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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 December 31, 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: 1-8456
THE CERPLEX GROUP, INC.
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(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
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(Address of principal executive office.) (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 January 28, 1999:
TITLE OF EACH CLASS OF COMMON STOCK NUMBER OUTSTANDING
- ----------------------------------- ------------------
Common Stock, $0.03 par value 7,367,518 shares
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THE CERPLEX GROUP, INC.
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998
and September 30, 1998 4
Consolidated Statements of Operations for the Three Months
Ended December 31, 1998 and December 26, 1997 5
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1998 and December 26, 1997 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION 18
Signatures 21
Index to Exhibits 22
</TABLE>
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THE CERPLEX GROUP, INC.
PART I
FINANCIAL INFORMATION
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THE CERPLEX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
DECEMBER 31, SEPTEMBER 30,
1998 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,495 $ 14,196
Accounts Receivable, less allowance for doubtful accounts
of $1,941 ($2,511 in Sep., 1998) 14,703 12,416
Inventories 6,962 6,626
Other current assets 3,296 4,628
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Total current assets 31,456 37,866
Goodwill 35,156 37,202
Property, plant and equipment, net 24,225 25,021
Intangible and other assets 396 452
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$ 91,233 $ 100,541
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 55,467 $ 53,886
Accounts payable 9,381 9,903
Accrued expenses 12,248 14,165
Accrued interest expense 766 1,424
Current portion of reserve for discontinued operations 48 154
Income taxes payable 1,248 1,271
Other current liabilities 11,089 12,478
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Total current liabilities 90,247 93,281
Long-term debt 26,775 25,782
Reserve for discontinued operations 1,822 1,822
Other long-term liabilities 4,714 4,714
Commitments and contingencies
Redeemable convertible preferred stock, 216 shares issued
(260 shares at Sep., 1998) 29,690 34,150
Stockholders' deficit:
Preferred stock, 1,000 shares authorized, none issued -- --
Common stock 75,000 shares authorized, 7,851 shares issued
(7,601 issued at Sep., 1998) 2,269 2,262
Additional paid-in capital 121,272 116,400
Treasury stock, at cost, 483 shares (16,675) (16,675)
Accumulated deficit (168,921) (161,232)
Cumulative translation adjustment 40 37
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Total stockholders' deficit (62,015) (59,208)
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$ 91,233 $ 100,541
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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 OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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DECEMBER 31, DECEMBER 26,
1998 1997
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Net revenues $ 29,489 $ 8,324
Cost of sales 27,816 7,049
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Gross profit 1,673 1,275
Selling, general and administrative
expenses 5,288 5,122
Amortization of intangible assets 2,150 25
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Operating loss (5,765) (3,872)
Interest expense (2,119) (1,036)
Other income (expense), net 480 (94)
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Loss before provision for
income taxes (7,404) (5,002)
Provision for income taxes (134) --
-------- --------
Net loss $ (7,270) $ (5,002)
======== ========
Dividends on redeemable preferred stock (419) (812)
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Net loss available for
common stockholders $ (7,689) $ (5,814)
======== ========
Basic and dilutive loss per common share $ (1.06) $ (8.50)
======== ========
Weighted average number of common
shares outstanding 7,232 685
======== ========
</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>
THREE MONTHS ENDED
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DECEMBER 31, 1998 DECEMBER 26,1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,270) $ (5,002)
Adjustments to reconcile net loss to net cash flows
from continuing operations:
Depreciation and amortization 3,125 374
Non-cash interest expense 371 397
Loss on disposition of assets -- 72
Foreign Currency Translation 3 --
Changes in assets and liabilities:
Current assets (1,291) 1,527
Current liabilities (3,894) (2,302)
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Net cash flows from continuing operations (8,956) (4,934)
Net cash flows from discontinued operations (106) (72)
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Net cash flows from operating activities (9,062) (5,006)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (227) (87)
Proceeds from sale of assets -- 330
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Net cash flows from investing activities (227) 243
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt -- (289)
Sale of redeemable convertible preferred shares -- 4,500
Proceeds from promissory note 2,500 --
Advances under demand notes -- 2,800
Other 7 --
Changes in borrowings under line of credit (919) --
-------- --------
Net cash flows from financing activities 1,588 7,011
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Net change in cash and cash equivalents (7,701) 2,248
Cash and cash equivalents at beginning of period 14,196 323
-------- --------
Cash and cash equivalents at end of period $ 6,495 $ 2,571
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE CERPLEX GROUP, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. CURRENT FINANCIAL CONDITION
During the quarter ended December 31, 1998 and the year ended September 30,
1998, the Company experienced recurring operating losses. As a result of these
losses, at December 31, 1998 the Company had a deficit of $62,015 in
stockholders' equity and negative working capital of $58,791. In addition, since
a recapitalization of the Company in March 1996, the Company has relied upon the
financial support of its largest stockholder for additional capital and to
maintain its existing credit facilities. At December 31, 1998, the Company has
approximately $44,620 in principal amount outstanding under its term debt and
line of credit which matures on April 30,1999. The Company is currently in
discussions with its lender to extend the repayment date. Furthermore, as of
December 31, 1998, the Company had $7.5 million and $3.1 million outstanding
related to its promissory note to its largest stockholder and a secured note
payable to one of its customers, respectively, which are also mostly due in
fiscal year ending 1999. Though the Company intends to make efforts to increase
revenues to improve operations, the Company's losses are expected to continue
for the foreseeable future and the Company will require additional funding and
financial support from its largest stockholder 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, or that the Company will be successful in
increasing revenues. In addition, there can be no assurance that the Company
will be successful in extending the repayment date of its term debt and line of
credit. These matters raise substantial doubt about the Company's ability to
continue as a going concern.
NOTE B. BASIS OF PRESENTATION
The accounting policies followed by the Company are set forth in Note B "Summary
of Significant Accounting Policies" of Notes to Consolidated Financial
Statements included in the 1998 Annual Report on Form 10-K for The Cerplex
Group, Inc.
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 1998 Annual
Report on Form 10-K for the Cerplex Group, Inc..
NOTE C. EARNINGS PER SHARE OF COMMON STOCK
Basic earnings (loss) per common share is computed by dividing net income(loss)
by the weighted average number of common shares outstanding after adding to loss
from operations cumulative dividends to holders of the Company's redeemable
convertible preferred stock.
Diluted earnings per share is computed by dividing net income (loss) available
to common stockholders by the sum of the weighted average number of common
shares outstanding and dilutive stock options. For all periods presented, common
stock equivalents (stock options) were excluded from calculations as they were
considered to be anti-dilutive.
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.
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NOTE D. INVENTORIES
Inventories consisted of the following:
<TABLE>
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DECEMBER 31, SEPTEMBER 30,
1998 1998
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(IN THOUSANDS)
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Spare and repair parts $6,649 $5,569
Work in process 146 113
Finished goods and purchased product 167 944
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Total inventories $6,962 $6,626
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</TABLE>
NOTE E. CAPITALIZATION
On October 5, 1998, a majority of the outstanding capital stock of
the Company entitled to vote, voted at a Special Meeting of Stockholders to
effect a one-for-ten reverse stock split (the "One-for-Ten Reverse Split"), in
which each ten shares of the Company's Common Stock were converted into one
share of the Company's Common Stock. Stockholders who would have received
fractional shares of Common Stock as a result of the One-for-Ten Reverse Split,
were paid, in lieu of receiving fractional shares, cash in an amount equal to
$0.104 per share. Unless otherwise stated, figures as to the number of shares
outstanding, earnings per share, exercise price to convert the 7% Convertible
Preferred Stock and other per share figures included herein, reflect the
One-for-Ten Reverse Split. Immediately following the One-for-Ten Reverse Split,
the outstanding capital stock of the Company consisted of 215,500 shares of 7%
Convertible Preferred Stock, 44,000 shares of Series A Convertible Preferred
Stock and 7,118,285 shares of Common Stock. Subsequent to the One-for-Ten
Reverse Split, on November 19, 1998, 249,233 shares of the Company's Common
Stock were issued as a result of the conversion of 44,000 shares of Preferred
Stock of the Company that had been issued to WCAS and other stockholders prior
to the Merger. A majority of such Preferred Stock was held by WCAS. As a
majority holder of such Preferred Stock, WCAS elected to cause all of the shares
of such Preferred Stock to be converted to the Common Stock of the Company. As
of December 31, 1998, there were 7,367,518 shares of the Company's Common Stock
outstanding.
NOTE F. DEBT
On December 9, 1998 the Company borrowed $2.5 million from WCAS,
under a 10% unsecured promissory note due December 9, 1999. Subsequent to
December 31, 1998, the Company borrowed $2.0 million from WCAS under the terms
of a 10% unsecured promissory note which matures January 26, 2000.
During the quarter the Company and WCAS agreed to modify the terms
of the Series A 10% Senior subordinated debentures to increase the principal
amount by the amount of accrued but unpaid interest as of December 31, 1998.
Accordingly, the total principal outstanding is $15,599 at December 31, 1998.
