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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 0-9725
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THE CERPLEX GROUP, INC. (formerly known as AURORA ELECTRONICS, INC.)
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(Exact name of registrant as specified in its charter)
Delaware 75-1539534
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1382 Bell Avenue, Tustin, California 92780
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(Address of principal executive offices) (Zip Code)
(714) 258-5300
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Registrant's telephone number, including area code
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 [ ]
Indicated below is the number of shares outstanding of each class of the
registrant's common stock, as of April 27, 1998:
Title of Each Class of Common Stock Number Outstanding
- ----------------------------------- ------------------
Common Stock, $0.03 par value 6,847,966 shares
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THE CERPLEX GROUP, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
and March 28, 1998............................................................4
Consolidated Statements of Operations for the Six Months Ended
March 28, 1998 and March 30, 1997 and Three Months Ended
March 28, 1998 and March 30, 1997.............................................5
Consolidated Statements of Cash Flows for the Six Months Ended
March 28, 1998 and March 30, 1997.............................................6
Notes to Unaudited Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................10
PART II. OTHER INFORMATION............................................................16
Signatures...................................................................17
Index to Exhibits............................................................18
</TABLE>
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THE CERPLEX GROUP, INC.
PART I
FINANCIAL INFORMATION
3
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THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 28, September 30,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,036 $ 323
Accounts Receivable, less allowance for doubtful accounts
of $983 (1998) and $736 (1997) 3,668 5,480
Inventories 802 3,389
Other current assets 436 449
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Total current assets 7,942 9,641
Property, plant and equipment, net 1,517 3,023
Intangible and other assets 6,012 1,965
========= =========
$ 15,471 $ 14,629
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 731 $ 1,177
Accounts payable 5,316 6,846
Accrued personnel expenses 1,991 1,904
Accrued interest expense 428 503
Current portion of reserve for discontinued operations 702 702
Other current liabilities 1,062 1,622
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Total current liabilities 10,230 12,754
Reserve for discontinued operations 1,637 1,888
Long-term debt 49,639 36,585
Commitments and contingencies
Redeemable convertible preferred stock 52,856 46,722
Stockholders' deficiency:
Preferred stock, 1,000 shares authorized, none issued
Common stock, 11,590 shares issued 348 348
Additional paid-in capital 62,438 62,443
Treasury stock, at cost, 4,743 shares (16,639) (16,639)
Accumulated deficit (145,038) (129,472)
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Total stockholders' deficiency (98,891) (83,320)
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$ 15,471 $ 14,629
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
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March 28, March 30, March 28, March 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net revenues $ 8,871 $ 17,922 $ 17,194 $ 35,181
Cost of sales 9,114 14,107 16,162 27,497
-------- -------- -------- --------
Gross profit (loss) (243) 3,815 1,032 7,684
Selling, general and administrative expenses 5,549 5,786 10,671 10,849
Amortization of intangible assets 25 251 50 501
-------- -------- -------- --------
Operating loss (5,817) (2,222) (9,689) (3,666)
Interest expense (1,159) (1,048) (2,195) (1,949)
Other income (expense), net (1,954) (34) (2,048) (12)
-------- -------- -------- --------
Loss before provision for income taxes (8,930) (3,304) (13,932) (5,627)
Provision for income taxes 41 33
-------- -------- -------- --------
Net loss (8,930) (3,345) (13,932) (5,660)
Dividends on preferred stock (823) (700) (1,634) (1,400)
-------- -------- -------- --------
Net loss available for common stockholders $ (9,753) $ (4,045) $(15,566) $ (7,060)
======== ======== ======== ========
Basic and diluted loss per share of
common stock $ (1.42) $ (0.61) $ (2.27) $ (1.07)
======== ======== ======== ========
Weighted average common shares used in
the calculation of loss per share 6,848 6,681 6,848 6,571
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE CERPLEX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
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March 28, March 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,932) $ (5,660)
Adjustments to reconcile net loss to
net cash flows from continuing operations:
Depreciation and amortization 1,714 1,299
Write-down of investment in subsidiary
Loss on disposition of assets 112
Noncash interest expense 1,456
Changes in assets and liabilities, net of acquisitions:
