2,977 (33,261) 3,468
Interest and other expense, net (329) (591) (1,252) (1,700)
------------ ------------ ------------ ------------
Income (loss) before taxes 7,899 2,386 (34,513) 1,768
Income taxes 3,002 890 (13,115) 620
------------ ------------ ------------ ------------
Net income (loss) $ 4,897 $ 1,496 $ (21,398) $ 1,148
============ ============ ============ ============
Net income (loss) per share (Note 3)
Basic $ 0.78 $ 0.24 $ (3.43) $ 0.19
============ ============ ============ ============
Diluted $ 0.77 $ 0.24 $ (3.43) $ 0.18
============ ============ ============ ============
Shares used in per share calculations
Basic 6,291 6,195 6,245 6,190
============ ============ ============ ============
Diluted 6,350 6,288 6,245 6,261
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MERIX CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended
February 27, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (21,398) $ 1,148
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,125 7,593
Deferred income taxes (13,115) 1,250
Amortization of unearned compensation 42 189
Restructuring charge 16,798 1,138
Contribution of common stock to 401(k) plan 608 -
Other 31 4
Changes in assets and liabilities:
Accounts receivable 6,634 (5,444)
Inventories 3,807 (1,673)
Income tax refund receivable - 2,308
Other current assets 940 (63)
Accounts payable 1,471 3,022
Accrued compensation 212 810
Other accrued liabilities 2,464 (1,278)
------------ ------------
Net cash provided by operating activities 4,619 9,004
------------ ------------
Cash flows from investing activities:
Capital expenditures (12,922) (12,353)
Short-term investments: purchases (11,016) (12,500)
maturities 9,546 13,594
Proceeds from sale of assets 4,504 31
------------ ------------
Net cash used in investing activities (9,888) (11,228)
------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt (2,230) (91)
Proceeds from exercise of stock options - 444
Reacquired common stock (2) (204)
------------ ------------
Net cash (used in) provided by financing activities (2,232) 149
------------ ------------
Decrease in cash and cash equivalents (7,501) (2,075)
Cash and cash equivalents at beginning of period 15,430 16,537
------------ ------------
Cash and cash equivalents at end of period 7,929 14,462
Short-term investments 8,939 7,466
------------ ------------
Cash and short-term investments at end of period $ 16,868 $ 21,928
============ ============
Supplemental disclosure of non-cash information:
Tax benefit related to stock-based compensation $ 5 $ 133
Asset acquired by recognition of liability - 1,093
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amount capitalized $ 1,367 $ 1,619
The accompanying notes are an integral part of the financial statements.
</TABLE>
4
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Merix Corporation (the
Company) have been prepared pursuant to Securities and Exchange Commission rules
and regulations. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended May 30, 1998.
The financial information included herein reflects all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for interim periods. The
results of operations for the three and nine months ended February 27, 1999 are
not necessarily indicative of the results to be expected for the full year.
The Company's fiscal year is the 52 or 53-week period ending the last Saturday
in May. Fiscal year 1999 is a 52-week year ending May 29, 1999 and fiscal year
1998 was a 52-week year ended May 30, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130) which establishes requirements
for disclosure of comprehensive income and is effective for the Company's fiscal
year ending May 1999. Reclassification of earlier financial statements for
comparative purposes is required. The Company adopted SFAS 130 in the first
quarter of fiscal year 1999. Comprehensive income (loss) did not differ from
currently reported net income (loss) in the periods presented.
Note 2. INVENTORIES
<TABLE>
<CAPTION>
February 27, May 30,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 1,201 $ 3,684
Work in process 4,446 3,638
Finished goods 1,341 3,473
----------- -----------
Total $ 6,988 $ 10,795
=========== ===========
</TABLE>
Note 3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
February 27, May 30,
1999 1998
----------- -----------
<S> <C> <C>
Land $ 2,190 $ 2,190
Buildings and grounds 19,800 24,267
Machinery and equipment 83,159 100,282
Construction in progress 6,231 2,828
----------- -----------
111,380 129,567
Less accumulated depreciation (51,505) (59,305)
----------- -----------
Property, plant and equipment, net $ 59,875 $ 70,262
=========== ===========
</TABLE>
5
<PAGE>
Note 4. INCOME (LOSS) PER SHARE
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period. Diluted earnings per share is
computed using the weighted average number of shares of common stock and
dilutive common equivalent shares outstanding during the period. Incremental
shares, related to outstanding stock options, of 59,072 for the three months
ended February 27, 1999, 92,711 for the three months ended February 28, 1998 and
70,578 for the nine months ended February 28, 1998 were included in the
calculations of diluted earnings per share.