All other terms remain the same.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company provides repair and logistics services, and spare parts sourcing and
service management for manufacturers of computer, communications and electronic
office equipment. In the computer marketplace, the Company primarily services
display terminals, printed circuit boards, laptops, networking equipment and
workstations. In the telecommunications marketplace, the Company primarily
services switching systems, payphones, video conferencing products,
multiplexers, mobile communications, transmission equipment, hubs and modems. In
the office automation marketplace, the Company services printers, scanners, fax
machines and high value products such as copiers, automatic teller machines
(ATMs) and other paper-handling equipment. The Company operates through its two
principal subsidiaries, Cerplex, Inc. and Aurora Electronics Group, Inc., and
their subsidiaries. Based in Tustin, California, the Company has locations
across the United States, in France and in the United Kingdom
The Company entered the computer and electronics industry in 1992, and has
expanded its operations through the acquisition of companies that supply,
refurbish and recycle electronic parts and equipment. The Company's most recent
acquisition was completed on April 30, 1998, when the Company, then known as
Aurora Electronics, Inc. acquired The Cerplex Group, Inc. ("Old Cerplex").
Prior to the Merger with Old Cerplex which is discussed in more detail below,
the Company's business consisted primarily of two divisions, the Asset Recovery
Services Division (the "ARS Division") and the Parts Services Supply Division
(the "PSS Division"). The Merger was accounted for under the purchase method
of accounting and, as such, the operations of Old Cerplex are not included in
the Company's financial statements prior to April 30, 1998. The majority of
the Company's revenues subsequent to April 30, 1998 are attributable to the
repair operations of Old Cerplex acquired in the Merger. Due to this and the
fact that the Company's ARS and PSS Divisions experienced declining revenues
from fiscal 1997 to fiscal 1998, the Company's historical results, especially as
they relate to the ARS and PSS Divisions, may not be indicative of future
results.
In the third quarter of the fiscal year ended September 30, 1995, the
Company completed a corporate reorganization, in which it: (a) exited the memory
upgrade manufacturing and supply business formerly known as the Premier
Division; and (b) substantially downsized its depot repair services operation
acquired in the FRS, Inc. acquisition, and refocused these operations to support
the Company's remaining spare parts distribution and electronic recycling
services business.
In March 1996, the Company completed a recapitalization in which the
Company (a) acquired approximately 4,268,000 shares of its Common Stock, (b)
issued $40.0 million of convertible preferred stock and $10.0 million of
subordinated debt to WCAS, (c) established a $35.0 million credit facility, (d)
repaid $26.0 million of senior bank debt and (e) redeemed approximately $9.3
million of Senior Subordinated Notes.
In October 1997, the Company completed the sale of the remainder of its
then-existing depot repair services operation and sold its Irvine, Scotland,
recovery processing facility. Losses from these transactions were accrued into
fiscal 1997 operating results.
In April 1998, the Company completed the Merger with Old Cerplex, in which
a wholly-owned subsidiary of the Company merged into Old Cerplex and each share
of Old Cerplex's Common Stock was converted into 1.070167 shares of the
Company's Common Stock (or .1070167 shares after giving effect to the Company's
recent One-for-Ten Reverse Split). As a result of the Merger, Old Cerplex became
a wholly-owned subsidiary of the Company. The Company changed its name to The
Cerplex Group, Inc., and Old Cerplex changed its name to Cerplex, Inc. The
Company now conducts its operations through two wholly-owned subsidiaries,
Cerplex, Inc. and Aurora Electronics Group, Inc., and their subsidiaries.
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The primary factors affecting the Company's repair business include, but
are not limited to, the pricing of the Company's services and the utilization of
the Company's resources that constitute fixed costs. Pricing in the Company's
industry is very competitive and price discounting could adversely affect the
Company's operating results. In addition, the Company has made a significant
investment in facilities, equipment and personnel. While the Company's
facilities have the capability of generating significantly more repair services
volume than current levels, the Company has, due to a variety of factors,
experienced decreasing revenues which have resulted in significant operating
losses. In particular, BT and Rank Xerox constituted Old Cerplex's and the
Company's largest customers in the last fiscal year. Revenues from these
customers have declined from fiscal 1997 through the first quarter of fiscal
1999 on a pro forma basis. It is anticipated that revenues from Rank Xerox will
decline in the future, and there can be no assurance that revenues from BT or
other customers will not decline in the future. The failure of the Company to
develop additional business from new and existing customers could have a
material adverse effect on the Company's business.
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
AND DECEMBER 26, 1997
Net revenues for the first quarter of fiscal 1999 were $29.5 million, as
compared to $8.3 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 Old Cerplex 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 as well as the PowerSource operation and an overall
decline in the prices and volumes of computer repair parts.
Gross profit for the first quarter of fiscal 1999 was $1.7 million (5.7% of
net revenues), as compared to a gross profit of $1.3 million (15.3% of net
revenues) for the corresponding quarter in the prior fiscal year. The increase
in gross profit was due primarily to the acquisition of Old Cerplex offset by
the decline in revenues for computer repair parts. The decrease in margin
percentages is primarily due to the lower historical margins of the Old Cerplex
operations and the impact of declining revenues in the Southern California
operations.
Selling, general and administrative expenses for the first quarter of
fiscal 1999 were $5.3 million (17.9% of net revenues), as compared to $5.1
million (61.5% of net revenues) for the corresponding quarter in the prior
fiscal year. The decrease as a percentage of revenues was due to the increase in
revenues noted above. Amortization expense for the first quarter of fiscal 1999
was $2.1 million compared to $25,000 for the corresponding quarter in the prior
fiscal year. The increase was due to the amortization of goodwill in connection
with the merger of Aurora and Old Cerplex.
Net interest expense for the first quarter of fiscal 1999 was $2.1 million,
or 7.2% of revenues, as compared to $1.0 million, or 12.4% of revenues, for the
corresponding quarter in the prior fiscal year. 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 $7.7 million as
compared to net loss of $5.8 million for the corresponding quarter in the prior
fiscal year.
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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 had a working
capital deficit of $58.8 million as of December 31, 1998 as compared to a
working capital deficit of $55.4 million as of September 30, 1998. See Note A of
Unaudited Notes to Consolidated Financial Statements -- "Current Financial
Condition."
The Company's most immediate liquidity concern is its ability to repay its
indebtedness under the Greyrock Line of Credit, which approximated $44.6 million
in principal amount as of December 31, 1998. All amounts owing Greyrock are due
to be repaid by April 30, 1999, and the Company's cash on hand and cash flow
from operations are anticipated to be insufficient to repay the amounts due by
such date. The Company is currently in discussions with Greyrock to extend the
repayment date of the Greyrock Line of Credit, however, there is no assurance
that the extension will be obtained or, if obtained, that the extension will
give the Company sufficient time to obtain replacement financing to repay
Greyrock. If satisfactory extension and/or additional funds are not obtained,
the Company will experience severe liquidity problems. If the Greyrock Line of
Credit is not repaid, Greyrock has the ability to foreclose on the Greyrock Line
of Credit. This matter raises substantial doubt as to the Company's ability to
continue as a going concern. See Note A of Notes to Consolidated Financial
Statements -- "Current Financial Condition."
In addition to the need for capital to repay Greyrock, the Company
will require substantial additional working capital during fiscal 1999 to fund
operations and to repay the BT promissory note and the $9.5 million loan from
WCAS of which $5 million is due in fiscal 1999. Management believes that the
Company will continue to experience operating losses and negative cash flow in
fiscal 1999. Because the Company does not have availability to borrow additional
amounts pursuant to the Greyrock Line of Credit, management anticipates that the
only potential source of additional working capital available to the Company
will be from WCAS, the Company's largest stockholder. There is no assurance,
however, that the Company will attain results that WCAS will regard as
sufficient to support the infusion of additional capital.
In addition to the fact that the Company has limited access or no
access to additional working capital, the Company has limited ability to obtain
working capital from the operations of its Cerplex SAS subsidiary. The ability
to obtain working capital from Cerplex SAS is limited due to the internal
capital needs of Cerplex SAS and due to restrictions placed on Cerplex SAS in
connection with the Company's acquisition of Cerplex SAS from Rank Xerox in
1996. Under the terms of the acquisition, future payments are owed to Rank Xerox
and the Company therefore agreed to certain financial covenants over a four-year
period that limit the amount of dividends and other payments Cerplex SAS can
make to the Company, and impose certain other financial restrictions on the
Company and Cerplex SAS. Accordingly, of the Company's consolidated cash of $6.5
million at December 31, 1998, the cash of Cerplex SAS of $4.6 million is
generally not available to the Company for financing operations outside of
Cerplex SAS.
The Company is highly leveraged, and has significant debt repayment
obligations and preferred stock redemption obligations. As of January 31, 1999,
the Company had approximately $84.8 million principal amount of indebtedness
outstanding, which consisted of: (i) $45.0 million indebtedness under the
Greyrock Line of Credit; (ii) $16.0 million indebtedness under the Company's
10% Senior Subordinated Notes; (iii) $10.5 million indebtedness under the
Company's 7 3/4% Convertible Subordinated Debentures; (iv) $9.5 million combined
indebtedness under three loans from WCAS; (v) $3.1 million indebtedness under a
promissory note to BT; and (vi) $0.7 million of other indebtedness consisting
primarily of equipment leases. In addition, the Company also had as of December
31, 1998, $21.55 million outstanding (par value only) of its mandatorily
redeemable 7% Convertible Preferred Stock. Set forth below is a summary of the
terms of such indebtedness, as well as redemption and other obligations of the
Company's outstanding preferred stock.
