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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 June 24, 2000
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.)
111 PACIFICA AVENUE, SUITE 300, IRVINE, CALIFORNIA 92618
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(Address of principal executive office.) (Zip Code)
(949) 754-5300
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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 June 24, 2000:
TITLE OF EACH CLASS OF COMMON STOCK NUMBER OUTSTANDING
----------------------------------- ------------------
Common Stock, $0.03 par value 7,273,041 shares
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<PAGE>
THE CERPLEX GROUP, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 24, 2000
and September 25, 1999 6
Condensed Consolidated Statements of Operations for the Three
Months and The Nine Months Ended June 24, 2000
and June 30, 1999 7
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 24, 2000 and June 30, 1999 8
Notes to Unaudited Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION 23
Signatures 25
Index to Exhibits 26
4
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THE CERPLEX GROUP, INC.
PART I
FINANCIAL INFORMATION
5
<PAGE>
THE CERPLEX GROUP, INC. and Subsidiary
(A DEBTOR-IN-POSSESSION, as of July 26, 2000)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 24, SEPTEMBER 25,
2000 1999
----------- -------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 14 $ 382
Accounts receivable, less allowance for doubtful accounts
of $536 and $912 5,472 9,234
Inventories, net 3,345 5,375
Other current assets 1,228 1,191
--------- ---------
Total current assets 10,059 16,182
Goodwill -- 9,560
Property, plant and equipment, net 7,698 9,406
Intangible and other assets 333 483
--------- ---------
$ 18,090 $ 35,631
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt (all current) $ 39,588 39,406
Accounts payable 9,489 6,674
Accrued expenses 4,262 4,802
Accrued interest expense 741 458
Other current liabilities 4,828 1,338
--------- ---------
Total liabilities 58,908 52,678
Commitments and contingencies
Redeemable convertible preferred stock, 1000 shares
authorized and 216 shares issued 31,624 30,492
Stockholders' deficit:
Series B senior cumulative preferred stock, 59 shares
authorized and issued 62,748 59,669
Common stock 75,000 shares authorized, 7,850 shares issued
and outstanding 2,270 2,270
Additional paid-in capital 121,626 121,601
Treasury stock, at cost, 474 shares (16,675) (16,675)
Accumulated deficit (242,612) (214,415)
Accumulated other comprehensive income 201 11
--------- ---------
Total stockholders' deficit (72,442) (47,539)
--------- ---------
$ 18,090 $ 35,631
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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THE CERPLEX GROUP, INC. and Subsidiary
(A DEBTOR-IN-POSSESSION, as of July 26, 2000)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ------------------------
June 24, June 30, June 24, June 30,
2000 1999 2000 1999
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net revenues $ 9,053 $ 23,914 $36,361 $ 77,427
Cost of sales 9,612 22,547 37,621 75,039
-------- -------- ------- --------
Gross margin (559) 1,367 (1,260) 2,388
Selling, general and administrative
expenses 2,652 5,811 10,220 16,837
Amortization of intangible assets 250 1,450 574 5,758
Write-off of goodwill 9,074 18,375 9,074 18,375
Reduction in accruals --- (2,006) --- (2,006)
-------- -------- ------- --------
Operating loss (12,535) (22,263) (21,128) (36,576)
Interest expense (1,012) (1,622) (2,834) (5,760)
Other income (expense), net (257) 208 (257) 3,500
-------- -------- ------- --------
Loss before income taxes (13,804) (23,677) (24,219) (38,836)
Income tax benefit --- (646) (233) (631)
-------- -------- ------- --------
Net loss (13,804) (23,031) (23,986) (38,205)
Accrued dividends on preferred stock (1,403) (377) (4,210) (1,174)
-------- -------- ------- --------
Net loss applicable to common stockholders $(15,207) $(23,408) $(28,196) $(39,379)
======== ======== ======= ========
Basic and diluted loss per common share $ (2.09) $ (3.18) $ (3.88) $ (5.38)
======== ======== ======= ========
Weighted average number of common
shares outstanding 7,272 7,368 7,270 7,322
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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THE CERPLEX GROUP, INC. and Subsidiary
(A DEBTOR-IN-POSSESSION, as of July 26, 2000)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
JUNE 24,2000 JUNE 30, 1999
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(23,986) $ (38,205)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization 2,052 8,323
Non-cash interest expense 2,411 1,505
Foreign currency translation 190 ---
Loss on disposition of assets --- 32
Write-off of goodwill 9,074 18,375
Reduction in accruals (2,006)
Changes in assets and liabilities:
Current assets 6,187 (392)
Current liabilities 3,470 1,888
-------- --------
Net cash used in operating activities (602) (10,480)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (140) (1,218)
-------- --------
Net cash used in investing activities (140) (1,218)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from promissory note --- 4,600
Payment on capital leases --- (100)
Payments on revolving line of credit (21,830) ---
Payment on other debt (3,225) ---
Proceeds from revolving line of credit 24,408 ---
Proceeds from other debt 996 ---
Other 25 ---
-------- --------
Net cash provided by financing activities 374 4,500
-------- --------
Net change in cash and cash equivalents (368) (7,198)
-------- --------
Cash and cash equivalents at beginning of period 382 14,196
-------- --------
Cash and cash equivalents at end of period $ 14 $ 6,998
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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THE CERPLEX GROUP, INC.
AND SUBSIDIARY
(A DEBTOR-IN-POSSESSION, as of July 26, 2000)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS June 24, 2000, June 30, 1999 and September 25, 1999
NOTE A. CURRENT FINANCIAL CONDITION
On June 20, 2000 an involuntary Chapter XI bankruptcy petition was filed by a
group of The Cerplex Group, Inc. ("Group") creditors against Group. Group
consented to the involuntary filing on July 11, 2000. On July 27, 2000, Cerplex,
Inc filed a voluntary petition for protection under Chapter XI of the U.S.
Bankruptcy Code (the "Code"). An Order for Relief was issued by the United
States Bankruptcy Court for the District of Delaware (the "Court") in the Group
case on July 26, 2000 and on July 27, 2000 in the Cerplex, Inc. case. Under
Chapter XI of the Code, both Group and Cerplex, Inc. (collectively, the
"Company") are considered debtors-in-possession of the assets. As
debtors-in-possession ("DIP"), management of the Company continues to operate
the business under the supervision of the Court and, among other things, is
granted a 120 day exclusive right to propose a plan of reorganization. In
accordance with the provisions of the Code, an automatic stay provides that
creditors of the Company are prevented from seeking repayment of pre-petition
debts. The Company has arranged for a debtor-in-possession credit facility
through Congress Financial Corporation ("Congress") by entering into a
Ratification and Amendment Agreement ("DIP Agreement") to finance its working
capital needs while in bankruptcy; see Note F for additional information. On
July 28, 2000, the Court approved the DIP Agreement on an interim basis.
