CERPLEX GROUP INC/DE
Filing Type: 10-Q
Description: Quarterly Report
Filing Date: May 15, 2000
Period End: Mar 25, 2000
Primary Exchange: Over the Counter Includes OTC and OTCBB
Ticker: CPLX
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 25, 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.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive office.) (Zip Code)
(949) 754-5474
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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 May 3, 2000:
TITLE OF EACH CLASS OF COMMON STOCK NUMBER OUTSTANDING
- ----------------------------------- ------------------
Common Stock, $0.03 par value 7,272,958 shares
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THE CERPLEX GROUP, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 25, 2000
and September 25, 1999 4
Condensed Consolidated Statements of Operations for the Three
Months and The Six Months Ended March 25, 2000
and March 31, 1999 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended March 25, 2000 and March 31, 1999 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION 21
Signatures 24
Index to Exhibits 25
2
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THE CERPLEX GROUP, INC.
PART I
FINANCIAL INFORMATION
3
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THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 25, SEPTEMBER 25,
2000 1999
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6 $ 382
Accounts receivable, less allowance for doubtful accounts
of $667 and $912 7,208 9,234
Inventories 4,773 5,375
Other current assets 872 1,191
--------- ---------
Total current assets 12,959 16,182
Goodwill 9,236 9,406
Property, plant and equipment, net 8,475 9,560
Intangible and other assets 361 483
--------- ---------
$ 31,031 $ 35,631
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 41,154 $ 39,406
Accounts payable 8,402 6,674
Accrued expenses 1,994 4,802
Accrued interest expense 577 458
Other current liabilities 1,406 1,338
--------- ---------
Total current liabilities 53,533 52,678
Long-term debt 3,813 --
Commitments and contingencies
Redeemable convertible preferred stock, 1000 shares
authorized and 216 shares issued 31,247 30,492
Stockholders' deficit:
Series B senior cumulative preferred stock, 59 shares
authorized and issued 61,721 59,669
Common stock 75,000 shares authorized, 7,850 shares issued
and outstanding 2,270 2,270
Additional paid-in capital 121,601 121,601
Treasury stock, at cost, 474 shares (16,675) (16,675)
Accumulated deficit (226,466) (214,415)
Accumulated other comprehensive income (13) 11
--------- ---------
Total stockholders' deficit (57,562) (47,539)
--------- ---------
$ 31,031 $ 35,631
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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THE CERPLEX GROUP, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ------------------------
MARCH 25, MARCH 31, MARCH 25, MARCH 31,
2000 1999 2000, 1999
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net revenues $ 13,163 $ 24,024 $27,308 $ 53,513
Cost of sales 14,091 24,676 28,009 52,492
-------- -------- ------- --------
Gross profit (928) (652) (701) 1,021
Selling, general and administrative
expenses 3,896 5,738 7,568 11,026
Amortization of intangible assets 162 2,158 324 4,308
-------- -------- ------- --------
Operating loss (4,986) (8,548) (8,593) (14,313)
Interest expense 967 2,019 1,822 4,138
Other income (expense), net -- 2,812 -- 3,292
-------- -------- ------- --------
Loss before provision for income taxes (5,953) (7,755) (10,415) (15,159)
Provision for income taxes (207) 149 (233) (15)
-------- -------- ------- --------
Net loss (5,746) (7,904) (10,182) (15,174)
Accrued dividends on preferred stock (1,404) (378) (2,807) (797)
-------- -------- ------- --------
Net loss applicable to common stockholders $(7,150) $ (8,282) $(12,989) $(15,971)
======== ======== ======= ========
Basic and dilutive loss per common share $ (0.98) $ (1.15) $ (1.79) $ (2.21)
======== ======== ======= ========
Weighted average number of common
shares outstanding 7,270 7,232 7,269 7,232
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------
MARCH 25,2000 MARCH 31, 1999
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,182) $ (15,174)
Adjustments to reconcile net loss to net cash used in
continuing operations:
Depreciation and amortization 1,392 6,073
Non-cash interest expense 1,127 --
Foreign currency translation 24 103
Loss on disposition of assets -- 32
Changes in assets and liabilities:
Current assets 2,970 17
Current liabilities (628) (7,370)
-------- --------
Net cash used in continuing operations (5,297) (16,319)
Net cash used in discontinued operations -- --
-------- --------
Net cash used in operating activities (5,297) (16,319)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (137) (685)
-------- --------
Net cash used in investing activities (137) (685)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from promissory note -- 7,500
Payments on revolving line of credit (13,056) (919)
Payment on debt (2,871) (100)
Proceeds from revolving line of credit 16,879 --
Proceeds from debt 4,106 --
Other --
-------- --------
Net cash provided by financing activities 5,058 6,481
-------- --------
Net change in cash and cash equivalents (376) (10,523)
-------- --------
Cash and cash equivalents at beginning of period 382 14,196
-------- --------
Cash and cash equivalents at end of period $ 6 $ 3,673
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
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THE CERPLEX GROUP, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. CURRENT FINANCIAL CONDITION
During the six months ended March 25, 2000 and the year ended September 25,
1999, the Company experienced recurring operating losses. As a result of these
losses, at March 25, 2000 the Company had a deficit of $57,562 in stockholders'
equity and negative working capital of $40,574. 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 March 25, 2000, the Company had approximately $26.3 million in
principal amount outstanding under its senior secured term debt owed to WCAS
which matures on April 1, 2001, and $3.9 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.