Stock options to purchase 1,199,445 shares were not included in the net loss per
share calculation for the nine months ended February 27, 1999, because to do so
would have been antidilutive. Of the stock options outstanding at February 27,
1999, 960,242 had exercise prices below the market price of the underlying
common stock at that date.
Note 5. RESTRUCTURING
In the first quarter of fiscal year 1999 the Company announced a restructuring
plan, undertaken to improve capacity utilization and lower the Company's cost
structure. Pursuant to the restructuring plan, the Company closed its Loveland,
Colorado facility, reduced approximately 35 employees from administrative,
engineering and support functions at its Forest Grove, Oregon location and sold
its Soladyne facility in San Diego, California. The Soladyne facility was sold
in February 1999. Closure of the Loveland facility, which was completed on
October 30, 1998, resulted in the layoff of approximately 340 manufacturing and
support employees. The Company transferred a portion of the Loveland production
and manufacturing equipment used in the Loveland facility to the Forest Grove
site. Installation of the manufacturing equipment should be completed by the end
of the second quarter of fiscal year 2000.
In the third quarter of fiscal year 1999, the Company reversed $7.1 million of
the restructuring charge taken in the first quarter of the year. The reversal
was a result of a favorable termination of the Loveland facility lease, higher
than estimated proceeds from the sale of excess equipment and the sale of the
Soladyne facility. The components of the restructuring charge recorded in the
first quarter of fiscal year 1999, along with the reversal recorded in the third
quarter of fiscal year 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Aug. 29, 1998 Feb. 27, 1999 Feb. 27, 1999
------------- ------------- -------------
Adjusted
Restructuring Restructuring
Charge Reversal Charge
------------- ------------- -------------
<S> <C> <C> <C>
Non-cash charges:
Write-down and write-off
of manufacturing equipment $ 15,672 $ (2,826) $ 12,846
Write-off of goodwill and
intangible assets 3,952 - 3,952
------------- ------------- -------------
19,624 (2,826) 16,798
Cash charges:
Severance benefits 2,801 (372) 2,429
Lease termination costs 4,758 (3,059) 1,699
Other costs 696 128 824
------------- ------------- -------------
8,255 (3,303) 4,952
Total restructuring expense $ 27,879 $ (6,129) $ 21,750
============= ============= =============
Write-off of inventory, included in
cost of sales $ 2,118 $ (980) $ 1,138
============= ============= =============
</TABLE>
6
<PAGE>
Cash payments during fiscal year 1999 related to the restructuring charge
consisted of $2,382 of severance benefits, $511 of lease termination costs and
$636 of other costs. At February 27, 1999, $47 was included in accrued
compensation and $1,753 was included in other accrued liabilities.
In the second quarter of fiscal year 1998 the Company recorded a $1,878 charge
for the costs associated with a restructuring plan undertaken to improve the
Company's profitability, which included a work force reduction, the write-off
of certain manufacturing equipment, and other miscellaneous costs. All
outstanding liabilities associated with the restructuring plan were paid in the
third quarter of fiscal year 1998.
Note 6. LONG-TERM DEBT
The Company has $40 million outstanding under a private placement of senior
unsecured notes with two insurance companies which include certain financial
covenants (including minimum net worth, debt ratio and interest coverage
requirements). As of February 27, 1999, the Company was not in compliance with
the covenants which specify minimum net worth and interest coverage
requirements. Compliance with such covenants was waived by the holders of the
unsecured notes as of and for the quarter ended February 27, 1999.
The Company has a secured note payable to Tektronix, Inc. with $2,298
outstanding at February 27, 1999. The note bears interest at 7.5% and was
originally due in May 1999. In March 1999, the note was amended to defer the
payment of the outstanding balance as follows: $1,149 payable in June 2000 and
$1,149 payable in June 2001. All other terms of the note remain unchanged.