Trade receivables, inventories and other assets (955) (635)
Accounts payable and other liabilities (2,003) 1,486
Accrued interest and income taxes
receivable/payable (75) 39
Deferred income taxes (251)
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Net cash flows from continuing operations (13,934) (3,471)
Net cash flows from discontinued operations (335)
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Net cash flows from operating activities (13,934) (3,806)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (97) (1,661)
Proceeds from the sale of assets 472
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Net cash flows from investing activities 375 (1,661)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (446) 190
Sale of redeemable preferred shares 4,500 --
Changes in borrowings under line of credit 12,218 4,808
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Net cash flows from financing activities 16,272 4,998
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Net change in cash and cash equivalents 2,713 (469)
Cash and cash equivalents at beginning of period 323 1,537
-------- --------
Cash and cash equivalents at end of period $ 3,036 $ 1,068
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE CERPLEX GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. CURRENT FINANCIAL CONDITION
During the fiscal years ended September 30, 1997, 1996 and 1995, the
Company experienced significant declines in revenues and increasing levels of
operating losses. As a result of these losses, at March 28, 1998, the Company
has a deficit of $98,932 in stockholders' equity and a working capital deficit
of $2,288. In addition, since a recapitalization of the Company in March 1996,
the Company has relied upon the financial support of its largest shareholder for
additional capital and to maintain its existing credit facilities. The Company's
losses have continued into the current fiscal year, are expected to continue for
the foreseeable future, and the Company will require additional funding and
financial support from its largest shareholder or another third party. There can
be no assurance that such additional funding and financial support will be
available on acceptable terms, or that such funds, if available, would enable
the Company to continue operating. These matters raise substantial doubt about
the Company's ability to continue as a going concern.
Management has made significant changes in its business to address its
adverse financial position. The remaining portion of its depot repair business
has been sold. During the second quarter of fiscal 1998, the DRAM memory chip
segment of the asset recovery business has been discontinued. In October 1997,
the Scotland facility had been sold. The asset recovery business is now
emphasizing system and sub-systems operations. In parts service, the Company is
implementing an internet-based, electronic sales and fulfillment system which is
expected to reduce inventory exposure, increase order fill rates and be more
cost efficient than the existing process.
On January 30, 1998, the Company and its largest shareholder, Welsh,
Carson, Anderson & Stowe (WCAS), entered into an agreement whereby the Company
would merge with The Cerplex Group, Inc., a supplier of repair services to the
electronics industry. As a result of the merger, Cerplex would become a
wholly-owned subsidiary of Aurora, and the current equity holders of Cerplex
would be entitled to receive in a tax-free exchange approximately 25% of the
post-merger, fully-diluted common stock of Aurora, after giving effect to the
WCAS financing described below. Under the terms of the agreement, each share of
Cerplex common stock would convert into 1.070168 shares of Aurora common stock.
The merger is subject to Cerplex stockholder approval, regulatory
approvals and the satisfaction of certain other conditions precedent, including
securing acceptable senior bank financing. Cerplex stockholders holding more
than 50% of Cerplex's voting securities have executed proxies and options
agreements whereby such holders have committed to voting in favor of the merger.
The merger was completed on April 30, 1998. Aurora changed its name to The
Cerplex Group, Inc. and the combined company are operating under that name.
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THE CERPLEX GROUP, INC.
WCAS has agreed to provide additional financing to Aurora, in the form
of $18,000 of new preferred stock and $15,000 of new subordinated debt, and to
exchange approximately $11,000 of outstanding Aurora subordinated debt and
accrued interest for $3,300 of new preferred stock. After giving effect to the
merger and the WCAS financing, WCAS would own approximately 69.2% of the
fully-diluted common stock of Aurora. Consequently, if none of the Aurora
stockholders (other than WCAS and its affiliates) elect to participate in the
rights offering described below, the public stockholders would own approximately
5.8% of the fully-diluted common stock of Aurora following the merger. The
proceeds of the WCAS financing and the proposed new senior bank financing will
be used to repay approximately $30,000 of outstanding senior bank obligations of
Cerplex. In addition, approximately $18,000 of outstanding subordinated notes of
Cerplex, which have been purchased by WCAS, will be canceled and exchanged for
$5,700 of the new subordinated notes of Aurora.
