<PAGE> 1
FORM 10-Q/A
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 30, 1997
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- -------------------
Commission file number 0-23602
-------------------
THE CERPLEX GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0411354
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1382 Bell Avenue, Tustin, CA 92780
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(714) 258-5600
- --------------------------------------------------------------------------------
(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
--- ---
The number of shares outstanding of the Registrant's Common Stock on July 27,
1997 was 34,217,655.
<PAGE> 2
THE CERPLEX GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I --- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets.................................. 4
Condensed Consolidated Statements of Operations........................ 5
Condensed Consolidated Statement of Stockholders' Deficiency........... 6
Condensed Consolidated Statements of Cash Flows........................ 7
Notes to Condensed Consolidated Financial Statements................... 8
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
PART II --- OTHER INFORMATION
Legal Proceedings...................................................... 19
Changes in Securities.................................................. 19
Defaults Upon Senior Securities........................................ 19
Submission of Matters to a Vote of Security Holders.................... 19
Other Information...................................................... 19
Exhibits and Reports on Form 8-K....................................... 23
SIGNATURE................................................................... 24
</TABLE>
2
<PAGE> 3
THE CERPLEX GROUP, INC.
PART I
FINANCIAL INFORMATION
3
<PAGE> 4
THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,788 $ 23,782
Accounts receivable, net 17,023 19,539
Inventories 8,987 17,326
Net assets of discontinued operations -- 1,681
Prepaid expenses and other current assets 5,116 8,146
------- ---------
Total current assets 52,914 70,474
Property, plant and equipment, net 23,836 28,039
Goodwill -- 4,953
Other long-term assets 1,367 2,028
------- ---------
Total assets $ 78,117 $ 105,494
======= =========
LIABILITIES & STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable to banks $ 35,897 $ 6,000
Notes payable 4,826 5,026
Accounts payable 15,117 19,498
Accrued and other current liabilities 28,083 25,347
Income taxes payable -- 1,729
------- ---------
Total current liabilities 83,923 57,600
------- ---------
Long-term debt, less current portion 18,114 56,817
Long-term obligations 6,214 6,214
COMMITMENTS AND CONTINGENCIES
SUBSEQUENT EVENTS
Stockholders' deficiency:
Preferred stock, par value $0.001; 3,066,340 shares authorized,
none outstanding. 8,000 shares Series B Convertible Preferred
Stock of which 657 and 7,197 are issued and outstanding as of
June 30, 1997 and December 31, 1996, respectively; aggregate
liquidation preference of $1,314 and $14,394 as of June 30, 1997
and December 31, 1996, respectively 657 7,197
Common stock, par value $0.001 per share; 60,000,000 and 30,000,000
shares authorized as of June 30, 1997 and December 31, 1996,
respectively; 34,217,655 and 14,110,949 issued and outstanding
as of June 30, 1997 and December 31, 1996, respectively 34 14
Additional paid-in capital 58,646 51,648
Notes receivable from stockholders -- (139)
Unearned compensation -- (73)
Accumulated deficiency (88,774) (74,414)
Cumulative translation adjustment (697) 630
------- ---------
Total stockholders' deficiency (30,134) (15,137)
------- ---------
Total liabilities and stockholders' deficiency $ 78,117 $ 105,494
======= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Net sales $ 39,266 $ 51,339 $ 85,606 $ 92,185
Cost of sales 37,465 40,370 76,076 74,285
-------- -------- -------- --------
Gross profit 1,801 10,969 9,530 17,900
Selling, general and administrative expenses 10,993 8,870 20,121 15,860
Restructuring charge 4,307 -- 4,307 --
-------- -------- -------- --------
Operating income (loss) (13,439) 2,099 (14,898) 2,040
Equity in earnings from joint venture -- -- -- 357
Gain on sale of PCS 6,607 -- 6,607 --
Gain on sale of InCirT Division -- 450 -- 450
Other (income) expense, net 422 (288) 998 (221)
Interest expense, net 1,709 1,658 3,956 3,169
-------- -------- -------- --------
Income (loss) before income taxes (8,963) 1,179 (13,245) (101)
Provision for income taxes 394 477 1,115 770
-------- -------- -------- --------
Net income (loss) $ (9,357) $ 702 $(14,360) $ (871)
======== ======== ======== ========
Net income (loss) per common share $ (0.30) $ 0.01 $ (0.60) $ (0.11)
======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding 31,678 14,846 23,742 13,286
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Total
---------------- ------------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Other Deficiency Deficiency
------ ------- ----------- ------ ---------- ----- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 7,197 $ 7,197 14,110,949 $ 14 $ 51,648 $ 418 $ (74,414) $ (15,137)
Stock options exercised -- -- 10,665 -- -- -- -- --
Conversion of Preferred Stock (1,608) (1,608) 2,955,038 3 1,605 -- -- --
Net loss -- -- -- -- -- -- (5,003) (5,003)
Amortization of unearned compensation -- -- -- -- -- 18 -- 18
Translation adjustment -- -- -- -- -- (945) -- (945)
------ ------- ---------- ----- -------- ----- --------- -----------
Balance at March 31, 1997 5,589 5,589 17,076,652 17 53,253 (509) (79,417) (21,067)
Stock options exercised -- -- 5,887 -- -- -- -- --
Conversion of Preferred Stock (4,932) (4,932) 17,135,116 17 4,915 -- -- --
Net loss -- -- -- -- -- -- (9,357) (9,357)
Amortization of unearned compensation -- -- -- -- -- 55 -- 55
Translation adjustment -- -- -- -- -- (382) -- (382)
Reduction of notes receivable from
shareholder -- -- -- -- -- 139 -- 139
Repricing of Warrants -- -- -- -- 103 -- -- 103
Issuance of Warrants -- -- -- -- 375 -- -- 375
------ ------- ---------- ----- -------- ----- --------- ---------
Balance at June 30, 1997 657 $ 657 34,217,655 $ 34 $ 58,646 $(697) $ (88,774) $ (30,134)
====== ======= ========== ===== ======== ===== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 7
THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,360) $ (871)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 4,639 3,878
Amortization of unearned compensation 73 35
Foreign currency transaction (gain) loss (204) 28
Equity in earnings of joint venture -- (357)
Distribution of earning of joint venture -- 3,090
Non-cash charges related to restructure 4,307 --
Gain on sale of InCirT Division -- (450)
Gain on sale of PCS (6,607) --
Decrease (increase) in:
Accounts receivable 356 4,153
Inventories 5,847 (854)
Prepaid expenses and other current assets 2,888 6,335
Other long-term assets (747) (1,364)
Net assets of discontinued operations 1,681 1,250
Increase (decrease) in:
Accounts and notes payable (6,903) 1,854
Accrued and other current liabilities 6,203 (8,605)
Income taxes payable (1,708) (549)
-------- --------
Net cash provided by (used in) operating activities (4,535) 7,573
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment, net (701) (450)
Acquisition of businesses, net of cash acquired* -- 5,147
Proceeds from sale of InCirT Division -- 5,500
Proceeds from sale of PCS 13,750 --
-------- --------
Net cash used in investing activities 13,049 10,197
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 7,911
Proceeds from issuance of common stock -- 47
Repricing/issuance of warrants 478 --
Decrease in notes receivable from stockholders 139 (3)
Principal payments of long-term debt -- (304)
Net payments of borrowings (9,361) (2,000)
Other (12) --
-------- --------
Net cash provided by (used in) financing activities (8,756) 5,651
-------- --------
Effect of exchange rate changes on cash (1,752) (22)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,994) 23,399
Cash and cash equivalents at beginning of period 23,782 3,807
-------- --------
Cash and cash equivalents at end of period $ 21,788 $ 27,206
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the quarter for:
Interest $ 3,555 $ 3,319
======== ========
Income taxes $ 2,617 $ 25
======== ========
Acquisition of business*
Amount paid $ -- $ (8,977)
Cash acquired $ -- 14,124
-------- --------
$ -- $ 5,147
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
THE CERPLEX GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
(a) ORGANIZATION, BASIS OF REPORTING AND PRINCIPLES OF CONSOLIDATION
The Cerplex Group, Inc. (the "Company") was incorporated in California in
May 1990 and reincorporated in Delaware in November 1993. The Company is a
leading independent provider of electronic parts repair and logistics services
for a wide range of electronic equipment for the computer and peripheral,
telecommunications and office automation markets. The Company's key service
offerings are depot repair, logistics services and spare parts management and
sales, as well as a variety of ancillary services. The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and accounts have been
eliminated in consolidation.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
In May 1996, the Company acquired Cerplex SAS. As part of the acquisition,
sufficient cash was provided to fund certain liabilities of Cerplex SAS. Under
the terms of the Stock Purchase Agreement, the Company has agreed to certain
financial covenants over a four year period that limit the amount of dividends
and payments in the nature of corporate charges paid by Cerplex SAS.
Accordingly, the cash of Cerplex SAS is generally not available for financing
operations outside of Cerplex SAS. The cash balance of Cerplex SAS at June 30,
1997 was $16.8 million.
(c) INVENTORIES
Inventories are stated at the lower of cost (determined by the
weighted-average method) or market.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation for the
plant in the United Kingdom is provided utilizing the straight line method over
the estimated useful life of twenty-five years. Depreciation for equipment is
provided utilizing the straight-line method over the estimated useful lives
(primarily three to five years) of the respective assets. Leasehold improvements
are amortized using the straight-line method over the shorter of the lease term
or useful life.
(e) OTHER ASSETS
Long-term investments are recorded at cost. The Company periodically
assesses whether there has been an other than temporary decline in the market
value below cost of the investment. Any such decline is charged to earnings
resulting in the establishment of a new cost basis for the investment. Debt
issuance costs incurred to obtain financing are capitalized and amortized using
the straight-line method over the estimated life of the related debt. The
Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company's reported other investments are classified as available-for-sale under
SFAS 115. Accordingly, any unrealized holding gains and losses, net of taxes,
are excluded from income and recognized as a separate component of equity
(deficiency) until realized. Realized gains, realized losses and decline in
value, judged to be other than temporary, are included in other income.
8
<PAGE> 9
THE CERPLEX GROUP, INC.
(f) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through projected undiscounted future
cash flows. The amount of goodwill impairment, if any, is measured based on
projected discounted future cash flows using a discount rate reflecting the
Company's average cost of funds.