Greyrock Line of Credit
The Greyrock Line of Credit consists of a $36.0 million term loan, and
a revolving line of credit with available borrowings of up to $10.0 million
depending on certain financial conditions of the Company. As of January 31,
1999, the entire balance of the $36.0 million term loan was outstanding and $9.0
million of the revolving line of credit was outstanding. WCAS has guaranteed the
repayment of $25.0 million of the principal amount owing by the Company at any
time under the Greyrock Line of
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Credit. The amount available under the Greyrock Line of Credit is based on the
Company's eligible receivables and inventory. Currently, no additional
borrowings are available. The Greyrock Line of Credit is secured by all of the
Company's assets, including the Company's interest in its wholly-owned
subsidiary in the United Kingdom and 65% of the Company's interest in the
Company's wholly-owned subsidiary in France. The outstanding balance of the
Greyrock Line of Credit bears interest each month at the highest London
Interbank Offered Rate (LIBOR) in effect during such month, plus 4.875%per annum
on the line of credit and 4.50% per annum on the term loan, provided that the
interest rate in effect in each month shall not be less than 9% per annum, and
provided that the interest charged for each month is a minimum of $25,000,
regardless of the amount of the outstanding principal balance. This line also
prohibits the Company from paying out cash dividends.
10% Series A and Series B Senior Subordinated Notes.
As of January 31, 1999, there was approximately $16.0 million
principal amount outstanding of the Company's 10% Senior Subordinated Notes,
issued in two series, Series A and Series B. Almost the entire amount of the
$16.0 million principal of such notes consists of Series A notes sold to WCAS,
and the balance of the principal amount consists of Series B notes sold to
certain public stockholders. The terms of the Series A and Series B notes, as
described herein, are substantially similar. The 10% Senior Subordinated Notes
are subordinate in right of payment to all bank debt and other senior
indebtedness of Cerplex but rank senior to all outstanding subordinated
indebtedness. The 10% Senior Subordinated Notes are general, unsecured
obligations of the Company and bear interest at 10% per annum, payable
semi-annually in arrears in cash on June 30 and December 31 of each year,
beginning on June 30, 1998. During the quarter the Company and WCAS agreed to
modify the terms of the Series A 10% Senior subordinated debentures to increase
the principal amount by the amount of accrued but unpaid interest as of both
June 30, 1998 and December 31, 1998 ($244 and $743 respectively). The 10% Senior
Subordinated Notes mature in three equal annual installments commencing on
December 31, 2002. The 10% Senior Subordinated Notes may be prepaid at any time
at the option of the Company in whole or in part, upon not less than 20 or more
than 60 days' notice at the unpaid principal amount thereof plus accrued and
unpaid interest.
7 3/4% Convertible Subordinated Debentures.
As of January 31, 1999, there was approximately $10.5 million
principal amount outstanding of the Company's 7 3/4% Convertible Subordinated
Debentures (the "Debentures"). The Debentures mature April 15, 2001 and are
convertible into Common Stock of the Company at a conversion price, subject to
adjustment in certain instances, of approximately $116.60 per share, and are
redeemable at the option of the Company at face value plus accrued interest
thereon. The Company is required to make partial sinking fund payments of
approximately $117,000 and $2,516,000 in 1999 and 2000, respectively, on the
Debentures. The Debentures bear interest at 7 3/4% payable on April 14 and
October 14 of each year through maturity.
10% Short Term WCAS Notes.
As of January 31, 1999, there was $9.5 million aggregate principal
amount outstanding under three promissory notes to WCAS evidencing recent loans
by WCAS to the Company. The notes were issued on September 30, 1998, December 9,
1998, and January 26, 1999 in the respective principal amounts of $5.0 million,
$2.5 million and $2.0 million. The principal amount of each note must be repaid
in full on the one year anniversary of its issue date ($5.0 million is due
September 30, 1999, $2.5 million is due December 9, 1999 and $2.0 million is due
January 26, 1999). The notes are general, unsecured obligations of the Company
and bear interest at 10% per annum, payable in arrears in cash on March 30, 1999
with the balance at maturity.
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Secured Note Payable to BT.
As of January 31, 1999, there was $3.1 million principal amount
outstanding under a promissory note to BT (the "BT Note"). In July 1994, Old
Cerplex purchased the operating assets of BT Repair Services for cash and
assumed the BT Note in an original principal amount of pound sterling 2.5
million. The BT Note is a non-interest bearing note, secured by the land and
building purchased from BT. The BT Note is payable at the earlier of the point
when orders from the customers of the business purchased by the Company from BT
reach a cumulative 78.0 million pounds (approximately $122.0 million as of
December 31,1998) or May of 1999. As of December 31, 1998, required sales
volumes had not yet been met. Management currently estimates that sales volumes
will not be high enough to require repayment of the BT Note before the outside
maturity date in May of 1999.
Other Debt.
As of January 31, 1999, there was $0.7 million principal amount of
other debt outstanding, consisting primarily of secured equipment financing and
capital lease obligations with interest rates ranging from 8.9% to pound
sterling 12.9%, due in monthly installments through 1999.
7% Senior Cumulative Convertible Preferred Stock.
As of January 31, 1999, there was $21.55 million amount outstanding
(excluding accrued dividends) of the Company's 7% Convertible Preferred Stock
(215,500 shares at $100 per share). Holders of the 7% Convertible Preferred
Stock are entitled to receive dividends of $7.00 per share per annum (or 7% of
the face amount), payable when and as declared by the Company's Board of
Directors. Unpaid dividends are cumulative and accrue. Accrued but unpaid
dividends do not bear interest. The 7% Convertible Preferred Stock must be
redeemed by the Company in equal installments on each of December 31, 2006 and
2007. In addition, the 7% Convertible Preferred Stock is redeemable at the
option of the holders thereof upon a change of control of the Company, which
includes the sale of 50% or more of the voting power of all outstanding shares
of the Company to a party other than WCAS. In the event of a liquidation,
dissolution or winding up of the affairs of the Company, the holders of the 7%
Convertible Preferred Stock are entitled to receive a liquidation preference in
the amount of $100 per share of the 7% Convertible Preferred Stock, plus accrued
and unpaid dividends thereon, prior and in preference to any distribution to
holders of any class of capital stock of the Company junior to such 7%
Convertible Preferred Stock. The 7% Convertible Preferred Stock is convertible
in whole or in part at the option of the holders thereof. Each share of 7%
Convertible Preferred Stock is convertible into 40 shares of the Company's
Common Stock upon payment of the conversion price of $2.50 (subject to
anti-dilution adjustment under certain circumstances).
YEAR 2000 COMPLIANCE
The Company faces Year 2000 risks as the result of computer programs,
microprocessors and embedded date reliant systems using two digits rather than
four to define the applicable year. If such programs or microprocessors are not
corrected, date data concerning the Year 2000 could cause many systems to fail,
lock up or generate erroneous results. A computer system is considered to be
"Year 2000 compliant" if the system's performance and functionality are
unaffected by the processing of dates prior to, during and after the Year 2000,
but only if all products (for example hardware, software and firmware) used with
the system properly exchange accurate date data with it.
The Company is implementing a program intended to enable the Company
to become Year 2000 compliant. The Company is using management information
systems (MIS) personnel knowledgeable regarding Year 2000 problems to determine
the extent of work necessary for the Company to become Year 2000 compliant and
attempt to remedy such problems. The Company has purchased and is in the process
of installing certain software and hardware intended to upgrade its networked
personal computer system to be Year 2000 compliant. More significantly, the
Company is in discussions with its primary software vendor to obtain the source
code for the Company's main operating systems software so that the Company can
modify the software to be Year 2000 compliant. In addition, the Company has
begun discussing Year 2000 issues with certain of its significant suppliers and
customers to evaluate their Year 2000 readiness, and to determine whether any
Year 2000 issues will impede the ability of such suppliers to continue to
provide goods and services to the Company, and the ability of such customers to
continue to provide business to the Company. The Company anticipates that its
internal systems, equipment and processes will be substantially Year 2000
compliant by July 1999, and intends to complete the analysis and remediation of
potential Year 2000 problems with its significant suppliers and customers by
July 1999. The Company estimates that the total dollar amount that the Company
will spend to remediate its Year 2000 issues will not exceed $500,000. Despite
the Company's efforts to become Year 2000 compliant, there is no assurance that
the Year 2000 issue will not pose significant problems. There may be delays in
the Company's remediation efforts, a failure to fully identify all Year 2000
problems in
13
<PAGE> 14
the systems, equipment or processes of the Company or its vendors or customers,
or unanticipated remediation expenses, all of which could have material adverse
consequences on the Company's financial position and results of operations.
The Company believes that the most likely worst case scenario with respect
to Year 2000 problems would be that the Company or the third parties with whom
the Company does business would fail to successfully complete their Year 2000
remediation efforts, in which case the Company would encounter disruptions to
its business that could have a material adverse effect on its financial position
and results of operations. In addition to specific problems that the Company may
encounter with its own systems and those of the third parties with whom the
Company does business, the Company may be materially impacted by widespread
economic or financial market disruptions caused by Year 2000 problems. The
Company has not at this time established Year 2000 contingency plans in the
event that there is a failure of the Company's Year 2000 remediation efforts or
the Year 2000 remediation efforts of third parties with whom the Company does
business. The Company intends to consider contingency plans in the event that
its Year 2000 remediation efforts and those of such third parties appear to be
ineffective or unduly delayed.
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
to, 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:
Inability to Repay Greyrock Line of Credit; Threat to Status as a Going
Concern. As of January 31, 1999, the Company has outstanding $36.0 million in
term debt and $9.0 million in revolving debt under the Greyrock Line of Credit.