The Congress Line of Credit is due in February 2001. The liquidation of Cerplex
S.A.S. in October, 1999, as described more fully in the 1999 Annual Report on
Form 10-K for The Cerplex Group, Inc., may cause either a default or
cross-default under all the material debt instruments of the Company. Unless
appropriate waivers are obtained by the Company, the holders of such debt may
have the right to accelerate payment of principal thereunder. The acceleration
of such debt would have a material adverse effect on the Company. In this
regard, the Company has obtained a default waiver from its senior lenders and is
currently in the process of seeking a default waiver from its various
subordinated debt holders. On April 17, 2000, the Company was required to make a
sinking fund payment of approximately $1.8 million against the principal on the
7 3/4% convertible subordinated debentures and approximately $.4 million in
accrued interest. Such payments were not made when due. The total amount of the
indebtedness was approximately $10.8 million at April 17, 2000.
During the three months ended March 25, 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. Defaults existing
under the 7 3/4% Convertible Subordinated Debentures caused a cross default
under the Company's 10% Senior Subordinated Notes. At March 25, 2000, the total
indebtedness owned pursuant to the WCAS Senior Secured Notes and Congress Line
of Credit was approximately $26.3 million and $3.9 million, respectively. At
April 17, 2000, the total indebtedness owned pursuant to the 7 3/4% Convertible
Subordinated Debentures and the 10% Senior Subordinated Notes was approximately
$10.8 million and $0.4 million, respectively.
The Company is pursuing various financing alternatives that may be available to
it, 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 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 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 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 1999 Annual Report on Form 10-K for The Cerplex
Group, Inc.
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)
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.
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Certain information in footnote disclosures 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 1999 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 antidilutive.
The Company's 7% Senior Cumulative Convertible Preferred Stock and 10% Series B
Senior Subordinated Debentures (which mature in three equal installments on
December 31, 2002, 2003 and 2004), were not common stock equivalents at the time
of issuance and are therefore not included in the calculation of diluted
earnings per share.
NOTE D. INVENTORIES
Inventories consisted of the following:
March 25, September 25,
2000 1999
------------ -------------
(IN THOUSANDS)
Spare and repair parts $5,284 $ 4,687
Work in process 92 493
Finished goods and purchased product 181 195
------ ------
Total inventories $5,557 $5,375
====== ======
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
8
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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 previously issued to WCAS and other
stockholders. 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 May 3,
2000, there were 7,272,958 shares of the Company's Common Stock outstanding.
NOTE F. DEBT
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 April 22, 2000 the Company had $.1 million available to borrow
under this facility. 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 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 financings of this type. The liquidation of Cerplex S.A.S. 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 ("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.
As of March 25, 2000 the Company had $3.9 million outstanding under the Congress
Line of Credit, $3.8 million outstanding under the Burdale Loans, $26.2 million
outstanding under the WCAS Senior Secured Notes, and $0.4 million outstanding
under the 10% Series B Senior Subordinated Notes. As of April 22, 2000 the
Company had $3.6 million outstanding under the Congress Line of Credit, $3.7
million outstanding under the Burdale Loans, $26.2 million outstanding under the
WCAS Senior Secured Notes, $10.4 million outstanding under the 7 3/4%
Convertible Subordinated Debentures and $0.4 million outstanding under the 10%
Series B Senior Subordinated Notes.
During the quarter ended March 25, 2000, the Company and Congress agreed to an
amendment to modify the terms of the Line of Credit to reduce the Adjusted Net
Worth covenant restrictions in amounts sufficient to reflect the write-off of
the Company's
9
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investment in Cerplex S.A.S. as of July 20, 1999. Additionally, the Amendment
included a waiver, to waive a notification default related to the liquidation of
Cerplex S.A.S. and a cross-default relating to a default which exists in
connection with the Series B Notes. All other terms of the Congress Line of
Credit remain the same.