(g) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at
quarter-end rates of exchange and net sales and expenses are translated at the
average rates of exchange for the year. Translation gains and losses are
excluded from the measurement of net income or loss and are recorded as a
separate component of stockholders' deficiency. Gains and losses resulting from
foreign currency transactions are included in net income.
(h) INCOME TAXES
Provisions are made for the amount of income taxes on the reported
operations of each year. Tax credits are treated as reductions of the applicable
Federal income tax provisions in the years earned. On a quarterly basis, the
Company provides for state and foreign income taxes based on an estimate of the
effective rate for the entire year.
(i) REVENUE RECOGNITION
Sales are recognized upon shipment of product to customers. Sales relating
to deferred service contracts are recognized over the related contract terms on
a straight-line basis.
(j) INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number
of common shares and dilutive common equivalent shares outstanding. Common stock
equivalents consist of preferred stock, stock options and warrants, which were
computed using the treasury stock method. Discounts on the issuance of Preferred
Stock (decrease) increase the net income (loss) for determining net income
(loss) per share of Common Stock. Net loss per share excludes the effect of
common stock equivalents, because their effect would be anti-dilutive.
Amortizaton of $589,000 relating to the Preferred Stock discount feature has
been reflected in the Company's Financial Statements during the quarter ended
June 30, 1996 and as such the income (loss) per share has been restated for the
three and six-month periods ended June 30, 1996.
In 1997, Financial Accounting Standards No. 128 ("FAS 128") Earnings Per
Share was issued. FAS 128 is effective for earnings per share calculations for
periods ending after December 15, 1997. At that time the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods, as needed. The effects of this change are not
expected to have a material effect on income (loss) per common share.
(k) FINANCIAL STATEMENT ESTIMATES
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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period.
9
<PAGE> 10
THE CERPLEX GROUP, INC.
NOTE 2 - BASIS OF PRESENTATION
- ------------------------------
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position as of June 30,
1997 and consolidated statement of operations and statement of cash flows for
the six months ended June 30, 1997 and 1996. Results of operations for the three
and six months ended June 30, 1997 are not necessarily indicative of results to
be expected in the future.
Although the Company believes that the disclosures in the accompanying
financial statements are adequate to make the information presented not
misleading, certain information and footnote information normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, and these financial statements should
be read in conjunction with the Company's Form 10-K for the year ended December
31, 1996.
The Company's fiscal year is the 52 or 53 week period ending on the
Saturday closest to December 31. For purposes of presentation, the Company has
indicated its accounting quarter and year end as June 30 and December 31,
respectively. Certain reclassifications have been made to the 1996 consolidated
financial statements and the financial statements for the six-month period
ended June 30, 1997 to conform to the most recent 1997 presentation.
NOTE 3 - CONVERSIONS OF SERIES B PREFERRED STOCK
- ------------------------------------------------
Due in part to the decreases in the trading price of the Company's Common
Stock, the conversion rights of the Series B Preferred Stock have resulted in,
and may in the future result in, dilution to the holders of Common Stock and
could impact adversely the ability of the Company to consummate an equity
financing. The stockholders approved an increase in the Company's authorized
Common Stock from 30,000,000 to 60,000,000 shares at the Annual Stockholders'
Meeting held on June 10, 1997.
NOTE 4 - ACQUISITIONS
- ---------------------
In May 1996, the Company acquired Rank Xerox Limited's subsidiary, Cerplex
SAS, for $6.1 million, including estimated taxes, registration fees, legal,
accounting and other out-of-pocket expenses of $1.2 million. Cerplex SAS is the
legal successor to Rank Xerox et Compagnie ("Rank Xerox SNC"), which was
transformed immediately prior to the acquisition from societe en nom collectif
(a type of partnership) into a societe par actions simplifee (a form of limited
liability company), at which time its name was changed to Cerplex SAS. Cerplex
SAS performs repair and refurbishment services primarily for large copiers in
the northern region of France, near Lille. Based on the allocation of the
purchase price to the fair value of the assets and liabilities (including long
term liabilities for taxes and employment related matters) related to the
acquisition, the Company reduced other long-term assets by the amount of
negative goodwill ($1.5 million) in accordance with APB #16, Business
Combinations. As part of the acquisition, RXL provided sufficient cash to fund
certain liabilities of Cerplex SAS. Under the terms of the Stock Purchase
Agreement, the Company has agreed to certain financial covenants over a
four-year period that limit the amount of dividends and payments in the nature
of corporate charges paid by Cerplex SAS; the maintenance of Cerplex SAS'
current ratio greater than one; and restrictions on guarantees with respect to
Cerplex and its subsidiaries (excluding Cerplex SAS). In addition, Cerplex SAS
entered into a four-year Supply and Services Agreement with RXL to provide
repair and refurbishment services with guaranteed levels of production hours (at
standard rates) that decline over the period of the contract. Revenues and
income before taxes of Cerplex SAS for the six months ended June 30, 1997 were
$29.3 million and $3.9 million, respectively. Revenues and income before taxes
for the five week period ending June 30, 1996, were $5.3 million and $1.0
million, respectively.
10
<PAGE> 11
THE CERPLEX GROUP, INC.
In April 1996, the Company acquired the remaining 51% interest in
Modcomp/Cerplex L.P. (Modcomp/Cerplex") for $2.8 million. Modcomp/Cerplex is a
supplier of real-time computer systems, products and services for the process
control industry. As a result of the acquisition of the remaining interest in
Modcomp/Cerplex, the Company consolidated the results of operations and
financial position of this entity effective April 1, 1996. Prior to April 1,
1996, the Company recorded its 49% interest in Modcomp/Cerplex on the equity
method of accounting. The fair value of the assets and liabilities acquired
exceeded the purchase price by approximately $2.0 million, resulting in negative
goodwill. In accordance with APB #16, Business Combinations, the Company reduced
other long-term assets to zero and recorded the remaining amount of $500,000 as
negative goodwill, which is being amortized into income over a five year period.
Assuming the above acquisitions occurred at the beginning of 1996, the pro
forma results of operations of the Company for the six months ended June 30,
1996, would have been as follows:
<TABLE>
<CAPTION>
In Thousands, except per share data Pro Forma
----------------------------------- ----------
(As Restated)
<S> <C>
Net Sales $126,653
Income from continuing operations 323
Net loss per share of common stock from
continuing operations (.02)
</TABLE>
NOTE 5 - SALES OF INCIRT DIVISION AND PCS SUBSIDIARY
- ------------------------------------------------------
Effective April 1, 1996, the Company sold its contract manufacturing
division in Tustin, California ("InCirT Division") to Pen Interconnect for $3.5
million in cash and approximately $2.0 million in restricted common stock. The
gain on the sale of InCirT Division was $450,000.
On April 11, 1997, the Company sold Peripheral Computer Support, Inc.
("PCS"), a subsidiary of the Company, for $14.5 million in cash and the
cancellation of $500,000 of indebtedness. Of such amount, $8.25 million was used
to pay down bank debt, $500,000 was placed into escrow, and approximately
$750,000 was used to pay expenses associated with the transaction. The escrow
deposit will be used to pay or reimburse any losses or tax liabilities, as
defined in the Purchase Agreement and Tax Allocation Agreement, respectively, or
any other amounts incurred by the purchaser or PCS in connection with the sale.
Subject to resolution of certain pending tax audit issues with PCS, the Company
is entitled to any amounts remaining in the escrow deposit on the first
anniversary of the closing date. The gain on the sale of PCS was $6.6 million.
NOTE 6 - RESTRUCTURING COSTS
- ------------------------------
During the second quarter of 1997, the Company's Board of Directors
authorized and committed management to implement a consolidation and cost
reduction plan to reduce North America staffing levels by 16%, eliminating 125
positions. As part of the restructure, the Company closed its Poughkeepsie, New
York operations, relocating it to the Lawrence, Massachusetts. In addition, the
Company plans to consolidate its Redmond, Washington and Tustin, California
operations, transferring their service programs to the Company's hub-based
operations in northern and southern California, Kentucky, and Massachusetts. As
a result of these actions, the Company recorded a restructuring charge of $4.3
million, primarily for severance and termination benefits, lease termination
costs and write-down of plant and equipment related to vacated facilities.
NOTE 7 - GOODWILL
- -------------------
During the second quarter of 1997, the Company wrote-off $1.1 million of
goodwill as a result of continued declining sales based at its Leeds, England
operation and $3.2 million in connection with the sale of PCS. The Company also
wrote-down an additional $0.5 million in goodwill as a result of facility
closures.
11
<PAGE> 12
THE CERPLEX GROUP, INC.
NOTE 8 - SUBSEQUENT EVENTS
- --------------------------
On August 11, 1997, the Company entered into an agreement to sell all of
the assets of Modcomp/Cerplex L.P. to CSP, Inc. for approximately $8.2 million.
The closing of the transaction is subject to the fulfillment of certain closing
conditions which the Company believes will be fulfilled by the end of August,
1997.
Effective August 6, 1997, the Company entered into the Sixth Amendment to
its Senior Credit Agreement, which reduced the maximum amount available under
the revolver and changed the lending rate. See Management Discussion and
Analysis for further discussion.
12
<PAGE> 13
THE CERPLEX GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
This report may contain forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed under "Item 5.
Other Information (a) Risk Factors."
OVERVIEW
- --------
The Company is an independent provider of electronic parts repair, spare
parts sales and management, and logistics. The Company's net sales have
increased substantially over the last few years, primarily as a result of
acquisitions. The Company is no longer permitted under the terms of its credit
facility to engage in acquisitions. The Company's results of operations have
been adversely affected over the last two years due to a variety of factors
discussed below.
During the third quarter of 1995, the Board of Directors approved a
Liquidation Plan to discontinue its end-of-life programs, a segment of the
Company, through liquidation of these operations. In its end-of-life programs,
the Company assumed all responsibilities for the support and repair of products
which are no longer manufactured or are being phased out of manufacturing.
Generally, when the Company undertook an end-of-life program, it acquired
substantially all of the unique test equipment, repair equipment and inventories
needed to support the program. Services provided by the Company under
end-of-life programs include repair, provision of spare parts for a defined
period of time, plant return and parts reclamation, engineering and document
control, warehousing, and vendor certification and management. The Company no
longer undertakes these programs. The liquidation of end-of-life programs has
been accounted for as discontinued operations.