As a result of the bankruptcy proceedings, substantially all of the Company's
indebtedness is in default. The repayment of such indebtedness, if any, will be
the subject of the Company's plan of reorganization or order of the Court. An
important element in successfully reorganizing the Company will be the ability
to sell certain assets to reduce indebtedness and provide funding for operations
(see Note J - "Subsequent Events").
During the nine months ended June 24, 2000 and the year ended September 25,
1999, the Company experienced recurring operating losses. As a result of these
losses, at June 24, 2000 the Company had a stockholders' deficit of $72,442 and
negative working capital of $48,849. In addition, since recapitalization of the
Company in March 1996, the Company has relied upon the financial support of an
investment fund managed by the investment firm of Welsh, Carson, Anderson &
Stowe ("WCAS"),its largest stockholder, for additional capital. At June 24,
2000, the Company had approximately $26.8 million outstanding under its senior
secured term debt owed to WCAS which matures on April 1, 2001, and $2.6 million
and $3.8 million outstanding related to a senior secured line of credit with
Congress Financial Corporation (Western) ("Congress") and Burdale Financial
Limited ("Burdale"), respectively.
As part of the process to attempt a reorganization of the Company, the Company
is pursuing various financing alternatives that may be available, although there
can be no assurance that the Company will be able to successfully implement such
alternatives. Though the Company intends to make efforts to increase revenues,
the Company's losses are expected to continue for the foreseeable future. To
maintain continuing operations, the Company will require additional funding and
financial support from a 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. These
matters raise substantial doubt about the Company's ability to continue to
exist.
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NOTE B. BASIS OF PRESENTATION
The significant accounting policies of the Company as of June 24, 2000 are set
forth in Note B "Summary of Significant Accounting Policies" of Notes to
Consolidated Financial Statements included in the 1999 Annual Report on Form
10-K for The Cerplex Group, Inc. See the "Future Reporting While in Chapter XI
Proceedings" section of Note J for additional information.
In the opinion of management, the accompanying condensed consolidated balance
sheets and related interim condensed consolidated statements of operations and
cash flows include all adjustments (consisting only of normal recurring items,
except as described in Note I) necessary for their fair presentation. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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, and
such differences could be material. Interim results are not necessarily
indicative of results for a full year.
Certain information in footnote disclosures normally included in annual
financialstatements 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 the consolidated financial statements and notes
thereto included in the 1999 AnnualReport on Form 10-K for The Cerplex Group,
Inc.
NOTE C. LOSS PER SHARE OF COMMON STOCK
Basic loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding after adding to the net loss from
operations cumulative dividends to holders of the Company's redeemable
convertible preferred stock.
Diluted loss per share is computed by dividing net loss available to common
stockholders by the sum of the weighted average number of common shares
outstanding and potential common stock. For all periods presented, potential
common stock (stock options) was excluded from such calculations as they
wereantidilutive. The Company's 7% Senior Cumulative Convertible Preferred Stock
and 10% Series B Senior Subordinated Debentures (which mature in equal
installments on December 31, 2002, 2003 and 2004), were not potential common
stock at the time of issuance and are therefore not considered in the
calculation of dilutedloss per share.
NOTE D. INVENTORIES
Inventories (net of the allowance for obsolete and slow-moving items of $792 and
$2,186, respectively) consisted of the following:
June 24, September 25,
2000 1999
------------ -------------
(IN THOUSANDS)
Spare and repair parts $3,150 $ 4,687
Work in process 68 493
Finished goods and purchased product 127 195
------ ------
Total inventories $3,345 $5,375
====== ======
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NOTE E. EQUITY 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, loss
per common 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.
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
. 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 Common Stock of the Company. As of June 24, 2000, there
were 7,273,041 shares of the Company's Common Stock outstanding.
NOTE F. DEBT
As a result of failing to make a sinking fund payment, the cross-default
provisions of certain other credit agreements, and the bankruptcy proceedings,
substantially all of the Company's debt is in default; see Note A for additional
information.
On November 24, 1999 the Company and its subsidiary entered into a Loan and
Security Agreement ("Congress Line of Credit") with Congress providing for a
$13.0 million senior secured revolving credit facility. Concurrent with this
financing, WCAS agreed to subordinate its security interest in the Company's
assets. The Congress Line of Credit, which matures in February 2001, will
provide additional working capital and financing for the Company's domestic
operations. As of June 24, 2000 the Company had no borrowing capacity under this
credit arrangement. Borrowings under the Congress Line of Credit bear interest
at fluctuating rates of either the Prime Rate plus 1/2% or the Adjusted
Eurodollar Rate plus 2 3/4%. Borrowing availability pursuant to the Congress
Line of Credit is limited by the value, as defined in the credit agreement, of
assets pledged as collateral, namely accounts receivable. The agreement also
contains customary financial covenants and events of default for financing of
this type. The liquidation of Cerplex S.A.S. (see Note G) caused a default and a
cross-default under the Congress loan. The Company has received a waiver from
Congress for an exception that covers this default. Cerplex, Inc. is the
borrower under the Congress Line of Credit and the Company guarantees the
repayment of its obligations thereunder.
On December 14, 1999, Cerplex, Ltd. closed a financing arrangement consisting of
debentures and a line of credit (the"Burdale Loans") with Burdale, an affiliate
of Congress. The credit facility provides for advances to Cerplex Ltd. up to
$2.9 million under a line of credit secured by accounts receivable and up to
$3.5 million under a loan secured by real estate. This credit facility was used
to repay indebtedness to British Telecommunications plc ("BT") and to finance
the working capital needs of Cerplex Ltd. The Burdale Loans bear interest at
fluctuating rates of LIBOR plus 2%. The Burdale Loans are covered by an
agreement that provides customary financial covenants and events of default for
financing arrangements of this type. Indebtedness under this agreement is
guaranteed by the Company.
On June 30, 2000, Cerplex, Ltd completed a sale of its real estate in Enfield,
England. Proceeds from the sale totaled approximately $6.6 million, of which
approximately $5.6
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million was paid to Cerplex Ltd in cash net of tenant improvement allowances and
rent security deposits held by the purchaser in connection with a real estate
leaseback. From the net cash proceeds, Cerplex Ltd repaid amounts owed to
Burdale pursuant to the Burdale debenture (secured by real estate) and the
Burdale line of credit (secured by accounts receivable). The Burdale Loan
balances, repaid in full as of June 30, 2000, totaled approximately $.8 million
and $.3 million, respectively.