Losses from operations sustained by the Company during the quarter ended March
25, 2000 have resulted in an adjusted net worth, as defined in the Congress Line
of Credit, to be less than that required pursuant to the covenant therein.
Consequently, the Company is in default under the Congress Line of Credit. There
can be no assurance that the Company will receive default waivers from Congress
or that future earnings would be sufficient to maintain adjusted net worth
requirements.
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. Defaults existing
under the 7 3/4% Convertible Subordinated Debentures caused a cross default
under the Company's 10% Senior Subordinated Notes. At March 25, 2000, the total
indebtedness owed pursuant to the WCAS Senior Secured Notes and Congress Line of
Credit was approximately $26.3 million and $3.9 million, respectively. At April
17, 2000, the total idebtedness owed pursuant to the 7 3/4% Convertible
Subordinated Debentures and the 10% Senior Subordinated Notes was approximately
$10.8 million and $0.4 million, respectively.
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 writing off assets
carried at $20.9 million, liabilities carried at $13.8 million and intercompany
balances for SAS of $0.9 million. For the second quarter 1999 SAS had sales of
$9.9 million and a net loss of $.4 million. These amounts are included in the
Company's condensed consolidated financial statements reported herein. There
were no sales or operations from SAS reported in the second quarter of fiscal
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.
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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 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.
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
11
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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. However, subsequent to the write-off of terminated
operations, the remaining operations have a 15 year remaining useful life.
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,
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 second 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 second 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. 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.
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During the three months ended March 25, 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. Defaults existing
under the 7 3/4% Convertible Subordinated Debentures caused a cross default
under the Company's 10% Senior Subordinated Notes. At March 25, 2000, the total
indebtedness owed pursuant to the WCAS Senior Secured Notes and Congress Line of
Credit was approximately $26.3 million and $3.9 million, respectively. At April
17, 2000, the total indebtedness owed pursuant to the 7 3/4% Convertible
Subordinated Debentures and the 10% Senior Subordinated Notes was approximately
$10.8 million and $0.4 million, respectively.
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 25, 2000
AND MARCH 31, 1999
Net revenues for the second quarter of fiscal 2000 were $13.2 million, as
compared to $24.0 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 $7.1 million in the second quarter of fiscal 1999. There were no
revenues reported from SAS in the second quarter of fiscal 2000. In addition,
revenues generated by the Company's North American Repairs and Parts operations
declined in the fiscal quarter ended March 25, 2000 to $7.5 million and $1.6
million, respectively from $10.7 million and $1.8 million in the comparable
fiscal 1999 quarter. UK revenues during the second fiscal 2000 quarter were $4.1
million compared to $4.6 million in the same fiscal 1999 quarter. The Company
had negative gross profit for the quarter ended March 25, 2000 of $.9 million
(7.0% of net revenues), compared to a negative gross profit of $.7 million (2.9%
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. These declines were partially offset by slight
reductions in the costs of the North American Parts operations during the second
fiscal quarter of 2000. Selling, general and administrative expenses for the
second quarter of fiscal 2000 were $4.1 million (30.0% of net revenues), as
compared to $7.7 million (32.1% of net revenues) for the corresponding quarter
in the prior fiscal year. SG&A expense reductions during the quarter ended March
25, 2000 were primarily attributable to the deconsolidation of SAS which
generated approximately $1.2 million of SG&A expenses during the second fiscal
quarter of 1999 and the reduction of expenses within the Company's North
American operations. Amortization expense for the second quarter of fiscal 2000
was $0.3 million compared to $2.2 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 second quarter of fiscal 2000 was $1.0 million, or
7.3% of revenues, as compared to $2.0 million, or 8.4% 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 to common stockholders for the quarter was $7.2 million as compared to
net loss of $8.3 million for the corresponding quarter in the prior fiscal year.
COMPARATIVE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 25, 2000 AND
MARCH 31, 1999
Net revenues for the first half of fiscal 2000 were $27.3 million, as compared
to $53.5 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 $17.0 million in the first half of fiscal 1999. There were no
revenues reported from SAS in the first half of fiscal 2000. In addition,
revenues generated by the Company's North American Repairs and Parts operations
declined in the first half of fiscal 2000 to $12.9 million and $4.6 million,
respectively. The Company had negative gross profit for the first half of fiscal
2000 of $0.7 million (2.6% of net revenues), compared to a gross profit of $1.0
million (1.9% of net revenues) for the corresponding period of fiscal 1999. The
decrease in gross profit of $2.2 million from the first half of fiscal 1999 to
the first half of fiscal 2000 primarily attributable to the Company's North
American Repair operations. Selling, general and administrative expenses for the
first half of fiscal 2000 were $7.9 million (29% of net revenues), as compared
to $11.0 million (20.6% of net revenues) for the corresponding period in the
prior fiscal year. SG&A expense reductions during the first half of fiscal 2000
were partially attributable to the deconsolidation of SAS which generated
approximately $2.4 million of SG&A expenses during the first half of fiscal 1999
and the reduction of expenses within the Company's North American operations.