Note 7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133 establishes accounting and reporting standards requiring every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 also requires changes in the
derivative's fair value be recognized currently in results of operations unless
specific hedge accounting criteria are met. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. The Company does not expect SFAS 133 to
have a material impact on its consolidated financial statements.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Dollars in thousands)
This discussion and analysis is designed to be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Merix Corporation (the Company) Form 10-K for the
fiscal year ended May 30, 1998.
Results of Operations
Fiscal year. The Company's fiscal year is the 52 or 53-week period ending the
last Saturday in May. Fiscal year 1999 is a 52-week year ending May 29, 1999 and
fiscal year 1998 was a 52-week year ended May 30, 1998.
Net Sales. Net sales for the third quarter of fiscal year 1999 were $30,503, a
decrease of 34.3% from net sales of $46,416 in the third quarter of fiscal year
1998. Net sales for the first nine months of fiscal year 1999 were $81,050, a
decrease of 41.1% from net sales of $137,546 in the first nine months of fiscal
year 1998. Net sales decreased due to lower unit sales and lower average selling
prices which resulted from the general electronics industry downturn, pricing
pressures in the printed circuit industry, excess customer inventories and the
closure of the Loveland facility. Net sales at the Forest Grove, Oregon
production facility have increased sequentially during the three quarters of
fiscal year 1999. The Company attributes these increases to its continued
efforts to penetrate new customers and new programs, to a return of demand from
its existing customers as their inventory and market issues are resolved and to
increasing sales in the high-end computing and communications market segments.
While pricing has stabilized somewhat in the third quarter of fiscal year 1999
compared to the prior quarter, the Company expects pricing pressures to
continue. During periods of slowdown in the electronics industry, the Company's
customers are more price sensitive, which has had, and could continue to have,
an adverse effect on interconnect pricing. Additionally, as a result of the
current economic situation in Asia, many Asian printed circuit companies have
turned to the U.S. domestic market as a source of new customers to utilize their
excess capacity. This additional competition in the domestic printed circuit
market has created intensified pricing pressures from both international and
domestic competitors in many of the markets in which the Company competes.
Sales by market segments as a percent of net sales are shown in the table below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
February 27, February 28, February 27, February 28,
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Segments
Computers 35% $ 10,530 32% $ 14,673 33% $ 26,675 29% $ 39,851
Communications 46 13,977 24 11,275 36 29,293 25 34,548
Test and Instruments 14 4,371 41 18,979 27 22,104 42 57,812
Other 5 1,625 3 1,489 4 2,978 4 5,335
----------------- ----------------- ----------------- -----------------
Total 100% $ 30,503 100% $ 46,416 100% $ 81,050 100% $137,546
================= ================= ================= =================
</TABLE>
The Company's five largest customers comprised approximately 68% and 72% of net
sales in the third quarter of fiscal year 1999 and 1998, respectively, and 67%
and 74% of net sales in the first nine months of fiscal year 1999 and 1998,
respectively. The Company continues to focus on additional diversification of
its customer base, and is achieving its objectives with regard to increasing
sales in the high-end computing and communications market segments and
decreasing sales of lower margin products in the test and measurement market
segment. However, there can be no assurance that sales within a particular
market segment will not experience decreases which could have an adverse effect
on the Company's results of operations.
8
<PAGE>
The Company's 90 day backlog was approximately $19.4 million at February 27,
1999, compared to $15.8 million at the end of fiscal year 1998. A substantial
portion of the Company's backlog is typically scheduled for delivery within 60
days. Cancellation and postponement charges generally vary depending upon the
time of cancellation or postponement, and a significant portion of the Company's
backlog is subject to cancellation or postponement without significant penalty.
The level and timing of orders placed by the Company's customers vary due to
many factors, including customer attempts to manage inventory, timing of new
product introductions and variation in demand for customer products.
Accordingly, the Company's backlog is not necessarily indicative of future
quarterly or annual financial results. The Company typically does not obtain
long-term purchase orders or commitments from its customers and a variety of
conditions may cause customers to cancel, reduce or delay orders that were
previously placed. The Company cannot assure the timely replacement of canceled,
delayed or reduced orders.