On July 28, 2000, the Court approved the DIP Agreement entered into by Congress
and the Company that establishes a lending arrangement for the Company under
certain conditions while in bankruptcy. As with the Congress Line of Credit, the
DIP Agreement contains certain covenants and conditions that govern the loans to
the Company. Loans under the DIP Agreement are limited by the amount of eligible
collateral based upon a formula applied to the Company's accounts receivable. As
with the Congress Line of Credit, the DIP Funding is secured by substantially
all the assets of the Company. As of August, 10 2000, total indebtedness of the
Company under the DIP Agreement was $.8 million. Additional borrowing capacity
was $.1 million.
As of June 24, 2000 the Company had $2.6 million outstanding under the Congress
Line of Credit, $3.8 million outstanding under the Burdale Loans, $26.8 million
outstanding under the WCAS Senior Secured Notes, and $0.4 million outstanding
under the 10% Series B Senior Subordinated Notes. As of August 10, 2000 the
Company had $2.9 million outstanding under the Congress Line of Credit, $27.1
million outstanding under the WCAS Senior Secured Notes, $11.1 million
outstanding under the 7 3/4% Convertible Subordinated Debentures, and $0.4
million outstanding under the 10% Series B Senior Subordinated Notes.
NOTE G. LOSS OF CONTROL OF SUBSIDIARY
On July 20, 1999, the management of Cerplex S.A.S. ("SAS") requested assistance
from the Commercial Court of Lille, France to structure a social plan for a
portion of the work force. The Commercial Court declared SAS insolvent as of
July 15, 1999 and opened bankruptcy proceedings with respect to SAS. A judicial
administrator was appointed by the Court to assist the management of SAS in all
its activities pending the Court's decision on the development of the
proceedings. The terms of assignment of the judicial administrator included
reviewing SAS's condition and prospects and issuing a recommendation relating to
a plan of reorganization developed by SAS management. While the administrator
was overseeing SAS's operations, the Company believed that a plan of
reorganization would be adopted. In the event that the administrator could not
support a plan of reorganization, it would become necessary to refer the case to
a liquidator pursuant to Commercial Court guidelines.
On October 12, 1999, the Commercial Court, acting upon the recommendation of the
judicial administrator, ordered the liquidation of SAS. Prior to this decision,
management believed it would realize its investment in SAS through a
reorganization. However, after the liquidation of SAS was ordered, the Company
recognized that its investment in SAS was at significant risk of realization and
should therefore be written off as of July 20, 1999, the date Cerplex, Inc.
effectively lost control of SAS. As a consequence of this order, SAS
discontinued its operations, and the liquidator has laid off substantially all
employees. As the Company effectively lost control of its subsidiary on July 20,
1999, the Company deconsolidated SAS from its financial statements as of that
date. Based on Management's understanding and outside legal counsel's assessment
of the situation in France, the Company believes there is no additional
financial exposure related to the SAS liquidation, but there can be no
assurances that a deficiency judgment will not be entered against Cerplex, Inc.,
the parent company. This is described in the 1999 Annual Report on Form 10-K of
The Cerplex Group, Inc. under "European Operations".
The liquidator is responsible for selling the assets and paying off the debts of
SAS. As a result of the cost of laying-off all employees, the value of the SAS
assets may not exceed its liabilities. There can be no assurance that Cerplex,
Inc., as shareholder, will receive any liquidation proceeds. Accordingly,
Cerplex, Inc. has written off its investment in SAS which totaled $6.2 million
at July 20, 1999. The $6.2 million write-off was comprised of assets
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carried at $20.9 million, liabilities carried at $13.8 million and intercompany
balances for SAS of $0.9 million. For the third quarter 1999 SAS had sales of
$8.4 million and a net loss of $.7 million. These amounts are included in the
accompanying 1999 condensed consolidated financial statements. There were no
sales or operations by SAS during the nine months ended June 24, 2000.
NOTE H. BUSINESS SEGMENT AND FOREIGN OPERTIONS
The Company currently operates in one industry segment, the outsourcing of
services to the computer and electronics industry. The Company's operations
outside the United States include a manufacturing facility in the United
Kingdom.
For the quarter ended June 24, 2000, a single foreign customer accounted for
approximately 39% of the Company's total revenue. Unit sales to such customer
have been declining, and are expected to continue to do so.
Total foreign assets approximated $8.5 million at June 24, 2000; see Note J
("Sale of U.K. Real Estate") for additional information.
NOTE I. GOODWILL IMPAIRMENT CHARGE
As discussed in Note A, the Group and Cerplex Inc are now operating under the
protection of the Court. If approved by the Court, the Company proposes to sell
a significant portion of certain operating assets as described in Note
J;.additional asset sales may be necessary to finance the Company's remaining
operations. The Company has a history of substantial operating losses, and had a
stockholders deficit (approximately $72.4 million before the adjustment
described below) and negative working capital at June 24, 2000.
Based on the matters discussed in the preceding paragraph and the possibility
that the Company will not succeed in reorganizing under the federal bankruptcy
laws, management has determined that goodwill was impaired as of June 24, 2000.
Accordingly, the $9.1 million carrying amount of such asset was written off in
the quarter ended June 24, 2000.
NOTE J. SUBSEQUENT EVENTS
Major subsequent events other than the Company's bankruptcy filing (which is
described in Note A) are as follows:
Sale of U.S. Repair Assets
Since January 2000 the Company has been engaged in a process to sell selected
assets of its subsidiary. On July 16, 2000, the Company entered into a
definitive agreement with a subsidiary of Teleplan International, N.V.
("Teleplan") for the sale of assets and customer accounts of its three domestic
repair operations as well as the technical support call center operations.
During the course of due diligence, Teleplan made loans to Cerplex, Inc.
totaling approximately $.3 million which will be forgiven as part of the
purchase, if approved by the Court. In addition to this debt forgiveness, the
purchase consideration consists of cash and the assumption of certain trade
supplier liabilities as well as assumption of lease obligations for Cerplex
facilities located in Livermore, California, Louisville, Kentucky and Tewksbury,
Massachusetts.