The results of operations for 1996 and the first quarter of 1997 reflected,
to a large degree, the resolution of several matters that have been adversely
impacting the Company. Specifically, the Company closed its unprofitable Texas
operations and reached a settlement with the SpectraVision bankruptcy; it
established reserves for the impairment of assets, and incurred additional
losses on common stock received in settlement of various transactions; it closed
its training operations and approved the consolidation of certain operations,
resulting in restructuring charges and asset write-downs; and, due to changes in
the Company's business, or the business of third parties, the Company recorded
charges for inventory write-downs, uncollectible receivables and other assets.
The financial problems of SpectraVision, Novadyne and other clients resulted in
write-offs of receivables and assets by the Company during 1995, 1996 and 1997
of over $16 million, which adversely affected the Company's results of
operations.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth items from the Company's Condensed
Consolidated Statements of Operations as a percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 95.4 78.6 88.9 80.6
Gross margin 4.6 21.4 11.1 19.4
Selling, general & administrative 27.8 17.3 23.5 17.2
Restructuring charge 11.0 -- 5.0 --
Operating income (loss) (34.2) 4.1 (17.4) 2.2
</TABLE>
13
<PAGE> 14
THE CERPLEX GROUP, INC.
NET SALES
Net sales for the three and six month periods ended June 30, 1997 decreased
$12.1 million and $6.6 million, respectively, to $39.3 million and $85.6
million, respectively, over the net sales for the corresponding periods of 1996.
The decrease in net sales of 23.5% and 7.1% in the three and six month periods
of 1997 compared to the corresponding periods of the prior year is primarily
attributable to the April 1997 sale of Peripheral Computer Support, Inc. ("PCS")
a decrease in net sales in the Company's North American operations, particularly
in relation to spare parts sales, the April 1, 1996 sale of the InCirT Division,
and the closing of Certech Technology, Inc., the Company's Texas subsidiary.
These actions were partially offset by the May 1996 purchase of Cerplex SAS and
April 1996 acquisition of the remaining 51% interest in Modcomp/Cerplex.
GROSS PROFIT
Gross profit as a percentage of net sales for the three and six month
periods ended June 30, 1997 were 4.6% and 11.1%, respectively, compared to 21.4%
and 19.4% during the corresponding periods of the prior year. The gross profit
ratio during the three and six month periods ended June 30, 1997 decreased
primarily as a result of a $4.2 million write-down of excess/obsolete inventory,
property, plant and equipment and other assets in the second quarter of 1997. In
addition, there was a decrease in margins due to inefficiencies due to lower
overall sales volumes in the Company's North America depot repair and spare
parts businesses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of net sales
for the three and six month periods ended June 30, 1997 increased to 27.8% and
23.5%, respectively, from 17.3% and 17.2% during the corresponding periods of
the prior year. The increase in selling, general and administrative expenses as
a percentage of net sales is primarily due to the write-down of $600,000 in
other assets and plant and equipment resulting from plant consolidations, the
write-down of $1.6 million of goodwill, an increase in staffing of information
systems personnel and higher legal and consulting expenses related to bank debt
restructuring.
RESTRUCTURING CHARGES
In the second quarter of 1997, the Company recorded a restructuring charge
of $4.3 million, primarily for severance and termination benefits, lease
termination costs and write-down of plant and equipment.
EQUITY IN EARNINGS FROM JOINT VENTURE & OTHER EXPENSES
Equity in earnings of joint venture relates to the Company's ownership
interest in Modcomp/Cerplex. As discussed in the Company's financial statements,
Note 4 - Acquisitions, the Company acquired the remaining 51% of Modcomp/Cerplex
effective April 1, 1996. As a result, the Company consolidated the results of
operations and financial position of this entity effective April 1, 1996. Prior
to April 1, 1996, the Company recorded its 49% interest in Modcomp/Cerplex on
the equity method of accounting.
On April 11, 1997, the Company sold PCS, a subsidiary of the Company, for
$14.5 million in cash and the cancellation of $500,000 of indebtedness. Of such
amount, $8.25 million was used to pay down bank debt, $500,000 was placed into
escrow, and approximately $750,000 was used to pay expenses associated with the
transaction. The gain on the sale of PCS was $6.6 million.
Effective April 1, 1996, the Company sold its contract manufacturing
division in Tustin, California to Pen Interconnect for $3.5 million in cash and
approximately $2.0 million in restricted common stock. The gain on the sale of
the InCirT Division was $450,000.
14
<PAGE> 15
THE CERPLEX GROUP, INC.
INTEREST EXPENSE
Interest expense for the three and six month periods ended June 30, 1997
increased $51,000 and $787,000 as a result of increased amortization of loan
fees, debt discount and warrants, and a higher weighted average interest rate.
Average borrowings outstanding were $58.2 million during the six month period
ended June 30, 1997, compared to $65.5 million during the six month period ended
June 30, 1996. The effective interest rate on credit facilities increased to
10.86% during the six month period ended June 30, 1997, from 9.68% during the
six month period ended June 30, 1996.
INCOME TAXES
Income tax expense for the six months ended June 30, 1997 and 1976, is
primarily related to income taxes on earnings of the Company's operations in
Europe at an effective tax rate of 34%. The Company has not recorded an income
tax benefit related to operating losses in the United States, and, accordingly,
a full valuation allowance for deferred tax assets has continued to be
maintained due to uncertainties surrounding their realization.
15
<PAGE> 16
THE CERPLEX GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
SENIOR CREDIT FACILITY
The Company's senior credit agreement was established in October 1994 (the
"Credit Agreement") with a group of banks led by Wells Fargo Bank (the
"Lenders"). During part of 1996 and part of 1997, the Company was in default of
various covenants in the Credit Agreement, which resulted in a series of waivers
and amendments to the agreement. In April 1996, the Company entered into an
amended Credit Agreement that reduced the maximum amount under the line of
credit from $60.0 million to $48.0 million and required reductions in the total
commitments to $47.0 million by September 30, 1996, to $45.0 million by December
31, 1996 and to $43.0 million by March 31, 1997. The interest rate on the
Agreement was increased to prime plus 2.25% and the maturity accelerated from
October 1997 to March 31, 1997. In consideration for the amendment, the Company
provided the lenders with warrants to purchase 125,000 shares of common stock at
$6 per share and paid certain commitment fees and out-of-pocket expenses.
In November 1996, the Company entered into amendments to the Credit
Agreement. As compensation for the amendments, the company repriced the 125,000
warrants issued in April 1996 from $6.00 per share to $2.50 per share.
In April 1997, the agreement was again amended to provide for borrowings
comprising a revolver and a term loan. The revolver had a maximum amount
available of $6.0 million. The interest rate on the revolver was the prime
lending rate plus 2.25%. The term loan was for $38.9 million and carried an
interest rate of prime lending rate plus 3.125%. In addition, the Company must
use to pay down the term loan 66.67% of all cumulative cash flow in excess of
$9.0 million during 1997, and generally 66.67% of all proceeds from asset, stock
investment and subsidiary sales, as well as 25% of the proceeds of any equity
offerings. The Company reduced the term loan and the revolver by an aggregate of
approximately $8.25 million on April 11, 1997 in connection with the sale of
PCS. The amended Credit Agreement expires May 1, 1998. In consideration for the
amendment to the Credit Agreement, the Company was required to provide the
lenders with warrants to purchase 750,000 shares of the Company's common stock
at an exercise price of $0.60, and to pay certain commitment fees and
out-of-pocket expenses. In addition, the warrants issued April 1996 were
repriced to an exercise price of $0.60. The April 1997 Credit Agreement included
revised covenants for profitability, current ratio, minimum tangible net worth,
leverage and working capital.
In June 1997, the Company and the Lenders entered into another
amendment to the Credit Agreement which eliminated or revised certain
covenants. On August 6, 1997, the Credit Agreement was again amended to reduce
the maximum amount available under the revolver to $4,886,984. The interest
rate on revolving loans outstanding on August 6, 1997 was changed to the prime
lending rate plus 2.00% per annum; however, the interest rate for all new
revolving loans after August 6, 1997 will be 15%. The term loan was also
reduced to $31,371,520 and now carries an interest rate at the prime lending
rate plus 3.125%. In the event the Company fails to pay all outstanding
obligations under the Credit Agreement by September 30, 1997 the interest rates
under the term loan and revolver increase by 1% per month, effective September
1, 1997, for each month which such obligations are not paid in full up to a
maximum of 4%. In addition, the mandatory pay down of the term loans and/or the
revolving loans with the proceeds of any equity offering has been reduced from
25% to 20%, although the first $1,500,000 of any equity offers must be used to
permanently reduce the term loans and/or the revolver. Under the new agreement,
$6,000,000 of the net proceeds from the sale of Modcomp shall be used to pay
down the term loans, $2,000,000 (or the remainder, whichever is less) of such
proceeds shall be applied to the revolver, and one half of the remainder shall
again be used to pay down the term loans. Subject to certain limitations, the
Company may reborrow up to $2,000,000 of the Modcomp proceeds used to pay down
the revolver. The sixth amendment to the Credit Agreement also resulted in
revised financial covenants. The sixth amendment to the Credit Agreement is
subject to certain post-effective date deliveries which must be supplied on or
before August 14, 1997, including, without limitation, the issuance of warrants
to the Lenders to purchase 1,235,313 shares of Common Stock at $0.59 per share
and the execution of an amendment with the holders of the Company's Senior
Subordinated Notes.
SUBORDINATED NOTES
In November 1993, the Company sold $17.3 million in principal amount of its
Series A 9.0% (changed to 9.5% in October 1994) Senior Subordinated Notes and
$5.7 million in principal amount of its Series B 9.0% Senior Subordinated Notes
with 920,000 detachable warrants to purchase common stock. The detachable
warrants were issued at the option price of $.01 per share resulting in an
original issue discount of $3.6 million on the Series B 9.0% Senior Subordinated
Notes. The Series A Senior Subordinated Notes accrued interest at the rate of
9.5% per annum, payable quarterly, with principal amount thereof payable in
three installments in November 1999, 2000 and 2001. The Company is subject to
certain financial and other covenants which include restrictions on the
incurrence of additional debt, payment of any dividends and certain other cash
disbursements as well as the maintenance of certain financial ratios.
16
<PAGE> 17
THE CERPLEX GROUP, INC.