In December 1997, the Company announced plans for a major expansion of its
Forest Grove manufacturing capacity. The expansion project is expected to be
complete by the end of May 1999. During the third quarter, the Company added
approximately 130 direct production employees. Completion of the expansion
project is expected to position the Company to take advantage of increasing
customer demand. However, future profitability and the ability to utilize
manufacturing capacity in an effective manner will be dependent upon the
Company's ability to increase sales to existing and new customers.
Gross profit (loss). The Company's gross margin was 17.1% and 17.5% in the third
quarters of fiscal year 1999 and 1998, respectively, and was (1.8%) and 14.8% in
the first nine months of fiscal year 1999 and 1998, respectively. In the first
and third quarters of fiscal year 1999, gross profit (loss) was affected by
expense and benefit, respectively, related to the restructuring charge. See Note
5 of Notes to Financial Statements and "Restructuring" below. The decreases in
gross profit in the fiscal year 1999 periods were attributable to lower capacity
utilization, lower product pricing, and the effect of the net write-down of
inventory related to the fiscal year 1999 restructuring charge. Sequentially,
gross profit improved in the third quarter of fiscal year 1999 compared to the
second quarter of fiscal year 1999 primarily as a result of increased sales of
higher margin products, increased capacity utilization of the Forest Grove
manufacturing facility, lower costs as a result of the restructuring, and other
cost reduction actions.
The Company's customers are demanding more sophisticated products, which
incorporate high technology and increasing layer counts. The Company has
increased its sales in the high-end computing and communications market segments
and decreased its sales of lower margin products in the test and measurement
market segment. However, there can be no assurance that these efforts will
result in higher profits. The Company's basic interconnect technology is
generally not subject to significant proprietary protection, and companies with
significant resources may develop expertise in these higher technology processes
and products and compete with the Company. Increased competition could result in
price reductions, reduced margins or loss of market share, which could
materially adversely affect the Company's business, financial condition and
results of operations.
Engineering. Engineering expenses were $1,010 and $1,441 in the third quarters
of fiscal year 1999 and 1998, respectively, and were 3.3% and 3.1% of sales,
respectively. Engineering expenses were $3,058 and $4,420 in the first nine
months of fiscal years 1999 and 1998, respectively, and were 3.8% and 3.2% of
sales, respectively. These expenses decreased due to reduced headcount, cost
controls and the capitalization of labor. The Company capitalized $0 and
approximately $650 of dedicated engineering labor in the third quarter and first
nine months of fiscal year 1999, respectively, related to the Forest Grove
expansion project. Engineering expenses, as a percentage of sales, increased as
a result of lower sales in the third quarter and first nine months of fiscal
year 1999.
Selling, General and Administrative. Selling, general and administrative
expenses were $2,121 and $3,720 in the third quarters of fiscal years 1999 and
1998, respectively, and were 7.0% and 8.0% of sales, respectively. Selling,
general and administrative expenses were $7,032 and $10,604 in the first nine
months of fiscal years 1999 and 1998, respectively, and were 8.7% and 7.7% of
sales, respectively. These expenses decreased due to reduced headcount resulting
from the restructurings, cost controls and reduced selling expenses as a result
of a lower level of sales. See Note 5 of Notes to Financial Statements.
9
<PAGE>
Restructuring Expense. In the first quarter of fiscal year 1999 the Company
announced a restructuring plan, undertaken to improve capacity utilization and
lower the Company's cost structure. Pursuant to the restructuring plan, the
Company closed its Loveland, Colorado facility, reduced approximately 35
employees from administrative, engineering and support functions at its Forest
Grove, Oregon location and sold its Soladyne facility in San Diego, California.
The Soladyne facility was sold in February 1999. Closure of the Loveland
facility, which was completed on October 30, 1998, resulted in the layoff of
approximately 340 manufacturing and support employees. The Company transferred a
portion of the Loveland production and manufacturing equipment used in the
Loveland facility to the Forest Grove site. Installation of the manufacturing
equipment should be completed by the end of the second quarter of fiscal year
2000.
