- Quarterly Report (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended November 28, 2009

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

For the transition period from ________ to ________

Commission File No. 1-33752

MERIX CORPORATION

(Exact name of registrant as specified in its charter)

Oregon	93-1135197
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

15725 SW Greystone Court, Suite 200, Beaverton, Oregon		97006
(Address of principal executive offices)		(Zip Code)


Registrant’s telephone number, including area code: 503-716-3700

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

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

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

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

The number of shares of common stock outstanding as of December 31, 2009 was 21,882,457 shares.

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MERIX CORPORATION

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION		Page

Item 1.	Consolidated Financial Statements (Unaudited)

	Consolidated Balance Sheets – November 28, 2009 and May 30, 2009		2

	Consolidated Statements of Operations – for the three- and six-month fiscal periods ended November 28, 2009 and November 29, 2008		3

	Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) – for the three- and six-month fiscal periods ended November 28, 2009 and November 29, 2008		4

	Consolidated Statements of Cash Flows – for the six month fiscal periods ended November 28, 2009 and November 29, 2008		5

	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28

Item 4.	Controls and Procedures		29

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		30

Item 1A.	Risk Factors		31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		46

Item 6.	Exhibits		46

Signatures			47

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PART I – FINANCIAL INFORMATION

Item I. Consolidated Financial Statements (Unaudited)

MERIX CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	November 28,			May 30,
	2009			2009
Assets
Current assets:
Cash and cash equivalents	$	10,472		$	16,141
Accounts receivable, net of allowances for doubtful
accounts of $1,640 and $1,503		53,523			43,290
Inventories, net		17,203			14,593
Assets held for sale		112			3
Deferred income taxes		265			160
Prepaid and other current assets		9,703			5,437
Total current assets		91,278			79,624

Property, plant and equipment, net of accumulated depreciation of $146,729 and $138,482		85,283			95,170
Goodwill		11,392			11,392
Definite-lived intangible assets, net of accumulated amortization of $11,318 and $10,380		5,890			6,828
Deferred income taxes, net		1,656			521
Assets held for sale		1,146			1,146
Other assets		4,062			4,470
Total assets	$	200,707		$	199,151

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	41,866		$	33,371
Accrued liabilities		12,521			13,088
Total current liabilities		54,387			46,459

Long-term debt		78,000			78,000
Other long-term liabilities		4,771			4,374
Total liabilities		137,158			128,833

Commitments and Contingencies (Note 15)

Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized; none issued		-			-
Common stock, no par value; 50,000 shares authorized; 21,880 and 21,781 issued and outstanding		217,953			217,112
Accumulated deficit		(158,583	)		(150,813	)
Accumulated other comprehensive income		39			34
Total Merix shareholders' controlling interest		59,409			66,333
Noncontrolling interest		4,140			3,985
Total shareholders' equity		63,549			70,318
Total liabilities and shareholders' equity	$	200,707		$	199,151

See accompanying Notes to Consolidated Financial Statements.

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MERIX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Fiscal quarter ended						Six months ended

	November 28, 2009			November 29, 2008			November 28, 2009			November 29, 2008
Net sales	$	71,298		$	76,900		$	129,095		$	167,527
Cost of sales		62,216			70,865			116,499			151,218
Gross profit		9,082			6,035			12,596			16,309

Operating expenses:
Engineering		343			697			604			1,260
Selling, general and administration		8,865			7,989			16,831			17,691
Amortization of intangible assets		469			520			938			1,040
Impairment of fixed assets (Note 17)		-			702			642			702
Severance charges and other restructuring costs (Note 17)		-			387			314			(140	)
Total operating expenses		9,677			10,295			19,329			20,553
Operating loss		(595	)		(4,260	)		(6,733	)		(4,244	)

Other income (expense):
Interest income		5			45			11			96
Interest expense		(1,020	)		(984	)		(2,061	)		(1,860	)
Other income (expense), net		1,491			(90	)		1,438			(454	)
Total other income (expense), net		476			(1,029	)		(612	)		(2,218	)

Loss before income taxes and minority interests		(119	)		(5,289	)		(7,345	)		(6,462	)
Provision for (benefit from) income taxes		(1,014	)		693			(105	)		1,421
Net income (loss)		895			(5,982	)		(7,240	)		(7,883	)
Net income attributable to noncontrolling interest		431			106			530			352
Net income (loss) attributable to controlling interest	$	464		$	(6,088	)	$	(7,770	)	$	(8,235	)

Basic and diluted income (loss) per share attributable to
Merix common shareholders	$	0.02		$	(0.29	)	$	(0.36	)	$	(0.39	)

Weighted average number of shares - basic		21,628			20,945			21,621			20,867
Weighted average number of shares - diluted		22,296			20,945			21,621			20,867


See accompanying Notes to Consolidated Financial Statements.

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MERIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
For the six months ended November 28, 2009 and November 29, 2008
(in thousands)

													Accumulated
													Other
	Non-												Comprehensive			Total
	controlling			Common Stock						Accumulated			Income			Shareholders'
	Interest			Shares			Amount			Deficit			(Loss)			Equity

Balance at May 31, 2008	$	4,573			21,073		$	215,085		$	(101,358	)	$	47		$	118,347
Dividend declared for distribution to non-controlling interest		(297	)		-			-			-			-			(297	)
Stock Plans:
Issuance of restricted stock to employees		-			26			-			-			-			-
Issuance of stock under employee stock purchase plan		-			147			262			-			-			262
Share-based compensation expense		-			-			566			-			-			566
Shares repurchased, surrendered or cancelled		-			(8	)		(18	)		-			-			(18	)
Comprehensive loss:
Net income (loss)		246			-			-			(2,147	)		-			(1,901	)
Foreign currency translation adjustment, net of tax		-			-			-			-			(2	)		(2	)
Quarterly comprehensive loss																	(1,903	)
Balance at August 30, 2008	$	4,522			21,238		$	215,895		$	(103,505	)	$	45		$	116,957
Dividend declared for distribution to non-controlling interest		(934	)		-			-			-			-			(934	)
Stock Plans:
Share-based compensation expense		-			-			406			-			-			406
Comprehensive loss:
Net income (loss)		106			-			-			(6,088	)		-			(5,982	)
Foreign currency translation adjustment, net of tax		-			-			-			-			(14	)		(14	)
Quarterly comprehensive loss																	(5,996	)
Balance at November 29, 2008	$	3,694			21,238		$	216,301		$	(109,593	)	$	31		$	110,433

Comprehensive loss - six months ended November 29, 2008:
Net loss																$	(7,883	)
Foreign currency translation adjustment, net of tax																	(16	)
Net comprehensive loss																$	(7,899	)

Balance at May 30, 2009	$	3,935			21,781		$	217,112		$	(150,622	)	$	33		$	70,458
Elimination of one-month reporting lag for Asia subsidiary		50			-			-			(191	)		1			(140	)
Dividend declared for distribution to non-controlling interest		(375	)		-			-			-			-			(375	)
Stock Plans:
Issuance of restricted stock to employees		-			108			-			-			-			-
Share-based compensation expense		-			-			475			-			-			475
Shares repurchased, surrendered or cancelled		-			(8	)		(8	)		-			-			(8	)
Comprehensive loss:
Net income (loss)		99			-			-			(8,234	)		-			(8,135	)
Foreign currency translation adjustment, net of tax		-			-			-			-			(1	)		(1	)
Quarterly comprehensive loss																	(8,136	)
Balance at August 29, 2009	$	3,709			21,881		$	217,579		$	(159,047	)	$	33		$	62,274
Dividend declared for distribution to non-controlling interest					-			-			-			-			-
Stock Plans:
Share-based compensation expense		-			-			376			-			-			376
Shares repurchased, surrendered or cancelled		-			(1	)		(2	)		-			-			(2	)
Comprehensive loss:
Net income		431			-			-			464			-			895
Foreign currency translation adjustment, net of tax		-			-			-			-			6			6
Quarterly comprehensive income																	901
Balance at November 28, 2009	$	4,140			21,880		$	217,953		$	(158,583	)	$	39		$	63,549

Comprehensive loss - six months ended November 28, 2009:
Net loss																$	(7,240	)
Foreign currency translation adjustment, net of tax																	5
Net comprehensive loss																$	(7,235	)





See accompanying Notes to Consolidated Financial Statements.

