UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 29, 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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Series A Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of July 1, 1999 was $32.3 million based upon the composite closing
price of the Registrant's Common Stock on the Nasdaq National Market System on
that date.
The number of shares of the Registrant's Common Stock outstanding as of July 1,
1999 was 6,383,571 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement in connection with its 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III.
<PAGE>
MERIX CORPORATION
FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1. Business 2
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk 15
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 32
Part III
Item 10. Directors and Executive Officers of the Registrant 32
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial
Owners and Management 32
Item 13. Certain Relationships and Related Transactions 32
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 33
Signatures 36
1
<PAGE>
PART I
ITEM 1. BUSINESS.
Merix Corporation (Merix or the Company) is a leading manufacturer of advanced
printed circuit boards for use in sophisticated electronic equipment. Principal
markets served by the Company include the communications, computer, industrial
and medical instrumentation segments of the electronics industry.
Merix, an Oregon corporation, was formed in March 1994 to succeed the business
conducted by the Circuit Board Division of Tektronix, Inc. (Tektronix). The
Company's manufacturing facility and corporate offices are located at 1521
Poplar Lane, Forest Grove, Oregon 97116 and the telephone number is (503)
359-9300.
In fiscal year 1999 the Company completed a restructuring, undertaken to improve
capacity utilization and lower the Company's cost structure. Pursuant to the
restructuring plan, the Company closed its Loveland, Colorado facility in
October 1998 and sold its Soladyne facility in San Diego, California in February
1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 of this Report.
Electronic Interconnect Industry Overview
Printed circuits, including rigid and flexible printed circuits, are the basic
platforms used to connect the microprocessors, integrated circuits and other
components essential to the functioning of electronic equipment. These products
consist of patterns of electrical circuitry etched from copper laminate to a
board made of insulating material. The manufacture of these and other complex
interconnect products requires increasingly sophisticated engineering and
manufacturing expertise and substantial capital investment. This has contributed
to increasing reliance by original equipment manufacturers (OEMs) on independent
manufacturers for such products.
According to industry reports, the U.S. domestic market for all interconnect
products was approximately $8.6 billion in 1998. During the last few years,
virtually all domestic printed circuit board manufacturing has been outsourced
by OEMs to independent producers, such as the Company. OEMs found that
independent producers can often provide greater flexibility, higher levels of
responsiveness and faster delivery at a lower overall cost than their own
captive operations. Pursuant to the outsourcing strategy, printed circuit board
manufacturing operations of captive producers, which were typically divisions of
larger OEMs, have been sold to independent producers, spun-off or closed.
Historically, the industry has been highly fragmented. However, the industry is
seeing a growing trend towards consolidation among printed circuit board
producers. The increasing technology demands and resulting requirement for
capital investment, the effects of the recent electronics industry downturn,
continuing product pricing pressures intensified by Asian competition and the
benefits of achieving economies of scale have all contributed to increased
consolidation activity in the industry.
Customers, Marketing and Sales
The Company's customers include a diversified base of leading OEMs in the
computer, communications and test and instruments segments of the electronics
industry. These customers often use leading-edge technologies and their product
requirements generally drive the advancement of electronic interconnect
manufacturing technology.
The Company also manufactures and sells products to contract manufacturers which
assemble components on the products for resale to OEMs. The Company seeks to
expand existing relationships and establish relationships with other customers
in the contract manufacturing channel to gain access to more OEM customers.
2
<PAGE>
ITEM 1. BUSINESS. (Continued)
The Company seeks to develop strategic relationships with its customers and
markets its products and services through a field-based direct sales force as
well as manufacturers' representatives. The Company's applications engineers
provide advice to customers with respect to applicable technology,
manufacturability of designs and cost implications.
The Company believes continuous improvement in product technology is essential
to satisfy customer needs. To gain knowledge of future technology needs and
enhance the Company's visibility in the marketplace, the Company holds
technology planning and review meetings with its major customers and attends
technical conferences and trade shows. Additionally, the Company was recently
chosen to participate in the Advanced Embedded Passive Technology Consortium
sponsored by the National Center for Manufacturing Sciences.
In fiscal year 1999, five companies represented 67.8% of net sales, with each of
those companies representing 20.7%, 15.0%, 13.8%, 10.9% and 7.4% of net sales,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 of this Report and Note 11 of Notes to
Financial Statements in Item 8 of this Report.
The Company generally does not obtain long-term purchase orders or commitments
from its customers, and the orders received by the Company usually require
delivery within 90 days. However, many of the Company's customers have
maintained long-term purchasing relationships with the Company.
Manufacturing and Engineering
Products
The Company's principal products are high-density, multilayer rigid printed
circuits manufactured with materials ranging from standard fiberglass to
high-performance substrate materials.
The Company manufactures fiberglass-based circuit boards and high-performance
circuits. Fiberglass-based circuit boards are used in virtually all segments of
the electronics industry. High-performance circuits are used in electronic
products requiring high-speed and high-frequency interconnect solutions, such as
cellular phone base stations and other communications, computing and
instrumentation products. High-performance circuits are manufactured using
specialty materials with properties that address the need for faster speeds,
higher operating temperatures and higher frequencies. The Company has developed
the expertise and specialized engineering processes required to manufacture
high-performance circuits using a broad range of materials, including Teflon(R)
and GETEK(R).
Manufacturing Processes
The manufacture of complex multilayer printed circuits involves the use of a
variety of sophisticated production processes and equipment. In general, the
Company receives circuit designs directly from its customers in the form of
computer aided design files that it reviews to ensure manufacturability. Using
these computer files, the Company generates images of the circuit patterns that
it develops on individual layers using advanced photographic processes. Through
a variety of plating and etching processes, the Company selectively adds and
removes conductive and insulating materials forming horizontal layers of thin
traces or circuits. A finished multilayer circuit board sandwiches (or
laminates) together a number of layers of circuitry, using intense heat and
pressure under vacuum. Vertical connections between layers are achieved by
plating through small holes called vias. Vias are made by highly specialized
equipment capable of achieving extremely fine tolerances with high accuracy.
The Company specializes in multilayer printed circuits with extremely fine
geometries and tolerances. Because of the tolerances involved, the Company uses
clean rooms in certain manufacturing processes
3
<PAGE>
ITEM 1. BUSINESS. (Continued)
where tiny particles can create defects on the circuit patterns, and uses
automated optical inspection (AOI) to ensure consistent quality.
As OEMs continue to design more sophisticated electronics equipment requiring
more complex printed circuits, the average number of layers of circuitry in the
printed circuits manufactured by the Company has increased from approximately
eight in fiscal year 1998 to 10 in fiscal year 1999. In May 1999, the Company
completed a major expansion of its Forest Grove manufacturing capacity, which is
expected to support the growing demand for printed circuits with higher layer
counts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 of this Report.
The Company uses total quality management systems to meet the highest industry
standards for product quality. The Company is ISO 9000 registered. In May 1996,
the Company's Forest Grove facility received the Shingo Prize for Manufacturing
Excellence. The Shingo Prize is awarded annually by the National Association of
Manufacturers to recognize North American domestic manufacturing companies that
demonstrate excellence in manufacturing leading to quality enhancement,
productivity improvement, and customer satisfaction.
Supplier Relationships
Historically, the majority of raw materials used to manufacture the Company's
products have been readily available. As printed circuit technology increases,
the Company expects its use of certain high-performance raw materials to
increase. These materials are often produced by a limited number of suppliers.
From time to time, the Company has experienced difficulties in obtaining
sufficient quantities of these materials. A significant shortage of these
materials could have an adverse impact on the Company's sales and profitability.
To date, material shortages or price fluctuations have not had a materially
adverse effect on the Company.
In order to reduce lead times and inventory carrying costs, to enhance the
quality and reliability of the supply of raw materials and to reduce
transportation and other logistics costs, the Company has entered into strategic
relationships with certain suppliers of laminates, raw materials and services.
Matsushita Electronics Materials, a key laminate supplier, operates an 82,000
square foot factory adjacent to the Company's facility to produce standard and
high-performance laminates. A second key laminate supplier utilizes an
independent warehouse distribution center adjacent to the Company's facility to
offer just-in-time delivery of high-performance raw materials. In addition,
Probe Test Fixtures, Inc. provides on-site electrical test services at the
Company's facility.
The Company strives to develop and maintain good working relationships with its
key suppliers to enhance operation of the business. Supplier management programs
drive improvements and cost reductions. These programs include, but are not
limited to, quarterly review meetings, joint product and process development,
and participation in meetings with the Company's key and strategic customers.
Environmental Controls
Electronic interconnect product manufacturing requires the use of a variety of
materials, including metals and chemicals. As a result, the Company is subject
to environmental laws relating to the storage, use and disposal of chemicals,
solid waste, and other hazardous materials, as well as air quality regulations.
Water used in the manufacturing process must be treated to remove heavy metals
and neutralized before it can be discharged into the municipal sanitary sewer
system. The Company operates and maintains effluent water treatment systems and
utilizes approved laboratory testing procedures at its manufacturing facility
under effluent discharge permits issued by authorized governmental agencies.
These permits must be renewed periodically and are subject to revocation in the
event of violations of environmental laws.
4
<PAGE>
ITEM 1. BUSINESS. (Continued)
Certain waste materials and byproducts generated by the Company's manufacturing
processes are sent to approved third parties for recycling, reclaim, treatment
or disposal.
The Company believes that its environmental management complies with
environmental protection requirements in all material respects. However, there
can be no assurance that violations will not occur in the future. Further, to
the extent that environmental laws change, environmental expenditures could
increase.
Backlog
The Company's 90 day backlog was approximately $18.0 million at the end of
fiscal year 1999 and $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.
Competition
Competitive factors in the market for printed circuits include product quality,
technological capability, responsiveness to customers in delivery and service,
and price. The Company believes its primary competitive strengths are its
ability to provide a wide array of high quality, high technology interconnect
products with on-time delivery, engineering and manufacturing expertise, and
customer service and support.
The printed circuit industry in the United States is highly fragmented. An
industry source estimates there are approximately 700 companies producing
circuit boards in the United States. According to an industry source, the top 10
merchant suppliers accounted for approximately 37% of total circuit board sales
by independent suppliers in 1998. Increasing technology demands and the
resulting demands for capital investment are expected to continue to contribute
to a growing trend toward consolidation of independent producers.