During part of 1996 and 1997, the Company was in default of various
covenants under the Note Purchase Agreement, which resulted in a series of
waivers and amendments. In April 1996, the Company entered into an amendment to
the Note Purchase Agreements which revised the covenants for maximum leverage,
net worth and fixed charges. In consideration for the amendment to the Note
Purchase Agreements, the Company was required to provide the Senior Subordinated
Note Holders 1,000,000 warrants to purchase common stock at $6.00 per share. The
warrants issued pursuant to the amended Note Purchase Agreements, and the
amended Credit Agreement discussed above, were recorded at fair market value
with such amount amortized as a charge against income over the period of the
warrants. In November 1996, the Company entered into amendments to the Note
Purchase Agreements which revised certain financial covenants. As compensation
for the amendments, the company repriced the warrants issued in April 1996 from
$6.00 per share to $2.50 per share.
In April 1997, the Note Purchase Agreement was again amended revising
certain covenants. Interest is now payable semi-annually instead of quarterly.
The term of the Agreement is unchanged from the prior Agreement. In
consideration for the amendment, the Company repriced the warrants issued in
April 1996 to the April 4, 1997 market price of $0.60 per share.
On June 30, 1997, the Company received waivers with respect to various
provisions of the Amended and Restated Note Purchase Agreement. Such waivers
have been twice extended and presently run through August 14, 1997. The Company
is currently negotiating with the subordinated note holders to amend the
Amended and Restated Note Purchase Agreement, although there is no assurance
that any such agreement will be reached. Failure to reach an agreement will
result in a default under the Company's Senior Credit Agreement.
MISCELLANEOUS
Effective April 1, 1996, the Company sold its contract manufacturing
operations in Tustin, California for $3.5 million cash and restricted Common
Stock valued at approximately $2.0 million at the time of the acquisition. The
Company was required to use $2.0 million of the proceeds from the sale of the
InCirT Division to repay a portion of the borrowings under the Credit Agreement.
In April 1996, the Company received a distribution from its earnings of
Modcomp/Cerplex of $3.0 million which was used to acquire the remaining 51% of
this partnership.
In May 1996, the Company acquired Rank Xerox Limited's subsidiary, Cerplex
SAS, for $6.1 million, including estimated taxes, registration fees, legal,
accounting, and other out-of-pocket expenses of $1.2 million. Under the terms of
the Stock Purchase Agreement, the Company has agreed to certain financial
covenants over a four-year period that limit the amount of dividends and
payments in the nature of corporate charges paid by Cerplex SAS; the maintenance
of Cerplex SAS' current ratio greater than one; and restrictions on guarantees
with respect to Cerplex and its subsidiaries (excluding Cerplex SAS).
Accordingly, the cash of Cerplex SAS is generally not available to Cerplex for
financing operations outside of Cerplex SAS.
In June 1996, the Company issued 8,000 shares of Series B Stock at $1,000
per share in a private placement. The Series B Preferred Stock is convertible
into Common Stock of the Company at the option of each holder at the lower of
$5.07 per share or 80% of the average closing bid price over a ten-day period
ending three days prior to the date of conversion. The Series B Preferred Stock
has certain rights, privileges and preferences, including a $2,000 per share
preference in the event of a sale of the Company. The Board of Directors may not
pay dividends to the holders of the Company's Common Stock unless and until the
Board has paid an equivalent divided to the holders of Series B Preferred Stock
based upon the number of shares of Common Stock into which each share of Series
B Preferred Stock is convertible. As of June 30, 1997, 7,343 shares of the
Series B Preferred Stock had been converted into 20,725,147 shares of Common
Stock.
On April 11, 1997, the Company sold Peripheral Computer Support, Inc.
("PCS"), a subsidiary of the Company, for $14.5 million in cash and the
cancellation of $500,000 of indebtedness. Of such amount, $8.25 million was used
to pay down bank debt, $500,000 was placed into escrow, and approximately
$750,000 was used to pay expenses associated with the transaction.
On August 11, 1997, the Company entered into an agreement to sell all of
the assets of Modcomp/Cerplex L.P. to CSP, Inc. for approximately $8.2 million.
The closing of the transaction is subject to the fulfillment of certain closing
conditions which the Company believes will be fulfilled by the end of August,
1997. Proceeds will be used to repay the term loan and revolver under the
Company's Credit Agreement. Although approximately $2,000,000 may be available
under the revolver for future borrowings, there can be no assurance that the
sale of Modcomp will be consummated in a timely manner, if at all.
The Company or its subsidiaries are required to pay BT 1.8 million pounds
in 1999 or earlier if certain sales volumes are reached in connection with the
purchase of BT's plant in Enfield, England.
17
<PAGE> 18
THE CERPLEX GROUP, INC.
The Company acquired inventory consisting of used telephones from Lucent
Technologies, Inc. ("Lucent"). At December 31, 1996, the Company had $5.9
million of inventory, production cost commitments and assets related to the
telephones acquired from Lucent. In June 1996, the Company executed a promissory
note bearing interest at 9.75% in the amount of $4.6 million payable on
September 15, 1996 in favor of Lucent, reflecting a portion of the amount
invoiced to the Company by Lucent (the "Lucent Note"). Lucent has invoiced the
company for an additional $0.6 million. Due to the quality of the inventory and
the lack of availability of spare parts to effect repairs, the Company believes
it has claims against Lucent. The Company currently does not intend to pay the
Lucent note or other Lucent invoices. If the Company is required to pay the
Lucent Note and other Lucent invoices in full, it would have a material adverse
effect on the Company's financial resources. On October 7, 1996, the Company
filed a lawsuit against Lucent in the Orange County Superior Court seeking to
have the Lucent Note declared invalid. On November 6, 1996, Lucent filed a
cross-complaint seeking payment of the Lucent Note, alleging damages for breach
of contract and seeking a constructive trust on any proceeds from the sale of
the telephones. The Company's failure to have the Lucent Note declared invalid,
or the loss to Lucent of any of the material claims asserted against the
Company, could materially and adversely affect the Company.
In October 1996, the Company entered into a transaction with Atwood
Richards, Inc. ("ARI") pursuant to which the Company was obligated to continue
to repair and refurbish the remaining telephones in inventory through December
31, 1996, and deliver 100% of the repaired product to ARI. The Company received
trade credits for approximately $4.5 million in goods and services. The trade
credits received from ARI may be used to acquire various goods and services.
There can be no assurance that the Company will be able to use the trade credits
in the near term, if at all.
The Company's primary sources for liquidity are cash flow from operations
and its ability to reduce working capital requirements and, potentially, are
subject to the sale of Modcomp and borrowings under the revolver under the
Credit Agreement. The Company's ability to remain in compliance with, and borrow
additional funds under the Credit Agreement remain subject to the Company
amending its Note Purchase Agreement prior to August 14, 1997, consummating the
sale of Modcomp and remaining in compliance with the terms of the Credit
Agreement and Note Purchase Agreement. There can be no assurance that the
foregoing will occur or that such borrowing capacity and cash flow from
operations will be adequate to meet the Company's obligations in the future.
18
<PAGE> 19
THE CERPLEX GROUP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Refer to disclosure set forth in Part I, Item 3 (Legal Proceedings) of the
Company's Annual Report on Form 10-K for the 1996 fiscal year.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
During portions of 1996 and 1997, the Company was in default under its
senior Credit Agreement. The Company has renegotiated and amended such agreement
to cure such defaults, subject to the Company fulfilling certain conditions
subsequent by August 14, 1997. See "Liquidity and Capital Resources" herein
for a more detailed discussion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
At the Company's Annual Meeting of Stockholders held on June 10, 1997 (the
"Meeting"), the following matters were submitted and voted on by stockholders
and were adopted:
A. The approval of an amendment of the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Common
Stock from 30,000,000 to 60,000,000 shares.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
20,300,026 21,295 0 0
</TABLE>
B. The election of Richard C. Davis, Robert Finzi, Jerome Jacobson,
Patrick S. Jones, William A. Klein and Myron Kunin as directors of the
Company to serve until the next Meeting of Stockholders and until their
respective successors have been elected and qualified was carried.
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
Richard C. Davis 20,317,753 3,568
Robert Finzi 20,317,753 3,568
Jerome Jacobson 20,301,126 20,195
Patrick S. Jones 20,317,753 3,568
William A. Klein 20,301,126 20,195
Myron Kunin 20,301,126 20,195
</TABLE>
C. The approval of a series of amendments to the Company's Restated 1993
Stock Option Plan (the "1993 Plan"), including without limitation (a)
an increase in the number of shares of Common Stock available for
issuance under the 1993 Plan by an additional 4,000,000 shares and (b)
increases in the number of shares subject to the periodic stock option
grants made to non-employee directors pursuant to the Automatic Option
Grant Program of such 1993 Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
20,300,726 20,595 0 0
</TABLE>
D. The ratification of KPMG Peat Marwick LLP as the Company's independent
auditor for the current fiscal year.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
20,298,430 20,195 2,696 0
</TABLE>
ITEM 5. OTHER INFORMATION
- --------------------------
(a) RISK FACTORS
This report may contain forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
differences include, but are not limited to, those discussed below.
LOSSES AND ACCUMULATED DEFICIT. For the six month period ended June 30,
1997, the Company reported a net loss of $14.4 million, including an operating
loss of $14.9 million. As of June 30, 1997, the Company had an accumulated
deficit of $88.8 million. There can be no assurance that the Company will reduce
its operating losses or operate profitably in the future. Continued losses could
materially and adversely affect the Company's business and the value of, and the
market for, the Company's equity securities.
DEPENDENCE ON KEY CUSTOMERS. During 1996, Rank Xerox, IBM, BT and Digital
Equipment Corporation accounted for approximately 17%, 12%, 11%, and 4% of
revenues, respectively. In the six month period ended June 30, 1997, these
customers accounted for approximately 30%, 6%, 10%, and 10% of revenues,
respectively. During 1995 and 1996, IBM significantly decreased orders for
certain programs which materially and adversely affected the Company and its
results of operations. A significant portion of the Company's net sales
attributable to IBM in 1995 were from discontinued operations, and, as such, the
Company expects net sales attributable to IBM to continue to account for a
decreasing percentage of the Company's net sales. During the first half of 1997,
sales to IBM decreased 68% from the first half of 1996. Sales to BT
significantly decreased during 1996 to approximately $21.4 million representing
a 36% decrease from 1995. During the first half of 1997, sales to BT decreased
29% from the first half of 1996. There can be no assurance that major customers
of the Company will not terminate any or all of their arrangements with the
Company; significantly change, reduce or delay the amount of services ordered
from the Company; or significantly change the terms upon which the Company and
these customers do business. Any such termination, change, reduction or delay
could have a material adverse effect on the Company's business.