Sale of asset will be an essential component of a plan of reorganization because
the Company lacks sufficient resources to fund the ongoing operations as
currently constituted.Net proceeds from the sale are expected to approximate
$4.2 million cash plus the assumption of selected liabilities (as of the date
the Court approves the proposed transaction) owed to trade creditors which are
associated with the assets sold. Cash proceeds from the sale will be used first
to repay all indebtedness owed to Congress, both under the Congress Line of
Credit and under the DIP Agreement. After such repayment, the lending
arrangements with Congress will cease. The Company has no other bank lending
facilities available to finance working capital requirements. The Company is
attempting to obtain a bank lending arrangement that would replace the credit
facilities from Congress. Obtaining adequate financing and approval to use part
of the proceeds from the asset sale described above are both important elements
of the Company's reorganization plans. Without working capital funding from
these sources, the Company
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will be unable to continue operation. The Company continues to experience losses
and it is uncertain whether the Company will be successful in reducing expenses
and increasing revenues sufficiently to become profitable. Accordingly,
additional asset sales (all of which are subject to approval by the Court) may
be necessary to generate additional cash and eliminate unprofitable operations.
Sale of U.K. Real Estate
On June 30, 2000 Cerplex Ltd. completed a sale of the land and building it owned
in connection with its repair operations in Enfield, England. The sale to Easter
Development contemplated a leaseback of part of the property sold. See Note F
for additional information.
Future Financial Reporting While in Chapter XI Proceedings
Effective with the fourth quarter of fiscal 2000, accounting principles
generally accepted in the United States will require that the Company's
financial statements be prepared in accordance with AICPA Statement of Position
90-7 ("Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," hereinafter referred to as "SOP 90-7"). The principal financial statement
requirements of SOP 90-7 for entities in Chapter XI bankruptcy proceedings with
the expectation of reorganizing are as follows:
o Balance sheet: Distinguish between pre-petition liabilities that
are and are not subject to compromise, and post-petition
liabilities.
o Statement of operation: Revenues, expenses, gains and losses
resulting from the reorganization/restructuring are separately
reported as "reorganization items," except for discontinued
operations and extraordinary items.
Certain additional disclosures including (1) claims not subject to reasonable
estimation of the amount to be allowed, (2) the principal categories of claims
subject to compromise, and (3) any significant difference between reported
interest expense and stated contractual interest are also required by SOP 90-7.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company provides repair and logistics services, and 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
principal subsidiary, Cerplex, Inc., and its subsidiary. Based in Irvine,
California, the Company has locations across the United States 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.
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 its wholly-owned subsidiary,
Cerplex, Inc. and its subsidiary, Cerplex, Ltd.
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On June 25, 1999 the Company consented to an assignment by Greyrock of its
rights and interests under the Greyrock Line of Credit to WCAS in return for
payment in full of all outstanding balances of principal and interest
thereunder. WCAS repaid principal and interest outstanding under the Greyrock
Line of Credit totaling $45.4 million. Concurrent with the assignment, WCAS
advanced to the Company an additional $4.6 million for working capital purposes,
resulting in $50.0 million of total indebtedness outstanding under the WCAS
Senior Secured Notes as of June 25, 1999. The terms of the WCAS Senior Secured
Notes are the same as those under the Greyrock Line of Credit except (i) the
interest rate was reduced to LIBOR plus 1 3/4%; (ii) principal and interest are
due on April 1, 2001; (iii) collateral consisting of the stock of the Company's
subsidiaries in the UK and France that had secured the Greyrock Line of Credit
was released; (iv) the negative pledge agreements covering assets owned by the
Company's subsidiaries in the UK and France were terminated; and (v) the
Company's obligations were no longer subject to minimum collateral borrowing
base requirements previously established in the Greyrock Line of Credit. On June
30, 1999 the Company issued approximately 58,643 shares of Series B Preferred
Stock at a price of $1,000 per share. The Series B Preferred Stock was issued as
repayment of various obligations owed to WCAS which included $25.0 million of
principal outstanding under the WCAS Senior Secured Notes, $16.5 million of
principal of the 10% unsecured promissory notes ( "WCAS Notes"), approximately
$15.6 million of principal of the 10% Series A Senior Subordinated Debentures,
and approximately $1.5 million of accrued interest owed to WCAS under these
obligations. The Series B Preferred Stock consist of 7% cumulative,
non-convertible preferred shares that are redeemable by the Company at its
option and redeemable by the holders upon a change of control of the Company.
As of April 30, 1998 following the merger of Cerplex and Aurora Electronics,
Inc., the Company recorded an excess of purchase price over net assets acquired
totaling approximately $40.6 million. Since that time, the Company has closed
and consolidated several of its operations, exited certain lines of business and
has revised its estimates for expected future cash flows from continuing
operations. Based on these estimates and the goodwill ascribed to closed and
discontinued operations, the Company determined, in the quarter ended June 30,
1999, that an impairment charge of approximately $18.4 million was necessary.
The carrying value of goodwill as of June 30, 1999, after the impairment charge,
was approximately $9.7 million. The blended average life of the goodwill
attributable to all operations originally acquired was five years. Based on
certain recent events including the Company's bankruptcy status as described
below, management determined that it was appropriate to write off the remaining
goodwill of approximately $9.1 million during the quarter ended June 24, 2000.
On July 20, 1999, the management of SAS requested assistance from the Commercial
Court of Lille, France to structure a social plan for a portion of the work
force. Upon review, the Commercial Court declared SAS insolvent as of July 15,
1999 and opened bankruptcy proceedings with respect to SAS. A judicial
administrator was appointed by the Court to assist the management of SAS in all
its activities pending the Court's decision on the development of the
proceedings. The terms of assignment of the judicial administrator included
reviewing SAS's condition and prospects and issuing a recommendation relating to
a plan of reorganization developed by SAS management. While the administrator
was overseeing SAS's operations, the Company believed that a plan of
reorganization would be adopted. In the event that the administrator could not
support a plan of reorganization, it would become necessary to refer the case to
a liquidator pursuant to Commercial Court guidelines.
On October 12, 1999, the Commercial Court, acting upon the recommendation of the
judicial administrator, ordered the liquidation of SAS. Prior to this decision,
management believed it would realize its investment in SAS through a
reorganization. However, after the liquidation of SAS was ordered, the Company
realized its investment in SAS was lost and should therefore be written off as
of July 20, 1999, the date Cerplex, Inc. lost control of its subsidiary. As a
consequence of this order, the Company terminated the operations of SAS, and the
liquidator has laid off substantially all employees. The liquidator is
responsible for selling the assets and paying off the debts of SAS. As the
result of the cost of laying-off all employees, the value of the SAS assets may
not exceed the value of its liabilities. There can be no assurance that Cerplex,
Inc., as shareholder, will receive any liquidation proceeds. Accordingly,
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Cerplex, Inc. has written off its investment in SAS which totaled $6.2 million
at July 20, 1999.
Since the Company effectively lost management control as of July 20, 1999, SAS
has been deconsolidated from the Company's financial statements as of that date.