In the third quarter of fiscal year 1999, the Company reversed $7.1 million of
the restructuring charge taken in the first quarter of the year. The reversal
was a result of a favorable termination of the Loveland facility lease, higher
than estimated proceeds from the sale of excess equipment and the sale of the
Soladyne facility. The components of the restructuring charge recorded in the
first quarter of fiscal year 1999, along with the reversal recorded in the third
quarter of fiscal year 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Aug. 29, 1998 Feb. 27, 1999 Feb. 27, 1999
------------- ------------- -------------
Adjusted
Restructuring Restructuring
Charge Reversal Charge
------------- ------------- -------------
<S> <C> <C> <C>
Non-cash charges:
Write-down and write-off
of manufacturing equipment $ 15,672 $ (2,826) $ 12,846
Write-off of goodwill and
intangible assets 3,952 - 3,952
------------- ------------- -------------
19,624 (2,826) 16,798
Cash charges:
Severance benefits 2,801 (372) 2,429
Lease termination costs 4,758 (3,059) 1,699
Other costs 696 128 824
------------- ------------- -------------
8,255 (3,303) 4,952
Total restructuring expense $ 27,879 $ (6,129) $ 21,750
============= ============= =============
Write-off of inventory, included in
cost of sales $ 2,118 $ (980) $ 1,138
============= ============= =============
</TABLE>
Cash payments during fiscal year 1999 related to the restructuring charge
consisted of $2,382 of severance benefits, $511 of lease termination costs and
$636 of other costs. At February 27, 1999, $47 was included in accrued
compensation and $1,753 was included in other accrued liabilities.
In the second quarter of fiscal year 1998 the Company recorded a $1,878 charge
for the costs associated with a restructuring plan undertaken to improve the
Company's profitability, which included a work force reduction, the write-off
of certain manufacturing equipment, and other miscellaneous costs. All
outstanding liabilities associated with the restructuring plan were paid in the
third quarter of fiscal year 1998.
Interest and Other Expense, net. Interest and other expense, net was $329 and
$591 for the third quarters of fiscal years 1999 and 1998, respectively, and
$1,252 and $1,700 for the first nine months of fiscal years 1999 and 1998,
respectively. Interest and other expense, net decreased due to the
capitalization of interest related to the Forest Grove expansion project of $185
and $584 in the third quarter and first nine months of fiscal year 1999,
respectively.
10
<PAGE>
Income Taxes. In the first nine months of fiscal year 1999, the Company recorded
a benefit of $13,115 from the recognition of net operating loss carryforwards.
The Company estimates its effective income tax rate will be approximately 38% in
fiscal year 1999.
Liquidity and Capital Resources
Cash and short-term investments at February 27, 1999 were $16,868 compared with
$22,899 at May 30, 1998. Cash and short-term investments are expected to
continue to decline as the Company completes the funding of its capital
expansion project. Working capital decreased to $13,823 at February 27, 1999
from $40,755 at May 30, 1998, primarily as a result of reclassification of
long-term debt to current liabilities to reflect an $8,000 payment due in
September 1999, and decreases in cash, accounts receivable and inventories.
Cash provided by operating activities in the first nine months of fiscal year
1999 was $4,619, which primarily consisted of a net loss for the period adjusted
for depreciation and amortization, and an increase in deferred income taxes,
primarily offset by the net restructuring charge, a decrease in accounts
receivable and inventories and an increase in other accrued liabilities.
Deferred income taxes increased as a result of the net loss in the period, and
accounts receivable and inventories decreased as a result of the lower level of
sales in the period. Other accrued liabilities increased due to the accruals
related to the fiscal year 1999 restructuring charge. See Note 5 of Notes to
Financial Statements.
Cash used in investing activities in the first nine months of fiscal year 1999
was $9,888, which primarily consisted of $12,922 of capital expenditures for
manufacturing equipment, and $11,016 of purchases of short-term investments,
offset by $4,504 of proceeds from sale of assets and $9,546 of maturities of
short-term investments. The Company's policy is to hold such short-term
investments to maturity.
Cash used in financing activities in the first nine months of fiscal year 1999
was $2,232, which primarily consisted of payment of long-term debt.
The Company has a secured note payable to Tektronix, Inc. with $2,298
outstanding at February 27, 1999. The note bears interest at 7.5% and was
originally due in May 1999. In March 1999, the note was amended to defer the
payment of the outstanding balance as follows: $1,149 payable in June 2000 and
$1,149 payable in June 2001. All other terms of the note remain unchanged.
