<PAGE> 1
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 June 28, 1998
---------------
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
THE CERPLEX GROUP, INC. (Formerly known as AURORA ELECTRONICS, INC.)
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 75-1539534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification No.)
1382 BELL AVENUE, TUSTIN, CALIFORNIA 92780
- --------------------------------------------------------------------------------
(Address of principal executive office.) (Zip Code)
(714) 258-5300
- --------------------------------------------------------------------------------
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 July 31, 1998:
Title of Each Class of Common Stock Number Outstanding
- ----------------------------------- ------------------
Common Stock, $0.03 par value 70,575,517 shares
<PAGE> 2
THE CERPLEX GROUP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 28, 1998
and September 30, 1997 4
Consolidated Statements of Operations for the Three Months
and the Nine Months Ended June 28, 1998 and June 29, 1997 5
Consolidated Statements of Cash Flows for the Nine Months Ended
June 28, 1998 and June 29, 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 18
Index to Exhibits 19
</TABLE>
2
<PAGE> 3
THE CERPLEX GROUP
PART I
FINANCIAL INFORMATION
3
<PAGE> 4
THE CERPLEX GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 28, September 30,
1998 1997
---------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,635 $ 323
Accounts Receivable, less allowance for doubtful accounts
of $2,713 (1998) and $736 (1997) 14,195 5,480
Inventories 6,497 3,389
Other current assets 3,445 449
--------- ---------
Total current assets 40,772 9,641
Goodwill 35,706 --
Property, plant and equipment, net 23,304 3,023
Intangible and other assets 922 1,965
--------- ---------
$ 100,704 $ 14,629
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 42,630 $ 1,177
Accounts payable 11,090 6,846
Accrued personnel expenses 3,024 1,904
Accrued interest expense 876 503
Current portion of reserve for discontinued operations 702 702
Other current liabilities 24,058 1,622
--------- ---------
Total current liabilities 82,380 12,754
Long-term debt 28,904 36,585
Other long-term liabilities 8,347 1,888
Commitments and contingencies
Redeemable convertible preferred stock 26,894 46,722
Stockholders' deficiency:
Preferred stock, 1,000 shares authorized, none issued -- --
Common stock, 70,401 (1998) and 11,590 (1997) shares issued 2,262 348
Additional paid-in capital 123,201 62,443
Treasury stock, at cost, 4,826 (1998) and 4,743 (1997) shares (16,675) (16,639)
Accumulated deficit (154,609) (129,472)
--------- ---------
Total stockholders' deficiency (45,821) (83,320)
--------- ---------
$ 100,704 $ 14,629
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
THE CERPLEX GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -----------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 23,691 $ 17,209 $ 40,885 $ 52,391
Cost of sales 21,967 13,978 38,129 41,475
-------- -------- -------- --------
Gross profit 1,724 3,231 2,756 10,916
Selling, general and administration
expenses 7,099 6,216 17,770 17,605
Amortization of intangible assets 2,125 275 2,175 776
-------- -------- -------- --------
Operating loss (7,500) (3,260) (17,189) (6,925)
Interest expense (1,611) (1,039) (3,806) (2,989)
Other income (expense), net 170 191 (1,878) 179
-------- -------- -------- --------
Loss before provision for
income taxes (8,941) (4,108) (22,873) (9,768)
Provision for income taxes 54 -- 54 33
-------- -------- -------- --------
Net loss $ (8,995) $ (4,108) $(22,927) $ (9,768)
======== ======== ======== ========
Dividends on preferred stock (576) (700) (2,210) (2,100)
-------- -------- -------- --------
Net loss available for
common stockholders $ (9,571) $ (4,808) $(25,137) $(11,868)
======== ======== ======== ========
Net loss per share of common stock $ (.22) $ (.71) $ (1.20) $ (1.79)
======== ======== ======== ========
Weighted average number of common and
common equivalent shares 44,406 6,790 20,872 6,644
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
THE CERPLEX GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
June 28, 1998 June 29, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,927) $(9,768)
Adjustments to reconcile net loss to net cash flows from
continuing operations:
Depreciation and amortization 5,347 1,203
Loss (gain) on disposal of equipment 224 (190)
Changes in assets and liabilities, net of acquisitions:
Current assets 7,875 968
Current liabilities 14 (384)
-------- -------
Net cash flows from continuing operations (9,467) (8,171)
Net cash flows from discontinued operations -- (430)
-------- -------
Net cash flows from operating activities (9,467) (8,601)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to other assets 930 (435)
Acquisition of property, plant and equipment (1,107) (190)
Acquisition of Cerplex
Net working capital deficit 30,606 --
Goodwill (37,792) --
Property, plant and equipment (22,509) --
Long-term debt and other long-term liabilities 21,912 --
-------- -------
Net cash flows from investing activities (11,107) (625)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt, net (10,308) (62)
Sale of redeemable convertible preferred shares 21,300 --
Issue of senior subordinated debentures 15,000 --
Issue of common stock for Cerplex merger 7,783 --
Purchase of treasury stock (36) --
Changes in borrowings under line of credit -- 8,582
-------- -------
Net cash flows from financing activities 33,739 8,520
-------- -------
Net change in cash and cash equivalents 16,312 (706)
Cash and cash equivalents at beginning of period 323 1,537
-------- -------
Cash and cash equivalents at end of period $ 16,635 $ 831
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
THE CERPLEX GROUP, INC.