No additional borrowings are available under the Greyrock Line of Credit. WCAS
has guaranteed the repayment of $25.0 million of the principal amount owing by
the Company at any time under the Greyrock Line of Credit. All amounts owing
under the Greyrock Line of credit are due to be repaid by April 30, 1999. The
Company's cash flow from operations is anticipated to be insufficient to repay
the amounts due on the Greyrock Line of Credit by April 30, 1999. If the Company
does not repay the loan, Greyrock has the ability to foreclose on the loan. The
Company is currently in discussions with Greyrock to extend the repayment date,
however, here is no assurance that the extension will be obtained, or, if
obtained, that the extension will give the Company sufficient time to obtain
replacement financing to repay Greyrock. If additional funds are not obtained,
the Company will experience severe liquidity problems. This matter raises
substantial doubt about the Company's ability to continue as a going concern.
See Note A to the Unaudited Consolidated Financial Statements -- "Current
Financial Condition."
High Degree of Leverage; Future Capital Requirements. As of January
31,1999, the Company has approximately $84.8 million principal amount of
indebtedness outstanding, which consisted of: (i) $45.0 million indebtedness
under the Greyrock Line of Credit; (ii) $26.5 combined indebtedness under the
Company's 10% Senior Subordinated Notes and 7 3/4% Convertible Subordinated
Debentures; (iii) $9.5 million combined indebtedness under three loans from
WCAS; (iv) $3.1 million indebtedness under a promissory note to BT; and (v) $0.7
million of other indebtedness consisting primarily of equipment leases. In
addition, the Company also has as of January 31, 1999, $21.55 million
outstanding (excluding accrued dividends) of its mandatorily redeemable 7%
Convertible Preferred Stock. The payment terms of the debt and preferred stock
are described in Item 2 of this report under, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." It is anticipated that the Company's cash from operations
will not be sufficient to enable it to meet its debt service and preferred stock
redemption requirements, and the Company will be required to obtain additional
funds through equity or debt financings in order not to default on its debt. In
many cases, if the Company defaults on a particular debt, the default will cause
other debts of the Company
14
<PAGE> 15
to be in default and come due early. The degree to which the Company is
leveraged could adversely affect its ability to obtain additional financing and
could make it more vulnerable to economic downturns and competitive pressures.
The terms of any equity financings have in the past been, and may in the future
be, dilutive to the Company's stockholders, and the terms of any debt financings
are likely to contain restrictive covenants which limit the Company's ability to
pursue certain courses of action. There can be no assurance that additional
funding will be available on acceptable terms, if at all. If adequate funds are
not available, the Company will experience severe liquidity problems. This
matter raises substantial doubt about the Company's ability to continue as a
going concern.
Losses and Accumulated Deficit. For the quarter ended December 31, 1998,
the Company reported a net loss of $7.3 million and an operating loss of $5.8
million. As of December 31, 1998, the Company has a stockholders' deficit of
$62.0 million. The Company is expecting to experience losses for the foreseeable
future, and will require additional funding and financial support. Continued
losses and/or the failure to obtain such additional funding and financial
support could materially and adversely affect the business and financial
condition of the Company and the value of, and the market for, the Company's
equity and debt securities.
Integration with Old Cerplex; New Management. The Company's success will
depend, to a large extent, upon whether the Company effectively integrates its
business with the business of Old Cerplex following the Merger with Old Cerplex
in April 1998. The Company is subject to the risks normally involved in the
integration of each company's operating, administrative, finance, sales and
marketing organizations, as well as each company's communication technologies
and the coordination of sales efforts and streamlining of facilities and back
office operations. In addition, following the Merger, certain key executives
left the management team and others joined. As a result, the Company became
dependent upon a new management group, some members of which had not been
previously involved in managing the Company. While the Company's key executives
have business experience, they are still in the process of familiarizing
themselves with the specific operations of the Company. There can be no
assurance that the Company will be able to successfully integrate with Old
Cerplex in a manner that will result in the synergies intended as a result of
the Merger. These difficulties could have a material adverse impact on the
Company's financial condition and results of operations.
Control by WCAS. WCAS owns approximately 70% of the Company's voting
capital stock, which consists of WCAS's ownership of shares of the Company's
outstanding Common Stock, and shares of the Company's 7% Convertible Preferred
Stock (which give the holders thereof the right to vote on all matters on which
the holders of Common Stock are entitled to vote, as if the 7% Convertible
Preferred Stock had been converted to Common Stock). As a result, WCAS is able
to control all matters requiring approval by the Company's stockholders,
including the election of directors. The Company's Board of Directors has the
authority to issue additional shares of preferred stock in one or more series
and fix the rights, preferences, privileges and restrictions granted to or
imposed upon any such shares of preferred stock. The issuance of such preferred
stock may adversely affect voting and dividend rights, rights upon liquidation
and other rights of holders of the Company's Common Stock and may result in
immediate and substantial dilution to the holders of the Common Stock. The
issuance of such preferred stock and the control by WCAS of the Company may also
have the effect of delaying, deferring or preventing a change in control of the
Company.
Dependence on Key Customers. For the quarter ended December 31, 1998, Rank
Xerox and BT accounted for approximately 2% and 14% of the Company's revenues,
respectively. These revenues were almost entirely attributable to the business
of Old Cerplex. There can be no assurance that such customers will not terminate
any or all of their arrangements with the Company, significantly change, reduce
or delay the amount of services ordered from the Company, or significantly
change the terms upon which the Company and these customers do business. Any
such termination, change, reduction, or delay could have a material adverse
effect on the Company's business. It is anticipated that the Company's contract
with Rank Xerox will be phased out by June 2000. In addition, unit volumes from
BT have been declining and are expected to continue to decline due to, among
other things, product evolution. The future success of the Company's European
operations is dependent upon replacing these declining volumes with new revenue
from either these or new customers.
15
<PAGE> 16
There can be no assurance that the Company will be able to replace these
declining volumes with sales to either these or new customers.
Competition. The Company competes with the in-house repair and service
centers of OEMs and TPMs. There is no indication that these companies will
choose to outsource their repair and service needs. In certain instances, these
companies compete directly with the Company to provide services to third party
OEMs and TPMs. Moreover, the industry in which the Company operates is
fragmented, and the Company faces competition from a variety of small
independent suppliers. Competition for business from OEM, TPM and MVSO customers
is based on a number of factors, including breadth of services provided and
price. Certain of the Company's competitors have greater revenue or larger
capitalizations than the Company. There can be no assurance that the Company
will be able to compete effectively in its target markets.
Reliance on International Sales. For the quarter ended December 31, 1998,
approximately 52% of the Company's sales were outside of North America. There
can be no assurance that the Company will continue to be able to successfully
market, sell, and deliver its products and services in these markets. Moreover,
it is anticipated that the Company's contract with Rank Xerox, which accounted
for approximately 2% of the Company's revenues for the quarter, will be phased
out by June 2000. In addition to the uncertainty as to the Company's ability to
maintain or expand its international presence, there are certain risks inherent
in doing business on an international level, such as unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable, political instability, severance and
other costs associated with work force reductions, fluctuations in currency
exchange rates, and potentially adverse tax consequences, any of which could
adversely impact the success of the Company's international operations. There
can be no assurance that one or more of such factors will not have a material
adverse effect on the Company's international operations and, consequently, on
the Company's business, operating results and financial condition.
Reliance on Short Term Purchase Orders and Contracts. The Company generally
distributes spare parts to, and receives its recyclable material from customers
pursuant to non-exclusive contracts that do not contain guaranteed or minimum
quantities and are subject to cancellation on short notice at the customer's
discretion. Similarly, the Company's repair contracts are typically subject to
termination on short notice at the customer's discretion, and purchase orders
under such contracts typically only cover services over a 90-day period.
Dependence on the Electronics and Computer Industry. The Company's
businesses are dependent upon the growth, viability and financial stability of
its customers and potential customers in the electronics and the computer
industry. The electronics and computer industry have been characterized by rapid
technological change, compressed product life cycles and pricing and margin
pressures. The factors affecting segments of the electronics and computer
industry in general, and the Company's OEM customers in particular, could have
an adverse effect on the Company's business. There can be no assurance that
existing customers or future customers will not experience financial difficulty,
which could have a material adverse effect on the Company's business.
Risks Associated with Intangible Assets. As of December 31, 1998,
approximately $35.6 million of the Company's total assets consisted of
intangible assets. The intangible assets consist primarily of goodwill resulting
from the Merger with Old Cerplex. The goodwill must be amortized over a number
of years and deducted from the Company's earnings, even though the goodwill may
not generate earnings to offset such deduction. There can be no assurance that
the value of the Company's intangible assets will ever be realized by the
Company, particularly in any sale or liquidation of the Company. However,
management continues to monitor goodwill in accordance with the provisions of
Statement of Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long Lived Assets and Long Lived Assets to be Disposed of." Any
significant decrease in the value of such intangible assets or increase in the
rate of amortization thereof would adversely affect the Company's financial
condition and results of operations.
16
<PAGE> 17
Limited Trading Market and Possible Volatility of Stock Price. The volume
of trading of the Company's Common Stock has been very limited and there can be
no assurance of an active trading market for the Common Stock in the future. In
addition, the trading price of the Company's Common Stock has been, and in the
future could be, subject to significant fluctuations in response to variations
in quarterly operating results of the Company, the depth and liquidity of the
market for the Company's Common Stock, investor perception of the Company and
the industry within which it competes, the gain or loss of significant
contracts, changes in management or new products or services offered by the
Company or any 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 the
Company's Common Stock.