19
<PAGE> 20
THE CERPLEX GROUP, INC.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company's
ability to maintain its current revenue base and to grow its business is
dependent on the availability of adequate capital. Without sufficient capital,
the Company's growth may be limited and its existing operations may be adversely
affected. The Company's financial condition and limited capital has adversely
impacted the Company's relationship with certain customers and may adversely
impact its relationship with customers in the future. During portions of 1996
and 1997, the Company was in default under its senior credit agreement and
subordinated note agreement. The Company has renegotiated amendments to its
senior credit facility and is negotiating amendments to its subordinated note
agreement. The terms of the senior credit agreement provide for a limited
borrowing base which will be further reduced through May 1998. The Company is
required to use a portion of cash generated from operations, and from sales of
assets to further reduce its borrowing base under the senior credit agreements.
The interest rate payable by the Company has increased significantly and will be
subject to significant further increases in the event the Company does not repay
the senior credit agreement in full by September 30, 1997. As a result, the
Company currently has limited capital. In addition, the terms of such agreements
restrict the Company's ability to incur additional indebtedness and could
adversely affect the Company's ability to obtain additional financing. General
market conditions and the Company's future performance, including its ability to
generate profits and positive cash flow, will also impact the Company's
financial resources. The failure of the Company to obtain additional capital
when needed could have a material adverse effect on the Company's business and
future prospects. The Company is required to maintain or fulfill certain
covenants and obligations in order to maintain its credit facility. No assurance
can be given that the Company will be able to fulfill such obligations and
covenants or to otherwise maintain its current credit facilities or that
additional financing will be available or, if available, will be on acceptable
terms.
IMPACT OF SERIES B PREFERRED STOCK. In June 1996, the Company issued 8,000
shares of Series B Preferred Stock at $1,000 per share in a private placement.
The Series B Preferred Stock is convertible into Common Stock of the Company at
the option of each holder at the lower of $5.07 per share or 80% of the average
closing bid price over a ten-day period ending three days prior to the date of
conversion. The Series B Preferred Stock has certain rights, privileges and
preferences, including preferential voting rights and a $2,000 per share
preference in the event of a sale of the Company. The Board of Directors may not
pay dividends to the holders of the Company's Common Stock unless and until the
Board has paid an equivalent dividend to the holders of Series B Preferred Stock
based upon the number of shares of Common Stock into which each share of Series
B Preferred Stock is convertible. As of June 30, 1997, 7,343 shares of the
Series B Preferred Stock had been converted into approximately 20,725,147 shares
of Common Stock. Due in part to the decreases in the trading price of the
Company's Common Stock, the conversion rights of the Series B Preferred Stock
have resulted in, and may in the future result in, dilution to the holders of
Common Stock.
DISPUTE WITH LUCENT TECHNOLOGIES. The Company acquired inventory consisting
of used telephones from Lucent. At December 31, 1996, the Company had $5.9
million of inventory, production cost commitments and assets, related to the
telephones acquired from Lucent, which were subsequently sold to a Company that
specializes in worldwide corporate bartering. In June 1996, the Company executed
a promissory note bearing interest at 9.75% in the amount of $4.6 million
payable on September 15, 1996 in favor of Lucent, reflecting a portion of the
amount invoiced to the Company by Lucent. Lucent has invoiced the Company for an
additional $0.6 million. Due to the quality of the inventory and the lack of
availability of spare parts to effect repairs, the Company believes it has
claims against Lucent. The Company currently does not intend to pay the Lucent
note or other Lucent invoices. If the Company is required to pay the Lucent note
and other Lucent invoices in full, it would have a material adverse effect on
the Company's financial resources. On October 7, 1996, the Company filed a
lawsuit against Lucent in the Orange County Superior Court seeking to have the
Lucent note declared invalid. On November 6, 1996, Lucent filed a
cross-complaint seeking payment of the Lucent Note, alleging damages for breach
of contract and seeking a constructive trust on any proceeds from the sale of
the telephones. The Company's failure to have the Lucent note declared invalid,
or the loss to Lucent of any of the material claims asserted by the Company,
could materially and adversely affect the Company.
20
<PAGE> 21
THE CERPLEX GROUP, INC.
RISK OF EXCESS AND UNUSABLE INVENTORY; DECREASED VALUE OF ASSETS. At June
30, 1997, inventory constituted approximately 11% of the Company's assets. Any
decrease in the demand for the Company's repair services could result in an
additional portion of the Company's inventory becoming excess, obsolete or
otherwise unusable. During the last few years, the Company wrote down a
significant amount of inventory and a significant amount of other assets,
including receivables, securities and goodwill. Changes in the Company's
business, as well as the business of third parties, could adversely affect the
value of assets remaining, possibly resulting in write-offs. The existence,
amounts and timing of any such additional write-offs will be dependent upon
various factors including, without limitation, the volume and profitability of
future operations, market conditions as well as the operations of the
above-mentioned third parties. In addition, the Company became entitled to
receive an aggregate of approximately 370,000 shares of Common Stock of Pen
Interconnect, Inc. in connection with the sale of its InCirT division which were
valued at $5.40 per share. The trading price of such shares has subsequently
decreased substantially and the Company wrote off $1.1 million in the fourth
quarter of 1996 and $0.5 million in the second quarter of 1997. There can be no
assurance that the Company will not be required to write down additional amounts
of its investment with respect to such shares in the future. In October 1996,
the Company entered into an agreement to sell its phone inventory purchased from
Lucent to Atwood Richards, Inc. ("ARI"). The consideration paid to the Company
from ARI was up to $7.5 million in trade credits. The Company has no prior
experience in using trade credits and there can be no assurance the Company will
realize the value of the trade credits. The Company wrote down the value of the
trade credits on the Company's financial statements at the end of 1996 to $3
million. There can be no assurance that the Company will not be required to
write down significant amounts of its inventory or other assets in the future,
which could have a material adverse effect on the Company's business and results
of operations.
DEPENDENCE ON CUSTOMERS IN THE ELECTRONICS INDUSTRY. The Company is
dependent upon the continued growth, viability and financial stability of its
customers and potential customers in the electronics industry, particularly the
computer industry. The computer industry has been characterized by rapid
technological change, compressed product life cycles and pricing and margin
pressures. The factors affecting segments of the electronics industry in
general, and the Company's OEM customers in particular, could have an adverse
effect on the Company's business. During 1995 and 1996, several of the Company's
customers experienced severe financial difficulty resulting in significant
losses to the Company as a result of write downs of receivables and other
assets. 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.
RELIANCE ON SHORT-TERM PURCHASE ORDERS. The Company's customer 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. The termination of any material contracts or any
substantial decrease in the orders received from major customers could have a
material adverse effect on the Company's business.
COMPETITION. The Company competes with the in-house repair centers of
original equipment manufacturers ("OEM's") and third party maintainers ("TPM's")
for repair services. There is no assurance that these entities will choose to
outsource their repair needs. In certain instances, these entities compete
directly with the Company for the services of unrelated OEM's and TPM'S. In
addition to competing with OEM's and TPM'S, the Company also competes for depot
repair business with a small number of independent organizations similar in size
to the Company and a large number of smaller companies. Many of the companies
with which the Company competes have significantly greater financial resources
than the Company. There can be no assurance that the Company will be able to
compete effectively in its target markets.
21
<PAGE> 22
THE CERPLEX GROUP, INC.
EXPANSION OF INTERNATIONAL SALES. During the six months ended June 30,
1997, approximately 64% of the Company's sales were international. During 1996,
approximately 41% of the Company's sales were international. There can be no
assurance that the Company will 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 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, fluctuations in currency exchange rates and potentially adverse tax
consequences, 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.
DEPENDENCE ON ACQUISITION STRATEGY. Certain of the Company's repair
programs result in decreasing net sales as the installed base of the particular
products under such programs decreases over time. An important component of the
Company's strategy to maintain its revenue and to grow its business has been the
acquisition of repair programs and complementary businesses. Competition for
these types of transactions is likely to intensify. The Company's ability to
effect any transactions requiring capital will be limited by the Company's lack
of working capital and by the terms of the Company's senior credit facility and
subordinated notes. The Company is no longer permitted under the terms of its
credit facility to engage in acquisitions. There can be no assurance that the
Company will be able to acquire additional repair programs or complementary
businesses in the future or, if acquired, that such operations will prove to be
profitable.
DISCONTINUED OPERATIONS; CHANGE IN STRATEGY. In September 1995, Cerplex
adopted a plan to discontinue its end-of-life programs, a line of business which
historically generated a significant percentage of the Company's total sales,
but which experienced declining sales. Net sales from end-of-life programs
declined from approximately $33 million in 1994 to $20 million in 1995 and
further declined to $9.2 million in 1996. Sales from end-of-life program during
1997 were not material. In connection with discontinuing its end-of-life
business, the Company changed certain elements of its business strategy and is
undergoing changes in management and operations, is developing a direct sales
force and terminating the majority of its outside sales representatives, is
reducing its emphasis on inventory acquisitions and is focusing on targeted
customers in specific industries. There can be no assurance that such changes
will positively impact the Company's business and results of operations in the
short or long term.
RISK ASSOCIATED WITH THE ABILITY OF EXISTING STOCKHOLDERS TO CONTROL THE
COMPANY. As of July 31, 1997, the officers, directors, principal stockholders
and their affiliates owned greater than a majority of the outstanding common
stock. Although there are currently no voting agreements or similar arrangements
among such stockholders, if they were to act in concert, they would be able to
elect a majority of the Company's directors, determine the outcome of most
corporate actions requiring stockholder approval and otherwise control the
business affairs of the Company. The Board of Directors of the Company has the
authority under the Company's Restated Certificate of Incorporation to issue
shares of the Company's authorized preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued shares of preferred stock. The issuance of preferred stock may
adversely affect the voting and dividend rights, rights upon liquidation and
other rights of the holders of common stock. The issuance of preferred stock and
the control by existing stockholders, if they were to act in concert, may have
the effect of delaying, deferring or preventing a change in control of the
Company. In April 1997, William A. Klein acquired 3,663,898 shares of Common
Stock upon the conversion of Series B Preferred Stock, Richard C. Davis acquired
166,667 shares of Common Stock upon the conversion of Series B Preferred Stock
and the Sprout Growth, II L.P. acquired 7,563,333 shares of Common Stock upon
the conversion of Series B Preferred Stock. In addition, DLJ Capital Corporation
converted 231 shares of Preferred Stock into 770,000 shares of Common Stock.