Aurora is offering to all of its existing stockholders the right to
purchase a pro rata share of the new preferred stock and new subordinated notes.
The rights offering will be made only by means of a prospectus. As noted, any
stockholder not electing to participate in this offering would experience
substantial dilution of its existing equity interest in Aurora.
NOTE B. BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and
related interim statements of operations and cash flows include all adjustments
(consisting only of normal recurring items) necessary for their fair
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, and expenses. Actual results could differ from those estimates.
Interim results are not necessarily indicative of results for a full year.
Certain information in footnote disclosure normally included in
financial statements has been condensed or omitted in accordance with the rules
and regulations of the Securities and Exchange Commission. The information
included in this Form 10-Q should be read in conjunction with Management's
Discussion and Analysis and financial statements and notes thereto included in
the Aurora Electronics, Inc. 1997 Annual Report on Form 10-K.
NOTE C. EARNINGS PER SHARE OF COMMON STOCK
The Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (FAS 128), in February 1997, which is effective for both
interim and annual periods ending after December 15, 1997. The Company has
adopted FAS 128 in this first quarter of fiscal 1998. FAS 128 requires the
presentation of "basic earnings per share," which represents income available to
common stockholders divided by the weighted average number of common shares
outstanding for the period. A presentation of "diluted earnings per share" is
also required, which is similar to the previous presentation of fully diluted
earnings per share. FAS 128 requires restatement of all prior-period earnings
per share data presented.
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THE CERPLEX GROUP, INC.
The Company's Redeemable, Convertible Preferred Stock, 7-3/4%
Convertible Subordinated Debentures due April 15, 2001, and 7% Subordinated
Convertible Promissory Notes (the "7% Notes") due September 30, 1997, were not
common stock equivalents at the time of issuance and are therefore not included
in the calculation of diluted earnings per share.
NOTE D. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 28, SEPTEMBER 30,
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<S> <C> <C>
Spare and repair parts $ -- $ 317
Work in process 13 94
Finished goods and purchased product 789 2,978
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Total inventories $ 802 $3,389
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</TABLE>
NOTE E. WARRANTS
At June 30, 1996, and at various subsequent dates, the Company was not
in compliance with certain financial covenants under its bank Credit Agreement.
To obtain waivers of noncompliance from the lenders, on September 30, 1996, the
Company, and WCAS entered into a Financial Support Agreement, pursuant to which,
with subsequent amendments, WCAS has guaranteed $16,292, the total borrowings
currently outstanding under the Credit Agreement, and the Company has granted
WCAS warrants to purchase 2,654 Shares of Common Stock at prices ranging from
$1.025 to $2.10 per share. The Credit Agreement has been amended to waive all
events of non-compliance with financial covenants, to eliminate future financial
covenants and to establish the maturity date for the facility as April 30, 1999.
At present, no additional borrowings are available under the Credit Agreement.
NOTE F. SUBSEQUENT EVENTS
The merger between Aurora Electronics, Inc.(Aurora) and Cerplex, Inc.
(Cerplex) was completed on April 30, 1998. As a result of the merger, Cerplex
became a wholly-owned subsidiary of Aurora and Aurora changed its name to The
Cerplex Group, Inc. Each outstanding share of Cerplex Common Stock will be
converted into the right to receive 1.070168 shares of Aurora Common Stock.
As part of the merger agreement, $33 million in cash will be infused
into the new company under a restructuring plan. Proceeds from Aurora's New
Senior Loan, together with proceeds from the WCAS financing and Rights Offering
was partially used to retire Cerplex's Senior Debt, the related accrued interest
and a $200,000 Amendment fee, which was due upon
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THE CERPLEX GROUP, INC.
payment of the outstanding debt. WCAS has agreed to provide additional financing
to Aurora, in the form of $18,000 of new preferred stock and $15,000 of new
subordinated debt, and to exchange approximately $11,000 of outstanding Aurora
subordinated debt and accrued interest for $3,300 of new preferred stock.
