<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 29, 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
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THE CERPLEX GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0411354
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1382 Bell Avenue, Tustin, CA 92780
- ---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(714) 258-5600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock on April 30,
1997 was 30,000,000.
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THE CERPLEX GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<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..................................................... 11
PART II -- OTHER INFORMATION
Legal Proceedings............................................................... 17
Changes in Securities........................................................... 17
Defaults Upon Senior Securities................................................. 17
Submission of Matters to a Vote of Security Holders............................. 17
Other Information............................................................... 17
Exhibits and Reports on Form 8-K................................................ 22
SIGNATURE.................................................................................. 23
</TABLE>
2
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THE CERPLEX GROUP, INC.
PART I
FINANCIAL INFORMATION
3
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THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
------------ -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,936 $ 23,782
Accounts receivable, net 18,854 19,539
Inventories 14,314 17,326
Net assets of discontinued operations -- 1,681
Prepaid expenses and other current assets 5,796 8,146
------------ ------------
Total current assets 61,900 70,474
Property, plant and equipment, net 27,122 28,039
Goodwill 4,694 4,953
Other long-term assets 1,738 2,028
------------ ------------
Total assets $ 95,454 $ 105,494
============ ============
LIABILITIES & STOCKHOLDERS' DEFICIENCY
Current liabilities:
Note payable to bank $ 6,000 $ 6,000
Notes payable 5,026 5,026
Accounts payable 16,148 19,498
Accrued and other current liabilities 23,972 25,347
Income taxes payable 2,254 1,729
------------ ------------
Total current liabilities 53,400 57,600
------------ ------------
Long-term debt, less current portion 56,907 56,817
Long-term obligations 6,214 6,214
Commitments and contingencies
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 5,589 and 7,197 are issued and
outstanding as of March 31, 1997 and December 31, 1996, respectively;
aggregate liquidation preference of $11,178 and $14,394 as of 1997,
and 1996, respectively. 5,589 7,197
Common stock, par value $0.001 per share;
30,000,000 shares authorized; 17,076,652
and 14,110,949 issued and outstanding in
1997 and 1996, respectively. 17 14
Additional paid-in capital 53,253 51,648
Notes receivable from stockholders (139) (139)
Unearned compensation (55) (73)
Accumulated deficiency (79,417) (74,414)
Cumulative translation adjustment (315) 630
------------ ------------
Total stockholders' deficiency (21,067) (15,137)
------------ ------------
Total liabilities and stockholders' deficiency $ 95,454 $ 105,494
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
---------------------
1997 1996
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<S> <C> <C>
Net sales $ 46,340 $ 40,846
Cost of sales 38,829 33,915
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Gross profit 7,511 6,931
Selling, general and administrative expenses 8,970 6,720
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Operating income (loss) (1,459) 211
Equity in earnings from joint venture -- 357
Other expense, net 576 67
Interest expense, net 2,247 1,781
-------- --------
Loss before income taxes (4,282) (1,280)
Provision for income taxes 721 293
-------- --------
Net loss $ (5,003) $ (1,573)
======== ========
Net loss per share $ (.32) $ (.12)
======== ========
Weighted average common shares outstanding 15,741 13,174
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
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THE CERPLEX GROUP, INC.
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)
====== ======= ========== === ======= ===== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
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THE CERPLEX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,003) $ (1,573)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 2,295 1,859
Amortization of unearned compensation 18 18
Foreign currency transaction loss 25 36
Equity in earnings of joint venture -- (282)
Decrease (increase) in:
Accounts receivable 456 2,518
Inventories 2,763 (818)
Prepaid expenses and other 2,112 (360)
Investment in other long-term assets (381) (167)
Net assets of discontinued operations 1,681 (323)
(Decrease) increase in:
Accounts payable (2,685) 3,888
Accrued and other current liabilities (458) (2,452)
Income taxes payable 667 214
-------- --------
Net cash provided by operating activities 1,490 2,558
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Cash flows from investing activities:
Purchase of plant and equipment, net (747) (703)
-------- --------
Net cash used in investing activities (747) (703)
-------- --------
Cash flows from financing activities:
Principal payments of long-term debt (257) (243)
Proceeds from issuance of common stock -- 18
Other (5) (3)
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Net cash used in financing activities (262) (228)
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Effect of exchange rate changes on cash (1,327) (12)
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Net increase (decrease) in cash and cash equivalents (846) 1,615
Cash and cash equivalents at beginning of period 23,782 3,807
-------- --------
Cash and cash equivalents at end of period $ 22,936 $ 5,422
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the quarter for:
Interest $ 1,625 $ 1,538
======== ========
Income taxes $ 18 $ 18
======== ========
Non-cash activities during the quarter:
Capital lease additions $ 249 $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
7
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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 March 31,
1997 was $18.0 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.