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MERIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Six months ended
CASH FLOWS FROM OPERATING ACTIVITIES	November 28, 2009			November 29, 2008
Net loss	$	(7,240	)	$	(7,883	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization		11,353			11,125
Share-based compensation expense		850			973
Impairment of fixed assets		642			702
Gain on disposition of assets		(25	)		(628	)
VAT penalty accrual reversal		(1,522	)		-
Alternative minimum tax refund receivable		(580	)		-
Deferred income taxes		(1,240	)		13
Changes in operating accounts:
(Increase) decrease in accounts receivable, net		(10,345	)		7,471
(Increase) decrease in inventories, net		(2,610	)		1,222
(Increase) decrease in other assets		(3,630	)		1,724
Increase (decrease) in accounts payable		8,724			(1,498	)
Increase (decrease) in other accrued liabilities		1,380			(1,652	)
Increase (decrease) in due to affiliate, net		-			1,519
Net cash provided by (used in) operating activities		(4,243	)		13,088

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(1,069	)		(14,844	)
Proceeds from disposal of property, plant and equipment		28			599
Net cash used in investing activities		(1,041	)		(14,245	)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing on revolving line of credit		5,000			28,983
Borrowing on long-term notes payable		5,200			-
Principal payments on revolving line of credit		(10,200	)		(22,000	)
Proceeds from exercise of stock options and stock plan transactions		-			263
Reacquisition of common stock		(10	)		(18	)
Dividend distribution to non-controlling interest		(375	)		(296	)
Other financing activities		-			(20	)
Net cash provided by (used in) financing activities		(385	)		6,912

NET CHANGE IN CASH AND CASH EQUIVALENTS		(5,669	)		5,755

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		16,141			5,728

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	10,472		$	11,483

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes, net	$	1,580		$	1,664
Cash paid for interest		738			976




See accompanying Notes to Consolidated Financial Statements.

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MERIX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF BUSINESS

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

NOTE 2. BASIS OF PRESENTATION AND CONSOLIDATION

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

The Company’s fiscal year consists of a 52 or 53 week period that ends on the last Saturday in May. Fiscal 2010 is a 52-week fiscal year ending on May 29, 2010. The second quarters of fiscal 2010 and fiscal 2009 included 13 weeks each and ended November 28, 2009 and November 29, 2008, respectively The six month periods ended November 28, 2009 and November 29, 2008 each included 26 weeks.

The consolidated financial statements include the accounts of Merix Corporation and its wholly-owned and majority-owned subsidiaries. Beginning in the first quarter of fiscal 2010, all intercompany accounts, transactions and profits have been eliminated in consolidation. Prior to May 30, 2009 certain intercompany amounts related to Merix Asia could not be eliminated, as discussed in Note 5.

The functional currency for all subsidiaries is the U.S. dollar. Foreign exchange losses totaled $0.1 million for both the fiscal quarter ended November 28, 2009 and the fiscal quarter ended November 29, 2008 and are included in net other expense in the consolidated statements of operations. Foreign exchange losses for the six months ended November 28, 2009 and November 29, 2008 totaled $0.1 million and $0.4 million, respectively.

Events subsequent to November 28, 2009 were evaluated through January 4, 2010, the date on which the financial statements were issued.

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NOTE 3. MERGER AGREEMENT

On October 6, 2009, the Company announced that it entered into a merger agreement to be acquired by Viasystems Group, Inc. (Viasystems), a leading worldwide provider of complex multi-layer printed circuit boards and electro-mechanical solutions. Under the terms of the merger agreement, Viasystems will acquire all of the outstanding common stock of Merix Corporation.

Approximately 98 percent of the holders of Merix’ $70 million 4% Convertible Senior Subordinated Notes due 2013 have agreed to enter into an exchange agreement by which their notes will be exchanged for approximately 1.4 million newly issued Viasystems shares plus a total cash payment of approximately $35 million.

Following completion of the merger transaction and noteholder exchange agreements, and an approximate 9-for-1 reverse stock split, Viasystems will have approximately 20 million shares outstanding which will be publicly traded on the NASDAQ exchange. Existing Merix shareholders will own approximately 2.5 million shares or approximately 12.5% of the shares outstanding, Merix noteholders will own approximately 1.4 million shares or 7.0% of the shares outstanding, and existing Viasystems shareholders will own approximately 16.1 million shares or 80.5% of the shares outstanding.

The Company’s Board of Directors has unanimously approved the merger and the related plan of merger, which must also be approved by a majority of the Company’s shareholders entitled to vote thereon and is expected to be completed in February 2010.

NOTE 4. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

We estimate the fair value of our monetary assets and liabilities based upon comparison of such assets and liabilities to the current market values for instruments of a similar nature and degree of risk. Our monetary assets and liabilities include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt. Due to their short-term nature, we estimated that the recorded value of our monetary assets and liabilities, except long-term debt as disclosed below, approximated fair value as of November 28, 2009 and May 30, 2009.

The fair market value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise; however, the quoted market price for the Company’s debt is currently reflecting a significant risk premium. The Company’s debt trades infrequently in the open market and as such, the quoted market price is considered a Level II input in the assessment of fair value. At November 28, 2009 and May 30, 2009, respectively, the book value of our fixed rate debt and the fair value, based on open market trades proximate to the fair value measurement date, was as follows:

	November 28, 2009		May 30, 2009
Book value of fixed rate debt	$	70,000	$	70,000
Fair value of fixed rate debt	$	40,885	$	28,000

NOTE 5. ELIMINATION OF ONE MONTH REPORTING LAG FOR MERIX ASIA

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

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

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

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

The amounts presented on the consolidated balance sheet as of May 30, 2009 have been revised from those previously reported in the Annual Report on Form 10-K to reflect the consolidation of Merix Asia after the elimination of the one-month reporting lag as shown below:

	May 30, 2009			May 30, 2009
Assets	(as reported)			(as revised)
Cash	$	17,571		$	16,141
Accounts receivable, net		43,285			43,290
Inventories, net		14,367			14,593
Other current assets		5,059			5,600
Total current assets		80,282			79,624
Property, plant and equipment, net		95,883			95,170
Other assets		24,505			24,357
Total assets	$	200,670		$	199,151

Liabilities and Shareholder’s Equity
Accounts payable	$	33,263		$	33,371
Accrued liabilities		14,715			13,088
Total current liabilities		47,978			46,459
Long-term debt		78,000			78,000
Other long-term liabilities		4,234			4,374
Total liabilities		130,212			128,833

Noncontrolling interest		3,935			3,985
Common stock		217,112			217,112
Accumulated other comprehensive income		33			34
Accumulated deficit		(150,622	)		(150,813	)
Total shareholder’s equity		70,458			70,318
Total liabilities and shareholder’s equity	$	200,670		$	199,151

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

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NOTE 6. INVENTORIES

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

Provisions for inventories are made to reduce excess inventories to their estimated net realizable values, as necessary. A change in customer demand for inventory is the primary indicator for reductions in inventory carrying values. The Company records provisions for excess inventories based on historical experiences with customers, the ability to utilize inventory in other programs, the ability to redistribute inventory back to the suppliers and current and forecasted demand for the inventory. The increase (decrease) to inventory valuation reserves was ($0.1 million) and $0.6 million, respectively for the second quarters of fiscal 2010 and 2009, and ($0.4 million) and ($0.2 million), respectively during the fiscal year-to-date periods ended November 28, 2009 and November 29, 2008. As of November 28, 2009 and May 30, 2009, inventory reserves totaled $3.2 million and $3.6 million, respectively.

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

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

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

	November 28, 2009		May 30, 2009
Raw materials	$	3,394	$	2,910
Work-in-process		5,913		3,967
Finished goods		3,454		3,930
Consignment finished goods		4,442		3,786
Total inventories	$	17,203	$	14,593

NOTE 7. PREPAID AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following at November 28, 2009 and May 30, 2009 (in thousands):

	November 28, 2009		May 30, 2009
Prepaid expenses	$	1,266	$	1,578
Income taxes receivable		658		328
Value-added tax receivable		5,317		2,009
Other assets		2,462		1,522
	$	9,703	$	5,437

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NOTE 8. DEFINITE-LIVED INTANGIBLE ASSETS

At November 28, 2009 and May 30, 2009, the Company’s definite-lived intangible assets included customer relationships and a manufacturing sales representative network. The gross amount of the Company’s definite-lived intangible assets and the related accumulated amortization were as follows (in thousands):

	Amortization
	Period	November 28, 2009			May 30, 2009
Customer relationships	6.5-10 years	$	17,168		$	17,168
Manufacturing sales representatives network	5.5 years		40			40
			17,208			17,208
Accumulated amortization			(11,318	)		(10,380	)
		$	5,890		$	6,828

Amortization expense was as follows (in thousands):

	Six Months Ended
	November 28, 2009		November 29, 2008
Customer relationships	$	934	$	1,036
Manufacturing sales representatives network		4		4
	$	938	$	1,040

Amortization expense is scheduled as follows (in thousands):

Remainder of fiscal 2010	$	828
2011		1,552
2012		1,120
2013		727
2014		727
Thereafter		936
	$	5,890

NOTE 9. OTHER ASSETS

Other assets consisted of the following at November 28, 2009 and May 30, 2009 (in thousands):

	November 28, 2009		May 30, 2009
Leasehold land use rights, net	$	1,183	$	1,197
Deferred financing costs, net		2,629		3,022
Other assets		250		251
	$	4,062	$	4,470

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NOTE 10. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at November 28, 2009 and May 30, 2009 (in thousands):

	November 28, 2009		May 30, 2009
Accrued compensation	$	7,570	$	6,602
Accrued warranty (Note 11)		879		986
Income taxes payable		848		321
Contingent customs penalty accrual		-		1,522
Other liabilities		3,224		3,657
	$	12,521	$	13,088

From September 2005 through October 2006, the Company recorded $1.5 million of contingent liability for potential customs penalties related to subcontract manufacturing. In the second quarter of fiscal 2010, due primarily to the passage of time, the Company determined that it was not probable that such a penalty would be assessed and, accordingly, have reversed the $1.5 million accrual. The credit is recorded as a component of net other non-operating income on the consolidated statement of operations.