After giving effect of the merger and WCAS financing, WCAS will, in the
aggregate, depending on the number of Rights Units purchased by the Aurora
Public Stockholders in the Rights Offering, beneficially own approximately
between 61% and 69% of the voting stock of the new company, The Cerplex Group,
Inc., on an as-converted basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
The Cerplex Group, Inc. (the "Company") provides spare parts
distribution and electronics recycling services to major personal computer
manufacturers and field service organizations. In October of 1997, the Company
completed the sale of the remainder of its depot repair services operation and
sold its Irvine, Scotland recovery processing facility. A reserve for the losses
resulting from these transactions was accrued in the fourth quarter of fiscal
1997. Aurora now operates facilities in the United States and the Netherlands.
COMPARATIVE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 28, 1998 AND
- -----------------------------------------------------------------------------
MARCH 30, 1997
- --------------
Net revenues for the second quarter of fiscal 1998 were $8,871, as
compared to $17,922 in net revenues for the corresponding quarter in the prior
fiscal year. The Company's decline in revenues was due substantially to a
continued decline in the average sales prices for DRAM memory chips and the
subsequent closing of this segment of the Asset Recovery Division and an overall
decline in the prices of computer repair parts in its Parts Services Division.
Gross profit (loss) for the second quarter of fiscal 1998 was ($243)
(2.7% of net revenues), as compared to a gross profit of $3,815 (21.3% of net
revenues) for the second quarter of fiscal 1997. The decrease in gross profit
was due primarily to the decline in revenues from electronics recycling and
spare parts distribution mentioned above.
Selling, general and administrative expenses for the second quarter of
fiscal 1998 were $5,549 (62.6% of net revenues), as compared to $5,786 (32.3% of
net revenues) for the same quarter of the prior fiscal year. The increase as a
percent of revenues was due to the significant decline in revenues noted above.
Amortization expense for the second quarter of fiscal 1998 was $25 compared to
$251 for the second quarter of fiscal 1997. The decrease was due to the
write-off in the fourth quarter of fiscal 1997 of goodwill related to the
acquisition of Century Computer Marketing.
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THE CERPLEX GROUP, INC.
Net interest expense for the second quarter of fiscal 1998 was $1,159,
or 13.1% of revenues, as compared to $1,048, or 5.9% of revenues, for the same
period in fiscal 1997. The increase in interest expense is due to higher loan
balances on the Company's revolving credit facility.
Net loss to common stockholders for the quarter was $9,753 as compared
to net loss of $4,045 for the first quarter of fiscal 1997. The loss in the
quarter is the result of operating losses from electronics recycling and spare
parts distribution.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary requirements for capital are directly related to
its levels of accounts receivable, inventories, additions to its property and
equipment, and required debt principal payments. The Company's working capital
was a deficit of $2,288 as of March 28, 1998, as compared to working capital
deficit of $3,113 as of September 30, 1997. Working capital contributions from
the purchase of $2,500 of Series C Redeemable Convertible Preferred stock by
Welsh, Carson Anderson & Stowe (WCAS), the Company's largest shareholder, on
October 2, 1997, the purchase of $2,000 of Series D Redeemable Convertible
Preferred Stock by WCAS on October 24, 1997 and a $2,800 loan from WCAS on
December 2, 1997 were used to fund continuing operations.
WCAS provided the Company an additional $9,600 in debt financing in the
second quarter of 1998, with an additional loan of $2,500 in April 1998.
As reported in a Form 8-K filed with the Commission on February 6, 1998,
Aurora executed a definitive merger agreement with The Cerplex Group, Inc.