Shares Available for Future Sale. No prediction can be made as to the
effect, if any, that future sales of shares, or the availability of shares for
future sale by WCAS, will have on the market price of the Company's Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock
(including shares issued upon the exercise of stock options and the conversion
of preferred stock), or the perception that such sales could occur, may
adversely affect prevailing market prices for the Company's Common Stock.
17
<PAGE> 18
THE CERPLEX GROUP, INC.
PART II
OTHER INFORMATION
18
<PAGE> 19
THE CERPLEX GROUP, INC.
ITEM 1. LEGAL PROCEEDINGS
Inapplicable.
ITEM 2. CHANGES IN SECURITIES
On November 19, 1998, the Company effected the One-for-Ten Reverse
Split whereby every ten shares of the Company's Common Stock were
converted into one share of the Company's Common Stock. In connection
with such stock split, the $100 principal amount of each share of
outstanding 7% Convertible Preferred Stock became convertible, at the
option of the holder thereof, into 40 shares of the Company's Common
Stock.
November 19, 1998 44,000 shares of Series A Convertible Preferred
Stock were converted into 249,233 shares of Common Stock. No shares
of Series A Convertible Preferred Stock remain outstanding.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders on October 5, 1998, holders of a
majority of the capital stock of the Company entitled to vote
approved the following matters:
1. The amendment of the Company's Certificate of Incorporation to
effect the One-for-Ten Reverse Split whereby every ten shares of the
Company's Common Stock were converted into one share of the Company's
Common Stock;
2. The adoption of the Company's 1998 Stock Option and Restricted
Stock Purchase Plan, which provides for the grant to employees,
directors, and consultants of the Company of options and awards to
purchase up to 2,835,500 shares (post-reverse split) of the Company's
Common Stock; and
3. The approval of KPMG LLP as the Company's independent public
accountants and auditors.
<TABLE>
<CAPTION>
[Post Revere Split]
Affirmative Negative Votes
Votes Votes Withheld
----------- -------- --------
<S> <C> <C> <C>
a. Amendment of the Certificate of
Incorporation to effect reverse
stock split 11,987,358 4,991 83
b. Adoption of 1998 Stock Option
and Restated Stock Purchase
Plan 11,985,136 6,805 492
c. Certification of KPMG LLP as
the Company's Independent
Accountants 11,989,329 2,934 169
</TABLE>
ITEM 5. OTHER INFORMATION
Inapplicable.
19
<PAGE> 20
TEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
3.1.1 The Restated Certificate of Incorporation of the Company, as amended
(incorporated by reference from Exhibit 3.1 to the Company's
Transition Report on Form 10-K for the transition period from
December 31, 1991 to September 30, 1992).
3.1.2 The Certificate of Amendment to the Restated Certificate of
Incorporation of the Company, filed on April 28, 1998 (incorporated
by reference from Exhibit 4.1.1 of the Company's Post-Effective
Amendment No. 2 to the Company's Registration Statement on Form S-3,
filed on May 13, 1998 (Registration No. 333-47973)).
3.1.3 The Certificate of Amendment to the Restated Certificate of
Incorporation of the Company, filed on April 30, 1998 (incorporated
by reference from Exhibit 4.1.2 of the Company's Post-Effective
Amendment No. 2 to the Company's Registration Statement on Form S-3,
filed on May 13, 1998 (Registration No. 333-47973)).
3.1.4 Certificate of Amendment to Certificate of Incorporation of the
Company filed on October 6, 1998 (incorporated by reference from
Exhibit 3.1.4 of the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998 and filed on January 12, 1999).
3.2.1 Bylaws of the Company, as amended (incorporated by reference from
Exhibit 4.2 of the Company's Registration Statement on Form S-8
(Registration No. 33-79426)).
3.2.2 Resolutions adopted by the Board of Directors on April 30, 1998,
amending the Bylaws of the Company (incorporated by reference from
Exhibit 4.2.1 of the Company's Post-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-3, filed on May 13, 1998
(Registration No. 333-47973)).
4.1 Certificate of Designations, Preferences and Rights of Convertible
Preferred Stock filed on November 19, 1998 eliminating the Series B,
C and D Convertible Preferred Stock (incorporated by reference from
Exhibit 4.18 of the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998 and filed on January 12, 1999).
4.2 Certificate of Elimination of Convertible Preferred Stock filed on
December 15, 1998 (incorporated by reference from Exhibit 4.19 of the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and filed on January 12, 1999).
10.1 10% Senior Subordinated Note for $5,000,000, due September 30, 1999,
between the Company, Aurora Electronics Group, Inc. and Cerplex, Inc.
as payors and Welsh, Carson, Anderson & Stowe VII, L.P. as payee
(incorporated by reference from Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998 and
filed on January 12, 1999).
10.2 10% Senior Subordinated Note for $2,500,000, due December 9, 1999,
between the Company, Aurora Electronics Group, Inc. and Cerplex, Inc.
as payors and Welsh, Carson, Anderson & Stowe VII, L.P. as payee
(incorporated by reference from Exhibit 10.4 of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998 and
filed on January 12, 1999).
*10.3 10% Senior Subordinated Note for $2,000,000, due January 26, 2000,
between the Company, Aurora Electronics Group, Inc. and Cerplex, Inc.
as payors and Welsh, Carson, Anderson & Stowe VII, L.P. as payee.
*11 Computation of Per Share Earnings.
*27 Financial Data Schedule - Article 5 of Regulation S-X.
</TABLE>
- ---------
* Filed herewith.
(b) Reports on Form 8-K
None
20
<PAGE> 21
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: February 10, 1999
THE CERPLEX GROUP, INC.
/s/ Steven L. Korby
----------------------------------------
Steven L. Korby
Executive Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
/s/ Anthony E. Palumbo
----------------------------------------
Anthony E. Palumbo
Corporate Controller
(Controller)
21
<PAGE> 22
THE CERPLEX GROUP, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
3.1.1 The Restated Certificate of Incorporation of the Company, as amended
(incorporated by reference from Exhibit 3.1 to the Company's
Transition Report on Form 10-K for the transition period from
December 31, 1991 to September 30, 1992).
3.1.2 The Certificate of Amendment to the Restated Certificate of
Incorporation of the Company, filed on April 28, 1998 (incorporated
by reference from Exhibit 4.1.1 of the Company's Post-Effective
Amendment No. 2 to the Company's Registration Statement on Form S-3,
filed on May 13, 1998 (Registration No. 333-47973)).
3.1.3 The Certificate of Amendment to the Restated Certificate of
Incorporation of the Company, filed on April 30, 1998 (incorporated
by reference from Exhibit 4.1.2 of the Company's Post-Effective
Amendment No. 2 to the Company's Registration Statement on Form S-3,
filed on May 13, 1998 (Registration No. 333-47973)).
3.1.4 Certificate of Amendment to Certificate of Incorporation of the
Company filed on October 6, 1998 (incorporated by reference from
Exhibit 3.1.4 of the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998 and filed on January 12, 1999).
3.2.1 Bylaws of the Company, as amended (incorporated by reference from
Exhibit 4.2 of the Company's Registration Statement on Form S-8
(Registration No. 33-79426)).
3.2.2 Resolutions adopted by the Board of Directors on April 30, 1998,
amending the Bylaws of the Company (incorporated by reference from
Exhibit 4.2.1 of the Company's Post-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-3, filed on May 13, 1998
(Registration No. 333-47973)).
4.1 Certificate of Designations, Preferences and Rights of Convertible
Preferred Stock filed on November 19, 1998 eliminating the Series B,
C and D Convertible Preferred Stock (incorporated by reference from
Exhibit 4.18 of the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998 and filed on January 12, 1999).
4.2 Certificate of Elimination of Convertible Preferred Stock filed on
December 15, 1998 (incorporated by reference from Exhibit 4.19 of the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and filed on January 12, 1999).
10.1 10% Senior Subordinated Note for $5,000,000, due September 30, 1999,
between the Company, Aurora Electronics Group, Inc. and Cerplex, Inc.
as payors and Welsh, Carson, Anderson & Stowe VII, L.P. as payee
(incorporated by reference from Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998 and
filed on January 12, 1999).
10.2 10% Senior Subordinated Note for $2,500,000, due December 9, 1999,
between the Company, Aurora Electronics Group, Inc. and Cerplex, Inc.
as payors and Welsh, Carson, Anderson & Stowe VII, L.P. as payee
(incorporated by reference from Exhibit 10.4 of the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998 and
filed on January 12, 1999).
*10.3 10% Senior Subordinated Note for $2,000,000, due January 26, 2000,
between the Company, Aurora Electronics Group, Inc. and Cerplex, Inc.
as payors and Welsh, Carson, Anderson & Stowe VII, L.P. as payee.
*11 Computation of Per Share Earnings.
*27 Financial Data Schedule - Article 5 of Regulation S-X.
</TABLE>
- ---------
* Filed herewith.