NOTE 11. ACCRUED WARRANTY

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

Warranty activity was as follows (in thousands):

	Fiscal Quarter Ended						Six Months Ended
	November 28, 2009			November 29, 2008			November 28, 2009			November 29, 2008
Balance, beginning of period	$	701		$	2,320		$	986		$	2,147
Provision for warranty charges		913			828			1,371			1,509
Warranty charges incurred		(735	)		(1,078	)		(1,478	)		(1,586	)
Balance, end of period	$	879		$	2,070		$	879		$	2,070

NOTE 12. EARNINGS PER SHARE AND ANTIDILUTIVE SHARES

For the fiscal quarters and six-month periods ended November 28, 2009 and November 29, 2008, the following potentially dilutive shares were excluded from the calculation of diluted EPS because their effect would have been antidilutive:

	Fiscal Quarter Ended				Six Months Ended
Potential common shares excluded from diluted EPS since their effect would be antidilutive:	November 28, 2009		November 29, 2008		November 28, 2009		November 29, 2008
Stock options		1,821		3,371		1,953		3,310
Restricted stock awards		-		293		252		293
Convertible notes		4,608		4,608		4,608		4,608

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NOTE 13. SEGMENT INFORMATION

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

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

	Fiscal Quarter Ended				Six Months Ended
	November 28, 2009		November 29, 2008		November 28, 2009		November 29, 2008
North America	$	32,735	$	36,151	$	59,032	$	81,068
Asia		38,563		40,749		70,063		86,459
	$	71,298	$	76,900	$	129,095	$	167,527

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

	Fiscal Quarter Ended				Six Months Ended
	November 28, 2009		November 29, 2008		November 28, 2009		November 29, 2008
North America	$	3,324	$	1,484	$	2,553	$	6,648
Asia		5,758		4,551		10,043		9,661
	$	9,082	$	6,035	$	12,596	$	16,309

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

	November 28, 2009		May 30, 2009
North America	$	131,078	$	131,535
Asia		69,629		67,616
	$	200,707	$	199,151

NOTE 14. SIGNIFICANT CUSTOMERS

There were no customers individually accounting for 10% or more of the Company’s net sales in the second quarter of fiscal 2010 and the six months ended November 28, 2009. One customer accounted for 10% and 13%, respectively, of the Company’s net sales in the second quarter of fiscal 2009 and the six months ended November 29, 2008.

At November 28, 2009, five entities represented approximately 44% of the Company’s net accounts receivable balance, individually ranging from approximately 5% to approximately 18%. The Company has not experienced significant losses related to its accounts receivable in the past.

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NOTE 15. COMMITMENTS AND CONTINGENCIES

Litigation

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

Securities Class Action Complaints

Four purported class action complaints were filed against the Company and certain of its executive officers and directors on June 17, 2004, June 24, 2004 and July 9, 2004. The complaints were consolidated in a single action entitled In re Merix Corporation Securities Litigation , Lead Case No. CV 04-826-MO, in the U.S. District Court for the District of Oregon. After the court granted the Company’s motion to dismiss without prejudice, the plaintiffs filed a second amended complaint. That complaint alleged that the defendants violated the federal securities laws by making certain inaccurate and misleading statements in the prospectus used in connection with the January 2004 public offering of approximately $103.4 million of the Company’s common stock. In September 2006, the Court dismissed that complaint with prejudice. The plaintiffs appealed to the Ninth Circuit Court of Appeals. In April 2008, the Ninth Circuit reversed the dismissal of the second amended complaint seeking an unspecified amount of damages. The Company sought rehearing which was denied and rehearing en banc was also denied. The Company obtained a stay of the mandate from the Ninth Circuit and filed a certiorari petition with the United States Supreme Court on September 22, 2008. On December 15, 2008, the Supreme Court denied the certiorari petition and the case was remanded back to the U.S. District Court for the District of Oregon. On May 15, 2009, the plaintiffs moved to certify a class of all investors who purchased in the public offering and who were damaged thereby. On November 5, 2009, the court partially granted the certification motion and certified a class consisting of all persons and entities who purchased or otherwise acquired the Company’s common stock from an underwriter directly pursuant to the Company’s January 29, 2004 offering, who held the stock through May 13, 2004, and who were damaged thereby. The case is currently in the discovery phase. The plaintiffs seek unspecified damages. A potential loss or range of loss that could arise from these cases is not estimable or probable at this time.

The Company, its board of directors and Viasystems are named as defendants in two putative class action lawsuits brought by alleged Merix shareholders challenging the Company’s proposed merger with Viasystems. The shareholder actions were both filed in the Circuit Court of the State of Oregon, County of Multnomah. The actions are called Asbestos Workers Philadelphia Pension Fund v. Merix Corporation, et al., filed October 13, 2009, Case No. 0910-14399 and W. Donald Wybert v. Merix Corporation, et al., filed on or about November 5, 2009, Case No. 0911-15521. Both shareholder actions generally allege, among other things, that each member of the Company’s board of directors breached fiduciary duties to the Company and its shareholders by authorizing the sale of Merix to Viasystems for consideration that does not maximize value to shareholders. The complaints also allege that Viasystems and the Company aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Company’s board of directors. The shareholder actions seek equitable relief, including to enjoin the defendants from consummating the merger on the agreed-upon terms. On November 23, 2009, the court entered an order consolidating the cases into one matter. On or about December 2, 2009, the plaintiffs filed a Consolidated Amended Class Action Complaint, which substantially repeats the allegations of the original complaints, adds Maple Acquisition Corp., the Viasystems subsidiary formed for the merger, as a defendant and also alleges that Merix did not make sufficient disclosures regarding the merger.

Commitments

As of November 28, 2009, the Company had capital commitments of approximately $1.3 million, primarily relating to the purchase of machinery and equipment.

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NOTE 16. RELATED PARTY TRANSACTIONS

The Company paid the following amounts to Huizhou Desay Holdings Co. Ltd. and its wholly-owned subsidiary, a minority shareholder of two Merix Asia manufacturing facilities, during the periods indicated (in thousands):

	Fiscal Quarter Ended				Six Months Ended
	November 28, 2009		November 29, 2008		November 28, 2009		November 29, 2008
Consulting fees	$	53	$	53	$	106	$	145
Operating lease rental fees		83		81		164		224
Management fees		36		39		72		55
Capitalized construction costs for factory expansion		-		247		-		1,406
Other fees		77		84		143		322
	$	249	$	504	$	485	$	2,152

NOTE 17. SEVERANCE, ASSET IMPAIRMENT AND RESTRUCTURING CHARGES

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

	Fiscal Quarter Ended				Six Months Ended
	November 28, 2009		November 29, 2008		November 28, 2009		November 29, 2008
Severance charges - Asia	$	-	$	81	$	95	$	121
Gain on sale of Merix Asia equipment		-		-		-		(567	)
Other restructuring – Asia		-		-		56		-
Severance charges – North America		-		306		150		306
Asset impairment – North America		-		702		642		702
Legal and other restructuring charges		-		-		13		-
	$	-	$	1,089	$	956	$	562

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

The Company also recorded $0.2 million in other severance charges during the first six months of fiscal 2010 due to minor reductions-in-force in North America in order to mitigate costs in response to softness in demand for its products.

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

To reduce expenditures in response to lower demand for our products as a result of deteriorating macroeconomic conditions in the second quarter of fiscal 2009, the Company completed a modest reduction in headcount to reduce administrative overhead costs, primarily in the North America segment, with a small impact in the Asia segment. The headcount reductions were completed in October 2008 and the Company incurred and paid approximately $0.4 million in severance and related charges during the second quarter of fiscal 2009.

In the second quarter of fiscal 2009, the Company implemented a plan to dispose of certain surplus plant assets to streamline the utilization of equipment in its Oregon factory and recorded an impairment charge of $0.7 million on the assets, which were sold in the third quarter of fiscal 2009.

In the first quarter of fiscal 2009, the Company recorded a gain of approximately $0.6 million related to the sale of equipment previously used at our Hong Kong manufacturing facility, which was closed in the fourth quarter of fiscal 2008.

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

	Beginning Balance		Charged to Expense		Expenditures			Ending Balance
First quarter	$	435	$	245	$	(572	)	$	108
Second quarter		108		-		(108	)		-

NOTE 18. NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

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

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51,” which requires the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and early adoption is prohibited. SFAS No. 160 shall be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The impact of adopting SFAS No. 160 did not have a material impact on the Company’s consolidated financial position or results of operations. The adoption of SFAS No. 160 did result in a reclassification of minority interest into total consolidated equity thereby increasing total equity by $4.0 million at May 30, 2009.

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

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

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

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

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the standard requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, which will alert users of the financial statements that the Company has not evaluated subsequent events occurring after that date. SFAS No.165 is effective for interim or annual reporting periods ending after June 15, 2009 and the adoption of SFAS No. 165 did not have a material impact on the Company’s consolidated financial position and results of operations. Note 1 to the consolidated financial statements includes a disclosure of the date through which subsequent events have been evaluated.