Additionally, as a result of the 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, particularly in less technologically
advanced product segments of the interconnect industry. Historically, Asian
printed circuit suppliers have primarily competed in less technologically
advanced markets, although they continue to expand their technology to include
higher technology printed circuits. The Company's focus continues to be on
providing high technology products and processes, and it currently does not
expect to encounter direct competition from Asian suppliers in the high
technology segment of the printed circuit market in the near future. However,
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.
5
<PAGE>
ITEM 1. BUSINESS. (Continued)
Patents and Other Intellectual Property
The Company's success depends in part on certain proprietary technology and
manufacturing expertise. While the Company attempts to protect its proprietary
technology through patents, copyrights and trade secrets, it believes that its
success will depend more upon further innovation and technological advances.
Companies in the electronics industry from time to time receive letters from
third parties alleging infringement of patent rights and the Company may receive
such letters in the future.
Executive Officers
The following table sets forth certain information with respect to the executive
officers of the Company.
Name Age Position
- ---- --- --------
Deborah A. Coleman 46 Chair and Chief Executive Officer
Mark R. Hollinger 41 President and Chief Operating Officer
Terri L. Timberman 41 Senior Vice President and Chief
Administrative Officer
Janie S. Brown 54 Vice President, Chief Financial Officer
and Treasurer
Deborah A. Coleman has served as Chair of the Board of Directors and Chief
Executive Officer since the inception of the Company. Ms. Coleman also served as
President until May 1999. From November 1992 to the inception of the Company,
Ms. Coleman served as Vice President, Materials Operations of Tektronix, where
she led worldwide procurement, distribution, component engineering and component
manufacturing operations. Prior to joining Tektronix, Ms. Coleman held various
positions at Apple Computer, Inc. for 11 years, including Chief Financial
Officer, Vice President Information Systems & Technology, and Vice President of
Operations. Ms Coleman serves on the Board of Directors of Applied Materials
Inc. and Synopsys, Inc.
Mark R. Hollinger has served as President since May 1999 and Chief Operating
Officer since August 1998. From September 1997 until August 1998, he served as
Senior Vice President - Operations. From October 1994 until joining the Company
in September 1997, Mr. Hollinger served as Vice President of Operations at
Continental Circuits Corporation. Prior to October 1994, Mr. Hollinger held
various manufacturing and management positions at IBM Corporation.
Terri L. Timberman has served as Senior Vice President and Chief Administrative
Officer since August 1998. Ms. Timberman served as Vice President - Human
Resources from the inception of the Company until August 1998. Ms. Timberman
joined the Circuit Board Division of Tektronix, Inc. in February 1994. From 1992
until joining the Company, Ms. Timberman served in various human resource
management positions for Tektronix. Prior to 1992, Ms. Timberman served as
Director of Human Resources for TriQuint Semiconductor, Inc.
Janie S. Brown has served as Vice President and Chief Financial Officer since
August 1998 and Treasurer since September 1997. Ms. Brown served as Corporate
Controller from June 1995 until August 1998. From September 1982 until joining
the Company, Ms. Brown held various positions, including audit partner, with
Deloitte & Touche LLP.
Employees
As of May 29, 1999 the Company had a total of 1,112 employees, of which 927 were
regular employees and 185 were temporary agency employees. None of the Company's
employees are represented by a labor
6
<PAGE>
ITEM 1. BUSINESS. (Continued)
union. The Company has never experienced an employee-related work stoppage. The
Company believes its relationship with its employees is good.
ITEM 2. PROPERTIES
The Company owns a 73-acre industrial land site located in Forest Grove, Oregon
on which a 174,000-square-foot manufacturing facility, a 6,300-square-foot waste
treatment facility and a 62,500-square-foot administration and training facility
are located. In May 1999, the Company completed an expansion of the Forest Grove
manufacturing capacity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this Report. Pursuant to a
trust deed granted by the Company to Tektronix, the Company's manufacturing and
waste treatment facilities are subject to a mortgage securingthe Company's
obligation to repay a note payable to Tektronix, under which $2.3 million is
currently outstanding. Additionally the Company owns a 37,500-square-foot
building approximately one mile from the Forest Grove manufacturing facility.
The Company uses approximately 30,000 square feet of this building for
manufacturing operations, including electrical testing, final inspection and
shipping.
Pursuant to the restructuring plan, the Company closed its Loveland, Colorado
facility in October 1998 and sold its Soladyne facility in San Diego, California
in February 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this Report.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market System under
the symbol MERX. The range of the high and low prices for the Company's Common
Stock as reported on the Nasdaq National Market System for the eight most recent
fiscal quarters were as follows:
High Low
Fiscal year 1999:
Quarter 4 $ 7.00 $ 4.75
Quarter 3 7.00 3.00
Quarter 2 7.13 2.50
Quarter 1 12.38 4.00
Fiscal year 1998:
Quarter 4 $ 20.50 $ 11.62
Quarter 3 16.75 13.62
Quarter 2 19.50 13.75
Quarter 1 18.50 15.75
As of July 1, 1999 there were 129 shareholders of record and approximately 3,400
beneficial shareholders.
7
<PAGE>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS. (Continued)
The Company has never declared any cash dividends. The Company currently intends
to retain all future earnings for use in the Company's business and,
accordingly, does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 113,982 $ 178,620 $ 156,184 $ 155,634 $ 101,448
Net (loss) income (20,681) 2,138 321 12,793 10,564
Basic net (loss) income per share $ (3.30) $ 0.35 $ 0.05 $ 2.10 $ 1.74
Diluted net (loss) income per share $ (3.30) $ 0.34 $ 0.05 $ 1.98 $ 1.67
Balance Sheet Data:
Working capital $ 14,322 $ 40,755 $ 45,586 $ 34,841 $ 34,201
Total assets 109,383 135,168 130,449 111,170 69,597
Long-term debt, less current
portion 34,299 40,000 42,390 26,670 6,427
Shareholders' equity 50,326 70,191 67,416 66,353 52,319
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations (Dollars in thousands)
Results of operations information in dollars and as a percentage of net sales
are as follows:
<TABLE>
<CAPTION>
Percentage of Net Sales
-----------------------------------
1999 1998 1997 1999 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 113,982 $ 178,620 $ 156,184 100.0% 100.0% 100.0%
Cost of sales 110,534 151,100 134,328 97.0 84.6 86.0
--------- --------- --------- --------- --------- ---------
Gross profit 3,448 27,520 21,856 3.0 15.4 14.0
Operating expenses:
Engineering 4,100 5,854 6,013 3.6 3.3 3.9
Selling, general and
administrative 9,045 14,266 13,822 7.9 8.0 8.8
Restructuring 21,750 1,878 - 19.1 1.0 -
--------- --------- --------- --------- --------- ---------
Total operating expenses 34,895 21,998 19,835 30.6 12.3 12.7
--------- --------- --------- --------- --------- ---------
Operating (loss) income (31,447) 5,522 2,021 (27.6) 3.1 1.3
Interest income 912 1,432 1,380 0.8 0.8 0.9
Interest expense (2,906) (3,313) (3,247) (2.5) (1.8) (2.1)
Other income (expense), net 85 (290) 137 0.1 (0.2) 0.1
--------- --------- --------- --------- --------- ---------
(Loss) income before taxes (33,356) 3,351 291 (29.2) 1.9 0.2
Income tax benefit (expense) 12,675 (1,213) 30 11.1 (0.7) -
--------- --------- --------- --------- --------- ---------
Net (loss) income $ (20,681) $ 2,138 $ 321 (18.1)% 1.2% 0.2%
========= ========= ========= ========= ========= =========
</TABLE>
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
Sales by market segments in dollars and as a percent of net sales are as
follows:
<TABLE>
<CAPTION>
Percentage of Net Sales
--------------------------------
1999 1998 1997 1999 1998 1997
--------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Market Segments
Computers $ 37,364 $ 49,880 $ 42,998 32.8% 27.9% 27.5%
Communications 43,186 46,735 32,406 37.9 26.2 20.7
Test and Instruments 28,912 75,247 54,263 25.4 42.1 34.8
Contract Manufacturers (a) - - 23,134 - - 14.8
Other 4,520 6,758 3,383 3.9 3.8 2.2
--------- --------- --------- -------- -------- --------
Total $ 113,982 $ 178,620 $ 156,184 100.0% 100.0% 100.0%
========= ========= ========= ======== ======== ========
(a) Amounts shown in the table as sales to contract manufacturers in fiscal
year 1997 represent sales to those contract manufacturers. Sales to
contract manufacturers in fiscal years 1999 and 1998 are reflected in sales
to the original equipment manufacturer (OEM) served by the contract
manufacturer. Sales through the contract manufacturing channel were $35,617
and $42,413 in fiscal years 1999 and 1998, respectively.
</TABLE>
Comparison of Fiscal Years 1999 and 1998 (Dollars in thousands)
Fiscal Year. The Company's fiscal year is the 52 or 53-week period ending the
last Saturday in May. Fiscal year 1999 and 1998 were 52-week years.
Net Sales. Net sales for fiscal year 1999 were $113,982 compared to $178,620 in
fiscal year 1998. Net sales decreased as a result of lower unit sales and lower
average selling prices which resulted from a general electronics industry
downturn, pricing pressures in the printed circuit industry, excess customer
inventories, the closure of the Loveland manufacturing facility in October 1998
and the sale of the Soladyne manufacturing facility in February 1999. See Note 2
of Notes to Financial Statements in Item 8 of this Report and "Restructuring"
below.
The Company's five largest customers comprised 67.8% and 75.1% of total sales in
fiscal years 1999 and 1998, respectively. See Note 11 of Notes to Financial
Statements in Item 8 of this Report. 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, the loss of one or more principal customers
or a change in the mix of product sales could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business-Backlog" in Item 1 of this Report.
Net sales at the Forest Grove manufacturing facility increased throughout the
last three quarters of fiscal year 1999. The Company attributes these increases
to its continued efforts to penetrate new customers and new programs, a return
of demand from its existing customers and increasing sales in the high-end
computing and communications market segments. The Company's expansion of its
Forest Grove manufacturing capacity was substantially complete at the end of
fiscal year 1999. During the remainder of calendar year 1999, the Company will
install manufacturing equipment transferred from the closed Loveland facility.