22
<PAGE> 1
EXHIBIT 10.3
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS. NEITHER THE SECURITIES EVIDENCED HEREBY, NOR ANY
INTEREST THEREIN, MAY BE OFFERED, SOLD, TRANSFERRED, ENCUMBERED OR OTHERWISE
DISPOSED OF UNLESS EITHER (I) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER
SAID ACT AND LAWS RELATING THERETO OR (II) THE BORROWERS HAVE RECEIVED AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY IN FORM AND SUBSTANCE TO THE
BORROWERS, STATING THAT SUCH REGISTRATION IS NOT REQUIRED.
THE CERPLEX GROUP, INC.
CERPLEX, INC.
AURORA ELECTRONICS GROUP, INC.
10% Senior Subordinated Note
$2,000,000 January 26, 1999
THE CERPLEX GROUP, INC., a Delaware corporation ("Parent"),
CERPLEX, INC., a Delaware corporation and wholly-owned subsidiary of Parent
("Cerplex"), and AURORA ELECTRONICS GROUP, INC., a California corporation and
wholly-owned subsidiary of Parent ("AEG," and collectively with Parent and
Cerplex, the "Borrowers"), for value received, hereby jointly and severally
promise to pay to Welsh, Carson, Anderson & Stowe VII, L.P. or its registered
assigns, the principal sum of TWO MILLION DOLLARS ($2,000,000) on JANUARY 26,
2000 (subject to applicable restrictions set forth in Section 15 hereof), and to
pay interest (computed on the basis of a 360-day year consisting of twelve
30-day months) from the date hereof on the unpaid principal amount hereof at the
rate of 10% per annum on July 26, 1999 and on the date the outstanding principal
amount hereof shall have become due and payable in full, whether at maturity or
by acceleration or otherwise. If the principal amount hereof shall not be paid
when the same shall have become due and payable in full, whether at maturity or
by acceleration or otherwise, then such overdue principal amount and (to the
extent permitted by applicable law) any overdue interest shall thereupon bear
interest at the rate of 12% per annum until paid in full.
All payments of principal and interest on this Note shall be
in such coin or currency of the United States of America as at the time of
payment shall be legal tender for payment of public and private debts, and shall
be made at the offices of the person deemed the holder hereof in accordance with
Section 4 below.
<PAGE> 2
For purposes of this Note, "Business Day" shall mean any day other than
a Saturday, Sunday or a legal holiday under the laws of the State of New York or
the State of California.
1. UNSECURED NOTE. The indebtedness evidenced by this Note shall at all
times be unsecured.
2. TRANSFER, ETC. OF NOTES. The Borrowers shall keep at the office or
agency maintained as provided in paragraph (a) of Section 9 a register in which
the Borrowers shall provide for the registration of this Note and for the
registration of transfer and exchange of this Note. The holder of this Note may,
at its option, and either in person or by duly authorized attorney, surrender
the same for registration of transfer or exchange at the office or agency of the
Borrowers maintained as provided in paragraph (a) of Section 9, and, without
expense to such holder (except for taxes or governmental charges imposed in
connection therewith), receive in exchange therefor a Note or Notes each in such
denomination or denominations as such holder may request, dated as of the date
to which interest has been paid on the Note or Notes so surrendered for transfer
or exchange, for the same aggregate principal amount as the then unpaid
principal amount of the Note or Notes so surrendered for transfer or exchange,
and registered in the name of such person or persons as may be designated by
such holder. Every Note presented or surrendered for registration of transfer or
exchange shall be duly endorsed, or shall be accompanied by a written instrument
of transfer, satisfactory in form to the Borrowers, duly executed by the holder
of such Note or his attorney duly authorized in writing. Every Note so made and
delivered in exchange for this Note shall in all other respects be in the same
form and have the same terms as this Note. No transfer or exchange of any Note
shall be valid unless made in the foregoing manner at such office or agency.
3. LOSS, THEFT, DESTRUCTION OR MUTILATION OF NOTE. Upon receipt of
evidence satisfactory to the Borrowers of the loss, theft, destruction or
mutilation of this Note, and, in the case of any such loss, theft or
destruction, upon receipt of an affidavit of loss and indemnity from the holder
hereof reasonably satisfactory to the Borrowers, or, in the case of any such
mutilation, upon surrender and cancellation of this Note, the Borrowers will
make and deliver, in lieu of this Note, a new Note of like tenor and unpaid
principal amount and dated as of the date to which interest has been paid on
this Note.
4. PERSONS DEEMED OWNERS; HOLDERS. The Borrowers may deem and treat the
person in whose name this Note is registered as the owner and holder of this
Note for the purpose of receiving payment of principal of and interest on this
Note and for all other purposes whatsoever, whether or not this Note shall be
overdue. With respect to any Note at any time outstanding, the term "holder", as
used herein, shall be deemed to mean the person in whose name such Note is
registered as aforesaid at such time.
2
<PAGE> 3
5. PREPAYMENTS. Subject to any applicable restrictions contained in the
Loan Agreement (as hereinafter defined), upon notice given as provided in
Section 6 the Borrowers may, at their option, prepay all or any portion of this
Note, at the principal amount thereof so to be prepaid, together with interest
accrued thereon to the date fixed for such prepayment.
6. NOTICE OF PREPAYMENT AND OTHER NOTICES. The Borrowers shall give
written notice to the holder of this Note of any prepayment of this Note or any
portion hereof pursuant to Section 5 not less than 10 nor more than 60 days
prior to the date fixed for such prepayment. Such notice of prepayment and all
other notices to be given to any holder of this Note shall be given by
registered or certified mail to the person in whose name this Note is registered
at its address designated on the register maintained by the Borrowers on the
date of mailing such notice of prepayment or other notice. Upon notice of
prepayment being given as aforesaid, the Borrowers covenant and agree that they
will, subject to obtaining the prior written consent referred to in Section 5,
prepay, on the date therein fixed for prepayment, this Note or the portion
hereof, as the case may be, so called for prepayment, at the principal amount
thereof so called for prepayment together with interest accrued thereon to the
date fixed for such prepayment.
7. INTEREST AFTER DATE FIXED FOR PREPAYMENT. If this Note or a portion
hereof is called for prepayment as herein provided, this Note or such portion
shall cease to bear interest on and after the date fixed for such prepayment
unless, upon presentation for such purpose, the Borrowers shall fail to pay this
Note or such portion, as the case may be, in which event this Note or such
portion, as the case may be, and, so far as may be lawful, any overdue
installment of interest, shall bear interest on and after the date fixed for
such prepayment and until paid at the rate per annum provided herein for overdue
principal.
8. SURRENDER OF NOTES; NOTATION THEREON. Upon any prepayment of a
portion of the principal amount of this Note, the holder hereof, at its option,
may require the Borrowers to execute and deliver at the expense of the Borrowers
(except for taxes or governmental charges imposed in connection therewith), upon
surrender of this Note, a new Note registered in the name of such person or
persons as may be designated by such holder for the principal amount of this
Note then remaining unpaid, dated as of the date to which interest has been paid
on the principal amount of this Note then remaining unpaid, or may present this
Note to the Borrowers for notation hereon of the payment of the portion of the
principal amount of this Note so prepaid.
9. COVENANTS. The Borrowers covenant and agree that, so long as this
Note shall be outstanding:
(a) MAINTENANCE OF OFFICE. The Borrowers will maintain an office or
agency in such place in the United States of America as the Borrowers may
designate in writing to the registered holder hereof, where this Note may
be presented for registration of transfer and exchange as herein provided,
where notices and demands to or upon the Borrowers in respect of this Note
may be served and where, at the option of the holder thereof, this
3
<PAGE> 4
Note may be presented for payment. Until the Borrowers otherwise notify the
holder of this Note, said office shall be the principal office of Parent at
1382 Bell Avenue, Tustin, California 92780.
(b) CORPORATE EXISTENCE. Each of the Borrowers will do or cause to be
done all things necessary and lawful to preserve and keep in full force and
effect its corporate existence, rights and franchises and the corporate or
partnership existence, rights and franchises of each of its subsidiaries;
provided, however, that nothing in this paragraph (b) shall prevent the
abandonment or termination of any rights or franchises of any Borrower, or
the liquidation or dissolution of, or a sale, transfer or disposition
(whether through merger, consolidation, sale or otherwise) of all or any
substantial part of the property and assets of, any subsidiary or the
abandonment or termination of the corporate or partnership existence,
rights and franchises of any subsidiary if such abandonment, termination,
liquidation, dissolution, sale, transfer or disposition is, in the good
faith business judgment of the Borrowers, in the best interests of the
Borrowers and is not disadvantageous in any material respect to the holder
of this Note.
(c) NOTICE OF DEFAULT. If any one or more events which constitute, or
which with notice or lapse of time or both would constitute, an Event of
Default under Section 11 of this Note shall occur, or if the holder of this
Note shall demand payment or take any other action permitted upon the
occurrence of any such Event of Default, the Borrowers shall, immediately
after they become aware that any such event has occurred or that such
demand has been made or that any such action has been taken, give notice to
the holder of this Note, specifying the nature of such event or of such
demand or action, as the case may be; provided, however, that if such
event, in the good faith judgment of the Borrowers, will be cured within
ten days after the Borrowers have knowledge that such event would, with or
without notice or lapse of time or both, constitute such an Event of
Default, no such notice need be given if such Event of Default shall be
cured within such ten-day period.
(d) MERGER OR CONSOLIDATION. If any Borrower shall effect a merger or
consolidation in which it is not the surviving entity, then the Borrowers
shall take such action as may be necessary, as a condition to consummating
such transaction, to cause the surviving entity to assume all of such
Borrower's obligations under this Note, as if such entity had been the
original issuer thereof, and such entity shall acknowledge in writing its
obligation to fully and timely honor such Borrower's obligations under this
Note.