Accounting Standards Update (ASU) 2009-05, Measuring Liabilities at Fair Value was issued by the FASB in August 2009 and is applicable to interim and annual fiscal periods beginning after August 28, 2009. This ASU provides guidance on measuring the fair value of liabilities under FASB Accounting Standards Codification Topic (ASC) 820 (formerly FAS 157). ASC requires that the fair value of liabilities be measured under the assumption that the liability is transferred to a market participant. In practice, however, many liabilities contain restrictions preventing their transfer. Accordingly, this additional guidance has been provided, which specifies that the company determine whether a quoted price exists for an identical liability when traded as an asset (i.e. a Level 1 fair value measurement) and if not, the company must use a valuation technique based on the quoted price of a similar liability traded as an asset, or another valuation technique (i.e. market approach or income approach) and that the company should not make a separate adjustment for restrictions on the transfer of a liability in estimating fair value. The adoption of ASU 2009-05 did not have a material impact on the Company’s consolidated financial position and results of operations.

Recently Issued Accounting Pronouncements

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

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

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

NOTE 20. SUBSEQUENT EVENTS

On December 30, 2009, the Company entered into a Provisional Agreement for the Assignment of Lease (the Assignment Agreement) which provides for the transfer of the land lease rights and real property comprising our vacated Hong Kong manufacturing and administrative facilities. The purchase price to be paid to the Company in accordance with the Assignment Agreement totals HK$85.8 million, or approximately US$11.1 million. The completion of the transaction is subject to approval by the land lessor and completion of required financing by the purchaser. The closing is expected to occur in the fourth quarter of fiscal 2010.

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

Forward Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made in this Quarterly Report, other than statements of historical fact, are forward-looking, including, but not limited to, statements regarding industry prospects and cyclicality and future results of operations or financial position. We use words such as “anticipates,” “believes,” “expects,” “future” and “intends” and other similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations, plans or projections and are inherently uncertain. Actual results could differ materially from management’s expectations, plans or projections. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Certain risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, plans and projections are described in Part II, Item 1A, “Risk Factors” under the subheading “Risk Factors Affecting Business and Results of Operations.” This section, along with other sections of this Quarterly Report, describes some, but not all, of the factors that could cause actual results to differ significantly from management’s expectations, plans and projections. We do not intend to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended May 30, 2009.

Business

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

Operating Segments

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

Backlog

Backlog comprises purchase orders received and, in some instances, forecast requirements released for production under customer contracts. Backlog shippable within the next 90 days totaled $39.8 million and $27.6 million at November 28, 2009 and May 30, 2009, respectively. The increase in backlog reflects strengthening demand in our markets in the second quarter of fiscal 2010 as customers begin rebuilding inventory levels in anticipation of global economic recovery.

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

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

Net sales of $71.3 million in the current quarter increased $13.5 million or 23% compared to net sales in the first quarter of fiscal 2010, as we experienced increasing demand in both of our operating segments for our products consistent with trends observed in the global PCB industry. During the second quarter of fiscal 2010, orders outpaced shipments resulting in a book-to-bill ratio of 1.11 in our North America segment and 1.12 in our Asia segment. Gross margin increased to 12.7% of net sales in the current quarter compared to 6.1% in the first quarter of fiscal 2010, reflecting the benefit of our streamlined cost structure and the impact of increased variable contribution margins on higher production volumes, primarily in our North American operating segment.

Operating expenses of $9.7 million remained flat compared to the first quarter of fiscal 2010. Operating expenses in the second and first quarters of fiscal 2010 included $1.6 million and $0.7 million, respectively, of costs related to our pending merger with Viasystems and our securities litigation cases. The first quarter of fiscal 2010 also included $1.0 million of restructuring charges. Exclusive of these merger, litigation and restructuring charges, operating expenses in the second quarter increased by $0.1 million compared to the first quarter of fiscal 2010.

Current quarter net income benefited from a $1.5 million reversal of a contingent liability for customs penalties, a $1.2 million reversal of a valuation allowance against certain Asia deferred tax assets and a $0.6 million in alternative minimum tax refund receivable due to a change in United States tax law. Net income attributable to Merix shareholders for the quarter totaled $0.5 million or $0.02 per diluted share, compared to a net loss of $8.2 million or $0.38 per diluted share in the first quarter of fiscal 2010.

As we begin to see increases in demand in response to improving global economic conditions, management is carefully evaluating our manufacturing capacity to ensure we meet customers’ requirements while at the same time maximizing Merix’ financial returns. Although visibility remains somewhat limited, we have observed a diverse increase in demand across our customer base and end markets.

Backlog of $39.8 million at the end of the second quarter increased by $8.3 million compared to the previous quarter end and bookings in the first few weeks of December remained strong, particularly for our Asia segment. We expect that the increased demand levels recently observed will be sustained through the third quarter of fiscal 2010, but the impact of the holiday season, including the Chinese New Year, will result in revenues that are flat compared to the second quarter of fiscal 2010. If booking levels are sustained throughout out the third quarter consistent with levels observed in the first few weeks, net sales may increase modestly. Operating expenses are expected to increase slightly as a result of merger-related professional fees and variable compensation costs. Net non-operating expense in the third quarter of FY2010 is also expected to remain stable, exclusive of the $1.5 million customs penalty adjustment recorded in the second quarter.

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Results of Operations Compared to Prior Year

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

	Fiscal Quarter Ended (1)					Fiscal Quarter Ended (1)
	November 28, 2009					November 29, 2008
Net sales	$	71,298		100.0	%	$	76,900		100.0	%
Cost of sales		62,216		87.3			70,865		92.2
Gross profit		9,082		12.7			6,035		7.8
Engineering		343		0.5			697		0.9
Selling, general and administrative		8,865		12.4			7,989		10.4
Amortization of identifiable intangible assets		469		0.7			520		0.7
Severance, impairment and restructuring charges		-		-			1,089		1.4
Operating loss		(595	)	(0.8	)		(4,260	)	(5.5	)
Other income (expense), net		476		0.7			(1,029	)	(1.3	)
Loss before income taxes		(119	)	(0.2	)		(5,289	)	(6.9	)
Provision for (benefit from) income taxes		(1,014	)	(1.4	)		693		0.9
Net income (loss)		895		1.3			(5,982	)	(7.8	)
Net income attributable to non-controlling interests		431		0.6			106		0.1
Net income (loss) attributable to Merix common shareholders	$	464		0.7	%	$	(6,088	)	(7.9	)%

(1) Percentages may not add due to rounding.

	Six Months Ended (1)					Six Months Ended (1)
	November 28, 2009					November 29, 2008
Net sales	$	129,095		100.0	%	$	167,527		100.0	%
Cost of sales		116,499		90.2			151,218		90.3
Gross profit		12,596		9.8			16,309		9.7
Engineering		604		0.5			1,260		0.8
Selling, general and administrative		16,831		13.0			17,691		10.6
Amortization of identifiable intangible assets		938		0.7			1040		0.6
Severance, impairment and restructuring charges		956		0.7			562		0.3
Operating loss		(6,733	)	(5.2	)		(4,244	)	(2.5	)
Other expense, net		(612	)	(0.5	)		(2,218	)	(1.3	)
Loss before income taxes		(7,345	)	(5.7	)		(6,462	)	(3.9	)
Provision for (benefit from) income taxes		(105	)	(0.1	)		1,421		0.8
Net loss		(7,240	)	(5.6	)		(7,883	)	(4.7	)
Net income attributable to non-controlling interests		530		0.4			352		0.2
Net loss attributable to Merix common shareholders	$	(7,770	)	(6.0	)%	$	(8,235	)	(4.9	)%

(1) Percentages may not add due to rounding.

Net Sales

Net sales decreased by $5.6 million, or 7%, to $71.3 million, in the second quarter of fiscal 2010 compared to $76.9 million in the second quarter of fiscal 2009. Net sales of $129.1 million in the six months ended November 28, 2009 decreased by $38.4 million, or 23%, compared to net sales of $167.5 million in the comparable period of the prior fiscal year. The decline in net sales is directly related to the deterioration in global economic conditions, which reduced demand for our products over the past twelve months. Management believes that the second quarter of fiscal 2010 marks a turning point in the demand cycle for PCB products, as improved industry demand trends observed in the latter half of the first quarter of fiscal 2010 have continued through the second quarter and into the third quarter of fiscal 2010.

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Net Sales by Segment

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

	Fiscal Quarter Ended				Six Months Ended
	November 28, 2009		November 29, 2008		November 28, 2009		November 29, 2008
North America	$	32,735	$	36,151	$	59,032	$	81,068
Asia		38,563		40,749		70,063		86,459
	$	71,298	$	76,900	$	129,095	$	167,527

Net sales for our North American segment decreased by 9% and 27%, respectively, for the three- and six-month periods ended November 28, 2009 compared to the same periods in the prior fiscal year. Net sales in our Asia segment decreased by 5% in the current quarter compared to the second quarter of fiscal 2009, and decreased 19% in the six months ended November 28, 2009 compared to the six months ended November 29, 2008.