("Cerplex"), a supplier of repair services to the electronics industry, on
January 30, 1998. As a result of the merger, Cerplex would become a wholly-owned
subsidiary of Aurora, and the current equity holders of Cerplex would be
entitled to receive in a tax-free exchange approximately 25% of the post-merger,
fully-diluted common stock of Aurora, after giving effect to the WCAS financing
described below. Under the terms of the agreement, each share of Cerplex common
stock would convert into 1.070168 shares of Aurora common stock.
The merger received Cerplex stockholder approval and regulatory
approvals, and met certain other conditions precedent, including securing
acceptable senior bank financing. Cerplex stockholders holding more than 50% of
Cerplex's voting securities have executed proxies and options agreements whereby
such holders have committed to voting in favor of the merger. The merger was
completed by the end of April 1998. Following the completion of the merger,
Aurora changed its name to The Cerplex Group, Inc. and the combined company will
operate under that name.
WCAS has agreed to provide additional financing to Aurora, in the form
of $18,000 of new preferred stock and $15,000 of new subordinated debt, and to
exchange approximately $11,000 of outstanding Aurora subordinated debt and
accrued interest for $3,300 of new preferred stock. After giving effect to the
merger and the WCAS financing, WCAS would own approximately 69.2% of the
fully-diluted common stock of Aurora. Consequently, if
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THE CERPLEX GROUP, INC.
none of the Aurora stockholders (other than WCAS and its affiliates) elect to
participate in the rights offering described below, the public stockholders
would own approximately 5.8% of the fully-diluted common stock of Aurora
following the merger. The proceeds of the WCAS financing and the proposed new
senior bank financing would be used to repay approximately $30,000 of
outstanding senior bank obligations of Cerplex. In addition, at the effective
time of the merger, approximately $18,000 of outstanding subordinated notes of
Cerplex, which have been purchased by WCAS, would be canceled and exchanged for
$5,700 of the new subordinated notes of Aurora.
Aurora contemplates offering to all of its existing stockholders the
right to purchase a pro rata share of the new preferred stock and new
subordinated notes. The rights offering will be made only by means of a
prospectus. As noted, any stockholder not electing to participate in this
offering would experience substantial dilution of its existing equity interest
in Aurora.
OUTLOOK AND UNCERTAINTIES
- -------------------------
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: The matters discussed in this Quarterly Report on
Form 10-Q contain statements that constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
The words "expect," "estimate," "anticipate," "predict," "believe," and similar
expressions and variations thereof are intended to identify forward-looking
statements. Such statements appear in a number of places in this Quarterly
Report on Form 10-Q and include statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
thereto, among other things: (i) trends affecting the Company's financial
condition or results of operations; (ii) the Company's financing plans; and
(iii) the Company's business growth strategies. Readers are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors. These risks and uncertainties include, but are not limited to, the
following:
Market in Early Stages of Development
Aurora believes that the market for its spare parts distribution and
electronics recycling services is in the early stages of development and that
awareness among certain potential customers of the availability of these
services may be relatively low. While Aurora believes that it offers a mutually
beneficial solution to large customers' and field service organizations' spare
parts, recycling and asset recovery requirements, and has therefore targeted
these entities as its primary potential customers, there is no assurance that
these entities will choose to make use of these services, continue to outsource
their spare parts, recycling and asset recovery needs, or choose not to become
direct competitors of Aurora. Aurora addresses these issues in many ways,
particularly including the development of information tools to use in its
business, and the installation of information processing software. These
projects require large budgets and manpower commitments, and have uncertain time
schedules. Successful completion of these projects is not certain, and a failure
of these projects may have adverse consequences for the development of Aurora's
business and/or its ability to compete successfully.
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THE CERPLEX GROUP, INC.
Dependence on the Computer Industry
Aurora's business is dependent upon the continued growth, viability and
financial stability of its customers and potential customers in the computer
industry. The computer industry has been characterized by rapid technological
change, compressed product life cycles, and pricing and margin pressures. While
these factors could be beneficial to Aurora's business, such factors affecting
segments of the computer industry in general, and Aurora's customers in
particular, could have an adverse effect on Aurora's business.