Amortization expense for the first half of fiscal 2000 was $0.6 million compared
to $4.3 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 half of fiscal 2000 was $1.8 million, or 6.7%
of revenues, as compared to $4.1 million, or 7.7% 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 to common stockholders for the first half of fiscal 2000 was $13.0
million as compared to net loss of $16.0 million for the corresponding period in
the prior fiscal year.
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 and interest payments. The Company had a
working capital deficit of $40.6 million as of March 25, 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."
During the three months ended March 25, 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, that 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. Defaults existing
under the 7 3/4% Convertible Subordinated Debentures caused a cross default
under the Company's 10% Senior Subordinated Notes. At March 25, 2000, the total
indebtedness owed pursuant to the WCAS Senior Secured Notes and Congress Line of
Credit was approximately $26.3 million and $3.9 million, respectively. At April
17, 2000, the total indebtedness owed pursuant to the 7 3/4% Convertible
Subordinated Debentures and the 10% Senior Subordinated Notes was approximately
$10.8 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 7 3/4% Convertible Subordinated 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.
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The Company will be seeking waivers of defaults relating to its indebtedness.
However, there can be no assurance that continued operating losses will not
cause a default in the future. See Note A of Notes to Unaudited Condensed
Consolidated Financial Statements -- "Current Financial Condition."
In addition to not having the capital necessary to make the sinking fund
payment, management believes that the Company will likely continue to experience
operating losses and negative cash flow during part or all of the remainder of
fiscal 2000.
The Company is highly leveraged, and has significant debt repayment obligations
and preferred stock redemption obligations. As of March 25, 2000, the Company
had approximately $44.9 million principal amount of indebtedness outstanding,
which consisted of: (i) $26.2 million indebtedness under the WCAS secured loan;
(ii) $0.4 million indebtedness under the Company's 10% Series B Senior
Subordinated Notes; (iii) $10.4 million indebtedness under the Company's 7 3/4%
Convertible Subordinated Debentures plus accrued interest that was not paid at
April 17, 2000 of approximately $.4 million; (iv) $3.8 million indebtedness
under the Burdale Loans; (v) $3.9 million indebtedness under the Congress Line
of Credit; and (vi) $0.2 million of other indebtedness consisting primarily of
equipment leases. In addition, the Company also had as of March 25, 2000, $21.6
million outstanding (par value only) of its mandatory redeemable 7% Convertible
Preferred Stock.
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
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 consist of a line of credit which
matures in February 2001 and provide for advances to Cerplex Ltd. up to $2.9
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million under a line of credit secured by accounts receivable. The Burdale
Debenture, which matures in December 2003, provides 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 will be used 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.
10% Series B Senior Subordinated Notes.
As of April 22, 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 April 22, 2000, there was approximately $10.4 million principal amount
outstanding of the Company's 7 3/4% Convertible Subordinated Debentures (the
"Debentures"). The Debentures are 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 which gives holders the right, under certain conditions, to accelerate
the maturity. The Debentures bear interest at 7 3/4% payable in April and
October of each year through maturity.
Other Debt
As of April 22, 2000, there was $0.2 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 12.9%, due in monthly
installments through 2000.
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
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
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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).
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 implemented a program that was intended to enable the Company to
become Year 2000 compliant. The Company used 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 to
remedy such problems. The Company purchased and installed certain software and
hardware intended to upgrade its networked personal computer system to be Year
2000 compliant. More significantly, the Company obtained the source code for the
Company's main operating systems software that the Company modified to be Year
2000 compliant. In addition, the Company has discussed 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 would 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's internal systems, equipment and processes are now
substantially Year 2000 compliant. The Company has completed the analysis and
remediation of potential Year 2000 problems with its significant suppliers and
customers. 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 a failure to identify all Year 2000 problems in 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
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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 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.
Subsequent to January 1, 2000, the Company has encountered only minimal problems
related to Year 2000 issues. The cost of remediation has been immaterial and the
cost of future remediation efforts is expected to be immaterial.