Based on Management's understanding and outside legal counsel's assessment of
the situation in France, the Company believes there is no additional financial
exposure related to the SAS liquidation, but there can be no assurances that a
deficiency judgment will not be entered against Cerplex, Inc., the parent
company.
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 BT have
declined from fiscal 1997 through the third quarter of fiscal 2000 on a pro
forma basis and, with the liquidation of SAS in 1999, the Company generated no
revenues from Rank Xerox during the third quarter of fiscal 2000. As a result of
the liquidation of SAS the contract with Rank Xerox has been terminated, and
there can be no assurance that revenues from BT or other customers will not
decline in the future.
On June 20, 2000 an involuntary Chapter XI bankruptcy petition was filed by
certain creditors of The Cerplex Group, Inc. ("Group"). Group consented to the
involuntary filing on July 11, 2000. At the time, Group's subsidiary, Cerplex,
Inc. and its subsidiary, Cerplex Ltd. were not in bankruptcy or subject to any
such proceedings. On July 27, 2000, Cerplex, Inc filed a voluntary petition for
protection under Chapter XI of the U.S. Bankruptcy Code (the "Code"). An Order
for Relief was issued by the United States Bankruptcy Court for the District of
Delaware (the "Court") in the Group case on July 26, 2000 and on July 27, 2000
in the Cerplex, Inc. case. Under Chapter XI of the Code, both Group and Cerplex,
Inc. (collectively, the "Company") are considered debtors-in-possession of the
assets. As debtors-in-possession ("DIP"), management of the Company continues to
operate the business under the supervision of the Court and, among other things,
is granted a 120 day exclusive right to propose a plan of reorganization. In
accordance with the provisions of the Code, an automatic stay provides that
creditors of the Company are prevented from seeking repayment of pre-petition
debts. Additionally, the Company must, unless otherwise approved by the Court,
refrain from payment of pre-petition indebtedness. The Company has arranged for
a DIP credit facility through Congress by entering into a Ratification and
Amendment Agreement ("DIP Agreement") to finance its working capital needs while
in bankruptcy. On July 28, 2000, the Court approved the DIP Agreement and a
process for the sale of assets by the Company.
During the nine months ended June 24, 2000, the Company was in default under
several of its senior and subordinated debt obligations. With regard to the
Congress Line of Credit and the WCAS Senior Secured Notes (collectively, "Senior
Securities"), defaults exist due to, among other reasons, failure to maintain
minimum required adjusted net worth and a cross-default arising from the default
which occurred under the Company's 7 3/4% Convertible Subordinated Debentures
(the "Debentures"). On April 17, 2000, pursuant to the Debentures, the Company
was required to make a sinking fund payment of principal of approximately $1.8
million and a payment of accrued interest of approximately $0.4 million. The
failure to make the sinking fund payment resulted in a default under the terms
of the Indenture governing such indebtedness. The Company has been advised by
the Indenture Trustee that the entire amount of the indebtedness outstanding
under the Debentures is now due and payable. The Company also failed to pay
semi-annual interest of approximately $.02 million due pursuant to the 10%
Senior Subordinated Notes due on June 30, 2000. Failure to make such payments
and the bankruptcy proceedings caused defaults under the 10% Senior Subordinated
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Notes. At June 24, 2000, the total indebtedness owed pursuant to the WCAS Senior
Secured Notes and Congress Line of Credit was approximately $26.8 million and
$2.6 million, respectively. At June 24, 2000, the total indebtedness owed
pursuant to the Debentures and the 10% Senior Subordinated Notes was
approximately $11.1 million and $0.4 million, respectively.
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 24, 2000
AND JUNE 30, 1999
Net revenues for the third quarter of fiscal 2000 were $9.1 million, as compared
to $23.9 million in net revenues for the corresponding quarter in the prior
fiscal year. The Company's decrease in revenues was due principally to the
impact of the deconsolidation of the SAS operation. SAS revenues were
approximately $8.4 million in the third quarter of fiscal 1999. There were no
revenues reported from SAS in the third quarter of fiscal 2000. In addition,
revenues generated by the Company's North American Repairs and Parts operations
declined in the fiscal quarter ended June 24, 2000 to $4.6 million and $1.3
million, respectively from $9.2 million and $2.1 million in the comparable
fiscal 1999 quarter. UK revenues during the third fiscal 2000 quarter were $3.2
million compared to $4.3 million in the same fiscal 1999 quarter. The Company
had negative gross profit for the quarter ended June 24, 2000 of $.6 million
(6.0% of net revenues), compared to a gross profit of $1.4 million (6% of net
revenues) for the corresponding quarter of fiscal 1999. The decrease in gross
profit was due primarily to gross profit declines in certain North American
repair operations. Selling, general and administrative expenses for the third
quarter of fiscal 2000 were $2.7 million (29.3% of net revenues), ascompared to
$5.8 million (24.2% of net revenues) for the corresponding quarter in the prior
fiscal year. SG&A expense reductions during the quarter ended June 24, 2000 were
primarily attributable to the deconsolidation of SAS which generated
approximately $1.1 million of SG&A expenses during the third fiscal quarter of
1999 and the reduction of expenses within the Company's North American
operations. Amortization expense for the third quarter of fiscal 2000 was $0.3
million compared to $1.5 million for the corresponding quarter in the prior
fiscal year. The decrease was due to a goodwill impairment charge incurred in
the third fiscal 1999 quarter.
Net interest expense for the third quarter of fiscal 2000 was $1.0 million, or
11.1% of revenues, as compared to $1.6 million, or 6.7% of revenues, for the
corresponding quarter in the prior fiscal year. The decrease in interest expense
is due to the reduction of interest bearing debt that resulted from the
financial restructuring that occurred on June 25, 1999 as described in the 1999
Annual report on Form 10-K of the Cerplex Group, Inc. As a result of such
restructuring, approximately $58.6 million of indebtedness owed by the Company
to WCAS was converted to Series B Preferred Stock which carries a 7% cumulative
dividend.
Net loss applicable to common stockholders for the quarter was $15.2 million as
compared to a net loss of $23.4 million for the corresponding quarter in the
prior fiscal year.