Completion of the expansion project and installation of the Loveland equipment
will add capacity and will position the Company to take advantage of increasing
customer demand. However, future profitability and the ability to utilize added
manufacturing capacity in an effective manner will be
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
dependent upon the Company's ability to increase sales to existing and new
customers. The failure to successfully utilize additional manufacturing capacity
could adversely affect the Company's business, financial condition and results
of operations.
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. While the Company's pricing stabilized during
the last half of fiscal year 1999, the Company expects pricing pressures to
continue. Additionally, as a result of the 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. See
"Business-Competition" in Item 1 of this Report.
Gross Margins. The Company's gross margin was 3.0% in fiscal year 1999 and 15.4%
in fiscal year 1998. The decrease in gross margin in fiscal year 1999 was
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. See Note 2 of Notes to Financial Statements in Item 8 of
this Report and "Restructuring" below. The Company's gross margins are affected
by various factors, including capacity utilization, product mix, production
yields, price changes and changes in the Company's cost structure.
Gross profit began to improve in the last half 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 expects its
gross margin will improve in fiscal year 2000 depending on a variety of factors
which cannot be predicted with certainty, including, but not limited to, receipt
and timing of orders for products, mix of products sold, product pricing and
ability to utilize manufacturing capacity effectively.
Engineering. Engineering expenses were $4,100 and $5,854 in fiscal years 1999
and 1998, respectively, and were 3.6% and 3.3% of sales, respectively. These
expenses decreased due to reduced headcount, cost controls and the
capitalization of labor. The Company capitalized approximately $650 of dedicated
engineering labor related to the Forest Grove expansion project in fiscal year
1999.
Selling, General and Administrative. Selling, general and administrative
expenses were $9,045 and $14,266 in fiscal years 1999 and 1998, respectively,
and were 7.9% and 8.0% of net 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 2 of
Notes to Financial Statements and "Restructuring" below.
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 was
completed in October 1998 and 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, the installation of which is expected to be completed by
the end of the second quarter of fiscal year 2000.
In the third quarter of fiscal year 1999, the Company reversed $7,109 of the
restructuring charge taken in the first quarter of the year. The reversal was
the 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.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
The components of the restructuring charge, along with the reversal, were as
follows:
<TABLE>
<CAPTION>
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 proceeds from asset sales of $4,770 are included in the amounts shown above
for write-down and write-off of manufacturing equipment and inventory. All cash
payments for severance benefits, lease termination costs and other costs related
to the restructuring charge were paid in fiscal year 1999. At May 29, 1999,
there were no outstanding liabilities associated with the restructuring plan.
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 liabilities
associated with the restructuring plan were paid in the third quarter of fiscal
year 1998.
Interest Income. Interest income was $912 and $1,432 in fiscal years 1999 and
1998, respectively. Interest income decreased primarily as a result of a lower
level of cash, cash equivalents and short term investments during fiscal year
1999.
Interest Expense. Interest expense was $2,906 and $3,313 in fiscal years 1999
and 1998, respectively. The decrease in fiscal year 1999 was primarily due to
the capitalization of interest related to the Forest Grove expansion project of
approximately $450 in fiscal year 1999.
Income Taxes. The Company's effective tax rate was approximately (38)% in fiscal
year 1999 compared to 36% in 1998. The increase in the effective rate for fiscal
year 1999 was due to the reduction in the 1998 Oregon state statutory rate
resulting from the refunding of excess income taxes collected in prior years.
The Company expects its effective tax rate for fiscal year 2000 will approximate
39%.
Comparison of Fiscal Years 1998 and 1997 (Dollars in thousands)
Fiscal Year. The Company's fiscal year is the 52 or 53-week period ending the
last Saturday in May. Fiscal year 1998 was a 52-week year, fiscal year 1997 was
a 53-week year.
Net Sales. Net sales for fiscal year 1998 were $178,620 compared to $156,184 in
fiscal year 1997. The increase in sales was primarily attributable to a higher
level of demand for the Company's products and an improvement in the product
mix, including increased sales of higher layer count, higher priced products.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
A general slow-down in the electronics industry and excess capacity in the
domestic printed circuit industry negatively impacted the level and pricing of
customer orders in the Company's fourth quarter ended May 30, 1998. Net sales
were $41,074 in the fourth quarter of fiscal 1998 compared to $46,416 in the
third quarter of fiscal 1998 and $43,285 in the fourth quarter of fiscal 1997.
During the first three quarters of fiscal year 1998, manufacturing constraints
limited the capacity available to meet the production needs of the Company's
current and new customers. In response, in December 1997, the Company announced
plans for a major expansion of its Forest Grove manufacturing capacity, expected
to cost approximately $21,000.
The Company's five largest customers comprised 75.1% and 73.6% of net sales for
fiscal years 1998 and 1997, respectively.
Gross Margins. The Company's gross margin was 15.4% in fiscal year 1998,
compared with 14.0% in fiscal year 1997. The improvement in gross margin was
attributable to a higher sales volume, improved product pricing, improved
product mix, reduced materials costs and cost reductions resulting from the
restructuring which occurred in the second quarter of fiscal year 1998. The
Company's gross margins are affected by various factors, including sales
volumes, product mix, production yields, price changes and changes in the
Company's cost structure.
Restructuring. Results of operations for fiscal year 1998 included a $1,878
charge for the costs associated with a restructuring plan, announced in the
second quarter of fiscal year 1998, undertaken to improve the Company's
profitability.
The restructuring plan consisted of a work force reduction in the support and
administrative functions, the write-down of certain manufacturing equipment, and
other miscellaneous costs. The charge for the work force reduction of
approximately $700 included the reduction of 85 positions in the Company's
support and administrative functions, including purchasing, materials,
administration and computer automated tooling. No direct manufacturing jobs were
eliminated. As of May 30, 1998, all outstanding liabilities associated with the
workforce reduction had been paid. In connection with the restructuring plan,
the Company analyzed its manufacturing equipment based on Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-lived Assets
and For Long-lived Assets To Be Disposed Of", and based on that analysis,
recorded a non-cash charge for the write-off of approximately $1,100 of
manufacturing equipment located primarily at the Company's Loveland, Colorado
facility.
Engineering. Engineering expenses were $5,854 and $6,013, respectively, and were
3.3% and 3.9% of net sales, respectively, in fiscal years 1998 and 1997.
Selling, General and Administrative. Selling, general and administrative
expenses were $14,266 and $13,822 in fiscal years 1998 and 1997, respectively,
and were 8.0% and 8.8% of net sales, respectively. Selling, general and
administrative expenses have increased principally as a result of increased
sales and marketing personnel, and costs associated with the reorganization and
relocation of the Company's sales force.
Interest Income. Interest income remained relatively constant at $1,432 and
$1,380 in fiscal years 1998 and 1997, respectively.
Interest Expense. Interest expense was $3,313 and $3,247 in fiscal years 1998
and 1997, respectively. The increase in fiscal year 1998 was principally due to
a full year of interest expense related to the issuance of $40,000 in senior
notes in September 1996.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
Income Taxes. The Company's effective tax rate was approximately 36% in fiscal
year 1998 compared to (10)% in 1997. In fiscal year 1997, the Company had lower
pretax income and higher tax exempt interest income in relation to such pretax
income.
Liquidity and Capital Resources (Dollars in thousands)
Cash, cash equivalents and short-term investments at May 29, 1999 were $13,381,
compared to $22,899 at May 30, 1998. Working capital decreased to $14,322 at May
29, 1999 from $40,755 at May 30, 1998, primarily as a result of decreases in
cash and cash equivalents, accounts receivable, inventories and an $8,000
reclassification of long-term debt to current liabilities to reflect payments
due in fiscal year 2000.
Cash provided by operating activities in fiscal year 1999 was $4,091, which
primarily consisted of a net loss for the period, adjustments 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.
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.
Cash used in investing activities in fiscal year 1999 was $11,415, primarily
consisting of $15,914 in capital expenditures principally for manufacturing
equipment, offset by $4,537 of proceeds from the sale of assets. At May 29,
1999, the Company had capital commitments of approximately $2,560.
Cash used in financing activities in 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 $2,299
outstanding at May 29, 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 $1,150 payable
in June 2001. All other terms of the note remain unchanged.
The Company has $40,000 outstanding under a private placement of senior
unsecured notes with two insurance companies, with interest payable
semi-annually at 7.92%. On May 28, 1999 the notes, which originally provided for
annual principal payments of $8,000, were amended to provide for semi-annual
principal payments of $4,000 commencing in September 1999 with a final principal
payment of $8,000 payable in September 2003. Additionally, the notes were
amended to omit the minimum net worth and interest coverage covenants until the
fiscal quarter ending August 28, 1999, at which time minimum net worth and
interest coverage covenants will be required to be met on a fiscal quarterly
basis. As of May 29, 1999, the Company was in compliance with all covenants.
In July 1999, the Company obtained a commitment for an equipment lease line,
which allows for the lease of up to $5,000 of manufacturing equipment. The
commitment expires on May 31, 2000. No amounts are currently outstanding under
the equipment lease line.
The Company believes that its existing capital resources and cash generated from
operations should be sufficient to meet its working capital and capital
expenditure requirements during its 2000 fiscal year. To the extent necessary,
the Company may also satisfy capital requirements through additional bank
borrowings and equipment leases if such resources are available on satisfactory
terms.
Year 2000 Disclosure
The Company has developed a program 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
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
"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 100%
complete and remediation of the manufacturing equipment control systems is 45%
complete. 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 70% of the suppliers contacted have indicated
they are, or expect to be, Year 2000 compliant.