8
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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 year-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) LOSS PER SHARE
Loss per share is computed using the weighted average number of common
shares outstanding. Common stock equivalents consist of preferred stock, stock
options and warrants, which were computed using the treasury stock method,
respectively. Net loss per share excludes the effect of common stock
equivalents, because their effect would be anti-dilutive.
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.
(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
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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 March 31,
1997 and consolidated statement of operations and statement of cash flows for
the three months ended March 31, 1997 and 1996. Results of operations for the
three months ended March 31, 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 March 31 and December 31,
respectively. Certain reclassifications have been made to the 1996 consolidated
financial statements to conform to the 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. In
addition, due to the conversion of the Series B Preferred Stock, the Company has
insufficient authorized Common Stock to effect the conversion of additional
outstanding Series B Preferred Stock or to issue the Common Stock issuable upon
exercise of outstanding options and warrants. The lack of authorized capital, as
well as the existence of the Series B Preferred Stock, could impact adversely
the ability of the Company to consummate an equity financing. The Company's
Board of Directors recently approved an increase in the Company's authorized
Common Stock from 30,000,000 to 60,000,000 shares. The Company intends to submit
this increase to the Company's stockholders for approval at the Annual Meeting
on June 10, 1997. Failure to receive such approval by July 1997 constitutes an
event of default under the Company's senior credit facility.
10
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THE CERPLEX GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains 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 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
business, 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, uncollectable receivables and other
assets.
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>
For the Three
Month Period
Ended March 31
----------------
1997 1996
------- ------
<C> <C>
Net sales 100.0% 100.0%
Cost of sales 83.8 83.0
----- -----
Gross margin 16.2 17.0
Selling, general and administrative 19.4 16.5
----- -----
Operating income (loss) (3.2)% 0.5%
===== =====
</TABLE>
11
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THE CERPLEX GROUP, INC.
NET SALES
Net sales for the quarter ended March 31, 1997 increased $5.5 million or
13.5% to $46.3 million over net sales for the corresponding quarter of 1996. The
increase in net sales for the first quarter of 1997 compared with the first
quarter of 1996 is primarily due to $23.3 million in incremental sales from the
acquisitions in the second quarter of 1996 of Cerplex SAS and the remaining 51%
interest in Modcomp/Cerplex L.P., a Delaware limited partnership
("Modcomp/Cerplex"). This increase was partially offset by declines in North
America sales attributable to a $4.2 million sales decline in the Company's
spare parts business, a $3.3 million sales decrease in the Company's Southern
California operations, a $3.2 million revenue decline due to the sale of the
Company's InCirt division in the second quarter of 1996, and a $3.1 million
revenue decline due to the closure of the Company's Texas contract service
operations in the third quarter of 1996.
GROSS PROFIT
Gross profit as a percentage of net sales declined to 16.2% during the
quarter ended March 31, 1997 from 17.0% during the quarter ended March 31, 1996.
The decrease in the gross profit margin percentage was primarily driven by cost
inefficiencies due to lower overall sales volumes in the Company's North America
depot repair and spare parts businesses. In addition, the gross profit
percentage was negatively impacted by additional inventory reserves. The
decrease in the gross profit margin percentage was partially offset by higher
margins in the Company's international operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased by $2.3
million and as a percentage of net sales were 19.4% during the quarter ended
March 31, 1997 compared with 16.5% during the quarter ended March 31, 1996. The
increase in SG&A dollar spending is due to additional SG&A resulting from the
additions of the Company's Cerplex SAS and Modcomp/Cerplex subsidiaries which
were acquired in the second quarter of fiscal 1996, and from higher legal and
consulting expenses incurred during the quarter.