(e) OPTIONAL PREPAYMENTS OF DEBT. Other than with respect to Senior
Indebtedness (as hereinafter defined), the Borrowers will not make any
optional prepayment of any indebtedness for borrowed money, prior to the
repayment in full of this Note.
4
<PAGE> 5
10. MODIFICATION; WAIVER. The Borrowers may, with the written consent of
the holder of this Note, modify the terms and provisions of this Note or the
rights of the holder of this Note or the obligations of the Borrowers
thereunder, and the observance by the Borrowers of any term or provision of this
Note may be waived with the written consent of the holder of this Note. Any such
modification or waiver shall be binding upon any future holder of this Note and
upon the Borrowers, whether or not this Note shall have been marked to indicate
such modification or waiver, but any Note issued thereafter shall bear a
notation referring to any such modification or waiver.
11. EVENTS OF DEFAULT. If any one or more of the following events,
herein called Events of Default, shall occur, for any reason whatsoever, and
whether such occurrence shall, on the part of the Borrowers or any subsidiary,
be voluntary or involuntary or come about or be effected by operation of law or
pursuant to or in compliance with any judgment, decree or order of a court of
competent jurisdiction or any order, rule or regulation of any administrative or
other governmental authority, and such Event of Default shall be continuing:
(a) default shall be made in the payment of the principal when and as
the same shall become due and payable, whether on demand (to the extent
demand is permitted to be made under Section 15 hereof) or at a date fixed
for prepayment or by acceleration or otherwise; or
(b) default shall be made in the due observance or performance of any
other covenant, condition or agreement on the part of the Borrowers to be
observed or performed pursuant to the terms hereof and such default shall
continue for 30 days after written notice thereof, specifying such default
and requesting that the same be remedied, shall have been given to the
Borrowers by the holder of this Note; or
(c) the entry of a decree or order for relief by a court having
jurisdiction in the premises in respect of any Borrower or any subsidiary
in an involuntary case under the federal bankruptcy laws, as now
constituted or hereafter amended, or any other applicable federal or state
bankruptcy, insolvency or other similar laws, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of any Borrower or any subsidiary or for any substantial part of
any of their property, or ordering the winding-up or liquidation of any of
their affairs and the continuance of any such decree or order unstayed and
in effect for a period of 90 consecutive days; or
(d) the commencement by any Borrower or any subsidiary of a voluntary
case under the federal bankruptcy laws, as now constituted or hereafter
amended, or any other applicable federal or state bankruptcy, insolvency or
other similar laws, or the consent by any of them to the appointment of or
taking possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator (or other similar official) of any Borrower or any Subsidiary
or for any substantial part of their property, or the making by any of them
of any assignment for the benefit of creditors, or the failure of the
Borrowers or any Subsidiary generally to pay its debts as such debts
become due;
5
<PAGE> 6
then the holder of this Note may, at its option, by notice to the Borrowers,
declare this Note to be forthwith due and payable together with interest accrued
thereon without presentment, demand, protest or further notice of any kind, all
of which are expressly waived to the extent permitted by law.
At any time after any declaration of acceleration as to this Note has
been made as provided in this Section 11, the holder of this Note may rescind
such declaration and its consequences, if (i) the Borrowers have paid all
overdue installments of interest on this Note and all principal that has become
due otherwise than by such declaration of acceleration and (ii) all other
defaults and Events of Default (other than nonpayments of principal and interest
that have become due solely by reason of acceleration) shall have been remedied
or cured or shall have been waived pursuant to this paragraph; provided,
however, that no such rescission shall extend to or affect any subsequent
default or Event of Default or impair any right consequent thereon.
12. SUITS FOR ENFORCEMENT. Subject to the provisions of Section 15 of
this Note, in case any one or more of the Events of Default specified in Section
11 of this Note shall occur and be continuing, the holder of this Note may
proceed to protect and enforce its rights by suit in equity, action at law
and/or by other appropriate proceeding, whether for the specific performance of
any covenant or agreement contained in this Note or in aid of the exercise of
any power granted in this Note, or may proceed to enforce the payment of this
Note or to enforce any other legal or equitable right of the holder of this
Note.
In case of any default under this Note, the Borrowers will pay to the
holder thereof such amounts as shall be sufficient to cover the reasonable costs
and expenses of such holder due to said default, including, without limitation,
collection costs and reasonable attorneys' fees, to the extent actually
incurred.
13. REMEDIES CUMULATIVE. No remedy herein conferred upon the holder of
this Note is intended to be exclusive of any other remedy and each and every
such remedy shall be cumulative and shall be in addition to every other remedy
given hereunder or now or hereafter existing at law or in equity or by statute
or otherwise.
14. REMEDIES NOT WAIVED. No course of dealing between the Borrowers and
the holder of this Note or any delay on the part of the holder hereof in
exercising any rights hereunder shall operate as a waiver of any right of any
holder of this Note.
15. SUBORDINATION. (a) Anything contained in this Note to the contrary
notwithstanding, the indebtedness evidenced by this Note shall be subordinate
and junior, to the extent set forth in the following paragraphs (A), (B), (C)
and (D), to all Senior Indebtedness of the Borrowers. "Senior Indebtedness"
shall mean the principal of, premium, if any, and interest
6
<PAGE> 7
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law and
including any loans made to any Borrower as a debtor in possession in any
bankruptcy proceeding by any persons who were the holders of any Senior
Indebtedness on the date such bankruptcy proceeding was commenced) on, and all
reasonable fees, reimbursement and indemnity obligations, and all other
obligations arising in connection with, any indebtedness for borrowed money of
any Borrower, contingent or otherwise, now outstanding or created, incurred,
issued, assumed or guaranteed in the future, except for all indebtedness of any
Borrower due to Cerplex SAS. Without limiting the generality of the foregoing,
Senior Indebtedness shall include all Obligations (under and as defined in the
Loan Agreement), including, without limitation, any obligations of any of the
Borrowers under any guaranties in favor of the Senior Lender (as hereinafter
defined); notwithstanding the foregoing, Senior Indebtedness shall include only
such Obligations until such time as the same are paid in full in cash and all
obligations to provide financial accommodations under the Loan Agreement have
terminated. For purposes of this Note, "Loan Agreement" shall mean the Loan and
Security Agreement, dated as of April 30, 1998, as amended or otherwise
modified, among the Borrowers, the other borrowers named therein and Greyrock
Business Credit, a Division of NationsCredit Commercial Corporation (the "Senior
Lender"), together with any agreement entered into in connection with the
restatement, renewal, extension, restructuring, refunding or refinancing of the
obligations under such loan agreement. Notwithstanding anything herein to the
contrary (and without limiting any of the other provisions hereof),
notwithstanding any default or event of default with respect to the subordinated
debt evidenced by this Note, the holder of this Note will take no action to
accelerate or enforce this Note or any rights or remedies relating thereto
against the Borrowers (including without limitation the commencement of, or
joining in, any involuntary bankruptcy petition or similar judicial proceeding
against the Borrowers) until the expiration of six months after written notice
of default is given by the holder to the Senior Lender.
(A) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceedings, or any receivership
proceedings in connection therewith, relative to the Borrowers or their
respective creditors or property, and in the event of any proceedings
for voluntary liquidation, dissolution or other winding up of the
Borrowers, whether or not involving insolvency or bankruptcy
proceedings, then all Senior Indebtedness shall first be paid in full
in cash and all obligations to provide financial accommodations under
the Loan Agreement have terminated, before any payment, whether on
account of principal, interest or otherwise, is made upon the Notes.
(B) In any of the proceedings referred to in paragraph (A)
above, any payment or distribution of any kind or character, whether in
cash, property, stock or obligations which may be payable or
deliverable in respect of the Notes shall be paid or delivered directly
to the holders of Senior Indebtedness for application in payment
thereof, unless and until all Senior Indebtedness shall have been paid
in full in cash and all obligations to provide financial accommodations
under the Loan Agreement have terminated.
7
<PAGE> 8
(C) No payment shall be made, directly or indirectly, on
account of the Notes (i) upon maturity of any Senior Indebtedness
obligation, by lapse of time, acceleration (unless waived), or
otherwise, unless and until all principal thereof and interest thereon
and all other obligations in respect thereof shall first be paid in
full in cash and all obligations to provide financial accommodations
under the Loan Agreement have terminated, or (ii) upon the happening of
any default in payment of any principal of, premium, if any, or
interest on or any other amounts payable in respect of Senior
Indebtedness when the same becomes due and payable whether at maturity
or at a date fixed for prepayment or by declaration or otherwise (a
"Senior Payment Default"), unless and until such Senior Payment Default
shall have been cured or waived or shall have ceased to exist.