The Company currently estimates that it will spend between $400 and $700 in
addressing the Year 2000 issue, of which approximately $160 has been incurred
through May 29, 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
is currently developing contingency plans to mitigate the effect of such events,
and intends to complete its contingency plans 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 Annual Report on Form 10-K relating to fiscal year
1999 and beyond, including changes in product mix, gross margin, customer
demand, competition from Asian suppliers, increases in manufacturing capacity,
effective tax rate 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. Items 1 and 7 of this Annual Report on Form 10-K
discuss certain of these factors, including the lingering effects of the prior
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; ability to manage and utilize
manufacturing capacity; significant customer concentration; difficulties in
diversifying the customer base; risks related to customer cancellation,
postponement or reduction of orders; ability to execute financing strategies;
and unanticipated costs associated with any required modifications to the
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
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Continued)
interconnect industries; dependence on the electronics industry; 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not currently use derivative financial instruments for
speculative purposes which expose the Company to market risk. The Company is
exposed to cash flow and fair value risk due to changes in interest rates with
respect to its outstanding debt. Information required by this item is set forth
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Report and in Note 6 of Notes to Financial
Statements in Item 8 of this Report.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MERIX CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Merix Corporation
We have audited the accompanying balance sheets of Merix Corporation as of May
29, 1999 and May 30, 1998 and the related statements of income, shareholders'
equity, and cash flows for the years ended May 29, 1999, May 30, 1998, and May
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Merix Corporation as of May 29, 1999 and May
30, 1998, and the results of its operations and its cash flows for the years
ended May 29, 1999, May 30, 1998, and May 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
June 25, 1999
16
<PAGE>
<TABLE>
<CAPTION>
MERIX CORPORATION
BALANCE SHEETS
(In thousands)
May 31
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,874 $ 15,430
Short-term investments 7,507 7,469
Accounts receivable, net of allowance of $237
and $259, respectively 15,784 19,303
Accounts receivable - affiliates 1,724 2,501
Inventories 6,537 10,795
Income tax refund receivable - 759
Deferred tax asset 713 1,577
Other current assets 941 2,454
---------- ----------
Total current assets 39,080 60,288
Property, plant and equipment, net 60,892 70,262
Goodwill, net of accumulated amortization of $432 - 2,027
Deferred tax asset 9,093 -
Other assets 318 2,591
---------- ----------
Total assets $ 109,383 $ 135,168
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,104 $ 10,584
Accrued compensation 2,512 2,512
Current portion of long-term debt 8,000 4,529
Other accrued liabilities 2,142 1,908
---------- ----------
Total current liabilities 24,758 19,533
Long-term debt 34,299 40,000
Deferred tax liability - 4,171
Other liabilities - 1,273
---------- ----------
Total liabilities 59,057 64,977
---------- ----------
Commitments and contingencies - -
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: 6,370 shares, 1998: 6,203 shares 45,194 44,625
Unearned compensation (3) (250)
Retained earnings 5,135 25,816
---------- ----------
Total shareholders' equity 50,326 70,191
---------- ----------
Total liabilities and shareholders' equity $ 109,383 $ 135,168
========== ==========
See the accompanying Notes to Financial Statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
MERIX CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended May 31
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 113,982 $ 178,620 $ 156,184
Cost of sales 110,534 151,100 134,328
---------- ---------- ----------
Gross profit 3,448 27,520 21,856
---------- ---------- ----------
Operating expenses:
Engineering 4,100 5,854 6,013
Selling, general and administrative 9,045 14,266 13,822
Restructuring 21,750 1,878 -
---------- ---------- ----------
Total operating expenses 34,895 21,998 19,835
---------- ---------- ----------
Operating (loss) income (31,447) 5,522 2,021
Interest income 912 1,432 1,380
Interest expense (2,906) (3,313) (3,247)
Other income (expense), net 85 (290) 137
---------- ---------- ----------
(Loss) income before taxes (33,356) 3,351 291
Income tax benefit (expense) 12,675 (1,213) 30
---------- ---------- ----------
Net (loss) income $ (20,681) $ 2,138 $ 321
========== ========== ==========
Net (loss) income per share:
Basic $ (3.30) $ 0.35 $ 0.05
========== ========== ==========
Diluted $ (3.30) $ 0.34 $ 0.05
========== ========== ==========
Shares used in per share calculations:
Basic 6,269 6,194 6,146
========== ========== ==========
Diluted 6,269 6,272 6,260
========== ========== ==========
See the accompanying Notes to Financial Statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
MERIX CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock
----------------------- Unearned Retained
Shares Amount Compensation Earnings Total
---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1996 6,133 $ 43,733 $ (737) $ 23,357 $ 66,353
Net income 321 321
Exercise of stock options 35 316 316
Tax benefit related to stock-based
compensation 261 261
Restricted stock awards 19 364 (364) -
Amortization of unearned
compensation 434 434
Shares surrendered or canceled (20) (314) 45 (269)
---------- ---------- --------- ---------- ----------
Balance at May 31, 1997 6,167 44,360 (622) 23,678 67,416
Net income 2,138 2,138
Exercise of stock options 55 525 525
Tax benefit related to stock-based
compensation 122 122
Amortization of unearned
compensation 122 122
Shares surrendered or canceled (19) (382) 250 (132)
---------- ---------- --------- ---------- ----------
Balance at May 31, 1998 6,203 44,625 (250) 25,816 70,191
Net loss (20,681) (20,681)
Stock issued under defined
contribution plan 184 907 907
Amortization of unearned
compensation (90) (90)
Shares surrendered or canceled (17) (338) 337 (1)
---------- ---------- --------- ---------- ----------
Balance at May 31, 1999 6,370 $ 45,194 $ (3) $ 5,135 $ 50,326
========== ========== ========= ========== ==========
See the accompanying Notes to Financial Statements.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
MERIX CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Years ended May 31
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (20,681) $ 2,138 $ 321
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 8,081 10,261 8,762
Deferred income taxes (12,400) 2,479 2,398
Amortization of unearned compensation (90) 122 434
Restructuring charge 16,798 1,149 -
Contribution of common stock to
defined contribution plan 912 - -
Other 169 68 (85)
Changes in assets and liabilities:
Accounts receivable 4,296 2,353 382
Inventories 4,258 (2,153) (2,207)
Income tax refund receivable 759 1,671 (2,048)
Other current assets 1,513 (637) (1,228)
Accounts payable 1,520 573 2,555
Accrued compensation - (572) (1,418)
Income taxes payable - - (67)
Other accrued liabilities (1,044) (582) (428)
---------- ---------- ----------
Net cash provided by operating activities 4,091 16,870 7,371
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (15,914) (18,466) (17,769)
Short-term investments:
Purchases (11,016) (13,500) (15,110)
Maturities 10,978 14,591 13,717
Proceeds from sale of assets 4,537 507 422
Other assets - (1,306) -
---------- ---------- ----------
Net cash used in investing activities (11,415) (18,174) (18,740)
---------- ---------- ----------
Cash flows from financing activities:
Long-term borrowings:
Proceeds - - 40,000
Principal payments (2,230) (121) (23,951)
Exercise of stock options - 525 91
Deferred financing costs - - (382)
Reacquired common stock (2) (207) (43)
---------- ---------- ----------
Net cash (used in) provided by financing activities (2,232) 197 15,715
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents (9,556) (1,107) 4,346
Cash and cash equivalents at beginning of year 15,430 16,537 12,191
---------- ---------- ----------
Cash and cash equivalents at end of year $ 5,874 $ 15,430 $ 16,537
========== ========== ==========
Supplemental Disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 2,951 $ 3,116 $ 3,205
Noncash transactions:
Tax benefit related to stock-based compensation (5) 122 261
Surrender of unvested shares of restricted stock 337 175 45
Receipt of common stock for exercise of stock options - - 225
See the accompanying Notes to Financial Statements.
</TABLE>
20
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Merix Corporation, an Oregon corporation, was formed in March 1994 to succeed
the business conducted by the Circuit Board Division of Tektronix, Inc.
(Tektronix). On June 1, 1994, Merix acquired the assets and assumed certain
liabilities of the division in connection with the initial public offering of
its common stock, and began to operate as an independent corporation.
Fiscal Year
The Company's fiscal year is the 52 or 53-week period ending the last Saturday
in May. Fiscal year 1999 was a 52-week year ending May 29, fiscal year 1998 was
a 52-week year ended May 30 and fiscal year 1997 was a 53-week year ended May
31. For convenience, these periods have been presented in these financial
statements as ended May 31.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
Balance Sheet Financial Instruments: Fair Values
The carrying amounts reported in the balance sheet for investments, accounts
receivable and accounts payable approximate fair value because of the immediate
or short-term maturity of these financial instruments. The carrying amount for
long-term debt approximates its fair value because the related interest rates
are comparable to rates currently available to the Company for debt with similar
terms and maturities.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash in banks and highly liquid
investments with maturities of three months or less when purchased.
Short-Term Investments
The Company classifies securities at acquisition into one of three categories:
held to maturity, available for sale, or trading. At May 31, 1999 and 1998, all
of the Company's investments with original maturities of more than 90 days are
classified as held to maturity and are valued at amortized cost.
Inventories
Inventories are valued at the lower of cost or market and include materials,
labor and manufacturing overhead. Cost is determined on the first-in, first-out
(FIFO) basis.
21
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Property and Depreciation
Property, plant and equipment is carried at cost less accumulated depreciation.
Costs of improvements, including capitalized interest, are capitalized.
Depreciation is calculated based on the estimated useful lives of depreciable
assets as follows: 40 years for buildings, 10 to 20 years for grounds, 3 to 7
years for machinery and equipment, and is provided using the straight-line
method.
Long-lived Assets
The Company's long-lived assets are reviewed for impairment when circumstances
indicate that the carrying amount may not be recoverable. If the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset, a
loss is recognized.
Goodwill
The cost of goodwill is amortized on a straight-line basis over the estimated
period benefited of 15 years. Goodwill amortization for fiscal years 1999, 1998,
and 1997 was $41, $167 and $169, respectively.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment. Service
revenue is recognized as services are provided.
Engineering Expense
Expenditures for engineering of products and manufacturing processes are
expensed as incurred.
Warranty
The Company generally warrants its products for a period of up to four months
from shipment. Accordingly, a provision for the estimated cost of the warranty
is recorded upon shipment.
Net (Loss) Income Per Share
Basic net (loss) income per share is computed using the weighted average number
of shares of common stock outstanding for the period. Diluted income per share
is computed using the weighted average number of shares of common stock and
dilutive common equivalent shares related to stock options outstanding during
the period. Incremental shares, related to outstanding stock options of 78,501
and 114,061 for fiscal years 1998 and 1997 were included in the calculations of
diluted net income per share.