COMPARATIVE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 24, 2000 AND
JUNE 30, 1999
Net revenues for the first nine months of fiscal 2000 were $36.4 million, as
compared to $77.4 million in net revenues for the corresponding period in the
prior fiscal year. The Company's decrease in revenues was due principally to the
impact of the deconsolidation of the SAS operation. SAS revenues were
approximately $25.4 million in the first nine months of fiscal 1999. There were
no revenues reported from SAS in the first nine months of fiscal 2000. In
addition, revenues generated by the Company's North American Repairs and Parts
operations declined in the first nine months of fiscal 2000 to $17.5 million and
$6.0 million, respectively. The Company had negative gross profit for the first
nine months of fiscal 2000 of $1.3 million (3.5% of net revenues), compared to a
gross profit of $2.4 million (3.1% of net revenues) for the corresponding period
of
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fiscal 1999. The decrease in gross profit of $3.7 million from the first nine
months of fiscal 1999 to the first nine months of fiscal 2000 primarily
attributable to the Company's North American Repair operations. Selling, general
and administrative expenses for the first nine months of fiscal 2000 were $10.2
million (28.1% of net revenues), as compared to $16.8 million (21.7% of net
revenues) for the corresponding period in the prior fiscal year. SG&A expense
reductions during the first nine months of fiscal 2000 were partially
attributable to the deconsolidation of SAS which generated approximately $3.5
million of SG&A expenses during the first nine months of fiscal 1999 and the
reduction of expenses within the Company's North American operations.
Amortization expense for the first nine months of fiscal 2000 was $0.6 million
compared to $5.8 million for the corresponding period in the prior fiscal year.
The decrease was due to a goodwill impairment charge incurred in the third
fiscal 1999 quarter.
Net interest expense for the first nine months of fiscal 2000 was $2.8 million,
or 7.8% of revenues, as compared to $5.8 million, or 7.4% of revenues, for the
corresponding period in the prior fiscal year. The decrease in interest expense
is due to the reduction of interest bearing debt that resulted from the
financial restructuring that occurred on June 25, 1999 as described in the 1999
Annual report on Form 10-K of the Cerplex Group, Inc. As a result of such
restructuring, approximately $58.6 million of indebtedness owed by the Company
to WCAS was converted to Series B Preferred Stock which carries a 7% cumulative
dividend.
Net loss applicable to common stockholders for the first nine months of fiscal
2000 was $28.2 million as compared to $39.4 million for the corresponding period
in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's inability to make payments of principal and interest that came due
on April 17, 2000 pursuant to the Debentures caused a default thereunder and
cross-defaults relating to the Company's Congress Line of Credit and the WCAS
Senior Secured Notes. Such payments of principal and interest totaled
approximately $1.8 million and $.4 million, respectively. Subsequently, the
Company received notice from the indenture trustee accelerating the maturity of
the entire amount owed under the Debentures. The total amount of principal
indebtedness outstanding under the Debentures as of June 24, 2000 was $10.4
million. The failure by the Company to make payment of these obligations when
due resulted in a filing on June 20, 2000 by a group of Debenture holders of an
involuntary bankruptcy petition under Chapter XI of the Bankruptcy Code (case
no. 00-2471). The Company consented to such petition on July 11, 2000. On July
27, 2000 Cerplex, Inc, a wholly-owned subsidiary of the Company, filed a
voluntary petition under Chapter XI of the Bankruptcy Code (case no. 00-3172).
Orders for Relief were issued by the Bankruptcy Court in these cases on July 26
and 27, respectively (collectively the "Bankruptcy Proceedings).
The Company also failed to make payment of semi-annual interest of approximately
$.02 million due pursuant to the 10% Senior Subordinated Notes due on June 30,
2000. Failure to make such interest payment and the Bankruptcy Proceedings
caused defaults under the 10% Senior Subordinated Notes.
The Company has arranged interim financing from Congress while operating
pursuant to the Bankruptcy Proceedings. Such debtor-in-possession financing
("DIP Funding") is provided by Congress pursuant to a Ratification and Amendment
Agreement between the Company and Congress ("DIP Agreement"). The DIP Agreement
allows the Company to borrow additional amounts from Congress post-petition
based on collateral as determined by the value of assets pledged to Congress as
security for the Congress Line of Credit and the DIP Agreement. As of August 10,
2000 the Company owed to Congress approximately $2.1 million and $.8 million
pursuant to the Congress Line of Credit and the DIP Agreement, respectively.
Based upon existing collateral and formulas for calculating available borrowing,
the Company may under certain circumstances borrow approximately an additional
$.2 million from Congress.
The Company's primary requirements for capital continue to be directly related
to its levels of accounts receivable and inventory. The Company's ability to
provide financing that is adequate for such needs is directly related to its
ability to
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borrow under the DIP Agreement and the ability to negotiate acceptable credit
terms with supplier while engaged in Bankruptcy Proceedings. The Company had a
working capital deficit of $48.8 million as of June 24, 2000 as compared to a
working capital deficit of $36.5 million as of September 25, 1999. See Note A of
Notes to Unaudited Condensed Consolidated Financial Statements -- "Current
Financial Condition." There can be no assurance that sufficient financial
resources will be available to meet the Company's financing requirements. The
lack of adequate working capital financing and other factors, some of which the
Company cannot control, may eventually result in an inability to continue to
conduct its operations.
The Company remains highly leveraged, and has significant debt repayment
obligations. As of August 10, 2000, the Company had approximately $41.5 million
of indebtedness (including accrued interest) outstanding, which consisted of:
(i) $27.1 million indebtedness under the WCAS Senior Secured Notes; (ii) $0.4
million indebtedness under the Company's 10% Series B Senior Subordinated Notes;
(iii) $11.1 million indebtedness under the Company's Debentures; (iv) $2.1
million indebtedness under the Congress Line of Credit; and (v) $.8 million
indebtedness outstanding under the DIP Agreement. In addition, the Company also
had as of August 10, 2000, $21.6 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.
During the nine months ended June 24, 2000, the Company was in default under
several of its senior and subordinated debt obligations. With regard to the
Congress Line of Credit and the WCAS Senior Secured Notes (collectively, "Senior
Securities"), defaults exist due to, among other reasons, failure to maintain
minimum required adjusted net worth and a cross-default arising from the default
which occurred under the Company's Debentures. On April 17, 2000, pursuant to
the Debentures, the Company was required to make a sinking fund payment of
principal of approximately $1.8 million and a payment of accrued interest of
approximately $0.4 million. The failure to make the sinking fund payment
resulted in a default under the terms of the Indenture governing such
indebtedness. The Company has been advised by the Indenture Trustee that
maturity is accelerated and all amounts under the Debenture are due and payable.