AND SUBSIDIARIES
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 June 28, 1998, the Company has
a deficit of $45.8 million in stockholders' equity and a working capital deficit
of $41.6 million. 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. During the second quarter of fiscal 1998, the DRAM
memory chip segment of the asset recovery business has been discontinued. The
Power Source parts distribution business was closed and the assets sold for a
nominal value. During the third quarter of 1998 management implemented a
consolidation and cost reduction plan. 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 that is
expected to reduce inventory exposure, increase order fill rates and be more
cost efficient than the existing process.
On April 30, 1998, the Company merged with The Cerplex Group, Inc., a
supplier of electronic parts repair, spare parts sales and management and
logistics to the electronics industry. As a result of the merger, Cerplex became
a wholly-owned subsidiary of Aurora, and the current equity holders of Cerplex
received 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 was converted into 1.070168 shares of Aurora common stock. Aurora changed
its name to The Cerplex Group, Inc. and the combined company is operating under
that name.
7
<PAGE> 8
THE CERPLEX GROUP, INC.
WCAS has provided additional financing in the form of $18 million of new
redeemable convertible preferred stock and $15 million of new subordinated debt,
and to exchange approximately $11.1 million of outstanding subordinated debt and
accrued interest for $3.3 million of new redeemable convertible preferred stock.
The new redeemable convertible preferred stock is convertible into common stock
at $.25 per common share or approximately 85.2 million shares. After giving
effect to the merger and the WCAS financing, WCAS owns approximately 68% of the
fully-diluted common stock of Cerplex. The public stockholders own approximately
7% of the fully-diluted stock of Aurora following the merger. The proceeds of
the WCAS financing and the new senior bank financing were used to repay
approximately $46 million of outstanding senior bank obligations of Cerplex and
Aurora. In addition, at the effective time of the merger, approximately $8.7
million of outstanding subordinated notes and $12 million of bridge loans owed
to WCAS, were paid.
Cerplex offered to all of its existing stockholders the right to
purchase a pro rata share of the new redeemable convertible preferred stock and
new subordinated notes. The rights offering were made only by means of a
prospectus. Any stockholder that did not elect to participate in this offering
experienced substantial dilution of its existing equity interest in Cerplex.
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" are
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.
The Company's 7% Senior Cumulative Convertible Preferred Stock, 10%
Series A Senior Subordinated Notes due December 31, 2002, 2003, and 2004, 10%
Series B Senior Subordinated Debentures due December 31, 2004, were not common
stock equivalents at the time of issuance and are therefore not included in the
calculation of diluted earnings per share.
8
<PAGE> 9
THE CERPLEX GROUP, INC.
NOTE D. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 28, 1998 September 30, 1997
------------- ------------------
(in thousands)
<S> <C> <C>
Spare and repair parts $ 4,467 $ 317
Work in process 59 94
Finished goods and purchased product 1,971 2,978
------- -------
Total inventories $ 6,497 $ 3,389
======= =======
</TABLE>
NOTE E. WARRANTS
In connection with the merger between the Company and The Cerplex Group,
Inc., warrants held by Cerplex Note holders and certain principals of Cerplex to
purchase 911,993 shares and common stocks were converted at the exchange ratio
of 1.070168 into warrants to purchase 975,985 shares of common stock.
NOTE F. RESTRUCTURING COSTS
During the third quarter of 1998, the company implemented a
consolidation and cost reduction plan. The San Diego Facility was closed and the
Systems Operations of the asset recovery business were moved to the company's
Rancho Cucamonga Facility. The Netherlands Operations were relocated to the
company's facility in England. As a result of these actions, the Company
recorded restructuring charges of approximately $2.0 million primarily for
severance and termination benefits and lease termination costs.