Per Unit Information

Selected statistical information is summarized below. We define “unit” as the number of panels shipped during the fiscal period. Percentage increases (decreases) in unit volume and pricing were as follows:

	Fiscal Quarter Ended November 28, 2009 Compared to Fiscal Quarter Ended			Six Months Ended November 28, 2009 Compared to Six Months Ended
	November 29, 2008			November 29, 2008
North America:
Unit volume		(12	)%		(27	)%
Average unit pricing		3	%		0	%

Asia:
Unit volume		(7	)%		(21	)%
Average unit pricing		2	%		3	%

Overall:
Unit volume		(7	)%		(21	)%
Average unit pricing		0	%		(2	)%

Consolidated

Consolidated unit sales volume decreased 7% in the current quarter compared to the second quarter of fiscal 2009 and 21% in the first six months of fiscal 2010 versus the comparable period in the prior year, driven primarily by decreases in demand from customers in each of our segments as further discussed below. Consolidated average unit pricing remained flat in the quarter ended November 28, 2009, despite increases in average unit pricing in each of our operating segments. This is primarily due to an overall shift in product mix from higher-technology, higher-priced PCBs produced by our North American facilities to generally lower-technology, lower-priced PCBs produced by our facilities in Asia. The Asia segment’s average price per unit is significantly lower than the North American segment and Asia net sales comprised 54% of total net sales in the second quarter of fiscal 2010 compared to 53% in the second quarter of fiscal 2009. For the six-month period ended November 28, 2009, overall average unit pricing decreased by 2% compared to the same period of the prior fiscal year, despite an increase in average unit pricing for the Asia segment and stable unit pricing reflected in our North America segment, also due to the technology shift in product mix. On a year-to-date basis, net sales for the Asia segment comprise 54% of total net sales in fiscal 2010 compared to 52% in the first six months of fiscal 2009. As production volume shifts into our Asia factories, consolidated average unit pricing decreases overall.

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North America

North America net sales of $32.7 million decreased by $3.4 million or 9% compared to the second quarter of fiscal 2009. Net sales of $59.0 million in the first six months of fiscal 2010 decreased $22.0 million or 27% compared to the first six months of fiscal 2009. These reductions are primarily due to a 12% and 27% decrease in unit volumes in the second quarter and first six months of fiscal 2010 versus comparable periods in fiscal 2009. Although sequential quarterly demand has increased, the impact of the deterioration of macroeconomic conditions is still reflected in lower net sales for the second quarter and year-to-date fiscal 2010 compared to the second quarter fiscal 2009 and six months ended November 29, 2008.

The volume decreases were partially offset by a 3% increase in average unit pricing resulting from a higher technology product mix for the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009, while fiscal year-to-date average unit pricing remained stable. The pricing environment remains competitive, but rational overall as competitors are not aggressively cutting prices.

Asia

Asia net sales of $38.6 million in the second quarter of fiscal 2010 decreased by $2.2 million or 5% compared to the second quarter of fiscal 2009. Net sales of $70.1 million in the six months ended November 28, 2009 decreased by $16.4 million or 19% compared to $86.5 million the first six months of fiscal 2009. The decreases in net sales in our Asia segment in the three- and six-month periods ended November 28, 2009 compared to the same periods of the prior fiscal year were primarily due to a 7% and 21% decrease, respectively, in sales unit volumes, due primarily to a drop in demand resulting from the deterioration in global economic conditions. The unit volume decreases were offset by average unit price increases from efforts to improve our product mix through enhanced technology offerings from our Asia manufacturing operations over the past year which resulted in a 2% increase in average unit pricing for second quarter and 3% increase in the first six months of fiscal 2010 versus comparable periods in fiscal 2009.

Net Sales by End Market

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

	Fiscal Quarter Ended
	November 28, 2009				November 29, 2008
Communications & Networking	$	24,427	32.5	%	$	29,664	38.6	%
Automotive		15,334	21.5	%		17,449	22.7	%
Computing & Peripherals		6,096	8.6	%		5,984	7.8	%
Test, Industrial & Medical		11,104	14.0	%		9,366	12.2	%
Defense & Aerospace		9,007	12.6	%		7,299	9.5	%
Other		5,330	10.8	%		7,138	9.3	%
	$	71,298	100.0	%	$	76,900	100.0	%

	Six Months Ended
	November 28, 2009				November 29, 2008
Communications & Networking	$	43,956	33.1	%	$	68,440	40.9	%
Automotive		28,107	21.8	%		36,862	22.0	%
Computing & Peripherals		10,135	7.9	%		12,569	7.5	%
Test, Industrial & Medical		19,378	14.1	%		19,785	11.8	%
Defense & Aerospace		16,164	12.5	%		14,522	8.7	%
Other		11,355	10.6	%		15,349	9.2	%
	$	129,095	100.0	%	$	167,527	100.0	%

Compared to the second quarter of fiscal 2009, net sales decreased in our two largest markets, by $5.2 million or 18% to $24.4 million in communications and networking, and by $2.1 million or 12% in our automotive market. These decreases are due primarily to a reduction in end demand in the commercial and consumer end market segments as a result of the global economic slowdown experienced over the past twelve months. However, the second quarter of fiscal 2010 appears to have marked a turning point in the demand cycle, and we expect net sales in these end markets to increase, consistent with recent industry trends. These end markets also reflect decreases on a fiscal year-to-date basis compared to the prior fiscal year, driven by the same factor discussed above.

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Defense & aerospace net sales increased by $1.7 million or 23% to $9.0 million in the second quarter of fiscal 2010 compared to $7.3 million in the second quarter of fiscal 2009 and increased by $1.6 million or 11% in the first six months of fiscal 2010 compared to same period in fiscal 2009. Overall market demand in this end market segment has not been as significantly affected by the global economic slowdown. Further, over the last 12 to 18 months the Company has specifically targeted key customers in the defense and aerospace market and made significant investments in its factories and support infrastructure to serve this market. The success of these efforts has generated quarterly sales at record historic levels for this end market.

Net sales in the second quarter of fiscal 2010 for our computing & peripherals and test, industrial & medical end markets, increased by $0.1 million (2%) and $1.7 million (19%), respectively, compared to the second quarter of the prior fiscal year. These increases are attributable to the recent increases in demand observed as the industry begins to recover from the deterioration in global economic conditions. On a fiscal year-to-date basis, sales to these end markets lag behind comparable periods in the prior fiscal year by $2.4 million (19%) for computing & peripherals and $0.4 million (2%) for test, industrial & medical.

Net Sales by Geographic Region

Net sales to customers outside the United States totaled 51% and 50% of net sales in the second quarters of fiscal 2010 and fiscal 2009, respectively. Net sales to customers outside the United States totaled 52% and 44% in the six months ended November 28, 2009 and November 29, 2008, respectively. In the second quarters of fiscal 2010 and fiscal 2009, sales to customers in China comprised 12% and 13% of net sales, respectively. In the six-month period ended November 28, 2009, sales to customers in China comprised 13% of net sales. There were no countries outside of the United States to which sales totaled 10% or more of net sales in the six-month period ended November 29, 2008.

Cost of Sales and Gross Margin

Cost of sales includes manufacturing costs, such as materials, labor (both direct and indirect) and factory overhead. Cost of sales decreased $8.6 million, or 12%, to $62.2 million in the second quarter of fiscal 2010 compared to $70.9 million in the second quarter of fiscal 2009 and decreased $34.7 million, or 23%, to $116.5 million in the six months ended November 28, 2009 compared to $151.2 million in first six months of fiscal 2009.

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

	Fiscal Quarter Ended				Six Months Ended
	November 28, 2009		November 29, 2008		November 28, 2009		November 29, 2008
North America	$	3,324	$	1,484	$	2,553	$	6,648
Asia		5,758		4,551		10,043		9,661
	$	9,082	$	6,035	$	12,596	$	16,309

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

	Fiscal Quarter Ended						Six Months Ended
	November 28, 2009			November 29, 2008			November 28, 2009			November 29, 2008
North America		10.2	%		4.1	%		4.3	%		8.2	%
Asia		14.9	%		11.2	%		14.3	%		11.2	%
Consolidated		12.7	%		7.8	%		9.8	%		9.7	%

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North America

Gross margin for our North American segment increased to 10.2% of net sales in the current quarter from 4.1% of net sales in the second quarter of fiscal 2009. The improvement in gross margin, despite lower sales volumes, reflects the success of the cost reduction programs which commenced near the end of the second quarter in fiscal 2009. Over the past year, we eliminated one of the four production shifts at our Oregon factory, reducing headcount and overtime costs for retained employees. This action, along with reductions-in-force and other cost reduction measures taken during fiscal 2009, reduced quarterly manufacturing costs by approximately $2.0 million.

Gross margin decreased to 4.3% of net sales in the six months ended November 28, 2009 compared to 8.2% in the same period of fiscal 2009. This decrease in year-to-date gross margin is driven by the decrease in unit sales, particularly in the higher-margin premium service line, which decreased by 20% in the six months ended November 28, 2009 compared to the first six months of fiscal 2009.

Asia

Gross margins at Merix Asia increased to 14.9% of net sales in the current quarter compared to 11.2% in the second quarter of the prior fiscal year and increased to 14.3% of net sales in the six months ended November 28, 2009 compared to 11.2% in the first six months of fiscal 2009. These increases are primarily the result of cost containment actions and improvements in product mix due to expanded technology capabilities developed in our Huiyang, China facility, more than offsetting the impact of a decrease in net sales that resulted from the deterioration in global economic conditions.