Diluted loss per share is computed using the weighted average number of shares
of common stock outstanding for the period. Stock options to purchase 1,260,890
shares were not included in the net loss per share calculation for the fiscal
year 1999, because to do so would have been antidilutive. Of the stock options
outstanding at May 29, 1999, 884,440 had exercise prices above the market price
of the underlying common stock at that date.
22
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Comprehensive (Loss) Income
In fiscal year 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income" 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. Comprehensive (loss) income did
not differ from currently reported net (loss) income in the periods presented.
Segment Reporting
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" (SFAS 131) in fiscal year 1999. Based on definitions
contained within SFAS 131, the Company has determined that it operates within
one segment. Additionally, the Company has no material revenues from external
customers outside the United States and has no long-lived assets outside the
United States. See Note 11 for information regarding significant customers.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS 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, as amended by SFAS 137, is effective for fiscal years beginning after June
15, 2000. The Company does not expect SFAS 133 to have a material impact on its
financial statements.
Reclassifications
Reclassifications of certain prior period balances have been made to conform
with the current method of presentation.
Note 2. 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 in
October 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 $7,109 of the
restructuring charge taken in the first quarter of the year. The reversal was
the result of a favorable termination of the
23
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 2. RESTRUCTURING (Continued)
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, along with the reversal, were as
follows:
<TABLE>
<CAPTION>
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 proceeds from asset sales of $4,770 are included in the amounts shown above
for write-down and write-off of manufacturing equipment and inventory. All cash
payments for severance benefits, lease termination costs and other costs related
to the restructuring charge were paid in fiscal year 1999. At May 31, 1999,
there were no outstanding liabilities associated with the restructuring plan.
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 liabilities
associated with the restructuring plan were paid in the third quarter of fiscal
year 1998.
Note 3. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable and investments. In
total, six customers represented approximately 73% of the accounts receivable
balance at May 31, 1999, individually ranging from 5% to 19%. The risk in trade
accounts receivable is limited due to the creditworthiness of companies
comprising the Company's customer base and their dispersion across many
different sectors of the electronics industry and geographies. The Company has
not had significant losses related to its accounts receivable in the past. The
risk in investments is limited due to the creditworthiness of investees
comprising the portfolio and the diversity of the portfolio. At May 31, 1999,
the Company does not believe it had any significant credit risks.
24
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 4. INVENTORIES
<TABLE>
<CAPTION>
May 31
1999 1998
---------- ----------
<S> <C> <C>
Raw materials $ 1,170 $ 3,684
Work in process 4,144 3,638
Finished goods 1,223 3,473
---------- ----------
Total $ 6,537 $ 10,795
========== ==========
</TABLE>
Note 5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
May 31
1999 1998
---------- ----------
<S> <C> <C>
Land $ 2,190 $ 2,190
Buildings and grounds 24,065 24,267
Machinery and equipment 85,563 100,282
Construction in progress 1,618 2,828
---------- ----------
Total 113,436 129,567
Accumulated depreciation (52,544) (59,305)
---------- ----------
Property, plant and equipment, net $ 60,892 $ 70,262
========== ==========
</TABLE>
Note 6. LONG-TERM DEBT
<TABLE>
<CAPTION>
May 31
1999 1998
---------- ----------
<S> <C> <C>
Senior unsecured notes $ 40,000 $ 40,000
Note payable to Tektronix 2,299 4,437
Other - 92
---------- ----------
Total 42,299 44,529
Less current portion (8,000) (4,529)
---------- ----------
Long-term debt $ 34,299 $ 40,000
========== ==========
</TABLE>
The Company has a secured note payable to Tektronix, Inc. with $2,299
outstanding at May 31, 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 $1,150 payable
in June 2001. All other terms of the note remain unchanged.
The Company has $40,000 outstanding under a private placement of senior
unsecured notes with two insurance companies, with interest payable
semi-annually at 7.92%. On May 28, 1999 the notes, which originally provided for
annual principal payments of $8,000, were amended to provide for semi-annual
principal payments of $4,000 commencing in September 1999 with a final principal
payment of $8,000 payable in September 2003. Additionally, the notes were
amended to remove the minimum net worth and interest coverage covenants until
the fiscal quarter ending August 28, 1999, at which time minimum net
25
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 7. STOCK-BASED COMPENSATION PLAN
worth and interest coverage covenants will be required to be met on a fiscal
quarterly basis. As of May 31, 1999, the Company was in compliance with all
covenants.
Future principal payments for long-term debt are as follows: 2000, $8,000; 2001,
$9,149; 2002, $9,150; 2003, $8,000; and 2004, $8,000.
The Company has a 1994 Stock Incentive Plan (the 1994 Plan) for employees,
consultants and directors of the Company. The 1994 Plan, as amended, covers
2,100,000 shares of common stock and permits the grant of incentive stock
options, non-qualified stock options, stock appreciation rights, stock and cash
bonus rights, restricted stock awards and performance based awards to employees,
independent contractors and consultants. A committee of the Board of Directors
has the authority to determine non-qualified stock option prices. To date, all
options have been granted at the fair market value of the stock at the date of
grant. The 1994 Plan provides for automatic option grants to directors not
affiliated with Merix or Tektronix of 20,000 shares at the time first elected to
the board and 5,000 shares annually thereafter. The options generally become
exercisable ratably over a four-year period beginning one year after the date of
grant and expire ten years after the date of grant.
A summary of non-qualified stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Price
Shares Per Share
--------- ---------
<S> <C> <C>
Outstanding at May 31, 1996 907,406 $ 18.33
Granted 457,506 19.73
Canceled (284,041) 28.76
Exercised (34,939) 9.04
--------- --------
Outstanding at May 31, 1997 1,045,932 16.42
Granted 392,120 17.40
Canceled (190,481) 19.79
Exercised (54,902) 9.57
--------- --------
Outstanding at May 31, 1998 1,192,669 16.52
Granted 852,902 7.29
Canceled (784,656) 17.32
Exercised (25) 5.13
--------- --------
Outstanding at May 31, 1999 1,260,890 $ 9.79
========= ========
</TABLE>
The Company's Board of Directors approved a plan which allowed employees, except
executive officers, to reprice existing stock options to the fair market value
of the underlying stock on June 30, 1998. Under the plan, employees received
nine options in exchange for every 10 options they elected to reprice. The
vesting schedule and term of repriced options remained the same as the original
option. During fiscal year 1999, options to purchase 332,820 shares at a
weighted average price per share of $18.39 were exchanged for options to
purchase 298,977 shares at a weighted average price per share of $9.9375.
26
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 7. STOCK-BASED COMPENSATION PLAN (Continued)
Restricted stock awards are subject to vesting and other terms as specified at
the time of issuance by a committee of the Board of Directors. Generally,
restricted stock awards vest ratably over a three-year period beginning on the
first anniversary of their issuance. Unearned compensation expense is recognized
ratably over the vesting period. There were no restricted stock awards in fiscal
years 1999 and 1998, respectively. The weighted average per share fair value of
restricted stock awards issued was $18.79 in fiscal year 1997.
A summary of restricted stock award activity is as follows:
<TABLE>
<CAPTION>
Number
of Value
Shares Per Share
-------- --------------
<S> <C> <C>
Unvested balance at May 31, 1996 57,702 $ 9.00 - 37.75
Awarded 19,400 16.50 - 21.25
Vested (27,167) 9.00 - 37.75
Canceled (5,000) 9.00
-------- --------------
Unvested balance at May 31, 1997 44,935 9.00 - 37.75
Awarded - -
Vested (20,135) 13.62 - 19.12
Canceled (6,600) 17.12 - 33.25
-------- --------------
Unvested balance at May 31, 1998 18,200 16.50 - 37.25
Awarded - -
Vested (1,200) 5.75 - 11.13
Canceled (16,600) 19.00 - 37.25
-------- --------------
Unvested balance at May 31, 1999 400 $ 16.50
======== ==============
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) defines a
fair value based method of accounting for employee stock options and similar
equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by Accounting Principles Board Opinion No.
25 (APB 25). Entities electing to remain with the accounting in APB 25 must make
pro forma disclosures of net income and, if presented, net income per share, as
if the fair value based method of accounting defined in SFAS 123 had been
adopted.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all stock options granted
27
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 7. STOCK-BASED COMPENSATION PLAN (Continued)
during fiscal years 1999, 1998, and 1997 using the Black-Scholes option pricing
model as prescribed by SFAS 123 using the following weighted average
assumptions:
<TABLE>
<CAPTION>
Years ended May 31
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate 5.12% 5.98% 6.06%
Expected dividend yield 0% 0% 0%
Expected lives 2.61 years 3.16 years 2.97 years
Expected volatility 71% 57% 59%
</TABLE>
Using the Black-Scholes methodology, the total value of stock options granted
during 1999, 1998 and 1997 was $2,016, $2,909 and $3,330, respectively, which
would be amortized on a pro forma basis over the vesting period of the options
(typically four years). The weighted average fair value of options granted
during 1999, 1998 and 1997 was $3.20, $7.59 and $7.30 per share, respectively.
If the Company had accounted for its 1994 Plan in accordance with SFAS 123, the
Company's net (loss) income and net (loss) income per share would approximate
the pro forma disclosures below:
<TABLE>
<CAPTION>
Years ended May 31
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net (loss) income as reported $ (20,681) $ 2,138 $ 321
Net (loss) income pro forma (21,492) 834 (866)
Reported diluted net (loss) income
per share $ (3.30) $ 0.34 $ 0.05
Pro forma diluted net (loss) income
per share $ (3.43) $ 0.13 $ (0.14)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to June 1, 1995, and
additional awards are anticipated in future years.
The following table summarizes information about stock options outstanding at
May 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Number of Average
Range of Number Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- ------------------- ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 3.06 - 4.88 258,000 9.19 $ 3.65 - $ -
5.00 - 6.50 131,200 6.29 5.60 17,850 5.13
9.00 - 9.00 337,845 4.92 9.00 337,345 9.00
9.25 - 9.25 700 7.66 9.25 250 9.25
9.94 - 31.38 533,145 7.61 14.29 172,897 16.01
- ------------------- ------------ ------------ ---------- ----------- ----------
$ 3.06 - 31.38 1,260,890 7.08 $ 9.79 528,342 $ 11.16
=================== ============ ============ ========== =========== ==========
</TABLE>
28
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 8. SHAREHOLDER RIGHTS PLAN
On March 25, 1997, the Board of Directors adopted a Shareholder Rights Plan (the
Plan) designed to preserve and enhance shareholder value and the Company's
ability to carry out its long-term business strategy, and reserved 500,000
shares of Series A Preferred Stock for purposes of the Plan. In connection with
the adoption of the Plan, the Board of Directors declared a dividend
distribution of one Right per share of common stock, payable to the shareholders
of record on April 25, 1997. A Right enables the holder, under certain
circumstances, to purchase either Series A Preferred or Common Stock of the
Company. The Company may redeem the Rights for $0.001 per Right under certain
circumstances.