NOTE G. ACQUISITION
The merger with Cerplex has been accounted for using the purchase method
of accounting. The preliminary allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
Allocation of the Purchase Price
--------------------------------
(in thousands)
<S> <C>
Current Assets $ 39,006
Property, Plant, Equipment 22,396
Other Assets 113
Goodwill 37,792
Net Current Liabilities (69,612)
Long Term Liabilities (21,912)
--------
TOTAL $ 7,783
========
</TABLE>
Goodwill resulting from the merger has been determined as the excess of:
(i) the fair value of the shares issued to Cerplex shareholders over; (ii) the
net fair value of the assets less the liabilities of Cerplex.
9
<PAGE> 10
THE CERPLEX GROUP, INC.
Considering the historical operating losses of Aurora and Cerplex,
management preliminarily expects to amortize the resulting goodwill over not
more than three years. Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long Lived Assets and Long Lived Assets to be
Disposed of" (FAS 121), requires that the carrying value of long-lived assets be
reviewed for impairment whenever circumstances indicate that the carrying amount
may not be recoverable based upon estimates or undiscounted future cash flows.
If this review indicates that the asset value is not likely to be recoverable
from these cash flows, the carrying value will be reduced to fair value. It is
possible that a subsequent FAS 121 review may require a reduction of the
carrying value of the goodwill resulting from the purchase accounting method for
the merger.
In connection with the merger, senior and subordinated debt of the
combined companies of approximately $78 million was retired and replaced with
new senior and subordinated debt of $36 million and $15 million, respectively,
along with the issuance of 213,000 shares of New Preferred Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Cerplex Group, Inc. (the "Company") provides electronic parts
repair, spare parts sales and management and logistics to major original
equipment manufacturers, end users and field service organizations. On April
30, 1998 the Company acquired Cerplex, Inc. This transaction was accounted for
a purchase and, accordingly, the results of operations of Cerplex, Inc. are
included from that date.
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 28, 1998 AND
JUNE 29, 1997
Net revenues for the third quarter of fiscal 1998 were $23.7 million, as
compared to $17.2 million in net revenues for the corresponding quarter in the
prior fiscal year. The Company's increase in revenues was due principally to the
acquisition of Cerplex, Inc. ($19.7 million) offset by a substantial 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
and volumes of computer repair parts in its Parts Services Division.
Gross profit for the third quarter of fiscal 1998 was $1.7 million (7.3%
of net revenues), as compared to a gross profit of $3.2 million (18.8% of net
revenues) for the third 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 offset by the gross profit contribution of
Cerplex, Inc. ($1.4 million or 7.2% of Cerplex, Inc.'s revenue contribution).
10
<PAGE> 11
THE CERPLEX GROUP, INC.
Selling, general and administrative expenses for the third quarter of
fiscal 1998 were $7.1 million (30.0% of net revenues), as compared to $6.2
million (36.1% of net revenues) for the same quarter of the prior fiscal year.
The decrease as a percentage of revenues was due to the increase in revenues
noted above. Amortization expense for the third quarter of fiscal 1998 was $2.1
million compared to $275,000 for the third quarter of fiscal 1997. The increase
was due to the amortization in the third quarter of fiscal 1998 of goodwill
related to the merger of Aurora and Cerplex.
Net interest expense for the third quarter of fiscal 1998 was $1.6
million, or 6.8% of revenues, as compared to $1.0 million, or 6% 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 $9.6 million as
compared to net loss of $4.8 million for the third quarter of fiscal 1997. The
loss in the quarter is the result of operating losses from electronics recycling
and spare parts distribution, restructuring charges and provision fore losses
for shutdowns and consolidations and the operating losses of Cerplex, Inc.
COMPARATIVE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 28, 1998 AND
JUNE 29, 1997
Net revenues for the nine months ended June 28, 1998 were $40.9 million,
as compared to $52.4 million in net revenues for the corresponding period in the
prior fiscal year. The Company's decrease in revenues was due principally to a
substantial 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 and volumes of computer repair parts in its Parts Services
Division offset by the acquisition of Cerplex, Inc. ($19.7 million).
Gross profit for the nine months ended June 28, 1998 was $2.8 million
(6.7% of net revenues), as compared to a gross profit of $10.9 million (20.9% of
net revenues) for the comparable period 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 offset by the gross profit
contribution of Cerplex, Inc. ($1.4 million or 7.2% of Cerplex, Inc.'s revenue
contribution).