22
<PAGE> 23
THE CERPLEX GROUP, INC.
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends, to a
large extent, upon the efforts and abilities of key employees. Competition for
qualified personnel in the industry is intense. The loss of services of certain
of these key employees could have a material adverse effect on the Company's
business. During the last year, the Company has lost the services of several of
its key executive officers and members of management.
The Company hired a new chief executive officer on July 8, 1997.
NO ASSURANCE OF PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF
STOCK PRICE. Prior to the Company's initial public offering, there was no public
market for the Common Stock. On February 20, 1997, the Company was removed from
the NASDAQ National Market System and commenced trading on the NASDAQ OTC
Bulletin Board. There can be no assurance of an active trading market for the
Company's Common Stock. In addition, the trading price of the Common Stock has
been, and in the future could be, subject to significant fluctuations in
response to variations in quarterly operating results, the gain or loss of
significant contracts, changes in management or new products or services by the
Company or its competitors, general trends in the industry and other events or
factors. In addition, the stock market has experienced extreme price and volume
fluctuations which have particularly affected the market price for many
companies in similar industries and which have often been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
ITEM 16. EXHIBITS.
a) Exhibits.
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2.1 Agreement of Merger dated as of August 30, 1993, Incorporated herein by reference to
by and among Cerplex Incorporated, Diversified Exhibit 2.1 to the Company's
Manufacturing Services, Inc. ("DMS"), EMServe, Registration Statement on Form S-1
Inc. ("EMServe"), InCirT Technology Incorporated (File No. 33-75004) which was
("InCirT") and Testar, Inc. ("Testar"). declared effective by the Commission
on April 8, 1994.
2.2 Agreement and Plan of Merger dated November 12, Incorporated herein by reference to
1993, between The Cerplex Group Subsidiary, Inc. Exhibit 2.2 to the Company's
and Registrant (conformed copy to original). Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
2.3 Certificate of Ownership and Merger of Registrant Incorporated herein by reference to
with and into The Cerplex Group Subsidiary, Inc. Exhibit 2.2 to the Company's
dated as of November 12, 1993. Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
2.4 Asset Purchase Agreement effective December 17, Incorporated herein by reference to
1993 by and between Certech Technology, Inc., a Exhibit 2.4 to the Company's
wholly-owned subsidiary of the Registrant Registration Statement on Form S-1
("Certech"), and Spectradyne, Inc. ("Spectradyne"). (File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
2.5 Purchase and Sale Agreement dated as of July 29, Incorporated herein by reference to
1994, by and among The Cerplex Group, Inc., Exhibit 2 to the Form 8-K filed July
Cerplex Limited, BT Repair Services Limited and 29, 1994.
BT.
2.6 Contract for repair, calibration and warehousing of Incorporated herein by reference to
certain items of BT Equipment dated as of July 29, Exhibit 10 to the Form 8-K filed July
1994, among The Cerplex Group and Cerplex 29, 1994.
Limited and BT.
2.7 Formation and Contribution Agreement effective Incorporated herein by reference to
December 1, 1994 by and among Modcomp/Cerplex Exhibit 2.7 to the Company's Annual
L.P., Modular Computer Systems, Inc., Cerplex Report on Form 10-K for the fiscal
Subsidiary, Inc. and The Cerplex Group, Inc. year ended January 1, 1995.
2.8 Contingent Promissory Note dated December 1, 1994 Incorporated herein by reference to
issued by Modcomp/Cerplex L.P. to Modular Exhibit 2.8 to the Company's Annual
Computer Systems, Inc. Report on Form 10-K for the fiscal
year ended January 1, 1995.
2.9 Limited Partnership Agreement of Modcomp/Cerplex Incorporated herein by reference to
L.P. effective December 1, 1994. Exhibit 2.8 to the Company's Annual
Report on Form 10-K for the fiscal year
ended January 1, 1995.
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THE CERPLEX GROUP, INC.
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2.10 Put/Call Option Agreement effective December 1, Incorporated herein by reference to
1994 by and among Cerplex Subsidiary, Inc., The Exhibit 2.8 to the Company's Annual
Cerplex Group, Inc., Modular Computer Systems, Report on Form 10-K for the fiscal
Inc. and Modcomp Joint Venture Inc. year ended January 1, 1995.
2.11 Stock Purchase Agreement dated as of June 29, 1995 Incorporated herein by reference to
by and among The Cerplex Group, Inc., Tu Nguyen Exhibit 2.11 to the Company's
and Phuc Le. Quarterly Report on Form 10-Q for
the quarter ended October 1, 1995.
2.12 Letter Agreement dated April 5, 1996 by and among Incorporated herein by reference to
Modular Computer Systems, Inc., Modcomp Joint Exhibit 2.12 to the Company's
Venture, Inc., AEG Aktiengesellschaft, the Annual Report on Form 10-K for the
Company, Cerplex Subsidiary, Inc. and fiscal year ended December 31, 1995.
Modcomp/Cerplex L.P.
2.13 Stock Purchase Agreement dated as of May 24, Incorporated herein by reference to
1996, by and among The Cerplex Group, Inc., Exhibit 2.13 to the Company's
Cerplex Limited, Rank Xerox - The Document Current Report on Form 8-K dated
Company SA and Rank Xerox Limited (conformed May 24, 1996.
copy to original).
2.14 Contract of Warranty dated as of May 24, 1996, by Incorporated herein by reference to
and among The Cerplex Group, Inc., Cerplex Exhibit 2.14 to the Company's
Limited, Rank Xerox - The Document Company SA Current Report on Form 8-K dated
and Rank Xerox Limited (conformed copy to the May 24, 1996.
original).
2.15 Supply and Services Agreement dated as of May 24, Incorporated herein by reference to
1996, by and among The Cerplex Group, Inc., Exhibit 2.15 to the Company's
Cerplex Limited, Rank Xerox - The Document Current Report on Form 8-K dated
Company SA and Rank Xerox Limited (conformed May 24, 1996.
copy to the original).
2.16 Stock Purchase Agreement dated March 28, 1997 Incorporated herein by reference to
relating to all of the outstanding stock of Peripheral Exhibit 2.16 to the Company's
Computer Support, Inc. among the Company, PCS Annual Report on Form 10-K for the
Acquisition Co., Inc., and Lincolnshire Equity fiscal year ended December 31, 1996.
Partners, L.P.
2.17 Asset Purchase Agreement dated August 6, 1997 by Incorporated herein by reference to
and among the Company, Cerplex Subsidiary, Inc., Exhibit 2.17 to the Company's
Modcomp Joint Venture, Inc., Modcomp/Cerplex Annual Report on Form 10-K for the
L.P. and CSP Inc. fiscal year ended December 31, 1996.
3.1 Restated Certificate of Incorporation of the Incorporated herein by reference to
Registrant. Exhibit 3.1 to the Company's
Registration Statement on From S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
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<PAGE> 25
THE CERPLEX GROUP, INC.
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3.2 Bylaws of the Registrant Incorporated herein by reference to
Exhibit 3.2 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
3.3 Certificate of Amendment of the Restated Certificate Incorporated herein by reference to
of Incorporation of the Registrant (filed June 16, Exhibit 3.3 to the Company's
1997). Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4.1 Stock Purchase Agreement dated as of November 19, Incorporated herein by reference to
1993 by and among the Registrant, the stockholders Exhibit 4.1 to the Company's
of the Registrant identified in Part A of Schedule I Registration Statement on Form S-1
thereto and the purchasers of shares of the (File No. 33-75004) which was
Registrant's Series A Preferred Stock identified in declared effective by the Commission
Schedule I thereto (including the Schedules thereto; on April 8, 1994.
Exhibits omitted).
4.2 Registration Rights Agreement dated as of November Incorporated herein by reference to
19, 1993, by and among the Registrant, the investors Exhibit 4.2 to the Company's
listed on Schedule A thereto and the security holders Registration Statement on Form S-1
of the Registrant listed on Schedule B thereto, (File No. 33-75004) which was
together with Amendment No. 1. declared effective by the Commission
on April 8, 1994.
4.3 Co-Sale Agreement dated as of November 19, 1993, Incorporated herein by reference to
by and among the Registrant, the managers listed on Exhibit 4.3 to the Company's
Schedule A thereto and the investors listed on Registration Statement on Form S-1
Schedule B thereto. (File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
4.4 Warrant Agreement dated as of November 19, 1993, Incorporated herein by reference to
by and among the Registrant and the purchasers Exhibit 4.4 to the Company's
listed in Annex 1 thereto. Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
4.5 Placement Agent Warrant Purchase Agreement dated Incorporated herein by reference to
as of November 19, 1993, between the Registrant Exhibit 4.5 to the Company's
and Donaldson, Lufkin & Jenrette Securities Registration Statement on Form S-1
Corporation. (File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
4.6 Observation Rights Agreement dated as of November Incorporated herein by reference to
19, 1993, between the Registrant and certain stock Exhibit 4.6 to the Company's
purchasers. Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
</TABLE>
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<PAGE> 26
THE CERPLEX GROUP, INC.
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4.7 Observation Rights Agreement dated as of November Incorporated herein by reference to
19, 1993, between the Registrant and certain note Exhibit 4.7 to the Company's
purchasers. Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
4.8 Note Purchase Agreement dated as of November 19, Incorporated herein by reference to
1993, by and among the Registrant and The Exhibit 4.8 to the Company's
Northwestern Mutual Life Insurance Company, John Registration Statement on Form S-1
Hancock Mutual Life Insurance, Registrant and Bank (File No. 33-75004) which was
of Scotland London Nominees Limited. declared effective by the Commission
on April 8, 1994.
4.9 Amendment No. 2 to Registration Rights Agreement Incorporated herein by reference to
dated as of April 6, 1994, by and among the Exhibit 4.9 to the Company's
Registrant and certain of its Securities holders. Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
4.10 Amendment to Note Purchase Agreement, dated as Incorporated herein by reference to
of October 27, 1994, by and among the Company, Exhibit 4.10 to the Company's
Northwestern Mutual Life Insurance Company, John Annual Report on Form 10-K for the
Hancock Mutual Life Insurance Company and North fiscal year ended March 31, 1995.
Atlantic Smaller Companies Trust P.L.C.
(collectively, the "Noteholders").
4.11 Waiver and Amendment Agreement dated April 15, Incorporated herein by reference to
1996 by and among Company, The Northwestern Exhibit 4.11 to the Company's
Mutual Life Insurance Company, John Hancock Annual Report on Form 10-K for the
Mutual Life Insurance Company and North Atlantic fiscal year ended December 31, 1995.