Note 9. INCOME TAXES
Income tax expense consists of federal and state income taxes. Deferred income
taxes are determined based on differences between the financial reporting and
tax bases of assets and liabilities, using currently enacted tax rates.
The provision for (benefit from) income taxes consisted of the following:
<TABLE>
<CAPTION>
Years ended May 31
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ (275) $ (1,266) $ (2,428)
State - - -
---------- ---------- ----------
Total current (275) (1,266) (2,428)
Deferred:
Federal (10,962) 2,236 2,357
State (1,438) 243 41
---------- ---------- ----------
Total deferred (12,400) 2,479 2,398
---------- ---------- ----------
Income tax (benefit) expense $ (12,675) $ 1,213 $ (30)
========== ========== ==========
</TABLE>
The principal differences between taxes on income computed at the federal
statutory rate of 34% in fiscal years 1999, 1998 and 1997 and recorded income
tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
Years ended May 31
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Tax computed at statutory rate $ (11,341) $ 1,173 $ 102
State income taxes, net of federal benefit (1,422) 107 -
Tax exempt interest - (22) (182)
Other, net 88 (45) 50
---------- ---------- ----------
Income tax (benefit) expense $ (12,675) $ 1,213 $ (30)
========== ========== ==========
</TABLE>
29
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 9. INCOME TAXES (Continued)
Significant components of the Company's deferred tax asset and liability were as
follows:
<TABLE>
<CAPTION>
May 31
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax asset (liability):
Inventories $ 445 $ 654
Vacation accrual 337 274
State loss carryforward - 624
Other (69) 25
---------- ----------
Deferred tax asset - current $ 713 $ 1,577
========== ==========
Deferred tax asset (liability):
Intangible basis difference $ 187 $ 317
Fixed asset basis difference (4,168) (4,219)
Net operating loss 12,919 -
Other 155 (269)
---------- ----------
Deferred tax asset (liability) - long-term $ 9,093 $ (4,171)
========== ==========
</TABLE>
Note 10. BENEFIT PLAN
The Company has a defined contribution plan, which meets the requirements of
Section 401(k) of the Internal Revenue Code, for all regular employees. Under
this plan, the Company matches employee contributions as follows; 100% of the
first 3% of an employee's base pay and 50% of the next 3% of an employee's base
pay. The Company's contributions may be made in cash or in the Company's stock.
During fiscal years 1999, 1998 and 1997, the Company's contribution expense was
$1,145, $1,153 and, $1,094, respectively.
Note 11. SIGNIFICANT CUSTOMERS
In fiscal year 1999, four customers represented 20.7%, 15.0%, 13.8% and 10.9%,
respectively, of net sales. In fiscal year 1998, three customers represented
29.3%, 16.6%, and 13.6%, respectively, of net sales. In fiscal year 1997, three
customers represented 25.4%, 18.4%, and 13.0%, respectively, of net sales.
Note 12. RELATED PARTY TRANSACTIONS
Included in net sales for fiscal years 1999, 1998 and 1997 are product sales to
Tektronix, a major shareholder of the Company, of $15,720, $29,688 and $28,766,
respectively. Accounts receivable-affiliates at May 31, 1999 and 1998 consists
of amounts receivable from Tektronix of $1,724 and $2,501, respectively.
The Company has an agreement with Tektronix for certain environmental and waste
management services to be provided by Tektronix. The fiscal year 1999, 1998 and
1997 expense related to these services was $90, $451 and $291, respectively. The
agreement was terminated effective June 1, 1999.
30
<PAGE>
MERIX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Note 13. COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, the Company may be party to various legal
claims, actions and complaints, including actions involving patent infringement
and other intellectual property claims. The Company believes that the
disposition of these matters will not have a material adverse effect on the
Company's financial position and results of operations.
Operating Leases
Operating leases with non-cancelable terms in excess of 12 months were
terminated during the 1999 fiscal year. Rental expense under operating leases
was $1,036, $2,346 and $2,376 in fiscal years 1999, 1998 and 1997, respectively.
Equipment Lease Line Commitment
Subsequent to year end, the Company obtained a commitment for an equipment lease
line, which allows for the lease of up to $5,000 of manufacturing equipment. The
commitment expires on May 31, 2000. No amounts are currently outstanding under
the equipment lease line.
31
<PAGE>
SUPPLEMENTARY DATA - QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1999
(In thousands, except per share data)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 20,515 $ 30,032 $ 30,503 $ 32,932
Gross (loss) profit (7,112) 461 5,230 4,869
Operating (loss) income (38,820) (2,669) 8,228 1,814
Net (loss) income (24,371) (1,924) 4,897 717
Basic net (loss) income per share (3.93) (0.31) 0.78 0.11
Diluted net (loss) income per share (3.93) (0.31) 0.77 0.11
1998
(In thousands, except per share data)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 44,559 $ 46,571 $ 46,416 $ 41,074
Gross profit 5,762 6,469 8,138 7,151
Operating (loss) income 891 (400) 2,977 2,054
Net (loss) income 293 (641) 1,496 990
Basic net (loss) income per share 0.05 (0.10) 0.24 0.16
Diluted net (loss) income per share 0.05 (0.10) 0.24 0.16
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item regarding directors is included under
"Election of Directors" in the Company's Proxy Statement for its 1999 annual
meeting of shareholders. The information required by this item regarding
executive officers is contained under "Executive Officers" in Item 1 of Part I
hereof. Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is included under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for its 1999
annual meeting of shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under "Executive Compensation"
and "Report of the Compensation Committee on Executive Compensation" in the
Company's Proxy Statement for its 1999 annual meeting of shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is included under "Voting Securities and
Principal Shareholders" and "Election of Directors" in the Company's Proxy
Statement for its 1999 annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under "Certain Relationships
and Transactions" in the Company's Proxy Statement for its 1999 annual meeting
of shareholders.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Index to Financial Statements.
Merix Corporation Page Reference
----------------- --------------
Independent Auditors' Report 16
Balance Sheets as of May 29, 1999 and May 30, 1998 17
Statements of Operations for fiscal years ended
May 29, 1999, May 30, 1998 and May 31, 1997 18
Statements of Shareholders' Equity for fiscal years
ended May 29, 1999, May 30, 1998 and May 31, 1997 19
Statements of Cash Flows for fiscal years ended
May 29, 1999, May 30, 1998 and May 31, 1997 20
Notes to Financial Statements 21
(a)2. Financial Statement Schedules
All schedules have been omitted since they are either not required or the
information is included in the financial statements included herewith.
(a)3. Index to Exhibits
The following exhibits are filed with, or incorporated by reference into,
this Annual Report on Form 10-K:
3.1 Articles of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-77348.
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Form 10-K for the fiscal year ended
May 31, 1997.
4.1 Article II of the Company's Articles of Incorporation,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-77348.
4.2 Shareholder Rights Agreement dated March 25, 1997, incorporated
by reference to the Company's Current Report on Form 8-K dated
March 25, 1997.
10.1 Asset Transfer Agreement between Tektronix and the Company
(including Note and Trust Deed and Assignment of Rents and
Leases), incorporated by reference to Exhibit 10.1 the Company's
Form 10-K for the fiscal year ended May 28, 1994.
10.2 Amendment No. 1 to Promissory Note dated June 1, 1994 from the
Company to Tektronix, Inc., incorporated by reference to Exhibit
10.33 to the Company's Form 10-Q for the quarterly period ended
February 27,1999
10.3 Registration Rights Agreement between the Company and Tektronix,
incorporated by reference to Exhibit 10.2 to the Company's Form
10-K for the fiscal year ended May 28, 1994.
10.4 Waste Management Agreement between the Company and Tektronix,
incorporated by reference to Exhibit 10.3 to the Company's Form
10-K for the fiscal year ended May 28, 1994.
10.5 Services Agreement between the Company and Tektronix,
incorporated by reference to Exhibit 10.4 to the Company's Form
10-K for the fiscal year ended May 28, 1994.
10.6+ Stock Incentive Plan of the Company, as amended, incorporated by
reference to Appendix A of the Company's Proxy Statement for the
1995 Annual Meeting of Shareholders.
33
<PAGE>
10.7+ Indemnity Agreement between the Company and Deborah A. Coleman as
of April 4, 1994, incorporated by reference to Exhibit 10.6 to
the Company's Form 10-K for the fiscal year ended May 28, 1994.
10.8+ Indemnity Agreement between the Company and Carl W. Neun as of
April 4, 1994, incorporated by reference to Exhibit 10.10 to the
Company's Form 10-K for the fiscal year ended May 28, 1994.
10.9+ Indemnity Agreement between the Company and Carlene M. Ellis as
of May 24, 1994, incorporated by reference to Exhibit 10.11 to
the Company's Form 10-K for the fiscal year ended May 28, 1994.
10.10+ Indemnity Agreement between the Company and Dr. Koichi Nishimura
as of May 24, 1994, incorporated by reference to Exhibit 10.13 to
the Company's Form 10-K for the fiscal year ended May 28, 1994.
10.11+ Indemnity Agreement between the Company and Terri L. Timberman as
of May 25, 1994, incorporated by reference to Exhibit 10.14 to
the Company's Form 10-K for the fiscal year ended May 27, 1995.
10.12+ Indemnity Agreement between the Company and Janie S. Brown as of
August 11, 1998, incorporated by reference to Exhibit 10.31 to
the Company's Form 10-Q for the quarterly period ended August 29,
1998.
10.13+ Amended Executive Severance Agreement between the Company and
Deborah A. Coleman, incorporated by reference to Exhibit 10.16 to
the Company's Form 10-K for the fiscal year ended May 31, 1997.