(D) Upon the happening of an event of default (other than
described in clause (A), (B) or (C) above) with respect to any Senior
Indebtedness permitting (after notice or lapse of time or both) one or
more holders of such Senior Indebtedness (or, in the case of the Loan
Agreement, the Senior Lender) to declare such Senior Indebtedness due
and payable prior to the date on which it is otherwise due and payable
(a "Nonmonetary Default"), upon the occurrence of (i) receipt by the
holder of this Note of written notice from the holders of said Senior
Indebtedness (or, in the case of the Loan Agreement, the Senior Lender)
of a Nonmonetary Default (any such notice, a "Blockage Notice"), or
(ii) if such Nonmonetary Default results from the acceleration of this
Note, the date of such acceleration; then (x) the Borrowers will not
make, directly or indirectly, to the holder of this Note any payment of
any kind of or on account of this Note; (y) the holder of this Note
will not accept from the Borrowers any payment of any kind of or on
account of this Note and (z) the holder of this Note may not take,
demand, receive, sue for, accelerate or commence any remedial
proceedings with respect to any amount payable under this Note, unless
and until in each case described in clauses (x), (y) and (z) all such
Senior Indebtedness shall have been paid in full in cash and all
obligations to provide financial accommodations under the Loan
Agreement have terminated; provided, however, that if such Nonmonetary
Default shall have occurred and be continuing for a period (a "Blockage
Period") commencing on the earlier of the date of receipt of such
Blockage Notice or the date of the acceleration of this Note and ending
179 days thereafter (it being understood that not more than one
Blockage Period may be commenced with respect to this Note during any
period of 360 consecutive days), and during such Blockage Period (i)
such Nonmonetary Default shall not have been cured or waived, (ii) the
holder of such Senior Indebtedness (or, in the case of the Loan
Agreement, the Senior Lender) shall not have made a demand for payment
and commenced an action, suit or other proceeding against the Borrowers
and (iii) none of the events described in subsection (A) above shall
have occurred, then (to the extent not otherwise prohibited by
subsections (A), (B) or (C) above) the Borrowers may, not less than 10
days after receipt by the holders of such Senior Indebtedness or the
Senior Lender, as the case may be, of written notice to such effect
from the holder of this Note, make and the holder of this Note may
accept from the Borrowers all past due and current payments of any kind
of or on account of this Note, and such holder may demand, receive,
retain, sue for or otherwise seek enforcement or collection of all
amounts payable on account of principal of or interest on this Note.
8
<PAGE> 9
(b) Subject to the payment in full in cash of all Senior Indebtedness as
aforesaid and the termination of all obligations to provide financial
accommodations under the Loan Agreement, the holder of this Note shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of any kind or character, whether in cash,
property, stock or obligations, which may be payable or deliverable to the
holders of Senior Indebtedness, until the principal of, and interest on,
this Note shall be paid in full in cash, and, as between the Borrowers,
their creditors other than the holders of Senior Indebtedness, and the
holders of this Note, no such payment or distribution made to the holders
of Senior Indebtedness by virtue of this Section 15 which otherwise would
have been made to the holder of this Note shall be deemed a payment by the
Borrowers on account of the Senior Indebtedness, it being understood that
the provisions of this Section 15 are and are intended solely for the
purposes of defining the relative rights of the holder of this Note, on the
one hand, and the holder of the Senior Indebtedness, on the other hand.
Subject to the rights, if any, under this Section 15 of holders of Senior
Indebtedness to receive cash, property, stock or obligations otherwise
payable or deliverable to the holder of this Note, nothing herein shall
either impair, as between the Borrowers and the holder of this Note, the
obligation of the Borrowers, which is unconditional and absolute, to pay to
the holder thereof the principal thereof and interest thereon in accordance
with its terms or prevent (except as otherwise specified therein) the
holder of this Note from exercising all remedies otherwise permitted by
applicable law or hereunder upon default hereunder.
(c) If any payment or distribution of any character or any security,
whether in cash, securities or other property, shall be received by any
holder of this Note in contravention of any of the terms hereof or before
all the Senior Indebtedness obligations have been paid in full in cash and
all obligations to provide financial accommodations under the Loan
Agreement have terminated, such payment or distribution or security shall
be received in trust for the benefit of, and shall be paid over or
delivered and transferred to, the holders of the Senior Indebtedness at the
time outstanding in accordance with the priorities then existing among such
holders for application to the payment of all Senior Indebtedness remaining
unpaid, to the extent necessary to pay all such Senior Indebtedness in full
in cash. In the event of the failure of any such holder to endorse or
assign any such payment, distribution or security, each holder of any
Senior Indebtedness is hereby irrevocably authorized to endorse or assign
the name.
(d) The rights under these subordination provisions of the holders of
any Senior Indebtedness as against any holders of the Notes shall remain in
full force and effect without regard to, and shall not be impaired or
affected by:
(1) any act or failure to act on the part of the Borrowers; or
9
<PAGE> 10
(2) any extension or indulgence in respect of any payment or prepayment
of any Senior Indebtedness or any part thereof or in respect of any other
amount payable to any holder of any Senior Indebtedness; or
(3) any amendment, modification or waiver of, or addition or supplement
to, or deletion from, or compromise, release, consent or other action in
respect of, any of the terms of any Senior Indebtedness or any other
agreement which may be made relating to any Senior Indebtedness; or
(4) any exercise or non-exercise by the holder of any Senior
Indebtedness of any right, power, privilege or remedy under or in respect
of such Senior Indebtedness or these subordination provisions or any waiver
of any such right, power, privilege or remedy or of any default in respect
of such Senior Indebtedness or these subordination provisions or any
receipt by the holder of any Senior Indebtedness of any security, or any
failure by such holder to perfect a security interest in, or any release by
such holder of, any security for the payment of such Senior Indebtedness;
or
(5) any merger or consolidation of any Borrower or any of its
subsidiaries into or with any other person, or any sale, lease or transfer
of any or all of the assets of any Borrower or any of its subsidiaries to
any other person; or
(6) absence of any notice to, or knowledge by, any holder of any claim
hereunder of the existence or occurrence of any of the matters or events
set forth in the foregoing clauses (1) through (5); or
(7) any other circumstance.
(e) The holder of this Note unconditionally waives (i) notice of any of
the matters referred to in Section 15(d); (ii) all notices which may be
required, whether by statute, rule of law or otherwise, to preserve intact any
rights of any holder of any Senior Indebtedness, including, without limitation,
any demand, presentment and protest, proof of notice of nonpayment under any
Senior Indebtedness or the Loan Agreement, and notice of any failure on the part
of the Borrowers to perform and comply with any covenant, agreement, term or
condition of any Senior Indebtedness, (iii) any right to the enforcement,
assertion or exercise by any holder of any Senior Indebtedness of any right,
power, privilege or remedy conferred in such Senior Indebtedness or otherwise,
(iv) any requirements of diligence on the part of any holder of any of the
Senior Indebtedness, (v) any requirement on the part of any holder of any Senior
Indebtedness to mitigate damages resulting from any default under such Senior
Indebtedness and (vi) any notice of any sale, transfer or other disposition of
any Senior Indebtedness by any holder thereof.
(f) The obligations of the holder under these subordination provisions
shall continue to be effective, or be reinstated, as the case may be, if at any
time any payment in respect of any Senior Indebtedness, or any other payment to
any holder of any Senior Indebtedness in its
10
<PAGE> 11
capacity as such, is rescinded or must otherwise be restored or returned by the
holder of such Senior Indebtedness upon the occurrence of any proceeding
referred to in paragraph 15(a)(A) or upon or as a result of the appoint of a
receiver, intervenor or conservator of, or trustee or similar officer for, the
Borrowers or any substantial part of their property or otherwise, all as though
such payment had not been made.
(g) Notwithstanding anything to the contrary herein, the Borrowers
shall not at any time offer (and the holder hereof shall not at any time accept)
(i) any pledge of collateral or (ii) any guaranty by any parent or subsidiary of
any Borrower, in each case with respect to the obligations of any Borrower under
this Note.
16. COVENANTS BIND SUCCESSORS AND ASSIGNS. All the covenants,
stipulations, promises and agreements in this Note contained by or on behalf of
the Borrowers shall bind their respective successors and assigns, whether so
expressed or not.
17. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
18. HEADINGS. The headings of the Sections and paragraphs of this Note
are inserted for convenience only and do not constitute a part of this Note.
[Remainder of page intentionally left blank.]
11
<PAGE> 12
IN WITNESS WHEREOF, each of the Borrowers has caused this Note to be
signed in its corporate name by one of its officers thereunto duly authorized
and to be dated as of the day and year first above written.
THE CERPLEX GROUP, INC.
By: /s/ Steven L. Korby
------------------------
Name: Steven L. Korby
Title: Executive Vice President
CERPLEX, INC.
By: /s/ Steven L. Korby
------------------------
Name: Steven L. Korby
Title: Executive Vice President
AURORA ELECTRONICS GROUP, INC.
By: /s/ Steven L. Korby
------------------------
Name: Steven L. Korby
Title: Executive Vice President
<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
-------------------------------
DECEMBER 31, DECEMBER 26,
1998 1997
------------ -------------
<S> <C> <C>
Net loss available to common stockholder $(7,689) $ (5,814)
ADJUSTED NUMBER OF COMMON SHARES ======= =========
Weighted average shares outstanding 7,232 685
Net loss per common share $(.1.06) $ (8.50)
======= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,495
<SECURITIES> 0
<RECEIVABLES> 16,644
<ALLOWANCES> (1,941)
<INVENTORY> 6,962
<CURRENT-ASSETS> 31,456
<PP&E> 29,018
<DEPRECIATION> (4,793)
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<CURRENT-LIABILITIES> 90,247
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29,690
0
<COMMON> 2,269
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<TOTAL-REVENUES> 29,489
<CGS> 27,816
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<INCOME-PRETAX> (7,404)
<INCOME-TAX> (419)
<INCOME-CONTINUING> (7,270)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,270)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