Inventory Obsolescence
The market for personal computers and subsystems is characterized by
rapidly changing technology and frequent new product introductions. Innovations
and improvements in computer and subsystem design, engineering and production
may shorten the useful lives of existing systems and associated spare parts.
Such rapid changes and improvements in technology, coupled with the need to
maintain sufficient inventory levels of spare parts to ensure ready
availability, subject Aurora to the risk of inventory obsolescence.
Lack of Long-Term Supply Contracts
Aurora's success is dependent on its ability to continue to sell spare
parts to its customers and to attract a reliable stream of recyclable material
from its customers. Generally, Aurora distributes spare parts to, and receives
its recyclable material from, customers pursuant to non-exclusive contracts that
to do not contain guaranteed or minimum quantities and are subject to
cancellation on short notice at the customer's discretion. There is no assurance
that Aurora's customers will continue to do business with Aurora. The
termination of a material contract or any substantial decrease in demand for
spare parts or of the supply of recyclable material from significant customers
could result in a significant decrease in Aurora's sales.
Dependence on Key Personnel
The success of Aurora is dependent, in part, upon key management
personnel. Expansion of Aurora's business may require additional managers and
employees with industry experience. Competition for skilled management personnel
in the industry is intense.
Competition
Aurora competes with the in-house repair and service centers of OEMs and
TPMOs. There is no assurance that these companies will choose to outsource their
repair and service needs. Moreover, the independent spare parts distribution and
the electronic recycling services industry is fragmented with widespread
competition from a variety of small independent suppliers. Aurora believes that
competition for OEM, TPMO, and MVSO customers is based on a number of factors,
including: (i) breadth of parts distributed; (ii) ability to offer sophisticated
inventory and materials management programs; (iii) ability to offer rapid
delivery
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THE CERPLEX GROUP, INC.
and sophisticated logistics programs; and (iv) price. Among Aurora's major
independent competitors are DecisionOne, Data Trend, and PC Service Source.
Certain of these competitors are larger in total company revenue or have larger
capitalizations than The Cerplex Group, Inc.
Control by Major Shareholder
As a result of the Recapitalization of Aurora in March 1996, WCAS, and
their affiliates, currently own approximately 79.5% of Aurora's voting stock. As
a result, WCAS is able to elect the entire Board of Directors, to determine the
outcome of all corporate actions requiring shareholder approval, and otherwise
control the business affairs of Aurora. The Aurora Board has authority under the
Aurora Charter to issue shares of Aurora Preferred Stock in one or more series
and fix the rights, preferences, privileges, and restrictions granted to or
imposed upon any unissued shares of preferred stock. The issuance of preferred
stock may adversely affect voting and dividend rights, rights upon liquidation,
and other rights of holders of Aurora Common Stock. The issuance of Aurora
Preferred Stock and the control by WCAS and their affiliates may have the effect
of delaying, deferring, or preventing a change of control of Aurora.
Future Capital Needs; Uncertainty of Additional Financing; Dependence on Major
Shareholder
During portions of fiscal years 1996 and 1997, Aurora was in default
under its Credit Agreement. In the past, Aurora has successfully renegotiated
waivers and amendments to its Credit Agreement. The Credit Agreement has been
amended to waive all events of non-compliance with financial covenants, to
eliminate future financial covenants, and to establish a maturity date for the
facility as April 30, 1999. At present no additional borrowings are available
under the Credit Agreement. Aurora's ability to raise additional capital depends
on WCAS's approval. In the recent past, WCAS has displayed its continuing
commitment to Aurora through a series of debt and equity financings. Absent
continued financial support of WCAS, however it is unlikely that Aurora can
successfully implement its 1998 business plans and strategies. In connection
with the proposed Merger, WCAS has committed to providing approximately $33
million in new financing to the combined company.
Discontinued Operations; Change in Strategy
Aurora has adopted a plan to discontinue its depot repair business, a
line of business that historically generated significant amount of sales and
revenue, but which recently experienced a continuous decline in sales and
revenue. In addition, in its asset recovery business, Aurora's Scotland facility
has been sold and it discontinued the integrated circuits segment limiting its
exposure to the price fluctuations in integrated circuits and emphasizing
systems and sub-systems. Although in connection with these changes, Aurora
changed certain elements of its business strategy and underwent changes in
management and operations, there can be no assurance that such changes will
positively impact Aurora's business and results of operations in the short or
long term.