10.14+ Amended Executive Severance Agreement between the Company and
Terri L. Timberman, incorporated by reference to Exhibit 10.17 to
the Company's Form 10-K for the fiscal year ended May 31, 1997.
10.15+ Executive Severance Agreement between the Company and Janie S.
Brown, incorporated by reference to Exhibit 10.32 to the
Company's Form 10-Q for the quarterly period ended November 28,
1998.
10.16+ Executive Severance Agreement between the Company and Mark R.
Hollinger, incorporated by reference to Exhibit 10.33 to the
Company's Form 10-Q for the quarterly period ended August 30,
1997.
10.17+ Indemnity Agreement between the Company and Mark R. Hollinger as
of September 2, 1997, incorporated by reference to Exhibit 10.32
to the Company's Form 10-Q for the quarterly period ended August
30, 1997
10.18+ Indemnity Agreement between the Company and William C. McCormick
as of October 21, 1997, incorporated by reference to Exhibit
10.35 to the Company's Form 10-Q for the quarterly period ended
November 29, 1997.
10.19+ Indemnity Agreement between the Company and Robert C. Strandberg
as of June 30, 1998, incorporated by reference to Exhibit 10.30
to the Company's Form 10-K for the fiscal year ended May 30,
1998.
10.20 Note Purchase Agreement dated September 10, 1996, incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarterly period ended August 31, 1996.
10.21 Amendment to Note Purchase Agreement dated May 28, 1997,
incorporated by reference to Exhibit 10.26 to the Company's Form
10-K for the fiscal year ended May 31, 1997.
10.22 Second Amendment to Note Purchase Agreement dated August 29,
1997, incorporated by reference to Exhibit 10.29 to the Company's
Form 10-Q for the quarterly period ended August 30, 1997.
34
<PAGE>
10.23 Third Amendment to Note Purchase Agreement dated November 28,
1997, incorporated by reference to Exhibit 10.34 to the Company's
Form 10-Q for the quarterly period ended November 29, 1997.
10.24 Fourth Amendment to Note Purchase Agreement dated May 28, 1999.
23 Independent Auditors' Consent
27 Financial Data Schedule
+ This Exhibit constitutes a management contract or
compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 29, 1999.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on August 6, 1999.
MERIX CORPORATION
By JANIE S. BROWN
--------------------------------------
Janie S. Brown
Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on August 6, 1999 by the following persons on behalf of
the Registrant and in the capacities indicated.
Signature Title
--------- -----
DEBORAH A. COLEMAN Chair and Chief Executive Officer
- ---------------------------------- (Principal Executive Officer)
Deborah A. Coleman
JANIE S. BROWN Vice President, Chief Financial Officer
- ---------------------------------- and Treasurer (Principal Financial and
Janie S. Brown Accounting Officer)
MARK R. HOLLINGER President, Chief Operating Officer
- ---------------------------------- and Director
Mark R. Hollinger
CARLENE M. ELLIS Director
- ----------------------------------
Carlene M. Ellis
WILLIAM C. McCORMICK Director
- ----------------------------------
William C. McCormick
CARL W. NEUN Director
- ----------------------------------
Carl W. Neun
DR. KOICHI NISHIMURA Director
- ----------------------------------
Dr. Koichi Nishimura
ROBERT C. STRANDBERG Director
- ----------------------------------
Robert C. Strandberg
36
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-77348.
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Form 10-K for the fiscal year ended
May 31, 1997.
4.1 Article II of the Company's Articles of Incorporation,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-77348.
4.2 Shareholder Rights Agreement dated March 25, 1997, incorporated
by reference to the Company's Current Report on Form 8-K dated
March 25, 1997.
10.1 Asset Transfer Agreement between Tektronix and the Company
(including Note and Trust Deed and Assignment of Rents and
Leases), incorporated by reference to Exhibit 10.1 the Company's
Form 10-K for the fiscal year ended May 28, 1994.
10.2 Amendment No. 1 to Promissory Note dated June 1, 1994 from the
Company to Tektronix, Inc., incorporated by reference to Exhibit
10.33 to the Company's Form 10-Q for the quarterly period ended
February 27,1999
10.3 Registration Rights Agreement between the Company and Tektronix,
incorporated by reference to Exhibit 10.2 to the Company's Form
10-K for the fiscal year ended May 28, 1994.
10.4 Waste Management Agreement between the Company and Tektronix,
incorporated by reference to Exhibit 10.3 to the Company's Form
10-K for the fiscal year ended May 28, 1994.
10.5 Services Agreement between the Company and Tektronix,
incorporated by reference to Exhibit 10.4 to the Company's Form
10-K for the fiscal year ended May 28, 1994.
10.6+ Stock Incentive Plan of the Company, as amended, incorporated by
reference to Appendix A of the Company's Proxy Statement for the
1995 Annual Meeting of Shareholders.
10.7+ Indemnity Agreement between the Company and Deborah A. Coleman as
of April 4, 1994, incorporated by reference to Exhibit 10.6 to
the Company's Form 10-K for the fiscal year ended May 28, 1994.
10.8+ Indemnity Agreement between the Company and Carl W. Neun as of
April 4, 1994, incorporated by reference to Exhibit 10.10 to the
Company's Form 10-K for the fiscal year ended May 28, 1994.
10.9+ Indemnity Agreement between the Company and Carlene M. Ellis as
of May 24, 1994, incorporated by reference to Exhibit 10.11 to
the Company's Form 10-K for the fiscal year ended May 28, 1994.
10.10+ Indemnity Agreement between the Company and Dr. Koichi Nishimura
as of May 24, 1994, incorporated by reference to Exhibit 10.13 to
the Company's Form 10-K for the fiscal year ended May 28, 1994.
10.11+ Indemnity Agreement between the Company and Terri L. Timberman as
of May 25, 1994, incorporated by reference to Exhibit 10.14 to
the Company's Form 10-K for the fiscal year ended May 27, 1995.
10.12+ Indemnity Agreement between the Company and Janie S. Brown as of
August 11, 1998, incorporated by reference to Exhibit 10.31 to
the Company's Form 10-Q for the quarterly period ended August 29,
1998.
10.13+ Amended Executive Severance Agreement between the Company and
Deborah A. Coleman, incorporated by reference to Exhibit 10.16 to
the Company's Form 10-K for the fiscal year ended May 31, 1997.
<PAGE>
Exhibit No. Description
- ----------- -----------
10.14+ Amended Executive Severance Agreement between the Company and
Terri L. Timberman, incorporated by reference to Exhibit 10.17 to
the Company's Form 10-K for the fiscal year ended May 31, 1997.
10.15+ Executive Severance Agreement between the Company and Janie S.
Brown, incorporated by reference to Exhibit 10.32 to the
Company's Form 10-Q for the quarterly period ended November 28,
1998.
10.16+ Executive Severance Agreement between the Company and Mark R.
Hollinger, incorporated by reference to Exhibit 10.33 to the
Company's Form 10-Q for the quarterly period ended August 30,
1997.
10.17+ Indemnity Agreement between the Company and Mark R. Hollinger as
of September 2, 1997, incorporated by reference to Exhibit 10.32
to the Company's Form 10-Q for the quarterly period ended August
30, 1997
10.18+ Indemnity Agreement between the Company and William C. McCormick
as of October 21, 1997, incorporated by reference to Exhibit
10.35 to the Company's Form 10-Q for the quarterly period ended
November 29, 1997.
10.19+ Indemnity Agreement between the Company and Robert C. Strandberg
as of June 30, 1998, incorporated by reference to Exhibit 10.30
to the Company's Form 10-K for the fiscal year ended May 30,
1998.
10.20 Note Purchase Agreement dated September 10, 1996, incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarterly period ended August 31, 1996.
10.21 Amendment to Note Purchase Agreement dated May 28, 1997,
incorporated by reference to Exhibit 10.26 to the Company's Form
10-K for the fiscal year ended May 31, 1997.
10.22 Second Amendment to Note Purchase Agreement dated August 29,
1997, incorporated by reference to Exhibit 10.29 to the Company's
Form 10-Q for the quarterly period ended August 30, 1997.
10.23 Third Amendment to Note Purchase Agreement dated November 28,
1997, incorporated by reference to Exhibit 10.34 to the Company's
Form 10-Q for the quarterly period ended November 29, 1997.
10.24 Fourth Amendment to Note Purchase Agreement dated May 28, 1999.
23 Independent Auditors' Consent
27 Financial Data Schedule
+ This Exhibit constitutes a management contract or
compensatory plan or arrangement.
EXHIBIT 10.24
MERIX CORPORATION
________________________
FOURTH AMENDMENT
Dated as of May 28, 199
to
Note Purchase Agreements
dated September 10, 1996
________________________
Re: $40,000,000 7.92% Senior Notes
due September 15, 2003
<PAGE>
FOURTH AMENDMENT TO NOTE PURCHASE AGREEMENTS
THIS FOURTH AMENDMENT dated as of May 28, 1999 (the or this "Fourth
Amendment") to the Note Purchase Agreements, each dated September 10, 1996, as
amended by the First Amendment to Note Purchase Agreements dated May 28, 1997,
the Second Amendment to Note Purchase Agreements dated August 29, 1997, and the
Third Amendment to Note Purchase Agreements dated November 28, 1997, and
supplemented by the First Waiver Under Note Purchase Agreements dated as of
August 29, 1998, the Second Waiver Under Note Purchase Agreements dated as of
November 28, 1998, and the Third Waiver Under Note Purchase Agreements dated as
of February 27, 1999 is between MERIX CORPORATION, an Oregon corporation (the
"Company"), and each of the institutions which is a signatory to this Fourth
Amendment (collectively, the "Noteholders").
RECITALS:
A. The Company and each of the Noteholders have heretofore entered into
separate and several Note Purchase Agreements each dated September 10, 1996, as
amended by the First Amendment to Note Purchase Agreements dated May 28, 1997,
the Second Amendment to Note Purchase Agreements dated August 29, 1997, and the
Third Amendment to Note Purchase Agreements dated November 28, 1997, and
supplemented by the First Waiver Under Note Purchase Agreements dated as of
August 29, 1998, the Second Waiver Under Note Purchase Agreements dated as of
November 28, 1998 and the Third Waiver Under Note Purchase Agreements dated as
of February 27, 1999 (collectively, the "Note Purchase Agreements"). The Company
has heretofore issued the $40,000,000 7.92% Senior Notes Due September 15, 2003
(the "Notes") dated September 10, 1996 pursuant to the Note Purchase Agreements.