Engineering Costs

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

Engineering costs decreased $0.4 million, or 51%, to $0.3 million in the second quarter of fiscal 2010 compared to $0.7 million in the second quarter of fiscal 2009 and decreased $0.7 million, or 52%, to $0.6 million in the six months ended November 28, 2009 compared to $1.3 million in the six months ended November 29, 2008. The decreases are primarily due to decreased compensation expense resulting from reductions-in-force and salary and benefit curtailments implemented over the past 12 months.

Selling, General and Administrative Costs

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

SG&A expenses increased $0.9 million, or 11%, to $8.9 million in the second quarter of fiscal 2010 compared to $8.0 million in the second quarter of fiscal 2009 and decreased $0.9 million, or 5%, to $16.8 million in the six months ended November 28, 2009 compared to $17.7 million in the six months ended November 29, 2008.

Included in SG&A costs for the three- and six-month periods ended November 28, 2009 were costs related to securities litigation filed in 2004 and the merger transaction with Viasystems totaling $1.6 million and $2.3 million, respectively. Exclusive of these costs, SG&A expenses decreased by $0.7 million and $3.1 million, for the three- and six-month periods ended November 28, 2009 versus the comparable periods in fiscal 2009. The decreases on both a quarterly and fiscal year-to-date comparative basis were primarily due to lower labor costs resulting from headcount reductions and salary and benefit curtailments, lower stock compensation expense, reduced commission expense on the lower revenue base and reduced overall expense levels due to aggressive cost management programs.

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Amortization of Identifiable Intangible Assets

Amortization of identifiable intangible assets was $0.5 million and $0.9 million, respectively, in the second quarter of fiscal 2010 and the six months ended November 28, 2009 compared to $0.5 million and $1.0 million, respectively, in the comparable periods of the prior fiscal year. The reduction in amortization on a fiscal year-to-date basis is primarily related to declining amortization amounts for customer relationships acquired. Our identifiable intangible assets balance at November 28, 2009 was $5.9 million and current amortization is approximately $0.5 million per quarter.

Severance and Impairment and Restructuring Charges

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

	Fiscal Quarter Ended				Six Months Ended
	November 28, 2009		November 29, 2008		November 28, 2009		November 29, 2008
Severance charges - Asia	$	-	$	81	$	95	$	121
Gain on sale of Merix Asia equipment		-		-		-		(567	)
Other restructuring – Asia		-		-		56		-
Severance charges – North America		-		306		150		306
Asset impairment – North America		-		702		642		702
Legal and other restructuring charges		-		-		13		-
	$	-	$	1,089	$	956	$	562

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

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

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

To reduce expenditures in response to lower demand for our products as a result of deteriorating macroeconomic conditions in the second quarter of fiscal 2009, we completed a modest reduction in headcount to reduce administrative overhead costs, primarily in the North America segment, with a small impact in our Asia segment. The headcount reductions were completed in October 2008 and we incurred and paid approximately $0.4 million in severance and related charges during the second quarter of fiscal 2009.

In the second quarter of fiscal 2009, we implemented a plan to dispose of certain surplus plant assets to streamline the utilization of equipment in our Oregon factory and recorded an impairment charge of $0.7 million on the assets, which were sold in the third quarter of fiscal 2009.

In the first quarter of fiscal 2009, we recorded a gain of approximately $0.6 million related to the sale of equipment previously used at our Hong Kong manufacturing facility, which was closed in the fourth quarter of fiscal 2008.

Reversal of Accrued Customs Penalty

From September 2005 through October 2006, we recorded $1.5 million of contingent liability for potential customs penalties related to subcontract manufacturing. In the second quarter of fiscal 2010, due primarily to the passage of time, we determined that it was not probable that such a penalty would be assessed and, accordingly, have reversed the $1.5 million accrual. The credit is recorded as a component of net other non-operating income on the consolidated statement of operations.

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Income Tax Expense

On a quarterly basis, we estimate our provision for income taxes based on our projected results of operations for the full year. Income tax is provided for entities expected to generate profits that are not offset by losses generated by entities in other tax jurisdictions. As a result, our effective income tax rate was 852.1% in the second quarter of fiscal 2010 and negative 13.1% in second quarter of fiscal 2009. For the six months ended November 28, 2009 and November 29, 2008, the effective income tax rate was 1.4% and negative 22.0%, respectively. The variance in effective tax rates is typically due to the ratio of pre-tax foreign subsidiary pre-tax income to consolidated net pre-tax loss. Our second quarter fiscal 2010 results include two unique decreases to the provision for income taxes. First is the reversal of a net $1.2 million valuation allowance against certain Asia deferred tax assets based on past and expected future profitability of Huiyang, China facility. This reversal is reflected on our consolidated balance sheet as a $1.2 million increase in deferred tax assets. Second, the Worker, Homeownership, and Business Assistance Act of 2009 signed into law on November 6th, 2009 extended the net operating loss carryback period up to five years and eliminated the 90% utilization limitation on Alternative Minimum Tax net operating losses. As a result, the Company will be able to recover $0.6 million of Alternative Minimum Tax, expected to be received in the third quarter of fiscal 2010.

Our effective income tax rate differs from tax computed at the federal statutory rate primarily as a result of our mix of earnings in various tax jurisdictions, the diversity in income tax rates, and our continuous assessment of the realization of our uncertain tax positions and deferred tax assets. The effective tax rate reflects current taxes expected to be paid in profitable jurisdictions, provision for taxes and interest accrued on uncertain tax positions and maintenance of valuation allowances in jurisdictions with cumulative losses or profitability risks.

Liquidity and Capital Resources

Our sources of liquidity and capital resources as of November 28, 2009 consisted of $10.5 million of cash and cash equivalents and $49.8 million unused availability under our revolving bank credit agreement, described below. We expect our capital resources, together with the borrowing capacity under our credit agreements, to be sufficient to fund our operations and known capital requirements for at least one year from November 28, 2009, although we may seek additional sources of funds.

We have a Loan and Security Agreement with Bank of America, N.A. (the Credit Agreement) which provides a revolving line of credit of up to $55.0 million on a borrowing based calculated with respect to the value of accounts receivable, equipment and real property. The Credit Agreement expires in February 2013. The obligations under the Credit Agreement are secured by substantially all of our U.S. assets and certain accounts receivable from foreign customers. The borrowings bear interest based, at the Company’s election, on either the prime rate announced by Bank of America or LIBOR plus an applicable margin. As of November 28, 2009, the unused borrowing base was $49.8 million, with an outstanding balance of $2.8 million. The Credit Agreement contains usual and customary covenants for credit facilities of this type, all of which we were in compliance with as of November 28, 2009. In addition, the Credit Agreement also includes a financial covenant requiring a minimum fixed charge coverage ratio of 1.1:1.0 if Excess Availability, defined in the Credit Facility agreement as a function of the unused borrowing base and cash held in certain U.S. bank accounts, falls below $20.0 million. Excess Availability at November 28, 2009 was $49.4 million and as such, this covenant is not currently in effect. We would not be in compliance if this covenant was currently applicable. Based on management forecasts, we do not expect that Excess Availability will fall below $20.0 million for at least one year from November 28, 2009.

In the first six months of fiscal 2010, cash and cash equivalents decreased $5.7 million to $10.5 million as of November 28, 2009 from $16.1 million as of May 30, 2009 primarily as a result of $4.2 million used in operations (as described in more detail below) and the use of $1.1 million for the purchase of property, plant and equipment. Additionally, as a result of the elimination of the one-month reporting lag for our Asia subsidiary, the balance of cash and cash equivalents at May 30, 2009 was reduced by $1.4 million, which represents cash used primarily to fund working capital requirements for our Asia subsidiary in the month of May 2009 and is not reported in the statement of cash flows or the six months ended November 28, 2009. The net decrease in cash and cash equivalents at November 28, 2009 is $7.1 million compared to the balance of $17.6 million reported in our Annual Report on Form 10-K for fiscal 2009.

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Cash used in operating activities totaled $4.2 million in the first six months of fiscal 2010. Cash totaling $2.2 million was provided by a net loss of $7.2 million, adjusted for $9.5 million in non-cash charges, primarily $11.4 million for depreciation and amortization, a $1.5 million non-cash reversal of accrued customs penalty, a $1.8 million in non-cash items related to income taxes, $0.9 million in share-based compensation expense and $0.6 million of impairment charges. As discussed in more detail below, other significant changes in working capital to support increased demand consumed $6.5 million in cash from operations in the first six months of fiscal 2010 include $10.3 million from increases in accounts receivable, $2.6 million from increases in inventory and $3.6 million from increases in other assets, primarily related to an increase of $3.3 million value-added (VAT) refunds receivable from the Chinese tax authorities. These cash uses were offset by $10.1 million in cash inflows related to accounts payable and other accrued liabilities. Note that changes in working capital balances vary from cash flows from operations due to the impact of non-cash transactions on amounts reported in the consolidated balance sheets.

Accounts receivable, net of allowances for bad debts, increased $10.2 million to $53.5 million at November 28, 2009 from $43.3 million as of May 30, 2009. The increase is primarily due to the rising revenue base in the second quarter of fiscal 2010 compared to the fourth quarter of fiscal 2009. Our days sales outstanding, calculated on a quarterly basis, increased to 68 days at November 28, 2009 from 67 days at May 30, 2009.