The Company has $40 million outstanding under a private placement of senior
unsecured notes with two insurance companies. The notes bear interest at 7.92%,
payable on a semi-annual basis, with payment of principal in five equal annual
installments commencing on September 15, 1999.
The senior unsecured notes include certain financial covenants (including
minimum net worth, debt ratio and rolling four quarter interest coverage
requirements). As of February 27, 1999, the Company was not in compliance with
the covenants which specify minimum net worth and interest coverage
requirements. Compliance with such covenants was waived by the holders of the
unsecured notes as of and for the quarter ended February 27, 1999. See Note 6 of
Notes to Financial Statements. The Company expects that it will not satisfy
certain of the existing covenants as of the end of its quarter ending May 29,
1999 and intends to negotiate with the lenders to obtain an amendment of these
covenants. If the covenants are not further amended or waived, the notes could
become immediately due in full. The Company plans to seek additional financing
during the 1999 calendar year to meet its working capital and capital
expenditure requirements and is exploring additional financing alternatives,
including equipment leasing. There are no assurances that additional financing
will be available to the Company.
The Company had capital commitments of approximately $4,800 at February 27,
1999, primarily related to expansion of manufacturing capacity at its Forest
Grove facility. The Company currently expects to finance the expansion with
available resources.
11
<PAGE>
Year 2000 Disclosure
The Company has developed a plan to perform assessment and remediation of its
computer software programs and operating systems, including applications used in
its financial, shop-floor control and manufacturing equipment control systems,
to determine their readiness for the Year 2000 (the "Year 2000 Program"). The
inability of computer software programs and operating systems to accurately
recognize, interpret and process date codes designating the Year 2000 and beyond
could cause systems to yield inaccurate results or encounter operating problems,
including disruption of the business operations these systems control. The
Company has completed its assessment of the financial, shop-floor control
systems and manufacturing equipment control systems. Remediation of the
financial and shop-floor control systems is 50% complete and no remediation of
the manufacturing equipment control systems has been completed. The Company
expects to complete its remediation of all of its systems by the end of the
second quarter of fiscal year 2000.
The Company also may be exposed to risks from computer systems of parties with
which the Company transacts business. The Company has contacted most of its
critical suppliers to determine the extent to which the Company may be
vulnerable to those parties' failure to remedy their own Year 2000 issues and to
ascertain what actions, if needed, may be taken by the Company in response to
such risks. To date, approximately 90% of the suppliers contacted have indicated
they are, or expect to be, Year 2000 compliant.
The Company currently estimates that it will spend between $385 and $1,000 in
addressing the Year 2000 issue, of which approximately $120 has been incurred
through the third quarter of fiscal year 1999. The estimates are subject to
change as additional information is obtained in connection with the Year 2000
Program.
Based on its assessments to date, the Company believes it will not experience
any material disruption as a result of Year 2000 issues in its computer software
programs and operating systems used in its internal operations, its interface
with key suppliers and customers, or processing orders and billing. However, if
certain critical third party suppliers, such as those supplying electricity,
water, telephone service or critical materials, experience difficulties
resulting in disruption of the service or delivery of supplies to the Company,
or if the Company's internal operating systems fail to comply, a shutdown of the
Company's operations could occur for the duration of the disruption. The Company
has not developed a contingency plan to handle such events, but intends to
develop such a plan by the end of the first quarter of fiscal year 2000.
Furthermore, due to the general uncertainty inherent in the Year 2000 problem,
there can be no assurances that Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
Forward-looking Statements
Information set forth in this Report on Form 10-Q relating to fiscal year 1999
and beyond, including the Company's plans and expectations with respect to cost
savings, its restructuring plan, changes in product mix, gross margin, customer
demand, increases in manufacturing capacity, and Year 2000 matters constitute
forward-looking statements. Information contained in forward-looking statements
is based on current expectations and is subject to change, and actual results
may differ materially from the forward-looking statements.