Smaller Companies Investment Trust PLC.
4.12 Warrant Agreement dated as of April 15, 1996 by Incorporated herein by reference to
and among Company, The Northwestern Mutual Life Exhibit 4.12 to the Company's
Insurance Company, John Hancock Mutual Life Annual Report on Form 10-K for the
Insurance Company and North Atlantic Smaller fiscal year ended December 31, 1995.
Companies Investment Trust PLC.
4.13 First Amendment to Warrant Agreement dated April Incorporated herein by reference to
15, 1996 by and among Company and each of the Exhibit 4.13 to the Company's
holders of warrants listed on Schedule A thereto, Annual Report on Form 10-K for the
with respect to that certain Warrant Agreement dated fiscal year ended December 31, 1995.
November 19, 1993.
4.14 First Amendment to Observation Rights Agreement Incorporated herein by reference to
dated as of April 15, 1996 between Company and Exhibit 4.14 to the Company's
certain note purchasers. Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
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THE CERPLEX GROUP, INC.
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4.15 Third Amendment to Registration Rights Agreement Incorporated herein by reference to
dated as of April 15, 1996 by and among Company, Exhibit 4.15 to the Company's
the investors of Company listed on Schedule A Annual Report on Form 10-K for the
thereto and the security holders of Company listed on fiscal year ended December 31, 1995.
Schedule B thereto.
4.16 Warrant Agreement dated April 15, 1996 by and Incorporated herein by reference to
among Company, Wells Fargo Bank, National Exhibit 4.16 to the Company's
Association, Sumitomo Bank of California, BHF Annual Report on Form 10-K for the
Bank Aktiengesellschaft and Comerica Bank- fiscal year ended December 31, 1995.
California.
4.17 Stock Purchase Agreement dated June 10, 1996 by Incorporated herein by reference to
and among the Company and the investors listed on Exhibit 4.17 to the Company's
Schedule A thereto. Quarterly Report on Form 10-Q filed
August 14, 1996.
4.18 Fourth Amendment to Registration Rights Agreement Incorporated herein by reference to
dated June 10, 1996 by and among Company, the Exhibit 4.18 to the Company's
investors listed on Schedule A thereto, the security Quarterly Report on Form 10-Q filed
holders of Company listed on Schedule B thereto, the August 14, 1996.
banks listed on Schedule C thereto and each of the parties
listed on Schedule D thereto.
4.19 Certificate of Designation of Preferences of Series B Incorporated herein by reference to
Preferred Stock of The Cerplex Group, Inc. Exhibit 3.3 to the Company's
Quarterly Report on Form 10-Q
filed August 14, 1996.
4.20 Waiver and Amendment Agreement dated October Incorporated herein by reference to
31, 1996 by and among the company and the Exhibit 4.17 to the Company's
Noteholders. Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4.21 Waiver and Amendment Agreement dated December Incorporated herein by reference to
9, 1996 by and among the company and the Exhibit 4.18 to the Company's
Noteholders. Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4.22 Side Letter dated March 28, 1997 by and among the Incorporated herein by reference to
Company and the Noteholders. Exhibit 4.19 to the Company's
Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4.23 Amended and Restated Note Purchase Agreement Incorporated herein by reference to
dated April 9, 1997 by and among the Company and Exhibit 4.20 to the Company's
the Noteholders. Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4.24 Second Amendment to Warrant Agreement dated Incorporated herein by reference to
April 9, 1997, by and among the Company and each Exhibit 4.21 to the Company's
of the holders of warrants listed on Schedule A Annual Report on Form 10-K for the
thereto, which Second Amendment amends the fiscal year ended December 31, 1996.
Warrant Agreement dated November 19, 1993 as
amended by the First Amendment to Warrant
Agreement dated April 15, 1996.
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THE CERPLEX GROUP, INC.
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4.25 Second Amendment to Warrant Agreement dated Incorporated herein by reference to
April 9, 1997 by and among the Company and each Exhibit 4.22 to the Company's
of the holders of warrants listed on Schedule A Annual Report on Form 10-K for the
thereto, which Second Amendment amends the fiscal year ended December 31, 1996.
Warrant Agreement dated April 15, 1996, as
amended by a Waiver and Amendment Agreement
dated October 31, 1996.
4.26 Amended and Restated Warrant Agreement dated Incorporated herein by reference to
April 9, 1997 by and among the Company; Wells Exhibit 4.23 to the Company's
Fargo Bank, National Association; BHF-Bank Annual Report on Form 10-K for the
Aktiengesellschaft; and Citibank, N.A. fiscal year ended December 31, 1996.
4.27 Fifth Amendment to Registration Rights Agreement Incorporated herein by reference to
dated as of April 9, 1997 by and among the Exhibit 4.27 to the Company's
Company, the investors listed on Schedule A thereto, Annual Report on Form 10-K for the
the security holders of the Company listed on Schedule B fiscal year ended December 31, 1996.
thereto, the banks listed on Schedule C thereto, and the
parties listed on Schedule D thereto.
4.28 Waiver Agreement dated as of June 30, 1997 among Incorporated herein by reference to
the Company and the Noteholders. Exhibit 4.28 to the Company's
Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4.29 Side letter dated July 10, 1997 by and among the Incorporated herein by reference to
Company and the Noteholders. Exhibit 4.29 to the Company's
Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
4.30 Side letter dated August 6, 1997 by and among the Incorporated herein by reference to
Company and the Noteholders. Exhibit 4.30 to the Company's
Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
10.1 The Registrant's 1990 Stock Option Plan (the "1990 Incorporated herein by reference to
Plan"). Exhibit 10.1 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.2 Form of Stock Option Agreement pertaining to the Incorporated herein by reference to
1990 Plan. Exhibit 10.2 to the Company's
Registration Statement on Form S-1
(File No. 33-75005) which was
declared effective by the Commission
on April 8, 1994.
10.3 Form of Stock Purchase Agreement pertaining to the Incorporated herein by reference to
1990 Plan. Exhibit 10.3 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
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THE CERPLEX GROUP, INC.
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10.4 The Registrant's 1993 Stock Option Plan (the "1993 Incorporated herein by reference to
Plan"). Exhibit 10.4 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.5 Form of Stock option Agreement (grants to Incorporated herein by reference to
employees) pertaining to the 1993 Plan. Exhibit 10.5 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.6 Form of Stock Option Agreement (grants to directors Incorporated herein by reference to
and certain officers) pertaining to the 1993 Plan. Exhibit 10.6 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.7 Form of Stock Purchase Agreement for Installment Incorporated herein by reference to
Options pertaining to the 1993 Plan. Exhibit 10.7 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.8 Form of Stock Purchase Agreement for Immediately Incorporated herein by reference to
Exercisable Options pertaining to the 1993 Plan. Exhibit 10.8 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.9 The Registrant's Restated 1993 Stock Option Plan Incorporated herein by reference to
(the "Restated Plan"). Exhibit 10.9 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.10 Form of Stock Option Agreement, together with Incorporated herein by reference to
Addenda, pertaining to the Restated Plan. Exhibit 10.10 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.11 Master Task Agreement dated December 1, 1991, by Incorporated herein by reference to
and between International Business Machines Exhibit 10.11 to the Company's
Incorporated ("IBM") and the Registrant, together Registration Statement on Form S-1
with Amendment to Master Agreement and Task (File No. 33-75004) which was
Order. declared effective by the Commission
on April 8, 1994.
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THE CERPLEX GROUP, INC.
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10.12 Master Agreement dated May 6, 1992 by and Incorporated herein by reference to
between IBM and the Company. Exhibit 10.12 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.13 Technology Services Agreement effective March 1, Incorporated herein by reference to
1993, by and between Novadyne Computer Systems, Exhibit 10.13 to the Company's
Inc. ("Novadyne") and Cerplex Incorporated (a Registration Statement on Form S-1
California corporation and a predecessor of the (File No. 33-75004) which was
Registrant), together with Amendments Nos. 1 and declared effective by the Commission
2. on April 8, 1994.
10.14 Technology Services Agreement effective December Incorporated herein by reference to
17, 1993, by and between Spectradyne, Inc. Exhibit 10.14 to the Company's
("Spectradyne") and the Registrant. Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.15 Repair Services Agreement dated January 1, 1994 by Incorporated herein by reference to
and between Bull HN Information Systems, Inc. and Exhibit 10.24 to the Company's
the Registrant. Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.16 Form of Indemnity Agreement. Incorporated herein by reference to
Exhibit 10.15 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.17 Lease Agreement dated April 1, 1992 by and Incorporated herein by reference to
between Henry G. Page Jr., and Diversified Exhibit 10.16 to the Company's
Manufacturing Services, Inc. ("DMS"). Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.18 Sublease dated January 1, 1994 by and between Bull Incorporated herein by reference to
and Cerplex Group, Inc. (a Massachusetts Exhibit 10.17 to the Company's
corporation). Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.19 Standard Industrial/Commercial Single-Tenant Lease Incorporated herein by reference to
- Net dated November 29, 1990 by and among Exhibit 10.18 to the Company's
Kilroy Building 73 Partnership, Cerplex Incorporated Registration Statement on Form S-1
and InCirT, together with Amendment No. 1 (File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
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THE CERPLEX GROUP, INC.
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10.20 Lease dated December 17, 1993 by and between Incorporated herein by reference to
Spectradyne and Certech. Exhibit 10.19 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.21 Sublease dated March 1, 1993 by and between Incorporated herein by reference to
Novadyne and the Registrant together with Lease Exhibit 10.20 to the Company's
Amendment dated July 22, 1991 by and between Registration Statement on Form S-1
McDonnell Douglas Realty Company and Novadyne. (File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.22 Standard Industrial/Commercial Lease - Net dated Incorporated herein by reference to
September 4, 1991 by and between Proficient Food Exhibit 10.21 to the Company's
Company and W.C. Cartwright Corporation Registration Statement on Form S-1
("Cartwright"), together with Addendum and (File No. 33-75004) which was
Sublease dated September 6, 1991 by and between declared effective by the Commission
Cartwright and the Registrant. on April 8, 1994.
10.23 Sublease dated July 30, 1992 by and between Incorporated herein by reference to
Cartwright and DMS. Exhibit 10.22 to the Company's
Registration Statement on Form S-1
(File No. 33-75004) which was
declared effective by the Commission
on April 8, 1994.