Selling, general and administrative expenses for the nine months ended
June 28, 1998 were $17.7 million (43.5% of net revenues), as compared to $17.6
million (33.6% of net revenues) for the same quarter of the prior fiscal year.
The decrease as a percentage of revenues was due to the increase in revenues
noted above. Amortization expense for the nine months ended June 28, 1998 was
$2.2 million compared to $776,000 for the comparable period of fiscal 1997. The
increase was due to the amortization in the third quarter of fiscal 1998 of
goodwill related to the merger of Aurora and Cerplex.
Net interest expense for the nine months ended June 28, 1998 was $3.8
million, or 9.3% of revenues, as compared to $3.0 million, or 5.7% of revenues,
for the comparable 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 nine months ended June 28, 1998
was $25.1 million as compared to net loss of $11.9 million for the comparable
period of fiscal 1997. The loss is the result of operating losses from
electronics recycling and spare parts distribution, restructuring charges and
provision for losses for shutdowns and consolidations and the operating losses
of Cerplex, Inc.
LIQUIDITY AND CAPITAL RESOURCES
See Note A (entitled "Current Financial Condition") of Notes to
Unaudited Consolidated Financial Statements included elsewhere herein.
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 $41.6 million as of June 28, 1998, as compared to working
capital deficit of $3.1 million as of September 30, 1997.
As reported in a Form 8-K filed with the Commission on February 6, 1998,
Cerplex 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 became a wholly-owned
subsidiary of Aurora, and the current equity holders of Cerplex received 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 option agreements whereby
such holders have committed to voting in favor of the merger. The merger was
completed on April 30, 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.
11
<PAGE> 12
THE CERPLEX GROUP, INC.
WCAS has provided additional financing to Cerplex, in the form of $18
million of new redeemable convertible preferred stock and $15 million of new
subordinated debt, and to exchange approximately $11.1 million of outstanding
Aurora subordinated debt and accrued interest for $3.3 million of new redeemable
convertible preferred stock. The new redeemable convertible preferred stock is
convertible into common stock at $.25 per common share or approximately 85.2
shares. After giving effect to the merger and the WCAS financing, WCAS owns
approximately 68% of the fully-diluted common stock of Cerplex. The public
stockholders own approximately 7% of the fully-diluted stock of Aurora following
the merger. The proceeds of the WCAS financing and the new senior bank financing
were used to repay approximately $46 million of outstanding senior bank
obligations of Cerplex. In addition, at the effective time of the merger,
approximately $8.7 million of outstanding subordinated notes of Cerplex and $12
million of bridge loans owned by WCAS were repaid.
In May 1996, Cerplex acquired Rank Xerox Limited's subsidiary, Cerplex
SAS, for $6.1 million, including estimated taxes, registration fees, accounting,
and other out-of-pocket expenses of $1.2 million. Under the terms of the
agreement, Cerplex has agreed to certain financial covenants over a four year
period that the limit the amount of dividends and payments in the nature of
corporate charges paid by Cerplex SAS to Cerplex; the maintenance of Cerplex
SAS' current ratio greater than one; and restrictions on guarantees with respect
to Cerplex and its subsidiaries (excluding Cerplex SAS). Accordingly, the cash
of Cerplex SAS of $14.8 million at June 28, 1998, is generally not available to
Cerplex of refinancing operations outside Cerplex SAS.
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:
12
<PAGE> 13
THE CERPLEX GROUP, INC.
Market in Early Stages of Development
Cerplex 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 Cerplex 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 Cerplex. Cerplex 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 personnel 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
Cerplex's business and/or its ability to compete successfully.
Dependence on the Computer Industry
Cerplex'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 Cerplex's business, such factors affecting
segments of the computer industry in general, and Cerplex's customers in
particular, could have an adverse effect on Cerplex'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 Cerplex to the risk of inventory obsolescence.
Lack of Long-Term Supply Contracts
Cerplex'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, Cerplex 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 Cerplex's customers will continue to do business with Cerplex. 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 Cerplex's sales.
13
<PAGE> 14
THE CERPLEX GROUP, INC.
Dependence on Key Personnel
The success of Cerplex is dependent, in part, upon key management
personnel. Expansion of Cerplex's business may require additional managers and
employees with industry experience. Competition for skilled management personnel
in the industry is intense.
Competition
Cerplex competes with the in-house repair and service centers of
Original Equipment Manufacturers ("OEM's") and Third Party Maintenance
Organizations ("TPMO's"). 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.