EQUITY IN EARNINGS FROM JOINT VENTURE & OTHER EXPENSES
Equity in earnings of joint venture relates to the Company's 49% ownership
interest in Modcomp/Cerplex prior to April 1996. The Company acquired the
remaining 51% interest of Modcomp/Cerplex in the second quarter of 1996. The
increase in other expenses for the first quarter of 1997 is primarily due to the
write-off of $0.5 million in non-operating assets.
12
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THE CERPLEX GROUP, INC.
INTEREST EXPENSE
Interest expense for the quarter ended March 31, 1997 increased to $2.2
million from $1.8 million in the corresponding quarter of 1996. The increase was
due to increased debt amortization expenses together with a higher weighted
average interest rate. The increase was partially offset by a lower average debt
balance. Loan amortization costs in the quarter ended March 31, 1997 increased
by $0.5 million to $0.8 million. The effective interest rate on credit
facilities increased to 9.8% during the quarter ended March 31, 1997 from 9.2%
during the quarter ended March 31, 1996. Average borrowings outstanding were
$61.9 million during the quarter ended March 31, 1997 compared with $65.9 during
the quarter ended March 31, 1996.
INCOME TAXES
Income tax expense for the quarter ended March 31, 1997 increased to
$721,000 from $293,000 for the prior year quarter and is primarily related to
income taxes on earnings of the Company's operations in Europe. The Company has
not recorded an income 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.
13
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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. 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 has a maximum amount
available of $6.0 million. The interest rate on the revolver is the prime
lending rate plus 2.25%. The term loan is for $38.9 million and carries 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
described below. 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 includes revised covenants for profitability, current ratio, minimum
tangible net worth, leverage and working capital. In addition, the Company is
operating under waivers with respect to certain covenants under the Credit
Agreement and is required to fulfill certain covenants, including covenants to
hire a Chief Executive Officer by May 30, 1997 and to receive shareholder
approval to increase authorized Common Stock from 30,000,000 to 60,000,000
shares by July 1997.
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.
14
<PAGE> 15
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.
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 April 11, 1997, 5,880 shares of the
Series B Preferred Stock had been converted into 16,502,125 shares of Common
Stock. While additional holders of Series B Preferred Stock have converted their
shares into Common Stock after such date, the issuance of any Common Stock above
the 30,000,000 authorized shares remains subject to stockholder approval.
15
<PAGE> 16
THE CERPLEX GROUP, INC.
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 Company or it subsidiaries are required to pay BT 1.8 million pounds in
1999 or earlier if certain sales volumes are reached.
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 will
receive trade credits for up to $7.5 million in goods and services depending on
the number of telephones repaired. 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 source for liquidity is cash flow from operations and
its ability to reduce working capital requirements. The Company has limited
available capacity under its Credit Agreement. Management believes it will
remain in compliance with the financial covenants set forth in the revised
Credit Agreement throughout 1997, and that the borrowing capacity combined with
the net proceeds from the sale of PCS and forecasted cash flow from operations
will be sufficient to meet the working capital needs for 1997. There can be no
assurance that the existing borrowing capacity and cash flow from operations
will be adequate.