Inventories, net of reserves, increased by $2.6 million to $17.2 million at November 28, 2009 compared to $14.6 million at May 30, 2009. The variance is comprised primarily of a net increase of $2.4 million in raw materials and work-in-process inventories as a result of increases to support expected production volumes early in the third quarter.

Prepaid and other current assets increased $4.3 million to $9.7 million as of November 28, 2009 compared to $5.4 million as of May 30, 2009, primarily due to a $3.3 million increase VAT refunds receivable from the PRC government for taxes paid to local PRC vendors for the purchase of materials. The timing of payments and refunds is heavily influenced by production levels and the PRC government’s variable schedule of providing VAT refund payments.

Accounts payable and other current liabilities totaled $54.4 million at November 28, 2009, an increase of $7.9 million compared to $46.5 million at May 30, 2009. The increase is due primarily to an $8.5 million increase in accounts payable resulting from purchases to support the higher revenue base. Exclusive of the $1.5 million non-cash reversal of accrued customs penalty, other accrued liabilities increased by $1.0 million related primarily to an increased accrual for variable incentive compensation.

Expenditures for property, plant and equipment of $1.1 million in the first six months of fiscal 2010 primarily consisted of expenditures for improvements to our manufacturing equipment base. In response to the economic downturn and the resulting reduction in demand for our products, discretionary capital expenditures have been substantially curtailed. We believe our facilities and equipment are in good condition and do not require significant investments in the near term. It is management’s intent to minimize capital spending until market conditions and cash flows improve. Remaining capital expenditures in fiscal 2010 are currently estimated at approximately $4.3 million, but are dependent upon achievement of financial objectives.

On December 30, 2009, we entered into a Provisional Agreement for the Assignment of Lease (the Assignment Agreement) which provides for the transfer of the land lease rights and real property comprising our vacated Hong Kong manufacturing and administrative facilities. The purchase price to be received in accordance with the Assignment Agreement totals HK$85.8 million, or approximately US$11.1 million. The completion of the transaction is subject to approval by the land lessor and completion of required financing by the purchaser. The closing is expected to occur in the fourth quarter of fiscal 2010.

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Recently Issued Accounting Pronouncements

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

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

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

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Use of Estimates

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

Item 3 . Quantitative and Qualitative Disclosures About Market Risk

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

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Item 4 . Controls and Procedures

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

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

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PART II – OTHER INFORMATION

Item 1 . Legal Proceedings

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

Securities Class Action Complaints

Four purported class action complaints were filed against Merix and certain of our executive officers and directors on June 17, 2004, June 24, 2004 and July 9, 2004. The complaints were consolidated in a single action entitled In re Merix Corporation Securities Litigation , Lead Case No. CV 04-826-MO, in the U.S. District Court for the District of Oregon. After the court granted our motion to dismiss without prejudice, the plaintiffs filed a second amended complaint. That complaint alleged that the defendants violated the federal securities laws by making certain inaccurate and misleading statements in the prospectus used in connection with the January 2004 public offering of approximately $103.4 million of our common stock. In September 2006, the Court dismissed that complaint with prejudice. The plaintiffs appealed to the Ninth Circuit Court of Appeals. In April 2008, the Ninth Circuit reversed the dismissal of the second amended complaint seeking an unspecified amount of damages. We sought rehearing which was denied and rehearing en banc was also denied. We obtained a stay of the mandate from the Ninth Circuit and filed a certiorari petition with the United States Supreme Court on September 22, 2008. On December 15, 2008, the Supreme Court denied the certiorari petition and the case was remanded back to the U.S. District Court for the District of Oregon. On May 15, 2009, the plaintiffs moved to certify a class of all investors who purchased in the public offering and who were damaged thereby. On November 5, 2009, the court partially granted the certification motion and certified a class consisting of all persons and entities who purchased or otherwise acquired our common stock from an underwriter directly pursuant to the Company’s January 29, 2004 offering, who held the stock through May 13, 2004, and who were damaged thereby. The plaintiffs seek unspecified damages. The case is currently in the discovery phase. A potential loss or range of loss that could arise from these cases is not estimable or probable at this time.

Merix, its board of directors and Viasystems Group, Inc. (Viasystems) are named as defendants in two putative class action lawsuits brought by alleged Merix shareholders challenging the Company’s proposed merger with Viasystems. The shareholder actions were both filed in the Circuit Court of the State of Oregon, County of Multnomah. The actions are called Asbestos Workers Philadelphia Pension Fund v. Merix Corporation, et al., filed October 13, 2009, Case No. 0910-14399 and W. Donald Wybert v. Merix Corporation, et al., filed on or about November 5, 2009, Case No. 0911-15521. Both shareholder actions generally allege, among other things, that each member of our board of directors breached fiduciary duties to Merix and its shareholders by authorizing the sale of Merix to Viasystems for consideration that does not maximize value to shareholders. The complaints also allege that Viasystems and Merix aided and abetted the breaches of fiduciary duty allegedly committed by the members of our board of directors. The shareholder actions seek equitable relief, including to enjoin the defendants from consummating the merger on the agreed-upon terms. On November 23, 2009, the court entered an order consolidating the cases into one matter. On or about December 2, 2009, the plaintiffs filed a Consolidated Amended Class Action Complaint, which substantially repeats the allegations of the original complaints, adds Maple Acquisition Corp., the Viasystems subsidiary formed for the merger,as a defendant and also alleges that Merix did not make sufficient disclosures regarding the merger.

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Item 1A . Risk Factors

RISK FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS

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

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

Our business and operating results will continue to be affected by worldwide economic conditions and, in particular, conditions in the communications & networking, automotive, computing & peripherals, and test, industrial & medical, and defense & aerospace markets that we serve. As a result of slowing global economic growth, the credit market crisis, declining consumer and business confidence, increased unemployment, reduced levels of capital expenditures, fluctuating commodity prices, bankruptcies and other challenges currently affecting the global economy, our customers may experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing. As a result, existing or potential customers may delay or cancel plans to purchase products produced by our customers which would have a material adverse effect on us. Further, our vendors may be experiencing similar conditions, which may impact their ability to fulfill their obligations to us. Although the United States government and the governments of other countries have enacted, and may enact further, various economic stimulus programs, there can be no assurance as to the effectiveness of these programs, and with respect to future programs, the timing and effectiveness of such programs. Recent economic indicators and demand trends for our products indicate that the deterioration in global economic conditions may have reached a bottom but no assurance can be given that economic conditions will not experience significant declines in the future. If there is significant further deterioration in the global economy or the economic recovery is delayed or protracted, our results of operations, financial position and cash flows could be materially adversely affected.

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

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

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

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

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

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

significantly greater financial, technical, marketing and manufacturing resources;

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

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

more capital; and

larger customer bases.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Historically, we have derived a significant portion of our consolidated net sales from a limited number of customers. Our five largest OEM customers, which vary from period to period, comprised 31% and 32% of our consolidated net sales during the second quarter and first six months of fiscal 2010, respectively. We expect to continue to depend upon a small number of customers for a significant portion of our consolidated net sales for the foreseeable future. The loss of, or decline in, orders or backlog from one or more major customers could reduce our consolidated net sales and have a material adverse effect on our results of operations and financial condition. Further, as part of our plan to improve the profitability of our North American operations we have reduced our reliance on certain customers and products that have historically generated significant revenues for Merix. We anticipate retaining a meaningful portion of this business, but there can be no assurance we will be successful. An unplanned loss of a large portion of this revenue could adversely affect our financial results.

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

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

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

In total, five entities represented approximately 44% of the consolidated net trade accounts receivable balance at November 28, 2009, individually ranging from approximately 5% to approximately 18%. Our OEM customers direct our sales to a relatively limited number of electronic manufacturing service providers. Our contractual relationship is typically with the electronic manufacturing service providers, who are obligated to pay us for our products. Because we expect our OEM customers to continue to direct our sales to electronic manufacturing service providers, we expect to continue to be subject to the credit risk of a limited number of customers. This concentration of customers exposes us to increased credit risks. If one or more of our significant customers were to become insolvent or were otherwise unable to pay us, our financial condition and results of operations would be adversely affected.

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

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

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

fluctuation in demand for our customers’ products;

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

customers’ inventory management;

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

changes in new product introductions.

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

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

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

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

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

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

A significant portion of Merix Asia’s products are sold to customers in the automotive industry. Net sales to the automotive market accounted for approximately 22% of our consolidated net sales in the second quarter of fiscal 2010 and 22% of our consolidated net trade accounts receivable at November 28, 2009. As a result, Asia’s results of operations may be materially and adversely affected by market conditions in the automotive industry. Automotive production and sales are cyclical and depend on general economic conditions and other factors, including consumer spending and preferences. In addition, automotive production and sales can be affected by labor relations issues, regulatory requirements, trade agreements and other factors. Any significant economic decline that results in a reduction in automotive production and sales by Asia’s customers could have a material adverse effect on Merix’ business, results of operations and financial condition.