Defaults existing under the Debentures caused a cross default under the
Company's 10% Senior Subordinated Notes. At June 24, 2000, the total
indebtedness owed pursuant to the WCAS Senior Secured Notes and Congress Line of
Credit was approximately $26.8 million and $2.6 million, respectively. At August
10, 2000, the total indebtedness owed pursuant to the Debentures and the 10%
Senior Subordinated Notes was approximately $11.2 million and $0.4 million,
respectively. There can be no assurance that the Company will be able to obtain
default waivers from the holders of its Senior Securities, its Debentures or its
10% Senior Subordinated Notes. In the event that waivers are not obtained,
holders of such securities have the right, among others, to accelerate maturity
of such indebtedness. Such an event would have a material adverse effect on the
Company's financial condition.
Congress Line of Credit
On November 24, 1999 the Company and its subsidiary entered into a Loan and
Security Agreement providing for a $13.0 million senior secured revolving credit
facility (the "Congress Line of Credit"). Concurrent with the financing, WCAS
agreed with the Company and Congress to subordinate its security interest in the
Company's assets. The Congress Line of Credit, which matures in February 2001,
will provide additional working capital financing for the Company's domestic
operations. Loans under the Congress Line of Credit bear interest at fluctuating
rates of either the Prime Rate, as defined, plus 1/2% or the Adjusted Eurodollar
Rate, as defined, plus 2 3/4%. Borrowing availability pursuant to the Congress
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Line of Credit is limited by the value as defined in the credit agreement, of
assets pledged as collateral, namely accounts receivable and inventory. The
agreement also contains customary financial covenants and events of default for
lending arrangements of this type. Cerplex, Inc. is the borrower under the
Congress Line of Credit and the Company guarantees the repayment of its
obligations thereunder.
Burdale Line of Credit.
On December 15, 1999, Cerplex, Ltd. closed the Burdale Loans with Burdale, an
affiliate of Congress. The Burdale Loans consisted of a line of credit which
matures in February 2001 and provide for advances to Cerplex Ltd. up to $2.9
million under a line of credit secured by accounts receivable. The Burdale
Debenture provided for up to $3.5 million under a loan secured by real estate.
The Burdale Debenture was used to repay the BT Notes and the line of credit was
used to finance the working capital needs of Cerplex Ltd. On June 30, 2000,
Cerplex, Ltd completed a sale of its real estate in Enfield, England. Proceeds
from the sale totaled approximately $6.6 million, of which approximately $5.6
million was paid to Cerplex Ltd in cash net of tenant improvement allowances and
rent security deposits held by the purchaser in connection with a real estate
leaseback. From the net cash proceeds, Cerplex Ltd repaid amounts owed to
Burdale pursuant to the Burdale Debenture (secured by real estate) and the
Burdale Line of Credit (secured by accounts receivable). The Burdale Loan
balances, repaid in full as of June 30, 2000, totaled approximately $3.0 million
and $.3 million, respectively.
10% Series B Senior Subordinated Notes.
As of August 10, 2000, there was approximately $0.4 million principal amount
outstanding of the Company's 10% Series B Senior Subordinated Notes. These notes
were sold to certain public stockholders. The 10% Series B 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% Series B 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. The 10% Series B Senior Subordinated Notes mature in
three equal annual installments commencing on December 31, 2002. The 10% Series
B 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 August 10, 2000, there was approximately $10.4 million principal amount
outstanding of the Company's 7 3/4% Convertible Subordinated Debentures (the
"Debentures"). The Debentures were originally scheduled to 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. However, the Company did not make a required sinking fund
payment of principal of approximately $1.8 million in April, 2000 on the
Debentures causing a default. Subsequently, the Indenture Trustee, on behalf of
the holders of the Debentures, accelerated the maturity. The Debentures bear
interest at 7 3/4% payable in April and October of each year until repaid.
Other Debt
As of August 10, 2000, there was $0.3 million principal amount of other debt
outstanding consisting of unsecured prepaid from Teleplan Holding Inc.
7% Senior Cumulative Convertible Preferred Stock
As of April 22, 2000, there was $21.6 million outstanding (excluding accrued
dividends) of the Company's 7% Convertible Preferred Stock (215,500 shares at
$100 per share par value). Holders of the 7% Convertible Preferred Stock are
entitled to receive dividends of $7.00 per share per annum (or 7% of the face
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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 antidilution adjustment under certain
circumstances).
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:
Chapter XI Bankruptcy Proceedings
On June 20, 2000 an involuntary Chapter XI bankruptcy petition was filed by a
group of The Cerplex Group, Inc. ("Group") creditors. Group consented to the
involuntary filing on July 11, 2000. At the time, Group's subsidiary, Cerplex,
Inc. and its subsidiary, Cerplex Ltd. were not in bankruptcy or subject to a
proceeding. Subsequently, on July 27, 2000, Cerplex, Inc filed a voluntary
petition for protection under Chapter XI of the U.S. Bankruptcy Code (the
"Code"). An Order for Relief was issued by the United States Bankruptcy Court
for the District of Delaware (the "Court") in the Group case on July 26, 2000
and on July 27, 2000 in the Cerplex, Inc. case. Under Chapter XI of the Code,
both Group and Cerplex, Inc. (collectively, the "Company") are considered
debtors-in-possession of the assets. As debtors-in-possession ("DIP"),
management of the Company continues to operate the business under the
supervision of the Court and, among other things, is granted a 120 day exclusive
right to propose a plan of reorganization. In accordance with the provisions of
the Code, an automatic stay provides that creditors of the Company are prevented
from seeking repayment of pre-petition debts. Additionally, the Company must,
unless otherwise approved by the Court, refrain from payment of pre-petition
indebtedness. The Company has arranged for a debtor-in-possession credit
facility through Congress by entering into a Ratification and Amendment
Agreement ("DIP Agreement") to finance its working capital needs while in
bankruptcy. The Court approved the DIP Agreement on July 28, 2000. However,
there is no assurance that the Company will have adequate working capital
financing to continue operations during the course of the bankruptcy proceeding.
Furthermore, there can be no assurance that creditors and the Court will approve
a plan of reorganization that will enable the Company to survive.
High Degree of Leverage; Future Capital Requirements
As of August 10, 2000, the Company had approximately $41.5 million principal
(including accrued interest) of indebtedness outstanding, which consisted of:
(i) $27.1 million indebtedness under the WCAS Senior Secured Notes; (ii) $0.4
million indebtedness under the Company's 10% Series B Senior Subordinated Notes;
(iii) $11.1 million indebtedness under the
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Company's Debentures; (iv) $2.1 million indebtedness under the Congress Line of
Credit; (v) $.8 million indebtedness outstanding under the DIP Agreement. In
addition, the Company also had as of August 10, 2000, $21.6 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.
It is anticipated that the Company's cash from operations will not be sufficient
to enable it to meet all debt service and preferred stock redemption
requirements, and the Company will be required to obtain additional funds
through equity or debt financing in order to reorganize its operations and
continue operations.