Many factors could cause actual results to differ materially from the
forward-looking information. This Report on Form 10-Q discusses certain of these
factors, including the general slow-down in the electronics and printed circuit
board industries and the economic situation in Asia; declines in customer orders
and the resulting excess capacity that occurs in the industry from time to time;
pricing and other competitive pressures in the industry; risks related to the
Company's capacity expansion project; customer concentration and difficulties in
diversifying the customer base and increasing sales in the high end computing
and communications markets; risks related to customer cancellation, postponement
or reduction of orders; negotiations relating to the Company's loan agreements;
possible difficulty in seeking additional financing in calendar year 1999; and
unanticipated costs associated with any required modifications to the
12
<PAGE>
Company's manufacturing equipment computer systems and associated software and
other risks related to the Year 2000 issue. Other factors include business
conditions and growth in the general economy and the electronic and interconnect
industries; raw material availability; production delays; product mix; customer
acceptance of new technologies; costs and yield issues associated with
production; the ability to attract and retain a talented workforce;
unanticipated costs to comply with environmental laws; and other risks listed
from time to time in the Company's Securities and Exchange Commission reports or
otherwise disclosed by the Company. Any forward-looking statements should be
considered in light of these factors. Forward-looking statements speak only as
of date made. The Company undertakes no obligation to publicly release the
results of any revision to forward-looking statements which may be made to
reflect subsequent events or circumstances or to reflect the occurrence of
unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
Exhibit
No.
-------
10.33 Amendment No. 1 to Promissory Note dated June 1, 1994 from
Merix Corporation to Tektronix, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended February 27,
1999.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized this 12th day of April 1999.
MERIX CORPORATION
By: /s/ JANIE S. BROWN
-------------------------------------
Janie S. Brown
Vice President, Treasurer and Chief
Financial Officer
(Principal Financial Officer)
14
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.33 Amendment No. 1 to Promissory Note dated June 1, 1994 from
Merix Corporation to Tektronix, Inc.
27 Financial Data Schedule
PROMISSORY NOTE
AMENDMENT NO. 1
This Amendment No. 1 to the Promissory Note (the "Note") dated June 1, 1994
from MERIX CORPORATION ("Maker") to TEKTRONIX, INC. ("Payee"), is entered into
as of March 19, 1999. All capitalized terms not otherwise defined in this
Amendment shall have the meanings given to them in the Note.
Maker and Payee agree that the remaining principal and interest under the
Note, which is due in full on the last Friday in May 1999, shall instead be
payable as follows:
(1) On the last Friday in May 1999, accrued interest only, in the amount of
$171,919.70; and
(2) On each of June 1, 2000 and June 1, 2001, $1,149,280.02 in principal,
plus accrued interest.
All principal and interest shall have been paid on or before June 1, 2001.
IN WITNESS WHEREOF, Maker and Payee have executed this Amendment No. 1 as
of the date written above.
MERIX CORPORATION TEKTRONIX, INC.
By: DEBI COLEMAN By: CARL W. NEUN
------------------------------ ------------------------------
Name: Debi Coleman Name: Carl W. Neun
---------------------------- ----------------------------
Title: Chief Executive Officer Title: Chief Financial Officer
--------------------------- ---------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements found in the Company's Quarterly Report on
Form 10Q for the nine months ended February 27, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-29-1999
<PERIOD-START> MAY-31-1998
<PERIOD-END> FEB-27-1999
<CASH> 16,868
<SECURITIES> 0
<RECEIVABLES> 15,429
<ALLOWANCES> 259
<INVENTORY> 6,988
<CURRENT-ASSETS> 42,252
<PP&E> 111,380
<DEPRECIATION> 51,505
<TOTAL-ASSETS> 116,201
<CURRENT-LIABILITIES> 28,429
<BONDS> 0
0
0
<COMMON> 44,889
<OTHER-SE> 4,413
<TOTAL-LIABILITY-AND-EQUITY> 116,201
<SALES> 81,050
<TOTAL-REVENUES> 81,050
<CGS> 82,471
<TOTAL-COSTS> 82,471
<OTHER-EXPENSES> 31,840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (34,513)
<INCOME-TAX> (13,115)
<INCOME-CONTINUING> (21,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,398)
<EPS-PRIMARY> (3.43)
<EPS-DILUTED> (3.43)
</TABLE>