During the last twelve months we experienced significant decreases in demand from our automotive customers who have been affected by the significant economic difficulties facing the automotive industry. Recent public bankruptcies and liquidity concerns of certain companies in the automotive supply chain could impact our future demand levels and the collectibility of outstanding receivables and consigned inventory with this customer base. A prolonged downturn or the failure of one or more of our automotive customers could result in the impairment of assets invested in this end market, including our Huizhou, China facility, which is heavily reliant on the automotive industry for sales of its products.

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

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

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

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

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

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

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

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

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

Due to the global economic downturn, the Company has made substantial reductions-in-force, including a number of significant management and professional personnel. In addition, on October 6, 2009, Merix announced that it had entered into a merger agreement to be acquired by Viasystems. As a result of the announcement of the merger or its subsequent completion, certain significant management and professional personnel positions will either be terminated as part of synergy efforts or individuals may elect to terminate employment with the Company on their own accord. We do not anticipate the loss of any of the personnel will have a material impact on our operations and have attempted to mitigate the impact of the change in personnel. However, there can be no assurance that these risks are fully mitigated.

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

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

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

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

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

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

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

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

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

potentially adverse tax consequences;

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

longer sales and collection cycles;

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

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

restrictive governmental actions;

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

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

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

difficulties in collecting accounts receivable.

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

We must comply with the Foreign Corrupt Practices Act.

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

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

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

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

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

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

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

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

lack of developed infrastructure;

currency fluctuations;

overlapping taxes and multiple taxation issues;

employment and severance taxes;

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

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

less protection of our proprietary processes and know-how.

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

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

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

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

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

delays in receiving and installing required manufacturing equipment;

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

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

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

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

additional unanticipated costs; and

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

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

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

Failure to maintain good relations with a minority investor in our majority-owned China subsidiaries could materially adversely affect our ability to manage our Asian operations.

Currently, we have a PCB manufacturing plant in Huiyang and Huizhou, China that are each operated by a separate majority-owned joint venture subsidiary of Merix. A minority investor owns a 5% interest in our subsidiary that operates the Huiyang plant. The same minority investor owns a 15% in the Merix subsidiary that operates the Huizhou plant. The minority investor owns the buildings of the Huizhou facility and it leases the premises to our subsidiary. The minority interest investor is owned by the Chinese government and has close ties to local economic development and other Chinese government agencies. In connection with the negotiation of its investments, the minority investor secured certain rights to be consulted and to consent to certain operating and investment matters concerning the plants and to be represented on the subsidiaries’ boards of directors overseeing these businesses. Failure to maintain good relations with the minority investor in either Chinese subsidiary could materially adversely affect our ability to manage the operations of one or more of the plants.

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

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

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

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

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

Merix has a bank credit agreement covenant that limits the incremental investment into Merix Asia to $40 million and provides that our investments cannot be made if a default exists under the credit agreement or the Excess Availability (defined in the credit agreement as a function of outstanding borrowings and available cash) is less than $20 million. As of November 28, 2009, we had advanced Asia approximately $0.4 million against the incremental investment limit. If our Asian operations at any time require an amount of cash greater than our available capital resources, or than is permitted to be advanced under applicable credit agreements, there is risk that we will not be able to fund our Asian operations or achieve our growth plans in Asia.

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

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

problems integrating the purchased operations, technologies or products;

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

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

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

increased concentration of business from existing or new customers;

unanticipated expenses and working capital requirements;

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

asset impairments related to the acquisitions; or

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

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

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

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

incur debt and assume liabilities that could impair our liquidity;

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

incur amortization expenses related to intangible assets;

uncover previously unknown liabilities;

become subject to litigation and environmental remediation issues;

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

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

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

We have recently announced a merger agreement with Viasystems which requires the approval of our shareholders. If the merger is not completed, our results of operations or stock price may be negatively impacted.

On October 6, 2009, we announced that we had entered into a merger agreement to be acquired by Viasystems. The merger requires the approval of our shareholders and is expected to be complete in the third quarter of fiscal 2010. However, if such approval is not obtained or the merger transaction is not completed for any other reason, our operations or stock price may be negatively impacted. The impacts of a merger failure may include:

·	the required payment of a termination fee up to $3.9 million;

·	reduced net sales as a result of our customers’ response to the anticipated merger, or the failure to complete the merger transaction;

·	reduced operational efficiency resulting from diversion of management resources;

·	the requirement to replace employees that terminated employment in anticipation of the merger completion; or

·	a stock price decline due to shareholder and market perception of a merger failure.

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

Recent turmoil in global financial markets has limited access to capital for many companies. We are not currently experiencing any limitation of access to our revolving line of credit and management is not aware of any issues currently impacting our lender’s ability to honor its commitment to extend credit. However, if we were unable to borrow on our revolving line of credit in the future due to the global credit crisis, our business and results of operations could be adversely affected. Furthermore, additional capital may not be available to us on favorable terms or at all. To the extent that additional capital is raised through the sale of equity, or securities convertible into equity, current shareholders may experience dilution of their proportionate ownership.

As of November 28, 2009, we had total indebtedness of approximately $78 million, which represented approximately 57% of our total capitalization. We also have $49.8 million unused availability under a secured bank revolving line of credit that would increase our leverage if utilized.

Our indebtedness could have significant negative consequences, including:

·	increasing our vulnerability to general adverse economic and industry conditions;

·	limiting our ability to obtain additional financing;

·	requiring the use of a substantial portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;

·	limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

·	placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources.

Additionally, we are exposed to interest rate risk relating to our revolving credit facility which bears interest based, at our election, on either the prime rate or LIBOR plus an additional margin based on our use of the credit facility. At November 28, 2009, there was $2.8 million outstanding under the revolving line of credit. When we utilize our revolving credit facility to meet our capital requirements, we are subject to market interest rate risk that could increase our interest expense beyond expected levels and decrease our profitability.

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

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

Due to the substantial variance between our market capitalization based on the current trading price range for our common stock and the net asset value reflected in our consolidated balance sheet, as well as other factors regarding our results of operations and the current economic environment, management has undertaken quarterly assessments of potential impairment of the Company’s long-lived assets. An impairment charge was recorded in fiscal 2009 to reduce the value of goodwill recorded in the acquisition of our Asia operations to $0. It is possible that further impairment charges may be recorded in the future, which would adversely affect our results of operations and financial condition.

As of November 28, 2009, our consolidated balance sheet reflected $17.3 million of goodwill and intangible assets. We periodically evaluate whether events and circumstances have occurred that indicate the remaining balance of goodwill and intangible assets may not be recoverable. If factors indicate that assets are impaired, we would be required to reduce the carrying value of our goodwill and intangible assets, which could adversely affect our results during the periods in which such a reduction is recognized. Our goodwill and intangible assets may increase in future periods if we consummate other acquisitions. Amortization or impairment of these additional intangibles would, in turn, adversely affect our earnings.

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

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

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

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

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

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

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

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

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

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

We may be subject to claims of intellectual property infringement.

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

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

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

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

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

our ability to utilize net operating losses;

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

changes in tax laws or the interpretation of such laws.

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

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

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

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RISKS RELATED TO OUR CORPORATE STRUCTURE AND STOCK

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

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

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

actual and anticipated variations in our operating results;

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

interest rates;

geopolitical conditions throughout the world;

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

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

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

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

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

developments related to regulations, including environmental and wastewater regulations.

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

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

We may, in the future, sell additional shares of our common stock, or securities convertible into or exercisable for shares of our common stock, to raise capital. We may also issue additional shares of our common stock, or securities convertible into or exercisable for shares of our common stock, to finance future acquisitions. Further, a substantial number of shares of our common stock are reserved for issuance pursuant to stock options. As of November 28, 2009, we had approximately 4.1 million outstanding options, each to purchase one share of our common stock, issued to employees, officers and directors under our equity incentive plans. The options have exercise prices ranging from $1.60 per share to $67.06 per share. In October 2009, our shareholders approved a new equity compensation plan and the availability of three million shares to grant stock options or restricted stock awards. Currently outstanding options, as well as any issued in the future, could have a significant adverse effect on the trading price of our common stock, especially if a significant volume of the options was exercised and the stock issued was immediately sold into the public market. Further, the exercise of these options could have a dilutive impact on other shareholders by decreasing their ownership percentage of our outstanding common stock. If we attempt to raise additional capital through the issuance of equity or convertible debt securities, the terms upon which we will be able to obtain additional equity capital, if at all, may be negatively affected since the holders of outstanding options can be expected to exercise them, to the extent they are able, at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable than those provided in such options.

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

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

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

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

	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
August 30, 2009 to October 3, 2009		342	$	2.18		-		-
October 4, 2009 to October 31, 2009		-		-		-		-
November 1, 2009 to November 28, 2009		280		1.88		-		-
Total		622	$	2.04		-		-

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

Item 6 . Exhibits

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

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

+ furnished herewith

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SIGNATURES

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

MERIX CORPORATION

Dated: January 4, 2010 /s/ MICHAEL D. BURGER

Michael D. Burger

Director, President and

Chief Executive Officer

(Principal Executive Officer)

/s/ KELLY E. LANG

Kelly E. Lang

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

/s/ALLEN L. MUHICH

Allen L. Muhich

Vice President, Finance and Corporate Controller

(Principal Accounting Officer)

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