Cerplex believes that competition for OEM, TPMO, and Multi Vendor Service
Organizations 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 and
sophisticated logistics programs; and (iv) price. Among Cerplex'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
capitalization's than The Cerplex Group, Inc.
Control by Major Shareholder
As a result of the Recapitalization in April 1998, WCAS, and their
affiliates, currently own approximately 68% of Cerplex'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 Cerplex. The Cerplex Board has authority under
its Charter to issue shares of Cerplex 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 Cerplex Common Stock. The issuance of Cerplex Preferred
Stock and the control by WCAS and their affiliates may have the effect of
delaying, deferring, or preventing a change of control of Cerplex.
Future Capital Needs; Uncertainty of Additional Financing; Dependence on Major
Shareholder
During portions of fiscal years 1996 and 1997, Cerplex was in default
under its Credit Agreement. In the past, Cerplex has successfully renegotiated
waivers and amendments to its Credit Agreement. Currently the Company has a $36
million term loan due April 30, 1999, and a line of credit of $10 million
secured by the company's account receivable and inventories of which $4.1
million was outstanding as of June 28, 1998. In the recent past, WCAS has
displayed its continuing commitment to Aurora through a series of debt and
equity financing. In connection with the merger, WCAS provided $33 million in
new financing to the combined company.
14
<PAGE> 15
THE CERPLEX GROUP, INC.
Discontinued Operations; Change in Strategy
Cerplex has discontinued the integrated circuits segment of the asset
recovery business limiting its exposure to the price fluctuations in integrated
circuits and emphasizing systems and sub-systems. Although in connection with
these changes, Cerplex 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 Cerplex's business and results of operations
in the short or long term.
No Assurance of Public Market for Common Stock; Possible Volatility of Stock
Price
On December 12, 1997, Cerplex 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 Cerplex 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 Cerplex 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 that have particularly
affected the market price for many companies in similar industries and which has
often been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of Cerplex
Common Stock.
Other Uncertainties
Other operating, financial, or legal risks or uncertainties are
discussed in this Quarterly Report on Form 10-Q or in Cerplex's other filings
with the Commission from time to time in specific contexts. Cerplex 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
16
<PAGE> 17
THE CERPLEX GROUP, INC.
ITEM 1. LEGAL PROCEEDINGS
Inapplicable.
ITEM 2. CHANGES IN SECURITIES
New issues:
October 2, 1997 - 25,000 shares of redeemable convertible preferred
stock - 2,500,000.
October 24, 1997 - 25,000 shares of redeemable convertible preferred
stock - $2,500,000.
April 30, 1998 - 213,000 shares of redeemable convertible preferred
stock - $21,300,000.
April 30, 1998 - 63,811,087 shares of common stock - $1,914,000.
Conversion of preferred stock to common stock:
April 30, 1998 - 426,000 shares of redeemable convertible preferred
stock - $42,600,000. (Converted to 24,893,286 shares of common stock,
included above.)
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
Item (A)(2) Exhibit 27 - Financial Data Schedule
17
<PAGE> 18
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: August 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)
18
<PAGE> 19
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
19
<PAGE> 1
EXHIBIT 11
THE CERPLEX GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------ -----------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Net loss available to common stockholder $ (9,571) $ (4,808) $(25,137) $(11,868)
========== ========= ======== ========
ADJUSTED NUMBER OF COMMON SHARES
Weighted average shares outstanding 44,406 6,072 20,872 5,926
Incremental shares for exercise of stock
options and warrants and common stock
issuable -- 718 -- 718
---------- --------- -------- --------
Adjusted number of common shares 44,406 6,790 20,872 6,644
========== ========= ======== ========
Net loss per common share $ (.22) $ (0.71) $ (1.20) $ (1.79)
========== ========= ======== ========
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 16,635
<SECURITIES> 0
<RECEIVABLES> 16,908
<ALLOWANCES> 2,713
<INVENTORY> 6,497
<CURRENT-ASSETS> 40,772
<PP&E> 40,288
<DEPRECIATION> 16,984
<TOTAL-ASSETS> 100,704
<CURRENT-LIABILITIES> 82,380
<BONDS> 0
26,894
0
<COMMON> 2,262
<OTHER-SE> (74,977)
<TOTAL-LIABILITY-AND-EQUITY> 100,704
<SALES> 40,885
<TOTAL-REVENUES> 40,885
<CGS> 38,129
<TOTAL-COSTS> 17,770
<OTHER-EXPENSES> 4,053
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,806
<INCOME-PRETAX> (22,873)
<INCOME-TAX> 54
<INCOME-CONTINUING> (22,927)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,927)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