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THE CERPLEX GROUP, INC.
No Assurance of Public Market for Common Stock; Possible Volatility of Stock
Price
On December 12, 1997, Aurora was removed from AMEX and commenced trading
on the Over-The-Counter Bulletin Board. There can be no assurance of an active
trading market for Aurora's Common Stock. In addition, the trading price of
Aurora Common Stock has been, and in the future could be, subject to significant
fluctuations in response to variations in quarterly operating results, the gain
or loss of significant contracts, changes in management or new products or
services by Aurora or its competitors, general trends in the industry, and other
events or factors. In addition, the stock market has experienced extreme price
and volume fluctuations which have particularly affected the market price for
many companies in similar industries and which have often been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of Aurora Common Stock.
Other Uncertainties
Other operating, financial, or legal risks or uncertainties are
discussed in this Quarterly Report on Form 10-Q or in Aurora's other filings
with the Commission from time to time in specific contexts. Aurora is, of
course, also subject to general economic risks, the risk of interruption in the
source of supply, the risk of loss of a major customer or supplier and other
risks and uncertainties.
15
<PAGE> 16
THE CERPLEX GROUP, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Inapplicable.
ITEM 2. CHANGES IN SECURITIES
New issues:
October 2, 1997 -- 25,000 Redeemable convertible preferred stock
-$2,500.00
October 24, 1997 -- 20,000 Redeemable convertible preferred stock
-$2,000.00
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
ITEM 5. OTHER INFORMATION
Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Item
(a)(1) Exhibit 11 - Computation of Per Share Loss
(a)(2) Exhibit 27 -- Financial Data Schedule
16
<PAGE> 17
THE CERPLEX GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: May 12, 1998
THE CERPLEX GROUP, INC.
/s/ Steven L. Korby
-----------------------------------
Steven L. Korby
Executive Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
17
<PAGE> 18
THE CERPLEX GROUP, INC.
INDEX TO EXHIBITS
Item Description of Exhibits
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule -- Article 5 of Regulation S-X
18
<PAGE> 1
THE CERPLEX GROUP, INC.
INDEX TO EXHIBITS
Item Description of Exhibits
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule -- Article 5 of Regulation S-X
18
<PAGE> 2
THE CERPLEX GROUP, INC.
COMPUTATION OF PER SHARE LOSS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------------- -----------------------------------
March 28, 1998 March 30, 1997 March 28, 1998 March 30, 1997
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net loss available to common stockholders $ (9,753) $ (4,045) $(15,566) $ (7,060)
======== ======== ======== ========
ADJUSTED NUMBER OF COMMON SHARES
Weighted average shares outstanding 6,848 5,963 6,848 5,853
Incremental shares for exercise of stock
options and warrants and common stock
issuable 718 718
-------- -------- -------- --------
Adjusted number of common shares 6,848 6,681 6,848 6,571
======== ======== ======== ========
Basic and diluted loss per common share $ (1.42) $ (0.61) $ (2.27) $ (1.07)
-------- -------- -------- --------
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,036
<SECURITIES> 0
<RECEIVABLES> 4,651
<ALLOWANCES> 983
<INVENTORY> 802
<CURRENT-ASSETS> 7,942
<PP&E> 1,517
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,471
<CURRENT-LIABILITIES> 10,230
<BONDS> 0
0
52,856
<COMMON> 348
<OTHER-SE> (99,239)
<TOTAL-LIABILITY-AND-EQUITY> 15,471
<SALES> 17,194
<TOTAL-REVENUES> 17,194
<CGS> 16,162
<TOTAL-COSTS> 10,721
<OTHER-EXPENSES> 2,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,195
<INCOME-PRETAX> (13,932)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,932)
<EPS-PRIMARY> (2.27)
<EPS-DILUTED> 0
</TABLE>