10.24 Credit Agreement dated as of October 12, 1994 (the Incorporated herein by reference to
"Credit Agreement") among The Cerplex Group, Exhibit 10.24 to the Company's
Inc., as Borrower; the lenders listed therein, as Annual Report on Form 10-K for the
Lenders; and Wells Fargo Bank, National fiscal year ended January 1, 1995.
Association, as Administrative Agent; and those
certain exhibits, schedules and collateral documents
to such Credit Agreement.
10.25 Limited Waiver dated as of November 14, 1995 Incorporated herein by reference to
("Waiver") by and among The Cerplex Group, Inc. Exhibit 10.25 to the Company's
(the "Company"), the financial institutions listed on Quarterly Report on Form 10-Q for
the signature pages thereof ("Lenders"), and Wells the quarter ended October 1, 1995.
Fargo Bank, National Association, as administrative
agent for the Lenders ("Administrative Agent"), and
for certain limited purposes, Certech Technology,
Inc., Cerplex Mass., Inc., Cerplex Limited, Apex
Computer Company, Cerplex Subsidiary, Inc. and
Peripheral Computer Support, Inc. (the
"Subsidiaries"), which Waiver is made with
reference to the Credit Agreement.
10.26 The Cerplex Group, Inc. Restated 1993 Stock Option Incorporated herein by reference to
Plan (Restated and Amended as of January 13, Exhibit 10.26 to the Company's
1995). Quarterly Report on Form 10-Q for
the quarter ended October 1, 1995.
</TABLE>
31
<PAGE> 32
THE CERPLEX GROUP, INC.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.27 The Cerplex Group, Inc. Automatic Stock Option Incorporated herein by reference to
Agreement. Exhibit 10.27 to the Company's
Quarterly Report on Form 10-Q for
the quarter ended October 1, 1995.
10.28 First Amendment to Credit Agreement dated April Incorporated herein by reference to
15, 1996 by and among Company, the lenders whose Exhibit 10.28 to the Company's
signatures appear on the signature pages thereof, as Annual Report on Form 10-K for the
Lenders; Wells Fargo Bank, National Association, as fiscal year ended December 31, 1995.
Administrative Agent; and the Subsidiaries for
certain limited purposes.
10.29 Promissory Noted dated June 21, 1996 payable by Incorporated herein by reference to
the Company to Lucent Technologies. Exhibit 10.29 to the Company's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.
10.30 Limited Waiver dated as of October 31, 1996 by and Incorporated herein by reference to
among the Company, Lenders and Administrative Exhibit 10.29 to the Company's
Agent, and for certain limited purposes, the Quarterly Report on Form 10-Q for
Subsidiaries, Modcomp/Cerplex L.P., Modcomp the quarter ended September 29,
Joint Venture, Inc., Modular Computer Services, 1996.
Inc., Modular Computer Systems GmbH and
Modcomp France S.A., which waiver is made with
reference to the credit Agreement.
10.31 Extension and Forbearance Agreement dated March Incorporated herein by reference to
31, 1997 by and among the Company, the financial Exhibit 10.31 to the Company's
institutions listed on the signature pages thereof and Annual Report on Form 10-K for the
Wells Fargo Bank, National Association. fiscal year ended December 31, 1996.
10.32 Second Amendment to Credit Agreement dated Incorporated herein by reference to
November 30, 1996 (the "Second Amendment") by Exhibit 10.32 to the Company's
and among the Company, the financial institutions Annual Report on Form 10-K for the
listed on the signature pages thereof ("Lenders") and fiscal year ended December 31, 1996.
Wells Fargo Bank, National Association, as
administrative agent for the Lenders, and for certain limited
purposes, Certech Technology, Inc., Cerplex Mass., Inc.,
Cerplex Limited, Apex Computer Company, Cerplex Subsidiary,
Inc., Peripheral Computer Support, Inc., Modcomp/Cerplex, L.P.,
Modcomp Joint Venture, Inc., Modular Computer Services, Inc.,
Modular Computer Systems GmbH and Modcomp France S.A., which
Second Amendment amends the Credit Agreement dated October 12,
1994, as amended.
</TABLE>
32
<PAGE> 33
THE CERPLEX GROUP, INC.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.33 Third Amendment to Credit Agreement dated April Incorporated herein by reference to
9, 1997 (the "Third Amendment") by and among the Exhibit 10.33 to the Company's
Company, the financial institutions listed on the Annual Report on Form 10-K for the
signature pages thereof ("Lenders") and Wells Fargo fiscal year ended December 31, 1996.
Bank, National Association, as administrative agent
for the Lenders, and for certain limited purposes, Certech
Technology, Inc., Cerplex Mass., Inc., Cerplex Limited, Apex
Computer Company, Cerplex Subsidiary, Inc., Peripheral Computer
Support, Inc., Modcomp/Cerplex, L.P., Modcomp Joint Venture,
Inc., Modular Computer Services, Inc., Modular Computer Systems
GmbH and Modcomp France S.A., which Third Amendment amends the
Credit Agreement dated October 12, 1994, as amended.
10.34 Fourth Amendment to Credit Agreement and Limited Incorporated herein by reference to
Waiver dated as of May 30, 1997 and entered into Exhibit 10.34 to the Company's
by and among the Company, the financial institutions Registration Statement on Form S-2
listed on the signature pages thereof ("Lenders") and (Registration No. 333-28425).
Wells Fargo Bank, National Association, as
administrative agent for the Lenders, and for certain limited
purposes, Certech Technology, Inc., Cerplex Mass., Inc.,
Cerplex Limited, Apex Computer Company, Cerplex Subsidiary,
Inc., Modcomp/Cerplex L.P., Modcomp Joint Venture, Inc.,
Modular Computer Services, Inc., Modular Computer Systems GmbH
and Modcomp France S.A.
10.35 Fifth Amendment to Credit Agreement and Limited Incorporated herein by reference to
Waiver dated June 30, 1997 by and among the Exhibit 10.35 to the Company's
Company, the financial institutions listed on the Annual Report on Form 10-K for the
signature pages thereof ("Lenders") and Wells Fargo fiscal year ended December 31, 1996.
Bank, National Association, as administrative agent
for the Lenders and, for certain limited purposes,
certain subsidiaries of the Company.
10.36 Sixth Amendment to Credit Agreement and Consent Incorporated herein by reference to
dated August 6, 1997 by and among the Company, Exhibit 10.36 to the Company's
the financial institutions listed on the signature pages Annual Report on Form 10-K for the
thereof ("Lenders") and Wells Fargo Bank, National fiscal year ended December 31, 1996.
Association as administrative agent for the Lenders
as administrative agent for the Lenders and, for
certain limited purposes, certain subsidiaries of the
Company.
27.1 Financial Data Schedule. Filed herein.
</TABLE>
b. Reports on Form 8-K for the quarter ended June 28, 1997
None.
33
<PAGE> 34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1997
THE CERPLEX GROUP, INC.
/s/ ROBERT W. HUGHES
------------------------------
Robert W. Hughes
Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
34
<PAGE> 35
EXHIBIT INDEX
QUARTER ENDED JUNE 28, 1997
<TABLE>
<CAPTION>
Sequential
Exhibit Description of Exhibits Page No.
- ------- ----------------------- ----------
<S> <C> <C>
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 36
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
CERPLEX S.A.S
(A SUBSIDIARY OF THE CERPLEX GROUP, INC.)
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,412
Accounts receivable, net 1,307
Inventories 3,014
Prepaid expenses and other current assets 325
---------
Total current assets 23,058
Property, plant and equipment, net 12,005
Other long-term assets (102)
---------
Total assets $ 34,961
=========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,525
Accrued and other current liabilities 10,398
Income taxes payable 1,719
---------
Total current liabilities 19,642
Long-term obligations 6,214
Stockholders' equity:
Common stock 6,134
Retained earnings 3,098
Cumulative translation adjustment (127)
---------
Total stockholders' equity 9,105
---------
Total liabilities and stockholders' equity $ 34,961
=========
</TABLE>
<PAGE> 37
CERPLEX S.A.S
(A SUBSIDIARY OF THE CERPLEX GROUP, INC.)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Seven
Months Ended
December 31,
1996 (1)
-------------
<S> <C>
Net sales $33,443
Cost of sales 25,862
-------
Gross profit 7,581
Selling, general and administrative expenses 3,275
-------
Operating income 4,306
Other expense, net 11
Interest income, net (329)
-------
Income before income taxes 4,624
Provision for income taxes 1,526
=======
Net income $ 3,098
=======
</TABLE>
(1) Cerplex S.A.S. was acquired in June 1996.
<PAGE> 38
CERPLEX S.A.S
(A SUBSIDIARY OF THE CERPLEX GROUP, INC.)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Seven
Months Ended
December 31,
1996 (1)
------------
<S> <C>
Cash flows from operating activities:
Net income $ 3,098
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 399
Foreign currency transaction loss 22
Decrease (increase) in:
Accounts receivable (1,220)
Inventories (2,715)
Prepaid expenses and other 7,888
Other long-term assets 836
Increase (decrease) in:
Accounts payable 3,022
Accrued and other current liabilities (4,346)
Income taxes payable 1,759
-------
Net cash provided by operating activities 8,743
-------
Cash flows from investing activities:
Purchase of plant and equipment, net (178)
-------
Net cash used in investing activities (178)
-------
Cash flows from financing activities:
Investment from affiliates 102
-------
Net cash provided from financing activities 102
-------
Effect of exchange rate changes on cash (381)
-------
Net increase in cash and cash equivalents 8,286
Cash and cash equivalents at beginning of period 10,126
=======
Cash and cash equivalents at end of period $18,412
=======
</TABLE>
(1) Cerplex S.A.S. was acquired in June 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 21,788
<SECURITIES> 0
<RECEIVABLES> 17,023
<ALLOWANCES> 0
<INVENTORY> 8,987
<CURRENT-ASSETS> 52,914
<PP&E> 23,836
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,117
<CURRENT-LIABILITIES> 83,923
<BONDS> 0
0
657
<COMMON> 34
<OTHER-SE> (30,825)
<TOTAL-LIABILITY-AND-EQUITY> 78,117
<SALES> 85,606
<TOTAL-REVENUES> 85,606
<CGS> 76,076
<TOTAL-COSTS> 100,504
<OTHER-EXPENSES> (5,609)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,956
<INCOME-PRETAX> (13,245)
<INCOME-TAX> 1,115
<INCOME-CONTINUING> (14,360)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,360)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> 0
</TABLE>