LOSSES AND ACCUMULATED DEFICIT
For the quarter ended June 24, 2000, the Company reported a net loss of $12.5
million and an operating loss of $12.8 million. As of June 24, 2000, the Company
has a stockholders' deficit of $72.4 million. The Company is expecting to
experience losses for the foreseeable future, and will require additional
funding. Continued losses and/or the failure to obtain such additional funding
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.
Control by WCAS
WCAS owns approximately 69% of the Company's voting capital stock, which
consists of 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 June 24, 2000, BT accounted for approximately 39% of the
Company's revenues. These revenues were almost entirely attributable to the
business of Old Cerplex. There can be no assurance that this customer 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 this customer do
business. Any such termination, change, reduction, or delay could have a
material adverse effect on the Company's business. 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 this customer or new customers. There can be no assurance that the
Company will be able to replace this declining volume with sales to either this
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
22
<PAGE>
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
capitalization 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 June 24, 2000, approximately 35% 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. 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 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.
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
23
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risks with respect to its variable
note debt and its cash flows, receivables and payables denominated in foreign
currencies.
Of the Company's $41.5 million principal amount of indebtedness at
August 10, 2000, $26.8 million principal amount of such debt (which represents
total principal indebtedness under the WCAS Senior Secured Notes) bears interest
at a rate that fluctuates based on changes in the LIBOR rate. A 1% change in the
underlying LIBOR rate would result in $262 change in the annual amount of
interest payable on such debt.
The Company's oversees subsidiary operates in England. Both the trade
receivables and the trade payables for this unit are denominated in the local
currency. The balance as of June 24, 2000 was $0.4 million. The Company does not
hedge these balances. See Note O to the Consolidated Financial Statements --
"Business Segment and Foreign Operations" in the Company's 1999 annual report on
Form 10-K.
24
<PAGE>
THE CERPLEX GROUP, INC.
PART II
OTHER INFORMATION
21
THE CERPLEX GROUP, INC.
ITEM 1. LEGAL PROCEEDINGS
The Company has been operating as a debtor-in-possession under Chapter
XI of the Bankruptcy Code since July 27,2000. In October of 1999, a
French court ordered the liquidation of SAS, which has since
discontinued its operations.
See the "Overview" section of Item 2 in Part I of this filing for a
detailed discussion of the matters described in the preceding
paragraph.
ITEM 2. CHANGES IN SECURITIES
Inapplicable.
ITEM 3. Defaults Upon Senior and Subordinated Securities
During the nine months ended June 24, 2000, the Company was in default
under several of its senior and subordinated debt obligations. With
regard to the Congress Line of Credit and the WCAS Senior Secured
Notes (collectively, "Senior Securities"), defaults exist due to,
among other reasons, failure to maintain minimum required adjusted net
worth and a cross-default arising from the default which occurred
under the Company's 7 3/4% Convertible Subordinated Debentures. On
April 17, 2000, pursuant to the 7 3/4% Convertible Subordinated
Debentures, the Company was required to make a sinking fund payment of
principal of approximately $1.8 million and a payment of accrued
interest of approximately $0.4 million. The failure to make the
sinking fund payment resulted in a default under the terms of the
Indenture governing such indebtedness. The Company has been advised by
the Indenture Trustee that, pending further discussions regarding the
default, it will forbear actions and remedies which may be available
to holders under the indenture provided the Company refrains from
making payments other than in the ordinary course of business. At June
24, 2000, the total indebtedness owned pursuant to the WCAS Senior
Secured Notes and Congress Line of Credit was approximately $26.8
million and $2.6 million, respectively. At August 10, 2000, the total
indebtedness owed pursuant to the 7 3/4% Convertible Subordinated
Debentures and the 10% Senior Subordinated Notes was approximately
$11.1 million and $0.4 million, respectively.
25
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At an Annual Meeting of Stockholders on April 5, 2000, holders of a majority of
the capital stock of the Company entitled to vote approved the following
matters:
1. Ratification of KPMG LLP as the Company's Independent Accountants
2. Election of Larry McTavish, Richard H. Stowe, Thomas E. McInerney and
Bruce K. Anderson as the Directors of the Company.
ITEM 5. OTHER INFORMATION
Following the end of the third fiscal 2000, Thomas E. McInerney,
Richard H. Stowe and Bruce K. Anderson resigned from group's board of
director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
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).
26
<PAGE>
10.18 Loan and Security Agreement dated November 24, 1999 by and among
Congress Financial Corporation (Western) as lender and Cerplex, Inc.,
as borrower and The Cerplex Group, Inc. as Guarantor (incorporated by
reference from Exhibit 10.18 of the Company's Report on Form 10-K for
the year ended September 25, 1999 and filed on January 11, 2000).
10.19 Deed of Debenture dated December 15, 1999 between Cerplex Limited as
borrower and Burdale Financial Limited as lender (incorporated by
reference from Exhibit 10.19 of the Company's Report on Form 10-K for
the year ended September 25, 1999 and filed on January 11, 2000).
10.20 Guarantee and Indemnity agreement dated December 14, 1999 between The
Cerplex Group, Inc. as a guarantor and Burdale Financial Limited as
lender (incorporated by reference from Exhibit 10.20 of the Company's
Report on Form 10-K for the year ended September 25, 1999 and filed
on January 11, 2000).
10.21 Facility Agreement dated December 14, 1999 between Cerplex Limited as
borrower and Burdale Financial Limited as lender (incorporated by
reference from Exhibit 10.21 of the Company's Report on Form 10-K for
the year ended September 25, 1999 and filed on January 11, 2000).
*11 Computation of Per Share Earnings.
*27 Financial Data Schedule - Article 5 of Regulation S-X.
-----------
* Filed herewith.
(b) Reports on Form 8-K
None
THE CERPLEX GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 14, 2000
THE CERPLEX GROUP, INC.
/s/ Richard A. Alston
----------------------------------------
Richard A. Alston
President and Chief Operating Officer
27
<PAGE>
THE CERPLEX GROUP, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
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).
*11 Computation of Per Share Earnings.
*27 Financial Data Schedule - Article 5 of Regulation S-X.
-----------
* Filed herewith.
EX-11
2
EXHIBIT 11
28
<PAGE>
THE CERPLEX GROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------
JUNE 24, JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Net loss available to common stockholder
ADJUSTED NUMBER OF COMMON SHARES $(28,196) $(39,379)
======= =======
Weighted average shares outstanding 7,270 7,322
Net loss per common shares $ (3.88) $ (5.38)
======= =======
</TABLE>
29