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:
High Degree of Leverage; Future Capital Requirements. As of April 22, 2000, the
Company has approximately $44.7 million principal amount of indebtedness
outstanding, which consisted of: (i) $26.2 million indebtedness under the WCAS
secured loan; (ii) $10.5 million indebtedness under the Company's 10% Series B
Senior Subordinated Notes; (iii) $3.7 million indebtedness under the Burdale
Loans; (iv) $3.7 million indebtedness under the Congress Line of Credit; (v)$0.4
million indebtedness under the Company's 10% Series B Senior Subordinated Notes;
and (vi) $.2 million of other indebtedness consisting primarily of equipment
leases. In addition, the Company also has as of April 22, 2000, $21.6 million
outstanding (excluding accrued dividends of $9.3 million) 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 all 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 such requirements.
In many cases, if the Company defaults on a particular debt, the default will
cause other debts of the Company to be in default and come due early. The
failure to pay principal when due pursuant to the Company's 7 3/4% Convertible
Subordinated Debentures may cause the acceleration of all the material debt
instruments of the Company, either because it triggers a default or a
cross-default under such instruments. Unless appropriate waivers are obtained by
the Company, the acceleration of such debt would have a material adverse effect
on the Company.
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In this regard, the Company will be seeking default waivers from various
creditors whose agreements were affected and wherein a default exists. There can
be no assurance that such default waivers will be obtained or, if obtained, that
the Company will remain in compliance with other material covenants. 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 March 25, 2000, the
Company reported a net loss of $7.2 million and an operating loss of $5.0
million. As of March 25, 2000, the Company has a stockholders' deficit of $57.6
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 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 March 25, 2000, BT accounted
for approximately 20% 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
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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
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 March 25, 2000,
approximately 31% 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.
Risks Associated with Intangible Assets. As of March 25, 2000, approximately
$9.2 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. 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.
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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.
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 $44.7 million principal amount of indebtedness at
April 22, 2000, $26.2 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 March 25, 2000 was $0.3 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 annual report on Form
10-K.
20
<PAGE>
THE CERPLEX GROUP, INC.
PART II
OTHER INFORMATION
21
<PAGE>
THE CERPLEX GROUP, INC.
ITEM 1. LEGAL PROCEEDINGS
Inapplicable.
ITEM 2. CHANGES IN SECURITIES
Inapplicable.
ITEM 3. Defaults Upon Senior and Subordinated Securities
During the three months ended March 25, 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.
Defaults existing under the 7 3/4% Convertible Subordinated Debentures
caused a cross default under the Company's 10% Senior Subordinated
Notes. At March 25, 2000, the total indebtedness owed pursuant to the
WCAS Senior Secured Notes and Congress Line of Credit was
approximately $26.3 million and $3.9 million, respectively. At April
17, 2000, the total indebtedness owed pursuant to the 7 3/4%
Convertible Subordinated Debentures and the 10% Senior Subordinated
Notes was approximately $10.8 million and $0.4 million, respectively.
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
Inapplicable.
22
<PAGE>
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).
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
23
<PAGE>
THE CERPLEX GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: May 15, 2000
THE CERPLEX GROUP, INC.
/s/ Richard A. Alston
----------------------------------------
Richard A. Alston
President and Chief Operating Officer
/s/ Robert M. Nelson
----------------------------------------
Robert M. Nelson
Corporate Controller
(Controller)
24
<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.
THE CERPLEX GROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MARCH 25, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Net loss available to common stockholder
ADJUSTED NUMBER OF COMMON SHARES $(7,150) $(8,282)
======= =======
Weighted average shares outstanding 7,270 7,232
Net loss per common shares $ (0.98) $ (1.15)
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000319237
<NAME> THE CERPLEX GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> DEC-26-1999
<PERIOD-END> MAR-25-2000
<EXCHANGE-RATE> 1
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 7,875
<ALLOWANCES> (667)
<INVENTORY> 4,773
<CURRENT-ASSETS> 12,959
<PP&E> 23,700
<DEPRECIATION> (15,225)
<TOTAL-ASSETS> 31,031
<CURRENT-LIABILITIES> 53,533
<BONDS> 0
31,247
61,721
<COMMON> 2,270
<OTHER-SE> (121,553)
<TOTAL-LIABILITY-AND-EQUITY> 31,031
<SALES> 13,163
<TOTAL-REVENUES> 13,163
<CGS> 14,091
<TOTAL-COSTS> 4,058
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 967
<INCOME-PRETAX> (5,953)
<INCOME-TAX> (207)
<INCOME-CONTINUING> (5,746)
<DISCONTINUED> 0
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<NET-INCOME> (5,746)
<EPS-BASIC> (0.98)
<EPS-DILUTED> (0.98)
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