The Noteholders are the holders of 100% of the outstanding principal amount of
the Notes.
B. The Company and the Noteholders now desire to amend the Note Purchase
Agreements in the respects, but only in the respects, hereinafter set forth.
C. Capitalized terms used herein shall have the respective meanings
ascribed thereto in the Note Purchase Agreements unless herein defined or the
context shall otherwise require.
D. All requirements of law have been fully complied with and all other acts
and things necessary to make this Fourth Amendment a valid, legal and binding
instrument according to its terms for the purposes herein expressed have been
done or performed.
1
<PAGE>
NOW, THEREFORE, in consideration of good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Noteholders do hereby agree as follows:
SECTION 1. AMENDMENT
1.1. Section 8.1 of the Note Purchase Agreements shall be and is hereby
amended in its entirety to read as follows:
"8.1. Required Prepayments.
On September 15, 1999 and on each March 15 and September 15
thereafter to and including March 15, 2003, the Company will prepay
$4,000,000 principal amount (or such lesser principal amount as shall
then be outstanding) of the Notes at par and without payment of the
Make-Whole Amount or any premium, provided that upon any partial
prepayment of the Notes pursuant to Section 8.2 or purchase of the
Notes permitted by Section 8.5, the principal amount of each required
prepayment of the Notes becoming due under this Section 8.1 on and
after the date of such prepayment or purchase shall be reduced in the
same proportion as the aggregate unpaid principal amount of the Notes
is reduced as a result of such prepayment or purchase."
1.2. Section 10.4 of the Note Purchase Agreements shall be and is hereby
amended in its entirety to read as follows:
"10.4. Interest Charges Coverage Ratio.
(a) The Company will not permit the ratio, as of the end of the
fiscal quarter of the Company ended August 28, 1999, of (i)
Consolidated Income Available for Interest Charges for the fiscal
quarter then ended to (ii) Interest Charges for such fiscal quarter,
to be less than 2.00 to 1.00.
(b) The Company will not permit the ratio, as of the end of the
fiscal quarter of the Company ended November 27, 1999, of (i)
Consolidated Income Available for Interest Charges for the period of
the two consecutive fiscal quarters then ended to (ii) Interest
Charges for the period of the two consecutive fiscal quarters then
ended, to be less than 2.00 to 1.00.
(c) The Company will not permit the ratio, as of the end of the
fiscal quarter of the Company ended February 26, 2000,
2
<PAGE>
of (i) Consolidated Income Available for Interest Charges for the
period of the three consecutive fiscal quarters then ended to (ii)
Interest Charges for the period of the three consecutive fiscal
quarters then ended, to be less than 2.00 to 1.00.
(d) The Company will not permit the ratio, as of the end of any
fiscal quarter of the Company ended after February 26, 2000, of (i)
Consolidated Income Available for Interest Charges for the period of
the four consecutive fiscal quarters then ended to (ii) Interest
Charges for the period of the four consecutive fiscal quarters then
ended, to be less than 2.00 to 1.00.
1.3. Section 10.5 of the Note Purchase Agreements shall be and is hereby
amended in its entirety to read as follows:
"10.5. Consolidated Net Worth.
The Company will not, at any time, permit Consolidated Net Worth
to be less than the sum of (a) $49,000,000 plus (b) an aggregate
amount equal to 50% of Consolidated Net Income (but, in each case,
only if a positive number) for each completed fiscal quarter of the
Company beginning with the fiscal quarter ended August 28, 1999."
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
2.1. To induce the Noteholders to execute and deliver this Fourth Amendment
(which representations shall survive the execution and delivery of this Fourth
Amendment), the Company represents and warrants to the Noteholders that:
(a) this Fourth Amendment has been duly authorized, executed and
delivered by the Company and this Fourth Amendment, the Note Purchase
Agreements, as amended by this Fourth Amendment, and the Notes
constitute the legal, valid and binding obligations of the Company
enforceable against it in accordance with their respective terms,
except as such enforceability may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and (ii)
general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law);
(b) the execution, delivery and performance by the Company of
this Fourth Amendment (i) has been duly authorized by all necessary
corporate action on the part of the Company, (ii) does not require the
consent, approval or authorization of, or registration, filing or
declaration with, or other action by, any Governmental Authority or
any other Person and (iii) will not (A) contravene,
3
<PAGE>
result in any breach of, constitute a default under, result in the
creation of any Lien in respect of any property of the Company under,
or give any other Person the right to require the Company to purchase
or repay any Debt under, any indenture, mortgage, deed of trust, loan,
purchase or credit agreement, lease, corporate charter or by-laws, or
any other agreement or instrument to which the Company is a party or
by which the Company or any of its properties may be bound or
affected, (B) conflict with or result in any breach of any of the
terms, conditions or provisions of any order, judgment, decree or
ruling of any court, arbitrator or Governmental Authority applicable
to the Company or (C) violate any provision of any statute or other
rule or regulation of any Governmental Authority applicable to the
Company;
(c) after giving effect to this Fourth Amendment, (i) no Default
or Event of Default has occurred and is continuing and (ii) except as
disclosed on Schedule 1 attached to this Fourth Amendment, no event
has occurred and no condition exists which has had a Material Adverse
Effect; and
(d) except as disclosed on Schedule 1 attached to this Fourth
Amendment, all the representations and warranties contained in Section
5 of the Note Purchase Agreements are true and correct in all material
respects with the same force and effect as if made by the Company on
and as of the date hereof.
SECTION 3. CONDITION TO EFFECTIVENESS OF THIS FOURTH AMENDMENT.
3.1. This Fourth Amendment shall become effective and binding upon the
Company and the Noteholders at such time as (a) executed counterparts of this
Fourth Amendment, duly executed by the Company and the Noteholders, shall have
been delivered to the Noteholders and (b) the Company shall have paid (in
immediately available funds) a fee of $75,000 in the aggregate to the
Noteholders (such fee to be allocated among the Noteholders in proportion to the
respective principal amounts of the Notes held by each).
SECTION 4. PAYMENT OF NOTEHOLDERS' COUNSEL FEES AND EXPENSES.
4.1. The Company agrees to pay upon demand, the reasonable fees and
expenses of Choate, Hall & Stewart, special counsel to the Noteholders, in
connection with the negotiation, preparation, approval, execution and delivery
of this Fourth Amendment.
SECTION 5. MISCELLANEOUS.
5.1. All terms, conditions and covenants contained in the Note Purchase
Agreements and the Notes are hereby ratified and shall be and remain in full
force and effect. This Fourth Amendment embodies the entire agreement and
understanding
4
<PAGE>
between the Company and the Noteholders and supersedes all prior agreements and
understandings relating to the subject matter hereof.
5.2. Any and all notices, requests, certificates and other instruments
executed and delivered after the execution and delivery of this Fourth Amendment
may refer to the Note Purchase Agreements without making specific reference to
this Fourth Amendment but nevertheless all such references shall include this
Fourth Amendment unless the context otherwise requires. This Fourth Amendment is
an Operative Document. The headings in this Fourth Amendment are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof. The
execution hereof by you shall constitute a contract between us for the uses and
purposes hereinabove set forth, and this Fourth Amendment may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
5.3. This Fourth Amendment shall be governed by and construed in accordance
with, and the rights of the parties shall be governed by, the law of The
Commonwealth of Massachusetts excluding choice-of-law principles of the law of
such jurisdiction that would require the application of the law of a
jurisdiction other than such jurisdiction.
[The remainder of this page is left blank intentionally.]
5
<PAGE>
If you are in agreement with the foregoing, please sign the accompanying
counterpart of this Fourth Amendment and return it to the Company, whereupon the
foregoing shall become a binding agreement between you and the Company.
MERIX CORPORATION
By: JANIE S. BROWN
----------------------------------
Its Chief Financial Officer
Accepted and Agreed to:
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: DANA DONOVAN
----------------------------------
Its Senior Investment Officer
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
By: DANA DONOVAN
----------------------------------
Its Senior Investment Officer
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By: RICHARD C. MORRISON
----------------------------------
Its Managing Director
CM LIFE INSURANCE COMPANY
By: RICHARD C. MORRISON
----------------------------------
Its Investment Officer
6
<PAGE>
SCHEDULE I
TO
FOURTH AMENDMENT
dated as of May 28, 1999
BETWEEN
MERIX CORPORATION,
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY,
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY,
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
AND
C.M. LIFE INSURANCE COMPANY
The representations and warranties in Section 5.3 of the Note Purchase
Agreements are qualified by the effects of the restructuring of the Company
disclosed in a press release dated August 18, 1998 and the operating losses
incurred by the Company through February 27, 1999 as reflected in the Company's
financial statements.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-87344 and 333-76367 of Merix Corporation on Form S-8 of our report dated June
25, 1999, appearing in this Annual Report on Form 10-K of Merix Corporation for
the year ended May 29, 1999.
DELOITTE & TOUCHE LLP
Portland, Oregon
August 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED MAY 29, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-29-1999
<PERIOD-START> MAY-31-1998
<PERIOD-END> MAY-29-1999
<CASH> 5,874
<SECURITIES> 7,507
<RECEIVABLES> 17,745
<ALLOWANCES> 237
<INVENTORY> 6,537
<CURRENT-ASSETS> 39,080
<PP&E> 113,436
<DEPRECIATION> 52,544
<TOTAL-ASSETS> 109,383
<CURRENT-LIABILITIES> 24,758
<BONDS> 0
0
0
<COMMON> 45,194
<OTHER-SE> 5,132
<TOTAL-LIABILITY-AND-EQUITY> 109,383
<SALES> 113,982
<TOTAL-REVENUES> 113,982
<CGS> 110,534
<TOTAL-COSTS> 110,534
<OTHER-EXPENSES> 34,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,906
<INCOME-PRETAX> (33,356)
<INCOME-TAX> (12,675)
<INCOME-CONTINUING> (20,681)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,681)
<EPS-BASIC> (3.30)
<EPS-DILUTED> (3.30)
</TABLE>