16
<PAGE> 17
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 the beginning of 1997, the Company was in
default under its senior Credit Agreement. The Company has renegotiated and
amended such agreement to cure such defaults. See "Liquidity and Capital
Resources" herein for a more detailed discussion. In addition, the Company is
operating under waivers with respect to certain covenants under the Credit
Agreement and is required to fulfill certain covenants by various deadlines over
the next couple of months.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
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 quarter ended March 31, 1997, the
Company reported a net loss of $5.0 million, including an operating loss of $1.5
million. As of March 31, 1997, the Company had an accumulated deficit of $79.4
million. There can be no assurance that the Company will reduce its operating
losses or operate profitably in the future. The Company anticipates incurring
additional operating losses during the second quarter of 1997. 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 and BT accounted
for approximately 17%, 12%, and 11%, of revenues, respectively. In the first
quarter of 1997 these three customers accounted for approximately 30%, 7%, and
9%, respectively. During 1995, 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. Sales to BT significantly decreased during 1996 to
approximately $21.4 million representing a 36% decrease from 1995 and it is
expected that sales during 1997 will decrease from the 1996 levels. 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.
17
<PAGE> 18
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. While the Company has renegotiated amendments to
such agreements, the terms of the senior credit facility have resulted in a
reduced borrowing base which will be further reduced over the next twelve months
and the Company currently has limited borrowing ability under such facility. 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. 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 including the hiring of a Chief
Executive Officer by May 30, 1997, 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; LACK OF AUTHORIZED CAPITAL. 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 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 April 11,
1997, 5,880 shares of the Series B Preferred Stock had been converted into
approximately 16,502,125 shares of Common Stock. Between March 31, 1997 and
April 11, 1997, 3,469 shares of Series B Preferred Stock had been converted in
12,912,094 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. In
addition, due to the conversion of the Series B Preferred Stock, the Company has
insufficient authorized Common Stock to effect the conversion of additional
outstanding Series B Preferred Stock or to issue the Common Stock issuable upon
exercise of outstanding options and warrants. The lack of authorized capital, as
well as the existence of the Series B Preferred Stock, could impact adversely
the ability of the Company to consummate an equity financing. The Company's
Board of Directors recently approved an increase in the Company's authorized
Common Stock from 30,000,000 to 60,000,000 shares. The Company intends to submit
this increase to the Company's stockholders for approval at the Annual Meeting
on June 10, 1997. Failure to receive such approval by July 1997 constitutes an
event of default under the Company's senior credit facility.
18
<PAGE> 19
THE CERPLEX GROUP, INC.
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.
RISK OF EXCESS AND UNUSABLE INVENTORY; Decreased Value of Assets. At March
31 1997, inventory constituted approximately 15% 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. No additional amounts were written off in the first 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.
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.
19
<PAGE> 20
THE CERPLEX GROUP, INC.
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.
MANAGEMENT OF GROWTH. The Company's growth has placed, and will continue to
place, a strain on the Company's managerial, operational and financial
resources. These resources may be further strained by the geographically
dispersed operations of the Company. The Company's ability to manage growth
effectively will require it to continue to improve its operational, financial
and management information systems; to develop the management skills of its
managers and supervisors; and to train, motivate and effectively manage its
employees. The Company's failure to effectively manage growth could have a
material adverse effect on the Company's business. Due to factors associated
with the Company's business and financial condition, there can be no assurance
that the Company's growth in net sales will continue into the future.
EXPANSION OF INTERNATIONAL SALES. 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 significant 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.
20
<PAGE> 21
THE CERPLEX GROUP, INC.
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. 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 April 30, 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
has a pending conversion of 231 shares of Preferred Stock into 770,000 shares of
Common Stock.
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. While the Company has
filled several positions, the Company is currently searching for a new Chief
Executive Officer and certain other key managers. William A. Klein, the
Company's Chairman is currently acting as President and Chief Executive Officer,
while the Company searches for a new Chief Executive Officer. The failure to
engage a new Chief Executive Officer by May 30, 1997 will result in an event of
default under the Company's senior Credit Facility.
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.
21
<PAGE> 22
THE CERPLEX GROUP, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit Description
- ------- -----------
27.1 EDGAR Financial Data Schedule
b) Reports on Form 8-K for the quarter ended March 29, 1997
None
22
<PAGE> 23
THE CERPLEX GROUP, INC.
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: May 13, 1997
THE CERPLEX GROUP, INC.
/s/ ROBERT W. HUGHES
-----------------------------
Robert W. Hughes
Senior Vice President of Finance
and Chief Financial Officer
(Principal Accounting Officer)
23
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